Equity and simplicity

ON LINE opinion – Australia’s e-journal of social and political debate

Posted Friday, 4 December 2009

I’m not the goose plucker, I’m the goose plucker’s son
and I’m only plucking geese till the goose plucker comes.

Ken Henry may have been asked by the Rudd Government to carry out a review of Australia’s tax system but he has not been given a blank sheet of paper to write down his favourite tax proposals. He will be forced to meet the economic and political constraints which drive one of the most controlling prime ministers in the last hundred years.

In addition to pleasing his political masters Henry has to present a tax blueprint which working families can understand and in large part accept. This necessitates him not traversing “the untrodden ways beside the springs of Dove where there are none to praise and very few to love”. In every meaning of the phrase, the Henry Review will be “rooted in the past”.

As well as attempting to keep Mr and Mrs Suburbia content or at least somnambulant, there are other dragons he must slay. These others are fearful beasts who guard their piece of the economic turf as if it had been placed directly into their hands by their god “Mammon”. These fire-breathing scaly reptiles come in all political hues from: captains of industry, mining company lobbyists, the CFMEU, teachers’ unions, the Australian Medical Association, to nature conservation groups and the churches.

Paul Keating warned that it was unwise to get between a state premier and a bucket of money. The warning, though apt, applies to a much larger group of industry, political, trade union, university, church and even welfare lobbyists who have received money in the past.

My tax plan

Given it’s the season to be jolly, this goose plucker’s son will proceed as if the task was to fill in a blank piece of paper with a tax plan which has a reasonable claim to be based on equity and simplicity. In addition I would want it to be efficient and to recognise that there are both positive and negative forms of taxation.

There are many forms of tax and in the minds of the general public, a tax is more likely to be considered popular when being paid by those who can afford it. Excise tax, which is considered a tax on sin (alcohol and cigarettes) is generally popular but there was an inordinate amount of hissing when the Rudd government tried to place a higher tax on alchopops than other alcoholic beverages. Here, perceptions about its complexity and unfairness held up the tax for a year in the labyrinths of the Senate.

Resource taxes are imposed in many countries. In 1795 American Thomas Paine argued that all citizens had the right to an equal share of the natural wealth of their country. The beauty about resource taxes is that they are imposed on profitable companies at the time when they are making a profit. Such resource taxes can be invested to pay a Basic Income in the future.

In Mongolia the government has recently announced it will pay all its citizens a Basic Income from the money it makes from exporting hydrocarbons and other minerals. Alaska has had a partial Basic Income for over 20 years paid to every resident who has lived there for six months. The Alaskan fund derives from oil royalties.

Some resource taxes like carbon emission taxes, are imposed to try to make polluting industries pay a contribution meant to deal with externalities which emerge as part of the mining or manufacturing processes. If such taxes are not imposed, the general public has to pay for the clean-up from general revenue.

Payroll taxes are a tax imposed on those who employ a substantial workforce. I am generally opposed to taxes on labour because they may cause some employers not to hire as many workers as they otherwise would. The one tax on labour which I feel must be paid by employers is workers compensation, because if employers pay the premium they are more likely to implement greater safety precautions in their work places, especially when higher premiums are incurred as the number of accidents increases.

Sales tax, consumption tax (GST), or valued added tax (VAT) are all variations on a theme. The GST or VAT taxes are generally more preferable to sales tax because they are simpler to understand and harder to avoid than sales taxes. Those who spend the most pay the most tax.

At first glance it might appear that a graduated income tax paid in inverse proportion to the amount of income earned would be a fair tax. However poor people have little opportunity to claim deductions whereas owners of a business and other highly paid employees have many deductions they can claim. The sheer complexity of the income tax legislation makes it very difficult for bureaucratically unsophisticated workers to claim deductions and the amounts involved are hardly worth the bother. Rich people seldom pay anything like the amount of income tax they should given the amount of income they receive, they tend to see income tax as a voluntary contribution rather than a compulsory requirement.

All forms of welfare are a form of negative tax. Unfortunately welfare benefits are surrounded by an array of confusing, demeaning, and disempowering regulations. Whether people get the appropriate benefit to suit their circumstances is in the luck of the draw. Few recipients of social security would have an accurate idea of how much they should be paid. Because of the extreme complexity of the Australian welfare system even Centrelink staff seldom know what amount people should be paid. Even more confusion occurs because eligibility for Social Security in Australia is calculated according to family composition not individual entitlement.

Private superannuation contributions (whether organised through industry funds or banking/insurance conglomerates) is a form of negative tax. The government taxes superannuation contributions at a concession rate and does not tax superannuation when it is withdrawn, provided certain guidelines are followed. Either way, the tax foregone on private superannuation disproportionately favours the rich. The greater the contributions one makes the less tax paid.

If equity was the desired end of Australia’s superannuation schemes then we would have introduced a social insurance superannuation scheme as was suggested by Hancock in 1976. Such a scheme would have been more like those operating in the bulk of European countries.

Rudd recently announced that the Productivity Commission will devise an income support and service delivery scheme to assist people with significant disabilities. No doubt they’ll suggest something like a privatised superannuation scheme rather than a disability social insurance scheme Woodhouse recommended in 1974 which would have provided a government run service like the Accident Compensation Corporation in New Zealand.


My ideal tax regime in Australia would include a flat income tax rate of 10 per cent for everybody and a flat rate of GST set at 30 per cent. Quite high resource taxes would be levied on extraction industries and water and carbon taxes would deal with their impact on the environment. There would be land taxes and family homes would attract an annual 1 per cent home owner tax on the home equity in excess of $700,000. Such a scheme would be reasonably simple and treat people equally. But without one final element, such a tax regime would not be fair.

To make the tax system equitable the existing pension and benefit system of income support would need to be abolished and replaced by a system which would guarantee that every permanent resident was entitled to a Basic Income paid at the rate of the age pension. This Basic Income would be paid to individuals irrespective of marital, employment or other social status. In order to pay for this, the preferential tax treatment of superannuation would need to be phased out and the $30 billion in subsidies to industry would need to be scaled back. Subsidies are, after all, just another form of negative tax.

Such a balanced positive and negative tax regime would not impede wealth accumulation. It would guarantee every permanent resident an income above the Henderson poverty line. It would provide a firm foundation on which to build social justice in Australia.