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Taxation Reform in Australia

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Introduction

Taxation is the Australian Government's main source of revenue as well as a method to intervene in the economy. The Government uses taxation for social, political and economical reasons; in the reallocation of resources, redistribution of income and stabilisation of economic activity. However, to maximise revenue, taxes must maintain equity, simplicity, and promote economic efficiency. Although achieving all of the above criteria would be ideal, in the words of Graham Hill, "these criteria are often, and probably almost always, incompatible with each other." As result taxation reforms occur to maintain a balance between the three criteria. Taxation reforms may aim to attain equity in the economy, which refers to the distribution of the tax burden on taxpayers and their economic circumstances. Vertical equity refers to the idea that the higher income earners should suffer a higher tax burden than the lower income earners. Tax rates 2007-08 Taxable income Tax on this income $1 - $6,000 Nil $6,001 - $30,000 15c for each $1 over $6,000 $30,001 - $75,000 $3,600 plus 30c for each $1 over $30,000 $75,001 - $150,000 $17,100 plus 40c for each $1 over $75,000 $150,001 and over $47,100 plus 45c for each $1 over $150,000 Tax rates 2008-09 Taxable income Tax on this income $0 - $6,000 Nil $6,001 - $34,000 15c for each $1 over $6,000 $34,001 - $80,000 $4,200 plus 30c for each $1 over $34,000 ...read more.

Middle

In Australia, income is accepted as the measure of tax liability however income is not the only factor which determines wealth. Wealth includes income as well as all liquid assets. For example, although two taxpayers earn the same income, one might be struggling to pay off his rent while the other may have inherited three or four properties. In this example the one with several properties is wealthier, but is in the same tax bracket as the other taxpayer. As a result horizontal equity is not achieved. But it can be achieved through other taxes or fees, such as capital gains and stamp duty, where if the properties are sold or leased out, tax must be paid on the profit. Although this would attain horizontal equity, it would complicate the taxation system as well as reduce its efficiency. Economic efficiency involves the efficient allocation of resources, where the tax system encourages resources to move from fields where individuals have a low tax burden to those fields which help the economy the most. The production possibility frontier above provides an example of possible allocation of resources. Assuming the Australian economy was producing at point A, it would be producing 50 units of both weapons and food. However, if 60 units of food were required, it would be the Government's role to move production to point B, a position which is more beneficial to the economy. ...read more.

Conclusion

The simplest tax would be a flat rate tax on total income generated from wages, shares, investment properties, etc. However, despite its simplicity, equity would be completely ignored as well as economic efficiency. In Australia's taxation system, a lot of time is consumed by individuals in filing their tax returns. The diagram above depicts how many Australians are required to file a tax return. This time is uses resources as individuals could provide their labour instead of filing tax returns. An advantage of having to file tax returns is the increased jobs for accountants however it is balanced out with the disadvantage inefficient resource allocation. When compared to New Zealand's tax system, it is clear that Australia's system is more complex. This is mainly due to the absence of the many tax deductions available to Australians. Now the advantage of Australia's tax system is the many deductions and tax benefits available but at the cost of complexity. In conclusion, there are three criteria to a 'good' tax system; equity, simplicity and economic efficiency. Although an ideal tax system would incorporate all three criteria, unfortunately these criteria are often incompatible with each other. This can be seen through income tax, where in achieving economic efficiency, equity and simplicity are forgone or to achieve simplicity, equity and economic efficiency are forgone. Whilst tax systems aim to achieve a balance between the three criteria, economic circumstances call for reforms to update the tax system to fulfil its purpose. ...read more.

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