Genuine tax reform is difficult and it’s partly my fault: Ken Henry
In a recent speech, former Treasury secretary Ken Henry admitted to playing a role in the short-term outlook of Australia’s tax conversation.
Looking back on his early days as a tax policy practitioner, former Treasury secretary and NAB chair Ken Henry said he could not shake the sense that he had participated in a “conspiracy” against future generations of Australian households.
In 1985, Henry learned the hard lesson that the only principles that were likely to move the needle on tax policy reform were static estimates of overnight cash gain estimates for different households.
The “academic” concerns – some of which Henry had focused on in his PhD – including tax system simplicity was “irrelevant.”
“All anybody would want to know is what was in it for them; how many dollars they were going to get,” he told the crowd at a launch event for Paul Tilley’s new book on the history of Australian tax reform.
“And that’s also all the newspapers would want to know. That’s what they would be printing on their front pages.”
The other, longer-term and more nuanced tax considerations that matter to tax practitioners “have no resonance with those who vote.”
If static analysis that “ignored the future” was the order, then Henry, as a freshly minted hire at Treasury, found a way to deliver.
Soon, Henry helped to develop a price input-output model referred to as TAXIO and a unit record file for the ABS’ Household Expenditure Survey.
These, he said, contributed to a broader culture of short-term mindedness that still characterises Australia’s tax conversations.
“Looking back from this distance, it is easy to understand why we did what we did,” he said.
“But I can’t escape the sense that, in developing the tools that facilitated squabbles over the distribution of gains and losses among the households of Australia in 1985, we were participating in a conspiracy against future Australian households.”
The Rudd government’s tax review, commissioned in early 2008 and chaired by Henry, helped to outline potential avenues for reform.
“Mugged” by the GFC, the reviewers had a rare opportunity to take in the long view of Australia’s tax future – a broader aim than the initial idea to design a “big bang reform package in which everybody would be a winner.”
That review identified a range of potential tax revenue sources – from natural resources to wealth and consumption. It noted that relying on labour income, transactions, and the “normal return on capital” risked detracting from future living standards by slowing productivity growth and workforce participation.
“But understanding these things and convincing others of them are very different exercises,” said Henry.
“A nation that has no tolerance of new taxes will not easily support land taxes, taxes on wealth or extensions to the GST.”
Effective, longer-term tax reform will involve avoiding transaction taxes, no longer relying on fiscal drag in personal income taxes, and simultaneous weaning off the government’s reliance on tax on the normal return on capital and a greater emphasis on equal across capital income sources, he said.
While the lessons learned in the 2009 review remain true, Henry admitted another foundational review might be warranted to investigate the “allocation of spending responsibilities across the federation.”
And he is far from alone in calling for such a review. Indeed, this case has been recently made by Melbourne Law School’s Paul Tilley – in the book Henry’s speech was delivered to promote – and the Productivity Commission’s chair Danielle Wood.
Others, too, have said the nation’s tax system is no longer fit for purpose, such as Minister Allegra Spender, RBA board member Alison Watkins, and more.
In comments attached to the Economics Committee’s recent competition review report, Spender said there “is now broad agreement that Australia’s tax system is not fit for purpose.”
“Australia’s tax system significantly inhibits intergenerational equity and economic efficiency, and its over-reliance on income tax makes it unsustainable given our ageing population,” wrote Spender.
She added that the Business Council, the Grattan Institute, the OECD and the Productivity Commission cited their own work as supporting a need for “broad-based tax reform – calls which have not been heeded by successive Australian governments.”
The current system will unfairly impact younger Australians, said Henry. The burden of funding the growing cost of public expenditure relative to GDP will “have to be shouldered by a declining proportion of the population – principally young workers.”
“The same people who have been priced out of the housing market; the same people who are going to have to adapt to the interrelated impacts of climate change and biodiversity loss,” he added.
Australia’s tax system, he said, is an “intergenerational tragedy” in the making.
