I attended the public lecture from Malcolm Turnbull tonight on tax reform to see what he’d say about Coalition arguments for tax reform. (And yes, given the calls on my time, it was a bit of a stretch to make the time to attend.) But the value in attending was at least finding that Turnbull believes what he’s saying.
Tax reform is a complex issue and even tiny changes can have a massive impact on the wealth of various groups. At least Turnbull admits that. His full speech is available for download from his website and my notes are in the extended entry. No critical stuff in my notes though – I still take notes like a journalist – verbatim rather than arguing as I was doing in my head with the content being delivered!
NOTES ON MALCOLM TURNBULL’S LECTURE ON TAX REFORM
Full text of the speech is available from the download section of Turnbull’s own website.
26 August Jeremy Templeton paper designed to make the tax system simpler, more broadly based and more equitable
Modelled 300 changes. Designed to consider the absolute costs as well as ‘hidden costs’.
Paper was designed to promote debate rather than an advocate a specific model.
MPs have a particular responsibility to ensure association and participation with public debate on tax reform.
One of the ideas of reducing the top marginal tax rate from 47% was only an idea covered in the paper and was noted to be an expensive option. Turnbull is not necessarily an advocate of reducing the top marginal tax rate.
Broad based low rate is the basic recommendation of the Treasurer.
Key finding from the study is that fundamental reform to the tax system is affordable and logical.
Case for levying FBT at tax payers rate (outside the usual 48.5% – paid by 3% of the total population) is possible but affordability is the key issue.
2005 Budget: EMTRs. Turnbull argues that the worker has done well, but middle income families have done better (he cites Anne Harding, Peter Saunders – critics who are concerned about churning).
Nonetheless, the 2005 Budget was a mixed blessing for tax reformists. By raising the threshold for the top rates, it reduced the tax income to the governments and thus benefits will be somewhat reduced. One of the great political challenges is in terms of base cuts and provision of tax concessions. You can model a broadening of the base and lower rates and narrow the benefits.
Changes in the paper did not assume cuts of government expenditure.
[[see paper for arguments for tax reform]]
2/3 of all income tax paid by top 20% of tax payers.
[[quotes for Adam Smith]]
Wide consensus around the world that tax systems around the world should be through broader bases and lower rates. In the last decade, 9 European countries have moved to flat tax rates.
The more complicated a tax system becomes, the more governments can further complicate the system.
Not advocating a flat tax – just flatter. Sort of changes Turnbull is speaking about would not be regarded as radical let alone revolutionary anywhere is the world.
Motivation to move to flatter taxes is to maintain incentives to earn….. so people like Hamish won’t leave the country and take their business overseas to HK (top tax of 17.5%)
[[see reference to Melb Inst paper in Turnbull’s speech]]
Reducing top two income tax rates won’t provide benefits to anyone else. Cost of reducing the top tax rate is approaching or approximately the same as reducing tax threshold by $1500.
Two models would result in 80,000 increase on workforce (small increase). Don’t’ count compliance costs.
Problem with the model is that it assumes Australia is a closed economy – so this is an issue in terms of the growth of the nation and the dispersion of the population.
Our system encourages to earners towards negative gearing and other tax reduction mechanisms, inducing a property bubble.
[[see paper for Capital Gains discussion]]
Almost all of our international competitors have zero or low Capital Gains tax, so can’t increase politically.
Relationship between tax and government revenues is not a simple equation. We may find that controversial changes in US tax (lowering tax rates and reductions in tax free threshold) will provide higher tax revenue. To combat this, there is an idea of a tax scale with just 2 tax rates of 30 and 40% with a tax credit for specific income ranges. 30% tax rates applied for wages fro $0 – $25,000. 40% for all above that. Tax credits apply all along the income ranges.
Emerson has focussed on removing the 42% bracket would only benefit top 20% of the income earners.
[[see speech for discussion of alternative arguments and other citations]]
It’s important to bear in mind that people focus on what they are going to lose rather than what they are going to gain. Political challenge is to focus on lowering of rates rather than focus on changes to benefits. Those who take the greatest advantage of concessions will be those who lose the most from reform. Once you have a benefit that is means tested, it means that once an income rises the benefit is removed.
Bracket creep is a concern. Important as families become subject to EMTRs. Average rather than marginal tax rates are affected by this phenomenon. Solution might be indexing.
[[see conclusion of the paper on the compliance and benefits/concessions of tax reform]]
“Fairer, simpler, more efficient tax system”. The time is right for another round of tax reform – should not let opportunity pass us by.
1. John McRobert. Nero’s fiddling while Rome burns. Flawed system fiddling doesn’t actually solve the system.
2. Difficult topic well researched. Did you look at the 2% expenditure tax? Turnbull wasn’t persuaded by the argument. Didn’t think it would be feasible. Michael Something. No income tax.
3. Unless you get everyone behind you, you can’t necessarily get things through. How do you intend to reform? Turnbull – suggests they we don’t embed tax reform in the Constitution (!). It’s possible to change and better not to be too complex. Incremental change adds complexity. Tax reform only really understood by an elite few.
4. Modelled impact on inflation? Turnbull doesn’t think his changes would have any impact on inflation. If no benefit in inflation, then how we lower and middle Australia benefit from proposed change. Turnbull: one of the dividends of a more efficient system is improvement on inflation. But there seems to be no general impact on inflation.