Thursday, December 22, 2005

$30,000 is far too rich for Labour's standards

Paying over 100% tax is just fine

This really should be given far more attention. This is what the Opposition needs to dig into, not petty "media sensation" style politics. It is far more important to the country than something Benson Pope did 20+ years ago.

It's the whole problem with any sort of "means-test" to save costs. It creates massive effective marginal tax rates. Be very careful of any pension reform that suggests means testing, then. Whenever you phase out benefits, you're creating disincentives. Look at Working for Families: at a certain point, you lose 20c for every additional dollar you earn. That's 59cents in the dollar as you earn over $60,000. Good thing you don't qualify for many of those other benefits and supplements then: you'd have to shell out over a dollar for every additional dollar you earn.

So how do we reform the system?

We need to remove as many perverse incentives as possible, while still retaining some element of a welfare state (to keep us electable).


1) Negative Income Tax. It has a number of flaws, but I vastly prefer it to the current benefit/taxation system. Say, 25cents in the dollar flat tax, every adult gets paid $5000 a year (increasing with inflation). There could perhaps be an additional payment made for children, say $3000. The amount must be kept low enough to avoid even more perverse incentives arising - e.g. having children is profitable, no need to work. Tax free threshold is $20,000. There's no unnecessary charges on people living thrifty, ie paying people less for living together. With average income of around $25,000 a year, income tax probably would generate very little surplus revenue, once all the transfer payments have been sorted out. But that will be collected in other ways.
2) Tax Parity. Trusts at 25c. Corporate tax rate at 25c. This minimizes all sorts of tax sheltering devices.
3) Increase GST. A consumption fuelled boom is not a good boom. Lowering income tax and increasing GST will encourage savings and investment, which are true backbones of economic growth (well, more the investment side of it). Consumption adds to GDP but don't be fooled: GDP is flawed. Technically if I go and buy a Plasma TV and chuck it into a landfill I've added to GDP. Which is why Christmas is so nutty.


Problems:

1) Youth workers. What about minors, earning a few thousand a year? In order to keep parity to avoid tax avoidance schemes, they should be taxed at 25c too. However, this will make youth workers pay the highest net tax rates of anyone. Perhaps this could be a good thing - disincentivize work to incentivize schoolwork.
2) Capital Gains Tax. Ideally, there should be one to ensure parity. However, they can cause even bigger distortions themselves. They encourage hording of items to avoid paying the tax on it. If your house goes up from $200,000 to $300,000, you'd pay $25,000 in Capital Gains Tax. However, you may simply go on to purchase another house than has also increased in value from $200,000 - $300,000. You pay $25,000 just for moving house. Even traders face this: despite it being their source of income, they can still be encouraged to needlessly hoard. And if you have some system to avoid this - you create even more loopholes. This shows flaws in income tax more than anything else. Ideally simply scrapping it and having other forms, such as higher GST, perhaps an "Asset Tax", could help minimize disincentives. But for now, in this system, there's a conundrum.

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