Key Points:

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.

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 Government would create superannuation savings accounts for individuals under Sir Roger's parallel tax plan, and those in the low-tax option would be guaranteed not to receive less than under the old system.

Sir Roger said the system would help the poor more than the wealthy.

"The poor are forced to queue for health care, while the wealthy get it when they need it through private provision," he said. "Only by restoring responsibility to individuals will we be able to tame the increasing cost of Government services."

Provision of services would be controlled by the individuals rather than bureaucrats and there would be an incentive to keep costs down.

Service providers would have an incentive to serve customers and be innovative, "not capture politicians and bureaucrats through lobbying".

Sir Roger, a reforming finance minister in the fourth Labour Government, criticised the last Labour-led Government's policies as well as the claims by the present National-led Government that it represents limited government.

He said last year's election was a choice between more spending by Labour or more spending and lower taxes from National.

"We offer a third option: less spending and lower taxes."

Sir Roger criticised what he called the "lack of vision" in the Government's response to the financial crisis.

It had resigned itself to increases in unemployment, but he said the Government should respond to fears of unemployment by reducing the compliance costs associated with hiring and employing.

"That fourth week of holiday may have seemed like a nice benefit at the time, but taking those decisions out of employers' and employees' hands will worsen and deepen the recession."

The Government's tax cuts were being financed by higher borrowing that would have to be paid back by future generations.

"We mortgaged our houses to buy consumer goods. The Government is now mortgaging our children for the next round of spending increases."

His reforms in the 1980s had set the stage for strong economic growth but the opportunities had been "squandered by nine years of an interventionist Government" on a "spending binge".

Sir Roger said the only way to increase wages was to increase productivity, and that had to be understood before policies were devised to boost incomes.

Any increase workers received beyond productivity increases would merely exacerbate unemployment.

"Elections have become an opportunity for politicians to promise they will take more money off you, only to give it back to you in another way - a gold card for superannuitants, a tax credit for working families, or an interest write-off for students.

"If we each pretend we can be made wealthy through taxing others, then we are destined for poverty."

Sir Roger said that New Zealand had become small-minded in not accepting the advice of talented people such as Business Roundtable head Roger Kerr, former Treasury Secretary and Act candidate Graham Scott, and businessman Roderick Deane.

* Individual's first $30,000 would be tax-free. Above that they would be taxed at a flat rate.
* Families with children would receive their first $50,000 tax-free.
* Individuals would have to pay for their own retirement, healthcare and insurance.