a flat argument

Tax reform is in the news yet again, especially with the Howard Government having a belly full of money in the lead up to the next federal Budget.

Especially when the predicted surplus could be anywhere between ten and thirteen BILLION dollars.

I have been following the debate and it took me back more than twenty years when John Howard was Treasurer under Malcolm Fraser. On radio, we discussed the “flat tax” issue. There were calls for personal income tax rates to be dropped to 20%  ( a la Singapore).

Howard told me that would be impossible in this country. That if we ever did have a flat tax it would have to be fixed at around 30 or 33 per cent. And that was pre-GST.

These days a flat tax of 33% sounds pretty good. And I am not just saying that because, personally I am on the top rate of 47% plus the 1.5 per cent medical levy that pushes you close to 50%.

The GST has reaped billions of dollars for governments. Promised cuts in other levies have not all come through. And the Federal Government has collected squill ions by double-dipping as petrol prices have gone through the roof. Almost half of what you pay at the pump goes in excise to the federal government and then they slog you for GST as well.

At 90 cents a litre they get something like 40-45 cents excise and nine cents GST.  At 1.20 a litre they get around 60 cents excise and 12 cents a litre GST. It is brutal double-dipping.

And, as the price of petrol spirals, you pay in other ways. Your fruit and vegies at Coles and Safeway cost more because the freight costs are passed on to you.  And then at the checkout your GST inflates as well on some items.

To me a flat tax on personal income makes sense. Whether it be 20, 30 or even 35 %. As long as very low income earners are still protected.

It would simplify things so much. Most people can’t afford a tax accountant. Many spend hours and hours burning the midnight oil to get their returns in on time.

A flat tax system would streamline tax returns. Sure, big income earners may lose some deductions. But that would be fine (as long as they exempted charity deductions) but really big earners have off-shore companies or hire an army of lawyers and accountants to funnel money into family trusts etcetera.

I know I have used that old vaudeville line before about governments:  They promise you everything, give you nothing, and before you get it they take it off you.

But there is more to it than that. Our petrol tax should pay for better roads and dual highways. Our income tax and GST should pay for better hospitals and more nurses and more police. Our income tax should also pay for better education and smaller classes.

Our taxes should make prescription drugs cheaper. There has been a scandalous story in the Herald Sun this week about a Shepparton mother of four who put her house on the market to pay for expensive breast cancer drugs. And I thought: How can this be in a civilised, heavily taxed community?

Newspaper readers rallied and donated enough money to save her house and pay for her treatment. But how can this be?  The cancer drug, Herceptin, which apparently is effective, is only subsidised by the Federal Government for women in the advanced stages of breast cancer. Do men make these rules?  Are these your taxes at work?  Surely it is common sense – and a wonderful investment of taxpayers’ money – to get it early and maybe save a life.

Back to the flat tax debate.  A group called the Business Coalition for Tax Reform this week called for a drastic overhaul of our tax system. They want a Singapore-style 20% flat tax rate. In exchange many deductions and credits and off-sets would disappear.

The head of the coalition, who is also the chief financial officer for Telstra, John Stanhope, says this is the time to examine serious tax reform and it should not be wasted.

“ Everybody is giving all these ideas and suggestions about tax reform. But we’re going up and down and not getting anywhere”.

He says that Australia’s personal income tax system is “holding the nation back”. And I suspect he is right. Last time I looked at Hong Kong personal income tax was 17%.

We recently had Finance Minister, Senator Nick Minchin, float the idea that government double-dipping on superannuation contributions should be scrapped. The Treasurer, Peter Costello, and, I suspect the Prime Minister, slapped him down real quick. But he was right.

On the one hand they are pushing you and your employer to put more and more into super funds and diminish your chances of getting a taxpayer-funded pension. On the other hand, they are punishing you by taxing you on the way in and on the way out. It doesn’t make sense. Except for governmental greed.

And I say that as a person who will never qualify for a taxpayer-funded pension because of my super investments and because in a few years I’ll be eligible for an American pensions – having worked there for more than ten years.

But  I go back to what Treasurer John Howard told me more than twenty years ago. A flat tax would have to be 30%. Bring it on John. I could sure spend the other 70%.

February 5, 2006

©Copyright Derryn Hinch 2006