Ken Henry says increase in GST 'inevitable'

Former Treasury secretary Ken Henry said an increase to GST was inevitable and further cuts to the company tax rate were vital as the federal government prepares to release its tax reform discussion paper.

The author of the last major tax review urged the Abbott government to make bold choices, warning the challenges facing the system were "profound" and that a day of reckoning was "getting closer".

"The major issue is the long-term sustainability of the Australian taxation system," he told The Australian Financial Review.

Dr Henry said while a cut to the company tax was "very important" given global competition, tinkering with superannuation tax breaks, which have been criticised as too generous, risked making the retirement system too complex.

"The fact that one part of the tax system raises less revenue than it might, or that it is not as progressive in its impact as other elements of the tax system, is not a sufficient reason for taxing it harder," Dr Henry said.

Dr Henry was the architect of a roots-and-branch taxation review that contained 138 recommendations and became known as the Henry tax review, released in 2010. The Rudd government pushed ahead with just four recommendations.

Despite an election promise from the Abbott government in 2013 to cut the company tax rate from 30 per cent to 28.5 per cent, it has remained at 30 per cent despite fierce lobbying from a frustrated business community.

"A lower company tax rate is a very important part of the policy mix that would set Australia up for success in the Asian century," he said.

Dr Henry was at pains not to "overdramatise the situation", describing the nation's fiscal position as "quite strong". However, the failure of governments to act on tax reform appears to have left him with a sense of unfinished business.

While the GST was not included in his review's terms of reference, Dr Henry says it should be among the government's top priorities when it comes to meaningful reform.

"At the Commonwealth level I would say that at some point an expansion of the base of the GST or an increase in the rate of GST is unavoidable."

"While there is some fragility in the Commonwealth taxation system, the state taxation systems are even more fragile and the revenues are even more volatile."

"The big issues for state government are land tax and the need to introduce a business cash flow tax to replace a myriad of taxes including payroll tax."

State-based stamp duties were also singled out as volatile and undesirable. Dr Henry likens the business cash flow tax he floated in his 2010 review as a "simple" version of GST and efficient replacement for various state taxes.

"There are quite profound issues facing the tax system. However, I think we can have both simplicity and effectiveness."

"The business cash flow tax is simple, it's elegant and it would be highly effective. And it would do a lot to improve the certainty of the tax system and of revenue flows to government.

That ticks a lot boxes." While Dr Henry said the recent proposal by Treasurer Joe Hockey to allow first-home buyers to access superannuation was contrary to the aims of the retirement savings system, the opportunity cost of generous tax concessions was understood by its architects.

"It was always understood that those who have the capacity to save, because they have higher incomes during their working lives, would benefit most from the tax concessions, with lower-income employees benefiting most from the pension."

Dr Henry said the key risk to superannuation was overzealous regulation, and governments who tinkered with the system for budgetary means risked undermining the system.

Dr Henry's interview on investor risk will be in Smart Investor, free with The Australian Financial Review on Friday.
 

Source: The Australian Financial Review , Australia, dated 18/03/2015