Opinion & Commentary
Taxation by stealth must top reform list
Throughout the federal election campaign, Kevin Rudd boasted of being an ‘economic conservative.’ Now he has the chance to prove it.
His first priority should be reform of personal income tax. Bracket creep increases the government’s tax-take every year and allows politicians to hand the money back at election time masquerading as genuine tax cuts. This is dishonest. It is taxation by stealth. To establish fiscal probity, Rudd should index all tax thresholds to inflation.
Labor has promised to reduce the number of tax rates, and the further they go in flattening the tax scales the better. They should also simplify our ludicrously complex system of rebates, allowances, offsets and credits. Three-quarters of taxpayers employ accountants yet basic rate taxpayers in other countries never have to make a tax return. Wayne Swan should strip out most of this clutter and cut the rates instead. He and his boss should also scrap their proposal to add yet another rebate, for parents who buy a home computer. Economic conservatives don’t fiddle, they simplify!
Closely linked to tax reform is the need to overhaul family payments. Under Howard there was a major transfer of income from single people and childless couples to parents with dependent children. It is right that parents should pay less tax than people without children, for their basic living costs are higher, but the system Howard and Costello put in place is a dog’s breakfast, and it has turned most of middle Australia into welfare recipients.
The distinction between ‘Part A’ and Part B’ family payments lost any meaning when Part B payments were extended to part-time second earners in the run-up to the 2004 election. That election also left us with a child care muddle by superimposing a new child care rebate onto the existing Child Care Benefit. Having two payments is costly, cumbersome and complicated, and it has been made even more so by transforming the rebate into a Centrelink payment.
Instead of rewarding one set of parents with a special payment if mum stays at home, and counter-balancing this by rewarding another set of parents with child care subsidies when mum goes out to work, the Rudd government should recognize that families with children have higher subsistence costs than those without, and build this into their overall tax-free allowance. Rather than giving families earmarked payments, let parents keep more of the money they earn, and leave them to decide how to spend it.
Once it has sorted out family payments, the new government should concentrate on reducing welfare dependency among jobless households. Almost two million Australians of working age are living on government payments. Unemployment is at a thirty year low, but there are approaching three-quarters of a million Disability claimants and six hundred thousand on Parenting Payment. Many of these people are ‘unemployed’ by another name. They could and should be working.
The Howard government made a start by changing the eligibility rules, but the key problem remains that many welfare claimants are unqualified, and unskilled jobs are disappearing. Labor is well aware of this, but thinks more education and training is the answer. For some people it is, but in many cases it won’t work, for many unqualified people lack the ability to develop the skills Labor wants to give them.
The real solution is to increase demand for unskilled labour, and that means reducing its cost. Some years ago, five eminent economists proposed freezing the minimum wage (the second-highest in the OECD) and compensating low-income workers by reducing their tax or topping them up with credits. Something along these lines is essential if low ability people are to make an active contribution in the future.
Labor likes the sound of tax credits but is likely to resist any reduction of minimum wages. But if we don’t seize this nettle, welfare will become a permanent dumping ground for people for whom more exams and qualifications can never be the answer. It is also just plain dumb to reintroduce Unfair Dismissal laws if we want to encourage employers to take on more marginal workers.
Finally, Labor made much in the campaign about ‘affordable housing,’ but economic conservatives know there is little governments can do beyond releasing more building land. Labor’s idea of encouraging first-time buyers to save for a deposit in low-taxed savings accounts should quietly be forgotten, for anything that boosts spending power will make matters worse by bidding up prices still further. For the same reason, the self-defeating First Home Buyers’ Grant should be wound up.
After eleven years of big government profligacy, a strong dose of economic conservatism is exactly what the country needs. But the next federal election is only a thousand days away. Rudd needs to act decisively if he wants to break with the Big Government Conservatism of the past.
Professor Peter Saunders is Social Research Director at the Centre for Independent Studies.
