Wayne Gumley

Tax Reform After Henry: There’s a Hole in the

Bucket

The 2010 Federal Budget

• Statement 5 Revenue $285BIndividuals $120BCompanies $51BGST $50BPetrol/diesel excises $13BSuper funds $5.9BFBT $3.6Royalties $1.3BPetroleum RRT $1.25B

• Tax Expenditures Statement 2009 $102BDoes not include ‘unmeasured’ TEsCGT concessions for main residence $31BSuperannuation $21BGST $9B

The Victorian Budget

• State revenue $43BPayroll tax $4BLand transfer tax $3.5BLand tax $1.28BRoyalties $48m*$22B (50%) by Fed grants (GST)

• State tax expenditures $3.1BLand tax exemptions $1.9BPayroll tax exemptions $0.8BLand transfer duty $0.2B

* contrast: WA $2.4B, Qld $1.4B, NSW $0.5B

The Henry Review

Terms of reference 3...... the environmental challenges of

the 21st century 3.4. .... enhancing the taxation on

consumption property and other taxation by the States

3.6. ..... the interrelationships with the proposed emissions trading system.

9. ...... consideration of all relevant tax expenditures.

“environmental challenges of the 21st century”

• HR Overview at 1.5 – brief mention of ‘growing environmental pressures’ but lacked specific description

• Concludes taxes can help address environmental problems

– but difficult to design and implement - see HR Part 2

– Carbon taxes? - uncritical acceptance of CPRS emissions trading approach

Footnote on climate change

• Are we beyond fooling around with market mechanisms?

• NSIDC – arctic ice decline in May the highest on record

6

“enhancing taxation by the States”

• Henry recommended – mobile bases best taxed by Cwth (eg. capital,

labour) and immobile bases by States (eg. land)

– replace ‘inefficient’ royalties with Resource Super Profits Tax@40% - ‘new insights’ (Chart C1-1)

User charges vs environmental taxes• Henry Review inconsistency

– recognises that user charges are important for common pool resources like fisheries, forests

– no recommendations for reform – no mention of ‘full cost pricing’ principle required by National Competition Policy

– prefers resource rent approach for ‘non-renewable’ mineral resources – to replace royalties

“interrelationships with CPRS” and “consideration of relevant tax expenditures”

– Stern – necessary to remove ‘barriers to change’ which are likely to inhibit effective market based responses

– Garnaut – ETS must be well integrated within the broader economy to drive new behaviour

> need to review tax rules - Henry Review given this task

– Australia has a wide range of tax expenditures that promote growth in greenhouse emissions – opposing the intended effects of the CPRS

Key tax concessions– Adjustments for fluctuating income– Deductions for up-front capital

expenditure and prepaid expenses– Allowance of losses against non-farm

income– Underpricing for water (by States)

Effects– Agriculture and forestry make up 27%

of greenhouse emissions– Land degradation and salinity– Nutrient and chemicals in waterways– Biodiversity losses– Recurring mass marketed tax avoidance

schemes in agribusiness sector

Agriculture and forestry

Property development

Impacts• 23% of energy emissions

– housing outside CPRS

• Transport and infrastructure costs

• Vast consumer of resources

Tax breaks• Main residence ($14 billion

pa)• Capital gains discount ($5

billion+)• Negative gearing ($5billion

+)

Transport

Impacts– 14% of Australian emissions

and growing (linked to housing developments)

– Massive infrastructure spending (opportunity cost)

Tax breaks– Fuel tax credit scheme for

heavy vehicles (gives back $5B)– FBT car benefits ($1 B) –

actually rewards higher kilometres!

Henry on tax expenditures

• Administrative convenience but ...• Lack of transparency and accountability• Efficiency questionable (blunt instrument)

• ATO ill-equipped to manage non-tax objectives

• Equity lacking – disproportionate benefits• Add to complexity• Undermine integrity & sustainability of tax bases

• Recommended • Trade-offs with spending programs• Better reporting and measurement – new

standards• Strong arguments for scrutiny by budgetary

procedures, rather than tax policy criteria

Conclusions

• Henry Review disappoints on environmental terms of reference

– Little recognition of ESD– Uncritical acceptance of CPRS

• Contradicts itself re “super tax” on mining

– aggravates fiscal imbalance– immobile sources should be taxed by

States– royalties can be redesigned– departs from ESD user pays/polluter pays– departs from NCP

• TEs deserved much deeper analysis– People who live in big houses have big

dogs!