| Despite the major changes brought in by the New Tax System the income tax system is still in need of reform.
There are two main sources of income tax – from businesses and from individuals. Company tax is at a flat rate of 30% (although deductions do result in lower actual rates) and personal income tax is at a top marginal rate of 48.5% (which includes Medicare payments). Personal income tax is an end tax, meaning respons-ibility for it goes no further than the taxpayer concerned. Company tax is an intermediate tax, that is a tax paid before income is actually (or eventually) distributed to people, who may then be taxed further on their total income.
The principle weaknesses of income tax are that:
income tax is still subject to bracket creep. Income tax is not indexed for inflation. Bracket creep refers to the process whereby wage growth to compensate for inflation pushes taxpayers into higher marginal tax brackets. As a result, every few years Governments need to provide tax cuts, just to restore real tax levels to what they were;
those in the 'black' economy, and others who manipulate the tax system, depress revenue, are not paying their fair share, and their tax avoidance and tax minimisation practices result in a higher burden than would otherwise be necessary, on wage earners in particular;
an ongoing problem with the Australian tax system is the still wide range of unwarranted tax deductions and concessions available or pursued that distorts both individual and company behaviour in ways purely designed to avoid tax. Examples are abusing the 'mutuality' provisions, and the mass marketed tax effective schemes rorts. Such practices and concessions also add unnecessary complexity to the system;
despite a major and welcome adjustment to tax rates in 2000, too much of the income tax burden still falls on the shoulders of low and middle income earners. Again despite welcome reforms to taper rates, many low-income earners still suffer in the tax system, because when social security means tests are taken into account, many families fall into poverty traps with high effective marginal tax rates;
despite increased tax avoidance measures, numbers of high-income earners still make income tax virtually optional by the contrived use of trust or corporate structures, income splitting, and using poorly designed tax breaks on savings and investments to unfairly minimise tax;
the gap between capital gains tax rates, corporate tax rates, and the top individual marginal tax rates results in arbitrage and revenue slippage, as higher income taxpayers manipulate their tax circumstance to take advantage of these differences.
Fixing these problems is not easy. It is costly, the vested interests concerned are powerful, and a reform agenda requires a long-term commitment to continuing income tax reform. As hard as it has proven to do in practice, in pursuing further reform the Democrats do believe in trying to make the tax system much more equitable, efficient and simple than it presently is.
Tax is the price we pay for a modern and civil society. The Democrats tax policy is based on the need to collect sufficient revenue to meet the legitimate needs of the Australian community. Accompanying that overall revenue objective must be reform of the income tax system to make it fairer and more effective.
A broad tax base maximises revenue generation. Once essential revenue needs are satisfied, if the broader base is delivering excess funds, then it becomes possible to lower tax rates. As a policy position, the Democrats believe that it is best to have as broad a tax base as possible in order to be able to deliver the lowest tax rates possible. Low tax rates, combined with a broad base, reduce both the incentive and opportunities for tax evasion.
We propose:
A review of international 'best practice' income tax laws, to pass on the lessons to Australia. A key accompaniment to this review is assessing the implementation of the Ralph business tax reforms where they address the unjustified extent of tax deductions in Australia;
A review of how to afford lower marginal tax rates and thresholds to significantly reduce the burden on low and middle-income earners, while maintaining a progressive but fair scale up to high-income earners;
Paying for these resultant income tax cuts through closing tax loopholes used by the rich and tax avoiders rather than by increasing tax rates;
Taxing businesses using different legal structures such as trusts, partnerships and companies in a similar way so that trusts, in particular, cannot be used to pay less tax than companies;
Attacking negative gearing. It is a tax avoidance practice. It costs Australia approximately $2 billion a year. Losses should be claimable against income from the investment, but not against other earned income;
Reviewing the intersection of the tax and social security systems to ensure that low-income householders do not face counter-productive poverty traps from means testing and thresholds of family payments and other social security benefits;
Raising the thresholds at which HECS tax repayments become payable;
Curbing artificial income splitting;
Cracking down on mass marketed tax effective schemes. Where these are devised as tax avoidance rather than real business schemes they result in billions of dollars lost revenue. They also ensure that personal and company tax rates must remain higher than necessary, reducing the incentive to work and invest in the broader economy.
The result of these reforms and the closing of these loopholes would significantly improve our income tax system.#
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Those in the ‘black’ economy, and others who manipulate the tax system, depress revenue, are not paying their fair share, and their tax avoidance and tax minimisation practices result in a higher burden than would otherwise be necessary, on wage earners i |
