Monday, May 3, 2010

No Surprises In Tax Reform

When it was originally announced that the Federal Government would conduct a “root and branch” review of taxation, everybody agreed that it was long overdue, and some even allowed themselves the indulgence of having their expectations raised. Perhaps at last something would be done to iron out the inequities and the inherent unfairness of the personal income tax system. Perhaps at last something would be done to simplify the complex array of business taxes, levies, fees and charges. Perhaps at last something would be done to remove the disincentives from the high effective marginal rates associated with the interaction between welfare payments and the tax system. But perhaps that was too much to expect.

In fact, the Henry Review of taxation did address all of these matters, and many more, delivering 138 recommendations. The trouble is that the government has embraced only four of them, including the much publicized resource rent tax on the mining industry. It seems that the government has attempted to do two things. Firstly, it has taken a carpet bombing approach to getting its hands on a bigger chunk of mining profits to pay for other elements of the reform. And secondly it has emphatically ruled out pretty much anything which might be unpopular even if it would have produced a long term benefit. After all, implementing reform tomorrow depends directly on being elected today.

Of course, the review was never intended to be a blueprint for immediate action. In fact, quite the opposite. It should be seen as guide to the long term future of taxation reform over the next couple of decades at least. The last time any such review was undertaken was in 1975 and it took 25 years for everything foreshadowed in that report to be implemented. So now we have a new report, and even though the government has categorically rejected a long list of measures, that doesn’t mean they will never happen. Over the years ahead, piece by piece, much of the Henry review will no doubt come to pass, including such things as congestion taxes and road user charges, but it’s easy to see why the government wants to distance itself from those ideas right now.

However, it’s not so easy to see why the government has not yet acted to simplify personal income tax returns for ordinary Australians. This is pone of the more popular recommendations from the review and so it should be something that would appeal to a government which is keen to be re-elected. Imagine no longer having to go through all your receipts hunting for deductions, wading through hundreds of pages of the tax pack document, or paying for a tax agent to file your return. Imagine instead, being granted a standard set of deductions and receiving your refund cheque within days, rather than the horrendous situation which exists now with hundreds of thousands of refunds stuck in limbo because of a Tax Office computer glitch.

If the government really wants to win votes, I am sure that they will announce this measure before very long, most likely along with the anticipated tax cuts in next week’s budget.

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