Monday, May 3, 2010

Sands of politics drift over the hard bits

THE Henry report has drawn up a vast agenda of potential reforms to our tax and welfare system. From that, the Rudd government has delivered one big reform, one small one, and a third which Team Henry opposes.

That was predictable. The Government agreed to the tax review under prodding from business and the 2020 summit. But it was never willing to take on a big tax reform agenda as Bob Hawke and Paul Keating did in 1985, or had a political strategy to deliver one.

What we've got instead is classic Rudd: a package to deliver benefits to the many, paid for by taking money from the top end of town, with the rest of Henry's reform plans either shelved or ruled out.

Treasurer Wayne Swan excuses this by describing Henry's work as a 10-year reform agenda. But most governments don't survive that long. If they do, new topics take over the stage, and unfinished business gets pushed aside.

Swan has flagged two more reforms, to reduce tax on income from savings, and to relieve us of the need to fill in a tax return. The risk is that, with these marketable parts of Henry's plans delivered, the more difficult bits will end up buried in the sands of politics.

Labor's big reform extending the resource rent tax to mining is fine in principle. Mining is not like other industries. A factory, a farm, a shop or an office can keep adding value to the economy indefinitely. Mining is one-off. It generates income by depleting the nation's capital our stock of mineral assets.

There's nothing wrong with that. There's no point in leaving assets in the ground. But apart from coal, there is no risk that our minerals will be left in the ground. They will be mined some day, and if that is 20 years away, logic suggests they will be more valuable then than now. There is no benefit in mining them now rather than later.

As Rudd and Swan argue, those assets belong to the Australian people. As they can be mined only once, we are entitled to a good return. You can argue over whether 40 per cent is the right rate, but this is the right tax.

It would be even better if the money was channelled into a long-term infrastructure fund, so that one form of the nation's capital wealth is used to create another. But only a bit of it is going to infrastructure, while the rest will pay for increased superannuation, cuts to the company tax rate, accelerated depreciation for small business and probably for cuts to taxes on savings, yet to be unveiled.

The government says the cut in company tax from 30 to 28 per cent of profits will make non-mining business better off. Not by the time their superannuation guarantee payments are lifted from 9 per cent of wages to 12 per cent, it won't.

Back in 1995 Paul Keating's plan was that workers themselves should pay that extra 3 per cent, with the government chipping in another 3 per cent. In other countries, employers and workers share the cost of providing for the workers' retirement income.

And so they should. Why make Australian business globally uncompetitive by making it pay the workers' share?

The next steps for Swan are the savings and simplification reforms. Team Henry came up with an ingenious plan to improve the tax treatment of bank savings (highly taxed), capital gains (lightly taxed), negative gearing and margin trading (both highly subsidised) by a 40 per discount on income and losses alike, across the board.

This would reduce the tax paid by savers, and reduce the tax rorts for those using debt to reduce their tax. But Team Henry's clever plan was blocked by Team Rudd.

Reforms work by using handouts to sweeten the tough reforms. Swan appears to be gearing up to give us the handouts without the medicine.

A once-in-a-generation opportunity for tax reform looks like being buried in the sands.