The team of five headed by Treasury Secretary Ken Henry has produced 138 recommendations that make up a compellingly comprehensive vision for Australia’s future tax and transfer system. It is a great document – probably the best tax review ever produced in this country.

Amazingly, the government has almost entirely ignored it. After five months of leaking and spinning since the report was handed to him, the Treasurer has picked up exactly 1.75 of its 138 recommendations, or a bit over 1%

In general, Wayne Swan’s tax policy statement bears almost no relation to the Henry Tax Review, except that it came out on the same day. Its centrepiece — the Resource Super Profits Tax (RSPT) — is one of the Henry recommendations, but the cut in the company tax rate is only about a quarter of the recommendations about company taxation, and the small business concessions are about a half of what’s proposed.

Total: 1.75 accepted; 136.25 rejected or put off.

Did the government have another, secret review going on at the same time as the Henry one? Where did his announcements about small business and superannuation come from? They’re certainly not in Henry.

The Swan statement is, in short, a political document designed to claw back some of the Coalition’s recent gains among small business, and released under the cover of 1332 pages of ‘Australia’s future tax system’, dated December 2009.

Nothing really wrong with that, except that nowhere does the government address the basic points made by the Review. Does the government agree, for example, with Recommendation No.1 – concentrating revenue on four robust and efficient tax bases?

The four, by the way, are: personal income, assessed more comprehensively; business income, with more growth-oriented rates and base; private consumption, through broad, simple taxes; and economic rents from natural resources and land.

Does it agree that 25%t is the right company tax rate “in the short to medium term”? Does it agree that the Medicare levy should be removed, or that superannuation should be fully taxed as income? What about removing the “active asset” reduction of 50 per cent in the capital gains tax, and in fact rewriting the entire capital gains tax legislation.

The Henry Review also recommends that the tax-free threshold for personal income tax be raised to $25,000 and that there should be a simple, transparent two-step tax scale, with 97% of the population paying 35%. After five months of reading and discussion, surely the government could have formed a view about that. Well, actually they obviously have formed a view – that it’s too hard and they should just shut up about it.

Likewise the second part of the Henry Review’s two “key directions for efficient land and resource taxation”. The first part is the idea of a 40 per cent resource rent tax, which was first leaked in January. The response to the leak was obviously sufficiently mixed for the thing to become the centrepiece of Mr Swan’s tax reform.

The second part – and given equal weight in the review – is a national land tax of 1 per cent applying to all land regardless of use. Absolutely no mention of that in either leaks or today’s statement.

The Henry Review also recommends a 40% discount to individuals for net interest income, residential rent, capital gains and interest related to listed shares. Also leaked, but rejected.

Likewise the recommendation to tax alcohol on a volumetric basis, which was also leaked, and the idea of congestion taxes on tollroads and mass-distance-location pricing for heavy vehicles, so that big trucks pay for their wear and tear on roads – leaked, but not there.

And look at the changes to company tax. The Henry Review recommends 25 per cent in the “short to medium term” as part of a broad set of reform suggestions for company tax, including an excellent set of reforms to capital tax arrangements.

The government has picked up the recommendation to cut the company tax rate, but only to 29 per cent for 2013-14 and then 28 per cent for 2014-15. Neither the 25% proposal, nor the other company tax recommendations are mentioned at all, while the government’s statement brings forward the reduction for small business and includes some new capital allowances for small business that were not mentioned by Henry.

All very weird, but that’s politics. And that word was not in the Terms of Reference.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey