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's tax and welfare systems have grown so complicated that they are almost impossible to understand. Our tax system includes more than 120 taxes, with the complexity forcing more than two thirds of taxpayers to file returns through tax agents. Buried in the complexity are distortions which promote speculation and borrowing at the expense of work and saving, burdensome business and payroll taxes which hamper entrepreneurialism and job creation, and ill-conceived charges on home sales which penalise home buyers and the young. Our tax system is estimated to impose efficiency losses of over $20 billion on the economy every year.

The welfare system faces similar problems: it has grown in ad-hoc fashion to encompass more than 20 separate payments, each with different means tests, sub-payments, administrative arrangements and compliance regimes. Administrative costs for tax and welfare run to over $5 billion annually, with $80 billion "churned" between systems (collected as tax and then returned to the same taxpayers as welfare) each year. The complexity of systems makes government transparency impossible, with the financial relationship between taxpayers and the state left unfathomable to taxpayers and policymakers alike.

Poor interaction between tax and welfare systems traps people in poverty. Recipients leaving welfare for work face a combination of large benefit cuts and income tax, which can lead to effective losses of more than 70% of earned income. This punishes the drive to be self-sufficient, and poor incentives are leading to inter-generational welfare dependency. Use of harassment and micromanagement to force welfare recipients into work amounts to a bureaucratic and heavy-handed response which fails to address the underlying problem.

Basic income through reverse taxation
The advance of digital technology places many jobs at risk, making it increasingly urgent to reduce tax on labour to keep it competitive. At the same time, a host of issues around transparency, bureaucracy and misaligned incentives need to be addressed. Ultimately, what is required is a comprehensively different model of tax and social support. The Pirate Party proposes a replacement of current systems with a unified tax and welfare system underpinned by 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 of earnings 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 income 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 a progressive tax system which provides a safety net for those unable to earn. It also supplements poverty-level wages, providing those on low incomes with more latitude to improve their training and skills. Other taxpayers 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: providing social support under the same principle 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. The current tax system discourages work by taxing it more than other sources of income such as capital gains and 'unearned' income including inherited wealth. Under a negative income tax system all forms of income will be treated equally, removing loopholes and allowing for a lower basic tax rate.

Social support delivered through an automatic mechanism will 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. The automatic safety net will also free people to take entrepreneurial risks. Farmers and workers with erratic income will also benefit, as the system will improve their financial stability. Churn between systems will cease, since no recipient of benefits will pay tax and no taxpayer will receive benefits. This will improve transparency and cut out swaths of bureaucracy and micromanagement.

Most importantly, under a negative income tax no taxpayer will lose more than 35% of any dollar they earn. This will sweep poverty traps out of the system and provide a strong and permanent incentive for the unemployed to seek work.

Income guarantees have been trialled in Canada, with 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
Case studies demonstrate a clear link between lower company tax and higher employment growth, economic diversification and international investment. The best way to balance economic and environmental priorities is to reduce company tax while also removing fossil fuel subsidies from the system along with unproductive tax offsets such as dividend imputation. To further reduce costs and complexity for business, the Pirate Party will remove payroll tax and GST, which burden businesses and hamper job creation. These and dozens of other inefficient taxes can be removed and replaced with a single low and broad consumption tax as recommended in the Henry tax review.

Supporting society
Pirate Party Australia believes taxes on carbon emissions are preferable to taxes on savings and work. Accordingly, our plan preserves carbon taxing, while substantially reducing income and other taxes. We also support the indexation of fuel excise, but believe the revenue should be used to abolish regressive car registration fees. This will ensure motorists are taxed according to "user pays" principles, with more frequent road users paying more tax. It will also improve the incentive to purchase efficient cars.

Tax reform can address the crisis around housing affordability. Pirate Party Australia will remove stamp duty (which hugely penalises new home buyers) and raise equivalent revenue through a nationwide land tax. Land taxes are preferable to most taxes since they levy on products of nature rather than products of labour. They are paid primarily by the wealthy and therefore add progressiveness to the tax code. They also encourage productive use and sale of idle land, which will increase housing supply. Pirate Party Australia would also remove negative gearing and unwind the present tax break on housing capital gains: both of these loopholes carry significant budget costs and have been major drivers of runaway house prices over the past 15 years.

Finally, the Pirate Party will classify all charities as 'deductible gift recipients', making every charitable donation and activity tax-deductible. At the same time, we will 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 supports reduced bureaucracy and an overall tax and spending ratio below 22 per cent of GDP. We seek to 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).
 * The tax threshold will adjust twice per year in line with changes in the consumer price index.
 * Tax treatment will be 'neutral' among forms of income including fringe benefits, share transfers and dividends, company cars, earnings through interest, rental or private company income, inflation-adjusted capital gains, bequeathments (excepting family-owned agricultural land), and termination payments.
 * Negative gearing will be phased out over five years; investors will instead be able to carry forward losses and deduct them from capital gains to reduce tax liability on property sales.
 * Superannuation contributions will be tax-free; withdrawals will be taxed as normal income, with credit provided for cases where contribution tax was previously paid.
 * The private health insurance rebate will be abolished, and the medicare levy and deficit levy replaced with a single health services levy of 3% on incomes over $80,000.
 * This levy will be waived for taxpayers with private health insurance.
 * Tax exemption will apply to charitable donations and items purchased for the purpose of disability support.
 * Negative income tax payments will supplement regular wage payments, or transfer fortnightly to those with no income.
 * The basic income will be 'topped up' conditionally in special cases:
 * Volunteers engaged in at least 15 hours of volunteer or community work per week will receive an additional $2,000 annually to cover incurred costs.
 * Primary caregivers who meet requirements for schooling and vaccination (where medically possible) will receive an additional $5,000 annually for child support. Additional per-child payments will be provided with the rate reduced by 25% for each subsequent child.
 * Aged and disabled persons, veterans, and full-time carers will receive an increase in the basic income to match existing pension levels.
 * All top-ups will be 'tapered out' as income rises, with tax and income thresholds returning to normal once an individual's taxable income reaches $100,000.
 * The basic income will be available to persons aged 18 and over, following graduation from school.
 * 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 Schemes, the Disability Support Pension, and Carer Payments.
 * 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.

Simplify the tax system

 * Cut the company tax rate to 20%.
 * Maintain revenue 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.
 * Tax trusts as companies.
 * Abolish payroll tax, GST, vehicle registration charges, stamp duties on vehicles, insurance taxes, luxury car taxes, and passenger movement charges.
 * Replace these taxes with a single low and broad based consumption tax based on the Henry review cash-flow tax model.
 * Financial services would be taxed equivalently to other forms of consumer spending.
 * Exports would be exempt and imports subject to the tax, to support international competitiveness.
 * Abolish stamp duty and existing land taxes.
 * Replace these taxes with a per square-metre land tax based on unimproved land value with coverage extending to owner-occupied housing.
 * The tax will apply at differential levels based on per-meter land value, with a per-meter tax free threshold to exclude low-value land including agriculture.
 * Land in its natural state would be excluded.
 * Land tax bills would be debited from basic income payments, with an option for taxpayers to defer all land tax until sale of the land to protect the income-poor.
 * Retain a carbon tax based on the 2012 model with coverage to include heavy on-road transport (see environment & climate change policy).

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 would no longer apply to commercial businesses run by religious organisations.
 * Tax exemptions would 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.