The Australian Economic Review, vol. 43, no. 4, pp. 429–36 Policy Forum: The Henry Review of Taxation The Henry Review and the Social Security System Peter Whiteford* Social Policy Research Centre, The Universityof New South Wales 1. Introduction At the 2009 Annual Conference of the Aus- tralian Council of Social Service (ACOSS), the Secretary of the Treasury Ken Henry stated that, ‘The tax-transfer system is the principal means of expressing societal choices about eq- uity. The tax-transfer system is a reflection of the kind of society we aspire to be’ (Henry 2009). This statement is of interest from a num- ber of perspectives, notably in its focus on eq- uity as a principle of reform and also in its characterisation of taxation and social security as a combined system. The importance of looking at the taxation and social security systems together has long been recognised in Australia (Podger, Ray- mond and Jackson 1980). The rationale for this is threefold. First, taxation is the source of financing for social welfare spending and correspondingly welfare spending is one of the most significant uses to which tax rev- enues are dedicated , with social spending (so- cial security, health and community services) accounting for just under 50 per cent of to- tal government spending in Australia. Second, the tax and transfer systems are the two main instruments used by governments to achieve distributional outcomes. Third, the tax and transfer systems overlap and can reinforce or offset each other, with implications for incen- tives to work and save and for household for- mation and other behaviour. Despite these well-recognised links between the taxation and social security systems, previ- ous reviews of the tax system in Australia have not focused in much detail on the role of the ∗ I am grateful for comments received from Peter David- son, Peter Saunders and Neil Warren. social security system. For example, the 1975 Report of the Taxation Review Committee (the Asprey Report) discussed the social security system in an eight page chapter of its 776 page report. The 1985 Draft White Paper on Reform of the Australian Tax System did not focus on the social security system (except to the ex- tent that transfers were a vehicle for compen- sation for the price effects of the proposed 12.5 per cent Broad Based Consumption Tax), but it did include tax proposals to reduce poverty traps associated with overlaps between the tax and social security systems (Australian Gov- ernment 2010). A New Tax System (ANTS) (1998) proposed more wide-ranging changes to the social security system, including increases in pension, benefits and family payments and reductions in income test withdrawal rates, but again the main driver of these changes was the need to compensate for the price effects of the 10 per cent Goods and Services Tax. In contrast, the Henry Review undertook a much more detailed analysis of the social se- curity system, looking not only at the inter- actions between taxation and transfer policy, but also analysing specific transfer policy is- sues in their own right. The Henry Review was preceded by the Harmer Pension Review, which reported in February 2009 and which was followed by significant changes in pension policy (for Age Pensioners, Disability Support Pensioners and Carers) in the 2009–10 Bud- get. In fact, the Harmer and Henry reviews in tandem provided the most detailed analysis of Australia’s social security system undertaken in more than 20 years—since the Social Secu- rity Review chaired by Professor Bettina Cass between 1986 and 1988. This article provides an assessment of the Henry Review’s evaluation of the Australian C  2010 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research Published by Blackwell Publishing Asia Pty Ltd