The best bits of the Henry Review ignored

I had this piece in The Australian this morning.

I am repeating it here for anyone interested. The idea of lifting substantially the tax-free threshold, but also removing all the silly bibs and bobs in the current tax and transfer arrangements, is a debate worth having. There is no doubt that this would bring about massive simplification. It would also do something about the high EMTRs (also referred to as poverty traps), which is an objective worth pursuing in order to induce higher workforce participation among the affected groups.

One of the amazing figures I was able to track down was that 44 per cent of single parent families (read, mothers overwhelmingly) is jobless. Moreover, these single parents appear to remain on income support for long periods of time. The real danger is that the disadvantage is transmitted down to the next generation.

It is interesting to ponder what Ken Henry, Secretary of the Australian Treasury, privately thinks about the Australian Government’s response to his report, Australia’s Future Tax System.

Having laboured for many months, taken submissions, attended conferences and doubtless debated various alternatives, the Final Report contains 138 recommendations.

Effectively, the Government initially picked up one and a half of those recommendations – the resource rent tax and the cut in corporate tax from 30 to 28 per cent (Henry had recommended 25 per cent). The increase in the rate of the Superannuation Guarantee Charge from 9 to 12 per cent was not contained in the report, although there were a number of other recommendations related to superannuation.

There were two further announcements in the Budget, although the concession on saving income (bank deposits) is much more modest than envisaged by Henry. The other uncontroversial recommendation taken up is the introduction of pre-filled personal income tax returns.

One of the problems with these kinds of reports is that, while the recommendations may make sense as a package, cherry-picking them almost always ends in bad policy and produces unintended and adverse consequences.

Moreover, the irony is, that in choosing to take up such a small number of the recommendations, the Government effectively by-passed the real centrepiece of the review – the reform of the personal tax and transfer systems.

As is noted in the report, “workforce participation is strongly influenced by incentives in the tax and transfer system, and by the affordability of child care”. While Australia’s overall rate of workforce participation compares reasonably well with other developed economies, we fall down in respect of particular groups, most notably women of child-bearing age and older workers.

If we take the former group, for instance, women of child-bearing age in Canada have a rate of labour force participation over 7 percentage points higher than us. And the gap between Australia and the US is 2 points.

Older people (those over 55 years of age) in Australia also participate at lower rates relative to a number of countries. Our cousins over the Tasman, for instance, participate at a rate nearly 15 percentage points higher than our older folk and, in the US, the rate is some 7 points higher.
This is where the importance of disincentives to work comes in and why the recommendations in the Henry Report are so significant. Chief among these disincentives are: the interaction between the tax and transfer (most particularly, family payments) systems; the availability and affordability of child care; and the lure of welfare benefits that entail disincentives to work, even on a part-time basis.

Under current arrangements, high effective marginal tax rates (withdrawal of benefits plus payment of tax) for certain types of families (particularly, those with dependent children and one or both partners on relatively low wages) dissuade one, or sometimes both, partners from seeking any work or additional hours of work. In turn, this has led to an unacceptably high incidence of jobless families in this country.

On the most recent figures, some 13 per cent of all families with children aged under 15 do not have a parent employed, with the rate much higher for lone parent families, at 44 per cent.

In the context of the current tax-transfer architecture, one of the problems for governments seeking to reduce high EMTRs is that it is a fiercely expensive thing to do.

This is why the Henry Review’s radical recommendations on the “tax and transfer system for the 21st century” are so important. According to the report, the tax-free threshold should be lifted to $25,000; above that level, there would be only two rates. By opting for such a high tax-free threshold, many of the insidious interactions between the tax and transfer systems would be eliminated.

There should be three categories of income support payments: pension, participation and student. While there should be differences in the levels of income attached to these categories, in recognition of the need to encourage workforce participation in the latter two cases, the payments should be indexed in a consistent manner.

There should also be consistency in the means testing arrangements applying to receipt of the payments and the payments should not subject to income tax.

The Henry Review also recommends that parents should be required to look for part-time work once their youngest child turns four as condition of payment. At the same time, a high rate of subsidy for child care costs (up to 90 per cent of actual costs) should apply to low-income families.

A number of other changes makes up the full package – and some of them are controversial (the ideas of dropping the medical expenses tax offset and private health insurance rebate, for instance) – but the great pity is that the real centrepiece of the Henry Review is largely being ignored at this stage.

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4 Responses to The best bits of the Henry Review ignored

  1. “This is why the Henry Review’s radical recommendations on the “tax and transfer system for the 21st century” are so important. According to the report, the tax-free threshold should be lifted to $25,000; above that level, there would be only two rates. By opting for such a high tax-free threshold, many of the insidious interactions between the tax and transfer systems would be eliminated.”

    Do this alone and it could be the most significant and best tax reform we’ve ever had. They’ve blown a great opportunity and wasted the political capital and legacy since Keating became treasurer.

  2. jtfsoon

    SRL

    I notice the Menzies House crowd aren’t too happy with the idea of cutting middle class welfare.

  3. I know. It’s pathetic. “Families need to be strong”.

    If you don’t use contraception on religious grounds, I’m not obliged to subsidise your kids. One commenter tried to criticise defending the right to wear a burqa as antiethical to Christianity. I responded with a quote of Rebecca from Genesis and Paul in his 1st letter to the Corinthians. What an inconsistent mess. Like feeding your dog curry and canned dogfood.

  4. http://www.menzieshouse.com.au/2010/05/you-gotta-fight-for-your-right-to-burrrrka.html#comment-6a012876778d82970c0133ed879570970b

    Semi Regular Libertarian said in reply to Jim…

    What a load of crap mate.

    “When Re-bek’ah raised her eyes, she caught sight of Isaac and she swung herself down from off the camel. Then she said to the servant ‘who is that walking in the field to meet us?’ and the servant said ‘It is my master’ And she proceeded to take a headcloth and to cover herself.”

    (Genesis: 24: 64 and 65)

    “But every woman that prays or prophesies with her head uncovered shames her head for it is one and the same as if she were a (woman) with a shaved head. For it a woman does not cover herself let her also be shorn; but if it is disgraceful for woman to be shorn or shaved, let her be covered.”

    (1 Corinthians: 11: 5, 6)

    BTW, where do you think Christianity originated?

    I do like this bit, Jim:

    “as we told the poms many years ago if you don’t like our culture and what we are here and don’t want to fit in, then go back home.”

    Republic NOW!

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