We could start by going to the Tax Act and deleting the phrase "the advancement of religion" and making the Holy Rollers pay their share so then maybe we could all save a bit on tax. All other exemptions, for education, charity, sport and research would remain, and should be in such a scenario policed strictly for abuse by a church seeking to define its operation as something else to avoid tax.

The writer seems determined to repeat some of the worst features of the tax system since WW2, namely the taxation of interest and capital gains.

Both these items are different from wages, as they are denominated in a depreciating currency. The fair taxation of both is to tax on the basis of real gain, not nominal gain. Is it any surprise that because it is impossible for an ordinary taxpayer to find a bank account that gives a real after tax return, that no-one saves, and everyone borrows, with the result that after 60 years we have a gross foreign debt of 1200 billion? If you remove tax deductions for expenses in earning income, people won't participate in those occupations, or even move to some other country where they can keep enough to save for retirement.

The real need is not for a new tax system. It is to find some way of stopping governments spending. One forward step which is followed in a few prudent countries is to make the legislators personally responsible for any deficit they vote for.

So why is it we can't simply have just one tax, that being a transaction tax.

My understanding of this is that each and every electronic transaction made attrats a flat tax of say, 2%.

Just imagine how much tax would be raised if 2% on every cent spent was collected.

What is so wrong with this and why can't it work?

*The fair taxation of both is to tax on the basis of real gain, not nominal gain. Is it any surprise that because it is impossible for an ordinary taxpayer to find a bank account that gives a real after tax return, that no-one saves, and everyone borrows, with the result that after 60 years we have a gross foreign debt of 1200 billion?*

Ah, so very true! At last, somebody who understands our economy
and one of its major problems.

The argument to exempt interest from tax is a tempting one. But the fewer tax shelters there are, the more bizarre the distortions become. We might see a range of new "interest paying" tax shelters which simply convert ordinary income to tax-free interest, any which way they can.

Better just to remove all the distortions and most of the beaurocracy, flatten the rate - and deduct CPI losses on deposits before calculating the taxable interest.

As overall tax collected is lowered (but revenue is the same, because collection cost is much lower), the tax on interest would drop from your marginal rate to the flat rate, discounting inflation.

Suppose we had a flat tax rate, without brackets, and with a negative-income-tax offset. NIT can replace both the tax-free threshold and much of the welfare system. The cost savings would be vast, allowing greatly lower taxes, a more efficient economy, a tighter sharper government, less scope for tax-break lobbying in Canberra, and a wealthier society all round.

A tough sell to legislate, with the whole tax minimisation industry screaming blue murder and special interest groups whipping up scare campaigns. But if the numbers are crunched effectively and voters can see they'll clearly be richer and the state won't be poorer, it might work.

Further information on Negative Income Tax is here: http://www.cis.org.au/Policy/aut2001/polaut01-4.htm

The simplest model is, every taxpayer gets a flat payment (say, $15,000) and then everyone pays a flat percentage of their total income in tax (say, 30 per cent).

A person earning nothing ends up with $10,500 after tax ($0 + $15,000 less $4,500 tax on the $15K), which is close to the current Newstart allowance. A person on $35,000 breaks even ($35K + $15K - $15K tax on the $50K). Anyone above that still gets the $15K payment but pays 30 per cent on everything.

Advantages include closing down much of Centrelink, much of the Tax Office, and much of the lobby group presence in Canberra; everyone has an incentive to work because the reward portion is the same, minimum wages can be relaxed and left to labour market forces, etc, etc.

sceptic.
A system such as yours would be very suitable in a rational society that values efficient process over "industry".
Making tax sensible would destroy the tax "industry", the personal accountant "industry" and the small business lobby "industry".
Most of our economy is not sensible wealth creation but useless middleman "industries" like these.
Alas, the idea of "good profits" and "parasitic profits" therefore "good industry" and "useless parasitic industry" is simply not understood by politicians, who are somewhat parasitic and so probably relate to parasites more than wealth producers.
With the advent of technology we should be working less hours and spreading work around and recognising that we do not need most humans to be "fully employed". Attempting to do so simply clogs work places with unmotivated and talentless people, making the real work harder to do. (Most big companies are full of "make work". Surprisingly, more so in private enterprise than Public. The decade of record profit has resulted in significant big business bloat.)
So long as the wealthy are subsidised by the poor we will continue to slide. Progressive, not regressive taxes are needed.

Indeed the tax system needs great simplification. However I am a sceptic - most attempts in the past have resulted in more complexity. Believe me, most accountants would welcome the removal of their requirement in the taxation system - it would leave them free to engage business clients in improvement and profit-increasing consulting...much more profitable for an accountant than taxation (but with an ongoing labour market shortage, many are stuck with large compliance workloads).

The problem with the NIT suggested, is that I believe that it ignores how to deal with business profits, and ignores how to deal with fringe benefits (non-cash payments to employees). The system has to have some level of complexity to deal with this. Perhaps an extension of the imputation system, with all business profits or income from investments taxed at a set rate (maybe 20%), and then when those profits are taken for personal use they come with a tax credit for what's already been paid, but the individual taking the income as their own then has to pay the difference (if the individual tax rate is 30%). This should encourage savings, and business reinvestment, as the funds used for such would be taxed at a lower rate, yet still hit at the normal rate if they are taken for personal use.

The current effect of the child welfare system would need to be taken into account as well, with some families raking in $20k+ just for having a housefull of kids (yes I know they cost a lot, but main cost is in provision of shelter). How to I dont know, but no doubt could be worked into the above.

Country Gal,

I'm not sure the NIT "ignores" these things. Certainly you can't write the entire Income Tax Act on the back of an envelope. But it can serve as the backbone for a new tax system in which most of the existing pandaemonium is cleaned out.

For example I suggested interest on deposits be adjusted for CPI before assessing it. Other refinements could cover things like non-monetary transactions as you suggest. The principle should be to smooth out distortions rather than to engineer good behaviour.

Company tax would be charged at the same flat percentage rate as personal tax (the above example of 30 per cent personal tax matching the current company rate). But without the negative tax component (-$15,000 in the example above) which would be only for natural-person taxpayers. (With probably an extra few thousand per dependent once it gets through negotiating with welfare lobbies.)

Recall John Hewson's 1992 Fightback campaign to reform tax with a GST. The original concept which generated so much excitement was that most existing taxes would be replaced by the new, simpler tax, eliminating the inequities, rorts, and tax avoidance industry. Enthusiasm cooled once it became clear that only a few existing taxes would be abolished. The final GST we got was more of an overdue necessity than a great reform.

Australians desperately want a simpler, fairer tax system, with minimal but equitable refinements. If done right, we can all become richer from it, including the government coffers, and this offsets most of the claims of rentseeking lobbies. Even the professional tax cheats would soon find themselves richer from living in an economy that no longer stumbles along with the equivalent of one leg shorter than the other one. Any political party that really seriously offers this can probably sail right into office.

The problem with any major change to any tax system is that taxpayers are generally fairly bright and largely averse to paying any more tax than they absolutely have to.
As a result, people have attempted since tax began to arrange their affairs in such a way as to minimise the tax they have to pay. This inevitably creates some distortions in the way tax is collected or not. Many people bash negative gearing, but the removal of it would have a massive effect on the property market as people move into other investment areas to maximise their tax benefits.
Likewise a 'transaction' tax as someone suggested will accomplish exactly the same thing - people will try to avoid electronic transactions.
This is why tax, to be effective, needs to be simply, wide, and hard to avoid.
It is not simply a matter of changing something and assuming all else will remain equal.

Country Gal,

Different investment rates or personal-use rates sound economically responsible, but they all become abused, leading to tax avoidance through tricky ways of converting between investment income and personal income.

Wouldn't it be better if there was simply no tax pressure either way, then people will invest to invest, save to save, and spend to spend. No more long-standing deductions or rebates.

From time to time, special tax incentives are required, like a training deduction or carbon tax. Such incentives should be for a limited term only, with a sunset clause after say five years. That way the tax system would remain lean, not become a shambling behemoth again with hundreds of obsolete provisions welded onto it long past their use-by dates.

J S Mill I would agree wholly with every word of your post.

Tax is not some method of wealth distribution,

Work is

Tax is not a method of supporting people in the manner they would wish to become accustomed to

Work is

As Dearest Margaret wrote

“The muddle arises because once we concede that public spending and taxation are than a necessary evil we have lost sight of the core values of freedom."

Col Rouge,

Well said. I think your statement stands alone in this thread, rather than summarising any earlier statement here, and I strongly agree with you.

The person writing as "J S Mill" is correct to say that using tax laws to engineer useful behaviour, simply leads to clever tax avoiders aping that good behaviour in letter but not in spirit.

Unfortunately, the person writing as "J S Mill" goes on in the next breath to defend his favourite tax incentive, negative gearing, a golden example of an abused tax law.

The virtue of negative gearing is to help start-up businesses get over the initial hill to first profitability, and for existing businesses to overcome temporary adversity, such as a farm in drought. It has become instead an entrenched feature in the business model of housing speculation. This has encouraged parasitic non-productive investment, and massive distortions to the housing market.

Here we see the problem: almost every opponent of tax distortions has one favourite exception, and all sorts of arguments why ending it would be catastrophic. (All tax reforms are disruptive, but disruption is not the same as catastrophe.)

For the necessary evil of welfare to those with little or no work, I refer to the Utilitarian principles of the original John Stuart Mill. There will always be poor people, and if you do not ensure they are fed and housed, they will plague you with crime. Fighting crime is more expensive, and less effective, than simply paying them to leave you alone.

I submit that the Negative Income Tax is the most effective way to do this since, unlike tiered brackets and tax free thresholds, the NIT still gives the poor an incentive to work and earn more money.

For the record Sceptic as a person with no investment property but four children and a stay-at-home wife I would have to say that my favorite tax incentive is not negative gearing but various forms of family tax subsidies (and income splitting would be great).
I have no strong view on the merits of negative gearing and nor did my post support it - it simply pointed out that a change to this (like any other) entrenched tax provision would have flow-on consequences. People wouldn't simply sit still and suck up the additional cost.
I do, however, think that if the tax office wishes to treat non-owner occupied residential dwellings as income producing businesses then they are stuck with allowing these businesses to deduct the value of their costs to produce that income - just like every other class of income producing business.