By Gavin Putland

It is argued that the replacement of pay-as-you-go personal income tax ("PAYG tax") by something more efficient (e.g. a land tax or consumption tax) would offend intergenerational equity because retirees no longer pay PAYG tax, and would offend vertical equity because higher-income earners would get proportionally larger cuts in PAYG tax.

These objections can be avoided by abolishing PAYG tax in such a way that the benefit, as far as possible, is received as lower prices rather than higher after-tax income.

One method is to let employers retain withheld PAYG tax or claim it as a credit against other taxes. Another is to reinterpret existing employment contracts by legislation, so that net wages (not gross wages) are held constant through the transition, pending new contracts under new employment laws for the new tax system. Either method would reduce employers' costs, hence prices, without reducing workers' net wages.

The latter method is harder to legislate if more than one legislature is responsible for employment (as is likely in a federal system). But it is preferable in that employers would no longer incur PAYG compliance costs while workers would no longer face the disincentive of marginal tax rates on their wages.


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Gavin Putland



Published: 8 Aug, 2015

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