Mr Howard's deserves an 8 out of 10 for his tax package.
The package does what Mr Howard promised last May when he set-off along the path of tax reform and it does so in a fair, well targeted and suitably comprehensive manner.
The centre piece of the package is reform of the indirect tax system. It will replace a large number of thoroughly dumb and destructive indirect taxes -- including the wholesales tax, financial transaction taxes, stamp duties on business transactions, and diesel fuel excise -- with a broad-based GST with a single rate of 10%.
This is a reform which is long overdue. It will provide a real boost to exports -- around $20 billion per year -- and jobs. It will also produce a fairer and more honest tax system. Under a GST everyone pays a bit and knows how much they have paid. While under the existing system tax rates vary from good to good and person to person without any rhyme or reason.
The package proposes the most radical overhaul of state-federal relations since World War II. In exchange for the loss of some indirect taxes and untied grants, the states will get access to all the revenue from the GST. This will provide the states two things for which they have long hoped -- access to a growth tax and greater revenue certainty.
The package also addresses the main concern of taxpayers and Premiers -- which is what will stop the Government from unilaterally changing the tax rate? The package plans to entrench GST rate but requiring the unanimous approval of all governments -- state and Commonwealth -- for any rate change. Although this is this no iron clad guarantee -- future Commonwealth Parliament will still be able to rewrite the legislation -- it come pretty close.
The weakness of this approaches is that it eliminates one of the only means of truly limiting the growth taxes -- inter-state competition. Under the proposed system the Commonwealth will level the GST at a common rate across all state. The states will not have the ability altered the rate or base.
The package provides for generous compensation -- totalling over $6 billions -- for pensioners, the unemployed and self-funded retirees who many be adversely hit by the GST. Education, health, child care and nursing homes services will be zero rated, which means the tax burden of these industries fall by over $600 million per year.
Food will be taxed by the proposed GST, but so it should. Exempting food would force the rate on other goods and services up by nearly 5 percentage points or 50% -- and the poor do not live by food alone.
Compliance cost is a major issue with the GST. The package will, however, more than compensate for additional red-tape, by scrapping provisional tax and moving to a quarterly payment system. Small business really could not ask for a better trade-off.
The package includes large income tax cuts -- $14 billions per year. Although the tax cuts are spread across all income levels, they are concentrated on the middle income groups.
The package plans to simplify the social security and family payments system. These changes in combination with income tax cuts, will give low to medium income a greater incentive to work and save and have a future.
The income tax cuts will really be little more than giving with one hand while taking with another. They will be funded by about $5 billion in higher indirect taxes on tobacco, wine, diesel and luxury cars and the drawing down of the budget surplus.
Overall, however, the package is impressive and on hits the mark.
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