henry urges wider profits tax

Henry urges wider profits tax

* David Uren, Economics correspondent
* From: The Australian
* June 22, 2010 12:00AM

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.

Although the Henry review's final report did not indicate any preference over the best way of taxing companies, Dr Henry said yesterday a tax system known as the "allowance for corporate equity" held the most promise.

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.

It said the problem was that to exempt normal company profits from tax, a higher rate of tax had to be applied to super-profits. University of Sydney professor Michael Dirkis said it was possible that Treasury saw the tax on the resource industry as a trial for applying it to all companies. "The commonality is that you're looking at a normal return on capital as being the government bond rate and that profits beyond that should be taxed," he said.

Dr Henry said he did not agree that the resource tax had slim prospects of being implemented. "I don't see it that way yet at all, and bear in mind this particular tax policy proposal is still two years away from commencement," he said. However, he said the experience of the past few weeks had underlined the difficulty in gaining "political traction" for ideas that were accepted wisdom among tax academics.

"It is much tougher to convince a wary public, tougher still cynical media. And it is virtually impossible -- in Australia at least -- to secure political consensus on any tax proposal other than a straightforward tax cut," he said.