AGENDA FOR TAX REFORM
As tax reform for Australia has again become a subject for public discussion the following extract from Nick Renton's Income Tax and Investment may be of interest.
It comprises some assorted suggestions, great and small, which should be considered by the authorities:
In order to eliminate bracket creep the steps in the income tax scale and all thresholds in the legislation should be adjusted for inflation each year. This indexation should occur automatically and in full and not on an ad hoc basis and only in part.
Married and de facto couples should be given the option to have each member taxed on half of their combined taxable incomes. The concept of treating couples as one unit is already enshrined in the social security legislation.
In the interests of better transparency, the separate Medicare levy should be absorbed into the general income tax scale.
In the interests of administrative simplicity, beneficiaries of public trusts, where these beneficiaries use cash accounting, should be taxed on trust distributions in the financial year in which these are actually received rather than retrospectively in the year to which they relate.
The income tax and social security systems should be combined both administratively and conceptually, with social security benefits being replaced by negative income tax for those on low incomes and/or with special needs. Such an approach would also eliminate the enormous cost and inconvenience of the present means test.
State payroll taxes, which are inflationary and which discourage the creation of jobs, should be completely abolished as a matter of priority.
Companies should be taxed as though they were partnerships and their shareholders were the partners, irrespective of whether the profits are distributed or not. This would be much simpler than the current dividend imputation system and it would also ensure a fairer treatment of corporate losses.
Pending this, the top marginal rate of personal income tax and the rate of company tax should be aligned.
Depreciation deductions should be based on the replacement cost of an asset, and not on its historical cost.
The amount of interest which is subject to tax in the hands of a lender or depositor, or claimable as a tax deduction by a borrower, should be adjusted to reflect the reduction in the purchasing power of the money represented by the principal of the loan. However, as this would lead to a different pattern of interest rates, the suggested rules should apply only to loans entered into or renegotiated after the date of the announcement of the change.
The amount of profit taxed when trading stock is sold should have regard to the cost of that stock adjusted for inflation.
On the grounds of fairness the transfer of tax losses between taxpayers should be freely permitted. This would mean that in the aggregate tax would be levied only on the actual gains net of losses which have been made by parties to such transactions.
To the extent that some of the above measures will lead to a loss of revenue an alternative source may need to be found. A net worth tax on selected assets owned by individuals above a stipulated threshold such as $500,000, and levied at a rate of about one per cent non-deductible (or, say, two per cent deductible), should be introduced in order to replace the revenue being foregone and also to encourage the better use of assets. Such an impost would also reflects the greater ability of persons with assets to pay tax.
Greater use should be made of land tax, but in order to minimise the impact on existing land owners and their tenants the change should be phased in gradually over about 25 years. Land tax should be levied at a flat rate and not on a sliding scale. Unlike the position with other asset classes, increases in the value of land are to a large extent derived from services provided by the community rather than from any effort on the part of the owner. A land tax would also encourage the more efficient use of a scarce resource.
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