A fictitious Federal Budget speech

Madam Speaker: This Budget will eliminate unemployment in Australia.

It will do this by eliminating four categories of taxes: first, and most importantly, taxes that cause the cost of hiring a worker to be greater than the worker's take-home pay; second, reverse tariffs; third, property taxes that penalize construction; and fourth, taxes with unnecessary compliance costs. Of course there is considerable overlap between the categories.

Under the last category, the GST will be abolished from 1 July 2013.

This will require changes in arrangements between the Commonwealth and the States. Accordingly, this Budget is being delivered 8 months early, to give the States ample warning. (And tonight, Madam Speaker, when I say "the States", I obviously mean the States and the Territories.)

Of all the taxes that raise the cost of labour above the worker's take-home pay, the biggest offender is PAYG personal income tax.

Accordingly, from 1 July 2013, employers will keep the PAYG income tax that they withhold from employees and contractors; but the employees and contractors will still receive credit for the withheld tax as if it had been paid to the ATO on the grossed-up incomes.

Allowing employers to retain the tax that they withhold from employees and contractors is the most innovative component of this Budget. It reduces the cost of labour as seen by employers, without reducing the workers' take-home pay, and without widening after-tax wage relativities. Unlike the outright abolition of personal income tax, it gives employers an income from which they can pay any alternative tax without having to raise prices. If that alternative tax is levied on anything but labour, it will preserve the desired reduction in the cost of labour as seen by employers.

Because income tax penalises income earned in production of Australian products but spares income earned in production of imported products, it amounts to a value-added tax without border-adjustment. In other words, it's a reverse tariff. But the true nature of the tax is disguised by separating the value added by labour from the value added by capital, and taxing the former under the guise of "personal income tax" and the latter under the guise of "company tax".

From 1 July 2013, company tax, other than capital gains tax, will be abolished.

The second-biggest reverse tariff, and the second-biggest reason why the cost of hiring a worker exceeds the worker's take-home pay, is the Superannuation Guarantee. A Federally mandated, employer-funded 9% super contribution is equivalent to a Federally funded 9% contribution paid for by a 9% Federal payroll tax. That 9% is soon to become 9.25%.

And a payroll tax is a reverse tariff because it taxes the labour content of Australian products but not imported products.

Accordingly, from 1 July 2013, employers will no longer have to make superannuation contributions or pay the Superannuation Guarantee Charge. Instead, each person's 9.25% superannuation contribution will calculated on the income that the person declares for tax purposes, and paid by the Government out of general revenue.