Tax & welfare policy (v2.0)

Greetings all

Here is a tax & social support policy that’s been cooking in the PDC for a few months now. It includes a few main elements:

  • A unified and tax and welfare system, which is theoretically 100% transparent.

  • A basic income guarantee, which replaces many convoluted welfare mechanisms.

  • Some measures to address issues like housing affordability and wealth concentration.

This carries over some older tax and welfare policy but also adds some extra stuff that’s a bit more distinctive.

Feedback is greatly valued so let us know what you think!


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.

Is it intentional that Youth Allowance is omitted from this list?

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Basic income is for people 18 and up. My sense is that if you replaced youth allowance with an unconditional income for younger folks it might encourage dropping out of school and push the policy cost a bit too high. Happy to be persuaded otherwise though…

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Does this mean then that Youth Allowance would be reserved for the 16–18s, and the Basic Income would be for everyone else (including university students)?

If the goal is to avoid encouraging people to drop out of school, it might be an idea to have the transition from Youth Allowance to Basic Income occur on 1 January of the year after high school graduation. If, for example, they finished high school in 2014, they would start receiving Basic Income on 1 January 2015.

This would solve a couple of issues:

  1. Students under 18 wouldn’t be encouraged to drop out,
  2. Students over 18 wouldn’t be encouraged to drop out either, and
  3. Students who skipped grades wouldn’t be disadvantaged after they graduated by receiving less than their peers.

Lots of students turn 18 in their final year of high school — having someone receive a basic income in January of their final year could provide the encouragement to drop out that you want to avoid.

At the same time, I went through uni with a few people who were still 17 — having their peers receive Basic Income while they’re stuck on Youth Allowance for up to 18 months longer (often half a degree in real terms) wouldn’t be particularly equitable.

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Yes the intent would be for youth allowance to remain for 16-18 y/o’s, with the basic income for everyone else. Currently the policy specifies school leavers 18 and over, which satisfies issues #1 & 2. But not issue 3. Your change sounds good to me.

I am not sure what the most sensible future-proof alternative to this is, but I have some misgivings about the stated income brackets. To be clearer: the numbers stated are not the problem, rather some thought might be usefully applied towards making the scheme immune to “bracket creep”?

At the moment it says:

The tax threshold will adjust in line with growth in the CPI or median wages (whichever is higher).

That should avoid bracket creep, in theory. Having the tax-free threshold pegged that way means that if wage growth drops below inflation (making people worse off) the tax system will provide a kind of compensation. The costs of that would blow the budget, so governments would have skin in the game when it came to supporting decent wages.

Apologies. Silly me for missing that!

So from what I can understand of your write up, The convoluted benefits system will be supported by a negative income tax, which will simplify the whole system.
So people with different levels of support, for example people with disabilities, will have the tax threshold raised so that the 35% of the tax threshold they receive will be raised also. Is this the correct understanding?

I didn’t see anything referencing changes to negative gearing. Is this something that is possible in this tax structure?
Also, what are your reasons for exempting tax from superannuation contributions? Or no mention on modifying the maximum yearly contributions.

Aside from those questions, the only other concern is the amount of people that will have to find work elsewhere as the public sector shrinks.

That’s all fairly much correct. With disabled allowances it would probably just be a straight-out top-up rather than raising the threshold. A top-up just raises the minimum safety net for people with no other income. Raising the threshold would be more universal and would benefit everyone who was disabled regardless of how rich or poor they were or how many sources of income they had. It would be more expensive. You could make an argument that it’s worth it.

Abolishing negative gearing would be easy - but probably not worthwhile. It’s not the primary culprit for high house prices. It was there for decades before house prices exploded. All it does is allow people who lose money on investments to reduce their taxable income accordingly. The real culprit for house prices is the tax break which basically means you don’t have to pay tax on the revenue you get from your home value growing. The Howard govt introduced that turkey in 1999 and the house price boom immediately followed. The policy abolishes it.

The reason to exempt superannuation contributions is that you want to encourage people to grow their super so that you don’t have to pay them a pension later. Also, note superannuation withdrawals are taxed, so also taxing deposits would double-dip and probably discourage retirement savings excessively. Right now we go the other way (taxing deposits but not withdrawals), so the incentive is to pull out all your super as an untaxed lump, blow it and then go on the pension. Tax withdrawals instead and you fix that crappy incentive.

The public sector thing might be true, but it’s not that great of a reason to have overly complex tax laws. Also, some of the those public service jobs could shift to things like tax enforcement, which raises money for the government. Tax enforcement would be more profitable still if the tax code was simpler with less loopholes for tax crooks to hide in.

I like the idea of taxing superannuation only “on the way out”, but I see the need for some kind of transitional arrangements. People will complain about having paid taxes on contributions and earnings for many years, and then be hit with higher taxes after retirement. Perhaps some kind of tax credit for past contributions would be fairer.

A reform I would like to see is a cap on the accumulated super balance (like to old Reasonable Benefit Limit). For example, you could set the cap at roughly the 80th percentile for each age. So if 80% of 40 year olds have $100,000 or less, then the cap for a 40 year old would be around $100,000. Once you hit the cap, any further contributions would be taxed as normal income, as would the earnings on the excess balance. This scheme would limit the tax breaks for those with high incomes but allow maximum flexibility for older workers with low balances to catch up by making higher contributions.

Transitional arrangements is a good thing to add.

I’m not sure about super caps. If withdrawals are taxed as normal income there’s no tax break - you’re just putting a portion of your money in a ‘time capsule’ and paying the tax on it later. In fact you may collect less tax if you impose a cap, because the contributions will drop and thus the matching of contributions by employers will also drop. Which is nice for employers but the smaller pool of stored-up super would yield a smaller pool of income tax in the longer term. Whether that would cancel the short-term benefits of more tax on super contributions I don’t know. Probably would depend on the level of tax - among other things.

Hi Mark. I think I see what you mean. Say a high-paid executive retires with 5m in super, and withdraws only 40k/yr for 5 years. So far he pays no tax on any of his super (but presumably has other income on which he does pay tax). He then dies unexpectedly. His super fund pays his estate the remaining 4.8m and the estate pays 35% tax (1.68m) on this income. His wife inherits the super, now worth 3.12m, on which she pays inheritence tax of 35% (1.09m). So all up, of the original 5m in super the ATO has collected 1.68+1.09=2.77m. Is that correct?

It still worries me that you are allowing people to defer an uncapped amount of tax for several decades. Since the deferred tax bill can be so large it creates a big incentive for avoidance.

Mark, I don’t see how you can claim that abolishing negative gearing is ‘probably not worthwhile’. The cost to the budget has ballooned from about 5b/yr in the mid 90s to 15b/yr. Moreover, this tax expenditure severely distorts the behaviour of property investors with 2/3 of them (1.2m out of 1.8m) making a loss in 2010/11.

The rapid growth in the household debt/GDP ratio during the Howard years, a large part of which the banks financed by offshore borrowing, has created huge risk for Australia. The govt. should not be encouraging debt financed purchasing of pre-existing assets.

A few more questions and suggestions.

How does the cash flow tax work? Can you point me to a reference?

It would be interesting to work out some examples of how the tax policy effects some typical types of household, i.e., compare the outcomes between the existing system and our proposed system. You could even crunch the numbers for some real people (assuming they agree) as a way of promoting the policy.

Should we preface the policy with a general statement that we advocate balancing the budget over the long term, and stating a target for revenue and spending as a % of GDP? As it stands, the policy gives the impression (to me, at least) that we are proposing to do this, but it is not spelled out explicitly. In the absence of any detailed costing I think a statement of this sort is needed.

I would like to see negative gearing abolished as well. :smile:

Bill - that’s an interesting example. I’m not sure if the transfer to the estate would be treated as the ‘estate’ earning income- unless that’s the current law? There’s nothing in the policy to change whatever the current law is. The passing of assets to wife is definitely taxed, so ultimately all the income he earned is fully taxed in the end.

Basically anyone who puts money in super has lost the chance to dodge tax, because super is so regulated and reported. Tax avoidance happens through things like trust funds and offshore tax havens. The more burden you put on super, the more attractive those other options would become. It’s one of the great myths in Australia that high earners pay 45% income tax. Fat chance!

Negative gearing is very well tackled by Saul Eslake in this speech.

The point is that negative gearing becomes costly and abusive only when it combines with the tax break on housing price gains. Getting rid of that tax break should neuter negative gearing. Abolishing neg-gearing altogether will mean landlords have to make money off their property and rents will rise. But the optics on negative gearing have become so putrid that maybe it’s worth abolishing anyway. If the party view supports abolition then so will the policy. We might like to have a social housing proposal at some point though to reduce the pain for low income renters.

Cash flow tax looks at the gap between business income and business costs and taxes the difference. That will get passed on in the form of a higher price. In that sense its much like GST, but the particular point that the tax kicks in means you can pay it very simply through modern (digital) accounting. GST uses an invoice-based method which is a headache for small businesses and not very well suited to the digital age.

Read to your heart’s content about cash flow tax here - start at page 279.

I agree about stating a target for revenue and spending. And we could certainly show examples of how it affects income. In terms of overall “better off” that gets tricky - its hard to show the effect of abolishing many narrow/hidden consumption taxes and replacing with a single broad and transparent one. Insurance will get cheaper (insurance taxes gone) while private school fees get more expensive (tax exemptions gone). Buying houses gets cheaper (stamp duty gone) but owning them gets more expensive (land tax increases). So it becomes a feature of where you are and what you’re planning to do as much as what you earn. The bigger the mess you’re trying to clean up, the harder it is to actually map the impact. Bugger of a problem for tax reformers :stuck_out_tongue:

Wouldn’t the knock on effect of abolishing negative gearing mean that:

  1. Rent prices go up
  2. People won’t pay the rent, end up in a crisis situation
  3. Owners of rental properties can’t find tenants because prices are too high
  4. Owners sell up due to lack of profits at a loss
  5. Market has now corrected itself to be affordable for those who previously could only afford to rent

If this is the case, I am quite happy to smash negative gearing. However, it makes more sense to “phase out” negative gearing over time, such as immediate cutoff for new purchases, and a total end to it after 5 years for those currently using it. That should stop the most negative aspect which would be homelessness for tenants.

Does that make sense?

Sense? Yes. However remember that most people respond to taxation policy with 10% logic, 80% emotion and a wiggle-factor of around 10%. (Of course I made up those numbers, but the concept is basically valid.)

I’m glad superannuation has been in discussed in more detail.
@tjc, That’s why we have to sell our policy to the public. Overall, these reforms should over time save the Australian taxpayers a lot of money, and since the most important thing at the moment is apparently “the deficit”, it should be possible. I mean common sense is common sense. 'Bout time a party has got in with some.

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@Mario_Pane: I couldn’t agree more. Much better expressed than my earlier cheap-shot!