A fictitious Federal Budget speech

Fourth, the owner of any property bought after 1 July 2013 will be allowed to pre-pay the vendor duty in the form of an annual charge equal to a percentage of the current site value. Further details -- including the percentage, and whether the pre-payment will be compulsory for certain classes of properties or owners -- will be matters for the individual States.

Madam Speaker, just as no home owner should be forced to move because of council rates, no home owner should be forced not to move because of stamp duty. The existing stamp duty tends to lock home owners into their current addresses, and discriminates against home owners who move frequently. The new vendor duty will reduce the lock-in effect, because a property sale will not create a tax liability, but will realize an existing liability. Home owners who move more frequently will no longer pay a proportionally higher amount of stamp duty over their lifetimes, but will pay their vendor duty in a larger number of smaller steps. Property owners will be better off, because the new vendor duty, unlike the old stamp duty, will be guaranteed not to turn a capital gain into a capital loss or to magnify a loss, and because the vendor duty on the capital gain will give the States an incentive to invest in infrastructure that raises property values.

To make room for the vendor duty, the Federal capital gains tax on real property will be abolished from 1 July 2013.

The replacement of a stamp duty on the purchase price by a vendor duty on the capital gain will obviously improve the competitive position of first home buyers, who by definition have no capital gains to tax.

Accordingly, the First Home Owners' Grant will be abolished from 1 July 2013.

Madam Speaker, it remains to announce what new tax will replace the revenue forgone. All else being equal, the aggregate revenue that enterprises save -- in PAYG personal income tax, company tax, GST, superannuation and payroll tax -- would balance the aggregate revenue that they pay out under the new tax, so that the overall price level would be unchanged.

But of course all else is not equal, for three reasons. First, the restoration of full employment will obviously reduce expenditure on welfare, so that not all of the revenue from the old taxes needs to be replaced. Second, the restoration of full employment will expand the base of the new tax. So the required rate -- and therefore its effect on prices -- will be less. Third, replacing several taxes by one tax will reduce compliance costs. For all these reasons, replacing the five old taxes by one new tax will reduce the overall cost of living -- provided, as always, that the new tax base is not labour income.

Accordingly, from 1 July 2013, Australia will impose a VAT on the broadest possible base (like New Zealand) at a rate of 25%. That rate will be applied to the tax-inclusive base because Australia (unlike New Zealand) will assess the VAT by the subtraction method.

In other words, if you are registered for VAT, you will subtract your domestic purchases from your domestic sales and send 25% of the difference to the ATO. The restriction to "domestic" purchases and sales is the "border-adjustment" which will make the VAT a consumption tax rather than a production tax. There will be no tax invoices. Hence you will be able to claim credit for all purchases from domestic suppliers even if they are input-taxed. Hence, if you are small enough to qualify for input-taxed status, you won't be forced to register for VAT just because your customers want input credits.

By doing away with tax invoices, and by leaving PAYG personal income tax in the hands of employers, this Budget will end the iniquitous practice of compelling small business operators to work as unpaid tax collectors.

A rate of 25% on the tax-inclusive base is equivalent to 33.3% on the tax-exclusive base. Value-added tax rates are indeed normally quoted on the tax-exclusive base. But that's because most VATs are collected by the tax-invoice method and coexist with company taxes calculated on VAT-exclusive incomes. The VAT proposed in this Budget uses the subtraction method, which works more easily with the tax-inclusive base; and it doesn't need to coexist with company tax, because that's being abolished! Moreover, because most of the revenue to be replaced comes from income tax, which is on a tax-inclusive base, it is appropriate to quote the tax-inclusive VAT rate for purposes of comparison.

While the Members opposite are free to play numerical games with the rate of the new VAT, the bottom line is that the replacement of five existing taxes by the new VAT will reduce the cost of living. The VAT will not add to the cost of labour as seen by employers and will not act as a reverse tariff. Jobs will be easier to get, the bargaining positions of workers and prospective workers will improve, and families will consequently find it easier to get ahead.

Madam Speaker, some of the advantages obtained through this Budget are first-mover advantages. But that makes it all the more necessary that Australia moves first. If other countries subsequently imitate Australia, they will presumably claw back some of the global market share that Australia gains through this Budget. This in turn may require Australian producers to rely more on domestic markets. That may be an issue to be tackled in a future Budget.

But in the present Budget, Madam Speaker, the urgent necessities are to restore full employment and raise Australia's market share -- by removing taxes on labour, removing the Big Three reverse tariffs, and cutting taxes on buildings. To those ends, I commend this Budget to the House.