The Henry Tax Review: Pearls Before Swine?

By Bryan Kavanagh (2013 submission to THE AGE)

Now Qantas.

Next?

Australian business doesn’t deserve to survive. It’s beyond repair. Some sections want tariffs to protect them against cheap imports. Others want to drive down wages (apparently so they can match those of the Chinese) in order to keep turning a profit.

Yes, and while we’re at it, why don’t we also remove all those fences at the top of cliffs and put ambulances down at the bottom? That might keep people in jobs at the expense of all other Australians, too.

The collapse of Australian industry and business is rarely correctly sheeted home to the perversity of the 125 taxes that make up the Australian tax regime at local, state and federal levels. Australia’s Future Tax System (AFTS) found that 115 of these were inefficient, raising only 10% of our revenue, and could easily be abolished, together with their collection costs and deadweight.

Australian business ignores a truism: when you continue to tax products and services, you will have less of them. Surely then, with Australian manufacturing and other businesses in their death throes, abolishing the 115 taxes suggested by the Henry Tax Review has something to recommend it as a good starting point?

The relative silence greeting this recommendation might be explained in terms of not meeting business expectations that favoured tariffs, or a labour relations program that would abolish penalty rates, or otherwise reduce wages.

In noting the mobility of international capital and the increasing mobility of labour, the Henry Tax Review also recommended greater use of Australia’s land and natural resources as a tax base, as these are unable to flee to tax havens.  

Secondary, but important, considerations were that capture of the economic rents of Australia’s resources will not create any less of them, nor can they be passed on in prices like taxes on incomes, services and products.

This proposal was also greeted by a yawn from business, if not antagonism in certain quarters. Perhaps a perceived need to remove Kevin Rudd and the Labor government from office had come to override genuine discussion of tax reform?

For example, the exceptionally hostile response from the big mining companies when the Rudd government tried to implement the Henry Tax Review’s proposed 40% resource super profits tax (RSPT) on mining was largely supported by business. The mining lobby spent $22 million in a successful advertising campaign to scrap the tax and this played an integral role in Kevin Rudd’s removal from the prime ministership.

Rudd’s replacement, Julia Gillard, cobbled together the minerals resource rent tax (MRRT) to replace the far sounder RSPT in a backroom deal with selected big miners. As the MRRT has delivered little revenue, it seems the miners have won another round at the expense of most Australians.

So, let’s investigate the practical merits of the original mining tax, the RSPT, at 40% of net profit before tax. (It has commercial parallels when a going concern business is leased out to tenants on the basis of a 50:50 split of net profit before tax.)

KPMG-Econtech modelled Australian taxes and found the existing 40% petroleum resource rent tax had no welfare loss for each additional dollar of revenue raised, none at all; therefore, in attempting to “sell” the RSPT mining tax, the Rudd government failed to educate Australians that this would simply bring mining into line with the petroleum tax which has proved in application to have zero social cost.

At the other end of the KPMG-Econtech modelling scale were royalties and crude oil excises: these show a welfare loss of 70 cents for each additional dollar collected, and are the mining taxes to which prime minister Abbott and treasurer Hockey are wedded once the MRRT, an admittedly poor tax itself, is removed.

Therefore, Labor having been scared out of tax reform by the mining lobby, and the lobby having captured the ear of the new Liberal government, wherein lies any hope of implementing any tax reform at all from the recommendations of the Henry Tax Review, arguably the most comprehensive analysis of taxation produced anywhere in the world?   

Business did not support the mining tax for its efficiency, nor has it supported the other leg, reform of state land taxes. It interesting to note that municipal rates and land taxes, at a welfare cost of less than 10 cents in the dollar, are the next most efficient to the RSPT and petrol resource rent tax. These compare with conveyancing stamp duties at a social cost of about 35% and corporate and payroll taxes around 40%.

As it seems business has not been won over by the relative efficiency argument, one is entitled to inquire what it actually takes to get business up in arms against a tax regime that is slowly but surely strangling it?  

Now that Labor is out of it way, if it refuses to acknowledge the obvious benefits of the tax reforms outlined in the Henry Tax Review, one is left to conclude that Australian business doesn’t deserve to be saved, and that it’s all downhill from here.