PDC: Tax and Welfare Policy version 2

Working group report
This working group was tasked with developing policy to promote a transparent tax and welfare system. This policy is in the development stage, so if you want to contribute email policydev@pirateparty.org.au.

Preamble
Australia is burdened with one of the least transparent tax and welfare systems in the world. Australians pay more than 120 taxes, most of which are concealed and few of which are efficient. The complexity of income tax alone forces two thirds of taxpayers to utilise tax agents, and distortions in the tax system promote speculation and borrowing at the expense of work and saving. Taxes such as GST and payroll tax hamper businesses and undermine job creation, while stamp duties discourage house building and sales, driving up house prices. Our tax system is estimated to impose efficiency losses of over $20 billion every year.

The welfare system faces similar problems, encompassing more than 20 separate payments, each with its own means tests, administrative arrangements and compliance regimes. Within those payments are gradients and sub-payments who's interactions are unfathomable to recipients and policymakers alike. Administrative costs for tax and welfare run to over $5 billion annually, while $80 billion is "churned" (collected as tax and then returned to the same taxpayers as welfare) each year. This churn is inefficient and penalises families by taxing individuals at a full rate, while paying welfare at reduced rates to couples.

Recipients leaving welfare for work face a combination of large benefit cuts and heavy income tax, which can lead to effective losses of more than 70% of earned income. This punishes the drive to be self-sufficient and places welfare recipients in long-term 'poverty traps'. Successive governments have attempted to 'motivate' welfare recipients through punishment and micromanagement, but the poor underlying incentives remain.

A negative income tax & basic income
The challenge policymakers face is great: tax on labour must be reduced to improve its competitiveness in the digital era. Transparency and efficiency must improve, and the incentives must be fixed. Ultimately, what is needed is a comprehensively different model of tax and social support. To that end, the Pirate Party advocates the introduction of a universal basic income delivered through a negative income tax.

Negative income tax is tax in reverse - money which is paid by the government to those with low or no taxable income. It is social support provided directly through the tax system rather than through a separate welfare system. The Pirate Party plan is for a tax threshold of $40,000 in conjunction with a tax rate of 35%. Under this plan taxpayers will pay no tax on the first $40,000 they earn, and will pay a flat rate of 35% on earnings above that. However people earning less than $40,000 will automatically receive 35% of the shortfall transferred to them from the government in the form of negative tax. Thus, persons earning nothing at all are guaranteed a basic income of $14,000 (representing 35% of the $40,000 by which they fall below the threshold). The following examples show how income is modified under a negative income tax:

Negative income tax is progressive, and the benefits are universal. A minimum income protects those unable to earn; poverty-level wages are supplemented; and other taxpayers gain a significantly higher tax-free threshold. Automatic tax credits (such as subsidies on mortgages) already support many forms of middle class and business activity. Covering low income earners under the same principle will level the playing field between state and citizen, ensuring that the government can no longer take income from citizens while refusing counter-obligations to citizens whose income collapses. It will also support an economy where people are freer to take entrepreneurial risks. Critical industries such as farming will be stabilised by income support in difficult times, improving resilience against climate change and curbing the need for ad-hoc government interventions. Delivery of social support through a single automatic mechanism will foster 'positive liberty', granting universal flexibility to receive education and training, volunteer, create art and culture or raise children without navigating bureaucratic obstacles and the complexity of shifting payments. Most importantly, under a negative income tax model no taxpayer will lose more than 35% of any dollar they earn. This amounts to a complete removal of poverty traps and a reduction in income tax for all workers. Improving the motivation of the poor to engage in work and enterprise is superior in every sense to relying on punishment and coercion. The use of a singular system for tax and social support will enshrine complete transparency and allow taxpayers to oversee the whole of their financial relationship with government through simple online tools. Replacing welfare with a negative income tax removes financial "churn", since under a negative income tax no recipient of benefits pays tax and no taxpayer receives benefits. The removal of churn, segregated payments, and welfare micromanagement will allow for huge reductions in bureaucracy.

Trials of similar schemes have shown other positives. In Canada, areas with minimum income recorded improved graduation rates, reduced domestic violence and better public health. In the US, the earned income tax credit (which tops up the wages of low-paid workers) has reduced poverty and boosted opportunities for training and education among the low paid. Economists across the political spectrum have called for further trials and implementations.

Maximising the benefits
Improved incentives to seek work need to be paired with higher rates of actual job creation. The best research shows company tax rates correlate strongly with employment growth, economic diversification and international investment. Job growth can be stimulated by sharply cutting the base rate of company tax, with revenue maintained by removing fossil fuel subsidies and abolishing unproductive tax offsets such as dividend imputation.

To substitute for lower income tax receipts, we propose levies on wealth and carbon emissions. Wealth is far more unevenly distributed than income, depends on protection from the state, and is largely inherited. A modest tax will encourage better use of idle assets and land. Taxing carbon is economically superior to taxing savings and work and is also the cheapest way to meet climate change targets.

The Pirate Party additionally supports the Henry Review proposal to remove GST, payroll tax and dozens of other inefficient taxes and substitute a simpler form of consumption tax. To make housing affordable, we seek to abolish stamp duty and remove tax distortions which inflate house prices (such as the tax break on capital gains). We also propose a 'user-pays' system for motorists in which car registration fees are abolished, with revenue made up by unfreezing the excise on fuel (thereby allowing it to rise with inflation). This will ensure more frequent road users pay appropriately, and provide greater incentives to purchase efficient cars.

The Pirate Party will classify all charities as 'deductible gift recipients', making every charitable donation and activity tax-deductible. We will also seek to remove tax exemptions linked to 'advancement of religion', since a secular society has no grounds to discriminate between taxpayers on the basis of their beliefs. The Pirate Party believes taxes should be few and transparent, reduced in aggregate, and with the minimum possible burden on work and enterprise. This will deliver a tax system worthy of the digital age and a smaller, smarter government which frees its citizens to truly reach for life and liberty.

Institute a negative income tax & basic income

 * The tax rate will be set to 35% with a threshold of $40,000 (generating a basic income of $14,000 p/a).
 * Negative income tax payments will transfer fortnightly to those with no income, and will otherwise automatically supplement regular wage payments
 * Growth in the threshold will be linked to growth in average wages to prevent 'bracket creep'
 * The tax-free threshold will be raised conditionally in special cases:
 * Volunteers will be eligible for a rise of $5,000 in the tax free threshold (generating an increase of $1750 in the basic income) if they engage in at least 15 hours of volunteer or community work per week
 * Parents who are primary caregivers will receive a rise of $20,000 in the tax-free threshold (equivalent to $7,000 of additional basic income) for their first child. This additional tax credit will reduce by 25% for each subsequent child, and will be 'tapered' such that the tax-free threshold returns to normal once taxable income reaches $80,000.
 * This benefit will be offered subject to requirements for schooling and vaccination (where medically possible)
 * The basic income for aged and disabled persons and full-time carers will be 'topped up' (made equivalent to the current age pension).
 * Items purchased for the purpose of disability support will be tax-exempt.
 * Recommendations of the Productivity Commission to gradually raise pension age to 70 are supported as a way to control costs.
 * Tax treatment will be 'neutral' among forms of income including fringe benefits, company cars, net interest, net rental income, private company income, withdrawal of superannuation benefits, real capital gains (excluding primary residence), share transfers and earnings, and termination payments.
 * Tax exemption will be limited to charitable donations and total superannuation contributions up to a value of $25,000 per year
 * The higher tax free threshold ($40,000) replaces other offsets including those for senior Australians, mature age workers, overseas civilians, entrepreneurs', low income earners, termination payments, pensioners and beneficiaries, zone offsets, notional tax offsets, and tax exemptions for foreign employment income. It also replaces the private health insurance rebate.
 * The basic income will replace welfare programs including Newstart, Age Pension, Austudy, Family Tax Benefits parts A and B, Baby Bonus, School Kids Bonus, Rental Assistance, Parental Leave Scheme, Disability Support Pension, and Carer Payments.
 * Pensions and support administered by the Veteran’s Affairs Department will continue to operate under existing arrangements.

Re-align other taxes to improve efficiency and incentives

 * Cut the company tax rate to 20% and close deductions and loopholes
 * Abolish dividend imputation, fuel tax credits (excepting agricultural use), energy security fund permits to power stations, aviation fuel concessions, and exploration and prospecting deductions.
 * Narrow R&D tax concessions to cover research activities only
 * Disallow tax evasion conducted through fund-shifting within corporate groups:
 * Modify tax code to ensure that no tax benefit exists for companies within corporate groups who classify as separate legal entities
 * Modify tax code to ensure that no tax benefit attaches to financial transfers between subsidiaries within a corporate group
 * Ban interest deductions for loans from related companies
 * Tax trusts as companies
 * Abolish payroll tax, GST, all forms of stamp duty on houses and vehicles, the Medicare levy, all insurance taxes, and all luxury car taxes.
 * Introduce a cash flow tax informed by the Henry model to efficiently tax consumption and replace revenue forfeited by the states.
 * Financial services will be taxed equivalently to other forms of consumption.
 * Exports will be exempt and imports subject to the tax, to support international competitiveness.
 * Unfreeze fuel excise indexation
 * Retain a carbon tax based on the 2012 model pending significant domestic emissions reductions and/or transfer to a strong global ETS.
 * Institute a wealth tax of 0.8% on individual net wealth over $100,000
 * Coverage to include improved land value, superannuation accounts (where benefits are being withdrawn), and insured value of physical assets
 * Agricultural land used as a primary income source and land in its natural state will be exempted
 * Costs may be deferred as a charge against a sale or estate, to protect low-income asset holders

Curb government spending to reduce overall tax

 * Return ASIO (and broader counter-terrorism) funding to 2004 levels
 * Withdraw all federal funding to elite sports and “anti-doping” agencies
 * Reduce administration and compliance costs linked to existing tax and welfare systems
 * End the war on drugs (see drug policy)
 * Reduce spending on pharmaceutical monopoly rents (see patents policy)
 * Abolish the school chaplains program (see education policy)

Support community benefit and 'citizen focus' within the tax system

 * Extend 'deductible gift recipient' status to all registered charities.
 * Remove 'advancement of religion' as a charitable activity for the purpose of determining tax-exemption.
 * Tax-exemptions will no longer apply to commercial businesses run by religious organisations.
 * Non-commercial income earned by religious organisations will remain tax-exempt if the organisation meets any other categories for exemption (including provision of charity, education, culture, community service, or health).
 * Implement Henry Review recommendations 28-30 to reduce administrative burdens for small businesses.
 * Allow all taxation transactions to be conducted online and provide a mechanism for citizens to review the totality of their financial relationship with government.
 * Ensure data and reviews on the function of taxes and transfer systems are made public.
 * Remove ATO powers to impose or enforce confidentiality clauses on taxpayers.