But why have taxes at all, dear Henry?

The first question for Ken Henry's tax review is whether we need taxes at all. If retirees can live on income from assets instead of burdening the taxpayer, why can't governments do the same?

An asset portfolio yielding just enough income to replace Federal taxes will have the same market value that the power to impose or avoid those taxes would have, if that power were a tradeable asset. Therefore the Commonwealth should be able to acquire the necessary assets (or shares thereof) in return for tax exemptions.

Indeed, because the asset sellers would avoid not only the actual Federal taxes but also the associated compliance costs and deadweight costs (lost opportunities because of otherwise viable activities rendered unviable by taxation), tax exemptions would exchange for more than enough assets to replace the lost revenue. The saving in deadweight costs would be a net benefit that could be shared between the Commonwealth and each taxpayer, making the exchange mutually beneficial.

Therefore such exchanges will be voluntarily entered into if the law merely permits them. The enabling legislation would not involve any political risk, because it would not impose any change on anyone. And because the tax-equity exchanges would be based on contracts, there would be no need for elaborate legislative protections against rorts: if the Tax Office smells a rat, it simply won't close the deal.

Taxpayers who don't own assets will at least hold tenancies, of which they could surrender negotiated shares to the government in return for tax exemptions. Together, shared equity and shared tenancy would enable all taxpayers to opt out of the Federal tax system.

Of course, similar arguments apply to State and Municipal taxes.

[Letter by Gavin R. Putland, rejected by the Australian, May 19, 2008. Posted here Apr.5, 2012.]