This is an edited transcript of Dr. Ken Henry’s radio interview with Andrew Pike on ABC's RN Drive Program recorded on 15 February 2024.
Dr. Ken Henry is an economist and public servant who served as the Secretary of the Department of the Treasury from 2001 to 2011. He chaired the Future Tax System Review, known as the Henry Tax Review, in 2010. Dr. Henry was also Chair of National Australia Bank from 2015 to 2019.
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Andrew Pike: How often do you find yourself warning somebody that something bad is going to happen if they don't act, and then you have to sit back and rather painfully watch it play out just as you suspected it would? That's unfortunately been the experience of one of Australia's top economists, who's now warning that the state of the tax system has deteriorated to the point that Australia's social compact is at risk of falling apart. Dr. Ken Henry was the Treasury Secretary for a decade until 2011. He famously conducted the comprehensive, routine branch examination of the tax system known as the Henry Review. That report made 138 recommendations and specifically warned about possible tax distortions created from negative gearing.
Dr. Henry, great to have you.
Dr. Ken Henry: It's good to be with you.
Pike: 138 recommendations. How many of those recommendations were adopted? Do you know?
Dr. Henry: No, I don't. Very little actually. And some of those that were adopted were subsequently reversed. So, for example, we proposed a new taxation system for Australia's natural resources to tax the very large profits that mining companies, multinational mining companies especially, were making out of the extraction of Australia's natural resources.
Pike: The RSPT, yeah.
Dr. Henry: The RSPT. At that time, the Rudd government endorsed that recommendation, but of course it didn't survive the parliament. Another of the recommendations, you remember at that time the government was designing what became called the Carbon Pollution Reduction Scheme, which was the emissions trading scheme, the economy-wide emissions trading scheme for dealing with climate change or carbon abatement. That was in due course implemented, and then of course, that was abolished when the Abbott government came into power. So, we have gone backwards. We're in a much worse position today than we were 15 years ago when we were working on that review.
Pike: I think a lot of people in voter land right now have seen the Stage 3 tax cut changes and vaguely believe that there is some more equality in the tax system. You say that Australia's social compact is at risk of falling apart due to the state of the tax system. What do you mean?
Dr. Henry: So, what I mean is that – and actually your reference to the restructuring of the personal income tax scales is highly appropriate, because the discussion that we in Australia have been having about the design of the personal income tax scales over the past 12 months or so has been a conversation about fairness, about equity, about who should get tax cuts. The tax cuts are going to be provided. Who should get them, high-income earners or low-income earners? And not surprisingly, the community consensus is that those tax cuts should be skewed to lower and middle-income earners.
Now that's consistent with a basic principle of tax reform, which is that if you think about the features of the tax system in terms of efficiency effects, basically what impact does the tax system have on the performance of the economy; the equity effect, which is all about fairness; and the simplicity of the tax system. If you think about those three buckets, the one that trumps, always trumps, is equity. But here's the point. Because we have lost interest in economic efficiency as a guiding principle, and also to some extent in simplicity, the tax system has now become so distorted that it is underpinning the greatest inequity of all, at least the greatest inequity that I've seen in my lifetime, which seems to me to be an intergenerational tragedy.
So, the point is that we now have, because of this intense focus on equity at every point in time, we have a system which has been designed to be fair to the baby boomers, people like me. The consequence of it is that people like me are sitting on large, untaxed capital gains in houses that young working-age families will never be able to afford to buy, and in fact, increasingly, are not being able to afford to even rent. And we're sitting there either as investors getting very lowly taxed capital gains and interest deductions, or we're sitting there on tax-free capital gains, and we have priced out the working-age generation. We've just priced them out of access to the Australian property market.
That's just one example of the way that through this intense focus on equity, equity, equity for every tax issue, we have managed to produce a situation in which we have created a tragic intergenerational inequity. We've lost sight of the main game. The main game should be making a better country for future generations.
Pike: So, if you don't disagree with the Albanese government's changes to the Stage 3 tax cuts, you say that they ultimately go to that point of equity, which is largely a good thing, what more can the Labor government do to address this equity to get middle Australians and working-age Australians into the position that their parents enjoyed?
Dr. Henry: Well, get serious about tax reform.
Pike: Negative gearing?
Dr. Henry: Well, of course, that has to be part of the discussion. We have to talk about negative gearing. We have to talk about the capital gains tax concession, the fact that only 50% of nominal capital gains are included in a taxpayer's income, whilst they get full interest deductions. That's what negative gearing is all about. We have to get serious about that. We have to think about the way the capital income is taxed, in the way the capital deductions are allowed in our system. But that's only one of the things we have to think about.
I mean, my generation, the baby boomers, at the same time as we're sitting on those tax-free capital gains and our wealth is not taxed, we are paying the smallest rate of consumption tax in the industrialized world. We've got to think about consumption tax in this country. The whole GST debate from 1975, when Kenneth Asprey published his report, The Asprey Review in 1975, right through until 2000, the debate was all about the so-called tax mix switch, putting more reliance on taxation of consumption and less reliance on the personal income tax system.
Pike: Is that the Scandinavian tax model? You've sort of raised this idea.
Dr. Henry: No, the Scandinavian tax model is really about how you apply similar taxation treatment to different forms of capital income, whether it'd be interest, rent, dividends, capital gains, trying to tax those in a uniform manner so as to reduce the distortions in the economy. That model does do a lot to address the distortions created by negative gearing. And that is one of the distortions that we do have to address.
But the other one that I was talking about just then is that we have to go back to thinking about the appropriate balance between taxes on income, taxes on wealth, and taxes on consumption. Because the source of the intergenerational inequity that I've been talking about is that the workers who are the ones that are paying the personal income tax, they are having to shoulder the burden of supporting a Commonwealth budget that delivers benefits not just to aged people, but predominantly to aged people or increasingly to aged people, I should say, who are themselves contributing very little. Because they're not paying tax on their superannuation, they're not paying tax on their capital gains, and they're paying a very, very low rate of consumption tax. So, we've got to ask ourselves, is this really fair? Is it really fair that the young working people who are the ones who are paying all the tax, they're not able to afford a house? They're the ones who are going to have to pay off the massive public debt that has been accumulated both in the Global Financial Crisis and more recently in the pandemic. Many of them have huge HECS bills. I mean, for goodness sake, how can anybody think this is fair?
Pike: I mean, you're almost directly talking to my generation in my early 40s. A lot of my friends are exactly in this position.
Dr. Henry: Right.
Pike: So, let me ask you then, who do we blame? I mean, do you put blame at the feet of the Rudd-Gillard government, which was in power at the time of your review, because it was arguably their lack of action, which allowed subsequent governments like Liberal and Labor governments to sort of sit on their hands?
Dr. Henry: I mean, of course, I would wish that they had been more successful. But they had a go. I don't blame them. Actually, I blame all of Australia. I think as a country, we've got to get real about where the country is going and the policy changes that we need to improve the way that the country is going. Many commentators will tell you that the Australian economy is really, really strong. What they mean is that the mining sector is doing well. That's what they mean. The mining sector, let me tell you, employs less than 1.5% of the Australian labor force, right? And yet, that's what's driving the great optimism amongst the economic commentators in Australia and including politicians in Australia. Oh, well, the economy must be doing well, but they're really talking about is mining is doing well, right? We've got to start worrying about the rest of the economy. We've got to start worrying about the other 98.5% of the labor force and what's happening to their real wages growth? Well, negative. And why negative? Because we don't have policies that are making the labor force more productive year after year after year.
Pike: So, on that, we heard yesterday, a treatise from Professor Ross Garnaut, who basically believes it's time for Australia to revisit a carbon tax. He calls it a carbon solutions levy, or CSL, get prepared to hear that quite a lot over the next few months until the next election. I mean, essentially, this is to incorporate the climate impacts of fossil fuels into the economic system also to open up our export industries to European standards, who are also implementing these kinds of taxes. What did you think of this vision, this idea of a CSL?
Dr. Henry: What do I think about it? Yeah, I think it's a great idea. By the way, I don't see it happening anytime soon, but I do think that that's exactly the sort of tax change – tax changes of that magnitude that we need to be having a discussion about. And we have avoided those discussions for many, many years now. We published the Intergenerational Report in 2002, which pointed to some of the looming intergenerational challenges that you and I have been talking about this afternoon. And we have, in the 20 years since studiously avoided talking about these big policy changes that are going to be required. And a policy change of that sort is exactly the sort of thing that we should be talking about.
Pike: It was Julia Gillard that said when she was PM, we think an abolition of negative gearing would cause distortions to the property market we don't want to see. I mean, this is sort of part of the problem, isn't it, that politicians are too afraid to tackle this head on?
Dr. Henry: Too afraid, yeah. I do remember when I was posted to the OECD in Paris, which was a lovely posting, I've got to say, but the analysts in Paris used to say that Australia was top of the class when it came to dealing with adversity. But whenever Australia thought that the good times were rolling, policy was just crap. And for most of the time, we think the good times are rolling, and so policy is just crap.