Monday, August 09, 2010

Who would have thought? Abbott looks to Henry

Me actually. I thought he would go even further.

The Coalition is is considering taxing all but a fraction of Australians at at one simple flat rate, exempting from tax the first $25,000 each Australian earns.

The proposal for a flat 35 per cent rate for earnings from $25,000 up to $180,000 is one of around one hundred put forward by the Henry Tax Review that is yet to receive a government response.

In announcing yesterday that within 12 months of taking office the Coalition would outline plans for tax reform Tony Abbott commended the Review's plan "for lower, simpler, fairer personal income taxes and an end to the money-go-round that traps people in poverty".

The Henry Review found that by exempting all Australians from tax on the first $25,000 earned there would be no need for the present complex system of tax offsets that eases the transtion to work as incomes climb above the present tax-free threshold of $6000.

The withdrawal of the offsets at higher wages has the effect of increasing the effective marginal tax rate charged over a broad range of incomes, decreasing the incentive to work...

The review also found that by taking more welfare recipients out of the tax system altogether a $25,000 tax-free threshold "could also reduce the number of people who have to deal with both systems at the same time".

Incomes above $180,000 would be taxed at 35 per cent rate for earnings up to $180,000 and at 45 per cent for earnings on top of that. Only around 3 per cent of Australians would be touched by the higher rate.

The Henry Review said the 35 per cent rate and the $25,000 threshold were "indicative" to illustrate the way in which a simple scale with a high tax-free threshold could keep the tax system progressive while largely eliminating entanglement with the welfare system.

In order to make the system simple special provisions including the Medicare levy would be removed meaning that for most Australians the headline rate of tax would be the rate they were actually charged.

Tony Abbott has twice before indicated he was attracted to the idea during the campaign including on the day the election was called.

But ironically as as part of his savings measures Mr Abbott has ruled out two of the Review's associated recommendations that were adopted by the Treasurer Wayne Swan.

One is to tax only 6 out of every 10 dollars of interest income, which the Labor has adopted in an amended form so that from mid next year only 5 of each 10 dollars of interest income will be taxed up to a maximum of $1000. Tony Abbott has pledged to abolish the concession because it is funded by the proposed mining tax.

The other associated Henry Review recommendation adopted by Mr Swan and rejected by Mr Abbott would give each Australian worker a standard deduction of $500 in lieu of work-related expenses from 2012, climbing to $1000 in 2013.

In announcing a timetable for responding to the Henry Review recommendation Mr Abbott opened up the possibility of extending the contract of its lead author Ken Henry whose second term as Treasury Secretary expires in April.

Published in today's SMH and Age

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