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Economics, Family, Governance, Investing, Workplace

Why a flat income tax is better

Flat income tax continues to spread across the globe

Why a flat income tax is better than the system we have now

By Shae Smith
30th October 2010 
Melbourne, Australia

Wayne Swan was dodging it and Tony Abbott wouldn’t shut up about it.

Well, it depends on which online news source you read, but last night Mr Abbott brought up the subject of a flat tax rate.

Generally any subject of taxation is bound to create froth at the mouth of your daily editor Kris.

Sadly for now, it’s very much a part of our daily lives. If you’re not paying tax through your income, you’re paying it through pretty much everything else you use and purchase. The socialists will tell you property is theft, whereas Kris Sayce will tell you taxation is theft.

When you lose so much of your hard earned money to the government, it’s no wonder people look for ways to beat the system. Who can blame them? You should do everything you can to reduce the tax you give to the government.

In fact Kris often reminds me to watch Kerry Packer’s appearance in front of the House of Representatives Select Committee in 1991. And especially the quote from Packer at the end of the video:

“Of course I am minimising my tax, and if anybody in this country doesn’t minimise their tax they want their heads read. Because as a government I can tell you you’re not spending it that well that we should be donating extra.”

But seeing as we’re stuck with a tax system, surely we can improve on the one we have.

Firstly, a little bit of tax history for you.

Income tax was introduced in Australia back in 1915, to help fund the First World War. Now, at that time, the taxation to GDP ratio was about 5%. At the time, we had a rather complicated tax system, and aside from workers’ hard earned money going to support the war, this was supposed to be the first step in simplifying the system. Sound familiar?

Hasn’t worked out quite so well has it.

Today the taxation to GDP ratio is more like 31.6%.

But the problem, over time, is that it didn’t get simpler. It got more complicated.

So much so that people look for ‘tax havens’ or tax breaks to offset the amount of tax they pay. Anything to reduce their tax bill.

Now, this isn’t the first time that a flat tax rate idea has been introduced. It was actually one of the idea’s to come out of the Ken Henry review that got pushed aside.

You see, the Labour party didn’t think the middle income voters were smart enough to see the benefits for them. And they didn’t want to lose their seat of power obviously, and just shove this neat little idea to the back of the folder.

The proposal from Abbott, as mentioned in the review, is a flat 35% for anyone earning $25,000 – $180,000.

The suggested rate is an abomination! Especially once you factor in GST and other sneaky little taxes you can guarantee that half your wage is going into government pockets.

But why does the report suggest a substantially higher figure, when the report shows a current average taxation rate for working Australians is about 30%?

Clearly, the government loves nothing better than a cash cow. Almost 60% of taxation generated comes from personal income tax. But don’t let the politicians fool you. Even on the higher ‘flat’ rate they won’t lose any money – sadly.

I mean, let’s be honest, you can hardly expect them to propose a new system where they lose out, can you?

But the idea of a much lower flat income tax rate should be introduced. The tiered income tax system we have now is unfair to pretty much all working Australians.

Why should you pay more tax because you earn more?

The current method of higher taxation discourages harder work.

You might work in one of the few companies that pays overtime, but why bother when you’ll only lose half of it to the tax man?

What if you want to pay off that mortgage quicker and you think second job is the answer? It might be, but won’t you just feel cheated when you see that the ATO wanted half of that wage too?

Or even a family on one single income? The parent who stayed home might want to return to work, but doesn’t see the point when the ‘government money’ is only slightly less to what they’d get working.

Right now, if you work hard and earn your money, you’re punished by the government. Think about the advantages of a simpler system.

Less paperwork. Less time at the accountants. You just look at what you’ve paid. Grumble and move on. Knowing we are all grumbling about it.

Not only is there the incentive to want to work harder to earn more money, but there’s less incentive to dodge the system.

Ever been told by your accountant that the only way to reduce your tax bill was to get an investment property?

And let’s not forget the rort that is salary sacrificing. Many people in the public sector have the opportunity to reduce the amount of tax they pay – thanks to the tax you’ve already paid. Car loans, mortgages, gym memberships, permanent parking spots in fancy eight story car parks, mortgages and even meals/entertainment packages can all be arranged to reduce their tax bill. Not yours though.

Of course one of the upsides of a less complicated tax system would mean a much smaller number of workers required at the ATO!

Finally, imagine you did free up some of your money. All that extra money not going to Canberra would mean you have more to spend. That’s more money going into the economy. Leading to a ot more jobs being created along the way…

If we are going to live in a country where tax is a must, then we need to address our very unfair and inadequate tax system.

A flat tax rate for all working Australian’s is exactly what we need. But not at 35%.

Shae Smith
Assistant Editor
Money Morning

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About steveblizard

Steve Blizard commenced his financial planning career in 1988 from a background of life insurance broking, a field in which he still works. He is a member of the Financial Planning Association and the Responsible Investment Association. His experience ranges from administration of Superannuation to advice regarding insurance, retirement, remuneration and investment planning. Steve is an accredited Remuneration Consultant, specialising in salary packaging. He is a columnist for the Swan Magazine and the WA Business News

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