With the ongoing partisan squabbling about tax accompanying the imminent federal election, I thought it might be worth setting out my own “wish list” for an ideal tax system.
As readers know, I am not an economist or accountant, and I have made no attempt to calculate whether the proposals discussed below would raise enough revenue to fund current and expected government expenditure needs and to eliminate the federal deficit over a reasonable period of time.
I would be interested in reader observations or calculations about that, as well as your thoughts on the workability of these ideas. I’m not interested in being told about their political non-feasibility. I am well aware that in Australia’s contemporary political culture just about any tax proposal no matter how sensible and workable will be automatically demonised in extravagant terms by the opposing political party and by interest groups who see themselves as losers, to the point where any meaningful change becomes politically impossible.
That’s why I refer to this as my “ideal” tax plan. It could only ever be implemented by a government with a majority in both Houses very early in its term of government, and even then it’s highly unlikely that any government would have the guts, except perhaps if our economy ends up in similar shape to that of Greece. Nevertheless I think there is a point in re-imagining what a good tax system would actually look like.
The principal measure I have in mind is a Negative Income Tax (NIT) or conditional Minimum Income Guarantee (MIG) not a Universal Basic Income, together with associated “Big Brother” IT payments automation. In an overarching sense these proposals are predicated on my perception that Australia has an increasing economic underclass whose position is characterised by extreme income insecurity:
- long-term unemployed people (who will often also need a range of other social and medical supports given the prevalence of people with various disabilities among their ranks);
- an increasingly casualised and totally insecure workforce;
- “outsourced” workers artificially characterised as independent contractors (usually via a labour hire company) to allow the boss to dodge most normal employment terms, conditions and protections;
- Students, tourists and 457 visa holders being exploited on rorted 7-Eleven and similar gross wage underpayment scams.
I don’t think it’s feasible to return to a highly regulated, protectionist welfare state that many on the Left envisaged (and had partly enacted) prior to the triumph of neoliberalism in public policy in the late 1970s and 1980s. Nevertheless, unless constructively addressed the phenomenon of widespread economic insecurity will progressively worsen over time as middle class workers are gradually thrust into insecure work conditions with the increasing sophistication and availability of Artificial Intelligence systems, advanced IT and robotics making it more and more feasible to replace knowledge workers with machines. A much more substantial universal guaranteed minimum income system is in my view essential to Australia’s continuing progress as a prosperous, civilised advanced nation. I suspect that this sort of underpinning income security for all will actually enhance national income rather than undermine it through excessive taxation. We cannot continue to push more and more people into financially insecure, marginalised work situations under the pretext of a “flexible” workforce, while blaming them for their own predicament in order to transfer an ever greater proportion of national income from labour to the owners of capital.
I don’t have in mind that either income management or a voluntary work requirement would be imposed on either age or invalid pensioners or people unemployed for a relatively short time. However for long-term unemployed and people who consistently need income supplementation by NIT it seems perfectly reasonable to me that there should be some expectation of tangible contribution to the community as a quid pro quo for long-term community support of a person’s income. If it’s broadly based and becomes a permanent part of the landscape it ceases to be seen as punitive or discriminatory and becomes instead part of the accepted fabric of citizenship. It involves genuine mutuality of obligations.
I’m not just talking about Work for the Dole with community or charity organisations but also things like child care and aged care work. There is a huge unmet need for both, although obviously a lot of unemployed or under-employed people won’t be suitable. Moreover, qualifying contributions would even be set wider than that, including not only land/environment care but even structured, accountable artistic and craft endeavour. What I have in mind over time is redefining the concept of work, especially if/when AI etc starts reducing waged work opportunities for the middle/professional class as well. How will we distribute money/the means to live in a future society that is enormously wealthy but where most of the wealth (at least as currently defined by economists) is produced by machines and machines controlling those machines, with only a tiny number of humans involved in any meaningful sense?
Personal income tax
The first $430 per week (approximately $22,000 per year) each person earns would be totally tax free. The threshold would be indexed annually to CPI. Thereafter all individuals would pay a flat tax rate of 25% (or perhaps 30, 35 or even 40% if budget-balancing requires that), with automatic normal work-related deductions allowed but detailed substantiation required if more than that is claimed.
Any investment could be negatively geared, and losses carried forward without limit but only claimed as deductions against future income or capital gains tax on that type of investment (not against wage and salary income). Existing negatively geared investments would be grandfathered as per the current ALP proposal.
Negative income tax/minimum income
Any adult earning less than $430 per week in any given week would have their income topped up to that amount by a federal government Negative Income Tax payment. This includes the unemployed, single parents and people on other social security benefits including aged and disability pensions. This figure for a single person is approximately equal to the Henderson poverty line. There would need to be variations for couples and families (as per Henderson figures). No NIT would be paid in any week when a person’s income (from any source including rents and dividends as well as wages) exceeded $430. The minimum income/NIT would be indexed annually against average weekly earnings (using Henderson figures). The weekly NIT amount equates roughly to what a person would earn from working 27 hours per week at the current national minimum wage (around $16 per hour).
Any person receiving more than half of their income in any week from the NIT (rather than from waged income etc) would be subject to compulsory income management in relation to the NIT component of their weekly income (i.e. it would be paid into their bank account and could only be spent on food, rent, clothing and public transport fares), unless they undertook no less than 14 hours per week unpaid work with a community or charitable organisation, Green Army etc. Alternatively they could undertake that number of hours of unpaid aged or child care work, as long as they had received suitable training and accreditation for such work (including a suitable psych assessment) and hold a current Ochre Card or similar clearance.
To facilitate such a system, Australia’s payments systems would need to be highly automated, with secure ID verification via mobile phone/device equipped with iris scanning and encrypted transmission of payment authorisation to each person’s bank account via EFTPOS or similar payment terminal for all transactions. Australia would become an almost cashless society. Government IT systems would have permanent access to everyone’s bank account to calculate and credit the appropriate NIT payment dynamically each week, and to deduct PAYG income tax weekly from the accounts of those earning more than $430 in any given week. Wages, rents, dividends etc would be required to be paid into a bank account monitored by government IT systems for these purposes (with strong privacy protections for all other purposes). It should be possible to design a system where PAYG taxation payments occur automatically without any administration by employers (a major saving on business expenses) and where many employees don’t need to lodge an annual tax return. Linking business bank accounts into the system might also enable quarterly BAS statements to be dispensed with (although that would be trickier). Big Brother as the price of efficiency, simplicity and income security for all.
Company tax would be levied at a flat rate of 25% of profit, with no dividend imputation. Trusts would not be recognised for taxation purposes (their sole purpose is artificial tax minimisation). There would be unlimited carry-forward of losses and unlimited ability to retain and reinvest profits (thereby avoiding or deferring double taxation in the hands of shareholders).
There would need to be strong provisions to prevent or minimise use of offshore tax havens and artificial schemes to shift profits offshore by both foreign and local corporations. It is beyond the scope of this article (and my expertise) to propose a detailed scheme for this. The proposed Google Tax is probably a good place to start but I suspect more is needed.
Capital gains tax
Capital gains tax would be levied at 25% of the net capital gain on market sale price (by valuation if non-arm’s length sale). Actual expenditure on capital improvements (not maintenance) during the ownership period would be deducted from the sale price to arrive at the net capital gain figure, and any negative gearing losses during that period could also be deducted.
The family home would remain CGT exempt (up to a fairly high value cap – say $5 million) but there would be no reduced rate for investment properties.
GST would be levied at 15% on all goods and services including food, educational, medical and other spending i.e. no goods or services would be GST-exempt. The states and territories would receive (on a needs basis as at present) a share of the increased GST pool to a sufficient extent to fund their impending shortfalls on health and education spending, but some would also be retained by the Commonwealth to assist with funding the tax cuts outlined above and to address the structural deficit over time.
The Commonwealth would levy a land tax on all privately owned land throughout Australia, both residential and commercial. The rate would be 1% of Unimproved Capital Value on residential land and 1.5% of UCV for commercial land, with no minimum threshold in either case. That would mean a typical suburban housing block worth $300,000 would have an annual land tax liability of $3000 per year, payable by monthly instalments of $250. This would be entirely separate from any state or territory land tax.
All personal assets (including real property and shares) would be liable to death duties of 25% on the then net market value of each asset (with deductions as per CGT). Payment of duty on the family home (where it is retained in the family) could be deferred until the youngest child in the family turns 18, or for up to 10 years where the surviving spouse is over retirement age, up to a value of $2 million (indexed to inflation). Furniture and household effects would be death duty exempt up to a maximum total of $100,000 value (to deter tax avoidance by investing in antiques or art works). Similarly with motor vehicles.
Resource Rent Tax
The Commonwealth would levy a resource rent tax on all mined onshore minerals similar to the current one applying to offshore oil and gas. It would be levied at a rate 50% higher than the average of current state/territory mineral royalties and 75% of proceeds would be remitted as untied grants to the states in the proportions levied from minerals mined in that state/territory, conditional on their repealing their own mineral royalties regimes.