Taxation Reform in Australia

Authors Avatar

    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

Tax rates 2008-09

    From the tables above, a progressive tax system is evident, whereby the higher income earners pay a higher proportionate tax than lower income earners thus achieving vertical equity. An advantage of this is the achievement of a fair system with progressive taxes. This is to allow lower income earners with enough income to purchase necessities such as food and clothing. However, a disadvantage is the incentives higher income earners, especially those in the top marginal tax rate, may have for tax avoidance and possibly even tax evasion. As they may be earning millions of Australian dollars and their marginal tax rate is 45%, it would be appealing for them to hire lawyers who will find loopholes to reduce their tax liability. Although tax evasion is illegal, tax avoidance is not and prior to the 1985 tax reform, taxpayers were able to convert their taxable income into non-taxable fringe benefits or capital gains. This reform reduced tax avoidance and acquired a more equitable distribution of income. In addition, the reform was advantageous to the government as it provided more revenue. Nevertheless, another disadvantage is the complexity of the taxation system in Australia. Although the reform discouraged tax avoidance, it generated more legislation thus complicating the tax system. The reform was only successful to an extent as taxpayers were able to go overseas to earn their money, for example to Singapore where their tax liability is much smaller.

Join now!

    Tax reforms reducing the marginal tax rates such as Kevin Rudd’s recent tax-cuts, can be advantageous to the economy as it promotes skilled migration as well as retaining Australia’s skilled employees. The disadvantage was that it provided consumers with more disposal income which increased their spending and thus increased the already high inflation of 4.5%.  

    Apart from vertical equity, tax reforms may also achieve horizontal equity. Horizontal equity is refers to the belief that all taxpayers of the same marginal rate should suffer an equal tax burden. In Australia, income is accepted as the measure ...

This is a preview of the whole essay