Opinion & Commentary
Fiddle diddle no more, tax needs an overhaul
As budget day approaches, the Federal Government is coming under mounting pressure to reform our income tax system, but it shows little inclination to act.
The Prime Minister says most Australians are not interested in tax reform but just want tax cuts. He has promised to deliver tax cuts if the Treasury thinks it can afford them.
John Howard could be right that there are few votes in tax reform, particularly if some people lose out. But there weren't many votes in the introduction of GST, and the Government was brave enough to do that. There aren't many votes in the recent labour market changes either, but they were needed and the Government pressed on with them.
That there is a problem with our income tax system is plain. It is riddled with distortions and disincentives.
The top rate of almost 50 per cent is increasingly out of line with other countries that have been moving to lower and flatter rates.
It is also out of kilter with the company rate, so most really high earners are paying a lower rate of income tax than workers earning little more than average income.
There are so many special allowances, exemptions, credits, offsets and write-offs that tax law has become indecipherable. We have to employ accountants to help us negotiate the tax maze, and vast sums get diverted into investments designed purely to reduce liability to tax.
Because tax brackets are not indexed to inflation, the total tax-take increases year by year without anybody even realising it. And the threshold at which people start to pay tax (an income of just $6000 a year) hasn't increased for years.
Because this threshold is well below subsistence income, workers are taxed before they have earned enough to maintain themselves and their families. The Government then has to give the money back in welfare payments that create a dispiriting dependency culture.
Churning of tax and welfare also creates high "effective marginal tax rates" as each extra dollar earned gets whittled away by tax on one side, and withdrawal of benefits on the other. This deters people from looking for work and penalises low-wage families whenever they try to increase their take-home pay.
Australia 's income tax system needs a radical overhaul to increase efficiency, reduce complexity, improve fairness, reward effort and encourage people to accept more responsibility for their own lives.
Here are eight basic steps that need to be taken.
· The Government should reduce taxes by keeping spending in check. Every dollar taken in tax syphons at least $1.20 from the real economy.
· The system needs simplifying by scrapping as many special allowances and rebates as possible. Since the Coalition came to power it has created 100 new tax breaks. The total cost of tax breaks amounts to 4 per cent of GDP, and this drives taxes higher than they need be. We should broaden the tax base and reduce the rates.
· Index all tax brackets. An honest tax system ensures that any increase in taxation is agreed by Parliament so all taxpayers know what's happening. Bracket creep undermines this principle. We need a law requiring all tax brackets to be revised annually in line with wage inflation.
· Align company and personal income tax rates. The corporate rate is now 17 percentage points lower than the top personal rate. This creates opportunities for arbitrage, and few really wealthy people pay the top rate.
· Move toward a proportional ("flat") tax. Introduction of a 40 per cent top rate should be the first step towards a system with just a zero rate (the tax-free threshold) and a flat 30 per cent rate above that. A flat tax of 30 per cent would increase output, reduce tax avoidance and evasion, and be fair.
· The tax-free threshold should be raised above subsistence income level. This would ensure no worker pays tax before they have earned enough to take care of themselves and their dependents.
· Reform the family support payments system to reduce high effective marginal tax rates. The cleanest way is to replace all welfare and family payments with a negative income tax while raising the tax-free threshold to $30,000.
· Most important of all, leave people to spend their own money. High taxes reduce people's capacity to pay their own way and encourage people to look to government to provide instead. Tax reform is needed to restore self-reliance and reduce dependency on government payments and services.
Australians are being "taxploited". Fiddling with tax cuts is not enough.
The system needs reforming, and with the economy booming, and the Treasury replete with our cash, now is the time to do it.
Professor Peter Saunders is the editor of Taxploitation, published by the Centre for Independent Studies.
