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The Flat Tax Costello Rejects

The 30% flat tax plan Treasurer Peter Costello rejected:

WHEN Treasurer Peter Costello left Canberra for his Christmas break last year, he had before him modelling for the most radical reform to income tax in 60 years.

The ambitious plan, prepared for the 2005 budget, would have replaced all the existing tax scales with a single flat rate of tax of 30 per cent…

The plan was clearly affordable without pushing the budget into deficit, with the cost rising from $7.7 billion in 2005-06 to $10.1 billion in 2008-09…

Only those privy to the Treasurer’s thinking know why the plan was dropped, but it may have been because of an analysis Treasury prepared on who would be the winners. Although nobody would be worse off as a result of the changes, only 20 per cent of taxpayers would be better off.

A more plausible explanation is that Costello is rationing tax cuts to fit with his leadership timetable.

posted on 14 October 2005 by skirchner in Economics

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“A more plausible explanation is that Costello is rationing tax cuts to fit with his leadership timetable”

I have had similar thoughts in the past, but I reckon Costello has lost all interest in real tax reform.  Why would he go to such lengths to discredit Turnbull’s ideas and then introduce (presumably) similar reforms when he becomes PM?

Its all academic anyway.  Howard looks unbeatable for the forseeable future.

Posted by .(JavaScript must be enabled to view this email address)  on  10/14  at  01:56 PM

Did you see Costello on the Insiders on Sunday?  This is not a man who has any interest in tax reform….


BARRIE CASSIDY: OK. On taxation, what is the status of the Treasury costings into a 30 per cent top marginal rate? You wouldn’t ask for this work to be done if you didn’t at least give this option some consideration.

PETER COSTELLO: Oh, Barrie, we probably modelled 10s, 20s, you know, probably more options since 2000. We modelled a lot of them before 2000 because we were changing the whole tax system, with the new tax system. We always keep them under review. You always make sure that in the circumstances, you’re on full top of the options. When we looked at that particular option, from memory, it cost $12 billion and 80 per cent of Australians didn’t get a benefit, so you can imagine why that never went anywhere.

BARRIE CASSIDY: But what Treasury did say about the 20 per cent rate, the flat tax: it would be fairer, simpler, more transparent and a stronger reward for effort. What’s holding you back?

PETER COSTELLO: Only one problem. It costs $12 billion a year, would drive the budget into deficit, put pressure on interest rates and wouldn’t benefit 80 per cent of Australians. How do you think that would go?

BARRIE CASSIDY: But it just seems, as it stands, and put aside the 30 per cent rate - but you are the one person resisting a reduction to the top 47 per cent rate, while all those around you are clamouring for it.

PETER COSTELLO: Oh, common on, Barrie. We cut income tax by $22 billion in May of this year. What’s that? Five or six months ago? $22 billion. We cut tax the year before, and we cut tax the year before. And as I’ve said, if you can balance your budget, if you can pay for health and security, if you can keep pressure off interest rates, of course you want to keep taxes as low as possible. I’ve always said that. Here’s the proof: When we started reforming the taxation system in 2000, people on average wages used to face a 34 per cent rate, a 43 per cent rate. These rates don’t even exist anymore. The average Australian - in fact, 80 per cent of Australians don’t pay more than 30 per cent, and you don’t pay top rates, or you’re not going to pay top rates, until you go one dollar above $125,000. An enormous amount of work has been done. Is there one fix once and for all for the tax system? No, there isn’t.

BARRIE CASSIDY: But you don’t accept that there are a lot of people on your side of politics wanting a reduction from the 47 per cent?

PETER COSTELLO: Well, you pay 47 per cent on your first dollar over $125,000, OK, which affects 3 per cent of Australians. Now, am I against cutting taxes for 3 per cent of Australians? No, of course not. I would love to cut taxes for 3 per cent of Australians, but I’m just as interested in the 97 per cent who don’t pay top rates. If all you did was have a cut for the top rate for each dollar over $125,000, you would improve things, but 97 per cent of Australians would say to you, “Well, what about me? I don’t get anywhere near $125,000. What about me?” And the art of taxation is to keep the burden as low as possible and when you’re cutting taxes, to bear in mind the whole of the public, not just a proportion of it.

BARRIE CASSIDY: Well, Malcolm Turnbull says that the costings prove that the kind of tax relief that he has been talking about is affordable in the Budget context. Is he wrong about that?

PETER COSTELLO: Well, the document is released under freedom of information, I think, from memory, had a one-year cost of $12 billion, enough to drive the budget into deficit, but 80 per cent of Australians wouldn’t get a benefit.

BARRIE CASSIDY: So he is wrong, they’re not affordable?

PETER COSTELLO: Well, I’m not commenting on anything other than that option, which is why that option wasn’t attractive. And let me make this point: what the Government did in the budget, was it cut tax, kept the budget in surplus for this year and next year - and that’s what we’re talking about, not the year gone by - this year and next year - and every Australian got a tax cut. 100 per cent. Not 20 per cent, 100 per cent.

Posted by .(JavaScript must be enabled to view this email address)  on  10/17  at  09:32 AM

Everyone would benefit from lowering the welfare/opportunity costs associated with high marginal rates.  To focus only on the extra cash in hand from tax cuts misses the point about tax reform.  Since many of the advocates of reform want to fund tax cuts by abolishing concessions, many of the proposals put forward are more of a tax mix switch than a reduction in the tax burden for high income earners. Costello knows all this, but chooses to hide behind populist rhetoric.

Posted by skirchner  on  10/17  at  12:59 PM

“Costello knows all this, but chooses to hide behind populist rhetoric”

He is a politician after all :)

My ideal tax system is one where the marginal tax rate is always the same, but low income earners are taxed at a lower overall rate than high income earners.  Additionally, it would tax capital gains, companies and individuals at the same rate.

Is it possible?  Sounds a little like this:

Posted by .(JavaScript must be enabled to view this email address)  on  10/17  at  01:15 PM

heh two davidms on the side of the ldp.

Posted by .(JavaScript must be enabled to view this email address)  on  10/20  at  02:18 PM

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