Equity and simplicity

At first glance it might appear that a graduated income tax paid in inverse proportion to the amount of income earned would be a fair tax. However poor people have little opportunity to claim deductions whereas owners of a business and other highly paid employees have many deductions they can claim. The sheer complexity of the income tax legislation makes it very difficult for bureaucratically unsophisticated workers to claim deductions and the amounts involved are hardly worth the bother. Rich people seldom pay anything like the amount of income tax they should given the amount of income they receive, they tend to see income tax as a voluntary contribution rather than a compulsory requirement.

All forms of welfare are a form of negative tax. Unfortunately welfare benefits are surrounded by an array of confusing, demeaning, and disempowering regulations. Whether people get the appropriate benefit to suit their circumstances is in the luck of the draw. Few recipients of social security would have an accurate idea of how much they should be paid. Because of the extreme complexity of the Australian welfare system even Centrelink staff seldom know what amount people should be paid. Even more confusion occurs because eligibility for Social Security in Australia is calculated according to family composition not individual entitlement.

Private superannuation contributions (whether organised through industry funds or banking/insurance conglomerates) is a form of negative tax. The government taxes superannuation contributions at a concession rate and does not tax superannuation when it is withdrawn, provided certain guidelines are followed. Either way, the tax foregone on private superannuation disproportionately favours the rich. The greater the contributions one makes the less tax paid.

If equity was the desired end of Australia’s superannuation schemes then we would have introduced a social insurance superannuation scheme as was suggested by Hancock in 1976. Such a scheme would have been more like those operating in the bulk of European countries.

Rudd recently announced that the Productivity Commission will devise an income support and service delivery scheme to assist people with significant disabilities. No doubt they’ll suggest something like a privatised superannuation scheme rather than a disability social insurance scheme Woodhouse recommended in 1974 which would have provided a government run service like the Accident Compensation Corporation in New Zealand.

Conclusion

My ideal tax regime in Australia would include a flat income tax rate of 10 per cent for everybody and a flat rate of GST set at 30 per cent. Quite high resource taxes would be levied on extraction industries and water and carbon taxes would deal with their impact on the environment. There would be land taxes and family homes would attract an annual 1 per cent home owner tax on the home equity in excess of $700,000. Such a scheme would be reasonably simple and treat people equally. But without one final element, such a tax regime would not be fair.

To make the tax system equitable the existing pension and benefit system of income support would need to be abolished and replaced by a system which would guarantee that every permanent resident was entitled to a Basic Income paid at the rate of the age pension. This Basic Income would be paid to individuals irrespective of marital, employment or other social status. In order to pay for this, the preferential tax treatment of superannuation would need to be phased out and the $30 billion in subsidies to industry would need to be scaled back. Subsidies are, after all, just another form of negative tax.

Such a balanced positive and negative tax regime would not impede wealth accumulation. It would guarantee every permanent resident an income above the Henderson poverty line. It would provide a firm foundation on which to build social justice in Australia.