Income tax overhaul off agenda

ACROSS-THE-BOARD income tax cuts are off Labor's agenda as the Henry review looks instead to ease the burden on individual taxpayers by simplifying returns and reducing churn in the tax and family payment systems.

The compromise at the heart of the report, now in the hands of Wayne Swan, marks the first occasion that a major tax reform will not be accompanied by tax cuts for all. The budget cannot afford them for at least six years. The fiscal straitjacket also means any lowering of the company tax rate will have to be offset by trimming concessions to business.

The findings of the five-member review panel, chaired by Treasury secretary Ken Henry, mix relief for families and individuals and controversial measures covering the taxation of bank savings, superannuation, petrol, resources, companies and federal-state financial relations.

The ambitious 20-year reform program delivered to the Treasurer this week aims to focus revenue collection on a "small set of broad-based taxes", according to a document leaked to The Weekend Australian. The overhaul is driven by the challenges of an ageing population, the new baby boom, the rise of China and India, globalisation and the environment.

The politically difficult reforms - including state-based congestion taxes, a national payroll tax collected on behalf of the states and a shift to a new form of taxation for business - are identified in the report as issues for future debate. This side-steps the need for hard recommendations that would have forced Labor to declare its hand early in an election year.

With the budget forecast to remain in deficit until the middle of the next decade, the Henry review has relied on efficiencies to fund some of its proposals. On the personal tax front, the report points out that Australians use tax agents more than most other nations, but for very little real benefit to the economy.

The report wants to minimise churn by doing away with the need to file paper-based tax returns and to give people the option of claiming a standard work deduction instead of taking on the taxman on each item.

Lower- and middle-income earners are expected to be better off through changes to the low-income tax offset and other incentives. Higher-income earners will lose some of their superannuation tax concessions to pay for new concessions for low-income earners. At the moment, lower-income earners receive no benefit from super contributions because their compulsory savings are taxed at the same rate as their regular income - at 15 per cent.

Any cut to the company tax rate in the short term will need to be revenue-neutral because of the budget deficit.

A briefing note Dr Henry distributed in the final stages of the report, which The Weekend Australian has obtained, outlines a two-way pressure on the budget - on the one hand, the ageing population is driving up spending, particularly through health and aged-care costs; on the other, the revenue surges from the resources sector pose adjustment problems for the rest of the economy. The document links a lower company tax rate to a change in the taxation of resources. Miners would cough up the extra cash to reduce the headline rate for all companies.

The briefing note defends the "broad architecture of Australia's tax and transfer system" - a signal that overhaul of personal taxes and payments is also off the agenda.

Nevertheless, changes within the existing structure to reduce churn are likely to form part of Mr Swan's opening response.

The review panel has not fallen for the obvious traps of taxing the family home, or extending the land tax base to households in exchange for the abolition of stamp duty on home sales. Labor is bracing for a difficult debate on petrol taxes. Treasury used its latest pocket brief on the tax system this week to show that Australia has the second-cheapest bowser prices in the developed world, and the fourth-lowest rate of petrol tax, comprising excise and GST.

Labor's tax reform dilemma can be summarised as too little revenue and too much regular spending. Personal tax collections are at historic lows of 9.6 per cent of gross domestic product in 2008-09, and 9.7 per cent for the present financial year. They won't return to double digits until 2012-13, but even then the figure of 10.2 per cent would merely match the level that prevailed in 2006-07. On paper, a lower tax burden should be good news for workers. But it comes at the cost of a large deficit.

By George Megalogenis

From: The Australian , December 26, 2009 12:00AM