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National Affairs

Tax reform: a world of opportunity

28 September 2011

The Henry Report spelt out a series of tax reforms that would increase environmental and social sustainability, writes Josh Dowse. It’s great ammunition for a debate that needs a fresh start

Right:

Above: Abolishing taxi licence fees would have social and environmental benefits.
Photo: Kyota Tanaka/ Flickr

Above: Abolishing taxi licence fees would have social and environmental benefits.
Photo: Kyota Tanaka/ Flickr



BACK in December 2009, Ken Henry presented the federal treasurer, Wayne Swan, with the final report of the Australia’s Future Tax System Review and the government buried it. The government formally released the report in May 2010, and promptly buried it again with its “deft” handling of the resource super profits tax. Henry made 137 recommendations; the federal government responded to three and a bit, and not at all well. Next week’s tax forum will look at a few more.

Reading the Henry Report is far more interesting than watching rampant self-interest fight the same tired pitched battles over tax in the guise of national debate. It would be nice if Australia’s future tax system looked a little more like Henry’s recommendations than the soul-destroying edifice it is now. And Henry is far from an impractical theorist: “In principle, the home production of alcohol would be subject to tax,” he observes. “In practice, this is unlikely to be feasible.”

So, in the belief that sense will ultimately prevail with tax reform as it will with a carbon price, here is a look at the future from the perspective of a sustainability practitioner: a brief look at taxation and public policy, environment taxes, housing, resources, transport, and charitable organisations. No room this time for Henry’s treatment of insurance, nor for smokin’, drinkin’ and gamblin’. The complexities of personal and corporate tax, superannuation and transfer (welfare) payments are still baffling the real experts.

As with all public policies, a tax policy needs to be effective, efficient and equitable. To be effective, taxes need to raise enough funds to pay for public security, health, education, transport and essential infrastructure – and a heap of other things that society may want to support. Societies may also agree to use them to discourage private actions that impose costs on the rest of the community (problem gambling, for instance), and encourage private actions that benefit others (certain donations, for instance). Taxes will be efficient if their administration costs are low. Equity is a bit trickier: “Taxes will be equitable if different groups pay taxes at levels that each sees as fair. Discuss.”

To achieve all this, Henry advocates whittling the current labyrinth down to clear and simple taxes on just three things: income, consumption and resources (which includes all the things in Australia that aren’t going anywhere – land and the stuff under it). Payroll tax and other odds and sods would disappear. The logic is impressive. Federalism and self-interest are the hurdles. The politics are horrendous.

Move people, not houses

Henry proposes that stamp duty and any other tax on the transfer of property should be scrapped. This should encourage land and buildings to be better matched with their most valued purpose, reduce the overall cost of housing, and increase incentives for large-scale housing investment.

Housing affordability is a real issue: prices have risen from three times to five times average earnings in just the past fifteen years, and the proportion of fifty-five to sixty-four year olds with mortgages has increased from 13 per cent to 30 per cent in the same short time (make you feel better?). While the population is growing at 1.7 per cent a year, housing completions are falling by 2 per cent. So more people are sharing, which sounds good, but it’s only because the leave-home age has risen from twenty-four to twenty-eight. Mental health costs must be soaring.

Reducing transaction costs helps reduce the size of houses and enables people to live closer to where they work. The higher the cost of transferring property, the more likely that people stay where they are, even when it doesn’t suit them. Empty-nesters are more likely to stay in houses with empty rooms; families needing more rooms are more likely to renovate than move to a larger house. Renovations usually add needed space, and a bit more to make sure, and I’m pretty sure they rarely shrink a house. Henry suggests that stamp duties also increase commuting, unemployment and barriers to entering the housing market, and hold back productivity growth. They’re a fly in the economic ointment and need to be Morteined.

Looking for opportunities off the back of such a move, a developer might build a portfolio of similar-style properties of different sizes in the same area so that people can transfer within that portfolio at minimal cost. They might design better granny-flat options. They might work with governments to reform related transaction taxes. Even real estate agents could benefit: some might seek a slice of the saved stamp duty; others might be happier instead with the increased turnover.

Land tax is proposed to replace stamp duties, consistent with the overall model of taxing what cannot be recreated (land, non-renewable resources, licensed markets) while maximising its economic potential. The tax would only apply to the unimproved value of the land itself, so as not to penalise improvements. But Henry recognises that many groups – pensioners and farmers, for example – may have valuable land with low incomes, so suggests using the income tax system to compensate low-income earners for the land tax. Others, including businesses, might need to reconsider their impact.

Taxing transport

Currently, two-thirds of Australian wealth is generated in the cities, but that is hampered by congestion – a $20.4 billion impost by 2020, or about 1.5 per cent of GDP, not counting the trauma some feel in peak hour or trying to get home for preschool pickup. Unless you’re careful, more roads are counterproductive: between 50 and 100 per cent of new capacity is filled by new road users within three years. So what do we do?

Better charging for road use, says Henry, as you’d expect from an economist. Our $16 billion in road-related taxes basically pays for new roads, but not for their wear and tear, policing, the annual $15 billion worth of accidents and whatever value you want to put on 1616 deaths. Those costs all come out of the general budget. The Henry insights are, first, that cars actually have zero impact on road wear-and-tear, which means that fuel taxes massively subsidise heavy vehicles; and, second, that electronic mass-distance-location charging is now available for those same heavy vehicles.

The Henry solution? User charges for heavy vehicles, an annual registration fee of about $500 per light vehicle to give unlimited access to the public road network, a congestion charge for peak demand areas, and a greenhouse gas emission charge as part of a broader emissions trading scheme or carbon tax. These taxes would account for the social, environmental and economic costs of traffic, so all other fuel taxes should be abolished. As should those pesky bugs, stamp duties.

It follows that Henry also suggests abolishing taxi licence fees, other than those needed for safety and service of the taxi system. Plates worth up to $477,000 would be a thing of the past (though the transitional compensation calculations could be fun). Anything that reduced the cost of taxi hire would be welcome, with taxis a regressive cost on the community: the poorest 20 per cent of the community spend more than twice as much of their income on taxis as other Australians because they are more likely to live in areas poorly serviced by public transport and/or not to have a car.

Any shift from road to rail will help with emissions, road congestion, the essential restoration of our rail system, and regional economies. The trade-off might be a day’s delay in deliveries by rail. But frankly, I’m amazed by what gets to me overnight at little cost, and I’d be happy to wait an extra day and be able to drive on highways without risking yet another truck-horror fatality. Rail-based freight companies may stage a comeback, and corporates might encourage them with rail-freight preferences. Taxis would be more common and mobile, with more frequent and cheaper trips replacing airport carparks full of cabs. Who knows, there may even be a real challenge to the tip-depriving monopoly Cabcharge’s 10 per cent.

Taxing resources

As flagged by its sledgehammer name, the main purpose of the government’s resource super profits tax is that we/they want more of the cash from resource extraction. Though reasonable, this is only a secondary argument for Henry.

Henry’s main argument, which I’d imagine would be a lot easier to sell politically, is that tax (in other words, fiscal policy) may be a better way to manage the mining boom than interest rates (monetary policy): it would help to get the most value from finite resources, maintain a balanced economy, and not penalise the rest of us. He argues that the owner of a non-renewable resource – us – erodes its value if it exploits the resource either faster or slower than the optimal rate, calculated against the market’s expected rate of return:

Arguments for exploration and production faster than this rate can fail to recognise that resources kept in the ground will generate a better return for the owner if higher rents can be obtained in the future (due to future higher prices or lower exploration and production costs). Similarly, arguments to bring forward exploration and production to create jobs can fail to recognise that this may be at the expense of future jobs in the resource sector (as there is a finite stock of resources) and may have an adverse impact on other sectors in the economy from which labour and capital are diverted.

Each month, the Reserve Bank looks at raising interest rates to dampen the isolated effects of the mining boom; meanwhile, the rest of Australia and the world economy are doing well to stay afloat. With mining accounting for just 1.4 per cent of jobs directly and another 3.5 per cent indirectly, it means that one-twentieth of the economy is setting policy for the rest, and not delivering the best deal for either its developers or the resource owners. Which all suggests that the resource super profits tax is a good idea, but like many other recent ideas it seems to be in the wrong hands for effective implementation.

Here is another case for better modelling and planning of the national environment, social and economic effects of major new investments or regional developments. While each project may be worthwhile on its own terms, particularly to its promoters, collectively they may be counter-productive. Without wanting to undermine a thriving market-based economy, there is a point where responsible governments will take a national view. Accurate information from a source broadly trusted is what is needed – if the adversarial system works in the law, a big “if,” it may not work in public policy. Such information sources are badly needed.

Not-for-profit environmental and social organisations

So you’re an NGO. Henry would like to simplify things for you. Which of the forty pieces of legislation administered by nineteen different agencies grants you your tax concessions? Your “public benevolence” status is defined by the Charitable Uses Act of… er… 1601 (the “Statute of Elizabeth”), so modern niceties like human rights, animal welfare, international aid and disaster relief need a separate application. But be wary. Henry assumes that not-for-profit organisations, “like for-profit [ones], will seek to maximise their profits in support of their philanthropic activities.” So, tax exemptions on the commercial activity of NFPs should be removed, because they “don’t provide an incentive for NFPs to undercut the prices of their for-profit competitors.”

But why would/should they? Orthodox economists struggle with any other model of firm performance other than profit-seeking, and use that assumption to support a range of findings. (Joke: How does an economist cross a river? First, assume a bridge.) But NFPs will maximise their social service activities and expenditures rather than any profits from them, and pricing is set accordingly. Any commercial services are priced at market rates, because they’re intended to raise funds for the social services, and to do otherwise would cause a backlash by other market participants who might otherwise be friendly to the NGOs.

These thoughts are very relevant to the current pokie-reform debate. Henry draws attention again to the obvious discrepancy of large mutual NFP clubs competing on a tax-exempt basis against commercial hotels and restaurants who do pay tax. Though tax-exempt, these clubs are not bound by the same rules as philanthropic NGOs, and “are free to spend their mutual receipts as they wish.” Where the only substantive activity of the club is to provide gaming, catering and entertainment to its “members,” “it is not clear that the wider community should entirely forgo tax on all of these profits, although some concession could be retained, particularly to support smaller [real mutual] clubs.” The discrepancies are highlighted by the clubs’ dependency on gambling. The 300 clubs without gaming averaged profits of $18,000 in 2005 (the last year the ABS/Productivity Commission published data), while the 1716 with gaming did a little better: $334,000 on average.

Spilling over into the carbon price debate

Henry stresses the idea that externalities or “spillovers” can work both ways. “An example of a negative spillover is where a river is polluted by inappropriate use of a fertiliser, causing harm to downstream users of the water. But spillovers can be positive too – a farmer who maintains native vegetation may deliver biodiversity benefits for the community, but will generally not be compensated for this service.” As these spillovers are not priced, or are priced poorly, “the environment is allocated inefficiently between its different uses, resulting in excessive environmental degradation.” Taxes can be used to address these spillovers.

It’s a theme that continues in the politics around climate change. Taxes can be used to price spillovers, but Henry is the zillionth economist to confirm that a properly designed emissions trading scheme (which is not a tax) is the best way of handling spillovers on greenhouse gases:

Market-based approaches allow the market to determine the lowest-cost means of abatement. Such approaches therefore provide the opportunity to deliver improved environmental outcomes at the lowest economic cost. They also provide strong ongoing incentives for investment in technology research, development and deployment, and in efforts to improve energy efficiency. [The] economic outcomes have often exceeded expectations as a result of market-oriented policy changes, as firms take up opportunities and incentives to innovate and improve productivity.

This time, maybe.

As with similar Productivity Commission reports and the like, the Henry Report is a rich vein of ideas and research on sustainability-related issues. While the final recommendations of these kinds of inquiries rarely make it through our poll-driven politics as a coherent body, they do provide ample material to support or counter a view or argument. Let’s use them when we can. •

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Photo: Andrew Jeffrey

Photo: Andrew Jeffrey