Guest Post: Gavin Putland giving an idealised budget speech

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.

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61 Responses to Guest Post: Gavin Putland giving an idealised budget speech

  1. Nato

    I like it.
    Some great ideas, with something to offend everyone, and idealistic enough to never be presentede.
    Even the conservatives that are often labelled as the countries right-wing would get their backs up at a top-down dictation from the Federals at how the states should govern their property taxes.
    Could it be explained in a way that could get a mandate, even with a weasel-words promise to review the tax system?

    Thanks for the chuckle.

  2. Driftforge

    In general, a good write up. Biggest concern is (as Nato alluded to) the further reduction in state own source income. Further tieing the states to Federal income sources is problematic to say the least. The stragne thing is that this may simply be a function of how things are written – the ‘vendor tax’ should reduce or eliminate the need for federal grants if implemented.

    The best thing going for this proposal is how comprehensively it changes the system. It;s not one change that can be simply fought; it is a whole scheme of overlapping changes that would have different consequences. Makes tearing it apart far more complicated.

    But it gets the basics right. Eliminate income tax. (I’d suggest that PAYG be retired as new employment contracts are written). Elimintate company tax.

    Renaming GST, dividing by 4 instead of 11, broadening the base.. I’m not sure how this is supposed to advantage local value adding over external inputs.

    Super – brought onto government books. Good thought in that it addresses the cost, but at the same time its going to increase the likelihood that government will want to direct its deployment further. It will just become a piggy bank for future governments to raid. It’s just happened here in Tassie with the State Labour government raiding the entire contents of the state super fund.

    Take some sorting through this.

  3. .

    Yeah I’m very pro Federalism but payroll tax is an ugly, ugly tax.

    I’d be all for it.

  4. Driftforge

    The other thing to follow this up with would be a constitutional amendment to revoke the right of the federal government to levy an income tax. That bat and ball should be taken home and put away, not left lying around for the next crew to come along to pick up again.

  5. thefrollickingmole

    Anything that simplifies the cluster of crap that is the present system is worth a look.

    As you point out, Australia effectively imposes tarrifs on its domestic goods with a lot of the fees and levies. (not a point I had thought of in that way before)

    Hammer that point and people like paule Howes might even get roped into supporting an overhaul of the current thing.

  6. Driftforge

    Cutting out the guff…

    Income tax eliminated, salaries reduced to the after tax level.

    Company tax eliminated.

    State taxes eliminated.

    Exclusions on GST elimintated, level raised to 33(!)%

    Carbon tax eliminated.

    LVT imposed by percentage SV at local level.

    Vendor tax levied at state level, picking up leftover LVT.

    ….

    The biggest hole I see in this is its reliance on vendor tax as a state funding arrangement. It would be far better to shift the whole LVT to the local (rates) level, with the state getting a cut from each council. This double dipping arrangement sounds viable but is absolutley borked in a falling market.

    Also.. 33% of all value adding to pay for federal costs? That’s borked too.

    Bring the money collection back as local as possible and treat higher levels of government as service providers.

    Give a full LVT to local governments, which then fund the state. A 10% GST ought to fund federal government sufficently on its own; anything more they can beg for from the states.

  7. Biota

    Give a full LVT to local governments, which then fund the state

    Nice in theory but they are not up to it. A lot of corruption and blundering at local government level. See Liverpool, Wollongong and Cessnock for example. Let along the green brigade at Marrackville.

  8. jtfsoon

    Agreed, Biota.

    I am not a sufficiently principled advocate of fiscal federalism to want to trust the typical clowns, Luddites and underemployed who make up local councils to effectively together ‘make up’ the States they each comprise. I’d rather keep federalism at the State level and let local govts be no more than the appendages they deserve to be.

  9. Driftforge

    I suspect given that arrangement that the make up of local councils would change relatively quickly.

    And really, are our state and federal governments that much better? At least this way, idiocy is localised rather than spread nationally.

    The bonus of doing this at the council level is that the council doesn’t have the capacity to make law. Keeping lawmaking and service funding as seperate as possible has some significant benefits.

  10. Infidel Tiger

    Local governments are full of Steve from Brisbane types. It’s the high office calling for the underemployed wowser fascist.

  11. m0nty

    I don’t get this income tax idea. Salaries are not changed at all, companies still calculate PAYG using the existing income tax structure so they can withhold it as tax credits for paying VAT. It sounds to me like nothing changes for workers, but companies get a massive transfer of wealth away from government and into their coffers.

    There is nothing benefiting regular voters here that I can see, apart from the changes to home ownership taxes. Every other change is either neutral to the median wage-earner in the case of all the pro-employer tax removals, or massively regressive in the case of the VAT.

    You lot love cost-benefit analyses so much, do me one for the median wage-earner under this system.

  12. I wonder what Herman Cain thinks of this tax plan. He’s the gold standard by which I judge all tax plans now.

    Heh.

  13. Driftforge

    Local governments are full of Steve from Brisbane types. It’s the high office calling for the underemployed wowser fascist.

    So.. no different from Labour members at the state and federal levels then?

  14. Driftforge

    I don’t get this income tax idea. Salaries are not changed at all, companies still calculate PAYG using the existing income tax structure so they can withhold it as tax credits for paying VAT. It sounds to me like nothing changes for workers, but companies get a massive transfer of wealth away from government and into their coffers.

    And then hit with a 33% GST. It will be good for some companies, crappy for others. The real benefits I see from the shift are that there will be massive reduction in the cost of taxation.

  15. Matt

    trust the typical clowns, Luddites and underemployed who make up local councils

    Funny, that’s what I mainly see at State government level …

  16. dismissive

    Driftforge

    I’m confused – I read the new VAT as 25%, where do you get 33%?

  17. m0nty

    And then hit with a 33% GST. It will be good for some companies, crappy for others.

    At least companies get some relief in the form of a bunch of taxes removed for them. Regular schmoes get nothing at all apart from some home-related taxes.

    Any government which tried to introduce this would get booted out of office. The claims about it leading to the magical wonderland of full employment are bogus. Add a quarter to a third onto the price of exports and see how many industries would die. I’m surprised Putland didn’t add in something about a unicorn that ate mine tailings and shat uranium.

  18. m0nty

    Driftforge

    I’m confused – I read the new VAT as 25%, where do you get 33%?

    It’s 25% tax-inclusive, but 33% tax-exclusive. We usually use the latter. For example, a widget worth $1 gets a tax of 33 cents. 33 cents is 25% of the tax-inclusive price of $1.33, but 33% of the tax-exclusive price of $1.

  19. Infidel Tiger

    mOnty you are doing an outstanding job of pretending you know what you are talking about. Keep it up and next week we will replace your pencil with a pen.

  20. Driftforge

    The claims about it leading to the magical wonderland of full employment are bogus.

    Always are. There are significant benefits to introducing an LVT – which is what this is trying to squeeze in amongst other stuff – but to suggest full employment, the absense of economic cycles and wonder everywhere as is commonly claimed is a bit much.

    The three big benefits of LVT are that it is low cost to levy; is levied on the state itself (rather than capital or labour), and is self limiting.

    This proposal gives away at least two of those.

    The one big problem with the LVT is that it is so different from where we are now that a sudden transition like this would be catastrophic.

  21. m0nty

    If you’re so smart, IT, you do the cost/benefit analysis for the median wage-earner that I asked for. That is the minimum political consideration for this not to be laughed at as a joke.

  22. jtfsoon

    You’re not very bright are you mOnty?

    A measure that significantly reduces the wage bill for employers only benefits employers?

  23. Infidel Tiger

    If you’re so smart, IT, you do the cost/benefit analysis for the median wage-earner that I asked for

    $660 an hour. Up front.

  24. dismissive

    thanks m0nty. Obvious once explained.

  25. Driftforge

    As to a CBA…

    Take home is the same.

    Super is the same, but paid by the Govt rather than the company – this will be an issue, but later down the track.

    So the income side is not going to differ, except that any tax concessions are going up in smoke along with the income tax they were deducted from.

    Cost side is a lot harder to figure. If the result of all that horsetrading is the same amount of income for the government, the costs are on average going to reduce slightly – 4% well may be about right.

    But that is going to be on average. There would be hell of a lot of dislocation and disruption in the immediate, a lot more than 4% would make up for.

    Longer term, there would be significant benefits.

    In general, I think the LVT advocates are going about the introduction all wrong. The change has to be enabled individually and voluntarily.

  26. Driftforge

    A measure that significantly reduces the wage bill for employers only benefits employers?

    At the same time as increasing the value tax bill threefold.. yeah, don’t know about that.

    If it was only the income tax, you’d see a pretty quick jump in salaries. With the GST bump, it will be a lottery.

  27. m0nty

    You’re not very bright are you mOnty?

    A measure that significantly reduces the wage bill for employers only benefits employers?

    Trickle down economics at its finest.

    We’re close to full employment now, Jason. Given prices would explode upwards and wages would stay the same, either we’d be thrown into a deep recession or wages would also explode. Or probably both.

    If you think people are annoyed about utility bills skyrocketing, wait until food, health and education all go up by 33% in one hit with zero relief for workers. What a silly idea.

  28. Matt

    Add a quarter to a third onto the price of exports and see how many industries would die

    The proposed VAT would not apply to export sales, according to the post.

    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

  29. m0nty

    The proposed VAT would not apply to export sales, according to the post.

    Alright then, my bad.

  30. Driftforge

    Prices would go every which way. Some stuff would jump by 30%+. Other stuff would drop by similar margins. The disruption would be enormous.

    The only time you could justify that sort of societal disruption would be in a hyperinflation, where 30% is irrelevant.

  31. Nanuestalker

    mOnty you are doing an outstanding job of pretending you know what you are talking about. Keep it up and next week we will replace your pencil with a pen.

    ouch!

  32. .

    We’re close to full employment now, Jason.

    Christ you’re an idiot.

    http://www.abs.gov.au/AUSSTATS/[email protected]/Latestproducts/6220.0Main%20Features2Sep%202011?opendocument&tabname=Summary&prodno=6220.0&issue=Sep%202011&num=&view=

    Given prices would explode upwards and wages would stay the same, either we’d be thrown into a deep recession or wages would also explode.

    On costs for labour going down will put us into an inflationary recession? Payroll taxes keep the economy stable and growing.

    What a fucking crackpot.

  33. m0nty

    23% to 33% inflation on all domestic prices in a single year with no tax cut for workers, what do you think is going to happen, Dot? Amaze me with your vast intellect. Do a cost/benefit analysis for the median Australian wage earner under Putland’s crazy wishlist.

  34. .

    23% to 33% inflation on all domestic prices in a single year with no tax cut for workers, what do you think is going to happen, Dot?

    No.

    You are a turkey.

    Excise taxes, tariffs, payroll taxes, stamp duties, company tax etc…all gone.

    The tax:GDP ratio stays the same or lessens and there is a more efficient tax mix. Thus inflation does NOT increase.

    Only a sick, slavishly demented ALP fool could defend the status quo. Fuck me you lot are desperadoes defending Swan and the status quo. He is a joke within labour anyway.

    “Lower taxes cause inflation” you chucklehead minty.

  35. Driftforge

    Wont be 23 – 33% except at the worst of the margins.

  36. m0nty

    The tax:GDP ratio stays the same or lessens and there is a more efficient tax mix. Thus inflation does NOT increase.

    The GST added almost 3% to inflation when it was introduced, and it replaced a lot of taxes in the name of efficiency as well. The VAT would be 2.3 to 3.3 times the GST in size. What would an instant 10% added to inflation do to the domestic economy, Dot?

  37. JC

    Monster

    Tax hikes such as those are not inflation per se you moron. In fact the RBA does not treat those increases as part of core inflation and adjusts for them.

    Stop calling things by the wrong economic terms. Go away.

  38. m0nty

    Votes would see a 33% price hike on food, health and education and think that is inflation, JC.

  39. Driftforge

    The VAT side of this proposal is DOA. The vendor tax is as well.

    Despite that, there’s some good thought.

  40. Driftforge

    The VAT side of this proposal is DOA. The vendor tax is as well.

    Despite that, there’s some good thought.

  41. Piett

    Yes, its a really interesting proposal, and, as someone mentioned earlier, has the advantage of a big integrated reform rather than endless patchwork tinkering — which has led to the ridiculous complexity of our current tax laws.

    But one thing I’m not sure about. Is it possible to get unemployment much lower than it is at present? Wasn’t it Milton Friedman who discovered an inverse correlation between unemployment and inflation?

    Aren’t we close to the ‘NAIRU’ level that they tell you about in 1st year Macro — the minimum unemployment level at which the RBA will hike up rates to kill inflation?

  42. Splatacrobat

    So if I bought a birthday cake?……………

  43. Driftforge

    Birthday cakes are bought before the election.

  44. .

    monty is really banging on a crackpot theory here.

    The GST raises roughly 1/4 of total Government revenue in Australia. The compliance cost of it being implemented was a short term increase in CPI less than 3 every quarter for one year.

    Big deal. Putland’s reforms are less onerous.

    So what – the RBA can accommodate. Rubinomics was successful. A reversal of monetary policy used in Rubinomics can be used.

    In fact the RBA accommodated for credit growth in 2000 – but they undershot.

    You basically have no evidence that the tax reforms would cost any more than the GST implementation, or that the RBA tightened enough in 2000-2001.

    Securitised lending grew at a very high pace above trend due to the movements of the dollar and international inflation. In fact total credit growth grew higher than since the mid-late 1980s just after the GST was introduced.

    You are trying to say inflation is linked to the assessable rate on new taxes. This is bizzare. It has to do with how many times it is levied, the deadweight losses and tax incidence and tax burden, but mostly from administrative costs.

  45. Winston Smith

    Old infantry saying. “Any change is for the worse.”

    This would all go belly up, because people will get confused and will misinterpret the changes.
    Sorry, guys, but remove the taxes slowly. PAYE and Company Tax first.
    All else is electoral suicide.

  46. Driftforge

    . – not sure if you are being dense because it is Monty, but he has a point. It’s not that there will be inflation per se, but that a number of basic items will jump in price by 20%+, creating the impression of inflation.

    There is a substantial difference between tax on profit and tax on value added that will result in some very notable changes in the distortion of the market taxation brings.

  47. Putland

    Thanks to Sinclair Davidson for posting this item.

    Explanatory note: Yes, I have another new screen name, due to continuing blockages.

    Trivial correction: In the first paragraph, I forgot to change “8 months” to “6 months”. The period of “8 months” comes from the “earlier draft” (mentioned the first footnote), which assumes that the speech is to be delivered in September 2012.

    Responses to comments:

    Why will this proposal restore full employment? Because it will reduce the marginal cost of labour by an amount equal to PAYG personal income tax plus the super guarantee plus payroll tax — without reducing workers’ spending power (see below on prices).

    But aren’t we already close to the Non-Accelerating-Inflation Rate of Unemployment? Yes, but the NAIRU isn’t a universal constant. It’s a function of tax policy. The more the cost of labour is inflated by taxes, the more unemployment is “needed” to compensate for the inflationary effect.

    Will this proposal raise prices by 33%? No. Once more for those who don’t get it: In the aggregate, the new VAT that enterprises will need to remit will be more than covered by the retention of PAYE personal income tax and the abolition of company tax, GST, employer-funded superannuation, payroll tax and carbon tax. So enterprises will not need to rake in any additional income (through higher prices) to cover the VAT. If you claim that the CPI will rise at all, you are double-counting at least one of the taxes. If you claim that prices will rise by 33%, you are double counting all of them.

    Of course, if the PAYG income tax currently withheld by employers were instead paid out in gross wages and salaries, it would not be available to pay the VAT, with the result that some of the VAT would need to come from elsewhere, namely higher prices. But that is not the arrangement proposed here.

    The replacement of income tax by a VAT will raise prices if it is done while preserving gross wages and salaries, but not if it is done while preserving net wages and salaries — as I first explained in February 2008 (Google “How the Left could learn to love a retail tax”). At first I assumed that the preservation of net wages and salaries would need to be done through workplace reforms. However, in April 2012 I learned that large American corporations were keeping the state income taxes that they withheld from employees (Google “Taxed by the boss” by David Cay Johnston). While this story was treated as a scandal by the American Left, it promptly struck me as a fast alternative method of preserving net wages and salaries!

    Yes, the forced abolition of payroll tax will cause an apparent reduction in the States’ fiscal independence. But because payroll tax is such an obvious subject of tax competition between the States, the competing payroll tax regimes are always going to be very similar. Meanwhile the efficiency of the vendor duty would give the States more fiscal flexibility than they have under the existing property-tax regimes. So I think the loss of fiscal independence would be more apparent than real.

    This Budget proposal, in spite of its source, isn’t big on LVT and doesn’t involve any “sudden transition” thereto. The change in the local rating system would be cushioned by caps on changes in bills. The pre-payment of the vendor duty would apply only to properties purchased after a specified future date, and political considerations virtually guarantee that the pre-payment would not be compulsory for the “family home”. There is no wholesale substitution of property taxes for non-property taxes. (Note: I tend to think of insurance taxes and emergency service levies as de-facto property taxes because they are largely paid by property owners.)

    Re Driftforge’s “CBA”: Unfortunately it isn’t true that “any tax concessions are going up in smoke along with the income tax they were deducted from”, because the proposal doesn’t eliminate personal income tax; it only eliminates the PAYG/withholding component. So all the current personal-income-tax rorts would remain in place for the time being. (My 2008 proposal didn’t have that problem.)

    The advantage of a consumption/destination tax base (VAT or retail tax) over a production/origin tax base (income tax or payroll tax) is that the former taxes imports but spares exports, while the latter taxes exports but spares imports. The further advantage of a consumption base over an income base is that a consumption tax, of itself, doesn’t tax capital formation or reduce the return on investment. And if Say was right and Keynes was wrong, it’s obviously better to tax demand than to tax supply.

    Thanks for your interest.

  48. Driftforge

    Wait – income tax isn’t eliminated, just the forward collection of it? Or is the income tax left as just adjustments?

    The vendor tax is still borked in a declining market, resulting in net outflows rather than income for a state.

    The difference between the VAT and it’s replaced tax is still going to be significant in some instances. Sure, 20%+ isn’t going to occur often, but I suspect areas like fresh food are going to be hit hard. Low profit, low labor taxes, no gst…

  49. Driftforge

    Also, a VAT is a production tax, not consumption.

  50. Alex W

    Surely the most important problem is state government revenue. Instead of an Australia wide VAT of constant rate, the commonwealth should collect its share and only its share of income. Then each state levies it’s VAT at the rate necessary for its own finances. We then get true competition between the states and an end to the federal state fracas over grants and distributions. If the total VAT is say 20% in WA and 30% in Tasmania, market forces should over time lead both WA and Tasmania in the right directions. Does need constitutional change but if where doing major surgery lets do the job properly.

  51. m0nty

    Will this proposal raise prices by 33%? No. Once more for those who don’t get it: In the aggregate, the new VAT that enterprises will need to remit will be more than covered by the retention of PAYE personal income tax and the abolition of company tax, GST, employer-funded superannuation, payroll tax and carbon tax. So enterprises will not need to rake in any additional income (through higher prices) to cover the VAT. If you claim that the CPI will rise at all, you are double-counting at least one of the taxes. If you claim that prices will rise by 33%, you are double counting all of them.

    This is hopeful hand-waving, Gavin. You hope that prices will stay the same because the tax changes you propose are going to be revenue neutral. In practice, though, some sectors will benefit from the removed taxes more than others, so there will be spotty price fluctuations even if we assume that companies pass on the full savings. And that is a BIG assumption.

    I would hazard a guess that food would be one sector where prices would jump by a lot. Would a sole trading farmer’s taxes really drop by 33% to offset the VAT? I don’t think so.

    Here’s a question: if workers aren’t paying income tax any more, doesn’t that mean their salary is likely to actually drop because they can’t get a tax refund for deductions at the end of the year? Do they still submit a list of deductible expenses to the ATO for refunds?

  52. JC

    Monster

    I left you a comment on the open thread. Go read it.

  53. TerjeP

    JC – I left you a comment on the Public Service Announcement thread. Go read it.

  54. This analysis assumes it’s possible to keep wages down well below the marginal product of labour. Not likely. High income earners will have their wages bid back up to their previous gross income level.

  55. Gav P

    Re John Humphreys:

    While my explanation of the one-off impact on the CPI assumes that wages initially fall below marginal products, the success of my proposal does not depend on preventing actual wages from rising back up to marginal products. Rather, it depends on allowing the prospective wages of the unemployed to FALL to the marginal product of their labour, so that they can get jobs. As Mr Humphreys noted on his blog on June 2 – see http://bit.ly/N7BSXr – creating jobs requires downward flexibility of wages. But for that purpose, the “wages” that count are the wages as paid by employers, not the wages as received by workers. I don’t assume that reducing the former means reducing the latter. Rather, I propose to reduce the former, but not the latter, by cutting out the middleman — i.e. the taxman.

    The reduction in the cost of labour, hence the increase in employment, that can be achieved by cutting out the middleman dwarfs that which can be achieved by any politically feasible reduction in wages as received by workers.

    What about the NAIRU? If wages that initially fall below the marginal product rise back to the marginal product, won’t that partly offset the anti-inflationary effect and hence the reduction in the NAIRU? Yes, but:

    (a) The same objection applies with greater force to any reduction in the minimum wage, because the initial impact of that reduction would affect only a minority of workers, namely those whose wages are pegged to the minimum.

    (b) Cutting the marginal cost of labour isn’t the only anti-inflationary ingredient in my proposal. The other is the reduction in welfare expenditure, hence the reduction in total revenue that needs to be raised from taxes that feed into prices. In other words, part of the claimed benefit of my proposal is a benefit of SMALLER GOVERNMENT. That should please a hard-core Libertarian like Mr Humphreys.

    In answer to Driftforge: The restoration of full employment would revive property markets, hence State revenues (through the vendor duty). A VAT without border-adjustment is a production tax; but a VAT WITH border-adjustment is a consumption tax. Border-adjustment means counting only domestic purchases and sales, with the result that imports are taxed and exports are not.

    In answer to m0nty: I don’t deny that there would be swings and roundabouts. I merely claim that, overall, the one-off impact of my proposal on the CPI would be negative. And yes, workers would still submit tax returns, in which they would still claim deductions and still be credited for “tax” withheld by the employers. Workers wouldn’t notice any difference on that score. But they would notice the reduction in the CPI and the greater availability of jobs.

    P.S.: One of the advantages of my proposal, as it relates to Federal taxes, is that individual enterprises can demand that the new system apply to them even if it has not yet been legislated across the board: http://t.co/E2xGCDYt . This in turn would create pressure to apply it across the board.

  56. Below is a response from Gavin Putland. For some reason his comments keep getting caught in the spam filter, so he’s asked me to re-create his comment here:

    =================

    You wrote: “This analysis assumes it’s possible to keep wages down well below the marginal product of labour. Not likely. High income earners will have their wages bid back up to their previous gross
    income level.”

    No, the success of my proposal doesn’t depend on preventing actual wages from rising to the marginal product of the workers. It depends on allowing the PROSPECTIVE wages of the unemployed to FALL to the marginal product of their labour, so that they can get jobs. As you say yourself in your latest blog post, creating jobs requires downward flexibility of wages. But for that purpose, the “wages” that count are the wages as paid by employers, not the wages as received by workers. Unlike conventional opponents of minimum wages, I don’t assume that reducing the former means reducing the latter. Rather, I propose to reduce the former, but not the latter, by cutting out the middleman — i.e. the taxman The reduction in the cost of labour, hence the increase in employment, that can be achieved by cutting out the middleman dwarfs that which can be achieved by any politically feasible reduction in wages as received by workers.

    What about the NAIRU? If some net wages rise back to the marginal product, won’t that partly offset the anti-inflationary effect and hence the reduction in the NAIRU? Yes, but:

    (a) The same objection applies a fortiori to reducing minimum wages, because that doesn’t reduce the cost of already-employed labour below its marginal product even in the short term, let alone the long term; and

    (b) Cutting the marginal cost of labour isn’t the only anti-inflationary ingredient in my proposal. The other is the reduction in welfare expenditure, hence the reduction in total revenue that needs to be raised from taxes that feed into prices. In other words, part of the claimed benefit of my proposal is a benefit of smaller government. That should please a hard-core Libertarian like yourself.

    In answer to Driftforge: The restoration of full employment would revive property markets, hence State revenues (through the vendor duty). A VAT without border-adjustment is a production tax; but a VAT WITH border-adjustment is a consumption tax. Border-adjustment means counting only domestic purchases and sales, with the result that imports are taxed and exports are not.

    In answer to m0nty: I don’t deny that there would be swings and roundabouts. I merely claim that, overall, the CPI would fall. And yes, workers would still submit tax returns, in which they would still claim deductions and still be credited for “tax” withheld by the employers. Workers wouldn’t notice any difference on that score. But they would notice the reduction in the CPI and the greater availability of jobs.

  57. My answer…

    You claimed “It reduces the cost of labour as seen by employers, without reducing the workers’ take-home pay, and without widening after-tax wage relativities.”

    It is the last bit I’m disagreeing with. High income earners will have their wages bid up, and so wage relativities will change.

    I have no problem with that. I’m not the type who gets jealous and bitter about the success of others.

  58. .

    This is hopeful hand-waving, Gavin. You hope that prices will stay the same because the tax changes you propose are going to be revenue neutral. In practice, though, some sectors will benefit from the removed taxes more than others, so there will be spotty price fluctuations even if we assume that companies pass on the full savings. And that is a BIG assumption.

    I would hazard a guess that food would be one sector where prices would jump by a lot. Would a sole trading farmer’s taxes really drop by 33% to offset the VAT? I don’t think so.

    You really are an imbecile minty…

    “I assume the tax will push prices up because I assume it will not lead to price reductions and only price increases…QED”

    This really proves monkeys can be used as journos or “telco analysts”.

  59. Gav P

    Apologies if my last comment appears in two versions (which it hasn’t yet). I tried to inform John Humphreys that I had eventually got through the filter; but apparently I didn’t make myself sufficiently clear. 😛

    In case the later version of my comment doesn’t appear, note that the above Budget proposal sets the stage for some strategic litigation against reverse tariffs and tax-related red tape: http://bit.ly/MOawnh .

  60. Pingback: Guest Post: An open letter to the ATO from Gavin Putland at Catallaxy Files

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