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 sheer complexity forcing more than two thirds of taxpayers to file returns through tax agents. Within the complexity are distortions which promote speculation and borrowing at the expense of work and saving, taxes which actively hamper enterprise and undermine job creation, and poorly conceived charges which hugely penalise home buyers and the young. Our tax system is estimated to impose efficiency losses of over $20 billion every year. Alongside tax is a welfare system which now encompasses more than 20 separate payments, each with its own 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 pointlessly "churned" (collected as tax and then returned to the same taxpayers as welfare) each year. The tax and welfare systems effectively make government transparency impossible, with interactions between them being unfathomable to taxpayers and policymakers alike.

One side effect of this poor interaction is the creation of poverty traps. 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 has led to the emergence of inter-generational welfare dependency. Punishment and micromanagement are frequently employed in response, but these are a poor substitute for proper incentives.

Basic income through reverse taxation
The advance of digital technology places many jobs at risk, making it increasingly important to reduce tax on labour to keep it competitive. At the same time, transparency and efficiency in tax and welfare systems must improve, and incentives must be corrected. Ultimately, what is required 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 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. It provides a basic income guarantee which replaces much of the convoluted and dehumanising welfare system. Poverty-level wages are supplemented, 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 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 enable reductions in income tax across the board, remove many tax loopholes employed by high earners, and ensure that earnings through work and enterprise are treated equivalently to inheritance and 'unearned' wealth.

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. It will also free people to take entrepreneurial risks. Farmers and others with erratic income will be stabilised. Churn between systems will cease, since no recipient of benefits will pay tax and no taxpayer will receive benefits. This will improve transparency and vastly reduce bureaucracy and the size of government.

Most importantly, a negative income tax guarantees no taxpayer loses more than 35% of any dollar they earn. Poverty traps are thus removed, and those on income support gain a strong and permanent incentive to 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. Australia's economy and environment can be improved through cuts in company tax and a simultaneous reduction in fossil fuel subsidies and 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 would 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 will also remove negative gearing as well as the present tax break on housing capital gains: both of these measures 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. Tax exemptions linked to 'advancement of religion' will cease 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, or transfer fortnightly to those with no income.
 * 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, capital gains (subject to inflation indexation), bequeathments (excepting family-owned agricultural land), and termination payments.
 * Tax exemption will remain for charitable donations and items purchased for disability support.
 * Superannuation contributions will be tax-free; withdrawals will be taxed as normal income, with credit provided for cases where contribution tax was previously paid.
 * Negative gearing will be removed; investors will instead be able to carry forward losses and deduct them from capital gains, reducing tax liability when the property is sold.
 * The tax threshold will adjust in line with growth in the CPI or median wages (whichever is higher).
 * 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 $2000.
 * Primary caregivers who meet requirements for schooling and vaccination (where medically possible) will be eligible for an increase of $5,000 for their first child. 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 $80,000.
 * The medicare levy and deficit levy will be 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.
 * The private health insurance rebate will be abolished.
 * 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.
 * 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 persons aged 18 and over, following graduation from school.

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 would replace payroll tax, GST, vehicle registration charges, stamp duties on vehicles, insurance taxes, luxury car taxes, and passenger movement charges.
 * 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.
 * Introduce a per square-metre land tax based on unimproved land value.
 * The tax will replace stamp duty and existing land taxes, and will include owner-occupied housing.
 * The tax will apply at differential levels based on a per-meter land value, with a per-meter tax free threshold applied to exclude low-value land (including agriculture).
 * Land in its natural state would be excluded.
 * Tax bills would be debited from basic income payments.
 * Taxpayers will have an option to defer all land tax until sale of the land, to protect the income-poor.
 * Retain a carbon taxed based on the 2012 model and extend coverage to include heavy on-road transport.

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.