February 11, 2009 6:33am by David Farrar

Sir Roger’s prescription

Sir Roger Douglas gave the now famous Orewa Rotary Club speech last night. His full speech is here.

Act MP Sir Roger Douglas is proposing a new low-tax option for taxpayers in which the first $30,000 of income would be tax-free – but only if they pay for their own retirement, health care and welfare insurance or costs.

Income over the $30,000 tax-free threshold would be at a flat tax rate – 15 per cent – to be phased in over 15 years.

The Douglas plan would cut corporate tax rates to the same 15 per cent.

Sounds a good idea to me. Encourage people to look after themselves.

There are fish hooks though. The Centre for Independent Studies had a seminar on this a couple of years ago, and the challenge is how do you cope with people wanting to move from one option to another. Should the decision you make at 18 be unchangeable throughout your life? But if you let people change, they might take the low tax option when healthy, and then when older the high tax option.

The other challenge is what if someone has gone for the low tax option and pledged to look after their only health and retirement costs – yet they lose their savings. As a society do you let them die because they can’t pay for their health care?

As I said, I am very supportive of the principle, and like the notion of people choosing. It would be good to have some further research done on how one might practically have such a system work.

Sir Roger outlined his opt-in proposal to the Orewa Rotary Club.

He would inflation-proof the tax-free income so the $30,000 threshold would rise at the rate of inflation.

But rates would vary for income-earners with dependent children: the threshold for a couple with one child would be set at $50,000.

Families would have a guaranteed minimum income, so that if they earned less than the tax-free threshold they would receive a tax credit up to the threshold.

The concept of people paying no tax until they are earning the minimum income they need is very sound. It avoids the deadweight costs of churn where you pay taxes to then get soem of it back in welfare.