Policies/Tax and Welfare

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Official Party Document
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Preamble

Australia's tax and welfare systems have grown so complicated that they are almost impossible to understand.[1] Our tax system includes more than 120 taxes[2], with the complexity forcing more than two thirds of taxpayers to file returns through tax agents.[3] Buried in the complexity are distortions which promote speculation and borrowing at the expense of work and saving,[4] burdensome business and payroll taxes which hamper entrepreneurialism and job creation,[5] 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.[6]

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.[7] 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.[8] This punishes the drive to be self-sufficient, and poor incentives are leading to inter-generational welfare dependency.[9] Attempts to force behaviour change through harassment and micromanagement add to bureaucracy, but cannot reduce overall unemployment or correct the underlying incentive problem.

Basic income through reverse taxation

The advance of digital technology places many jobs at risk,[10] 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:

Income before tax Tax threshold Gap between income & threshold Tax rate Change in income Income after tax
$0 $40,000 -$40,000 35% +$14,000 $14,000
$30,000 $40,000 -$10,000 35% +$3,500 $33,500
$40,000 $40,000 $0 35% Nil $40,000
$50,000 $40,000 $10,000 35% -$3,500 $46,500
$100,000 $40,000 $60,000 35% -$21,000 $79,000
A lower and simpler tax rate can be brought about by closing loopholes and unifying tax and welfare systems. A basic income guarantee will replace complex welfare measures, clearing out poverty traps and bureaucracy.
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 are treated equally, allowing the basic tax rate to be lowered across the board.

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 income of farmers and workers with erratic working arrangements will be stabilised. Churn between systems will cease, since no recipient of benefits will pay tax and no taxpayer will receive benefits. By stepping aside, the state can cut swaths of bureaucracy while freeing individuals to explore their own potential, take entrepreneurial risks and let diversity and creativity flourish.

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.[11][12] 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.[13] Economists across the political spectrum have called for further implementations.[14]

Supporting enterprise

The Pirate Party will abolish the most damaging taxes and lower the tax burden on work and investment.

Case studies demonstrate a clear link between lower company tax and higher employment growth, economic diversification and international investment.[15][16][17] 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.[18][19][20] 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.[21][22]

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 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.[23] 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.[24]

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 25 per cent of GDP for all layers of government. 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.

Policy text

Pirate Party Australia would undertake the following staged reforms:

Combine tax and welfare into a single, fair system through a negative income tax

  • Set tax rate to 35% with a threshold of $40,000 (generating a basic income of $14,000 p/a).[25]
    • Adjust the tax threshold in line with changes in the consumer price index.
    • Time negative income tax payments to supplement regular wage payments, or transfer fortnightly to those with no income.
    • Availability of basic income will extend to persons aged 18 and over, following graduation from school.
  • Ensure 'neutral' and equivalent treatment for all 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, and termination payments.
    • Provide tax exemption for bequeathments of family-owned agricultural land. Family homes will be subject to a tax-free threshold and option to defer tax until sale of the property.
    • Phase out negative gearing 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.
    • Ensure superannuation contributions are tax-free, with withdrawals taxed as normal income (with credit given where contribution tax was previously paid).
    • Abolish the private health insurance rebate, medicare levy and deficit levy, and replace with a single health services levy of 3% on incomes over $80,000.
      • This levy will be deducted with income tax, and waived for holders of private health insurance.
    • Limit tax exemption to charitable donations and items purchased for the purpose of disability support.
  • 'Top up' the basic income in special cases:
    • Volunteers engaged in at least 15 hours of volunteer or community work per week should receive an additional $2,000 annually to cover incurred costs.
    • Primary caregivers who meet requirements for schooling and vaccination (where medically possible) should receive an additional $6,000 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 should receive an increase in the basic income to match existing pension levels.
    • Taper out all top-ups as income rises, with tax and income thresholds returning to normal once an individual's taxable income reaches $100,000.
  • The basic income will replace existing welfare programs including Newstart, Age Pension, Austudy, Family Tax Benefits parts A and B, School Kids Bonus, Income Support Bonus, Low Income Super Contribution, the Disability Support Pension, and Carer Payments.
  • The higher tax threshold will replace existing tax 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.[26]
    • Tax trusts as companies.
  • Remove GST in current form and require states to abolish payroll tax, vehicle registration charges, stamp duties on vehicles, and insurance taxes.
    • Implement a single broad based consumption tax based on the Henry review cash-flow tax model to provide revenue to states.
      • 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.
    • Substitute 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 secure 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.
  • Undertake transparent annual reviews of tax policy implementation by the Productivity Commission.
    • Assessment will include impacts on income distribution, job creation, business response and unaccounted side effects.

References

  1. Department of the Treasury. Australia's Future Tax System. Report to the Treasurer. Part One — Overview, page 11. http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf
  2. Department of the Treasury. Australia's Future Tax System. Report to the Treasurer. Part One — Overview, page 13. http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf
  3. Department of the Treasury. Australia's Future Tax System. Report to the Treasurer. Part One — Overview, page 31. http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf
  4. Eslake, Saul. Australia's tax reform challenge - Australian Parliamentary Library lecture, page 3, 21 September 2011
  5. Khadem, Nassim. Small business’s $12,000 GST compliance burden. BRW. 18 December, 2012. http://www.brw.com.au/p/sections/fyi/small_business_gst_compliance_burden_4vet5VSU3DEdILVGBMPG5I (Accessed 1 March 2013).
  6. Alex Robson, The Costs of Taxation, Policy Monograph 68, May 2005, page 8, https://www.cis.org.au/images/stories/policy-monographs/pm-68.pdf (Accessed 10 February 2014)
  7. Dawkins, Beer, Harding, Johnson and Scutella, Towards a Negative Income Tax System for Australia, The Australian Economic Review, vol. 31, no. 3, page 238.
  8. Buddelmeyer, Dawkins, Freebairn, and Kalb, Bracket Creep, Effective Marginal Tax Rates and Alternative Tax Packages, Melbourne Institute, page 4, http://www.melbourneinstitute.com/downloads/reports/webreport.pdf (Accessed 10 February 2014)
  9. Pech and McCoull, Intergenerational Poverty and Welfare Dependence: Is there an Australian problem?, Commonwealth Department of Family and Community Services, http://www.aifs.gov.au/conferences/aifs6/pech.html (Accessed 12 February 2014)
  10. "The Future of Jobs", The Economist, January 18 2014. http://www.economist.com/news/briefing/21594264-previous-technological-innovation-has-always-delivered-more-long-run-employment-not-less (accessed 29 May 2014)
  11. Belik, A Town Without Poverty?, The Dominion, http://www.dominionpaper.ca/articles/4100 (Accessed 10 February 2014)
  12. Vooruitgang, Why we should give free money to everyone, de Correspondant, https://decorrespondent.nl/541/why-we-should-give-free-money-to-everyone/31639050894-e44e2c00 (Accessed 10 February 2014)
  13. The Earned Income Tax Credit, Center on Budget and Policy Priorities, page 2, http://www.cbpp.org/files/policybasics-eitc.pdf (Accessed 12 February 2014)
  14. Friedman, Negative Income Tax - I, Newsweek, 16 September 1968, page 86, http://0055d26.netsolhost.com/friedman/pdfs/newsweek/NW.09.16.1968.pdf (Accessed 12 February 2014)
  15. Business Tax Working Group - Final Report, Chapter 1, http://www.treasury.gov.au/PublicationsAndMedia/Publications/2012/BTWG-Final-Report/html/Chapter1 (Accessed 12 February 2014)
  16. OECD Country Notes - Australia, page 100, http://www.oecd.org/eco/growth/Australia.pdf (Accessed 12 February 2014)
  17. Crowe, Cut taxes, add jobs, OECD tells Australia, February 21, 2014, http://www.theaustralian.com.au/business/economics/cut-taxes-add-jobs-oecd-tells-australia/story-e6frg926-1226833759091 (Accessed 10 February 2014)
  18. Gruen, Tax Cuts to Compete, Committee for Economic Development of Australia, September 27, 2006, page 22
  19. Gruen, Dividend imputation - $20bn for the taking, September 18, 2012, http://www.smh.com.au/business/dividend-imputation--20bn-for-the-taking-20120917-262h2.html (Accessed 10 February 2014)
  20. Uren, Replace Dividend Imputation: Lobby, October 11, 2006, http://www.theaustralian.com.au/business/replace-dividend-imputation-lobby/story-e6frg8zx-1111112341883 (Accessed 10 February 2014)
  21. Department of the Treasury. Australia's Future Tax System. Report to the Treasurer. Part One — Overview, xxi. http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_1/00_AFTS_final_report_consolidated.pdf
  22. Bond, Stephen R. & Devereux, Michael P. Cash Flow Taxes in an Open Economy. CEPR Discussion Paper No. 3401, p4.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=319007 (accessed 23 April, 2013).
  23. Wood, Ong, Cigdem and Taylor, "The spatial and distributional impacts of the Henry Review recommendations on stamp duty and land tax", Australian Housing and Urban Research Institute, February 2012, page 42. www.ahuri.edu.au/publications/download/ahuri_80647_fr2 (accessed 23 May 2014)
  24. Eslake, Saul. Australia's tax reform challenge - Australian Parliamentary Library lecture, page 3, 21 September 2011
  25. Threshold applies for 2013-14 financial year.
  26. Department of the Treasury. Australia's Future Tax System. Report to the Treasurer. Chapter 12 - List of Recommendations. http://taxreview.treasury.gov.au/content/finalreport.aspx?doc=html/publications/papers/final_report_part_1/chapter_12.htm