Tax reform: cut taxes, bureaucracy & entitlement

tax.jpgWith only weeks to go until the Federal Budget, there has been a lot written in the press about tax and government spending.

My position is crystal clear and I make no bones about it: taxes and government spending both need to be reduced for the good of the economy and Australian families.

As it currently stands, the government takes money from companies and many Pay As You Earn (PAYE) taxpayers only to give it back to them in the form of rebates, benefits or concessions. Childcare rebates, family tax benefits and private health insurance rebates are just a few examples.

This process requires a complex bureaucracy to collect and manage whilst always remaining vulnerable to demands that ‘more needs to be done’. I would posit that these rebates actually do more long-term damage than good for taxpayers, as they often contain restrictions on where money can be spent and whenever they are increased, the cost of accessing the service usually increases proportionally.

Childcare is a case-in-point. The government imposes restrictions on who you can pay to look after your children and whenever the rebate threshold is lifted, the childcare fees also tend to rise. This money shuffle is inefficient and merely bloats the function of governments.

Surely it would be better to assist taxpayers through the taxation system in the first place rather than take money from them only to return a portion at some time in the future.

Perhaps allowing tax deductibility for your preferred form of childcare up to an annual threshold per child or family would be cheaper and easier to administer. An even better approach would be to remove the tax inequity from single income families compared to having both parents working.

As it stands, a sole breadwinner on 100K per year is almost $10,000 worse off than a couple cumulatively earning the same amount. In some cases, the dual income couple will also be accessing taxpayer subsidised childcare, further fuelling the inequity.

Why not allow tax free thresholds for non-working spouses or partial thresholds for each child to be applied to family income? It might not be perfect but it would remove the need for the money shuffle and reduce the size and cost of government at the same time.

This entire tax debate has been characterised recently as governments not having enough revenue and hence the need to increase taxes at the state and federal level. Frankly I disagree, and have always advocated that reducing taxes will fuel economic growth and is more likely to increase overall tax receipts.

There are those who now advocate increasing tax because it is necessary to fund state spending. The problem with this sort of approach is that tax rises are generally permanent whilst any compensating reductions are often temporary. Bracket creep makes this absolutely true when it comes to wage earners but comments this week highlighted another risk.

When the GST was implemented, it was designed to replace a raft of state taxes and charges. This week, we had the South Australian Labor government threaten to reimpose one of those taxes – the Financial Institutions Duty (FID)/Bank Account Debits (BAD) tax on bank deposits – if their share of GST payments wasn't maintained.

They are perfectly within their rights to impose such a measure, but then we would be left with the GST plus the tax it was intended to replace. That’s why I reject calls to increase the GST, because it wouldn't prevent further demands for new and increased taxes.

The bottom line is that few governments (if any) claim they have enough money to do all that is demanded of them by the modern welfare state. These demands are effectively bankrupting Western economies. An example is the United States, with estimates that more than 60 per cent of their $16 trillion national debt is now a result of accumulated interest payments on previous borrowings!

Thus far, Australia has been protected by such events but our day of reckoning is drawing ever closer. Tax rises and bigger, more bloated government will shrink our economy, giving momentum to a spiral of decay that we see in many other parts of the world.

It is time for a new approach. We need to cut taxes, cut the bureaucracy and end the entitlement mentality. If we don’t, the end result can be seen in Greece, Spain and Italy.

No doubt there will be many who say ‘it won’t happen here’ but I’m prepared to guess that many of those who make such claims have a vested interest in maintaining the status quo.