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Overhaul Australia's outdated and increasingly unfair tax system

One aim of good government is to change laws and policies as circumstances change, and even to make sensible predictions about how they may change and prepare for those changes.

Australia appears to have marked time recently. January is a good time to reflect and look forward. In the next few weeks, I'll look at some major policy areas and suggest how circumstances have changed and what we need to do about it.

Let's start with tax, for it is almost half of what government does. The significant changes in circumstances over the past decade or so have been: low inflation, low wage growth, greater spending on services, and growing ease of electronic transfers of large sums of money internationally.

Very little has been done to address the profound effects of these things on our tax system. The most significant effect has been growing unfairness, with a greater burden on the middle and a comparatively lower burden on the higher levels of income.

Governments have been reluctant to do anything because any structural change will have clear "winners" and "losers". Instead, they play it safe by succumbing to the inane media demand that "no one will be worse off". They hand out trivial notional cuts in a system whose structure delivers steadily increasing unfairness.

We could rephrase Edmund Burke saying that "the only thing necessary for the triumph of evil is for good men to do nothing" to "the only thing necessary for the infliction of greater taxes upon the lower and the middle is for the politicians who represent the upper to do nothing".

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We now face the prospect of people on the minimum wage being pushed into the 32.5 per cent marginal tax bracket. The Coalition adjusted upwards the prospect on people on $80,000 being pushed in to the 37 per cent bracket but did nothing about low-income people being pushed from 19 to 32.5 per cent. It is absurd that people on the minimum wage should lose almost a third of their extra income to tax.

The system needs wholesale reform. We should consider replacing these large steps in the marginal rate from 19 to 32.5 to 37 to 47 per cent. Instead, there should be no "steps" but a gradual increase in the rate of tax for every extra dollar earned.

We should consider a basic income of, say, the present pension rate for everyone aged over 18, abolishing all of the social-welfare and educational-compliance bureaucracy. Tax rates up the scale would ensure that the $20,000 or so payment of the guaranteed income to people with large other income would be recouped.

At present, the burden is falling on middle-income salary earners.

We have seen that overseas repatriation of profits in the form of "interest", "marketing" and "intellectual property" payments to parent or subsidiary corporations in low-tax jurisdictions has meant that vast profits in Australia by multinationals go untaxed.

We are cracking down, slowly. But one of the most effective ways to tax high-income earners is to tax their consumption. However, if we raise their consumption taxes, we also raise the consumption taxes on everyone else.

We should consider a basic income of, say, the present pension rate for everyone aged over 18.

Solid "compensation" regimes are needed. But people rightly distrust this. They think, with some good reason, that if the GST goes up, they will suffer. The antidote to that is the guaranteed minimum income.

Further, we should broaden the GST base. John Howard must have laughed all the way to the private school fete when the Democrats demanded and received an exemption from the GST for education. So all private-school fees were exempt from the GST, but the ball-point pen bought for a public pupil still copped a GST.

The GST should be imposed on all education, especially private school fees, because it becomes a tax that the wealthy cannot dodge. Similarly with health products. It is absurd that all sorts of new-age, "natural", non-treatments do not attract the GST, especially when it is a way of making the wealthy pay some tax.

The other major tax issues are capital-gains tax and negative gearing. These two are classics of network attacks upon established hierarchies, which do not know how to respond.

From the early 1980s in Australia, it was becoming apparent through financial and social networks that there was a glaringly obvious fail-safe tax-avoidance method available in Australia: using the security of your home, borrow to buy an investment property and deduct the interest and other expenses against your wage-slave income. Sell for a profit later.

Paul Keating at least made the capital gains taxable. But Peter Costello said only half of the gains would be taxed and the rort went on, pushing house prices through the roof. Governments did nothing.

Labor has promised piecemeal changes to negative gearing and capital-gains tax that came out of the blue from the top of the Labor hierarchy. The changes are unsophisticated and ill-informed.

Negative gearing and capital-gains tax need fine-tuning, like the income-tax scales. Gradual reductions in concessions without wholesale grandfathering would be the way to go.

The end result would be, say, full capital-gains tax but with an allowance for inflation and spread over, say, five years. On negative gearing, losses could be claimed against future rental gains or future capital-gains liability, but not wage-slave income.

The real point, though, as my back-of-the-envelope suggestions indicate, is there are myriad ways to make our tax system fairer, with nuanced gradually introduced changes but, alas, the debate regresses to winners and losers, so we all lose.

Our tax system has deep flaws affecting the prosperity of us all and offending our sense of fairness. There is something profoundly wrong when people on the minimum wage face being put into the 32.5 per cent marginal tax rates while Apple, Google and Microsoft have a marginal tax rate in Australia of near zero.

The failure on the revenue side then leads to governments (especially Coalition ones) saying we must clamp down on health, education and welfare spending to balance the budget.

crispinhull.com.au