Putting fox in charge of the chicken coop | The Australian

Ken Henry's opinions (The Australian, August 20) start from exactly the wrong premises and reveal a bureaucratic, Canberra-centric view of the world. He says he wants a more centralised and integrated taxation system and uses language such as "empowering the states". He clearly sees states as "service deliverers" and not genuine policy partners in the federation. He says he will consider each tax on its merits and then consider the level of government to which the tax will be "assigned" (it is not clear who is doing this assigning: presumably his panel).

If Australia had a unitary system of government, some of this might be appropriate. Even then, a tax review ought to begin with the time-honoured principles of taxation, including that taxes should be fair and equitable, efficient, appropriate, certain, non-distorting, easy to administer and transparent. It would also begin by acknowledging that Australia is generally too dependent on direct taxes, which are often higher than our competitors', and that the tax system has too much vertical imbalance in its federal-financial relations.

But Australia is not unitary; it is a federation and any tax review of this kind should begin from the premise that states are sovereign partners. They do not need to be "empowered"; they already have sovereign powers, including in taxation, and they had them before the commonwealth was created. Indeed, states jointly own the most important tax: income tax. They receive the proceeds of the GST only as a proxy for having temporarily given up their income-taxing powers, which they could reclaim at any moment. Indeed, if Henry were serious about his task he would ask his boss to amend his terms of reference to include the GST, otherwise his findings are going to be distorted and sub-optimal. It is the GST that is arguably the most iniquitous tax in this nation, with unfair exemptions for many government bodies that are in competition with private ones, and a piecemeal array of politically stitched-up deals for many sectors. The Henry review could have been the one chance to reform this mess. Why won't he request Treasurer Wayne Swan to amend his terms of reference to include the GST? Otherwise nobody can claim that this is a comprehensive tax review: yet that is precisely what Swan has been saying.

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