Ok, I decide we should play the game. But Henry obliges. He seems in a convivial mood. He only warns he must be a bit careful, because he is yet to provide his formal feedback to the review.
In the meantime, here it is:
1. LIFT THE RATE OF BASE OF THE GOODS AND SERVICES TAX
HENRY: YES (if not pursuing an alternative form of a consumption tax, like a business cash flow tax)
“I think that over time we’re going to have to place more reliance on consumption taxes and that means both a higher rate and a broader base. Whether it’s the GST we use, or an alternative like a cash flow tax or something of that sort, we are going to have to have a broader base and higher rates on consumption over time. If we don’t find an alternative consumption tax, then it does mean a higher GST rate and broader base.”
“I do think there’s an opportunity to simplify the administration of the GST. Rather than have our invoice and credit method, I think we could have a direct subtraction method tax, which is effectively what a cash flow tax would deliver. I think there’s an opportunity to do that. I think there would be benefits in doing that because it would be simpler, lower compliance costs and would give us an opportunity to rethink the appropriate base for the tax.”
2. ABOLISH STAMP DUTY AND INTRODUCE A BROAD BASED LAND TAX
“Absolutely. Long overdue. Gotta happen. And that’s the one that surely has the best chance of happening because everybody seems to understand the case for it.”
3. SHARE FEDERAL INCOME TAX REVENUE WITH THE STATES AND ABOLISH TIED GRANTS
HENRY: MAYBE to the first part, and YES to the second part
On the idea of the federal government giving some portion of income tax revenue to the states: “I think it’s worth exploring, so it’s a maybe.” However, adds Henry: “It’s been tried in the past and the states have shown little enthusiasm.”
On abolishing grants to state governments tied to particular purposes: “We did this in 2008,” he notes, with some frustration. “We had a huge reform of federal financial relations. We got rid of all this garbage. And things are even worse now than before we started in 2008. The problem that we’ve got in the Federation is that we’re capable of occasionally having these big grand bargains that deliver massive reform and then, within a decade, we’re back to where we were, or in a worse position. I think the story is that ministers with portfolio responsibility for various things cannot help themselves. If they see a problem that needs addressing, they’ll just put a bandaid on it [a grant to the states].”
It is at this point that Henry somewhat casually drops the bombshell into our conversation that he would like to see the federal government stripped of all responsibility for education and health and states stripped of their ability to approve big mining projects.
“The big problem here – which the review points to – is that there is no clearly settled allocation of roles and responsibilities between the Commonwealth and the states. So, both states and the Commonwealth see every problem as their political problem, that they have to fix. And so they’re always bending over backwards to come up with a new bright idea to fix a problem that is probably not really their responsibility at all, you know, constitutionally, but politically of course it is.”
But how to divvy things up?
“You just take a portfolio and say: ‘That’s yours. That’s not ours’,” Henry explains. “Defence is pretty obvious. But that’s the only easy one. Education I think yep, give it to the states completely. Health I think it has to be states. It has to be. Because it’s too hard for a centralised – even for a country as small as Australia in terms of population – it’s pretty hard to run a health system from Canberra. I would leave it to the states.”
“The big one, the really tough one, is environment. There I can see the sense in leaving it to the states. But their record has been so bad, I would not. It’s just terrible. And I think there has to be a national discipline when it comes to environmental matters. And I’m not just talking about climate change – obvious climate change – but the preservation of the continent has to be thought of in those terms: it has to be thought of as the continent of Australia. And that should be a national responsibility. Bizarrely, under the constitution, the Commonwealth doesn’t actually have power, except in unusual circumstances.”
So, would Henry strip state governments of the ability to approve mining projects?
But getting back to Thodey’s recommendations…
4. HARMONISE STATE PAYROLL TAXES AND REMOVE EXEMPTIONS
“But that’s a second best. I would replace it with an alternative, like a cash flow tax. But if there’s not going to be a cash flow tax, then yes, harmonisation and getting rid of the exemptions as much as possible makes sense.”
5. INTRODUCE ROAD USER CHARGING TO REPLACE FUEL EXCISE, STARTING WITH ELECTRIC VEHICLES
“I think it’s all very sensible what they’ve recommended.”
So, that’s a ‘thumbs up’ from Henry for Thodey’s recommendations, then. Which should come as no surprise, given most were also recommendations of Henry’s 2010 review.
Henry says he remains committed to these and other ideas from that review, including cutting company and income taxes.
So what else would Henry do on tax reform?
On the need to cut company taxes, Henry says: “We have to. We don’t have a tax system that’s capable of generating sufficient business investment and that’s doing enormous economic damage.”
And the only option is to cut the company tax rate?
“Or, a redesign, and this is where the other case for cash flow taxation comes in. But it gets really complicated. But the company tax – even with accelerated depreciation – does not provide as generous a treatment of business investment as cash flow taxation does. So…if you’re going to stick with our company tax system, then we are going to have to cut the company tax rate over time.”
“Of course, Jess,” Henry continues, “I don’t know how many of your readers would have figured this one out, but the principle reason the company tax rate has not been cut in Australia to date is because of the defeat of the resources super profits tax.”
Because we still just need the revenue?
“Correct,” replies Henry, “because the biggest payers of company tax are the miners and the banks. And if the miners were paying the alternative resources super profits tax, the company tax rate would have been cut by now.”
So, where to now for tax reform?
Does coronavirus provide politicians with the “burning platform” needed to embark on major reforms?
“We had a burning platform before the coronavirus hit, and it was that we had a tax system that was not capable of funding the goods and services that governments are committed to funding without doing enormous economic damage – without hampering productivity and growth… With the coronavirus, that means that now everybody should be able to see that it’s a burning platform because we have got governments needing to do more, with tax bases that have been damaged horrendously by the interventions that governments have had to take. So we had a burning platform and now the thing is shattered.”
What exactly should be done, though?
Should the Treasurer simply lift the GST to 15 per cent, as some commentators (ahem) have suggested?
“He’s not going to do that,” says Henry. “He would regard that as political suicide – and it may well be, if that’s all you did. But that would be a missed opportunity. There’s an opportunity here for national leadership in a national reform agenda that has tax at the top, but is not all about tax.”
And the last thing we need is another review, Henry concludes.
“We all know…huh.” Henry pauses. “Well,” he corrects himself, “we’ve all been told for long enough what needs to be done. We don’t need another review. We need agreement and political commitment. That’s all we need. And the national cabinet – that’s an appropriate body to be able to take those decisions. The question is whether there is a political will?
“But, as I said, it needs to go well beyond tax. We need to fix the climate policy mess. We need to fix the energy policy mess. We need a national approach to population. There’s a huge number of policy issue that have been there, unresolved, for a very long time, and now’s the opportunity to address them. Let’s do it.”
He’s only been arguing for tax reform since he first took the helm of Treasury’s tax policy division in 1984. But Henry’s passion for the subject seems undiminished nearly four decades on – unshackled, even, by some time on the farm.
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Jessica Irvine is a senior economics writer with The Sydney Morning Herald.