While the Henry Review runs to over a thousand pages of detailed analysis and 140-odd recommendations on achieving a more efficient tax system, the Government’s response has surprisingly little to do with the work of Ken Henry and his team.

The guts of it is a super profits tax on the mining sector, which is expected to return to enjoying an historic commodity prices boom, designed to fund a more general cut in taxation across the corporate sector, and a lift in the compulsory super rate, which wasn’t even in the review.

The rest is adornment. The super profits tax – which flows from the Review’s broader recommendations about taxation of immobile factors of production – is cleverly designed to target only those mining companies enjoying spectacular profits, while more marginal projects, or small resources companies investing heavily in exploration, will actually benefit from the changes, including a new exploration rebate.

The Government has wisely ducked a fight with the states over the issue of royalties, opting to accept the Review’s option of simply refunding companies for the royalties paid to State Governments as part of its own tax – ensuring the states continue to get their royalties, but removing their distortionary effect.

As the name suggests, the goal is to tap into mining company super profits, while not discouraging investment.  Indeed, the Government reckons the package will strengthen mining industry investment.  Expect that claim to be bitterly contested by the bigger mining companies.

The super profits tax will pay for a new infrastructure fund that seems primarily intended to placate Western Australia and Queensland, with a specific goal of funding resource-related infrastructure projects, but that will only be worth $750-odd million a year.  The main beneficiary of the new tax will be the rest of the corporate sector, which will get a 2% cut in tax over two years, and especially small business, which will get an early tax cut and accelerated depreciation.

So as you can see, it’s a fairly direct subsidy from the mining boom to the slower lane of our developing two-speed economy.  It’s not subtle, but given it’s being accomplished in a way that the Government and its modellers insist will not undercut mineral exploration and development, it should be effective.

Effective, that is, as long as the commodities boom continues and companies continue to earn super-profits.  Without that, we’ll be stuck with a “super profits tax” that primarily subsidises exploration costs.

The Government has included geothermal exploration in the resources exploration rebate, but that’s the only nod to renewables in a package focused squarely on exploitation of our non-renewable resources – although, interestingly, congestion taxes are not on the list of options explicitly ruled out by the Government.

The Government has also rejected the Review’s opinion, expressed last year, that the current 9% superannuation guarantee was sufficient to provide an “adequate” retirement income – something then-new Superannuation Minister Chris Bowen distanced himself from.

Instead, it has embraced the original Keating superannuation model of a 12% compulsory level, albeit moving slowly up to that point over the next decade.  Combined with the gradual removal of industry commissions and lower fees, this should make a substantial long-term contribution both to retirement income and the national savings pool.

Several smaller super changes come in its wake, but Wayne Swan today said that the Government had deliberately opted only to provide some additional assistance within the super system – to lower income-earners and workers over 50 – rather than undertake the more fundamental simplification and rebalancing of the taxation treatment of super sought by the Review.

This suggests our high level of superannuation-related tax expenditures – which cost us tens of billions of dollars a year in lost revenue – is set to continue.

Swan insisted that the Government’s response was a full agenda of work.  There’s certainly plenty of high-quality reform there, with more announcements on tax simplification to come – expect Swan to announce the end of the traditional tax return process in the lead-up to the election, possibly in July when most of us are struggling through our Tax Packs  – but the longer-term goal of a significantly more efficient tax system appears off the agenda for now.

It will be up to future governments – whether under Kevin Rudd or a future Prime Minister – to take on the more complex proposals advanced by the Review.

Peter Fray

Get your first 12 weeks of Crikey for $12.

Without subscribers, Crikey can’t do what it does. Fortunately, our support base is growing.

Every day, Crikey aims to bring new and challenging insights into politics, business, national affairs, media and society. We lift up the rocks that other news media largely ignore. Without your support, more of those rocks – and the secrets beneath them — will remain lodged in the dirt.

Join today and get your first 12 weeks of Crikey for just $12.

 

Peter Fray
Editor-in-chief of Crikey

JOIN NOW