Treasury hints at taxation changes
By Tim Colebatch | theage.com.au | 13 November
System 'complex, costly'
In an overview of the issues facing the Government's tax review, which he chairs, Dr Henry told the National Press Club the tax system had become too complex, added to costs, wasted everyone's time, and undermined fairness and confidence in the system.
He implied he would like to propose big changes to simplify the tax and welfare systems but warned this would inevitably make some people worse off, and impose political pain.
Dr Henry hinted the review panel could also propose a trade-off on business taxation - big cuts to company tax, paid for by increases in land tax and taxes on "economic rents" such as the super-profits of mining companies.
"Taxes on investment income can increase the cost of capital and reduce investment, which in turn can reduce the level of capital per worker, affecting labour productivity and, eventually, real wages," he said.
"If we were to adjust business tax arrangements to try to attract a greater share of global investment, we would ensure that firms have minimal incentive or opportunity artificially to shift profits offshore. We would want to recognise the impact of tax on the global location of mobile or marginal investments."
By contrast, Dr Henry argued, there was a good case, relative to other tax bases, to tax super-normal profits - "what economists call economic rents ... as these are, by definition, immobile and unresponsive to tax".
The Government has only one such tax: the resources rent tax, which is applied only to profits from offshore oil mining. Dr Henry said his panel was still in the early stages of its work, and he was not endorsing any specific tax shift. But his comments implied he was looking at a trade-off that extended resource rent taxes to other mining sectors - coal and iron ore would be obvious possibilities - while cutting company tax rates across the board.
He pointed to land tax as one with fewer side effects because it fell on immobile factors of production.
The key theme of his speech was a call to simplify the tax and welfare system. He related a conversation with a north Queensland farmer, Jim, whom he met on holidays while caring for endangered northern hairy-nosed wombats.
Jim pointed out to him even fencing wire can be taxed three different ways: as an immediate expense, a depreciable capital item, or as trading stock. "Isn't fencing wire just fencing wire?"
Dr Henry said the panel would consider Jim's suggestion of replacing existing business taxes with a tax on cash flow. He noted that Jim could operate as a sole trader, a partnership, a fixed trust, a non-fixed trust or a company, and face different rules for each.
"Perhaps it's fair to expect Jim to have to hire a tax expert while establishing a business, but Australians should not need to consult an accountant to decide whether to return to work or put their kids in child care," he said.
PricewaterhouseCoopers tax partner Tim Cox said Dr Henry's speech showed a real passion to reduce the complexity facing Australian taxpayers.
"It gives me confidence that he understands the problems and we're going to see some meaningful action," Mr Cox said.
Taxation Institute of Australia senior tax counsel Michael Dirkis said simplifying the tax laws would not threaten accountants.
First published by TheAge.com.au on November 13 2008
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