For delivery 12 November 2013.? Madam Speaker: This Budget will eliminate unemployment in Australia. It will do this by eliminating four categories of taxes: first, and most importantly, taxes that cause the cost of hiring a worker to be greater than the worker’s take-home pay; second, the quarter of a trillion dollars per annum of reverse tariffs that burden Australian producers but not their foreign competitors; third, property taxes that penalize the construction of housing and business accommodation; and fourth, taxes with unnecessary compliance costs. Of course there is considerable overlap between the categories. Under the last category, the existing GST will be abolished from 1 July 2014. Obviously this will require changes in financial arrangements between the Commonwealth and the States. Accordingly, this Budget is being delivered 8 months earlier than usual, in order to give the States ample time to study it while preparing their own Budgets. (And tonight, Madam Speaker, when I say “the States”, I obviously mean the States and the Territories.)
Of all the taxes that raise the cost of labour above the worker’s take-home pay, the most obvious offender, and the biggest offender in terms of revenue, is PAYG personal income tax. If personal income tax were simply abolished, the biggest tax cuts, not only in dollar terms but also in percentage terms, would go to those on the highest incomes. Meanwhile, whatever replaced personal income tax would presumably cause a rise in prices, for which the elimination of personal income tax would overcompensate high-income earners and undercompensate low-income earners, widening the gap between rich and poor. That is not an acceptable outcome.
Accordingly, from 1 July 2014, employers will keep the PAYG income tax that they withhold from employees and contractors; but the employees and contractors will still receive credit for the withheld tax as if it had been paid to the ATO on the grossed-up incomes. Allowing employers to retain the tax that they withhold from employees and contractors is the most innovative component of this Budget. It reduces the cost of labour as seen by employers, without reducing the workers’ take-home pay, and without widening after-tax wage relativities. Unlike the outright abolition of personal income tax, it gives employers an income from which they can pay any alternative tax without having to raise prices. If that alternative tax is levied on anything but labour, it will preserve the desired reduction in the cost of labour as seen by employers, without reducing the workers’ take-home pay.
Regrettably, this arrangement fails to eliminate the compliance costs of PAYG personal income tax, making it more necessary to reduce compliance costs in other ways. This Budget takes up the challenge.
Income tax in all its forms, except capital gains tax, is a tax on production and therefore raises prices. In the national accounts, income is synonymous with value added. Hence an income tax is a value-added tax. But because income tax penalises income earned in production of Australian products but spares income earned in production of imported products, it amounts to a value-added tax without border-adjustment. In other words, it’s a reverse tariff. At $200 billion per annum, it’s by far the biggest reverse tariff in the Australian tax system. But the true nature of the tax is disguised by labelling “value added” as “income”, separating the value added by labour from the value added by capital, and taxing the former under the guise of “personal income tax” and the latter under the guise of “company tax”.
In this Budget, as I have already implied, personal income tax will remain but employers will keep the PAYG component. It remains to explain what will happen to company tax. From 1 July 2014, company tax, other than capital gains tax, will be abolished.
The second-biggest reverse tariff, and the second-biggest reason why the cost of hiring a worker exceeds the worker’s take-home pay, is theSuperannuation Guarantee. A Federally mandated, employer-funded 9.25% super contribution is equivalent to a Federally funded 9.25% contribution paid for by a 9.25% Federal payroll tax — except that the employer-funded version is off-budget, making the Federal Government’s economic footprint look smaller than it really is. And a payroll tax is a reverse tariff because it taxes the labour content of Australian products but not imported products.
Accordingly, from 1 July 2014, employers will no longer have to make superannuation contributions or pay the Superannuation Guarantee Charge. Instead, each person’s superannuation contribution will calculated on the income that the person declares for tax purposes, and paid by the Government out of general revenue.
If the necessary contribution to “general revenue” is paid by employers instead of the Superannuation Guarantee, it will not require employers as a class to find any additional income, and will therefore not cause any overall rise in prices. Again, if that contribution is levied on anything but labour, it will preserve the desired reduction in the cost of labour as seen by employers, without reducing the workers’ take-home pay.
The third-biggest reverse tariff, and the third-biggest reason why the cost of hiring a worker exceeds the worker’s take-home pay, is State payroll tax, which taxes the labour content of Australian products but not imported products.
Accordingly, under this Budget, the Commonwealth will use its conditional grants power to compel the abolition of State payroll taxes from from 1 July 2014. The States will be compensated by increased grants from the Commonwealth, funded out of general revenue.
If the necessary contribution to “general revenue” is paid by employers instead of payroll tax, it will not require employers as a class to find any additional income, and will therefore not cause any overall rise in prices. Again, if that contribution is levied on anything but labour, it will preserve the desired reduction in the cost of labour as seen by employers, without reducing the workers’ take-home pay.
As promised, this Budget provides for the abolition of the carbon tax, which is the fourth-biggest reverse tariff.
Madam Speaker, under Australia’s constitutional arrangements, the primary responsibility for public investment in infrastructure rests with the States, which delegate some of that responsibility to local councils. The benefit of a public infrastructure project is manifested in higher property values in locations served by the project. More precisely, it is manifested as uplifts in site values, which are also loosely called land values or unimproved values. So, if the tax system captures a sufficient percentage of each uplift, the project will pay for itself by expanding the revenue base, without increasing tax rates, and without burdening taxpayers who don’t share in the benefit. Accordingly, from 1 July 2014, Commonwealth grants to the States will be subject to the following conditions:
- First, the States will require local councils to raise at least 80% of their own-source revenue from general rates on site values, and the rest from service charges, with effect from 1 July 2015.Because site values don’t include values of buildings, the new rating system won’t penalize construction. To ease the transition, year-on-year percentage increases in general rate bills, including any increases that coincide with the change in the rating system, will be capped in real terms. The caps will be determined by local councils — not imposed from above. In addition, councils will be given the unfettered right — if they don’t already have it — to defer rate payments from property owners who are asset-rich but income-poor, until their properties are sold in the normal course of events.No home owner should be forced to sell in order to pay rates.
- Second, insurance taxes, emergency service levies, conveyancing stamp duties, betterment levies, infrastructure levies on developers, and the existing land tax (not to be confused with local rates) will be abolished.
- Third, in lieu of the abolished taxes, the States will levy a “vendor duty” on all capital gains on property realized after 1 July 2014. Property owners who have paid the old stamp duty more recently will be automatically compensated because their capital gains will be smaller. As buildings don’t appreciate in value, except by way of capital expenditure which is deductible against capital gains, the vendor duty will automatically avoid penalizing construction of housing and business accommodation. The rate of the vendor duty, and whether that rate is applied to real or nominal capital gains, and whether there are any concessions for the family home or any transitional arrangements for properties purchased before tonight, will be matters for the individual States.
- Fourth, the owner of any property bought after 1 July 2014 will be allowed to pre-pay the vendor duty in the form of an annual charge equal to a percentage of the current site value. Further details — including the percentage, and whether the pre-payment will be compulsory for certain classes of properties or owners — will be matters for the individual States.
Madam Speaker, just as no home owner should be forced to move because of council rates, no home owner should be forced not to move because of stamp duty. The existing stamp duty tends to lock home owners into their current addresses, and discriminates against home owners who move frequently. The new vendor duty will reduce the lock-in effect, because a property sale will not create a tax liability, but will realize an existing liability. It will reduce the discrimination, because home owners who move more frequently will no longer pay a proportionally higher amount of stamp duty over their lifetimes, but will pay their vendor duty in a larger number of smaller steps. Property owners will be better off, because the new vendor duty, unlike the old stamp duty, will be guaranteed not to turn a capital gain into a capital loss or to magnify a loss, and because the vendor duty on the capital gain will give the States an incentive to invest in infrastructure that raises property values.
To make room for the vendor duty, the Federal capital gains tax on real property will be abolished from 1 July 2014. In other words, the power to tax capital gains on real property will be surrendered to the States, in return for the abolition of all existing State property taxes.
The replacement of a stamp duty on the purchase price by a vendor duty on the capital gain will obviously improve the competitive position of first home buyers, who by definition have no capital gains to tax. Indeed, the advantage conferred on first-time buyers by this change will be several times larger than that conferred by the First Home Owners’ Grant. Accordingly, the First Home Owners’ Grant will be abolished from 1 July 2014.
Madam Speaker, it remains to announce what new tax will replace the revenue from PAYG personal income tax, company tax, the GST, the Superannuation Guarantee, payroll tax, and the carbon tax. All else being equal, the aggregate revenue that enterprises save — in PAYG personal income tax, company tax, GST, superannuation, payroll tax and carbon tax — would balance the aggregate revenue that they pay out under the new tax, so that the overall price level would be unchanged. But of course all else is not equal, for three reasons.
- First, the reduction in welfare expenditure due to the restoration of full employment, together with other promised spending cuts, means that not all of the revenue from the old taxes needs to be replaced by the new one.
- Second, the restoration of full employment will expand the economy and therefore expand the base of the new tax. So, for any required amount of revenue, the required rate of the new tax — and therefore its effect on prices — will be less than it would be at the current size of the economy.
- Third, replacing several taxes by one tax will reduce compliance costs, which feed into prices as surely as any tax.
For all these reasons, replacing the six old taxes by one new tax will reduce the overall cost of living — provided, as always, that the new tax base is not labour income. A New-Zealand-style VAT meets that requirement. I shall call it a VAT in order to distinguish it from Australia’s existing GST.† Treasury estimates that a New-Zealand-style VAT at a rate of 25%, on the tax-inclusive base, would balance the Budget while causing a one-off 4% fall in the CPI.‡
Accordingly, from 1 July 2014, Australia will impose a VAT on the broadest possible base (like New Zealand) at a rate of 25%. That rate will be applied to the tax-inclusive base because Australia (unlike New Zealand) will assess the VAT by the subtraction method.
In other words, if you are registered for VAT, you will subtract your domestic purchases from your domestic sales and send 25% of the difference to the ATO. There will be no tax invoices. Hence you will be able to claim credit for all purchases from domestic suppliers even if they are input-taxed. Hence, if you are small enough to qualify for input-taxed status, you won’t be forced to register for VAT just because your customers want input credits. The criteria for input-taxed status will be the same as under the present GST.
The subtraction method will put an end to the present unfortunate situation in which enterprises that are small enough to be input-taxed are forced to register for GST, just because their prospective customers want tax invoices. It will also put an end to “sticky GST” — that is, GST which is hidden in prices charged by input-taxed entities but can’t be claimed back by their GST-registered customers. In consequence of this mechanism, we now have GST on GST. But we won’t have VAT on VAT.
By doing away with tax invoices, and by leaving PAYG personal income tax in the hands of employers, this Budget will end the practice of compelling small business operators to work as unpaid tax collectors. In future, businesses will be payers of VAT, not collectors of GST and personal income tax.
In the unlikely event that a subtraction-method VAT with border adjustment is found to contravene WTO rules, the enabling legislation will provide for the VAT to be turned into a retail tax at the same rate on the same base, measured by final consumption rather than value added. Consequently, no country will have anything to gain by questioning the legality of the VAT. The Government concedes that in the long term, the retail-tax option would further reduce the cost of living by further reducing compliance costs. However, because Australians are already familiar with the concept of value added, and because the subtraction method is compatible with natural accounting practices, the Government believes that a subtraction VAT would allow a smoother transition from present arrangements.
Madam Speaker, the Members opposite will be quick to point out that a rate of 25% on the tax-inclusive base is equivalent to 33? % on the tax-exclusive base. Value-added tax rates are indeed normally quoted on the tax-exclusive base. But that’s because most VATs are collected by the tax-invoice method, and coexist with company taxes calculated on VAT-exclusive incomes. The VAT proposed in this Budget uses the subtraction method, which works more easily with the tax-inclusive base; and it doesn’t need to coexist with company tax, because that’s being abolished! Moreover, because most of the revenue to be replaced comes from income tax, which is on a tax-inclusive base, it is appropriate to quote the tax-inclusive VAT rate for purposes of comparison.
While the Members opposite are free to play numerical games with the rate of the new VAT, the bottom line is that the replacement of six existing taxes by the new VAT will reduce the cost of living. While the Members opposite are free to describe the VAT as a great big new tax, the bottom line is that one great big new tax is better than six great big old ones, which together raised more revenue and had a greater effect on prices. That is especially the case when the VAT will not add to the cost of labour and will not act as a reverse tariff.
While the Members opposite want to improve workers’ wages and conditions by imposing further costs on employers, this Government will do it by reducing other costs that burden employers without helping workers. While the Members opposite want to help some workers by throwing others out of work, this Government would rather help all workers by raising the demand for labour. While the Members opposite see workers’ prosperity through the prism of class warfare, this Government sees it through the open door of tax reform.
While the Members opposite may pretend that the new VAT is the old GST on steroids, neither the GST nor any other existing consumption tax was introduced in a way that avoided any rise in the cost of living, or any widening of after-tax wage relativities. Under this Budget, the cost of living will fall, jobs will be easier to get, and the bargaining positions of workers and prospective workers will improve. If the Opposition loves “working families” as much as it hates bosses, it will welcome these developments.
It may seem contrary to conventional wisdom that a VAT replacing income tax would not raise prices. That’s because the conventional wisdom assumes that the income presently remitted by employers as PAYG tax would instead be paid out in gross wages and salaries, so that an equal amount of income remitted as VAT would need to come from elsewhere, namely higher prices. Under this Budget, however, the aggregate income presently withheld as PAYG tax will be made available to pay the VAT and will therefore not need to come from higher prices. When we further allow for the growth dividend and the fact that not all of the old revenue needs to be replaced, we must conclude that the overall price level will actually fall.
Madam Speaker, apart from political inertia, there is nothing to stop other countries from following the example that Australia is now setting through this Budget. Consequently, some of the advantages obtained through this Budget are first-mover advantages. But that makes it all the more necessary that Australia moves first. If other countries subsequently imitate Australia, they will presumably claw back some of the global market share that Australia gains through this Budget. This in turn may require Australian producers to rely more on domestic markets. That may be an issue to be tackled in a future Budget.
The reason why this Budget provides for personal income tax to be retained in the hands of employers, rather than completely abolished, is to preserve after-tax wage relativities, not only between high-paid workers and low-paid workers, but also between full-time workers and part-time workers. If the same result could be achieved by reform of the workplace-relations system, one could then abolish personal income tax altogether, with further savings in compliance costs. That too may be a challenge for a future Budget.
But in the present Budget, Madam Speaker, the urgent necessities are to restore full employment and raise Australia’s market share — by removing taxes on labour, removing reverse tariffs, and cutting taxes on buildings. To those ends, I commend this Budget to the House.
? By the next Treasurer, if the incumbent doesn’t act on my earlier draft.
† The New Zealanders called their VAT a GST because of its exceptionally broad base. By that logic, the subsequent Canadian and Australian “GSTs” should have been called VATs because of their narrower bases, and the broad-based “VAT” proposed here should be called a GST. But past corruptions of terminology can’t be helped.
‡ Of course, as this document is a “draft”, these figures aren’t really Treasury’s estimates. They’re Putland’s back-of-envelope estimates. One hopes that Treasury, with all its resources, can produce more accurate figures. But whatever the correct rate is, it will indeed reduce the cost of living for the reasons stated in the text.