An interesting divergence has emerged in the submissions to the Inquiry into Australia’s Future Tax Scheme headed by Treasury Secretary Ken Henry.
As of this week approximately 470 submissions have been made, about half from individuals and half from organisations.
Those from individuals are heavily skewed to calls for higher taxes on the wealthy and socially and environmentally destructive spending, such as foreign exchange, tobacco and higher-polluting cars. And they called for more anti-avoidance measures.
The submissions from companies, industry associations and interest groups, on the other hand, are typically self-serving — each special group seeking retention or expansion of whatever tax relief it gets and reduction of whatever tax is imposed on it.
There are troubles with both approaches. Significantly higher taxes on the wealthy make us less competitive; narrow taxes make us less efficient; and exemptions for special interests are unfair and lack the transparency of putting such things into the welfare or government-grant systems.
Rather we should aim for the broadest-based taxes possible. It will take some courage for the inquiry to ignore nearly all the submissions and go for the interests of the 21 million people who did not make a submission.
That will be made harder by the fact that the Government has ruled out any change to the rate or breadth of the GST and it has ruled out any change to tax-free payments from the super funds of those aged over 60 for political reasons.
But without touching those things it is hard to see the inquiry meeting the Government’s aim of a fairer, more efficient tax system that will make Australia more internationally competitive.
The whole aim of an independent inquiry is that it can provide support to a government that needs to impose some unpopular tax measures in the national interest.
That said some elements of the GST could still be used to make a fairer system.
Australia’s tax system is fairly sound, but it has weaknesses not shared by other countries.
One. The complexity and cost for the 75 per cent of Australian taxpayers who are forced to use tax agents.
Two. The overall complexity of the system which now has 128 different forms of tax.
Three. The federal-state disparity. This is called the “vertical fiscal imbalance” under which the Commonwealth raises between 70 and 80 per cent of the tax, but the states do most of the spending of it.
Four. Anomalies with the capital-gains tax.
If you could fix these four things, you would go a long way towards the two main goals of a tax system: efficiency and fairness.
First let’s look at the characteristics of the GST that make it fair and efficient. On the fairness front, the more you consume the more you pay. It is quite hard to avoid. We know this because it raises $45 billion a year and that fits the rate of the tax 10 per cent and the size of the Australian economy less the bits not embraced by the GST (governments, unprocessed food, rents and so on). There is an in-built anti-avoidance mechanism because one person’s GST levy is another person’s GST input deduction.
If you want to spend your wealth, you must at least pay GST even if you have avoided income and capital taxes in acquiring it.
The GST deals with vertical fiscal imbalance because it all goes directly to the states.
The GST is very efficient (and would be more efficient if there were fewer exemptions). The greatest efficiency comes because the vast bulk of the population is scarcely affected by it. They do no administration and to the extent they pay the tax they are by and large “compensated” through lower income taxes or higher welfare payments. If there were no GST, inefficient income taxes would have to be higher.
The only people required to collect and administer the GST are non-wage-earners. And these are the very sort of people who can cope with this administration. They are people who run businesses or who earn a significant part of their income through business. They are “registered” for GST and submit returns quarterly.
And herein lies a solution to the income-tax system – use a GST-style of administration to deal with income tax.
You would have income-tax registered people with significant non-wage income and the rest.
The Government would tax the transaction of paying wages, just as it taxes the transaction of consumption. The employer would take the tax out (on a progressive scale if need be) each fortnight or month, just as retailers collect the GST and send it to the Government.
For most people (those not registered for income tax) the tax would be gone, just like the GST. There would be no tax return and no deductions. Instead, we would give them all, say, $200 off their tax.
At present we have 11.5 million individuals filing returns claiming deductions averaging about $2400. But if you took out the individuals who had significant business or investment income, my guess is you would have about eight million people filing returns for deductions averaging maybe less than $500. And the average $500 deduction would result in a rebate of, say, on average $150.
It is a lot of work by a lot of people for some very small beer.
The people with more complex income – part wage and salary, part or all business – would register for income tax, just as they register for GST. Indeed, the two sets of people would be almost the same.
These people could measure their income inputs in the same way as they do for the GST. They would not, of course, be eligible for the automatic $200 rebate that the unregistered people would get.
Charities would have to be compensated because people would give less if they could not get a deduction. Large medical costs would be dealt with through the welfare safety net.
Interest would be tax free up to a point, say $2000, where people would have to register for income tax (just as some people are required to register for the GST). It would encourage saving. People with other non-wage and salary income would also have to register for income tax.
This would be a way of separating those with complex income and those with simple income. The latter would do no administration and be no worse off. The former, quite used to dealing with forms, accounts and the like would continue much as they have done in the past.
With the GST, it does not matter how poor you are you pay the tax and it is gone. There is no tax return pleading for a return of GST paid. The poor are looked after through the welfare system. It could be the same for income.
The other advantage of the GST approach is that it is broad-based. Narrow taxes are inefficient because people can avoid them. A classic is the luxury-car tax. The Rudd Government increased the tax from 25 per cent to 33 per cent. The result was less (not more) revenue because people avoided buying luxury cars. It was a similar story with alchopops.
Taxes on ownership (usually land tax) would also be better covered by a GST on rent. Rents will only go as high as the market bears. The GST would be borne by landlords, especially if they could not add the GST to rent under existing leases. It would be a much more efficient and more certain than messing around with land values. And fairer because it would be related to actual income earned. All the money would go to the states, so they would not be missing out.
Other taxes, too, could be subsumed by widening and/or increasing the GST
The capital gains tax poses separate difficulties. First, you have to pay all of it in the year you sell, driving people in higher tax brackets. That could be overcome by allowing taxpayers to put capital gains into superannuation, but for the unfair system of allowing tax-free withdrawals by people over 60.
Secondly, even though you pay tax on only half the notional gain, there is no allowance for inflation. It is easy to imagine, say, someone buying an investment house in 2004 for $500,000 and selling for $600,000 in 2009, just keeping up with inflation and therefore making no gain whatever. But the investor would still be taxed on $50,000 — a big, unfair tax on no gain.
To sum up, this tax review will be hampered by the political prohibition on changing the GST, despite the fact that the GST has proved to be the fairest, most efficient tax in Australia’s history. Even so, some of the thinking behind the GST can be put to good use.
In the meantime, the special interests will have three months more in which to put their special cases and I can’t imagine any of them advocating broad, efficient fair taxes.