tax and welfare are begging for reforms

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    Tax and welfare are begging for reforms


    The tantalising prospect of a vigorous economic reform agenda has been raised by the coalition's possible control of the Senate after its sweeping election victory.

    But I reckon anybody expecting another round of dramatic economic reforms, particularly on income tax and welfare, is likely to be disappointed.

    If anything, 8½ years of John Howard's stewardship has shown him to be a cautious, pragmatic politician, not above shameless displays of pork-barrelling to gain electoral advantage.

    This means he's unlikely to use any majority in the Senate, or the presence of what is expected to be a coalition-friendly Family First senator, to embark on a bold vision of a future Australia.

    However, it also doesn't mean that Mr Howard won't use his power to pursue some of his cherished reforms and programs.

    It's clear that selling the rest of Telstra is back on the agenda, although convincing the Nationals to join in may be more of a challenge than many commentators assume.

    As a bit of an aside, I can never understand why people think government ownership of Telstra is going to improve services in the bush.

    Telstra has been government owned since its inception and if that isn't long enough to fix up services in the bush, then no amount of time would suffice.

    I think it's just another mantra that has gained widespread acceptance without any basis in logic or fact.

    Another area likely to see some reform is workplace relations, where the coalition will make moves to exempt small businesses from unfair dismissal law and encourage more workers to move to individual contracts.

    Both these measures should be supportive of increasing productivity and are positive reforms that deserve support, despite the howls that will emanate from the unions, who are understandably reluctant to see their waning power erode any more.

    There is also likely to be some moves on the international taxation front, namely to give Australian companies relief from the tax already paid by their overseas subsidiaries.

    This is another good reform that will help Australian companies compete globally and encourage them to keep their headquarters here.

    These reforms have been on Mr Howard's agenda for some time, but now he could have the means to implement them.

    But what of new reforms? The area that virtually every commentator says is ripe for reform is income tax and welfare.

    It goes without saying that Australia's income tax system is unnecessarily complex and suffers tremendously from what economists call "churn" - the process by which the government takes lots of tax in order to redistribute it by means of welfare.

    This means Australia has some of the highest tax rates in the developed world that kick in at relatively low income levels.

    The welfare system is also shot full of contradictions and disincentives, often meaning it isn't worth the effort of moving from welfare to work, even should a person want to.

    Cutting tax rates, raising the tax-free threshold from its current $6000 would deliver meaningful tax reform, but unfortunately Mr Howard has spent much of the forecast Budget surpluses on election promises, most of which amount to more welfare.

    Middle class welfare is also becoming a huge problem, and runs the risk of becoming an increasing generational conflict area.

    More and more of the goodies are being targeted at the elderly or those nearing retirement, but the burden of paying for these is falling on the young, already struggling with record house prices and debts incurred from expensive educations.

    The family tax benefits are also a nightmare of complexity and nobody seems to want to fix this.

    Family payments will amount to something over $25 billion in 2004-05, or about $6250 per child under 16.

    Of course, not everybody gets this amount for each child, as high-income earners are means-tested out and a lot of the money is eaten up in administration costs.

    A simple way to end this is to lift the tax-free threshold for each child, say by $6000 for the first, $4000 for the second, up to say a maximum of $20,000 per family.

    This would provide a real benefit to parents in every pay packet, as employers could easily calculate the amount of tax to deduct given the number of children.

    It also eliminates the need for Centrelink to be involved and government transfer payments.

    Many countries overseas have this model and it seems to work very well. You have to make some adjustments for the unemployed with children, but the vast majority of people would benefit from such a simple system.

    But this is difficult reform, requiring hard work and effort to sell it to a sceptical public, which is now basically addicted to welfare.

    It is also here that Mark Latham has his best chance. If his heavy defeat teaches him anything, it should be that you can't simply be a poor imitation of the coalition.

    If Labor comes up with a genuine vision of a productive Australia where effort is genuinely rewarded and people take responsibility for themselves, this would provide a positive contrast to the coalition.



    Fig Jam

    One can only hope that at last the Liberals will tackle the pox of a taxation system with which we are now burdened.

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