tag:theconversation.com,2011:/us/topics/payroll-tax-10279/articlespayroll tax – The Conversation2020-09-15T19:52:54Ztag:theconversation.com,2011:article/1461862020-09-15T19:52:54Z2020-09-15T19:52:54ZTasmania’s tax system is broken: here are three ways to fix it<figure><img src="https://images.theconversation.com/files/358052/original/file-20200915-24-8eavaz.jpg?ixlib=rb-1.1.0&rect=1341%2C341%2C2739%2C1553&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">SevenMaps/Shutterstock</span></span></figcaption></figure><p>For two decades now, meaningful tax reform has proved elusive. </p>
<p>At the federal level, there hasn’t been any comprehensive reform since the Howard government’s <a href="https://treasury.gov.au/publication/economic-roundup-winter-2006/a-brief-history-of-australias-tax-system">New Tax System of 2000</a>, the one that brought in the goods and services tax.</p>
<p>It’s much the same for the states. </p>
<p>With the exception of the reforms that accompanied the introduction of the GST in 2000, state tax systems haven’t changed much since the 1970s, which began with the transfer of payroll tax from the Commonwealth to the states, and ended with the abolition of death duties.</p>
<p>For their part, state governments have spent most of the following four decades narrowing the bases of the few taxes over which they do have control, in order either to curry favour with important groups of voters such as small business people and home owners, or to compete with other states to attract employers.</p>
<p>Australia’s two largest states have become increasingly reliant on a tax uniformly condemned as a “<a href="https://theconversation.com/abolish-stamp-duty-the-act-shows-the-rest-of-us-how-to-tax-property-105378">bad tax</a>” – stamp duty on the transfer of land. </p>
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Read more:
<a href="https://theconversation.com/abolish-stamp-duty-the-act-shows-the-rest-of-us-how-to-tax-property-105378">Abolish stamp duty. The ACT shows the rest of us how to tax property</a>
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<p>The next two largest states have ridden booms in royalties from mining and gas which have, for the most part, allowed them to avoid the need for even thinking about reforming their taxes.</p>
<p>Only in the Australian Capital Territory has there been a genuine (so far successful) effort to undertake a reform that enjoys almost unanimous support among economists, the replacement of stamp duties on land transfers with a <a href="https://theconversation.com/abolish-stamp-duty-the-act-shows-the-rest-of-us-how-to-tax-property-105378">broadly-based land tax</a>. </p>
<p>The fact that the ACT government is also in effect the Canberra city council has allowed it to accomplish this by raising rates rather than breaking the taboo of imposing land tax on the “family home”.</p>
<h2>Tasmania specialises in bad taxes, and the GST</h2>
<p>The Tasmanian government raises less from its own resources (taxes, royalties, user charges and dividends) than any other jurisdiction except the Northern Territory. </p>
<p>That’s largely because, as identified by the <a href="https://www.cgc.gov.au/sites/default/files/tas_summary.pdf">Commonwealth Grants Commission</a> in its annual reviews, Tasmania’s revenue-raising capacity is less than that of any other state or territory, although it also partly reflects decisions by successive Tasmanian governments of both political persuasions to raise less than they could.</p>
<p>Perhaps because Tasmania has been able to rely on GST allocations and other grants from the Commonwealth, there have been no serious conversations about its tax system since a tri-partisan parliamentary inquiry was <a href="https://www.theadvocate.com.au/story/698684/review-of-state-taxes-suspended/?cs=87">abruptly terminated</a> almost nine years ago.</p>
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Read more:
<a href="https://theconversation.com/our-states-are-crying-poor-they-wouldnt-if-they-charged-for-rezoning-142838">Our states are crying poor. They wouldn't if they charged for rezoning</a>
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<p>Since then, Tasmania’s political parties have been more anxious to make commitments about what they would not do, than to outline plans for what was needed.</p>
<p>That complacency is likely to be challenged by the abrupt decline in revenue from the goods and services tax as a result of the current recession, as well as by its longer-term decline as a share of GDP for reasons recently identified by the <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office/Publications/Research_reports">Parliamentary Budget Office</a>. </p>
<p>The collapse in GST revenue will hurt Tasmania’s budget more than that of any other state or territory (other than the Northern Territory).</p>
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<p><strong>Goods and services tax revenue as a proportion of GDP</strong></p>
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<a href="https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=247&fit=crop&dpr=1 600w, https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=247&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=247&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=310&fit=crop&dpr=1 754w, https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=310&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/358031/original/file-20200915-18-86y8on.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=310&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Per cent of gross domestic product.</span>
<span class="attribution"><a class="source" href="https://www.aph.gov.au/-/media/05_About_Parliament/54_Parliamentary_Depts/548_Parliamentary_Budget_Office/Reports/2020-21/Structural_trends_in_GST/Structural_trends_in_GST_-_PDF.pdf?la=en&hash=FF8291FA10365CC45C88BC2EF94F109D5378786F">Parliamentary Budget Office</a></span>
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<h2>There’s a way out</h2>
<p>The report I’ve written for The Australia Institute published this morning entitled <a href="https://www.saul-eslake.com/reforming-tasmanias-tax-system-some-options/#full_version">Reforming Tasmania’s state tax system: Some options</a> notes that Tasmania gets a higher proportion of its total state tax take from “bad taxes” (stamp duty on land transfers, and taxes on insurance premiums) than any state or territory except Victoria.</p>
<p>It gets a smaller proportion of its tax take from what are generally thought to be “good taxes” (payroll tax and land tax) than any state or territory except Queensland.</p>
<p>It proposes three reforms which can be implemented by a Tasmanian government without requiring a lead from the larger states.</p>
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Read more:
<a href="https://theconversation.com/models-only-give-part-answer-to-real-tax-reform-54160">Models only give part answer to real tax reform</a>
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<p>None would require financial assistance from the Commonwealth (although that would be helpful, especially with transitional arrangements, if the Commonwealth is as serious about encouraging productivity-enhancing reform as the <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/speeches/4th-sir-john-downer-oration-university-adelaide">Treasurer</a> says he is).</p>
<h2>1. Land tax instead of stamp duty</h2>
<p>The first is to replace existing “conveyancing duties”, as stamp duties on the transfer of land are officially called in Tasmania, with a land tax whose base should include owner-occupied homes and “shacks”, which are currently exempt or otherwise not taxed.</p>
<p>It should be levied on individual land holdings (rather than the aggregate of them) at progressive rates on the per-square-metre value of each holding.</p>
<p>There would need to be a transitional provision, such as a credit for stamp duty paid on recently-acquired property. </p>
<p>And there would need to be a deferral provision for “asset rich, income poor” homeowners such as pensioners. Both are possible.</p>
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Read more:
<a href="https://theconversation.com/ideas-for-australia-five-ideas-to-help-fix-australias-tax-system-56272">Ideas for Australia: Five ideas to help fix Australia's tax system</a>
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<p>The average residential land-owner would not have paid more in land tax under this proposal than he or she would have by way of stamp duty on the purchase of the property until he or she had lived in it for more than nine years. </p>
<p>By that time, as the recent <a href="https://www.treasury.nsw.gov.au/sites/default/files/2020-06/FFR%20Review%20Draft%20Report%20.pdf">Thodey Report</a> to the NSW government points out, any reasonable interpretation of “fairness” demands owners should be paying more than they currently do.</p>
<h2>2. Proper payroll tax</h2>
<p>The second proposed reform is cutting the threshold for payroll tax to the average annual earnings of five Tasmanian employees from its current level, which is equivalent to the average annual earnings of 36 employees.</p>
<p>The extra revenue would be used to lower the rate from what is currently the second-highest in Australia to what would likely be the second-lowest, and to exempt new businesses from payroll tax altogether for the first so many years of their existence, where the number of years could be, for example, three or five.</p>
<p>This will produce howls of outrage from small businesses, a larger proportion of which are exempt from payroll tax in Tasmania than in any other state, and from others who (<a href="https://www.saul-eslake.com/reforming-tasmanias-tax-system-some-options/#full_version">wrongly</a>) believe that small business is the engine room of the economy.</p>
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<a href="https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/358042/original/file-20200915-14-btv9pn.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Small businesses are anything but the engine room of the economy.</span>
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<p>My report shows that exempting small business from payroll tax has not done anything to enhance job creation, innovation or any of the other blessings commonly claimed.</p>
<p>On the contrary, Bureau of Statistics figures show that over the four years to 2018-19, during which time Tasmania’s economy in many respects out-performed the rest of Australia, small business was responsible for only <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/ProductsbyCatalogue/48791677FF5B2814CA256A1D0001FECD?OpenDocument">13%</a> of Tasmania’s net increase in private sector employment.</p>
<p>Big businesses (who had to pay the second-highest payroll tax in Australia) were responsible for 34%.</p>
<p>Medium-sized businesses, many of whom also had to pay the second-highest payroll tax in Australia, accounted for 52%. </p>
<p>Indeed, over the 12 years to 2018-19, employment at Tasmanian small businesses declined by 11.6% – more than double the national average – despite Tasmania having the most generous payroll tax concessions for small businesses.</p>
<p>Of course the fact that payroll tax is paid in the first instance by employers doesn’t mean that it is a “tax on jobs” any more than is the goods and services tax, which in the first instance is paid by shoppers.</p>
<p>Preferencing <em>new</em> businesses would do far more to spur entrepreneurship and to stimulate job creation and innovation than preferencing <em>small</em> ones simply because they’re small.</p>
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Read more:
<a href="https://theconversation.com/memo-to-australias-states-try-renovating-your-tax-system-before-asking-for-a-new-one-141893">Memo to Australia's states: try renovating your tax system before asking for a new one</a>
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<p>It would also cost less: which would mean the special treatment for new businesses could be more generous, if desired. </p>
<p>And since new businesses can’t prevent themselves from becoming an old businesses, other than by going out of business, there would be no perverse incentives such as those that currently result in small businesses ceasing to grow at just below the point at which they become ineligible for preferential treatment.</p>
<h2>3. Death duties on estates over $1 million</h2>
<p>The third, and probably the most controversial, proposal is the reintroduction of death duties: specifically, on estates valued at over A$1 million (which would exclude 91% of the estates granted probate by Tasmania’s Supreme Court over the past three years), at rates ranging from 5% on amounts between $1 million and $5 million, 10% on the next $5 million, and 20% on anything over $10 million (which in Tasmania has been just 10 estates, 0.1% of the total, over the past three years.</p>
<p>However, the report also proposes that people whose estates would be liable to such a tax could obtain a credit against it (a reduction) for donations to Tasmanian-based deductible gift recipients – up to the point where, if they wished, they could completely extinguish their liability. </p>
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Read more:
<a href="https://theconversation.com/house-prices-and-demographics-make-death-duties-an-idea-whose-time-has-come-114175">House prices and demographics make death duties an idea whose time has come</a>
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<p>Such an arrangement would provide a powerful incentive for philanthropy in Tasmania, as it has <a href="https://theconversation.com/philanthropy-is-funding-serious-journalism-in-the-us-it-could-work-for-australia-too-79349">in the United States</a>. </p>
<p>There will of course be predictable cries of outrage against such a proposal, not so much perhaps from those whose estates would be subject to the tax as from their children and others who hope to benefit the inheritances without sharing any of the windfall – a requirement a surprising number of Americans don’t seem to find at all objectionable. </p>
<p>No doubt opponents of such a proposal will also find it convenient to ignore the stipulation that fewer than 10% of estates would be liable for the tax, or the suggestion that estates passing to surviving spouses (though not to other people) would be exempt.</p>
<h2>This needn’t mean more tax, or less tax</h2>
<p>All or any of these proposals could be used to raise more revenue than Tasmania’s present tax system. </p>
<p>Or they could be used to raise less revenue, by a party that wanted to argue that reducing the overall state tax burden would improve Tasmania’s competitiveness.</p>
<p>My report <a href="https://www.saul-eslake.com/reforming-tasmanias-tax-system-some-options/#full_version">doesn’t take a position in favour of either option</a>, instead it advocates for a fairer system.</p>
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Read more:
<a href="https://theconversation.com/rethink-inheritances-these-days-they-go-to-the-already-middle-aged-122029">Rethink inheritances. These days they go to the already middle-aged</a>
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<p>The system I propose would be more efficient in the sense of doing less to distort the choices businesses and households make as to how they allocate their capital, where they live, how often they move home and how they do other things.</p>
<p>And it would make Tasmania’s financial position less vulnerable to forces entirely beyond its control or influence.</p>
<p>Which is another way of saying it would represent real reform: something that has been sorely lacking, no less in Tasmania than anywhere else, for 20 years.</p><img src="https://counter.theconversation.com/content/146186/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The report referred to in this article was commissioned by The Australia Institute</span></em></p>Tasmania gets more of its revenue from “bad taxes” than any state or territory other than Victoria, and less from “good taxes” than anywhere other than Queensland.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1224092019-08-29T07:43:53Z2019-08-29T07:43:53ZSouth African taxpayers will bear the brunt of National Health Insurance<figure><img src="https://images.theconversation.com/files/290066/original/file-20190829-106524-m1bdl8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The proposed National Health Insurance has raised questions about the government's ability to manage a complex health system </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>South Africa’s government recently released the National Health Insurance (<a href="http://www.health.gov.za/index.php/nhi">NHI)</a> Bill whose aim is to extend universal healthcare to all South Africans. </p>
<p>But the Bill has sparked a great deal of controversy. The impact on private health care, quality of service and the government’s ability to manage such a complex system have been widely questioned.</p>
<p>One of the toughest questions being asked is: how on earth will it be funded?</p>
<p>The memorandum on the objects of the Bill explains that the NHI will be financed in various interrelated phases as determined in consultation with the National Treasury. Costing <a href="https://www.thesouthafrican.com/news/what-nhi-will-cost-south-africa-taxpayer/">estimates vary</a> from the health department’s “guesstimated” R259 billion last year, to the Institute of Race Relations calculation of R450 billion.</p>
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Read more:
<a href="https://theconversation.com/why-south-africas-plans-for-universal-healthcare-are-pie-in-the-sky-121992">Why South Africa's plans for universal healthcare are pie in the sky</a>
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<p>National Treasury is currently doing the costing exercise. It has said it will <a href="http://www.treasury.gov.za/comm_media/press/2019/2019082201%20Media%20statement%20-%20Budget%20Council%20meeting.pdf">release more information</a> at a later stage. </p>
<p>What’s known about the funding proposals can be gleaned from the Bill itself. These four proposals target the same low-hanging fruit, namely income tax.</p>
<h2>The four sources</h2>
<p><strong>Source 1: Existing tax revenue</strong>: This pool of general tax revenue includes funds currently directed to the provincial health departments (the so-called “provincial equitable share” and “conditional grants”). </p>
<p>The main public health funding stream consists of around R150 billion per year, which would be tapped for the NHI. The memorandum notes that this shifting of funds would occur in one of the later phases, and would require amendments to the National Health Act of 2003. It would also be dependent on how functions are shifted from provincial to national level; for example, if central hospitals were brought to the national level.</p>
<p><strong>Source 2: Scrapping medical scheme tax credits</strong>: This entails the reallocation of funding for medical scheme tax credits paid to various medical schemes towards the funding of the NHI. In other words, the current tax relief provided for by the medical tax credits would fall away. The impact on, for example, a family of four, would amount to just over R12 000 per year. This means that the tax owing to SARS would increase by about R12 000 per year for the main member of the medical scheme.</p>
<p>Calculation of medical scheme tax credit = (R620 + R209 + R209) x 12 months = R12 456.</p>
<p><strong>Source 3: Payroll tax on employeer and employee</strong>: The memorandum envisages that the payroll tax will be “small”. The Bill does not, however, quantify its “smallness” – or indeed, the magnitude. </p>
<p>In my view this payroll tax is in essence a tax on labour and productivity. For example, the payroll tax would inevitably result in reduced earnings or, worse, job losses. </p>
<p><strong>Source 4: Surcharge on personal income tax</strong>: The Bill does not contain any information regarding this surcharge, other than that it would be charged on an individual’s taxable income. This extra tax on taxable income could be viewed as a penalty (or disincentive) for increased productivity and wealth – yet another reason why some might participate in the <a href="https://businesstech.co.za/news/finance/295552/south-africas-tax-revolt-is-already-happening/">silent tax revolt</a>. </p>
<p>Despite not knowing the percentage of additional tax that might be levied, it is important to look at the number of taxpayers who will have to bear this additional tax. This metric is called the tax base.</p>
<h2>The tax base</h2>
<p>The country has a narrow <a href="https://www.sars.gov.za/About/SATaxSystem/Pages/Tax-Statistics.aspx">tax base</a>, defined as the number of individuals who were <em>assessed</em> for personal income tax. This is not to be confused with the number of <em>registered</em> individual taxpayers, which has increased by 4.9% from 2016/17 to 2017/18. The increase may be ascribed to the revised employee registration process which was introduced by the South African Revenue Service in 2010. </p>
<p>This process requires employers to register all individuals and issue them with a tax certificate, regardless of the amount of income earned. However, many of these taxpayers fall below the tax <a href="https://www.sars.gov.za/TaxTypes/PIT/Pages/default.aspx">threshold</a> and are thus not assessed. They are also <a href="https://www.sars.gov.za/AllDocs/Documents/PAYE%20tables/2020%20tables/PAYE-GEN-01-G01-A03%20-%202020%20Monthly%20Tax%20Deduction%20Tables%20-%20External%20Annexure.pdf">not liable</a> for the tax employers deduct from salaries and wages and hand over to the South African Revenue Service.</p>
<p>Conversely, the number of taxpayers actually assessed (or taxed) showed a sharp decline. In the 2013/14 tax year, a total of 5,991,934 individuals were assessed. This figure dropped to 4,898,565 individuals assessed in 2016/2017. The tax base therefore shrunk by about 18.2% from 2014 to 2017.</p>
<p>In contrast, the personal income tax burden shouldered by these individual taxpayers has increased. This can be expressed as the average personal income tax paid per assessed taxpayer. In the 2013/14 tax year, the tax burden amounted to R45,702. This burden expanded to R65,601 in 2016/2017, representing a whopping 43.5% increase from 2014 to 2017.</p>
<p>The overall result is that relatively fewer taxpayers have to carry an increasing burden of tax collections. Given the country’s poor economic outlook, credit rating downgrades, high unemployment figures and the myriad of social grants paid to millions of dependent individuals, it is clear that the tax base is already severely strained. </p>
<p>The NHI will simply add to this burden.</p>
<h2>Social solidarity</h2>
<p>The Bill attempts to make the extra tax burden more palatable by saying that the money will be collected “in accordance with social solidarity”. This is an interesting phrase used by the drafters of the Bill. “Social solidarity” is a concept that was developed by the Frenchman <a href="http://routledgesoc.com/category/profile-tags/social-solidarity">Émile Durkheim</a> in the late 1800s. Its core principle is that of collective action and enabling individuals to feel that they can enhance the lives of others. </p>
<p>The social solidarity envisaged by the memorandum is that of income cross-subsidies between “the affluent and the impoverished”. All well and good, until one considers that the payment of taxes is not a voluntary action done for the wellbeing of others. It is a legal obligation imposed by the State on its citizens. Social solidarity, therefore, implies a sense of altruism. A duty to pay income tax can hardly be said to be an act of selflessness.</p>
<p>Of course, what probably offends most taxpayers is not the communist undertone of social solidarity, which harks back to “<a href="https://www.marxists.org/archive/marx/works/1875/gotha/ch01.htm">from each according to his ability, to each according to his needs</a>”. Rather, it is the sense of frustration with a government rife with corruption, the widespread misuse of public funds and the brazen lack of accountability. The NHI funding proposals may very well be perceived as adding insult to injury for the 4.9 million individuals paying personal income tax.</p>
<p>It is somewhat of a relief that (according to the memorandum) tax options will only be evaluated as part of the last stage of implementation. Hopefully, the National Treasury will do a full impact analysis and take into account the economic and fiscal environment prevailing at the time.</p><img src="https://counter.theconversation.com/content/122409/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dr Lee-Ann Steenkamp is affiliated with the South African Institute of Tax Professionals (SAIT).</span></em></p>The South African government is going ahead with the National Health Insurance scheme but has yet to detail how it is to be funded. What seems certain is that taxpayers will foot the bill.Lee-Ann Steenkamp, Senior lecturer in taxation, University of Stellenbosch Business School (USB), Stellenbosch UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1053782018-11-01T03:53:47Z2018-11-01T03:53:47ZAbolish stamp duty. The ACT shows the rest of us how to tax property<figure><img src="https://images.theconversation.com/files/243391/original/file-20181101-173896-16lz7oq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The ACT has Australia's best state tax system, NSW the worst.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>This week we’re exploring the state of nine different policy areas across Australia’s states, as detailed in Grattan Institute’s State Orange Book 2018. Read the other articles in the series <a href="https://theconversation.com/au/topics/state-of-the-states-2018-61464">here</a></em>.</p>
<p>You might think that being a state (or territory) treasurer is a boring job. The federal treasurer gets all the media attention and controls many of the big economic levers, including income and company tax, massive Australia-wide spending and trade and competition policy. </p>
<p>But you would be wrong.</p>
<p>Grattan Institute’s <a href="https://grattan.edu.au/report/state-orange-book-2018/"><em>State Orange Book 2018</em></a> shows that if state treasurers relied less on taxes that hurt the economy and more on the ones that are the very best they could provide a huge boost to their economies. </p>
<h2>The big prize</h2>
<p>Almost every tax hurts economic growth, but some hurt more than others. </p>
<p>Our state treasurers know this, yet they continue to make poor choices.</p>
<p>Taxes on transactions, such as stamp duties on real estate purchases, are particularly inefficient.</p>
<p>They make it more expensive to move home to take a new job across town or in a different town, encouraging people to stay put. They make it more expensive to move into bigger or smaller homes, encouraging people to renovate instead.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/to-make-housing-more-affordable-this-is-what-state-governments-need-to-do-105050">To make housing more affordable this is what state governments need to do</a>
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<p>With the typical stamp duty bill now above A$40,000 in Sydney and Melbourne, this is more than just an idle theory. </p>
<p>In contrast, taxes on land are <a href="https://grattan.edu.au/report/property-taxes/">extraordinarily efficient</a>, and council rates equally so. </p>
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<h2>ACT is showing the way</h2>
<p>The Australian Capital Territory has Australia’s most efficient tax base – every dollar of revenue raised costs the economy just 21.9 cents. </p>
<p>New South Wales has the least efficient – every dollar of revenue raised costs the economy 29.7 cents. </p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=534&fit=crop&dpr=1 600w, https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=534&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=534&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=671&fit=crop&dpr=1 754w, https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=671&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/243371/original/file-20181101-78453-1gnjuck.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=671&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://grattan.edu.au/report/state-orange-book-2018/">Grattan Institute Orange Book 2018</a></span>
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<h2>While most states are going backwards</h2>
<p>Unfortunately, in most states taxes have became less efficient over the past five years. </p>
<p>Booming property prices in Sydney and Melbourne inflated stamp duties, giving them a growing share of the tax base in NSW and Victoria. </p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/243367/original/file-20181101-78447-1pk0y6g.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Average excess burden of taxation cents per dollar of tax revenue collected in each state and territory (2006-2016)</span>
<span class="attribution"><a class="source" href="https://grattan.edu.au/report/state-orange-book-2018/">Grattan Institute Orange book 2008</a></span>
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<h2>They should copy the ACT</h2>
<p>All state treasurers should <a href="https://grattan.edu.au/news/following-the-act-land-tax-approach-boosts-growth-and-state-budgets/">follow the lead</a> of the ACT and replace stamp duties with broad-based property taxes. </p>
<p>Our calculations suggest that doing so could make Australians up to $17 billion a year better off, while also <a href="https://grattan.edu.au/news/housing-tax-reform-what-difference-will-it-make/">making housing more affordable</a>.</p>
<p>And stamp duties are unfair. They make some families pay more tax than others simply because they move home more often. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/infrastructure-splurge-ignores-smarter-ways-to-keep-growing-cities-moving-105051">Infrastructure splurge ignores smarter ways to keep growing cities moving</a>
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<p>An annual flat tax <a href="https://grattan.edu.au/wp-content/uploads/2017/10/SA-Federalism-and-Tax-Future-Directions-for-Property-Tax-Reform-for-web-28-August-2017.pdf">set at between A$5 and A$7</a> for every A$1,000 of unimproved land value would be enough to fund the abolition of property stamp duties. </p>
<h2>Which won’t be easy</h2>
<p>Proposals to make the switch have stalled <a href="https://grattan.edu.au/wp-content/uploads/2017/10/SA-Federalism-and-Tax-Future-Directions-for-Property-Tax-Reform-for-web-28-August-2017.pdf">because the politics is hard</a>. </p>
<p>Recent purchasers would be reluctant to pay an annual tax so soon after paying stamp duty. A property tax would pose difficulties for people who are asset-rich but income-poor, especially retirees. </p>
<p>And property taxes cause angst: quarterly property tax bills remind people that they are taxpayers more often than does a one-off stamp duty with each purchase.</p>
<p>So state treasurers should make the switch gradually, <a href="https://grattan.edu.au/news/following-the-act-land-tax-approach-boosts-growth-and-state-budgets/">as in the ACT</a>: slowly wind back stamp duty and ramp up broad-based property tax over time. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australias-dangerous-fantasy-diverting-population-growth-to-the-regions-105052">Australia's dangerous fantasy: diverting population growth to the regions</a>
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<p>It would provide the states with an increasingly stable revenue stream while reducing the disparity between those who bought a home just before the change and just afterwards. </p>
<p>To ensure that asset-rich but income-poor households could stay in their homes, state treasurers would have to allow them to defer paying the levy (with interest) until they sell their properties.</p>
<h2>And they should axe insurance tax</h2>
<p>State treasurers should also replace state taxes on property, life, health and motor vehicle insurance with a broad-based property levy. Most states have already abolished insurance levies to fund fire and emergency services. </p>
<p>Insurance taxes <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/Publications/Papers/Final_Report_Part_2/chapter_e8.htm">deter</a> people and businesses from buying adequate insurance, leaving them <a href="https://theconversation.com/properties-under-fire-why-so-many-australians-are-inadequately-insured-against-disaster-50588">exposed to risks</a> such as flood or fire damage to their home, or motor vehicle theft. </p>
<h2>And charge for rezoning</h2>
<p>And state treasurers should <a href="http://www.planning.act.gov.au/topics/design-and-build/fees/change_of_use_charge_-_lease_variation_charge">follow another ACT lead</a> and introduce explicit “betterment taxes” to capture some of the windfall gains from rezoning of land. </p>
<p>Government permission to build higher-density housing, or convert farmland into greenfield housing land, generates large unearned windfall gains for landowners. </p>
<p>Taxing these windfall gains would be a particularly efficient form of taxation, would reduce the opportunities for <a href="https://www.smh.com.au/business/the-economy/in-the-zone-insider-trading-rife-in-land-rezoning-racket-20150929-gjx8nh.html">corruption</a> in the planning system, and would enable state treasurers to reduce other more economically harmful and regressive taxes.</p>
<h2>And apply payroll tax widely</h2>
<p>Finally, state payroll taxes should be broadened by abolishing carve-outs for small businesses. </p>
<p>This would enable state treasurers to cut payroll tax rates across the board.</p>
<p>Generous thresholds and exemptions have weakened states’ payroll tax bases and <a href="https://www.murphyeconomics.com.au/Information/tax/ATF_Vol.33-1_2018_Murphy.pdf">increased</a> the economic costs of the tax. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/grattan-institute-orange-book-2018-state-governments-matter-vote-wisely-105376">Grattan Institute Orange Book 2018. State governments matter, vote wisely</a>
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<p>Astoundingly, around 90% of NSW businesses <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_d3-2.htm">are exempt</a> from payroll tax.</p>
<p>We believe that, taken together, this set of reforms would make a big difference to economic growth. </p>
<p>Voters might even reward the treasurers and their premiers.</p><img src="https://counter.theconversation.com/content/105378/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.
The State Orange Book 2018, from which this article draws, was supported by a grant from the Susan McKinnon Foundation.
</span></em></p><p class="fine-print"><em><span>Brendan Coates and Tony Chen do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Grattan Institute says swapping stamp duty for land tax would make Australians up to $17 billion a year better off.Brendan Coates, Fellow, Grattan InstituteJohn Daley, Chief Executive Officer, Grattan InstituteTony Chen, Researcher, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/979882018-06-07T21:01:43Z2018-06-07T21:01:43ZSocial Security’s future is safe<figure><img src="https://images.theconversation.com/files/222277/original/file-20180607-13677-vwp7ev.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Despite alarming news, retirees can still rely on their retirement nest eggs. </span> <span class="attribution"><span class="source">Dan Kosmayer/Shutterstock.com</span></span></figcaption></figure><p>Social Security is the bedrock of Americans’ retirement income security. So you may have been concerned by the news that the federal government <a href="https://www.marketwatch.com/story/new-warnings-about-cuts-to-social-security-and-medicare-are-a-reason-to-worry-2018-06-07">needed to dip</a> into the Social Security’s trust fund to pay for the program this year.</p>
<p>Does that mean Social Security’s future isn’t safe?</p>
<p>As an economist who <a href="https://scholar.google.com/citations?user=xhht0KcAAAAJ&hl=en&oi=ao">has written extensively</a> on retirement and Social Security, I believe the system’s problems are manageable. The only question is whether Congress has the political will to resolve them.</p>
<h2>A manageable problem</h2>
<p>Social Security benefits typically make up the <a href="https://www.ssa.gov/policy/docs/statcomps/income_pop55/2014/sect08.html#table8.a1">largest share of retirees’ incomes</a>, even though the average benefit is actually quite modest. In 2016, 41.2 million retired workers <a href="https://www.ssa.gov/policy/docs/statcomps/supplement/2017/5b.html#table5.b4">received an average monthly benefit</a> of US$1,360.13. </p>
<p>While <a href="https://theconversation.com/why-are-so-many-americans-struggling-to-save-for-retirement-53798">American families count</a> on this program, Social Security faces a long-term financial challenge, as the latest <a href="https://www.ssa.gov/news/press/releases/2018/?utm_source=facebook&utm_medium=social&utm_campaign=oea-blog&utm_content%20field=#6-2018-1">annual trustees report</a> shows. </p>
<p>Basically Social Security works like this: Today’s workers pay for the benefits of retirees via the payroll tax. For most of the past 35 years, workers paid more into the system than retirees received in benefits, creating a surplus that was invested in interest-accruing trust funds.</p>
<p>The <a href="https://www.ssa.gov/news/press/releases/2018/?utm_source=facebook&utm_medium=social&utm_campaign=oea-blog&utm_content%20field=#6-2018-1">trustees report</a> stated that the federal government will have to tap Social Security reserves to pay a small portion of promised benefits in the current fiscal year for the first time since 1982. They also projected Social Security can continue to pay 100 percent of benefits through 2034 by relying in part on the money in the trust funds. </p>
<p>At that point, the trust funds will be depleted, and Congress will need to decide whether to increase revenue, cut benefits or both. Otherwise, Social Security <a href="https://www.ssa.gov/news/press/releases/2018/?utm_source=facebook&utm_medium=social&utm_campaign=oea-blog&utm_content%20field=#6-2018-1">will be able to pay just 79 percent</a> of promised benefits in 2035 and a little less for the foreseeable future.</p>
<p>Social Security’s projected shortfalls over the coming decades are larger than initially estimated because, as <a href="https://www.americanprogress.org/issues/economy/reports/2015/02/10/106373/the-effect-of-rising-inequality-on-social-security/">my research has shown</a>, rising economic inequality has pushed more individual income beyond the reach of its payroll tax, which was capped at $127,200 in 2017. This has meant less revenue and higher costs than projected.</p>
<p>Despite the <a href="https://www.deseretnews.com/article/900020827/disaster-looms-for-social-security-and-no-one-seems-to-care.html">alarmist</a> <a href="http://thehill.com/opinion/finance/391192-as-demagogues-squawk-clock-is-ticking-on-social-security">headlines</a>, however, this is neither the end of the world or the end of Social Security. The trust funds were never intended to be left alone – and indeed <a href="https://www.ssa.gov/OACT/STATS/table4a3.html">have been tapped many times</a> since they started. </p>
<p>In other words, addressing the financial shortfall poses a manageable long-term challenge. For example, increasing the payroll tax by just 2.88 percentage points <a href="https://www.ssa.gov/OACT/TR/2018/II_D_project.html#105057">would cover</a> the expected shortfall over the next 75 years. </p>
<p>The annual shortfall is also equivalent to about 1 percent of U.S. gross domestic product. To put this in perspective, that’s less than the 1.4 percent of GDP the recent <a href="https://www.cbo.gov/system/files/115th-congress-2017-2018/costestimate/53437-wydenltr.pdf">tax cuts are projected to cost</a> in 2019. </p>
<p>Paying for Social Security’s long-term financial shortfall is a matter of policy choices and political will. In my opinion, it is not an insurmountable economic obstacle.</p><img src="https://counter.theconversation.com/content/97988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Weller has received funding from AARP. Christian Weller is a senior fellow with the Center for American Progress. </span></em></p>Social Security will have to dip into its trust fund to pay benefits this year for the first time since 1982. Should we be worried?Christian Weller, Professor of Public Policy and Public Affairs, UMass BostonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/562722016-04-10T20:03:58Z2016-04-10T20:03:58ZIdeas for Australia: Five ideas to help fix Australia’s tax system<p><em>The Conversation has asked 20 academics to examine the big ideas facing Australia for the 2016 federal election and beyond. The <a href="https://theconversation.com/au/topics/ideas-for-australia">20-piece series</a> will examine, among others, the state of democracy, health, education, environment, equality, freedom of speech, federation and economic reform.</em> </p>
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<p>Our tax reform debate seems to be stuck. Our federal fiscal system is skewed. What kind of a fiscal bargain can we strike to build a better tax system for the future? </p>
<h2>A new federal bargain: share income tax and GST equally</h2>
<p>The federal fiscal bargain will always be a dynamic process. But we can re-set parts of our institutional framework to improve it. </p>
<p>Here’s an idea: share income tax and GST revenues equally between the federal government and the states, replacing all other grants from the Commonwealth government. A new Intergovernmental Agreement would be needed and both state and federal governments would have a stake in future tax reforms for both income tax and GST. </p>
<p>This would provide a clear budget constraint for the states, plus some more revenue. The revenues would be equalised across the country. </p>
<h2>Fix state land tax and payroll tax</h2>
<p>Before we sign up, let’s fix up those tax bases. States and territories need to commit to reforming <a href="http://apo.org.au/resource/reform-state-taxes-australia-rationale-and-options">stamp duty and payroll tax</a>. First, replace stamp duty with land tax. Second, expand payroll tax to cover all wages while lowering the rate. </p>
<p>Stamp duties are the most inefficient tax. A broad-based land tax with a low flat rate is the least distorting and it can raise stable and substantial revenues to fund state services. Stamp duties are a barrier to the transfer of commercial and residential property and the most volatile of state revenue sources. The exemption of the owner-occupied home from land tax distorts housing supply, making housing less affordable. </p>
<p>To make life simpler, state governments could put land tax and rates on the same return – and to fund transition, the extra revenue from Commonwealth income tax would help. </p>
<p>Current payroll taxes exempt about half of all wages. A broad-based payroll tax with a low rate would remove distortions in business organisation and end the arbitrary thresholds that keep growing businesses small, as well simplifying national business activity. A tax rate of about 3% on a broad base could raise as much revenue as the current payroll tax. In future, the payroll tax could be collected through the Pay As You Go income tax system.</p>
<p>States would keep all the revenue and could levy different rates if they chose, but crucially a single rate would have to apply to the harmonised base for each of payroll and land tax.</p>
<h2>Fix income tax and transfers for workers and families</h2>
<p>Australia’s progressive income tax rates and transfer system is mostly fair and stable – and should stay under control of the federal government.</p>
<p>Most importantly, the government should fix the high effective tax rates caused by interactions between income tax, family benefits and childcare payments. These contribute to keeping many women with young children out of the workforce or in part-time work. That in turn reduces their economic independence, retirement savings and lifetime well-being – as well as income tax revenues. </p>
<p>The best solution is to provide for universal paid parental leave of at least six months for infants, and universal childcare for parents who are working or studying. This is also an investment in our children, for the future. It would largely replace existing family or child payments – at least after the very early childhood years. We must make sure that those who cannot find work, and single parents and their children, get adequate income support and are not left behind in poverty. </p>
<p>And, yes, workers need an income tax cut. Our income tax thresholds need adjustment from time to time because of bracket creep as nominal wages rise with inflation. We should leave the tax-free threshold where it is, but the federal government can deliver an income tax cut focused on median and average wage earners – e.g. by adjusting the 19% or 32.5% tax rates down, or increasing the $80,000 threshold.</p>
<h2>Tax savings and retirement income more fairly</h2>
<p>Our superannuation and retirement pension system has served us well but provides perverse incentives now: excessively generous superannuation tax concessions for contributions, earnings and pay-outs, benefiting rich people the most, and steep effective tax rates for age pensioners on savings and earned income. </p>
<p>It would be better to tax contributions at the worker’s marginal tax rate and to exempt earnings and pay-outs. But in transitioning to a new system, we need some tax on existing super savings which have benefited from generous concessions. For most workers, who will need at least a part age pension, we should apply a lower effective tax to earned income and to deemed income from assets, smoothing the tax scale.</p>
<p>For other savings, we need a more coherent approach. Top income earners derive most capital gains and get the most benefit from negative gearing. We should limit deductibility of investment expenses to investment gains and income, and make the capital gains tax discount less generous. </p>
<h2>Fix the GST and company tax</h2>
<p>Finally, two proposals that are not so fashionable but are important for budget sustainability and prosperity.</p>
<p>First, fix the GST by expanding the base. Its main purpose as our second-largest tax is to raise revenue. The GST is an essential element in our tax system and it has lots of holes. </p>
<p>As well as covering digital downloads and e-commerce, we should apply GST to health, education, water and financial services. In the longer term we may need to increase the rate, say to 12.5%. Compensation is needed for welfare recipients and revenue should be used to help fund state tax reform, while also supporting cuts in personal income tax for moderate wage earners.</p>
<p>Second, Australia needs to set a clear path on company tax in future. This issue is not going to go away. It is plausible that we should aim for a company tax rate of 25% in the next few years. This costs revenue and it must be accompanied by broadening the company tax base and tightening enforcement co-operatively with other countries.</p>
<h2>A shared stake in fairer and more efficient taxes</h2>
<p>The Commonwealth government has an obligation to Australians to lead in shaping taxes for the national good. We can ensure budget sustainability by taxing a broader base – income, consumption and assets – more equally across the whole system. And we can re-set federal institutions with a new Intergovernmental Agreement to equally share income tax and GST, so that all governments in our federation are properly funded and accountable. </p>
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<p><em>You can read other articles in the series <a href="https://theconversation.com/au/topics/ideas-for-australia">here</a>.</em></p><img src="https://counter.theconversation.com/content/56272/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart has received funding from the Australian Research Council and the Academy of Social Sciences of Australia. </span></em></p>A better tax system and long-term budget sustainability starts with this blueprint.Miranda Stewart, Professor and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/329902014-11-14T10:32:18Z2014-11-14T10:32:18ZHow mathematics could help us save social security<figure><img src="https://images.theconversation.com/files/63490/original/pnzzywm2-1414976575.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Social security is on a collision course with insolvency. A little bit of math could keep it safe. </span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The US Social Security system has been heading toward insolvency for decades, with the program now <a href="http://www.cbo.gov/sites/default/files/44972-SocialSecurity.pdf">projected</a> to run a 25% deficit by a little after 2030, according to the Congressional Budget Office. Despite the best efforts of commission after commission, we are no closer to arriving at a solution to the problem. That’s because every proposal is accompanied by significant drawbacks and faces considerable political hurdles.</p>
<p>For problems of this complexity, the Analytic Hierarchy Process (AHP) provides a good way to find a solution and is among a few other mathematical approaches that can help us make better choices. Other approaches have been developed but are not as widely used. I developed the AHP in the 1970s as a structured method for helping people deal with complex decisions based on mathematics and human psychology. It provides a <a href="http://www.isahp.org/about/">rational framework</a> for structuring the problem, representing and quantifying its elements, relating those elements to overall goals and evaluating alternative courses of action.</p>
<p>During the past 30 years, the AHP method has been applied by me and thousands of others around the world to a broad spectrum of political and economic quandaries. Poland has used it to determine if and when to adopt the euro for its currency. China has used the AHP to decide on the suitability of locations for dams and bridges and whether or not to build them. The National Cancer Institute has used it to prioritize cancer antigens for investment. British Airways has used it to decide on the best entertainment equipment to put in its fleet. And the US government itself has used it in the past in determining, among other things, how to deal with copyright violations in China and whether or not to bomb Iran.</p>
<p>The ideal solution to the Social Security system should ensure that the program survives indefinitely and does not need further significant modifications after the initial fix. Participants should be able to rely on a predictable level of benefits that are adequate to support them in their retirement. Lastly, the program needs to be perceived as fair.</p>
<p>The AHP – and similar methods - is intended to improve decision-making outcomes for problems with many stakeholders, a scarcity of resources, limited data and finite time within which to make a decision – in short, all of the factors that make Social Security reform such an intractable problem. I reviewed 14 alternative solutions, which I narrowed to a list of five deemed the most practical and likely to succeed. A more thorough analysis is required to select the best solution among these alternatives.</p>
<p><strong>Raise the payroll tax ceiling.</strong> This plan proposes raising the level of income subject to the 12.4% Social Security withholding tax, split equally between the employer and employee. Currently, any income above $117,000 is not subject to the tax. The cap regularly increases with inflation and will rise to $118,500 in 2015. To increase it sufficiently to help bridge the funding gap, that cap could be lifted in a one-time, large adjustment move or over a series of years. A more draconian approach would be to remove the cap entirely for good.</p>
<p><strong>Raise the retirement age.</strong> The normal retirement age, currently about 65 but set to gradually climb to 67 by 2027, has been lifted in the past; a further increase is considered a viable option in the current environment. The life expectancy of Americans continues to climb and is now about 78 years. This increased longevity means the number of people collecting benefits is rising faster than the number paying into the system. As the ratio increases, it places increasing strain on the financial resources of the system. With all other factors held constant, the system will either need to increase revenue or decrease payouts.</p>
<p><strong>Privatize the system.</strong> Although there are numerous possible scenarios, a proposal by former President George W Bush was to let certain participants elect to have a third of their payroll tax or 4% of their wages diverted to a private investment account. The program would be voluntary and phased in over a number of years. Lower and higher percentages have also been proposed, but the political viability of this option is poor since the system’s revenues would decline along with the diverted payroll taxes. Some have estimated it would divert US$2 trillion out of the system over 10 years, though there are some proposals that would soften the transition cost.</p>
<p><strong>Reduce the benefits.</strong> This alternative can encompass a broad array of tactics. Among the choices are a simple one-time cut in benefits, a temporary freeze in benefit levels or a reduction in future cost of living adjustments. This would curb costs while leaving the withholding ceiling untouched.</p>
<p><strong>Keep the status quo – do nothing.</strong> This envisions Social Security is left as it is, with no modifications, whether by choice or political gridlock. Proponents of doing nothing believe that the current system does not require fixing and that some external influences will arise to correct the current deficit, such as an increase in the number of employed or a stronger economy that would yield greater tax revenue. History might suggest this as an alternative, no matter how ill-advised.</p>
<p>How do we plug the growing gap in our Social Security system? What is the most optimal solution? Policy makers have been asking these questions for decades, and although I don’t have the answer, I know that applying a formula such as the Analytic Hierarchy Process to the problem could move us closer to the solution. It could be used by the government as other countries have to grapple with these difficult decisions and come to a rational solution. Unfortunately, the politicians don’t seem interested at the moment</p><img src="https://counter.theconversation.com/content/32990/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The author’s sons own a company called Decision Lens that uses AHP and other methods to help governments and others make better critical decisions. The author does not have a financial state in the company.</span></em></p>The US Social Security system has been heading toward insolvency for decades, with the program now projected to run a 25% deficit by a little after 2030, according to the Congressional Budget Office. Despite…Thomas Saaty, Distinguished University Professor, University of PittsburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/319552014-09-25T20:07:33Z2014-09-25T20:07:33ZWhy we should consider ourselves a nation first, a federation second<figure><img src="https://images.theconversation.com/files/59763/original/42zw925k-1411448488.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A review of federalism and taxation should begin with recognising the value of what we have created as a nation.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/rpt/116702800/in/photolist-gnM92-b1tyPZ-bj8Ff-8Zx4MA-7yx4tG-d7NY5o-5wr2Jn-bgxg5V-o8cevz-5nqn4o-ntU5Qj-btPuXj-9dgoph-9Q9BfE-52rAhJ-52nmoV-4MZ339-cQTi4-apRST6-52rAgh-dAUfic-6xLzw3-cLFKL-cxQHaN-9dfNfw-e6Xmge-bBo6fX-99ngm7-eiUgc1-9RQpLa-5M485h-yJ2ye-jWyVJ6-wkBBB-9L43p-bxSfQj-3U2de7-bz6Bix-nVMyk5-a4hNjH-6JhcB-7ys3b3-4AeJLi-9ceqmu-56z2xw-kegUuy-edXNzR-2UwEXF-dPETmD-dPLtxN">Flickr/Ross Thomson</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>The reform of Australia’s federation is under review. So far in our special series, leading Australian academics have discussed the future of the federation when it comes to taxation, education and health; today, we look at the broader issues of democracy.</em></p>
<p><em>Honorary Professorial Fellow at the ANU’s Crawford School John Hewson argues the whole, rather than the parts, need to be the focus.</em></p>
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<p>Australia has built a very effective federalism that has provided us with a pretty effective national economy and society, operating with a common currency. This success should not be underestimated or forgotten as we work towards a review and further reform.</p>
<p>The recent decision by the Scottish electorate to remain part of the UK avoided what could have been devastating economic and social consequences. </p>
<p>So much was uncertain: what currency would Scotland use? How would it run monetary policy? What share would it be allocated of UK debt, and how would this be determined? Would it be allowed to remain in the EU and, if so, on what terms? What rights would it have over North Sea oil? What would happen to its financial services sector – one of the biggest in Europe? And, of course, how could the Scottish government possibly deliver on the promises made to increase government expenditure, especially social spending?</p>
<p>These, and many other, questions would probably have bedeviled/constrained the break up of the “old” UK for years, if not decades. Similar issues/questions must be addressed, explicitly or implicitly, in the reviews of our Federation and taxation, as we consider the division of policy and service delivery responsibilities, and their most effective funding.</p>
<p>The “romance”, especially among the young, of an independent Scotland, was effectively mugged by the reality of the difficulties, if not unsustainability, likely to be encountered by attempting to structure the break-up of the UK.
Some of the initial enthusiasm for an independent Scotland came from the simplistic notion that North Sea oil (NSO) was the basis of their wealth and ensured their future financial viability. However, in the process it has been recognised that NSO had “peaked” and future potential would be constraining.</p>
<h2>Sharing both the good and the bad</h2>
<p>At times in our past, resource rich states such as Western Australia and Queensland have “contemplated/threatened” to pursue “independence/secede”, as they felt the wealth they created, and thereby the national revenue they generated, was not sufficiently recognised by other states, yet they were unjustifiably required to share it with those other states.</p>
<p>These arguments seem to emerge with most vigour in the “good” years, when it is all too easy to overlook, aside from the historic constitutional and legislative structures, that resources are national assets, owned by all Australians, and that a successful federation necessitates that we develop an effective mechanism that ensures that their benefits are fairly distributed across all Australians.
It is also easy to forget that these same resource rich states had their “bad” years in the past, years in which they were significant recipients of support from the other States.</p>
<p>It is also worth recalling that, to a very large extent, our Federation is an “historical accident” - up until the last of the Conventions of the 1890s that negotiated the structure of our federation, New Zealand was in and NSW was out – a situation that was reversed at the last Convention. Of course, some are still envious of the “independence” of NZ that has been able to operate as a nation without states (and without an Upper House).</p>
<h2>Recognising the value of the Federation</h2>
<p>Clearly, the White Paper review of our Federation should attempt, once and for all, to determine which level of government is responsible for what, in terms of both policy development, and service delivery.</p>
<p>Then, to decide the most effective way to finance this structure, obviously linking with the Abbott Government’s Tax review, which needs to focus on both State and National tax structures, actual and potential. </p>
<p>One of the thrusts of the debate here is to minimise the so-called “vertical fiscal imbalance”, essentially to ensure that “those who do the spending should also do the taxing”, notionally to ensure the discipline that such a requirement would impose on government spending. </p>
<p>However, it has been a failing of state taxation that some of the most technically efficient tax bases, such as payroll and land taxes, have been so easily “neutered” by short-term politics, as states “compete” with each other to attract business and population.</p>
<p>It is so easy to “hypothecate” a percentage of say, income tax and GST revenue to the states to fund specified responsibilities - but so hard to stop them furthering competitive federalism. </p>
<p>Let’s begin these reviews by recognising the value of what we have created in our Federation, and thinking as a nation first, and a confederation of independent states, second.</p>
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<p><em>Renewing Federalism is in partnership with the Australian National University’s Tax and Transfer Policy Institute at the Crawford School of Public Policy and with the University of Melbourne School of Government.</em></p>
<p><em>Our Renewing Federalism series will culminate in a symposium on October 2 at ANU. If you would like to attend the event, please see event details and <a href="https://taxpolicy.crawford.anu.edu.au/events/4661/renewing-australian-federalism-starting-conversation">RSVP here</a>.</em></p>
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<p><strong>Read more in the series <a href="https://theconversation.com/au/topics/renewing-federalism">here.</a></strong></p><img src="https://counter.theconversation.com/content/31955/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hewson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The reform of Australia’s federation is under review. So far in our special series, leading Australian academics have discussed the future of the federation when it comes to taxation, education and health…John Hewson, Honorary Professorial Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/263352014-05-07T20:38:19Z2014-05-07T20:38:19ZAustralia’s tax system is half-baked and a deficit levy won’t help<p>The Victorian government has decided to reduce payroll tax by 0.05%, from 4.9% to 4.85%. The decision comes as the Commonwealth government contemplates an increase in income tax via a deficit levy. </p>
<p>But if the objective is to increase national productivity to meet growing expectations for government services, as well as private consumption, logic would shift the tax burden away from income tax and increase payroll tax. This approach might even provide the basis for more effective and transparent commonwealth-state financial arrangements.</p>
<h2>Stand-alone taxes are not the answer</h2>
<p>A comprehensive income tax system would include tax on wages, but also on capital income, where capital income is the return on accumulated savings, such as superannuation earnings. </p>
<p>Commonwealth taxation is reasonably comprehensive for wages, with fringe benefits concessions and tax breaks for superannuation for those on middle and high incomes. </p>
<p>In the case of capital income, there are many concessions, including the exemption of income earned on savings invested in owner-occupied homes, the half rate on capital gains and the low flat rate on superannuation fund earnings; interest and dividends face no concessions. A progressive rate schedule is applied to taxable income.</p>
<p>By contrast, a comprehensive payroll tax would fall on all labour remuneration, but not on capital income. </p>
<p>In Australia, the states impose payroll tax on a base that covers about half of all salaries. The largest concession is the exemption of small businesses, with the definition of small business varying across the states (and territories). There are exemptions also for other governments and charities. Above the threshold, a flat marginal tax rate is applied, again with different rates in different states.</p>
<h2>Measuring the real impacts of tax</h2>
<p>The ultimate outcome of income tax, and especially of payroll tax, is often misunderstood. It is generally accepted that most of the effect, if not all, of the income tax is borne by households as lower disposable income to buy things; with the tax revenue used to fund government goods and services. But in reality, most of the income tax on labour income is first paid by employers as a PAYG deduction from salaries.</p>
<p>And the economic impact of payroll tax should also be on households as lower take-home pay. Initially, businesses pay the payroll tax bill to government, and with a jump in labour costs some are forced to reduce the number of people they employ, boosting unemployment.</p>
<p>The increase in unemployment induces a slower rate of increase in market wages in order for the labour market to return to a new near full employment equilibrium. That is, in the longer run, households bear payroll tax as a lower market wage and take-home pay.</p>
<p>Further, consider the current payroll tax with its exemption on the half of employees working in small businesses. While large businesses write the payroll tax cheque, ultimately the tax is passed on as lower market wages and take-home pay for employees of both small businesses and large businesses.</p>
<p>At the same time, the selective payroll tax on large businesses distorts the employment mix away from large to small businesses with a loss of national productivity. </p>
<p>Replacing the current payroll tax, with its small business exemption, with a comprehensive base and lower flat rate payroll tax would also result in lower market wages for all employees. But, the distortions of the current system to the mix of big and small businesses would be removed, resulting in a net increase in national productivity.</p>
<h2>The case for a shift from income tax to payroll tax</h2>
<p>Shifting the tax burden away from income tax and onto a comprehensive payroll or consumption tax would reduce the effective tax burden on capital income, leading to an increase in aggregate investment and a more productive mix of different investment and saving options with a final economic impact on higher real wages and household income.</p>
<p>Since the arrival of Governor Phillip, Australia has been a net importer of foreign capital to meet its investment needs. Foreign investors, with options to place their savings in many other countries, require at least an alternative world return on the Australian investment after Australian tax. </p>
<p>A lower Australian tax on capital income, for example a lower income or corporate tax rate, means some marginal Australian investments with a lower pre-tax return become worthwhile. In time, the increased investment means a larger stock of capital and technology per Australian worker, feeding into higher labour productivity and market wages.</p>
<p>Finally, a broader base payroll tax, and possibly also a higher payroll tax rate, along with a reformed land tax, offers a desirable tax reform package to increase the tax revenue of the states.</p><img src="https://counter.theconversation.com/content/26335/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Victorian government has decided to reduce payroll tax by 0.05%, from 4.9% to 4.85%. The decision comes as the Commonwealth government contemplates an increase in income tax via a deficit levy. But…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.