More tax incentive needed at all levels

Malcolm Turnbull's preferred option (On Line Opinion article) - dropping the top rate to 40c, leaving the 30c rate where it is and raising the tax-free threshold to $10,000 - would cost $8.2 billion. Where's the money coming from?

The tax reform down payment outlined here costs $2.2 billion less than Turnbull's, limits the top marginal rate to 30c for 97 per cent of taxpayers, increases incentives to move from welfare to work and trims the top marginal rate for people earning more than $125,000 a year.

If an extra $2.2 billion were available, as required by Turnbull's proposal, it could be used to provide tax relief for Australians earning between $21,600 and $70,000 a year by extending the low-income tax offset up the income scale.

Economists agree that reductions in the top rates of income tax should be financed by broadening the income tax base. Turnbull advocates removing the 50 per cent discount on the taxation of capital gains. Does Treasurer Peter Costello agree? And Turnbull supports a crackdown on deductions enjoyed by the better off for work-related expenses that have ballooned in the past few years. It's refreshing to see a Liberal supporting the repair of the income tax base as a means of financing reductions in the top rates of income tax.

Another source of funds could be the wealthy giving up their welfare. A 10 per cent tightening of means testing of payments to families would save $2.7 billion, more than enough to abolish the top tax rate altogether.

The proposal outlined here has a top rate of 30c for anyone earning up to $125,000. Turnbull's proposal taxes Australians earning between $70,000 and $125,000 at a 40c marginal rate, a full 10 percentage points higher for one million taxpayers, and for 400,000 more in the next three years.

A more expensive Turnbull option, costing more than $11 billion, also abolishes the 42c rate, while cutting the 47c rate to 35c. It could be afforded only if serious repair work were done on the income tax base. But there is no evidence that Costello is remotely interested in repairing the income tax base. Whether it be middle Australia or people seeking to move from welfare to work, the proposal outlined here creates more incentive than the less costly of Turnbull's options. They are but two ideas. There are others.

But the most important feature of both proposals is that they are genuine attempts at tax reform. The take-home message is that large reductions in the top income tax rates are possible if the government had the stomach for repairing the holes it has opened up in the income tax base and cutting back welfare for the wealthy. We shall see.