Put all options on tax table

Each of us likes to think we have the silver bullet solution to the pressing issues of the day – from the environment to superannuation to tax. However political reality most often means good policy ideas get thrown into the too-hard basket in the face of pressure from lobby groups and vested interests.

But imagine you have a magic wand that you could wave and change anything in your business – no obstacles, no politics. What would you change?  Once we know your magic wand list, we can work on turning it into reality.

I sometimes think about what I would change about Australia’s tax system if given the chance.

I have a vision of what Australia’s tax system could be – efficient, effective and encouraging (asset write-offs don’t cut it). It’s also a benchmark against which I measure our actual tax system, or, more to the point, how far away from it we are. Of course, there’d be details to sort so all the pieces fit neatly together, but you’ll get the idea. So, here we go.   

• Company tax rate between 25 per cent and 28 per cent.
• Top personal income tax rate (including Medicare levy) between 30 per cent and 33 per cent. 
• Abolish work-related deductions for the first $5,000 – only any excess is deductible. 
• Exempt interest income from personal income tax if you’ve earned below $50 for the year.
• Exempt individuals from capital gains tax whose total sale proceeds in a year from investment assets are below $40,000. This accounts for a significant proportion of transactions, but only a small fraction of capital gains tax raised. 
• The above three points would mean a few million people no longer having to lodge a tax return. 
• GST rate of 20 per cent (you heard me, there’s no pussyfooting on my list).   
• Abolish the GST exemptions for food, education, water/sewerage, childcare and religion. I must admit I’m not sure about health, though. 
• Increase pensions and all other government benefits, and adjust all the other personal income tax rates and thresholds as appropriate, to shield low-income people from the regressive nature of the GST and in unity with everything else here.  There’s nothing mystical or magical about this.  We did it in 2000 when the GST was introduced, and we just do it again.
• Reduce the 50 per cent exemption on capital gains.  There is a sound basis for not fully taxing capital gains – no tax on capital gains is distorting, but so is full taxation. With all the other changes, 50 per cent is no longer necessary – 25 per cent to 30 per cent would be about right.
• Limit concessional superannuation taxation up to a level of wealth beyond which concessional taxation no longer serves any purpose.
• Although fringe benefits tax exists for good reason, the rules are complex, and the compliance costs are very high relative to the revenue it raises. Do something, anything, to simplify. 
• Adjust federal-state financial relations, GST carve-up (including imposing a cents-in-the-dollar return floor), etc in unity with everything else on the list.
• States and territories abolish payroll tax. Payroll tax actually isn’t the job-killer it’s often accused of being. It effectively acts like a GST by being passed on to consumers, but it’s more costly to comply with and administer, so good riddance anyway. 
• States and territories reduce/reform stamp duties and land taxes in unity with the above two items.
• Dramatically increase penalties and enforcement for tax cheats. 

Now, this is not a list from which you can cherry-pick, so don’t even think about singling out any individual item to scorn (or champion, for that matter). The reason any individual item on the list might appear audacious in isolation is that the list puts everything on the table – that’s when all possibilities are available. 

As soon as you start taking things off the table, the possibilities for what remains quickly diminish.  The point is that, viewed collectively, individual items aren’t so radical because of all the other complementary items on the list.  They all fit together like a jigsaw puzzle – a single piece is meaningless or even confusing, but bring all the pieces together, and a clear picture forms. 

On that last point about tax cheats … what do we expect will happen when our top personal tax rate is virtually 50 per cent? People will try to evade it. 

It doesn’t matter how much you earn, 50 per cent tax is not fair. That doesn’t justify evasion; the law is the law, but no-one is genuinely surprised by the Panama Papers, for example. I reckon this is why we can’t seem to bring ourselves to go hard on tax cheats, because there’s a sense of enforcing something unfair.  However, if you make the rules simple and fair, people will comply – and you can come down hard on those who don’t. 

As far as I’m concerned, if someone tries to evade income tax when the top personal rate is 30 per cent to 33 per cent, they deserve to be punished. And while we’re on the subject of tax cheats, the one tax they absolutely cannot evade paying is GST.

The point of such reforms is not to increase or decrease overall taxation or make anyone better or worse off.  Aside from the benefits of a more efficient and less-distorting tax system, the point is to positively change people’s behaviour in ways that will result in a bigger economic pie. 

In a few short weeks, the federal government will announce its tax reform plan with the budget. The opposition will likely issue further tax policies as well. Compare these reforms to your own magic wand list – or just use mine, if you like. You can make your own judgement as to whether our tax system will continue to limp along on life support.