Giving the baker a bigger slice of pie: tax reform to empower tax payers

We all hate taxes. This is a healthy state of affairs. It is the only restraint on government growth. It is the principal check on wasteful government spending. We are entitled to restrain government’s passion to spend our incomes and to make more of our own choices.

But we also hate taxes for other reasons.

They are too complicated. The agonies of GST compliance have been front-page news for more than two years. The agonies of income tax compliance have been with us for decades.

They are unfair. High marginal tax rates cut in at ridiculously low income levels – levels far lower than other developed countries.

They are inefficient. Collection costs are high and the disincentive effects are heavy – many of our taxes discourage productive economic activity.

It would be interesting to speculate how the tax system came to be such a mess with so many brilliant minds applied to it for so many years. But it is more fruitful to consider how matters could be improved.

Four Ways to Make Tax/Life Better

The tax system is a monster. Apart from the biblical proportions of the Income Tax Act and its Old Testament punitive regime, there are dozens of other taxes at Commonwealth, State and local levels of government. They are all complex and entrenched.

To propose a reform of the whole system and have it implemented would require, in ascending order of difficulty, many learned papers, an economic summit and agreement among the States.

These are not on any agenda now. So we propose just four changes to improve matters that are well within the reasonable range,:

• Restrain any further growth in the total real tax take;
• Raise and index the income tax brackets;
• Reduce taxes on transactions apart from GST;
• Ease the tax on savings;
• Restrain Total Tax in Real terms.

This is not an unworthy aim. Cutting the cake differently should not exclude a bigger slice for those who bake it. We should be allowed to dispose of as much of our income privately as possible. That is one of the fundamentals of a free and vital society.

Also, at over 30% of national income, our tax take is by no means low. Only a restricted group of developed countries have a higher take.

And this proposal does not cut taxes. Governments, and particularly the Commonwealth government, would budget not to increase the real tax take.

What this implies is that the real level of government spending can be maintained but, if new programs are adopted, savings must be found in existing programs. Governments and lobbyists would be forced to prioritise. Adjustments would be made from year to year to ensure the target was observed.

What it also implies is that the individual gets to keep the benefits of any real growth in the economy. In other words, the private sector share of the national income increases as the economy grows. This might amount to $5-6 billion a year. Over the past decades the reverse has been happening. The government share of growth has increased consistently at the expense of the private sector.

Adjust the Income Tax

If everyone hates taxes, they loathe the income tax. It all seems so onerous and so arbitrary. It would be a universal blessing to simplify this tax but the Government seems incapable of doing so. There is shorter-term option.

Our income tax level is high by almost any standard. One way to ease public discontent would be to lighten the burden and remove the continuous automatic theft of income that is known as bracket creep. The latter occurs when rising nominal incomes move taxpayers into higher tax brackets even though their real incomes have increased at a slower rate.

This could be alleviated in two ways:

Shift up the tax brackets over a three-year period so that they approximate more closely the real tax rates applying at the start of the 1980s.

At the same time, index the rates to the CPI so that they are annually adjusted to take account of inflation.

These changes would be consistent with the preceding proposal and it should be possible to mesh them so as to avoid shocks to the overall revenue. They would require resolve over a period of years but would send healthy signals to income earners and government spenders.

Remove Transaction Taxes

We are plagued with a host of relatively tiny taxes that were imposed by governments desperately seeking creative new ways to extract more from reluctant taxpayers.

Many of these were taxes on transactions. The largest is now the GST. Owing to the depredations of the Greens and the Democrats, the GST is far from universal or consistent but it is the closest we have to a neutral indirect tax and should be either extended to cover currently exempt categories or, at the very least, left alone.

There are other taxes that we could remove. Some progress has already been made by the abolition of the BAD and FID, absurd taxes on movements of money. But there are further taxes which could sensibly go.

The remaining stamp duties, taxes on some insurance transactions and fake user pays charges such as levies on property developments are all taxes that inhibit economic activity. Many of these taxes are at State government level, requiring compensation from the federal level. Stamp duties raised $7.3 billion in 1990/00. Extension of the GST would help offset the cost.

Ease the Tax on Savings

There is a curious ambivalence towards savings in our tax system.

On the one hand, government directs employers to pay increasing amounts into superannuation funds (i.e. savings) for their workers. Presumably we are collectively too short sighted to do this for ourselves. Or maybe, for most of us, the public pension is a better option than saving for retirement. In any case, the super levy is equivalent to a special purpose tax on business, which indirectly will come out of the wages pool.

On the other hand, government has conducted serial raids on the super funds through taxes on contributions, taxes on fund income and surcharges on anyone foolish enough to slip into higher tax brackets. Superannuation taxes raised $3.2 billion in 1999/00.

So we are being levied (taxed) to save partly so that government can tax and spend those savings now.

Given the increasing burden of the aged population, it would be prudent to maximise superannuation savings. It might also improve our dismal personal savings rate. Such savings will anyway be taxed in good time as the benefits are taken.

Government might start by reducing the tax on contributions, which would have immediate effects on the financial flow to super funds and might encourage higher contributions. Simply reversing the trend to expropriation would boost confidence in this form of saving. It would reallocate money to private saving from government spending.

If such a measure were introduced in steps it could be accommodated in the restraint on taxation proposed above.

Conclusion

We can reduce the tax slice of the economic cake and redistribute it at the same time. There are strong grounds for doing so. It requires two things. Government resolve to do it and a legislated program applying for several years to make sure it is done.