Work and Remuneration John Freebairn Community Tax Forum Canberra, 26 Feb., 2009

Potential reforms to achieve: Greater incentives and rewards from work. To reduce problems of high EMTRs associated with means testing of social security and child care, and clumsy tax clawbacks Equity, both horizontal and vertical, across different employees receiving different remuneration packages Simplicity. Over 70% use a tax agent and claim > $1 billion a year in fees. Plus own time

Reform issues include: Interface of tax, social security, child care, and potentially maternity allowance Tax base or taxable sum. Broaden base by removing special exemptions and deductions, and use revenue to fund lower tax rates Taxable unit. Suggest stay with the individual as it favours second income earner with higher labour supply responses Tax rate schedule. Be explicit and include LITO, SATO and Medicare levy

Package of Broader Base and Lower Rates Remove exemptions and treat a $ as a $, or all forms as wages –Fringe benefits concessions –Lump sum payments –Remote area allowances –Part of a broader package involving capital gains and superannuation (considered in later sessions) Revenue gained to fund lower rates Arguably the current ad hoc set of work related expenses also can be deleted with funds for lower tax rates or a flat tax credit for all.

Package of Broader Base and Lower Rates The pay-off –Greater simplicity and cost savings –More robust future revenue –Some efficiency gains Greater neutrality in remuneration and choice of expenditure Less waste in compliance costs Equity effects. Relative to the current position –Some winners (lower rates > lost deductions) –Some losers (lost deductions > lower rates) –Most only minor changes with the package Many precedents, eg 1985, 2000 business tax

Tax Rate Scale The public spin is a simple tax rate schedule with five brackets and rates. When one adds in LITO and SATO, and the Medicare levy (which only partially funds health expenditure), we have a much more complicated and opaque rate schedule. Suggest just one simple tax rate schedule that includes tax offsets and additional levies Automatic indexation of tax brackets. Use of AWE would maintain tax share of GDP

Big Issues to be Discussed by Other Panel Members include: Simplification of the social security, family allowances and child care support systems, individually, but preferably as part of an overall package Better integration of the tax system with the social security and child care systems Use of a common inflation indexation factor for all systems