The Science Party is committed to taxation reform. We believe in reforming the taxation system to make it more equitable, less complicated and hence less wasteful. We also believe the welfare system can be reformed to reduce disincentives to return to work. The tax system should also be structured in a way such that governments don't have a conflict of interest when dealing with taxes on activities that have negative effects on the individual and hence follow-on costs to society.
1. Removal of capital gains tax discount
For more detail on this policy, see the Capital Gains Tax section of our submission to the Tax White Paper.
1.1. Policy: Reform Capital Gains Tax.
1.2. Discussion: The Science Party will make taxation fairer. The current capital gains tax discount means the wealthy who generate their wealth through capital gains on their investments pay tax at half the rate of those who work in regular jobs. The Science Party has a balanced policy that provides for:
- Abolishing the 50% discount on assets held for longer than one year, including housing
- Restoring the CPI indexation of capital gains
- Retaining negative gearing
- Investigating ways to reduce "lumpiness" for more equitable taxing of capital gains
- Taxing capital gains on owner-occupied and investment properties equally
- Applying a CPI deduction to interest on bank accounts, such that only interest above CPI is taxed
Please also see the Superannuation section of our submission to the Tax White Paper.
2.1. Policy: Remove the non-concessional contributions cap for people aged 50 and over, and put a cap of $2 million (indexed to inflation) on each individual's superannuation balance.
2.2. Discussion: Currently, superannuation contributions made before tax (i.e. concessional contributions) are taxed at 15%. These include employer contributions and salary sacrifice payments. As of 2016–17, the concessional cap (to which this tax rate applies) is $30 000 for people aged under 49, and $35 000 for people aged 49+. Further contributions from after-tax income (non-concessional) are not taxed, up to a cap of $180 000. The Science Party will remove this non-concessional cap for people aged 50+ to allow people who had lower earnings earlier in life to "catch up" as they reach retirement age.
3. Land tax to replace stamp duty, council rates and payroll tax
3.1. Policy: Introduce a nationwide, broad-based ad valorem land tax to replace existing land taxes, council rates, property transfer stamp duties, and payroll taxes. The rate of this land tax should be variable.
3.2. Discussion: A broad-based ad valorem land tax applies to all land and is levied according to the estimated property value. It is one of the most economically efficient means of revenue generation available to government. This is supported by standing economic theory and the specific recommendations of the Henry Tax Review. Such a tax captures a portion of the pure economic rent derived from land ownership. Thus, it does not distort economic decision making.
In comparison, stamp duties are levied at a fixed rate per transaction (rather than as a rate over time, as with a land tax). Stamp duty therefore disincentvises buying and selling property. The transactions that would have been made in the absence of the tax have value; for instance people would upsize or downsize their home as their family circumstances change, or move to towns with better job prospects. Economists refer to the potential benefits left unrealised due to a tax as "deadweight loss". Stamp duties, furthermore, are levied (unlike a land tax) on the improved value of a property. This creates an incentive against improvements, such as renovation, leading to further deadweight loss. Likewise, payroll taxes and council rates also incur deadweight losses. However land tax incurs no deadweight loss, because it does not create a disincentive against economic activity.
The Science Party will work to ensure that interest-bearing loans are available to pay land taxes. This avoids cashflow problems for landowners who may be asset rich but have little income, for instance, pensioners who own a family home.
Finally, the Science Party believes the rate of the land tax should not be fixed, but rather should vary with the rates of return on other assets. This ensures that the rate of the tax on the capital invested in the land cannot significantly overtake the time value of money. Based on preliminary calculations, the Science Party believes the land tax could be set at half of the 10 year government bond rate.
This tax should be implemented on a state-by-state basis, as it will require a binding accord between the Commonwealth and the state in question. Land tax revenues should be split between local, state and federal governments, in agreed proportions, such that local and state governments are projected to earn at least as much revenue as was raised by the replaced taxes and rates.
As recommended by the Henry Tax Review, the tax should be phased in gradually to let property holders adjust. Each year for ten years, the land tax rate shall increase by 1/10th of its maximum rate while the replaced taxes decrease by 1/10th.
4. Simplification of Marginal Tax Rates
4.1. Policy: The Science Party endorses the Henry Tax Review's suggestion to simplify the marginal tax rates into 3 simple bands:
- 0% tax for income below $25 000 (tax free-threshold)
- 35% tax on each dollar earnt above $25 000 and below $180 000
- 45% tax on each dollar earnt above $180 000
4.2. Discussion: While the recommendations of the Henry Tax Review were partially accepted with an increase of the tax-free threshold from $6 000 to $18 000 per year, an income of $18 000 still represents significant poverty. People who earn $18 000 per year are still eligible for welfare payments, meaning that they are given welfare by the government but also required to pay some of that money back as tax. This system is wasteful as it increases bureaucracy unnecessarily, and it also contributes to the formation of welfare traps (see section 8.5).
By simplifying tax rates, we reduce the complexity of the tax system for both the individual while also reducing the compliance costs of businesses who pay employees.
5. Removing welfare traps
5.1. Policy: Remove welfare traps to reduce cost of providing welfare. Ensure that each dollar earnt in employment results in no more than 60% of that dollar taken from that person in welfare benefits and taxes.
5.2. Discussion: Welfare traps occur when a person receives benefits from the government and is not working as much as they might like, but has significant financial incentives to not increase the amount they work.
When a person earns an extra of dollar through work, some of that income is taken by the government directly in the form of income tax. The percentage of the extra dollar taken is called the marginal tax rate. But frequently there are other financial penalties imposed on additional income by the government, beyond taxation. The person may lose some or all of their welfare payments, such as Newstart allowance. They may also lose eligibility for free or subsidised government services—including healthcare, childcare, housing, or transport—requiring them to pay more, thus losing more money. Sometimes these eligibility criteria are based on hours worked rather than dollars earned, but the effective result is the same. The total percentage of all the losses caused by earning a marginal dollar is called the effective marginal tax rate.
In many cases, effective marginal tax rates can be close to or at 100%.
This means each extra dollar the person earns by working achieves essentially nothing; most or all of that dollar is taken away again as tax and lost benefits. Going to work is an incredibly poor use of the person's time.
In some cases, effective marginal tax rates can be well in excess of 100%.
In these even more absurd scenarios, a person does not merely fail to gain any benefit from working harder. They are actively punished for it. Issues of high effective marginal tax rates tend to most dramatically affect the least well off members of society—the people who frequently are most financially vulnerable to its effects, and stand the most to gain from the dignity and empowerment of paid employment.
While it may seem counter intuitive, increasing the benefit paid to people at the border of being on welfare encourages them to take on more work, rather than punishing them for taking on work. This reduces barriers to earning more, and hence we expect people move off welfare more quickly as they can see both the long term and the short term benefits of taking on more hours. The net effect of this is that the cost of providing welfare will be reduced.
6. Independent body to set Pigovian taxes
6.1. Policy: All Pigovian or "sin" taxes (gambling, tobacco and alcohol) are to be determined by an independent body. The maximum rate of tax on these products should be set by the independent body such that the total amount of tax returned to the government represents the amount that the government is required to spend ameliorating the harm caused by the products.
6.2. Discussion: The current taxation arrangement creates governments that are addicted to Pigovian or "sin" taxes from poker machines, casinos, alcohol and tobacco. These taxes prevent governments from acting with the best intentions of the community when creating rules regarding these services, as doing the right thing by the community (e.g. reducing poker machine availability) would cause budget deficits which could end their political career.
The Science Party recognises the fact that these products frequently cause harm to both their consumers and the people around them, and cost society in other ways.
The Science Party proposes that these taxes are determined and set independently of the government. The government may at any time remove the tax entirely if it chooses, but may not increase the tax beyond what the independent body has calculated the costs to the taxpayer to be. The maximum rate of tax on these products should be set by the independent body such that the total amount of tax returned to the government represents the amount that the government is required to spend ameliorating the harm caused by the products.