Ideas@TheCentre
The easy way to cut tax
The difficulty with cutting tax is that the government also needs to reduce its spending, and few people are willing to give up their government benefits. But there is a way to cut tax and spending by $80 billion, while leaving nobody worse off.
The trick is to cut middle-class welfare and link it to a matching cut in income taxes for the same people.
The total welfare budget in Australia is more than $250 billion per year, and about half of this goes to people who paid the tax in the first place.
We can reduce this pointless churn by means-testing welfare benefits, including health and school benefits, so that middle- and high-income earners pay for themselves.
There are two obvious objections to means-testing government benefits – that it is unfair to people with higher incomes and it creates a disincentive to work. But both of these problems are solved by linking the means-test to matching income tax cuts.
At first, a tax-welfare swap may not seem like a big change. There would still be the same amount of redistribution and there would still be universal health care and schooling. However, by reducing the pointless churn in the system, we could save billions of dollars of wasted administration, compliance, and efficiency costs. Removing the churn will also encourage more individual responsibility, provide greater transparency in the tax-transfer system, and make our welfare system more sustainable.
This is a policy that should appeal to all sides of politics. Free-market advocates should applaud the tax cuts and smaller government. On the other side, social democrats should be pleased with the removal of middle-class welfare and creating a more sustainable welfare system.
The only benefit from the current system is that it allows politicians to score political points by giving people back their own money. The billions of dollars of churn that flows from taxpayer to government to the same taxpayer is pointless, and provides a golden opportunity for the government to cut tax and cut spending without hurting anybody.
John Humphreys is a Research Fellow with the Economics Program at The Centre for Independent Studies. His report, ‘Ending the churn: a tax/welfare swap’ was released by the CIS this week.
