Ideas@TheCentre

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The Quest for the Holy Grail of Tax

Robert Carling | 07 May 2010
The Henry tax plan that burst onto the stage last Sunday was dryly and perhaps optimistically titled Australia’s Future Tax System (AFTS). A more colourful and apt title would have been In Search of the Holy Grail of Tax (ISHGOT). Like Indiana Jones and the Last Crusade, ISHGOT is a sequel in a long series of sequels. But has Indiana Henry finally found the Holy Grail of Tax?

For some visionaries, the Holy Grail is no tax at all. We must exclude that from the realm of practical possibilities. But a very realistic case can be made that there are too many taxes, and too much tax for the common good and certainly for the good of individual liberty.

Henry takes care of the ‘too many’ by recommending that a lot of them, particularly at the state level, be discarded. But as for the ‘too much’, the 138 recommendations add up to no change in the overall tax burden. No Holy Grail there.

The report is much more about the structure and design of the tax system. It recommends a radical simplification of the personal income tax base involving a high tax-free threshold and two marginal rates of 35 and 45%. It proposes a 40% discount for capital income, a company tax rate of 25%, a land tax rate of 1%, and a GST of 10% (which Henry would clearly like to see raised to offset other things but was constrained from saying so). It also supports a new resource rent tax of 40% and the removal of all state stamp duties as well as payroll tax. This is all consistent with modern mainstream tax theory, which tells the policymakers to tax in ways that do least harm to incentives and economic behaviour.

In that sense the Henry report at least provides a roadmap to somewhere in the vicinity of the Holy Grail, though still a long way short. The two personal tax rates are still too high for incentive and arguably should be collapsed into one. The resource rent tax has a major question mark over its design and high rate. Then there is the significance of the government’s selective and lopsided initial response. This reminds us that even if Indiana led his political masters right to the Holy Grail, he couldn’t make them drink from it.

Robert Carling is a senior fellow at the Centre for Independent Studies. The CIS released The Henry Tax Review – some initial comments this week.