I just did my quarterly taxes and once again it was a frustrating exercise in complexity and confusion. To add to the concern my tax software has not been correctly working out my income tax. I did it manually and found I had a significant liability. So now I am going to have to go begging to the state tax office to try and avoid penalty fees. I am not amused.

The tax system needs to be simplified. Progressive income tax scales are a good idea but they are complex especially when done at several levels. Property taxes are actually easier for me to pay and work out than income taxes. Because I am consulting I do not have to deal with service/consumption taxes directly so I do not have an informed opinion on that.

What would premier cam do [WWPCD] if given the keys to the NSW Cabinet?

Assume the parochial worst, I win a competition off the back of a Cherry Ripe wrapper to be Premier of NSW for a day. The competition is intended to be ceremonial where the winner gets to cut a ribbon on the Harbour Bridge and then open the ride at the new Luna Park where you have to duck the sword of a De Groot mannequin.

However I point out that turnips are used in Cherry Ripes instead of cherries as they are cheaper by the kilogram and taste the same if dunked in artificial flavouring. Rowntree and the NSW Government determine Australia cannot handle this secret escaping into the wild and consequently give me twenty-four hours to introduce a legislative agenda.

So, WWPCD?

I have had a go at trying to work out a simplified yet egalitarian system of taxation before. That didn't take into account the policies of Superannuation and 401Ks which have become popular since. Especially as the labor market is no longer biased toward youth and the boomers are getting older. This is forcing retirement savings into private accounts with government encouragement and tax breaks.

The simplest thing to do with income is to make it flat. This makes working out tax liabilities for businesses and individuals much easier and simpler. But how do you do that without losing the fair manner in which progressive taxes weight toward those that have a greater share of the economy's income. If you mix policies of flat tax and superannuation I think that issue can be solved.

1. The federal government has its income tax capability removed and NSW becomes the sole arbiter of income taxes in the state (this is constitutional, the feds tax by state agreement, not by legislative right).

2. There is a flat tax of 25% on individual's income. No exceptions.

3. Those that earn under half of all state income (which is approximate 65,000 IIRC) have any tax collected go directly into tax-free superannuation accounts (private/public/choice/whatever).

4. Those that earn over half of all state income have their tax collected under that halfway point go into superannuation as per point 3, but the tax collected above that goes to government revenues for operating expenses etc.

5. Individuals can withdraw money from their superannuation prior to age sixty, however a 25% tax is leveraged against that withdrawal and the tax moneys go to government operating revenues.

This policy should satisfy economic liberals (flat tax and private responsibility for retirement), social liberals (progressive taxation through superannuation policy and default savings), as well as republicans (decentralisation and limited government overhead).

Sacha Blumen has proposed using superannuation for home deposits and was interested in how the US handles withdrawing money from the 401K which is the American equivalent of Superannuation. Tim Dunlop posted an entry on Blogocracy discussing Labor's policy for a first home buyer saving scheme. I do not like the first home grant at all and a separate saving scheme seems complex when most people already have a mandated default saving scheme in Superannuation. In the United States you can withdraw or borrow money from your 401k.

The 401K is named after the relevant section of the tax code and is one of several different tax advantageous ways to save. Others being the IRA and Roth IRA which either defer tax upfront or tax on removal/recovery. These make the process unnecessarily complex unfortunately. When I moved from being an employee to a consultant I had to roll over my 401K into a traditional IRA.

The 401K is done through their employer with a set percentage being taken out of an individuals paycheck and added to the 401K. Tax is deferred until the money is withdrawn from the 401k. Often, but not always, employers do matching contributions. 401K's are not compulsory either, they are optional, as is the level of contribution an employee and employer can make.

The penalties against withdrawing from the 401k are high to discourage people withdrawing money from the fund constantly. However the tax code defines hardship where penalties are waived or reduced. Hardships can include; buying a primary residence, avoiding foreclosure, tertiary education, medical expenses and a couple of others.

Since the 401k is employer guided, not all employers support those hardship clauses, though nearly all do. The amount withdrawn for hardship still comes under income tax for the individuals year of earning but there is no additional penalties such as the extra 10% tax for withdrawing prior to age 60.

Depending on the employer's plan the 401k can usually be borrowed against. There are limitations on the loan, such as it being a maximum of five years in length, but taking a loan against the 401k avoids the extra 10% tax penalty. It is intended to give short term access to the 401k money for emergencies. There are also tax penalties for not repaying the loan.

Prior to all the cheap credit of the last five years or so it was standard practice in the US to save up a down payment of 20% on a property as proof you could afford the loan as well as get better interest rates. My wife and I withdrew money from our 401k to buy our first place.

Superannuation should adopt the withdraw and borrowing aspects of the American 401k. It would be simpler than establishing new default savings accounts each time a party has a new policy.