Work and Remuneration

John Freebairn

Community Tax Forum

Canberra, 26 Feb., 2009

Potential reforms to achieve:

• Greater incentives and rewards from work. To reduce problems of high EMTRs associated with means testing of social security and child care, and clumsy tax clawbacks

• Equity, both horizontal and vertical, across different employees receiving different remuneration packages

• Simplicity. Over 70% use a tax agent and claim > $1 billion a year in fees. Plus own time

Reform issues include:

• Interface of tax, social security, child care, and potentially maternity allowance

• Tax base or taxable sum. Broaden base by removing special exemptions and deductions, and use revenue to fund lower tax rates

• Taxable unit. Suggest stay with the individual as it favours second income earner with higher labour supply responses

• Tax rate schedule. Be explicit and include LITO, SATO and Medicare levy

Package of Broader Base and Lower Rates

• Remove exemptions and treat a $ as a $, or all forms as wages– Fringe benefits concessions– Lump sum payments– Remote area allowances– Part of a broader package involving capital gains and

superannuation (considered in later sessions)

• Revenue gained to fund lower rates• Arguably the current ad hoc set of work related

expenses also can be deleted with funds for lower tax rates or a flat tax credit for all.

Package of Broader Base and Lower Rates

• The pay-off– Greater simplicity and cost savings– More robust future revenue– Some efficiency gains

• Greater neutrality in remuneration and choice of expenditure• Less waste in compliance costs

• Equity effects. Relative to the current position– Some winners (lower rates > lost deductions)– Some losers (lost deductions > lower rates)– Most only minor changes with the package

• Many precedents, eg 1985, 2000 business tax

Tax Rate Scale

• The public spin is a simple tax rate schedule with five brackets and rates.

• When one adds in LITO and SATO, and the Medicare levy (which only partially funds health expenditure), we have a much more complicated and opaque rate schedule.

• Suggest just one simple tax rate schedule that includes tax offsets and additional levies

• Automatic indexation of tax brackets. Use of AWE would maintain tax share of GDP

Big Issues to be Discussed by Other Panel Members include:

• Simplification of the social security, family allowances and child care support systems, individually, but preferably as part of an overall package

• Better integration of the tax system with the social security and child care systems

• Use of a common inflation indexation factor for all systems