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A fictitious Federal Budget speech

By Gavin Putland - posted Thursday, 23 August 2012

Madam Speaker: This Budget will eliminate unemployment in Australia.

It will do this by eliminating four categories of taxes: first, and most importantly, taxes that cause the cost of hiring a worker to be greater than the worker's take-home pay; second, reverse tariffs; third, property taxes that penalize construction; and fourth, taxes with unnecessary compliance costs. Of course there is considerable overlap between the categories.

Under the last category, the GST will be abolished from 1 July 2013.


This will require changes in arrangements between the Commonwealth and the States. Accordingly, this Budget is being delivered 8 months early, to give the States ample warning. (And tonight, Madam Speaker, when I say "the States", I obviously mean the States and the Territories.)

Of all the taxes that raise the cost of labour above the worker's take-home pay, the biggest offender is PAYG personal income tax.

Accordingly, from 1 July 2013, employers will keep the PAYG income tax that they withhold from employees and contractors; but the employees and contractors will still receive credit for the withheld tax as if it had been paid to the ATO on the grossed-up incomes.

Allowing employers to retain the tax that they withhold from employees and contractors is the most innovative component of this Budget. It reduces the cost of labour as seen by employers, without reducing the workers' take-home pay, and without widening after-tax wage relativities. Unlike the outright abolition of personal income tax, it gives employers an income from which they can pay any alternative tax without having to raise prices. If that alternative tax is levied on anything but labour, it will preserve the desired reduction in the cost of labour as seen by employers.

Because income tax penalises income earned in production of Australian products but spares income earned in production of imported products, it amounts to a value-added tax without border-adjustment. In other words, it's a reverse tariff. But the true nature of the tax is disguised by separating the value added by labour from the value added by capital, and taxing the former under the guise of "personal income tax" and the latter under the guise of "company tax".

From 1 July 2013, company tax, other than capital gains tax, will be abolished.


The second-biggest reverse tariff, and the second-biggest reason why the cost of hiring a worker exceeds the worker's take-home pay, is the Superannuation Guarantee. A Federally mandated, employer-funded 9% super contribution is equivalent to a Federally funded 9% contribution paid for by a 9% Federal payroll tax. That 9% is soon to become 9.25%.

And a payroll tax is a reverse tariff because it taxes the labour content of Australian products but not imported products.

Accordingly, from 1 July 2013, employers will no longer have to make superannuation contributions or pay the Superannuation Guarantee Charge. Instead, each person's 9.25% superannuation contribution will calculated on the income that the person declares for tax purposes, and paid by the Government out of general revenue.

If the necessary contribution to "general revenue" is paid by employers instead of the Superannuation Guarantee, it will not require employers as a class to find any additional income, and will therefore not cause any overall rise in prices. Again, if that contribution is levied on anything but labour, it will preserve the desired reduction in the cost of labour as seen by employers, without reducing the workers' take-home pay.

The third-biggest reverse tariff, and the third-biggest reason why the cost of hiring a worker exceeds the worker's take-home pay, is State payroll tax.

Accordingly, under this Budget, the Commonwealth will use its conditional grants power to compel the abolition of State payroll taxes from 1 July 2013. The States will be compensated by increased grants from the Commonwealth, funded out of general revenue.

Under Australia's constitutional arrangements, the primary responsibility for public investment in infrastructure rests with the States, which delegate some of that responsibility to local councils.

The benefit of a public infrastructure project is manifested in higher property values in locations served by the project. More precisely, it is manifested as uplifts in site values, which are also loosely called land values or unimproved values. So, if the tax system captures a sufficient percentage of each uplift, the project will pay for itself by expanding the revenue base, without increasing tax rates, and without burdening taxpayers who don't share in the benefit.

Accordingly, from 1 July 2013, Commonwealth grants to the States will be subject to the following conditions:

First, the States will require local councils to raise at least 80% of their own-source revenue from general rates on site values, with effect from 1 July 2014. The new rating system won't penalize construction. To ease the transition, year-on-year percentage increases in general rate bills, including any increases that coincide with the change in the rating system, will be capped in real terms.

The caps will be determined by local councils -- not imposed from above. In addition, councils will be given the unfettered right -- if they don't already have it -- to defer rate payments from property owners who are asset-rich but income-poor, until their properties are sold in the normal course of events. No home owner should be forced to sell in order to pay rates.

Second, insurance taxes, emergency service levies, conveyancing stamp duties, betterment levies, infrastructure levies on developers, and the existing land tax (not to be confused with local rates) will be abolished.

Third, in lieu of the abolished taxes, the States will levy a "vendor duty" on all capital gains on property realized after 1 July 2013.

Property owners who have paid the old stamp duty more recently will be automatically compensated because their capital gains will be smaller.

As buildings don't appreciate in value, except by way of capital expenditure which is deductible against capital gains, the vendor duty will automatically avoid penalizing construction. The rate of the vendor duty, and whether that rate is applied to real or nominal capital gains, and whether there are any concessions for the family home or any transitional arrangements for properties purchased before tonight, will be matters for the individual States.

Fourth, the owner of any property bought after 1 July 2013 will be allowed to pre-pay the vendor duty in the form of an annual charge equal to a percentage of the current site value. Further details -- including the percentage, and whether the pre-payment will be compulsory for certain classes of properties or owners -- will be matters for the individual States.

Madam Speaker, just as no home owner should be forced to move because of council rates, no home owner should be forced not to move because of stamp duty. The existing stamp duty tends to lock home owners into their current addresses, and discriminates against home owners who move frequently. The new vendor duty will reduce the lock-in effect, because a property sale will not create a tax liability, but will realize an existing liability. Home owners who move more frequently will no longer pay a proportionally higher amount of stamp duty over their lifetimes, but will pay their vendor duty in a larger number of smaller steps. Property owners will be better off, because the new vendor duty, unlike the old stamp duty, will be guaranteed not to turn a capital gain into a capital loss or to magnify a loss, and because the vendor duty on the capital gain will give the States an incentive to invest in infrastructure that raises property values.

To make room for the vendor duty, the Federal capital gains tax on real property will be abolished from 1 July 2013.

The replacement of a stamp duty on the purchase price by a vendor duty on the capital gain will obviously improve the competitive position of first home buyers, who by definition have no capital gains to tax.

Accordingly, the First Home Owners' Grant will be abolished from 1 July 2013.

Madam Speaker, it remains to announce what new tax will replace the revenue forgone. All else being equal, the aggregate revenue that enterprises save -- in PAYG personal income tax, company tax, GST, superannuation and payroll tax -- would balance the aggregate revenue that they pay out under the new tax, so that the overall price level would be unchanged.

But of course all else is not equal, for three reasons. First, the restoration of full employment will obviously reduce expenditure on welfare, so that not all of the revenue from the old taxes needs to be replaced. Second, the restoration of full employment will expand the base of the new tax. So the required rate -- and therefore its effect on prices -- will be less. Third, replacing several taxes by one tax will reduce compliance costs. For all these reasons, replacing the five old taxes by one new tax will reduce the overall cost of living -- provided, as always, that the new tax base is not labour income.

Accordingly, from 1 July 2013, Australia will impose a VAT on the broadest possible base (like New Zealand) at a rate of 25%. That rate will be applied to the tax-inclusive base because Australia (unlike New Zealand) will assess the VAT by the subtraction method.

In other words, if you are registered for VAT, you will subtract your domestic purchases from your domestic sales and send 25% of the difference to the ATO. The restriction to "domestic" purchases and sales is the "border-adjustment" which will make the VAT a consumption tax rather than a production tax. There will be no tax invoices. Hence you will be able to claim credit for all purchases from domestic suppliers even if they are input-taxed. Hence, if you are small enough to qualify for input-taxed status, you won't be forced to register for VAT just because your customers want input credits.

By doing away with tax invoices, and by leaving PAYG personal income tax in the hands of employers, this Budget will end the iniquitous practice of compelling small business operators to work as unpaid tax collectors.

A rate of 25% on the tax-inclusive base is equivalent to 33.3% on the tax-exclusive base. Value-added tax rates are indeed normally quoted on the tax-exclusive base. But that's because most VATs are collected by the tax-invoice method and coexist with company taxes calculated on VAT-exclusive incomes. The VAT proposed in this Budget uses the subtraction method, which works more easily with the tax-inclusive base; and it doesn't need to coexist with company tax, because that's being abolished! Moreover, because most of the revenue to be replaced comes from income tax, which is on a tax-inclusive base, it is appropriate to quote the tax-inclusive VAT rate for purposes of comparison.

While the Members opposite are free to play numerical games with the rate of the new VAT, the bottom line is that the replacement of five existing taxes by the new VAT will reduce the cost of living. The VAT will not add to the cost of labour as seen by employers and will not act as a reverse tariff. Jobs will be easier to get, the bargaining positions of workers and prospective workers will improve, and families will consequently find it easier to get ahead.

Madam Speaker, some of the advantages obtained through this Budget are first-mover advantages. But that makes it all the more necessary that Australia moves first. If other countries subsequently imitate Australia, they will presumably claw back some of the global market share that Australia gains through this Budget. This in turn may require Australian producers to rely more on domestic markets. That may be an issue to be tackled in a future Budget.

But in the present Budget, Madam Speaker, the urgent necessities are to restore full employment and raise Australia's market share -- by removing taxes on labour, removing the Big Three reverse tariffs, and cutting taxes on buildings. To those ends, I commend this Budget to the House.

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This article is a non-partisan abridgment of a half-hour speech with two versions - one for a Labor government and one for a conservative government.

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About the Author

Gavin R. Putland is the director of the Land Values Research Group at Prosper Australia.

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