The Burning Need For Tax Reform.

Posted on October 28, 2007 by Daniel Farmilo

Tax cuts are good. Allowing people to keep and spend their own money is far more productive than taking taxes from the entire population and then giving it back to us in the form of election promises. The reason for this is simple: people spend their own money far more carefully than they spend the money of others.

We have had some tax cuts over the years from the Liberals, but just how much have they cut tax? It is true that an earner on a specific nominal wage will be paying less tax now than they were ten years ago; however, the one thing that politicians don’t like to mention when talking about the tax take is inflation. Over time, everyone’s nominal wages have crept up, yet the tax-free threshold has been idle at $6000 for many years. Inflation over time pushes people into higher tax thresholds, causing them to pay higher rates. The fact is that despite the Liberals’ tax cuts, the real per capita tax take has increased 34% over the last ten years. Has this resulted in 34% better government services?

Now John Howard and Peter Costello have announced another round of tax cuts (also largely adopted by Labor), but what they don’t tell you is that if wages don’t keep up with inflation during the period between now and 2010, take home pay will actually be lower than it is now. Increases to the “low income tax-free threshold” really don’t mean a thing for the average working Australian when they have to wait until tax return time to actually see the money.

It’s time to put an end to the smoke-and-mirrors style of tax cuts that we have seen since 1996. Only the Liberty & Democracy Party offers a comprehensive tax cut package for all Australians. We call it Reform 30/30. Based on a tax-free threshold of $30,000 for everyone and a single marginal rate of 30% above that threshold, Reform 30/30 will revolutionise and simply the Australian tax system. It also links to a comprehensive welfare policy based on a subsidy of 30c for every dollar below the $30,000 tax-free threshold, called the Negative Income Tax (NIT). It ends the harassment of the unemployed and the discrimination against couples. It also ends the various loop-holes and tax avoidance avenues currently available through deductions.

Reform 30/30 will allow us to abolish the destructive minimum wage, which is nothing more than a discrimination against young or unskilled workers, creating new jobs right across the country. We want to provide workers with a minimum income, which is far better done through the NIT system. The benefits of this are clear: no-one receiving welfare payments pays income tax, no-one paying income tax receives welfare, and everyone pays the same marginal rate above the same tax-free threshold.

For more information, see the LDP tax policy, or for a more comprehensive policy outline, see Reform 30/30: Rebuilding Australia’s Tax and Welfare Systems by John Humphreys.

Filed under: Policy

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9 Responses to “The Burning Need For Tax Reform.”

  1. Ralph, on October 30th, 2007 at 9:55 pm Said:

    G’day Daniel,

    Firstly, the flat tax you propose is still progressive. The $30,000 threshold makes it so. Clearly a person on say $40,000 will be paying a smaller proportion of their income as tax then a person on $100,000. Also bracket creep will still occur, what single rate tax does is reduce the number of brackets to one.

    Secondly, will the negative income tax require a work test? If not their would be nothing stopping people receiving their
    $9,000 for no effort- bludgers paradise.

    The negative income tax is supposed to be introduced with removing other benefits. Does this include family payments?
    If so you have two chances of it being introduced none, and buckleys.

    ta

    Ralph

  2. Daniel Farmilo, on October 30th, 2007 at 10:13 pm Said:

    Hey Ralph,

    You’re right to say that the system is “progressive”, but I am only referring to the fact that there is one “marginal rate” above the TFT.

    Creep within brackets (or “bracket” as the case is with 30/30) can partially be solved by indexing the rates. I’d imagine our view would be to index the TFT and marginal rate to inflation, but it is a substantial tax cut to start with, so we won’t get ahead of ourselves just yet. Obviously we are only trying to stop inflation based bracket creep, with a real wages increase naturally comes an increase in the average percentage of income paid as tax, and I don’t think anyone disputes that.

    The NIT will not require a work test, and this will greatly reduce Centrelink compliance costs. It’s also worth noting that $9000 is slightly less than what is received now, but Reform 30/30 would greatly increase work incentives. Coupled with the abolition of the minimum wage and the huge amount of jobs that would create, we don’t expect many people to be staying out of work just to get $9000 a year from the Government.

    Regarding the family benefits, please see this section of policy from the LDP welfare page:

    “The existing Family Tax Benefits part-A and part-B as well as the Child Care Tax Rebate and Baby Bonus would be replaced. However the LDP tax policy would recognise the additional cost of raising children with an increased tax free threshold of $6,000 per child for the nominated parent (usually the primary income earner) and a corresponding increase in the low income subsidy for families.”

    Of particular note is the fact that if the tax-free threshold is increased in this case, NIT payments are also increased for eligible individuals (obviously people not eligible for NIT payments get to keep more of their own money tax-free to help assist with the costs of raising a child/children).

    Hope this answered your questions.

    Regards,
    -Dan

  3. Ralph, on October 31st, 2007 at 5:05 am Said:

    G’day,

    Well, you say that the threshold will be indexed to inflation, the LDP doesn’t. In fact flat tax or no flat tax any government can index the the current thresholds and stop bracket creep but they don’t. Its far too good a tax earner. Instead they move the thresholds up when they like it to maximise political gain, thats what this government been doing with their tax cuts. Theres no reason to believe the LDP will change this.

    I worked for 23 years in DSS/Centrelink, if you think the $9000 sit down money will not be a subsidy to the indolent
    you are fooling yourself. The imposition of a work test has been one of the great policy improvements of this government. If administration cost are an issue then privitize Centrelink. In fact privitize all government administration.

    ta

    Ralph

  4. Daniel Farmilo, on October 31st, 2007 at 5:28 am Said:

    Hi,

    As I said, the LDP’s policy is not as yet to index the rates. Based on 2005 figures Reform 30/30 provides a $40bn tax cut per year. It is obvious that we are serious about being the only true low tax party, and to this end I believe we will have a view to index the rates in the future, but this is not something that has been worked out yet. For further information about this if you are interested, feel free to contact John Humphreys directly (he wrote the tax and welfare policies).

    Reform 30/30 and the NIT also saves $15bn dollars on welfare per year, and the way it scales will definitely result in greater workforce participation, not less. This current government still hasn’t done a great deal about high EMTRs, which remain one of the greatest disincentives for people to move from welfare onto work. 30/30 removes this by creating a system in which no one receiving welfare payments pays income tax, and no one paying income tax receives welfare (unlike the current system). I do actually agree with you that a minute number of people will be happy to not work and collect $173 per week from the government, but the number will be so small that it is negligible. We would still be saving $15bn over the current system, and if you think that Howard’s work testing has abolished dole bludgers, you’d be seriously mistaken. It’s simply not the case.

    Regards,
    -Dan

  5. Ralph, on October 31st, 2007 at 9:49 pm Said:

    G’day,

    I read the John Humphreys when it came out so I have just re-read it refresh my memory.

    Its out of date. The current single rate for Newstart is over $11,000. So the person with no income will be over $2000 worse off. Pensioners get nearly $14,000 a year now , they will be $5000 worse off. Do you really think a proposal thats going to chop grandma’s pension by a third will get much support?

    Also that $15, billion saving you mentioned only occurs if theres no benefits for people with kids, add that $6000 tax free extra and the benefits rapidly shrink.

    I think that tax policy needs an update.

    ta

    Ralph

  6. Daniel Farmilo, on October 31st, 2007 at 10:03 pm Said:

    The aged would be eligible for the low income subsidy along with everyone else. Those that prefer to continue working will not be confronted by disincentives from the taxation system.

    For those of pension age with no income apart from the low income subsidy, the low income subsidy will be topped up to the current pension level. However, in recognition of the introduction of compulsory superannuation in 1992 and of the increasing health and physical capability of older Australians, eligibility for this would be raised over time. For those born prior to 1945 there would be no change in the eligibility age. For each year of birth after 1945 the pension eligibility age would rise by one year. Thus, for example, somebody born in 1950 would be eligible for the top up when they turn 70.

    For any individuals that suffer hardship, the LDP would support tailored assistance delivered by private charities and state governments in preference to blanket policies delivered by the Commonwealth.

    The idea isn’t to match current assistance rates for the unemployed, by the way.

    Regarding the costings, you’ll need to get in touch with John Humphreys. They’re his costings as far as I know.

    It’s also worth noting that we really don’t expect to receive much support at all initially because our views are so new to the political arena. All we are looking to do is bring new ideas to Australian politics.

  7. Shem Bennett, on November 1st, 2007 at 2:39 am Said:

    Thanks for your input, Ralph.

    I definitely agree that the 30-30 scheme needs to be looked at in detail before it is implemented. I’m sure we’ll spend a lot of time with the treasury department, centrelink and other public servants working out the finer details if we ever win government.

    The fact is, however, we are unlikely to win government any time soon. 30-30 is an ideological plan with plenty of holes in it. The question isn’t “Is 30-30 perfect to be implemented right now?” The question is “Is 30-30 the right direction to be moving in?”

    I’d answer that with a resounding “yes”. Even if the LDP gains the balance of power in the Senate, we won’t be in a position to implement 30-30. But what we will be able to do it hopefully move tax debate and the tax policy of the government more towards a 30-30 type system. By lobbying the government to do things like increase the tax-free threshold (instead of just increasing LITO) we’d be moving towards a 30-30 type model.

    I agree that 30-30 is far from perfect. Every year that passes, the costing of 30-30 will become more and more outdated. There are some things it doesn’t even take into account- or only touches the surface of. But is 30-30 the right direction for tax policy to move towards in Australia? I think so.

  8. Sam Ward, on November 1st, 2007 at 7:08 am Said:

    Ralph: 30/30 would result in a lower payout over a year for someone with zero income, that is true.

    However, the advantage of 30/30 is that it removed disincentives to work present in the current welfare system.

    Currently if you are on the dole, and someone offers you 1 day’s work a week, you’d be silly to accept it, because all of the money you earned would simply be taken out of your next dole cheque, and you would have done a day’s work for effectively nothing.

    With the LDP 30/30 plan, you get to keep 70c of every dollar you earn, which means there will be a much bigger incentive for people to take casual work when it is available.

  9. John Humphreys, on November 10th, 2007 at 1:13 am Said:

    The $15b expected budget benefit factors in an extra payment for the aged pension and for disability payments and for parenting payments.

    I’m more than happy to argue for a cut in welfare payments. We have a policy of granfathering the aged pension anyway, so that wouldn’t be cut.

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