Thursday, November 13, 2008

Real Opportunity For Tax Reform

There were a few clues to the forthcoming review of taxation to be found in Treasury Secretary Ken Henry’s address to the National Press Club this week. While not giving too much away, Dr. Henry identified the complexity of our tax and transfer system as one of the major factors under consideration. This complexity presents as both the sheer number of taxes which exist in the system, and the compliance obligations which come with those taxes. He described the complexity itself as acting like another tax in that it provides a drag on the economy, although it does so while making no contribution to revenue.

While much of this complexity impacts upon business, it also applies to individuals with relatively simple tax affairs. It has previously been suggested that personal income tax returns could, in many cases, be dispensed with altogether, with a flat figure work related expenses deduction applied across the board. At the same time, the interaction between tax and welfare payments also suffers from complexity and high effective marginal rates, which mean that for every dollar of extra income an individual loses a high percentage as a combination of taxes and lost welfare payments.

Simplification of personal taxes would save us all a lot of wasted time and the expense of a tax agent, but it’s the arena of business taxes which provides the opportunity to really give a boost to the economy, which in turn would benefit us all. There has been a push to reduce company tax for quite some time, and that may well be on the agenda. But Dr. Henry specifically mentioned the role of tax arrangements in promoting foreign investment, at the same time as discouraging the shifting of profits offshore to avoid taxes.

It has also been reported that, although Dr. Henry did not specifically discuss dividend imputation, there may be a case for removing it. The suggestion is that imputation offers foreign investors no benefit while also discouraging Australian companies from investing offshore as foreign profits do not qualify to be offset against the tax on dividends. It is a complication, but the obstacle is that our entire superannuation system has been built around the mechanism of imputation, not to mention the Mum and Dad shareholders who have built a portfolio with an eye on tax effectiveness.

Dr. Henry made it clear that this “root and branch” review of taxation which has been ordered by the government will not be merely a “pruning and shaping” exercise. It would be safe to assume that when the review is complete, the recommendations will be substantial. It is also reasonable to view the current economic turmoil as an opportunity to rebuild the system virtually from the ground up to make it fairer and more efficient. While we have been promised tax reform in the past, it is reasonable to expect that, this time, we will get genuine reform. From the clues we have so far, it certainly seems that is the intention of Dr. Henry and his review panel.

What remains then is for the government to deliver on its commitment.

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