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 world's most opaque and inefficient tax and welfare systems. Australians pay more than 120 taxes, with sheer complexity forcing two thirds of taxpayers to utilise tax agents. Distortions in the tax system promote speculation and borrowing at the expense of work and saving, payroll taxes hamper businesses and undermine job creation, while stamp duties stifle the housing market, driving up house prices. Our tax system is estimated to impose efficiency losses of over $20 billion every year. The welfare system, which has been subject to similar ad-hoc changes, now encompasses more than 20 separate payments each with separate means tests, sub-payments, administrative arrangements and compliance regimes. 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. Churn is inefficient and penalises families by charging individuals full rates of tax while returning welfare at reduced rates for couples.

The interaction between tax and welfare is particularly fraught. 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 snares welfare recipients in 'poverty traps'. Punishment and micromanagement are frequently employed, but these are a poor substitute for proper incentives.

Basic income through reverse taxation
Transparency and efficiency in tax and welfare systems must be improved, incentives corrected, and work-based taxes cut to support the competitiveness of labour in the digital era. 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 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 the first $40,000 earned by workers will be tax-free, with a flat rate of 35% applied on earnings above that. However, people earning less than $40,000 will 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:

The Pirate Party plan provides a minimum income guarantee for those unable to earn. Poverty-level wages are also supplemented, allowing low earners to train and develop skills. Higher earners gain a significantly higher tax free threshold which efficiently replaces the cluttered array of existing thresholds and offsets. Many forms of middle class and business activity are already supported with automatic tax credits: extending this system to also cover low income earners will restore a form of balance between state and citizens, since the government will no longer be able to take income from citizens while refusing counter-obligations to citizens whose income collapses. A universal safety net frees people to take entrepreneurial risks. It also provides greater stability for farmers and others who periodically face difficult times.

Social support delivered through a single automatic mechanism can also foster 'positive liberty' by granting universal flexibility to receive education and training, volunteer, create art and culture or raise children without bureaucratic obstacles and complex payment rules. Most importantly, a negative income tax guarantees no taxpayer will lose more than 35% of any dollar they earn. Poverty traps are thus wholly removed, and income tax is reduced for all workers. The use of a singular system for tax and social support builds in transparency and removes financial "churn", since no recipient of benefits will pay tax and no taxpayer will receive benefits. Vast reductions in bureaucracy and the size of government will follow.

Income guarantees have been trialled in Canada, with social benefits including 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 by enhancing opportunities for training and education among the low paid. Economists across the political spectrum have called for further implementations.

Supporting enterprise
Available research provides a strong case for reducing company tax. Case studies demonstrate a clear link between lower company tax and higher employment growth, economic diversification and international investment. The Pirate Party advocates a reduction in the base rate of company tax, accompanied with a removal of fossil fuel subsidies and unproductive tax offsets such as dividend imputation.

To further reduce business costs and system complexity, the Pirate Party would enact the Henry Review proposal to remove GST, payroll tax and dozens of other inefficient taxes and instead fund the states through a simple, low, and broad consumption tax.

Supporting society
The current tax system unfairly penalises work by taxing it more than other sources of income such as inheritances and capital gains. Pirate Party Australia would remove this bias by treating all forms of income equally. This will remove loopholes and prevent excessive concentration of wealth while allowing for a lowering in the rate of tax for everyone. Tax on savings and work can also be lowered by substituting taxation on carbon emissions, which are a less damaging method for raising revenue and also the cheapest possible way to meet climate change targets. We also propose a 'user-pays' system for motorists in which regressive car registration fees are abolished, with revenue made up through a small increase in fuel excise. Frequent road users would pay appropriately under this system and incentives to purchase efficient cars would be stronger.

Tax reform is also a key to improving housing affordability. Stamp duty, which discourages construction and house sales, must be removed. Land tax, which encourages productive land use and development, should be raised to restore revenue and simultaneously place downward pressure on house prices. Removal of distortions such as the tax break on capital gains (which has inflated house prices) will also open the market to new buyers.

Finally, the Pirate Party will classify all charities as 'deductible gift recipients', making every charitable donation and activity tax-deductible. Tax exemptions linked to 'advancement of religion' would be removed, since a secular society has no grounds to discriminate between taxpayers on the basis of their beliefs.

The Pirate Party 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

 * The tax rate would be set to 35% with a threshold of $40,000 (generating a basic income of $14,000 p/a).
 * Negative income tax payments will supplement regular wage payments, and transfer fortnightly to those with no income.
 * Tax treatment will be 'neutral' among forms of income including fringe  benefits, company cars, net interest, net rental  income, private  company income, bequeathments (excepting family-owned agricultural land), 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, items purchased for disability support, and superannuation contributions.
 * The tax threshold will adjust in line with growth in the CPI or median wages (whichever is higher).
 * The tax-free threshold will be raised conditionally in special cases:
 * Volunteers engaged in at least 15 hours of volunteer or community work per week will be eligible for a rise of $5,000 in the tax free threshold (generating an increase of $1750 in the basic income)
 * Primary caregivers who meet requirements for schooling and vaccination (where medically possible) will be eligible for an increase of $20,000 in the tax-free threshold (equivalent to $7,000 of additional  basic income) for their first child.
 * This tax credit will reduce by 25% for each subsequent child, with 'tapering' applied to ensure that the tax-free threshold returns to normal once taxable income reaches $80,000.
 * The basic income for aged and disabled persons and full-time carers will be 'topped up' (made equivalent to the current age pension).
 * The higher tax free threshold will replace existing offsets for senior Australians, mature age workers, overseas civilians, entrepreneurs', low income earners, termination payments, zone offsets, notional tax offsets, and tax exemptions for foreign employment income and private health insurance.
 * The basic income will replace welfare programs including Newstart, Age Pension, Austudy, Family Tax Benefits parts A and B, the Baby Bonus, the School KidsBonus, Rental Assistance, Parental Leave Schemes, the Disability Support Pension, and Carer Payments.
 * The basic income will be available to school leavers aged 18 and over.
 * Pensions and services provided by the Veteran’s Affairs Department will remain unchanged.

Simplify the tax system

 * Cut the company tax rate to 20%.
 * Revenue would be maintained by capping fuel tax credits at $100,000 per year and abolishing dividend imputation, aviation fuel concessions, exploration and prospecting deductions, and all tax benefits applied to fund-shifting within corporate groups.
 * Implement Henry Review recommendations 28-30 to reduce administrative burdens for small businesses.
 * Trusts would be taxed as companies.
 * Introduce a cash flow tax informed by the Henry model to efficiently tax consumption.
 * The tax will replace payroll tax, GST, vehicle registration charges, stamp duties on vehicles, insurance taxes, luxury car taxes, and passenger movement charges.
 * Financial services will be taxed equivalently to other forms of consumer spending.
 * Exports will be exempt and imports subject to the tax, to support international competitiveness.
 * Establish a per square-metre land tax based on unimproved land value.
 * The tax will replace stamp duty on house purchases.
 * Land in its natural state will automatically be excluded.
 * A per-meter tax free threshold will ensure low-value land (including agriculture) remains exempt.
 * Tax bills will be defer-able until sale of the land, to protect the income-poor.
 * Retain a carbon tax based on the 2012 model until a global ETS is available.

Support community benefit and 'citizen focus'

 * 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.
 * Tax exemptions will apply to non-commercial income earned by religious organisations if the organisation meets any other categories for exemption including provision of charity, education, culture, community service, or health.
 * Provide online mechanisms to allow citizens to easily review their financial relationship with government and conduct digital tax transactions.
 * 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.