The Science Party is committed to taxation reform. We believe in reforming the taxation system such that it is more equitable, less complicated and hence less wasteful. We also believe the welfare system can be reformed to reduce disincentives to return to work. We think that the tax system should 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. The Science Party will make taxation fairer. The current capital gains tax discount means the wealthy who generate their wealth through capital gains 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%, 12-month discount
- 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. The Science Party has a policy of removing the non-concessional contributions cap for people aged 50 and over, and putting a cap of $2 million (indexed to inflation) on each individual’s superannuation balance.
Currently, superannuation contributions made before tax (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: The Science Party will seek to introduce a nationwide broadly based ad-valorem land tax to replace existing land taxes, council rates, property transfer stamp duties, and payroll taxes.
3.2. Discussion: A broad based ad valorem land tax 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 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, for instance, stamp duties, being levied at a fixed rate per transaction rather than as a rate over time as with a land tax, create an incentive to buy and sell property less frequently. The number of transactions in the property market is decreased. These lost transactions have value. For instance they correspond to people upsizing or downsizing their home as their family circumstances change, or moving to towns with better job prospects. Economists refer to all these potential benefits left unrealised due to a tax as the 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, and again, there is a further deadweight loss. Likewise the payroll taxes and in many cases council rates that the land tax replaces also incur deadweight losses. However the land tax itself, because it does not create any disincentive against economic activity, incurs no deadweight loss.
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 – specifically, the ATO-defined 10 year government bond rate. 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.
The implementation of this tax should occur on a State by State basis, as it will require a binding accord between the Commonwealth and the State in question. The resulting tax revenues from a given property should be split between the Local, State, and Federal governments, in fixed proportions agreed to by the State and Commonwealth, such that Local and State governments are projected to earn at least as much revenue as raised by the replaced taxes and rates.
As recommended by the Henry review, the tax will need to be phased in gradually, to give property holders the chance to adjust to the new regime. Each year for a 10 year period commencing from the point of State and Commonwealth agreement, 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, $18 000 is still at a level that 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 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 business 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 the value of the 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 many free or subsidised government services, including healthcare, childcare, housing, or transport – requiring them to pay more and thus, again, lose 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, by increasing the benefit paid to people at the border of being on welfare or not on welfare, we encourage them to take on more work, rather than punish 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 greatly 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.