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Issue #1454      12 May 2010

The Henry Review

Prescription for unfettered plunder

The Henry Review sets out a blueprint for the far-reaching transformation of the taxation system and changes to the provision of social welfare in Australia. The Rudd government commissioned the review, chaired by Treasury head Dr Ken Henry, two years ago. It was asked to carry out a comprehensive “root and branch” review of Australia’s tax and transfer (welfare) systems that would “position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century.” The review panel’s 900 plus-page report and its 138 recommendations are a neo-liberal prescription for the unfettered plunder of Australia’s non-renewable resources and to make Australia more attractive to foreign investment.

The government, after sitting on the report for more than four months, released it on May 2, just nine days before the federal budget. At the same time Rudd announced a few budgetry measures in response to the review relating to the resources sector, superannuation and company taxation.

“The perspective in this Report is necessarily long term. Economic, social and environmental change over the next 40 years is expected to have a profound impact on the tax and transfer system, but will evolve gradually,” the Review notes.

“Transfer system” are the latest buzz words for social welfare. It refers to aged, disability, sickness, family, unemployed, student and other benefits and allowances. Thus the scope of the review is far more wide ranging than just a tax review. It defines the future role of government in regard to its responsibility for the welfare and well-being of society, with measures to be phased in gradually and a hint of what will follow. It also provides for considerable corporate welfare through proposed tax reforms.

The main thrust of the review is to promote economic growth and to make Australia more attractive to foreign and domestic investors and increase the amount of capital investment in Australia – in particular in the non-renewable resource sector. Towards these ends it focuses on:

1. Boosting national savings and investments

Income tax paid on savings in superannuation funds to be reduced as an incentive to increase personal contributions. (It also seeks to have compulsory employer contributions taxed as part of the wage – a proposal the Rudd government has wasted no time rejecting.)

Personal (not related to business activities) income from interest on savings, capital gains, net residential rental income and interest expenses related to listed shares to be taxed at a lower rate than income from labour (wages, salaries, fees) with a 40 percent savings income discount.

2. Attracting foreign investment

Company tax to be reduced to 25 percent to be more competitive with other OECD countries. It also raises the possibility of a new “business level expenditure tax” to replace company tax on profits. This would not tax profits that were reinvested.

3. Increasing workforce participation

There would be more stringent means testing and targeting of welfare benefits and low incomes to drive welfare recipients into the workforce.

The childcare benefit and childcare rebate would be combined into a single payment to parents or the childcare centre. The rate would depend on parental income, up to 90 percent of costs for lowest income earners.

The new tax structure with its relatively high tax-free threshold would enable low-income earners to move from welfare payments to the workforce without a loss in income.

4. Raising productivity (meaning rate of profit)

There are a number of measures to boost the profitability of small business and encourage entrepreneurs, including provisions to write off smaller capital investments immediately.

Simpler tax system

It sets out to create a far more simple tax system, concentrating on four bases of taxation – personal; company; resource and land tax; and consumption. Welfare payments would not be taxed.

1. Personal tax

All welfare payments (“transfers”) and personal income up to $25,000 to be tax free. Income above the tax-free threshold up to $180,000 would be taxed at a flat rate of 35 percent, and above that at 45 percent. This continues a regressive trend commenced by the Hawke-Keating government in the 1980s and continued under Howard and Costello, towards a flat tax scale. The only progressive element is the raising of the tax-free threshold. This is not as generous as it first appears, as personal tax concessions and rebates are to be abolished.

Workers whose incomes are above the tax-free threshold and only other source of income is from interest could opt for an automatic tax return from the Australian Taxation Office (ATO) with allowance for work-related expenses based on an occupational basis. This could make life simpler for the ATO as well as workers, reducing the necessity for detailed record keeping and returns and use of accountants.

Superannuation would be made more attractive. Proposed measures include the abolition of tax on contributions in funds and a halving of the tax on fund earnings to 7.5 percent.

2. Company tax

As already indicated company taxation would be reduced in the short to medium term to 25 percent. The reduction in company taxation is a first step with further reductions and the possible elimination of the taxation of company profits in the future and their replacement by a narrower and smaller tax. Rudd, as a first step, announced reductions to 28 percent.

3. Land and resources taxes

At present state governments charge a royalties tax on non-renewable resources based on production. Henry wants to abolish this tax and replace it by a uniform rental tax of 40 percent imposed by the federal government. This tax would be based on net profits after certain additional deductions. The Rudd government has acted on this recommendation, but the 40 percent will only kick in on “super profits” over and above a certain level. (See page 1)

With the abolition of stamp duties and other state taxes, the Review proposes a broad land tax covering all land, but at marginal rates so that family homes on lower valued land would pay no tax. Most farmland, where it has a low value per square metre, would fall below the threshold.

Rudd moved quickly, with an election in the wings, to reassure the electorate that he would not tax the family home.

4. Private consumption

It was not within the terms of reference of the Review to address the amount of GST, but it did raise the idea of extending the GST to all consumption – at present education, health services, medications, fresh food products and government payments are exempt.

Abolition of certain taxes

Part of the simplification process would be to abolish tax rebates and concessions such as low income, senior Australians, mature age worker, pensioners, employment termination payment, education tax refund, medical expenses tax offset, etc. This would simplify the taxation of income. These would be incorporated in personal income tax scales.

The Review calls for the abolition of a multitude of other taxes over time, including: payroll tax; insurance tax; property transfer taxes; stamp duties on purchase of cars; luxury car tax; tax on superannuation contributions in fund; income taxes on all government pensions, benefits and allowances; and fuel and vehicle registration taxes if replaced by road user charges.

Where these taxes are collected by states they could be replaced by a broad-based cash flow tax paid by business and collected by the federal government. This continues a trend where the federal government collects taxes and allocates money to states.

In addition to the four basic taxes, the Review provides for the retention of specific taxes on tobacco (increase the tax), alcohol (tax based on alcoholic content), gambling and an emissions trading scheme that have a social objective such as changing behaviour, reducing costs to others or environmental protection. It also supports congestion taxes and other payments by road users, a step that would pave the way for privatisation of all roads.

Welfare payments

The review proposes three levels of welfare payments:

  • pension category – for people not expected to support themselves through work (age, disability, full-time carer, etc).
  • participation category – a lower pension rate for people of working age expected to support themselves in paid work now or in the near future.
  • student assistance category – an even lower payment for people engaged in full-time study, who would supplement their pension with paid work or by taking out a loan, a measure that disadvantages students from poorer backgrounds.

Assets tests would be abolished, but in their place deemed income from them (whether received or not) would be included in the means test.

Students from poorer backgrounds will be disadvantaged.

Changes to other income support payments include reducing benefits received by families to just one payment based on the age of the children – larger payment for older children. Parents would be expected to look for work when the youngest child turns four – at present the age is six. Rudd has rejected this age change.

With aged care the Review leaves open to a Productivity Commission study for the specifics, but raises the question of some form of compulsory levy on all personal taxpayers or insurance so that in the long term people fund their own aged care.

It seeks to wind back the taxation of incomes, and instead shift the focus to indirect taxes, self-provision in the longer term and user pays.

The corporate giants in the mining sector have a lot to gain from the Review which sets the scene for the unfettered plunder of our non-renewable resources, with no planning or consideration of the future or environment. The financial sector is laughing, with the prospects of billions more in workers’ savings to gamble with. There is little joy in it for workers and welfare recipients – just work harder and longer and struggle on inadequate incomes.

More articles examining the economic and political aspects of this issue will appear in future issues of The Guardian

Next article – Global opposition against US-financed state terrorism in the Philippines

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