Friday, April 30, 2010

It’s Almost Christmas

It almost feels like Christmas Eve. Over the weekend, the much anticipated Henry Review of taxation will be released, along with the federal government’s response. Just what will be included in the review and what will be adopted by the government has been the subject of much speculation and some informed discussion. The interim report gave us a few clues as to what to expect, but it remains to be seen if it will be a Santa sack full of goodies for taxpayers, or another missed opportunity for genuine reform.

While many headlines have already been devoted to a host of possible measures, including a resource rent tax on mining, standardized individual tax deductions removing the need for many people to file a return at all, concessions on the tax paid on savings, and removing the disincentives involved in the transition from welfare to work, it remains to be seen if you and I will actually be any better off as a result. There’s no doubt that reform is overdue, and that simplifying the tax system would reduce costs and improve efficiency, but whenever bureaucrats talk about becoming more efficient at collecting tax there is the risk that what they really mean is that they will find ways to collect more tax.

I think I can safely say that there are a few things that will not be included in tax reform. For example, I’m pretty sure that the tax free threshold will not be increased to the level of the minimum wage, something which would actually fix a lot of those problems with high effective marginal rates for welfare recipients. Neither do I expect to see any sudden commitment to make it compulsory for road and fuel taxes to actually be spent on building and maintaining roads. I don’t expect to see a proposal to make it possible to claim interest payments as a personal tax deduction, even though we are forced to pay tax on any interest payments we might receive.

While I would not be surprised to see a proposal for income tax marginal rates to be indexed for inflation, I doubt that the government will actually adopt it. There’s no doubt that there will recommendations to fine tune the tax treatment of superannuation, but somehow I doubt that the report will go far enough in quarantining super funds from tax so that retirement savings can be maximized more efficiently. That’s an idea which would both benefit future retirees as well as ultimately save the government money on its future liability for the age pension. All in all, I do not believe that the Henry Review will put forward a plan which will result in a reduction in overall taxation. In fact, the opposite is likely as the government contemplates the ever increasing demands upon its resources over the years ahead.

Even so, I am still looking forward to Sunday with some optimism that perhaps something good will be lurking in the bottom of the Santa sack.

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