The Best tax policy Going.

Logo of the Liberty and Democracy Party(Australia)

With election on the way, most parties wish to buy votes by offering to splurge our money on all sorts of 'largesse' and we need to get policy out there, so I have decided to publish the Liberty and Democracy Party policy on taxation: -

Much has been said about the need for tax and welfare reform in Australia, but the tyranny of the status quo and self-imposed limitations such as 'budget neutrality' and no 'person-worse-off' relegate any usual reform proposal to failure.

Consequently, the LDP does not argue for incremental reform. Instead it offers a new template from which to consider tax and welfare issues, a tax revolution: Reform 30/30.

Reform 30/30 includes a tax-free threshold of $30,000 and a flat income tax of 30%, with no deductions. All income taxes (company, Capital Gains Tax [CGT], Pay As You Go [PAYG], Fringe Benefits Tax [FBT]) would be equal at 30%, and the Medicare levy removed.

The tax-free threshold (TFT) would be increased to $30,000 per person and all tax expenditures (tax deductions, offsets, and so on) would be removed.

The current welfare system would be replaced by a sliding scale of payments (called a Negative Income Tax or NIT) that phased out at 30% and finished at an income of $30,000.

For example, if you earned $0, you would receive 30% of $30,000 ($9000). If you earned $10,000, you would receive 30% of $20,000 ($6000). If you earn $25,000, you would receive 30% of $5000 ($1500). This would involve a cut in payments to the unemployed and an increase in payments to low-income earners.

One advantage of the NIT is that it removes the need for the minimum wage. Instead of legislating for higher wages, the NIT allows wages to stay at their market rate and instead supplements low incomes with an NIT payment. Removing the minimum wage would result in a significant increase in the number of jobs available.

Probably the biggest advantage of Reform 30/30 is that the effective marginal tax rate (EMTR) is always 30%. The EMTR measures how much of an additional dollar earned goes to the government. Under the current system the EMTR is variable and high. One cause of high EMTRs for people on low-incomes is the overlap of paying income tax and losing welfare payments. This can lead to EMTRs of up to 80% on some of the poorest people in Australia and is called the "poverty trap", and is a major disincentive against getting a job.

The combination of lower unemployment payments, more jobs available and greater rewards for getting a job would lead to a significant increase in employment, and the social capital benefits that go with that (higher self-esteem, more opportunities, greater social participation). Absolute poverty would be reduced and economic growth would increase.

Another important benefit from Reform 30/30 is the administrative simplicity. By having a flat tax at the same level as company tax, and removing all tax expenditures (except those necessary to retain the integrity of the income tax system), it would no longer be necessary to complete a tax return. One problem of the current system is the churning of welfare -- where the same person both pays income tax and receives welfare. Under our proposal this would be abolished.

There would be no question of tax avoidance, no need for complex accounting procedures and no costly administration and compliance costs. The biggest losers from Reform 30/30 would be tax accountants -- which is surely a sign of good tax reform.

The proposal includes a significant reduction in income tax. This is appropriate as Australians currently pay too much tax -- more than any previous Australian generation. Still, a reduction in tax must be met with a reduction in spending. Some elements of Reform 30/30 will work to offset the lost revenue -- such as less unemployment, lower welfare payments, higher economic growth, less tax avoidance, the removal of middle-class welfare and lower administration costs. In addition, the removal of tax expenditures will save the government $30 billion and remove hundreds of inefficient distortions (which will in turn lead to higher economic growth).

Finally, no reform of the tax and welfare system would be complete without also removing the billions of dollars currently paid to industry as corporate welfare.

Reform 30/30 is unambiguously beneficial to the economy. It offers 500,000 new jobs, less poverty, a $90 billion bigger economy, higher growth rates, lower tax levels and a simpler, fairer tax/welfare system and more money in the budget. The price is that some sacred cows of politics ('progressive' tax, minimum wage, no-person-worse-off) will have to be sacrificed.

Issues of equity will always be contentious, but Reform 30/30 is more equitable than the status quo for several reasons. First, it massively reduces unemployment and poverty. Second, it ends discrimination against couples. Third, it ends discrimination against risky business and inconsistent income.

Finally, this reform will actually pay for itself. Rough estimates suggest a medium-term impact on the budget of +$15 billion per year, and more in the long run.

Full details on this reform policy are contained in Reform 30/30: Rebuilding Australia's Tax and Welfare Systems by John Humphreys.

A copy can be downloaded from Here.