Politicians should be listening to Ken Henry about tax reform

- February 16, 2024 2 MIN READ
Tax reform

A couple of weeks ago I called out the federal government for once again (and it’s all sides of politics) caving in when it comes to tax reform.

The Stage 3 tax cuts were rightly skewed toward low-to-middle income earners, but the 37 per cent tax bracket should also have been abolished as planned… but it wasn’t.

Our tax system is pretty stupid at the moment because it relies heavily on personal income tax from you and me. Plus it’s incredibly complicated.

Personal income tax revenue flowing into the government’s bank account is now at record levels. That’s because tax reform should be about spreading the tax streams, but now when there is tax reform the reliance is on personal and corporate tax increases.

Ken Henry was the boss of the Treasury Department for years. He is highly respected and I caught him being interviewed on the ABC this week. He talks so much sense.

Have a read of what he said:

Well, over time, we’ve got to place less reliance on personal income tax, and company tax, and payroll tax. So, less reliance on taxes on labour income and part of capital income. 

For the rest of capital income — which is interest, rent, and capital gains — we’ve got to do a much better job of getting similar tax treatment across those various forms of capital income. 

Consumption tax, we need to fix up the mess. We thought we fixed it in 2000, but we didn’t get as far as we wanted to get. In particular, we’ve got to get rid of all of those bloody transaction taxes, like stamp duties on insurance. 

And we’ve got to abolish fuel excise… and figure out a comprehensive road-user charging scheme.

He also said land was another big area that needs reform, and he’d like to see stamp duties on land abolished and replaced with “a decent property tax”.

Housing reform would help young Australians get into the market, Henry said:

Replacing stamp duty with an annual property tax is part of it, but we also need to deal with a more uniform taxation treatment of various forms of capital income, other than company tax. 

What we proposed in the review, and this was just one example, we said you could change the capital gains tax discount from 50 per cent to 40 per cent, do the same with interest, give it a 40 per cent discount, same with property rent, but the quid pro quo is you only get 60 per cent interest deduction, right? 

You could go to a Scandinavian model where you have unified tax treatment of capital income, you just say all capital income, whatever its source, is subject to a flat, I don’t know, 25 per cent tax rate. That’s it. And you do the same with interest deductions to unify it. 

So, a 25 per cent tax, the deduction’s only worth 25 per cent, you can’t offset it against other income, or if you do the only benefit you get is 25 per cent. You could do that. That’s probably the simpler way of going… I guess if I was writing the review today I would recommend that as the best way of doing it. 

He makes so much sense. I wish the politicians would listen.

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