Monday, June 4, 2012

Tax reform lost in saga of expediency

Whether led by Kevin Rudd or Julia Gillard, this government has little sense of strategic direction. Everything it does is a response to the needs of the moment. Consider the chequered history of the Henry inquiry into tax reform, the final blow to which was delivered in the budget last month.

The inquiry had its genesis in one of the first of Rudd's silly ideas, the Twenty-20 summit. Bring a bunch of bright people together with a pile of butcher's paper and who knows what good ideas they could come up with?

The business people attending came up with the world's most predictable idea: what this country needs is more tax reform. What they really meant was that taxes should be changed so they paid less. When it comes to contributing to the public debate, our business people are nothing if not chancers.

But Rudd was desperate for something solid to "take forward" to prove the summit hadn't been a complete fiasco. His need, I suspect, became the Treasury secretary's opportunity. No one in this country knows more, or cares more, about tax reform than Dr Ken Henry. He's been part of all the considerable reform we've had since the mid-1980s.

Knowing his time as Treasury secretary would come to an end, he must have seen his chance to make a last big mark on the future. Of course, his idea of tax reform was quite a bit different from that fondly imagined by business.

The inquiry was ordered to report by Christmas 2009. Really? A report about a subject as contentious as tax reform - with all its winners and losers - set to lob not many months before the next election?

But apparently Labor had a plan. Its coffers were overflowing with proceeds from the resources boom. It could go into the next election promising sweeping tax reform and using all the surplus revenue to square away any losers. What's the problem?

Then the global financial crisis. It quickly emptied the government's coffers and left it spending big to stimulate the economy. Oh no! We've got this blasted tax report coming which will propose all these changes everyone will hate.

By the time Henry reported, Rudd was in a terminal funk over the Senate's rejection of his carbon pollution reduction scheme and the failure of the Copenhagen climate change summit. Rather than putting the tax report out for public discussion he delayed looking at it, pretending to be too busy visiting dozens of hospitals to discuss health reform with the nearest pretty nurse.

Then someone had a bright idea. Among Henry's hundred-plus proposals was one for some new-fangled tax on the miners' economic rents. We could rip a lot of brass off the miners, then use the proceeds to cherry-pick Henry's other proposals.

At no net cost to the budget we could take a tax reform package into the election. We'd spread the proceeds around a host of interest groups. They'd love it and we'd have a reform program only the miners didn't like. But there'd be little public sympathy for them.

We'd cut the company tax rate by a couple of points, give something nice to small business and, above all, get the union secretaries and superannuation industry off our back by covering the budgetary cost of increasing super contributions to 12 per cent.

But caught off guard by a new tax no one understood (and which would raise twice as much as the government imagined), the miners - led by BHP Billiton's Marius Kloppers - opted to campaign for the government's defeat. They ran TV ads assuring the mug punters the mining tax would cost 'em their jobs.

Rudd's losing fight with the miners, coming on top of his collapse in the polls when he walked away from "the great moral challenge of our time", cost him his job. Gillard decided to buy off the big three miners - BHP, Rio and Xstrata - at any price so she could rush to an election and capitalise on her imagined honeymoon with the voters. The deal she did replaced an incomprehensible mining tax with a dog's breakfast designed on the run by the big miners. It came at the expense of their pipsqueak contemporaries - including T. Forrest, G. Rinehart and C. Palmer - and big business generally, which had its cut in the company tax rate halved.

Time passes, Gillard's poll ratings are at rock bottom and we get to this year's budget. With all the whingeing about the cost of living it would be great to give the punters a bribe, but how could we afford it when we're moving heaven and earth to get the budget back to surplus?

Another bright idea. Since everyone's lost interest in tax reform, why not unpick the remnants of the tax-reform package and use the savings to "spread the benefits of the boom to families" with votes?

Why not can the cut in the company tax rate (our stocks with business couldn't go any lower), postpone the higher concessional super contributions cap and forget the new standard deduction and the discount on tax on interest income?

Instead of using the mining tax to cut taxes elsewhere, why not just use it to increase welfare spending? Tax reform is sooo yesterday.

But the one bloke you don't need to feel sorry for in this saga is Henry. He was never so naive as to expect a weak, hard-up government to buy a bundle of unpopular tax reforms on the eve of an election.

What he wanted was to leave his successors in Treasury and elsewhere with a detailed blueprint of the direction in which the tax system should head over coming decades. He got to leave his legacy.