Treasurer flirted with flat tax
October 14, 2005
WHEN Treasurer Peter Costello left Canberra for his Christmas break last year, he had before him modelling for the most radical reform to income tax in 60 years.
The ambitious plan, prepared for the 2005 budget, would have replaced all the existing tax scales with a single flat rate of tax of 30 per cent.The current tax-free threshold of $6000 would have been abolished and replaced with a rebate to ensure low-income earners were no worse off.
Treasury modelled a number of tax plans, including proposals from the Australian Chamber of Commerce and Industry, accounting body CPA Australia and the Government's backbench tax ginger group.
The most detailed work, however, was completed on the proposal for a flat tax. It included an analysis of winners and losers and an outline of legislation, covering other tax rebates and pensions, that would need to be amended.
The plan was clearly affordable without pushing the budget into deficit, with the cost rising from $7.7 billion in 2005-06 to $10.1 billion in 2008-09.
By contrast, the tax plan Mr Costello eventually announced on budget day in May - including a $6-a-week tax cut for low-income earners and the increases in the thresholds for the top two tax rates - was phased in, with the annual cost rising increasing from an initial $3.1 billion to $6.7billion by 2008-09.
Treasury projects that the budget will be in surplus by $8.5 billion in that year, so the pot from which tax cuts could be drawn totalled $15.2 billion.
The proposal was still live after the Christmas break. In January, Treasury considered an option for eliminating workplace deductions for high-income earners. That would reduce the cost by the fourth year to $9.6 billion.
People earning more than $101,280 a year would be denied tax deductions for expenses such as motor vehicles, study and home offices. The plan was tailored so there would be no losers.
The key to this was the rebate for low-income earners that would replace the current tax-free threshold. The idea was that the rebate would be phased in for low-income earners up to incomes of $21,600, where it would be worth $3828 a year.
People on incomes up to $63,000 would get the full rebate, which would be gradually phased out for people earning between $63,000 and $101,280.
The proposal would have made people earning between $63,000 and $80,000 better off by 2c in the dollar.
The gain would then be 7c in the dollar up to $101,280 and 17c in the dollar for incomes higher than that.
Only those privy to the Treasurer's thinking know why the plan was dropped, but it may have been because of an analysis Treasury prepared on who would be the winners. Although nobody would be worse off as a result of the changes, only 20 per cent of taxpayers would be better off. The gains were biggest for high-income earners.
