Expectations about the Henry Review centred on a document that would be anything but the “root and branch” analysis originally sought by the Government: rather, it would offer an array of small – though significant – reforms that would improve an already strong and relatively efficient tax system.
While those expectations haven’t been confounded, this is a subtle and, in the long term, potentially very significant set of proposals that sticks closely to its goal of an efficient tax system and follows them rigorously, regardless of the consequences, over a forty-year timeframe.
Ken Henry and his team have recommended is a far simpler tax and transfer system intended to encourage productivity, participation and economic growth, secure retirement incomes, make housing more affordable and reduce the burden of tax compliance for all Australians.
In particular, the Review wants government revenue to be based on four principal sources – personal, corporate, consumption and natural resources taxes – with no other taxes except those aimed at addressing social or economic costs. In its view, all other taxes – insurance taxes, payroll taxes, fuel excise, you name it – should be abolished.
It makes nearly 140 recommendations across eight key areas. The highlights include:
Supporting productivity, participation and growth
· Long-term reduction of company tax toward the lower end of the OECD average, initially aiming at 25%
· Built work incentives into income support payments via targeted means tests
· Better support for child care
· Streamlining the tax treatment of investment, particularly for small business
· Improving road investment through road user charges, including congestion charges, that better reflect usage
· Volumetric taxation of alcohol
· Significant rise in tobacco excise
Simpler income tax system
· A higher tax-free threshold (~$25,000 pa)
· All transfer payments to be tax-free
· Two-step tax scale, with additional charges like Medicare integrated
· Rationalisation and reduction of income tax deductions and a fairer, work-supportive transfer system
· Three-level approach to transfer payments: pensions for aged, disabled and carers; lower-rate allowances for people of working age and assistance for young people and students
· Simplified family payments system
Removing inefficient state taxes
· Removing state taxes like payroll taxes with a single cash flow tax, with revenue allocated to state services
· Reform the taxation of immobile production factors like land, by removing or replacing resource royalties
· Replace state land taxes with a land tax system applying to all types of land
· Overhaul superannuation taxation treatment to make it more consistent with overhaul income taxation, with continuing assistance for workers over 50
· The development of longevity income products, including a Government product
· Boost rental assistance
· Streamline land taxation to remove disincentives to property investment
· Over the longer-term, make treatment of rental investment for personal income tax purposes more neutra
· Review infrastructure charges to remove impediments to housing supply
Simplifying the taxation system
· Provide a one-stop shop for taxpayers on all their income and taxation information
· Most personal taxpayers should have a pre-filled tax return
· Greater involvement by and feedback from taxpayers in the taxation system
There are few of the traditional big-ticket items from tax reform process of old, such as big new taxes. Instead, the Review has run through the entire state and Commonwealth taxation system to work out what, if we were designing it from scratch, we should change in order to improve a system that, while reasonably strong, is rife with perverse incentives, inefficiencies and inequities bequeathed us by politicians and our clunky federal system over the last century.
The review team was charged with providing a long-term reform blueprint, and they’ve come up with one.