Whither tax?

Even more so for environmental taxation like a carbon tax which raises revenue while reducing pollution. Henry also wants to tax congestion (for instance by rebalancing tolls to charge more at peak hour). That would raise revenue and reduce congestion as some people rearranged their transport to avoid peak tolls. Congestion costs Australia about $10 billion and Sydney nearly $4 billion a year - a figure that’s set to double within the decade.

Then there’s Henry between the lines.

Dividend imputation passes the company tax to company’s shareholders who can use “imputation credits” to pay their own income tax. It’s a nice idea, which reduces “double taxation” of shareholders’ investments. But most tax concessions sound like a good idea, especially to the beneficiaries. The question is, are they cost effective? In this case despite it’s truly monumental cost - around $25 billion next financial year - it achieves next to nothing for the economy.

It’s not available to foreigners, since they don’t pay Australian income tax. Yet they’re the ones with the real money. Where most Australians’ money will stay in the country with or without company tax breaks, a tiny fraction of global capital finds its way to Australia. If we did what numerous countries have now done and recirculated imputation as company tax cuts we could get the rate to around 19 per cent. That one third cut in the tax rate would increase the share of global portfolios we received. If it rose from - say 2 per cent to just 2.5 per cent of global portfolios - foreign investment would surge by a quarter, reduce Australian businesses’ cost of capital and boost investment in Australia’s factories, mines, tourist resorts, privately run infrastructure, etc.

Lateral Economics helped put this idea on the national agenda with a discussion paper for a business forum in 2006 and I presented it to a Treasury seminar last year. Some early, somewhat sympathetic, comments from Dr Henry thereafter produced a campaign by Australia’s investors to keep imputation, leading Treasurer Wayne Swan to publicly support them. In the upshot the Henry panel supported limited reductions in company tax and seemed very lukewarm on imputation. Their final report even contemplates a partial move towards what I’ve outlined, presumably on the grounds that if a job’s worth doing it’s worth half doing.

In any event, if we half do it, like we half did the resource rent tax, it would generate gains of a similar magnitude. (Australian shareholders would even get compensation for the return of double taxation - not only because company tax would be lower, but also because their shares would surge in value as foreigners bid for them. If only all reform came with its own building compensation package.)

The Henry panel also thought death duties were a good idea. They don’t distort behaviour much. And they’re the acme of fairness. Why should your chances in life depend on your skill in choosing your parents? Of course the very expression “death duties” strikes as much fear into politicians’ hearts as it strikes loathing into the denizens of Bellevue Hill and Toorak. But need it worry the rest of us? What if we only collected death duties from estates worth more than $2 million (OK, $5 million for the political chickens) and recirculated the revenue raised in lower tax elsewhere.

But though I didn’t see them explicitly ruled out by the Treasurer, the panel recommended not that we do it, but ... that we discuss it. So dear reader, here I am discussing away as instructed. You can do the same - on the train, at work. Anywhere! Remember, it’s Recommendation 25.

Finally, a complaint. The virtue of Henry’s simplicity and elegance is that it keeps the fundamental issues clear as the ideas navigate the messy world of political compromise. But simplicity can be overdone. Often a good idea can’t be introduced holus-bolus, but can be kept in play in some partial form. Generous tax free thresholds, like the one I proposed above for death duties, could be used more widely to begin the process of normalising good taxes that are currently political no-go zones. And caps on entitlements can be used to scale down access to unjustified tax concessions where abolition is politically taboo.

Your family home is exempt from various taxes including capital gains tax. It makes little economic sense but would be electorally impossible to overturn. But why should the concession be extended to the very wealthy few who live in houses worth more than, say, $4 million. By the same token, we could cap the extent to which we allow landlords to claim negative gearing against their other income - to say 20 per cent of the value of their interest payments. By dint of such makeshifts we could save plenty of revenue, and keep the issues more properly in play for continuing community deliberation.