Monday, January 12, 2009

My submission to the Tax Review

I have just submitted my 2 cents (or 10 priorities if you will) to the government's Tax Review. Feedback is welcome:


I have suggested 10 points which will improve economic growth and stimulus, cut red tape, improve fairness, foster entrepreneurship and new businesses, improve the government’s fiscal position, remove moral hazards such as welfare dependency and overall make it easier for people to understand and comply with the current the tax and welfare system.

1) Abolish all stamp duty on car and property transfers.

Firstly, this is in line with the current government’s short term objectives of stimulating and supporting the housing and auto markets. Sales volumes, car and house prices will definitely be bolstered by this move.
But more importantly, there is no rational reason for government to actively intervene in these voluntary exchanges between 2 parties, and taking a percentage of wealth out of the hands of every transaction. These transactions are economically desirable, as whenever property changes ownership, both parties have profited from their exchange (otherwise they would never have entered it) Stamp duty acts as a huge disincentive for people to make these exchanges, it makes people hold on to their current assets for longer than they otherwise would have.
It means individuals and families alike are faced with a huge penalty for changing homes and moving as their lifestyles or workplaces change. It also means that people keep old vehicles, to themselves or within the family for longer than they should, which compromises safety and risks lives. Stamp duty does nothing to enhance economic efficiency, they are simply deadweight losses.

2) Automatically index all tax brackets to CPI every year.
Inflation acts as a pernicious tax on everybody’s savings. One small way to help people cope with the impact of inflation is to move the tax brackets upwards to reflect the reality that average incomes increase over time, as do average prices.

3) Abolish the top personal income tax brackets. Bring the top tax rate down to 30%.
This will create an enormous incentive on people’s willingess to provide more labor and earn greater incomes, and it will also substantially reduce the incentives for high-income earners to accrue a large number of deductable expenses which can be offset against their taxable income. All deductions that are purchased by high income earners are discounted by their marginal tax rate, so the current system provides a 46.5% discount for them to purchase cell phones, laptops, travel to seminars and conferences and any other items which can possibly be claimed as business-related expenses.

When people direct spending towards items that they otherwise would not have bought, only to receive the benefits of the deduction, a large amount of wealth is destroyed through malinvestment. The logical and simple solution should not be to ban or limit deductions, but to substantially lower the top tax rate. After all, there is no clear way for the tax office to assess which deductions were incurred with the intention of operating a business, or with the intention of reducing the assessable tax.

4) Changes to capital gains calculations for income tax purposes.
Under the current system, both income and capital gains are assessable for tax. The income as wages that is earned over a financial year must be reported and assessed at the end of the financial year, however capital gains on assets may have been accrued over much longer periods, but the entire gain is assessable in one sudden payment at the end of the financial year.

The current 50% discount rule, on capital gains on assets held for over 12 months, helps spread the gains over the period in which they were made. An even better approach would be to remove the 50% discount and replace it with a new discount whereby capital gains are divided by the number of years an asset is held, rounded up, i.e:

  • assets held for 13 months – divide gain by 2 (50% discount)
  • assets held for 26 months – divide gain by 3 (66% discount).

5) Increase the medicare levy. Abolish the 1% medicare surcharge for high income earners without private health cover. Abolish the 30% rebate for private health premiums.
The current levy is deceptively low and misleads the entire tax-paying population as to the true costs of providing government services. It sends out a false signal to the population that the public system can be operated for only 1.5% of our GDP. This does not at all provide decent transparency and accountability for government operations.
In order to show people exactly how expensive (and not ‘free’) our public health system is, adjust the medicare levy to whatever level it needs to be to actually cover the costs of operating the entire public system (somewhere over 10% of GDP) and increase tax free threshold to compensate income earners, so it is overall revenue neutral.

The medicare levy is a pointless and harmful economic intervention. It suggests an individual places a bigger burden on the public system simply because they don’t have private health cover. It subsidises the insurance sector and forces many individuals who take the effort to look after their health into purchasing more insurance than they otherwise would. It sends out a strong signal, not for people to actually look after their own health, but instead to over-insure to cover the costs of medical procedures. When people who maintain a healthy lifestyle are punished if they do not take insurance, it leads to a huge moral hazard.

6) Allow more flexibility with superannuation accounts.
The principle behind superannuation is to encourage (or force) people to save towards retirement. To motivate this, past and present governments have made superannuation a very lowly taxed investment. It has thus become exceptionally popular and has resulted in a massive boom in superannuation funds held by individuals across the entire population of workers.

The drawback is the inaccessibility of these very sizeable superannuation accounts until a person reaches retirement age. In certain circumstances, such as medical emergencies, financial hardship and debt stress, a particular individual might be in desperate need of such funds. Rather than place a burden on our already over-burdened welfare system, I propose to allow individuals to access their super funds to pay towards medical procedures and education costs for themselves or their families.

7) Reduce the size and scope of welfare payments.
Currently a third of the entire population receives Centrelink payments (6.52 million individuals, 9.98 million entitlements).
Roughly half of government expenditure relates to the welfare system, and this has been alarmingly increasing at a rapid pace. Centrelink’s very purpose, is “Serving Australia by assisting people to become self-sufficient and supporting those in need”. Yet after decades of spiralling expenditures, it has not succeeded in reducing the number of people who are self-sufficient, but to the contrary, has failed by increasing the number of dependant Australian’s who rely on Centrelink payments for a large proportion of their income. This has succeeded in creating a massive dependency on the welfare system, and is perhaps the biggest moral hazard creating disastrous economic loseses which current and future generations of tax payers will have to bear.

8) Eliminating long term welfare dependancy.
Currently there is no counter-incentive for welfare recipients to actually become self-sufficient. One possible method is to introduce a HECS-like repayment scheme where a certain amount of current welfare payments will have to be repaid to the ATO at a future date. Even if we allow for Centrelink to act as an emergency support for people suffering shor term hardship, there should be a time limit after which a person can no longer rely on the tax payer to fund their lifestyle which involves the choice of not working.

Perhaps a reasonable time-frame is 3 months, after which certain welfare payments will be affected in one of the following ways.

  • some entitlements will end completely at the end of this period to force people to become self-sufficient.
  • some entitlements will accrue as part of a person’s debt, and must be eventually repaid when they earn income (similar to HECS).

One way to soften this approach or slowly phase it in would be to copy HECS and for government to contribute 2 or 3 dollars for every dollar of debt accrued.

9) Simplify the tax system and make it more transparent.
The ATO should publish the number of pages of tax-related legislation on its website. It should have the goal of reducing the number of pages of legislation so that many individuals, small business owners and aspriring entrepreneurs can manage their tax affairs without the need to hire tax professionals to comply with one of the most complex areas of legislation in existence. This will also save the ATO huge administrative costs, they currently are allocated huge numbers of public servants tasked with processing millions of tax returns, and they rely upon multiple electronic databases in order to scrutinise and verify information.
Many people with honest intentions can find themselves the target of a painful tax office investigation or audit. This intrusive system which asks individuals to give up much personal privacy and be forced to account for all kinds of private matters should be scaled back to a cleaner system.

10) Remove pay-as-you-go tax on salaries
We should begin by asking why most of our taxes were introduced in the first place. The income tax and pay as you go were introduced during WW2 to pay for our war efforts. PAYG was said to be a temporary tax at the time. It seems that many taxes no longer have a justification at all.

Seeing as Australians are saddled with huge government expenditures to pay for each year, we should at least remove the pay as you go approach where every employer is forced to be an agent of the tax office and an accountant who remits the estimated income tax from each pay-cheque towards the government, before an individual can even receive it. By abolishing the PAYG system, it will act as a huge stimulus, allow individuals to retire crippling debt and to direct spending towards urgent priorities like health or education costs. It will also cut red tape for many businesses, especially small businesses, who do not have the size or resources to hire accountants and HR personnel.