David Uren, Economics correspondent
From: The Australian January 22, 2010 12:00AM
AUSTRALIANS face tax hikes as a result of the Henry tax review, but older workers could be offered lower marginal tax rates to stay in their jobs as the nation grapples with the demographic time bomb of an ageing population.
Ken Henry, chairman of the tax review, yesterday put higher taxes firmly on the agenda when he delivered a blunt warning that future governments would need to produce strongly growing revenues in the longer term, and that taxes would have to rise as a share of GDP.
"The tax system needs to be prepared for the probability that in order to finance the government-provided goods and services demanded by the community, revenue needs will grow strongly in the longer term," Dr Henry told a tax conference in Sydney yesterday.
"It would be prudent to plan on the basis that the tax system will over time have to generate revenues to meet substantially larger fiscal costs." But older workers may do well from the Henry review as the government searches for ways to keep people in jobs longer to ease the pressure on the social security system.
Dr Henry suggested cutting taxes would make a bigger difference to the number of older workers deciding to remain in the workforce than it would for people of prime working age, who were likely to stay employed in any case.
"Older people are less likely to be in the workforce, due to retirement or working less hours," he said. "Marginal tax rates might need to be adjusted over time to ensure they reflect the changing abilities and propensities to work of different cohorts at different times in their lives."
Marginal tax rates could be lowered for older workers by making it easier for them to work while receiving the age pension, or by extending measures such as the mature-age tax offset offered to people aged 55 and over.
The Rudd government, which is considering its response to the Henry tax review, is bracing for a hostile political reception to the review, with Opposition Leader Tony Abbott declaring that all he expected from the exercise was "red tape and new taxes".
The government has pledged to keep tax to no more than the 24.7 per cent of GDP averaged in 2007-08 as part of its medium-term budget strategy, and would have difficulty managing any recommendations for new and increased taxes.
While saying he did not want to enter the debate about climate change, where the Coalition has tagged the government's emissions trading scheme as a "great big new tax on everything", Dr Henry said there was a strong case for new taxes to tackle environmental challenges.
Dr Henry said the political challenge of tax reform was shown by the hostility to taxing fringe benefits in the 1980s, when the Coalition fought the 1987 election campaigning for its repeal.
"Who on earth would consider it sensible that an executive who receives from his employer some part of his remuneration in the form of a Porsche motor vehicle and a holiday apartment on the Gold Coast should not be required to pay tax on that income?" Dr Henry asked.
"Tax reform is always difficult - even the things that are most obvious. That's probably because it almost always confronts sectional interest."
The Henry review is likely to endorse the government's long-term goal of lowering the top marginal tax rate.
Dr Henry said highly skilled people increasingly operated in a global labour market, suggesting that their tax rates needed to be globally competitive.
He said the ageing of the population would be a particular challenge for state governments because of their fast-rising budgets for health services.
States have mainly depended on stamp duties, land and payroll taxes to raise revenue, but the spread of exemptions has meant fewer taxpayers are now carrying a greater burden. "Funding projected increases in state health expenditures from these taxes would have increasingly high social costs," Dr Henry said.
There has been speculation the review will suggest extending payroll tax to small businesses and possibly exchanging the current stamp duty on property sales to a standard annual land tax, in addition to council rates, on all property.
There has also been speculation that capital gains tax will be changed so that it is charged at a person's full marginal tax rate.
However, Dr Henry said yesterday there was "almost no logical reason for taxing capital income at the same rate as labour".
He said while this was a revolutionary idea, compared with Australia's current tax system, it was established wisdom in academic circles.
The Treasury secretary said no country provided a blueprint for taxing capital income, including company profits.
"Like the Australian environment itself, the solutions are likely to be uniquely Australian," Dr Henry said.
The review's expected cut in company tax - financed in part by a new resource rent tax - is considered likely to bring the most fierce opposition from sectional interests.
Mr Swan's office last night said the Treasurer did not want to pre-empt the release of the Henry tax review.
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I think we'll have to wait for the dust to settle a bit first, to get our heads around it.
There's still much to debate in parliament...
On the surface - employer's superannuation contributions are on the way up.