Back in May 2008, when times were good and the inflation genie was free, the Government announced that a review of Australia’s tax system would be undertaken. But that was before the global financial crisis struck and a lot has changed since then, so should we be worried about what recommendations the review panel will make?
Personally I think the tax review will end up being an expensive way to churn out door stoppers and although I don’t doubt a lot of good ideas will come from it, I do doubt that most of them will ever be implemented. Why?
Well according to the mandate given to the panel: “The review will encompass Australian Government and State taxes, except the GST, and interactions with the transfer system”.
This would mean then that to implement many of the review’s recommendations, State and Federal Governments would have to work together and that seems like a long shot (unless the States are effectively bribed). Just look at the current spat between the States over proposed changes to how the GST money is dished out and you can see how well our governments work together.
Can you imagine if the panel suggested for example that the resources sector should pay more taxes? States like Victoria & NSW would probably have no problem but Queensland & Western Australia are unlikely to be very happy. (putting it mildly)
In addition the tax Kevin Rudd once considered evil, i.e. The Goods & Services Tax (GST) is not up for review, so the panel is not really reviewing the entire tax system at all.
Why has the GST been excluded from the review you ask? Well because the GST is a great earner for the Federal Government and they don’t want it messed with. Yes the Prime Minster once vowed to fight the GST when he was on the Opposition benches as a matter of principle, but when he finally finds himself in a position where he has the power to do something about it, he won’t even let it be reviewed.
I guess if Kevin Rudd was Winston Churchill he would have vowed to fight the German’s on the beaches, but then have done a runner if they actually started crossing the channel!
Anyway since the review panel are due to hand the report to the Treasurer in December (I hope they label it well for Swanny, in big letters) I figure it is a good time to think about what might be some of the big ticket items contained in it.
A few days ago one of the regular comment contributors to this site posted a link to a speech by Ken Henry entitled: Towards a better taxation of savings and I think that provides a useful framework when contemplating what the Australia’s Future Tax System Review Panel might come up with. (thanks Ned for the link!)
In this speech Ken Henry focuses on household income and highlights how superannuation, investment property, capital gains, salaries, bank deposits and shares for example are taxed differently. Does this suggest therefore the panel will try to align how these are taxed more closely?
Could we see for example the capital gains even on the family home taxed in the same way as capital gains on shares? Could the review suggest that all capital gains from any investment be treated in much the same manner?
I also noted with some interest this observation contained in the speech:
“One piece of anecdotal evidence that has captured my attention in the immediate aftermath of the global financial crisis is the role played by Australian superannuation funds in financing, through equity purchases, a large-scale de-leveraging of corporate Australia. It is not at all clear that such a large structural change in corporate financing could have been achieved without our very substantial pool of superannuation savings.”
I have read this a few times and cannot work out if it is a vote of confidence in the Australian superannuation system or a hint that the panel will be recommending some structural changes in this area? Honestly sometimes when economists ramble on I am not even sure if they clearly understand what they are talking about.
Frankly I don’t quite see how you can have a review of the tax system where the GST excluded. Of course there are plenty of other tweaks that can be made but why leave out the GST? Does this mean the panel cannot even suggest (dare I say it) raising the GST?
After reading Ken Henry’s speech I was left with the feeling that the whole exercise will deliver a politically bureaucratic flavoured report over to the Government at a time when they will be pre-occupied in trying to get debt under control and preparing for an election year.
Therefore the danger is that rather than a comprehensive review of the Australian taxation system ever being undertaken, all we will end up with is the Government taking the bits they like (and saying they were recommended to them by the panel) and parking the bits they don’t. Thus we will simply replace one unbalanced taxation system with another.
Or the entire report could get the same treatment as reviews of the transport system get in NSW i.e; a big announcement, press releases but then gradually get buried and the Government does what it wants anyway.
I also worry that the overall timing of the tax review is not particularly good. Is the Australian economy really stable enough to seriously think about actually making any changes to the tax system in the next few years? Also could the panel have been swayed too much by the abnormal financial events of the last few years?
If no action is taken on the recommendations in the final report soon after they are made public then they will be left hanging. Individuals, businesses and companies will be left to contemplate what measures may be acted on and which ones the Government will reject. This may lead to investor uncertainty and affect business investment decisions.
We should also not forget that the Emissions Trading Scheme is due to be rolled out in the next few years so is it even possible to do anything else but try and get that working until early into the next decade?
Finally the only way I can see the State Governments being happy is if they get more money. So no matter what happens I doubt the review is going to result in less tax revenue being collected and I would suggest if you have felt the hand of socialist leaning policies in your pocket, then you better be prepared for the same hand to be looking under your couch for loose change.
But to be honest I have not be following the review very closely (although I heard some rumblings about lowering the company tax rate) simply because I don’t see anything happening until the next Federal election is well out of the way. In the meantime I will sit back and see how much of the report is leaked to the media. (intentionally or otherwise)
So I welcome feedback from people who been watching how the review has been progressing. Will the review result in long overdue changes to the taxation system that will benefit the nation, or will it end up like a mini Australia 2020 summit minus Cate Blanchett?