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 by:
- Abolishing the 50% discount on assets held for longer than one year, including housing;
- Restoring the CPI indexation of capital gains;
- Investigating ways to reduce "lumpiness" for more equitable taxing of capital gains;
- Taxing capital gains on owner-occupied and investment properties equally; and
- Applying a CPI deduction to interest on bank accounts, such that only interest above CPI is taxed.
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.
See also policy point 4.3., which provides for an income tax offset in the case of CGT reform.
We are in favour of retaining negative gearing at this point in time. The current surge in house prices correlates more closely with the introduction of the CGT discount in 1999, while negative gearing has been in place in its current form since 1987.
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 disincentivises 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. Personal Income Tax Rates
4.1. Policy: The Science Party endorses the recommendation from Henry Tax Review to simplify the marginal tax rates into 3 simple bands:
- 0% tax for income below $26 600 (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).
The poverty line for a single person in the workforce in June 2017 was approximately $26 700 per year, as calculated by the Melbourne Institute. This amount therefore represents a reasonable annual income that should not be subject to income tax.
By simplifying tax rates, we reduce the complexity of the tax system for the individual while also reducing the compliance costs of businesses who pay employees.
Review of income tax to potentially offset CGT discount
4.3. Policy: The Science Party is open to a review of the top personal income tax bracket.
4.4. Discussion: Australians with the highest incomes are the greatest beneficiaries of the CGT discount, with 73% of the benefit of the discount going to the top income decile and 8.5% going to the second decile (“It's the revenue stupid”, figure 10).
While the CGT discount may be argued against on grounds of equity, it is undeniable that the discount distorts the market by making investment in property particularly attractive. This preferential tax treatment is a pressing issue as it appears to be a key driver of the steep increase in capital city housing prices, making owning a house unaffordable for most Australians who are not already in the market. As the removal of the CGT discount is a priority for the Science Party, we are willing to consider a reduction in the top income tax rate to offset (but not exceed) the extra tax paid when the 50% Capital Gains Tax (CGT) discount is removed.
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 rate1. 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%2.
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 sin taxes
6.1. Policy: The maximum rate for all "sin" taxes (e.g. gambling, tobacco and alcohol excise) is to be determined by an independent body, such that the projected total amount of tax returned to the government is equal to the amount that the government must spend to ameliorate the harm caused by the products. This spend may include, for example, research as well as interventions.
6.2. Discussion: The aim of "sin" taxes is to discourage certain behaviours that are deemed undesirable, due to the harm they cause the user, by increasing their cost to the user. The current taxation arrangement creates governments that are addicted to large tax revenues from poker machines, casinos, alcohol and tobacco. These taxes can 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 in some cases (e.g. reducing poker machine availability) would cause budget deficits which could end their political career.
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 costs to the taxpayer, as calculated by the independent body.
7. End tax exemptions for non-charitable religious activity
1. Policy: Repeal subsections 7(e) and 12(1)(d) of the Charities Act 2013, which defines "the advancement of religion" as a charitable purpose, thus qualifying some undeserving religious activities as tax-exempt.
7.2. Discussion: Only the charitable portions of a religious organisation's operations (as covered elsewhere in section 12(1) of the act) should qualify for the charitable tax exemption. Unlike other causes defined as charitable (such as the advancement of health, education or human rights), the advancement of religion cannot be uncritically regarded as being for the public benefit. Religion is a personal choice, and individuals and societies flourish with or without religion.
The highest rate of tax a taxpayer will pay on their income.
- 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.