State and federal tax reform a decade after the Henry Review

25 September 2019

Australia’s most comprehensive review of state and federal tax policy, the Henry Tax Review (2009), made many recommendations to improve the resilience, equity and efficiency of the tax system. A decade later, the policy issues raised in the Review remain as relevant as when the report was first released. September’s Melbourne Economic Forum will revisit these issues, with presentations and discussion covering the range of state and federal tax reform options, the incentive and distributional effects of interactions between tax and transfer policy, the relative efficiency of Australia’s many state and federal taxes, and options for promoting investment without cutting company tax.

John Freebairn. “Why Tax Reform?”

One or more of the often conflicting but sometimes complementary reasons for tax reform include: change revenue; redistribute for equity; reduce distortions to increase productivity; and, simplicity to save operating costs. There are legitimate arguments pro and con changes for revenue and redistribution objectives. On the other hand, there are many well-researched options for the reform of Commonwealth and State taxes to improve national productivity and to contribute to higher living standards for most Australians.

Guyonne Kalb. “The Australian tax system: providing incentives and a safety net?”

Interactions between tax and transfer policy (e.g., including family benefits and childcare subsidies) can have the unintended consequence of creating a “welfare trap”. Empirical analysis shows this is a particular concern for the primary caregiver when children are present (mostly women). Work disincentives at this life stage affect labour market participation and income distribution over an individual’s lifetime. Although encouraging female labour force participation is often mentioned by Government, analysis shows that policy changes between 1994 and 2016 do not appear to have contributed much to the increased labour supply by women. I will discuss options for reform addressing the hurdles faced in combining family and work.

Jason Nassios. “The economic efficiency of Australia’s state and federal taxes.”

The economic modelling in the Henry Review was undertaken with a long-run, comparative static model, with a single layer of government. In reality, Australia’s state taxes differ across the eight states and territories, and some taxes, such as state land tax, health insurance and life insurance levies, are applied in a subset of states and territories only. A general lack of interstate coordination is therefore evident in setting tax policy, as well as in reforming Australian tax policy. I will present a comprehensive analysis of the impact Australia’s state and federal taxes have on economic welfare using a bottom-up multi-regional dynamic model of Australia’s states and territories, called VURMTAX. Appropriately timed to coincide with the 10-year anniversary of the original Henry et al. (2009) review, this study provides the most detailed snapshot of the relative efficiency of Australia’s many taxes to date.

Janine Dixon. “Can an investment allowance stimulate investment and wages without harming national income?”

Dixon and Nassios (2018) find that unlike a cut to company taxes, an investment allowance can stimulate investment and wages without damaging gross national income. With company tax cuts off the agenda, there are renewed calls for an investment allowance from across the political spectrum. Here we revisit Dixon and Nassios (2018) with updated modelling, and report results for key indicators of economic well-being including wages, employment and national income.