Politics with Michelle Grattan: Treasury veteran Ken Henry on the “enormous damage” the tax system does to young people

In August, the Albanese government will hold an economic “roundtable” that will discuss productivity, budget sustainability and resilience. Australia’s tax system will be one of the central issues, and stakeholders are gearing up with their varying arguments for changes.

Ken Henry, a former secretary of the Treasury, has been part of the tax debates of the past 40 years. He was a treasury official working on tax at the time of the Hawke government’s 1985 tax summit and led the major review of the tax system commissioned by the Rudd government.

Henry is a passionate advocate of bold tax reform, especially reform that tackled intergenerational inequity, and he joins the podcast to discuss the issues.

Looking forward to the roundtable, Henry outlines some of the many changes that he thinks should be considered,

Firstly we’ve got to get rid of the remaining transactions taxes like stamp duty on property conveyancing and so on […] that alone means there has to be a commonwealth-state exercise.

Secondly, we’ve got to extract more revenue from the taxation of natural resources and also land.

Thirdly, we’ve got to get more revenue from the taxation of environmental externalities. In the tax review published in 2010, we were developing that at the same time as the Treasury and other departments were developing the Rudd government’s carbon pollution reduction scheme. We thought that there was going to be quite a significant carbon price in Australia. We don’t have it today – we should.

Henry wants a tax system that does not disadvantage younger people who are in the workforce; he says the present “lazy” reliance on bracket creep to “bring the budget back to anything approaching balance is doing enormous damage to younger people in particular”.

On reform generally, Henry says he’s “disappointed” that more hasn’t been done on the recommendations from his review.

I’m very disappointed, but I guess one would expect me to be very disappointed. And he laments Australia’s “abysmal” productivity performance over the last quarter century.

When I then reflect on what’s happened to Australia’s productivity performance, I mean we were saying in 2002 that we really should aim to get the productivity growth rate up from 1.75% to 2.25% a year and in fact if you look back now over the first 25 years of this century right what we actually achieved was only three quarters of one percent a year. That productivity performance is just abysmal.

To put it in terms that everybody will understand, had we achieved the two and a quarter percent a year rather than three quarters of a percent a year, the average wage and salary earner in Australia, their income would be 45% higher today than it is. This is not small stuff, this is huge stuff.

Despite backing significant reform, Chalmers has been a long-term opponent of GST reform, although not ruling it out completely. Henry says all options should be left on the table,

It would be better not to constrain the reform process by ruling the GST out and that was a shame for those of us who worked on the Rudd government’s tax review  […] that the terms of reference that we were given said that you’re not to make any recommendations concerning the GST.

Those who are having a good hard look at how to restructure the Australian taxation system should not have one hand tied behind their backs. Having said that, I do think it’s possible to achieve major reform of the Australian taxation system without necessarily increasing the rate or extending the base of the GST.

On Chalmers’ plan to tax unrealised capital gains on big superannuation balances, while not directly opposed, Henry says there are other ways to make the system fairer,

I’m not opposed to it. It’s just that I think there are other ways of increasing the taxation that applies to high superannuation balances and improving the intergenerational equity of the superannuation system. In the tax review that the Rudd government Commissioned, which I led, which was published in 2010, we spent quite a lot of time detailing how we thought the taxation arrangements applying to superannuation could be improved.

The thing that stands out is this big difference between the taxation of superannuation fund earnings in the so-called accumulation phase and the treatment that they get in the so-called pension phase, So […] these poor young workers, struggling, see the earnings on their accumulating superannuation balance as being taxed at 15%, whilst those who have big superannuation balances and are in the retirement, the earnings in their superannuation funds are completely tax-exempt, And that just seems rather weird.