"It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong." Richard P. Feynman

Tuesday, June 22, 2010

Unbelievable- Henry's New Tax Idea is Idiotic!

Treasury Secretary Ken Henry , not happy with putting the Rudd Government's poll numbers in the toilet over his resources tax now wants to extend it to all companies. With the Government under siege over the mining tax this idea will be as popular as the plague with Labor and will give the Opposition plenty of ammunition against a big taxing government.

A super-profits tax should be rolled out for all companies in Australia as a long-term reform.

Treasury secretary Ken Henry says the tax would be similar to the model proposed for mining groups.
Companies would be able to earn up to the government bond rate tax-free, but would then pay a heavier tax on "super-profits" above that level -- although less than the 40 per cent mining tax.
Complaining about the difficulty in converting academic ideas on tax into practical policy, Dr Henry told a tax conference in Sydney yesterday that the success of his review should not be judged by the number of recommendations adopted by Canberra but by its influence over the next 40 years. He said that although lowering the company tax rate towards 25 per cent should be a short-term target, eventually Australia would need a better method of taxing companies. One of the problems with the existing system is that companies are allowed to claim tax deductions for interest paid on their debts, but not for dividends paid to their shareholders. This means they are encouraged to use debt finance.
Background papers prepared for the Henry review explain that this would allow companies to earn a return on their equity investment, which should be no greater than the government bond rate. Profits higher than this would be treated as a super profit or economic rent, and would be taxed at a higher rate.

Dr Henry said variants on this system had been trialled in Croatia, Brazil, Italy, Austria, Belgium and Latvia, and offered the "least-resistance path of reform". However, an IMF study said most of these countries had since abandoned that tax system.
So even  the financial "giants" of Croatia, Brazil, Italy, Austria, Belgium and Latvia have abandoned this dopey idea but Henry still pushes it for Australia.
Henry laments: the experience of the past few weeks had underlined the difficulty in gaining "political traction" for ideas that were accepted wisdom among tax academics. 
Academic qualifications do not necessarily mean wisdom and in this case exactly the opposite. You would not allow these academics to run a corner store and they are in charge of a country, God help us all!
We have seen what has happened when academics seized the climate agenda , a disaster we don't want replicated in the economy.


  1. What Henry fails to see is that few taxpaying individuals, or entities have his intense technical interest in, or understanding of, the taxation system; nor do they want this. After all, that is what they pay him for and therein lies the real problem.

    Because he is a high ranking public official with an enforcement role to play and is not an elected official, he obviously sees himself as being in an unassailable position. He seems to think he should be the one who dictates government policy and therefore what is good for the unwashed masses, who apparently lack the intellectual ability to understand such complex issues and should therefore just bow to his wishes and consent to whatever he commands.

    This is typical of the egocentric behaviour one might expect from a person who has completely forgotten and forsaken the second of the two words that go to make up the term 'Public Servant' and sees himself as being above all of that.

    The government needs a certain amount of money to run the country and his role is to ensure that this money is raised in a fair and equitable manner using whatever tools the elected government of the day chooses to adopt.

    True, like most of its kind, this system is far from perfect and over the years it has definitely become untidy and unwieldy and in need of reform and I doubt any sane thinking person would deny this, but lets not forget that at the very heart of these problems has been a penchant for resorting to highly complex, technical solutions designed to create an elite structure of taxation specialists within the public service and professional business world.

    Why an earth then should we turn to these very same people for the solution to this problem when we know from experience it is folly to put the fox in charge of the henhouse?

    Because he is so vested in the industry, I seriously doubt Mr Henry's ability to come up with a solution to this problem that is going to any fairer, or less complex than what we have now and to my mind, his highly technical, academic based views on the so called 'Super Profits Tax' and related issues only serve to confirm this.

    I'm afraid that problems of this nature will continue to exist as long as people like him see the redistribution of wealth as a desirable outcome of any equitable taxation system. I have no problem with those who are well off paying higher taxes or with taxes being used to help those genuinely in need, but to blatantly talk of profits in terms of 'Super Profits' as though there is some arbitrary, but fair way of determining what is a fair profit and what is not flies in the face of everything that has made this country great.

    We all understand the concept of 'having a go' and that this implies being prepared to take a risk, so it follows that the higher the risk, the greater the return should be and this is what underpins our entire commercial system at the most basic and fundamental level. Take this over-riding incentive away and things like long research and development and mining exploration will soon become a thing of the past.

    Wake up Mr Henry!

  2. Teejay,
    You are right in what you say. This kind of tax is a retrograde tax in that it taxes success which is not productivity oriented. If more tax revenue is needed then a GST increase would be a far better way . Government efficiency improvement and expenditure reduction would be much better than both.