Tuesday, August 30, 2005

Bill and Mal's taxation adventure

On Sunday it was Malcolm...

A simple plan - and we can afford it, too
By Malcolm Turnbull
August 28, 2005

Australia's tax system needs further reform to make it simpler, more efficient and more competitive.

Our top marginal rates are too high, although the last budget's reforms mean they now cut in at higher levels of income than they previously did.

Most of us would agree that we should have a tax system that is less complex, with rates that are lower. But how do we finance reductions in rates? Where is the money coming from?

The answer is that there is a virtuous circle. A simpler tax system will have fewer concessions. This means that the tax base, the income that is available for taxation, will be broader. By broadening the base, we are able to raise the same amount of money with a lower rate. Broadening the base allows you to lower the rate, and vice versa. Simplicity and efficiency go hand in hand.


And on Monday it was Bill's turn:

Union chief joins call for big tax cuts
By Jason Koutsoukis
and Josh Gordon
Canberra
August 29, 2005

ONE of Australia's most influential union leaders has called for the top income tax rate to be slashed to 30 cents in the dollar as the push for widespread tax reform gathers pace.

Australian Workers Union national secretary Bill Shorten, who is widely tipped to enter Parliament at the next election, said all rates needed to be simplified as part of a radical overhaul of the tax system.

He urged Labor to embrace genuine reform to try to wrong-foot the Howard Government.


It seems the young turks on both sides of politics have decided that tax reform is way for to make a name for oneself. Not content with fighting the battle inside the party, they've taken it to the public, writing op-ed pieces, briefing journalists, and doing their best to be self-styled saviours of the Australian economy.

As is so typical in debates over tax reform, the first thing on the agenda is the degree to which income tax can be reduced. So far no problem - income tax in Australia is to high, particularly given international comparisons and the company tax rate. But the proposals are not about tax cuts - they are about tax reform, and both proposals are intended to be revenue neutral. Therefore the $64,000 question (to be taxed at 20% according to Bill) is just how the base will be broadened in order to ensure its revenue neutrality. Whether it's through clamping down on trusts, income splitting, fringe benifits tax, family tax benefit or tinkering with the GST excemptions (extremely unlikely since this would require the approval of the states), that part is going to be the hard sell.

Perhaps that relates to the Shorten/Turnbull/anyone else who wants to try their hand approach: the "no dessert unless you eat your greens" kitchen table strategy. Tempt people with the sweetness of the banana fritter of income tax rate reduction, and then later on focus on the necessity of bok choy and turnips exemption reduction.

Australia does need tax reform - a separate debate from a tax reduction. Hopefully we can soon get to the substance of a debate on the issue rather than having a bidding war on income tax rates. If Costello and Swan are reluctant to give it a go, then maybe we'll need to wait a few years for Turnbull and Shorten.

14 comments:

Jeremy said...

I outlined what is, imo, the best and fairest way of broadening the base a while ago - scrap income tax deductions. This would cover everything from negative gearing to all those stupid little deductions that don't really do anything for the economy, cost treasury ~$20bn/year and add masses of complexity to the system.

Chris Berg said...

scrapping income tax deductions would be useful, and would help, but the true challenge to that approach is what to do about business deductions - particularily given the steady drift into indepedent contracting.

Nahum said...

Tax reform is incredibly complex, and that is the way that it should be.

If you don't understand the way the tax system works, or you don't care, then you obviously don't pay enough tax.

Tax reform is an important issue for those people who already have a large tax burden, or those who already engage in means of tax avoidance, which is why people like Malcolm Turnbull and the Liberals are carrying this little chicken and squawking so loudly about it.

I see no imperative to change the system of taxation for those earning above $125k per annum because the argument is somewhat impotent. If you are earning above 125K per year, you start a company, and you pay tax on earnings at the company tax rate of 30 percent. Nobody actually pays the top rate. Sorry, that should read: Nobody who is smart enough to actually earn the money (rather than being given it for looking pretty and showing up at Channel ten to film something useless and soul depriving) will pay the top rate.

The reason the Libs are focusing on this particular issue is that Bush cut income tax heaps of times when he assumed power. And if Bush did it, then we should too.

The problem for the 'small government' philosophers in the Liberal party is that they have too much money to give away every budget. And if they don't give it away then they lose traction because after all, What are they actually doing with all those billion dollar surpluses anyway? (Besides letting Sophie (I hate Muslim's because they are all f__king terrorists) Popapillous take more mind altering substances onboard. Maybe she actually believes the crap she sprouts, or maybe it's the only way to survive in a crusty old conservative party of dry Libs)

Tax reform is a ridiculously immoral policy. Instead of looking at ways of giving more money to millionaires, the government should look at ways to use the money to develop Australia's future, and possibly to give countries in the 2/3's world a future. How about actually honouring commitments under the UN's Millenium Development Goals to halve world poverty by 2015, instead of singing the praises of the agreement and doing f__kawl about it when you get home?

Blair may be a twat, but at least he has made some attempt to achieve something greater than political milestones with his Prime Ministership.

NahumAyliffe said...
This comment has been removed by a blog administrator.
steve at the pub said...

ANY tax cut is a good start!

Nahum seems to be pissed off to think that there are people earning $125,000+ p.a.

Nahum: Stop staring jealously at other people's payslip. It does not increase your income (or mine) only increases blood pressure!

Lighten up!

Polly said...
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Polly said...

Here's take 2 on my post, without the spelling mistakes, and a couple of extra points (sorry - yes I know I should have previewed it first):

C'mon, Nahum, i've gotta call you out on the following statements:
"If you don't understand the way the tax system works, or you don't care, then you obviously don't pay enough tax" and "Tax reform is a ridiculously immoral policy".

I think it is silly to dismiss any talk of tax reform because you don't agree with Malcolm Turnbull's proposal to lower the tax rate for the top income tax bracket. Tax reform is certainly needed in this country, particularly in the area of income tax. Our tax-free threshold is way too low (and hasn't been keeping up anywhere with inflation for the last 20 years). You can glibly dismiss the case for tax reform as being immoral, but look at the impact high effective marginal tax rates have on people and families trying to move from welfare to work. People on minimum wages, and part-time workers are getting hit hard by a combination of rising living costs (e.g. housing and transport costs) and a rising tax bill due to 20 years of bracket creep. They have to contend with a byzantine bureacracy to get any welfare payments they may be eligible for (which also costs a fortune to administer), as well as mistakes that lead to the stress of having to find the cash to pay back overpayments.

I reckon the tax system definitely needs reforming, and putting the money into raising the tax-free threshold and indexing the tax brackets to CPI is a very worthwhile thing to do. Jeremy makes an excellent point that significant changes to tax system by eliminating a lot of allowable deductions.
I certainly agree that negative-gearing should be reconsidered, although abolishing it in one go, rather than phasing it out overs several years could have some serious consequences for the economy. I'd really like to see some modelling done on how changes to deductions and the capital gains rate would impact on the economy.

Nahum, why shouldn't people take this opportunity to use the whole issue of tax reform to push changes such as these? I also believe that significantly raising the tax-free threshold is a big potential vote winner.

Peter Parker said...

Polly, the tax-free threshold does appear very low, but there are heaps of people who have effective tax-free thresholds of $20, 30 or 40k.

These include:

- families with kids (due to family payments)
- retirees who know how to structure their finances
- people with leveraged investments, eg -ve geared rental properties

About the only people the low cut-in rate hits are working-age people without kids who don't have investments or their own businesses.

Apart from this low-middle income group, the current TFF is pretty much optional and can be avoided.

But to avoid tax you will most likely make before-tax financial losses on items such as kids and rental properties (where the tenant's rent normally covers less than half the holding costs).

However, I do like the idea of abolishing tax deductions (or, less radically discounting them to the 15% rate, regardless of the taxpayer's actual marginal rate).

Those that are deemed necessary should be funded directly. But the more of these there are, the higher overall taxes will be!

A way to gently scrap deductions is a simplified DIY tax return where taxpayers forfeit all deductions in exchange for a flat $1000 refund.

This would be voluntary. I reckon most taxpayers would take the $1000 rather than calculating deductions. In a couple of years the govt would quietly make this the only method, thus effectively scrapping deductions with the minimum of fuss from vested interests.

The biggest problem with tax reform is that not only does the government takes with a big hand, but also gives with a big hand.

Many people get more back in family tax refunds, etc than they pay in tax.

Thus even if the marginal rate was upped to (say) $20k, the reduction in tax would be less than the benefits many would, so they'd be worse off.

For families, the tax+family payment system is quite progressive (some would argue too progressive due to targeting which lowers the tax burden but causes high EMTRs), but is harsher on PAYE singles and DINKS who must pay tax even if income is below subsistence levels.

Peter Parker said...

I suppose the main argument for keeping PAYE tax deductions is that they are a cost incurred in earning an income.

Thus their current treatment is similar to business expenses.

Removing deductions from individuals and not businesses would make incorporation more attractive. So the gain in revenue in scrapping deductions may not be as much as thought.

It may also obliquely encourage more contract-style employment patterns, which would not be universally welcomed.

Nevertheless, how many times have you heard 'I'll buy it, after all it's deductible'? Thus it distorts people's buying decisions and encourages profligacy.

I can't help thinking maybe we should reduce deduction % claimable (to 15%?) for all expenses (whether under a company or PAYE individual regime) and reduced tax rates.

This would reward efficiency, as the mean spender/high profit-generator benefits vis a vis the extravagent spender/low profit generator.

Anonymous said...

It needs to be remembered that when the TFT is raised everyone, including the Packers of this world, get the same tax relief. When we drop the top marginal rate then only those in that bracket benefit. If we believe in a fair go then ya gotta go with Polly.

Cheers,

Cameron

Jeremy said...

I certainly agree that negative-gearing should be reconsidered, although abolishing it in one go, rather than phasing it out overs several years could have some serious consequences for the economy. I'd really like to see some modelling done on how changes to deductions and the capital gains rate would impact on the economy.
You’re absolutely right, I was just presenting the big picture there, I’m not a details guy – that’s what policy wonks are for ;)
@Peter
Thoughtful comments there. I discussed the (lack of) economically justifiable reasons for tax deductions in that post. Good argument you raise about business tax deductions. Unfortunately I’m not down on all the details – but is there any necessary reason why my argument isn’t equally valid for business expenses? Do they have the same sort of distortionary effects as income tax deductions, or do they serve more of a socially useful function.

Peter Parker said...

Jeremy, re business costs being tax deductible, I think the general principle is that taxes are levied on profits (ie the surplus between revenue and expenses). If the full amount of the expenses aren't deducted then you could have a situation where a business has negative income but is still paying tax, which is unfair.

Different treatment of personal and business deductions is something we might have to wear.

Serious tax reform would also tackle things like salary sacrifice, employer provided parking and car leases, etc.

These (together with mileage allowances that are more generous towards bigger cars) are terrible for energy conservation, traffic and public transport usage.

Also I am very skeptical of the tax benefits of superannuation or the efficacy of 'saving incentives'.

Every investor knows about the huge opportunity costs of spending vs investing, principles of compound interest and starting early, etc.

None of this requires government support through extra tax benefits for super, which are highly regressive and effectivey subsidise managed funds.

The super co-payment tries to even things up for lower income people, but it's yet another thing that is phased out as income rises, so contributes to high EMTRs.

Thus I'd be inclined to scrap both. Even if that means paying more pensions later. After all, given the time value of money, a dollar deferred is almost as good as a dollar saved.

Any look at tax must also cover super, welfare, family payments, and the other important subsidies such as private health cover rebates.

There is also an intergenerational equity issue, with high-income retired who can structure their affairs properly receiving about $50k pa AND many concessional benefits, whereas younger working people on much lower incomes get no deductions or benefits.

Peter Parker said...

As for negative gearing, there is a way it could be wound back gently without hurting lower income investors.

This would be to change the rate at which the deduction applies. Thus instead of it being on the person's top marginal rate, it could be on a maximum of (say) 30 cents in the dollar irrespective of income.

This would mean no change for low-middle income investors, but would mean that negative gearing isn't so attractive for those on higher incomes.

More radically, and if other deductions are reduced to this level, it could be dropped to the lowest marginal rate (15%).

There is the rationale that negative gearing helps investors provide rental housing, especially for lower income earners. Especially given that rents normally only cover 30-40% of a home's holding costs.

There is much to be said for a top limit on negative gearing. This could be on a loan value equal to a city's median house price. Thus it would not be possible to claim negative gearing on investment properties worth more than about $500k (1.25 x 400k median house price, assuming 80% LVR).

This would tend to encourage investors to provide rental housing for the bottom 50% where it is most needed.

The main problem of this is that while it would benefit low income renters, it makes under $500k houses dearer, thus affecting first home buyers.

As the tax system relies on patch-ups on patch-ups of various perverse incentives I'm going to suggest one too.

How about a vacancy tax, to apply to normally vacant houses (eg holiday houses) and undeveloped but serviced blocks within town areas? This would make providing housing more attractive than holding land for speculative purposes.

Jeremy said...

Good points there Peter.

Jeremy, re business costs being tax deductible, I think the general principle is that taxes are levied on profits (ie the surplus between revenue and expenses). If the full amount of the expenses aren't deducted then you could have a situation where a business has negative income but is still paying tax, which is unfair.

Different treatment of personal and business deductions is something we might have to wear.


If I actually thought about that I would have realised this.

Serious tax reform would also tackle things like salary sacrifice, employer provided parking and car leases, etc.

Absolutely. Can someone, anyone, explain to me why my dad can salary sacrifice a laptop, to get it effectively half price, then replace it the next year, making a profit on selling the other one second hand? It's insane - even though he doesn't actually do it, it's just a theoretical possibility.

Good thoughts on negative gearing & vacancy tax. Land taxes have problems, especially with valuation, but they're strongly progressive (even more so with a vacancy tax) and have a solid base.