Thursday, 29 July 2010

Tax Policies

This is the time of year when Australians avoid thinking about tax. That's not supposed to happen until late October. But we have an election (yay!) so tax is important again.

It's important because it directs how people behave. Taxes are increased as a disincentive, and deductions are given as an incentive. I'm not impressed about incentives, though. They require individuals to learn about the incentive and find a way to game it. If someone works two jobs, they probably will never find out about it. This is probably an argument for the flat-deduction now available.

But let's look at the Big Three and their policies on tax.

The ALP had a specific policy on tax. It was ambiguous, whereas I want some concrete actions. There was even an odd promise about tax breaks for interest earnings. Brace yourselves for, "a new 50% tax discount for up to $1,000 of interest income from saving deposits held with any bank, building society or credit union, as well as interest on bonds, debentures and annuity products." Calculate how much money you need to have in savings to earn $1000 a year (NAB offers 6%pa on 12-month term deposits, for example) and ask yourself whether you would use that money for savings or for paying off the mortgage. But the "50% tax discount" grabs your attention, doesn't it?

The Liberals had a lengthy PDF about economic principles. Reading this thing (it's 48 pages long, by the way) takes more effort than the ALP and the Greens policies, so there's a lot of detail in there. And most of it is about company tax and business tax. To get the most out of the Liberal policy, start your own business. Maybe you can use the savings from your ALP term deposit.

The Greens have a policy on economics too. It's punchy and numbered, like all their policies. Thankfully it's easy to read. The Greens want to place the burden on consumption and the excessively wealthy, with a mention of a "shift in the tax system from work based taxes to taxes on natural resources and pollution." This move away from income tax and towards consumption tax sounds great, except for the apparent opposition to the GST, which is a consumption tax. Some more clarity is required, I think.

But none of them seem interested in raising the tax-free threshold. Even the Henry report called for this.
Recommendation 2: Progressivity in the tax and transfer system should be delivered through the personal income tax rates scale and transfer payments. A high tax-free threshold with a constant marginal rate for most people should be introduced to provide greater transparency and simplicity.

Tax cuts, if applied, should be applied from the bottom up and not from the top down. The beneficial effect on low-income earners is more significant in relative terms, and in absolute terms everyone gets the same cut. Furthermore, since the current tax-free threshold is below the poverty line, the very act of taxing low-income earners is taxing the poor further into poverty.

Currently, none of the three political parties explicitly advocate for this, and some of them are actually opposed to it. I'm disappointed yet again (as I was for the last few elections) that this simple idea remains ignored.
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