Gavin R. Putland,  BE PhD

Thursday, August 23, 2012 (Comment)

Real reform is qualitative, not quantitative

What's better than reducing the company tax rate? Abolishing company tax. What's better than bailing out selected industries? Removing taxes on production. What's more competitive than devaluing the currency? Removing taxes that behave as reverse tariffs, especially those that reduce the return on investment. What creates more jobs than any feasible cut in minimum wages or any feasible lift in output per hour? Lifting output per dollar by removing taxes that cause the price of labour paid by employers to exceed the price received by employees.

And, lest anyone blame overseas events for our problems, what's worse than any likely deterioration in the terms of trade? Taxing export industries and their suppliers, thereby eroding the terms of trade as seen by the private sector.

Abolish company tax, except on capital gains. Abolish compulsory employer-funded superannuation contributions and instead fund the contributions out of general revenue. Let employers keep the PAYG income tax that they withhold from employees and contractors, but give the latter credit for the withheld tax as if it had been paid on their grossed-up incomes. Thus personal income tax is not abolished, but is removed from employers' labour costs.

Replace most of the revenue with a broad-based border-adjusted VAT, calculated by the subtraction method, so that the VAT calculation resembles the old company-tax calculation. The rest of the revenue doesn't need to be replaced, because unemployment and welfare expenditure are reduced.

As the VAT bill will be more than covered by the abolished company tax and superannuation contributions and the retained PAYG income tax, the CPI will fall. (If the retained PAYG income tax were instead paid out in gross wages, some of the VAT remissions would need to be funded by higher prices; but that is not what is proposed here.) Employees won't see any reduction in their take-home pay or any change in after-tax wage relativities. They will see more jobs.

In Australia, where the Federal Parliament can influence State and municipal policies through its conditional-grants power, we can do all this and more in a single Federal Budget.

But none of this holds the attention of our economic experts, who ignore the elephants in the room and argue about the mice.

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