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Why the Ken Henry taxation review will achieve little.

January 26th, 2010 · Greg Atkinson · 19 Comments

For some time now investors and the public in general have been drip fed details of what might or might not be included in grand sounding “Australia’s Future Tax System Review”. Now that the report has been handed over to Wayne Swan and the Government it might be tempting for us to think that we will see sweeping changes to Australia’s tax system, but I am here to tell you that little will happen and here’s why.

You can tell straight away when a bureaucratic paper generation exercise is in full swing by simply looking at the homepage of the tax system review where you will find the review described in the following terms:

“The Review took a ‘root and branch’ approach and examined Australian and State government taxes, and interactions with the transfer system in order to make recommendations to position Australia to deal with the demographic, social, economic and environmental challenges that lie ahead.”

Really? How is this possible when the GST was excluded from the review? So before the review even started, one significant part of the tax system was left out and as I explained in Ken Henry and his tax review: should we be worried? this is because no matter how evil Kevin Rudd said the GST was when he was in Opposition, the fact is that the Government needs the money it raises.

This means the review and the recommendations that result from it, will be based on a flawed process. Because you cannot undertake a system wide review without looking at the entire system!

Maybe the GST needed to be adjusted in order “to position Australia to deal with the demographic, social, economic and environmental challenges that lie ahead”? Perhaps the Government were scared that Ken would suggest raising it?

But if this isn’t bad enough, it gets worse, because not only will the review of the taxation system not be based on the entire system, the recommendations that may finally be implemented will not be done in a system like manner and thus there will be unintended consequences.

To illustrate my point let me tell you a little story about when I was a young, wet behind the ears, electronic systems technician.

Back in the mid 1980’s I had just completed 2.5 years full time training in the navy as an electronics technician and was posted to my first ship, the destroyer escort – HMAS Derwent. (DE 49)

I was responsible on the ship for the operation and maintenance of a missile guidance system. Since I had completed around three months training on the system I figured I knew just about everything there was to know about it and was ready to take on the world as they say.

But before being let loose, my Chief (i.e. Chief Petty Officer) and a very wise senior dockyard technician thought they should give me some further on-the-job training. “Egads” I thought, how dare they suggest I need further training, but I was hardly in a position to disagree and hence the training started.

The Chief and “Docky” then started placing some faults on the system and observed (with coffee in hand) as I tried to identify the cause and then rectify the problem. But day after day I struggled to even narrow the fault down into an area, let alone be in a position to isolate it. What was I doing wrong?! Would I ever solve any of the faults they were setting on the system?!

Eventually after watching me squirm for weeks my tormentors decided to give me some practical tips of how to fault-find electronic systems, and I realised some years later, that these also tips were also useful when looking at non-technical systems as well.

The first thing they told me was I needed to step back more and take in the big picture view. Rather than leaping onto the fact that some part of the system appeared not be be working properly, or that there was an alarm going off, I needed to take note of what was working just as much and of what wasn’t working.

I needed to learn that I had to take time and make sure I had all the information I needed and not just the most obvious. (and resist the urge to leap in first and worry about what I had missed later)

Secondly I had to be aware that as soon as I started tweaking things or making changes that there was a danger I could make the situation worse, if I did not have a clear idea of what the problem was first.

Finally I gained an appreciation that I needed to be patient and think things through even at times when the pressure was on to do something quickly. I finally came to understand that doing something when you are not clear in your mind about what you are trying to fix, can be worse than doing nothing at all. (this is not an easy lesson to take-in especially since they placed faults on the system ten minutes before weekend leave!)

Now you might think to yourself that the above system fault-finding tips appear like just plain common sense, and well, they are. But I was was a young lad and still had much to learn – but can the Government use the same excuse?

How could the Government expect the review panel to take in the big picture taxation system view for example when item 5 of the terms of reference states:

“The review will reflect the government’s policy not to increase the rate or broaden the base of the goods and services tax (GST); preserve tax-free superannuation payments for the over 60s; and the announced aspirational personal income tax goals”

So before the tax system review starts, the fault-finding team headed by Ken Henry need to cover one eye and ignore how some areas of the tax system are performing. Goodness me, my Chief would have clipped me across the ears for doing that!

But this is hardly Ken Henry’s fault, he got Rudd and I had my Chief, so poor old Ken is off to a bad start.

This leads Ken and his team into making their second error because they are now trying to fix a system without actually taking all aspects of the system into account. This means that their recommendations or “tweaks” may in fact make things worse.

The next problem with the tax review is the timeline. The review should have been delayed and the team given time to take into account the impact of the global financial crisis. Now is not the time to being making recommendations or suggesting changes, now is the time to sit back and see what has changed since the review was started.

Do some review areas need to be looked at again to take into account the impact of the GFC? In my opinion the answer is a big “Yes”.

Finally the biggest problem with the taxation review is that the changes or recommendation it has come up with are as a result of a less than system wide review. However these changes may in effect, be applied to the whole taxation system.

So thinking back to my technician days this would mean I would have ignored problems in other areas of the system, but still gone ahead and tried to implement changes and hoped this fixed things. That approach certainly would have earned me another clip across the ears from my Chief. (and a few choice words as well!)

But for Ken Henry and his team there is one final obstacle that will result in their review achieving little and that obstacle is the Government.

Because the Government will generally implement changes that are mainly good for them, and not necessarily what are good for the system as a whole.

This means that the Ken Henry taxation review has been basically:

– A review of the entire tax system except for some of the most important bits.

– A review that started before the global financial crisis hit and has been finished before the full impact of this crisis on the Australian economy is understood.

– An exercise that has resulted in recommendations being made even-though the big picture view was not taken into account and without full consideration of life after the GFC.

The best we can hope for as a consequence of this taxation review and the Governments meddling is that the few changes that will be made won’t cause us many problems. But my feeling is that we should brace ourselves for the review to turn into a revenue raising exercise. (the Government debt will need to be paid down somehow)

By the way, where did the Emissions Trading Scheme (ETS) fit into all of this extensive “roots and branches” taxation system review you may ask? Well my friends, that was just another part of the system that was missed!

Luckily for Rudd, Swan and Henry my former Chief is not supervising them, otherwise they would have very sore ears!

19 responses so far ↓

  • 1 Christina // Jan 26, 2010 at 6:52 pm

    I hope you are right that little will happen with this review. Those of us with SMSFs don’t like what Rudd has already changed about super and don’t need want more restrictions on super. Our family is already $13K worse off this year due to the lower cap for super contributions and changes to family tax benefit rules.

    Maybe hardworking middle class Australians should pull a “Massachusetts” on Rudd to let him know we are not happy. It seems have worked very well on Obama.

    BTW, I also want to say I really enjoy reading your blog – one of the few that sees Australia from a global view which is so different from what you read in mainstream media in Australia. Keep up the good work!

  • 2 Greg Atkinson // Jan 27, 2010 at 9:48 am

    Thanks Christina for the feedback. As for the tax review my feeling is that we won’t see any major structural reform since this does not seem possible since the GST was excluded (and a few other things), but I do expect the Government to pick out a few areas where they can bring in more money.

    Sadly I don’t think SMSF’s will get too many favours from Kevin Rudd or Ken Henry. Rudd seems to think those who have built up a nest egg are people who deserve to be taxed more and Henry has no problems going after retirement savings or superannuation because his Government backed pension won’t be touched by any of his proposed reforms!

    The problem with giving a review to a public servant is that you can be sure they won’t review their own perks! When was the last time Ken Henry had to set up his own Super fund, manage a business loan or worry about how his pension would be taxed?

    If Rudd and Co really wanted an honest review of the tax system then the panel should have been independent of the Government and public service, and everything should have been on the table, including the GST.

    The final report should have then been delivered to the Government, the Opposition and the public at the same time thus allowing the contents to be debated/analysed.

    As it the whole review is a staged managed political circus and sadly it seems Ken Henry has become one of Rudd’s willing performers.

  • 3 Ralph // Feb 2, 2010 at 2:53 pm

    Fully agree, Greg. The tax review is a colossal waste of time and energy. It presented a real opportunity to make some changes to the tax system, but it would be hard to find a more gutless government. It sums up all that Rudd is – a convener of reviews, summits and hot air, but practically nil in the way of action. I’m sure we’ll see a few small trinkets come out of it, but they’ll be peripheral issues that won’t really matter a great deal.

    As you say, the really big things, like GST, capital gains, negative gearing will be put into the too hard basket. And watching Swannie trying to sell the intergenerational report is funny. We’ve got a gutless wonder as a PM and an international disgrace as treasurer.

    As for the ETS, that probably we’re probably at least 10 years away from the world being remotely in a place to consider co-operating on that. So the chances of our fearless government going down that path – less than zero.

  • 4 Senator13 // Feb 13, 2010 at 6:42 am

    We are STILL waiting for this to be released… What a joke.

  • 5 Greg Atkinson // Feb 13, 2010 at 7:44 am

    We have to wait for someone to read the report to Swanny page by page and explain all the big words to him.

  • 6 Senator13 // Feb 13, 2010 at 4:21 pm

    It is a bit disappointing that there has been such blatant politicisation of the review.

    A review of tax has its merits. But before the review even started they were already ruling things in and out and now that it has been several months since it has been finished and they are still not releasing it you have to question the motives.

    Who knows if we will actually ever see the original report…

  • 7 Biker Pete // Feb 25, 2010 at 1:51 pm

    Greg: “The next problem with the tax review is the timeline. The review should have been delayed…”

    Politically, the timing is almost perfect. We won’t see the full report until just prior to the federal election. This will allow Rudd & Swan to time the announcements of their policies in response to the KHR exactly, forcing Abbott & Barney into a “Me too” position.

    Mind you, one can’t always predict opposition responses. Who would have thought Rudd could have forced Abbott into a corner over the insulation debacle? Abbott’s complaints about job losses and businesses losing millions was the catalyst… and his own lack of commitment to the program was then attacked by Labor. All Abbott needed to respond with was: “We’ll get the insulation program back-on-track, but with strict guidelines and controls.” Instead he has nowhere to go, in a scenario where “We’ll do it properly!” was the smarter response.

    Catch 22 if he has no intention of retaining the program, for then his complaints about job losses and businesses losing millions are meaningless. Interesting times…!

  • 8 Greg Atkinson // Feb 25, 2010 at 2:13 pm

    Biker all in all the Government looks a lot more stressed than it did last year. Maybe the Henry report will work for them, maybe not but I reckon they know wish they hadn’t kicked it off in the first place.

    As for the pink batts debacle, Garrett should have walked. Any person with some practical experience knows that a rushed job is likely to cause you some pain and the risk management assessment conducted by Minter Ellison warned of this.

    We had a saying in the navy – Prior Planning Prevents P%ss Poor Performance.

    If they had taken an extra few months to get things sorted 4 people may still be alive today and yet, nobody responsible for implementing and overseeing the program has been held to account! Amazing.

  • 9 Ned S // Feb 26, 2010 at 12:02 pm

    I think Rudd came to power with the thought in mind that life was good and that he as a fiscally conservative capitalist with some strong underlying social democratic leanings could make just about everything really good. 🙂 With a “roots and branch” tax review sounding like just what was needed for both making the capitalist side of things better and figuring out how to pinch more loot off it so the socialist side could be better too.

    But the GFC reminded him rather forcibly that Oz is a flea on the tail rather than the dog. And presumably taught him that he really is very short on for skills in lots of important things. Plus I’d doubt it’s escaped his notice that few if any of his sidekicks have many skills either?

    Lindsay Tanner seemed to be OK. But he’s become pretty much a case of Lindsay Who? Tanya Plibersek had a look at housing affordability and figured out anything she might do to fix it in a hurry would cook the economy. So nothing more from her corner. Garret and Wong and Gillard – The less said the better perhaps? (With fingers crossed that none of the new school halls fall down on the kiddies heads.) A report on Superannuation still to come. And a double dissolution brewing over Health.

    And all this lack of talent and skills are being asked to deliver on a whole heap of promises made and reviews commissioned to assist with same while also coping with the GFC thing.

    I think we’re looking at a case of an idealistic control orientated chap without many skills or talented support, running head on into a sizable dose of reality and having every reason to suspect he’s gotten way more on his plate than he can handle and no real idea what to do about it?

  • 10 Anon // Mar 4, 2010 at 9:48 am

    “KEVIN Rudd has put the Henry tax review firmly on the backburner, confirming today that his $50 billion public health takeover plan is his top priority.”

    Lol, somebody shoot me.

  • 11 Greg Atkinson // Mar 4, 2010 at 9:52 am

    Well the Henry Report is being buried as we discussed on this site last year. It will be filed next to the Australia 2020 Summit suggestions. Another waste of time and resources.

  • 12 Ned S // Mar 4, 2010 at 10:59 am

    Vote us back in based on some promises we make about health and we’ll tell you about your new tax system once we’ve got our bums safely back on the parliamentary benches for another three years. Wonder if the public will fall for it?

    Absolute and total incompetence – You wouldn’t trust them to take ya bloody dog for a walk!

  • 13 Ralph // Mar 4, 2010 at 1:38 pm

    Ned, your comment #9 describes the situation precisely. Similarly in #12.

    Rudd call himself an emperor but he now realise he’s not wearing any clothes. And there’s nothing in the wardrobe either. And the worst thing for him as that now the general public realise that too. Game’s up.

    I agree, his case for re-election is brittle at best. Yes, he’s done “wonders” with the GFC, but as I commented on another thread, any mug sitting in the chair would have done pretty much the same thing. All it needs is for Abbott to come up with a few credible alternatives (that’s the challenge) and Kevvie will be looking for another job.

  • 14 Ned S // Mar 4, 2010 at 2:30 pm

    Regarding the GFC Ralph, Yes, it isn’t exactly difficult to panic and based on advice taken, throw money at everything and everyone. So no special brownie points for doing what any “mug” would have as you say.

  • 15 Greg Atkinson // Apr 23, 2010 at 8:07 am

    By the way..isn’t the Henry Report supposed to have been released by now?

  • 16 Ned S // Apr 23, 2010 at 8:34 am

    Swan is at the G20 Greg. No show without Punch?

  • 17 Ned S // Apr 23, 2010 at 10:32 pm

    With a bit of effort Kev might be able to figure out what the tax free threshold is by then … 🙂

  • 18 Greg Atkinson // Apr 24, 2010 at 2:01 pm

    Oh another G20 meeting…I guess we will hear once again what legends our financial leaders are.

    I thought the Henry Report was suppose to be released weeks ago?

  • 19 TaxNews // Aug 26, 2010 at 4:19 pm

    The Review came out, take a look to see what it means to you:

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