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Merger of tax and welfare systems, and establishment of a basic income

Australia's tax and welfare systems have grown so complicated that they are almost impossible to understand.[1] The tax system now comprises more than 120 different taxes[2], and includes a range of bad incentives which favour property speculation and penalise work and saving.[3] The complexity nullifies any chance at real government transparency; it also forces more than two thirds of taxpayers to file returns through tax agents.[4]

The welfare system also faces problems with complexity. It has grown in ad-hoc fashion to encompass more than 20 separate payments, each with different means tests, sub-payments, administrative arrangements and compliance regimes.[5] Administrative costs for tax and welfare run to over $5 billion annually, and over $80 billion is "churned" (collected as tax and then returned to the same taxpayers as welfare) each year. Recipients leaving welfare for work often face a combination of large benefit cuts and income tax, which can lead to effective losses of more than 70% of earned income.[6] This punishes the drive to be self-sufficient and creates a risk of inter-generational poverty.[7]

Basic income through reverse taxation

Significant reforms are needed to improve transparency and fairness in the system. This need will only become more urgent as automation advances, potentially changing the face of the labour market and putting the system under more strain than ever before.[8] As the challenges of the 21st century unfold, a comprehensively different model of tax and social support will be needed.

We believe it is time to combine the disparate systems of tax and welfare together, unifying them into a single system underpinned by a basic income guarantee. This basic income guarantee would be paid in the form of a negative income tax.

Negative income tax is tax in reverse—money paid by the government to those with low or no taxable income. It provides social support directly through the tax system rather than through a separate welfare system. Pirate Party Australia proposes a tax threshold of $37,500 should be used in conjunction with a tax rate of 37.5%. Under this plan, the first $37,500 of earnings would become tax-free, with a tax rate of 37.5% applied only on earnings above that. However, people earning less than $37,500 will receive 37.5% of the shortfall transferred to them from the government in the form of negative income tax. Thus, persons earning nothing at all are guaranteed a basic income of just over $14,000 (representing 37.5% of the $37,500 by which they fall below the threshold). The following examples show how income is modified under a negative income tax:

Income before tax Tax threshold Gap between income & threshold Tax rate Change in income Income after tax Effective tax rate $0 $37,500 -$37,500 37.5% +$14,062 $14,062 0% $27,500 $37,500 -$10,000 37.5% +$3,750 $31,250 0% $37,500 $37,500 $0 37.5% Nil $37,500 0% $47,500 $37,500 $10,000 37.5% -$3,750 $43,750 7.9% $100,000 $37,500 $62,500 37.5% -$23,437 $76,563 23.4%

A basic income system protects against poverty by providing a platform beneath which nobody can fall. This removes the financial dependence which traps people in abusive relationships, and overseas trials show that income guarantees are one of the most effective ways to reduce domestic violence.[9][10][11] A basic income would improve the bargaining power of workers and stabilise low and volatile wages, smoothing the path for those seeking to shift from welfare into work.

There would also be a material reduction in the size and reach of government. Swaths of bureaucracy and welfare 'churn' would be cut. And a fundamental power imbalance between the individual and the state would be corrected, since government would no longer be able to take income from citizens while refusing counter-obligations to citizens whose income collapses.

A basic income guarantee provides a way to clear out poverty traps and bad incentives from our social support systems.

Most importantly, a basic income is a platform for 'positive liberty', granting everyone the freedom to seek education and training, volunteer, create art and culture, or raise children without bureaucratic obstacles and complex payment rules. A basic income is a platform on which 21st century entrepreneurship and creativity can be built.

On the tax side, a higher tax-free threshold will improve progressiveness in the income tax system. It also provides a simple means to replace the current mass of thresholds, offsets and tax breaks, which unduly favour wealthy investors and those who can afford tax accountants. Negative income tax is one of only a few tax and welfare proposals which has near-unified support among economists, demonstrating its merit as a serious economic reform.[12][13]

Balancing revenue

A shift to negative income tax will reduce income tax receipts by around $30 billion per year, with the bulk of benefit flowing to low income earners. Some of this could be made up through a price on carbon emissions (see climate change policy), and a removal of fossil fuel rebates. Revenue could also be supported by abolishing tax breaks on negative gearing and capital gains: these loopholes have created a huge bias towards property speculation and locked a whole generation out of home ownership.[14] The remaining, substantial tax reduction should simply be left intact as a means to support labour and enterprise in Australia.

On the spending front, a negative income tax can replace the bulk of existing welfare and its associated bureaucracy, as well as a range of expensive and underperforming "employment services" whose function can be served in the private market. US cost estimates based on Congressional Budget Office data suggest that a shift to negative income tax requires only a tiny lift in spending[15][16], and Pirate Party calculations suggest the same is true in Australia. Any additional cost is likely to vanish over time as incentives for welfare recipients improve.

Charity and fairness

A few other tweaks would improve the function of our tax and welfare system. All charities should be classified as 'deductible gift recipients' in the future: this will make every charitable donation and activity tax-deductible. At the same time, tax exemptions linked to 'advancement of religion' should be removed, since a modern secular society has no grounds to discriminate between taxpayers on the basis of their beliefs.

Pirate Party Australia advocates the following reforms:

Combine tax and welfare into a single, fair system through a negative income tax

Set tax rate to 37.5% with a threshold of $37,500 (generating a basic income of $14,062 p/a). [17] Adjust tax thresholds (and basic income) in line with inflation. Time negative income tax payments to supplement regular wage payments, or transfer fortnightly to those with no income. Ensure basic income is available to all persons aged 18 and over, following graduation from school.

Ensure 'neutral' and equivalent tax treatment for all forms of income including fringe benefits, share transfers and dividends, earnings through interest, rental or private company income, and inflation-adjusted capital gains. Phase out negative gearing over five years; allow investors to carry forward losses and deduct them from capital gains to reduce tax liability on property and asset sales. Ensure superannuation contributions are tax-free, with withdrawals taxed as normal income (subject to credit where contribution tax was previously paid). Limit tax exemption to charitable donations and items purchased for the purpose of disability support.

'Top up' the basic income in special cases: An additional $6,000 in child support to primary caregivers, with additional per-child payments reduced by 25% for each subsequent child. A top-up to match existing pension levels for aged and disabled persons, veterans, and carers. A top-up to match existing rent assistance for low income earners lacking public housing. Taper out all ‘top-ups’ as income rises, with top-ups removed once income reaches $100,000.

Use the basic income to replace existing welfare programs including Newstart, Age Pension, Austudy, Family Tax Benefits parts A and B, School Kids Bonus, Income Support Bonus, Low Income Super Contribution, the Disability Support Pension, and Carer Payments.

Use the higher tax threshold to replace existing tax offsets for senior Australians, mature age workers, overseas civilians, entrepreneurs, low income earners, holders of private health insurance, termination payments, zone offsets, notional tax offsets, and tax exemptions for foreign employment income.

Enact changes to broaden and improve tax collection.

Cap fuel tax credits at $100,000 per year and abolish aviation fuel concessions, exploration and prospecting deductions.

Tax trusts as companies.

Restore a carbon price based on the 2012 model (see environment & climate change policy).

Improve citizen and charitable focus in the tax system

Provide secure online mechanisms to allow citizens to easily review their financial relationship with government and conduct digital tax transactions.

Ensure data and reviews on the function of taxes and transfer systems are made public.

Remove ATO powers to impose or enforce confidentiality clauses on taxpayers.

Extend 'deductible gift recipient' status to all registered charities.

Remove 'advancement of religion' as a charitable activity for the purpose of determining tax exemption. Retain exemptions for non-commercial income earned by religious organisations if the organisation meets any other categories for exemption including provision of charity, education, culture, community service, or health.



References