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The way ahead means tax and welfare reform

By Malcolm Turnbull - posted Tuesday, 26 April 2005


  • Is this policy making it easier and more attractive for people to go to work?
  • Is this policy enabling Australian workers to be more productive?
  • Is this policy promoting or assisting the formation of Australian families?

Any policy, any law, which does not receive a “yes” to all questions should require a very powerful countervailing argument to remain part of our national agenda.

My views on families are well-aired. So let me concentrate on the first two questions. Greater participation and greater productivity, are of course closely linked. If people are more productive they will be better paid, if they are better paid they will have a greater incentive to go out to work. This brings us directly to tax reform and welfare reform.

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Tax reform

It is important to note here that, while there is always scope for increased efficiencies in the delivery of government services, given the demographic challenges we face it would be rash to assume that overall the expenditures of the Federal Government can be materially reduced. As a consequence, tax reform proposals need to be at least revenue-neutral.

Our tax system would be a better one if rates were lower and the base broader. Our current high tax is imposed on a tax base which has been eroded over the years by special deductions and concessions and can, quite legitimately, be avoided by those able to earn income through corporate entities (taxed at 30 per cent) and effectively split income between family members and corporations. Despite a concentrated effort by the Government there remains ample opportunity for businesses to defer and thereby reduce income. PAYE and other “unincorporated” taxpayers, however, have limited scope for tax avoidance, even of the most elementary kind.

A worthy objective is to aim, over time, to have a top marginal rate of tax equal to or at least not materially greater than the corporate rate of 30 per cent. Recent changes to our tax system have been incremental. The system has become more complex and compliance more of a burden. So much is obvious. The new tax system introduced in 2000 was the most comprehensive single set of reforms to the tax system in our nation’s history and there is an appetite in the community for a second round of substantial tax reform. It may be that in the final analysis the conclusion is that the only reforms practically available are incremental ones, but we will never know unless we have an open and lively debate.

There are numerous models proposed but in my view, the only way in which a major simplification of the tax system can be practically effected is if there is a very significant reduction in the top marginal rate.

There is little doubt that our productivity would be enhanced if our tax regime were more competitive and if enterprise therefore were better rewarded. We may be doing well with our natural resource sector today, but the real wealth of Australia is not under the ground, but consists of the intellect and energy of Australians. We live in a borderless world. We cannot have a tax system which serves to encourage our brightest to seek to make their wealth somewhere else.

Counter-intuitive though it may be, the experience of substantial reductions in tax is that it generally results in increased collections - a consequence of greater compliance and increased economic activity. We have seen, in the US and the UK, that as the top tax rate is cut, the top taxpayers account for more of the total income tax take.

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Welfare reform

The phenomenon called the Effective Marginal Tax Rate (EMTR) functions as a disincentive for people get off welfare and instead to choose to work. Many people on low incomes who are in receipt of welfare benefits will, as they start to earn more income, lose in net dollars a considerable part (often much more than half) of each dollar earned, by reason of the combination of the tax system and the loss of means tested benefits. EMTR is a misleading term. A disincentive exists, but it is not mainly a function of the tax system. To a great extent it is the result of a welfare benefit being withdrawn when income rises above the means test. Any benefit which is means tested creates this same disincentive.

One approach, of course, is to impose a more stringent work obligation so that the option is removed or at least heavily qualified. As Peter Costello has said, it is inappropriate in a country with a labour shortage, facing the consequences of demographic change, to have people capable of work in the welfare system without those people having an obligation to seek work.

However the only way to completely eliminate the disincentive would be to either remove the welfare payment completely or remove the means test. Neither approach is feasible (obviously) and so the avenues open to government are essentially limited to reducing the taper rate at which a benefit is lost as income increases. Over the last four years, Family Tax Benefit A, for example, has seen its taper rate reduce from 50 cents (i.e. 50 cents of benefit lost for every dollar over the means test limit) to 20 cents.

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Article edited by Margaret-Ann Williams.
If you'd like to be a volunteer editor too, click here.

Extracted from a speech by Malcolm Turnbull, MP, Member for Wentworth, to the Sustaining Prosperity Conference at the Melbourne Institute on April 1, 2005. The full speech can be found here.



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About the Author

Malcolm Turnbull is is the federal Leader of the Opposition and member for Wentworth. You can see his web site here: www.malcolmturnbull.com.au

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