The Australian Council of Social Services released a report in October 2003 that succinctly captured the Australian attitude to the provision of social services by the government. It found a long term trend of declining concern about taxation but rising concern for issues such as health and education and a greater preparedness for taxes to rise to fund public services. It also found corporations and wealthy people are perceived as not paying their fair share of taxes and that this seems to undermine the willingness of the wider public to meet their tax commitments. (ACOSS Info 335, 2003). More recently research conducted by Roy Morgan found almost 90% of Australians would prefer the Government use the money to fix problems in housing, education and health rather than the muted $5 tax cut. (National Welfare Rights Network, 2004). The formation of the welfare state since 1945 has raised expectations for government intervention to achieve fiscal goals. In this paper I will describe how these goals have been re-defined by the interests of capital to make the incidence of tax heavier on workers and easier on those most able to manipulate the tax legislative regime by tax shifting and planning. Orthodox economics argues reducing income taxes will stimulate saving and investment whilst increasing efficiency and growth. I dispute this, using recent data, and feature compliance costs as the major inefficiency. Although consumption taxes widen the tax base and are more efficient to collect I will argue their introduction is problematic. I will draw on the work of the Evatt foundation and ACOSS to suggest reforms to the taxation system more in line with the wishes of the citizens as relayed by the surveys quoted above. The goal is a fairer tax system.
Serfs in medieval times resented paying taxes for a very good reason. The way the taxes were collected and the fact they saw little return. At the top of the tax chain stood the monarch and his court that enjoyed a lifestyle considerably better than any of his subjects. This fundamental perception of unfairness persists today. As Whiting (2000) has observed, successful taxation to redistribute wealth to achieve equity ‘ought to be a desirable good not a necessary evil’. There has to be an element of consent. There has to be a fairness argument for efficient taxation to be accepted by the taxed. This is essentially not about high tax versus low tax but what is fair tax. Treat people with different levels of income the same and treat equally different sources of income. This is a type of horizontal calculation compared to a vertical calculation which more favors the view good taxation generates greater equality. High income should be reduced to create a more stable society. The re-distributing of wealth is the object. For Kaldor the main issue is also to address inequality particularly through the principle of progressive taxation. Hayek disagreed with this progressive principle, arguing these taxes acted as a disincentive to improve monetary reward for effort. This view has been disputed in light of recent data.
Income distribution in the UK and Australia has shifted towards the higher income group in the last two decades.(Goodman and Webb, 1994., Jenkins, 1995 in Laramie, A. J. (2000) p184) However, not only have capitalists increased their income share, they have substantially increased their propensity to consume. (Laramie, A. J. (2000 p.185). Capitalists no longer seem to be behaving in the traditional capitalist manner and are increasingly substituting consumption for investment. Investment in the UK has leveled off whilst capitalist income has continued to grow strongly.
Capital has redefined fiscal policy to provide for low inflation in a moderate growth environment. To stabilize the economy around a zero trend rate of investment with a balanced budget (another new goal) requires the government to raise the tax rate on wage income or cut the tax rate on profits. The empirical evidence from the US suggests strongly that changes in tax rates on wage income have a much more potent effect on investment than changes in tax rates on profits. Thus, in practice, the fiscal burden of stabilization would be borne by the recipients of wage income but only if they are unable to shift their increased tax burden. (Laramie, A. J. 2000. p189)
This leads to some discussion on tax shifting. In many cases the incidence of the tax may be shifted from the initial impact to someone else. Taxes initially falling on businesses must eventually be shifted to individuals. The final burden may fall on consumers in the form of higher prices, on workers in the form of lower wages or on suppliers of other inputs in the form of lower prices or rent or on stockholders in the form of lower dividends. (Winfrey, J.C. 1998, p56). If corporation income taxes were paid by the firm’s owners the tax would be progressive. There is disagreement among economists as to who actually bears the burden however. Some studies claim that most corporation income tax is passed on to consumers in the form of higher prices. This would indicate the tax is regressive and it would indicate that increases would add to inflation. Other studies claim that corporations have not raised prices in response to increases, and therefore, the burden must reside with the owners. Although it is widely assumed that employers and employees both pay their designated parts of payroll tax, economists are nearly unanimous in their belief that employees bear the entire burden. The incidence of property taxes is also disputed. It is generally held that homeowners bear their part of the tax but that owners of rental housing are able to pass their burdens on in the form of higher rents. It is argued sales taxes and excise taxes are regressive. (Winfrey, J.C. 1998)
Two points about compliance costs are relatively well accepted and are not surprising. Firstly they tend to be much larger than the direct costs of the Australian Taxation Office. Secondly, compliance costs are usually regressive affecting small taxpayers and businesses to a much greater extent than large firms.
No matter what action was taken to reduce compliance costs, these features may persist. Some reductions in compliance costs are likely to be achievable by focusing not only on the complexity of tax law and the operations of the ATO, but also on the response of different types of businesses to prevailing tax laws and rules. This could help identify management structures and characteristics that are associated with lower tax compliance costs. Planning costs which are incurred by taxpayers to reduce tax liabilities show up as tax compliance costs. (Pope, 1993). Planning costs have the effect of increasing compliance costs and reducing total taxation revenues, thus increasing the ratio of compliance costs to total taxation paid. Indeed, the relatively high tax compliance costs in Australia are likely to result in part from the complexity of the tax system providing scope to minimize tax liabilities by incurring substantial planning costs. The obvious way to reduce planning costs is to reduce the scope for tax planning to minimize tax liabilities.
Voluntary compliance costs are incurred for a variety of reasons, including the complexity of the tax system and because of the large number of deductions that are currently available. These costs could be reduced, in part, by continuation and extension of current initiatives to simplify tax regulations.
Causes of compliance costs include:
• Increasingly complex economic activity
• The design of tax law is often constrained by equity considerations (for example complex transitional provisions preserving pre-existing benefits)
• The tax system is being used to achieve a variety of other non-tax objectives (for example, education and industry assistance)
• Ad-hoc development of tax law over time
• Governments prescribe in legislation arrangements that will apply in most circumstances, rather than allowing a large measure of bureaucratic discretion. This increases the transparency and certainty of the tax system. However it also increases its complexity
• The ongoing need to develop, draft and refine complex anti-avoidance provisions to close off tax minimization practices. (Rimmer, S. & Wilson, S. 1996)
This writer agrees the ultimate test of taxes is not whether they benefit the economy or some section of the economy but whether they promote a better society. The tax system should be structured in ways which will raise revenue fairly. A caring attitude not only develops social cohesiveness but also assists economic performance, not least in facilitating ongoing structural change. The tax system should be uncomplicated and with general perceptions that the arrangements are basically fair will help to deliver high levels of compliance. (Evatt Foundation Group. 1999 p6)
Income taxation is the logical place to look for sustained revenue growth. It is currently the largest generator of government revenue contributing about 70 percent of total Australian Commonwealth Government revenues in the last decade. About 50 percent of this is income tax collected from individuals. It follows the tax reform process should address the factors contributing to the erosion of this tax base. The myriad of tax benefits which individuals and business derive through tax exemptions, deductions, rebates and other concessions are as real as any provided through direct expenditure programs but they tend to be less transparent and subject to less public and private scrutiny than direct expenditures. These supports are viewed as incentives whereas supports through the welfare system are viewed as handouts. Substantial tax expenditures are provided to vested interests in mining and agriculture for narrow political and ideological gains. It is suggested tax expenditures in each functional area of the economy should be combined with direct expenditure in the same area and relevant ministers could be pressed to justify their combined outlay and tax expenditure.
In the interests of fairness the current preferential tax status of capital gains – which benefits mainly high income earners-should not be allowed to continue. With professional help, income streams are being readily converted into capital gains streams which attract preferential treatment. Gains from investments in property, including the family home, dividends, sale of shares and the roll-over of small businesses should be taxed as income.
Negative gearing should be abolished. This form of tax avoidance has grown dramatically in the last decades. Typically used to claim deductions for expenses associated with income producing properties against income from other sources, it facilitates tax shifting into the future and to the lower capital gains tax rate. It benefits the higher income groups and according to ACOSS (2004) does nothing to provide low rental properties, the reason often cited for its continuance.
The absence of taxes on net wealth and wealth transfers in Australia needs to be addressed. One of the few countries in the world not to have such taxes, Australia exhibits a case on equity grounds for such a tax.
All work related expenses of employees should be disallowed. It is expected employers would move to pick up the legitimate expenses of employees and adjust their take home pay, leaving both parties unaffected. Deductions for self-education expenses should be disallowed. More direct and better targeted measures are needed to ensure life-long learning in the community.
The Pay-As-You-Earn system of taxation is being eroded reflecting several factors. Deficiencies in the taxation of fringe benefits, contracting out and interposing a company or trust are the main culprits. All these techniques to minimize, delay or avoid income tax should be banned.
The major problem with the perception of the tax system as unfair is in the provision of artificial tax minimization schemes to those high income and wealthy individuals best able to use them. Using private companies and trusts offer flexible mechanisms for income splitting and shifting income and losses to the best tax advantage. It also facilitates hiding true asset ownership which is one of the current tests for welfare recipients. This promotes middle class welfare at the expense of those who truly need it.
Poverty traps have resulted from the increase in complexity of the tax system over the last decades. This complexity is the result of labor market changes including an increase participation of women, decentralization and deregulation of the workplace, expansion of part-time and part-pay arrangements, downwards pressure on minimum pay rates and increased unemployment. The number of social security and tax based assistance programs has doubled, all major social transfer payments have been subject to increased targeting and composite wage-tax-social income packages were negotiated under the Accords of the 1980’s and the early 1990’s. Many people now receive a composite income made up of wages and social transfers. As a persons hours of employment increase, the combination of taxation of the market income and the social transfer withdrawal imposes high effective marginal tax rates. This can lead to tax rates of over 100% in some cases. Perhaps the most pernicious result of this inequality is the number of recipients forced to work in the underground economy. This has further revenue implications from the avoidance of income tax but more importantly adds to the perception of unfairness held by those caught by these traps and from their relatives, friends and members of the community alerted by the media.
Individual income tax rates and thresholds needs to be reviewed. Given the measures outlined above broadens the income tax base and additional revenue could be expected from ongoing economic growth, bracket creep and enhanced compliance it is appropriate to consider reductions in rates and increased income banding. The only recipients for such consideration should be low income groups further demonstrating real progress towards a fairer tax system. In contrast, Keating argues for an increase in rates across the board. He says the present taxation ceiling is essentially politically determined, and the economic case against an increase in the level of taxation is not strong. The principal problem with our arbitrary tax ceiling is that it does not reflect any serious consideration of the future needs of the country and their relative priority. In these circumstances if the present size of government was considered to be about right twenty years ago, it should not altogether be a surprise that taxation might rise in future, given the nature of the challenges that our society is facing. Indeed our willingness to pay for some increase in the size of government might well influence our capacity to increase employment participation and achieve the desired rate of future economic growth.
The problem with continuing the present limits to taxation and spending is that we risk fooling ourselves that these limits are sacrosanct and that they are capable of reflecting our future priorities. But the reality is that by limiting taxation from the outset, without any serious consideration of what it implies, we are more likely to distort our priorities. (Keating, M. 2004)
There is no compelling evidence lowering the company tax rate increases the desirability of Australia as a destination for investment. Comparisons with other low tax jurisdictions such as in Asia are specious because international companies are in a position to manage their affairs with profit shifting, transfer pricing, numerous exemptions, concessions and special rules. Australia should not be in a race to the bottom as companies shop for the best option in tax reduction techniques particularly given the increased dominance of multi-nationals in the global economy.
More needs to be said about the broadening of the indirect tax base. The introduction of a value added tax in the form of a Goods and Services Tax was made on the argument it provided a simpler and cheaper tax collecting device because it effectively turned every consumer into a tax collector and it is supposed to catch tax lost through income tax revenue reductions. The major equity argument against such a tax is it is regressive, hitting the least well off the hardest. A switch to GST, it is suggested, might encourage a little more saving, because income taxes tend to reduce the net rate of return on saving while consumption taxes have no impact on this rate of return. As yet there is no evidence to support this view. On the contrary, Canadian experience has demonstrated a ballooning of the cash economy. For a lot of people the GST is just another tax to dodge with the wealthiest more adept than poor people in doing so. On the other hand the battle to expand the income tax base in the face of a lack of political will and popular support combined with the demographic imperative of a decline in the number of potential taxpayers and an increase in the number of older citizens may make some move in this direction inevitable. It can never be the preferred option when fairness is the main objective of the tax system. (Evatt Foundation Group. 1999)
All proponents agree on the need to compensate low income earners for the regressive nature of a consumption tax. Consumption based compensation is not straightforward. Like the rest of the social security system should the compensation be family based or individual. Individual consumption patterns change and are expensive to track. Family based compensation faces intra-family redistribution problems. Groups like the self-employed and low income young people would not be easy to compensate through the existing tax and transfer mechanism. Other difficulties arise for part-rate pensioners and beneficiaries in which the scope and adequacy of compensation arrangements conflict with cost and equity considerations. Unfortunately some groups will miss out on full compensation in a compromise that stops overcompensation and will not be expensive. (Saunders, P. and Whiteford, P. (1990 p1)
Regressive taxes more effectively increase the state funding capacity that results from flat rates and a tax base resistant to erosion. Politics preclude an efficient direct transfer from the rich to the poor and needy who lack a majority support, and prevent progressive taxation from raising large revenues by increasing loopholes and special tax measures. At the same time, however, the formation of the state funding capacity is a historical product and path-dependent upon a peculiar pattern of tax policy development. Among the existing industrial democracies, the early institutionalization of regressive taxes is a critical cause of a self-enforcing process of high tax and high welfare: both policy makers and the public accepted high taxes to finance high welfare after the expansion of state funding capacity during the high growth of the 1950’s and 1960’s. (Kato, J. (2003)
This paper has detailed a substantial overhaul of the tax system in line with suggestions from the Evatt Foundation and ACOSS. I argue for a re-emphasis on income taxes in the interests of fairness and efficiency. Compliance costs need to be reduced. Whilst recognizing the need for a consumption tax work on compensatory redistributions needs to be done. With Keating, I present an argument for higher tax rates and suggest urgent attention needs to be paid in the interests of a more equitable society.
References
ACOSS Info 351, 2003) Taxation, Fairness and Public Opinion. Accessed April 14 2004
http://coss.net.au/news/upload/info351_tax_fairness_1.doc
ACOSS (2004) ‘ACOSS calls for tax loopholes to be plugged’ Matt Wade, Sydney Morning Herald. Website accessed 12 April 2004
http://www.smh.com.au/articles/2004/04/12/
1081621896896.html
Evatt Foundation Group. (1999) Bernie Fraser, Trevor Boucher, John Freeland, Professor Bob Gregory, Alison McClelland. A Fair and Adequate Tax System. Evatt Foundation. Sydney
Goodman, A and Webb, S (1994), ‘For richer, for poorer: the changing distribution of income in the UK. 1961-1991’. Fiscal Studies, 15 (4), 29-62
Jenkins, S.P. (1995), ‘Accounting for inequality trends: decomposition analyses for the UK, 1971-1986 Economica, 62,29-63
Kaldor, N. ‘Taxation for Economic Development’
Kato, J. (2003) Regressive Taxation and the Welfare State. Cambridge University Press. Cambridge.
Keating, M. (2004) The Case for Increased Taxation. Academy of the Social Sciences in Australia. Canberra
Laramie, Anthony J (2000.) A dynamic theory of taxation : integrating Kalecki into modern public finance Edward Elgar Publishing Cheltenham, UK
Leibfritz, W., Thornton, J. and Bibbee, A. (1997) Taxation and Economic Performance. Economics Department Working Papers. No. 176. OECD. Paris.
National Welfare Rights Network (2004) website accessed 2 May 2004
http://www.welfarerights.org.au
Pope, J. Fayle, R and Chen, D.L.(1993) The Compliance Costs of Employment Related Taxation in Australia. Australian Tax Research Foundation. Sydney.
Rimmer, S. & Wilson, S. (1996) Compliance Costs of Taxation in Australia. Office of Regulation Review. Industry Commission. Canberra.
Saunders, P. and Whiteford, P. (1990) Compensating low income groups for indirect tax Reforms. Social Policy Research. UNSW. Australia
Winfrey, J.C. (1998) Social Issues: The Ethics and Economics of Taxes and Public Programs. Oxford University Press. Oxford.
Whiting, R. (2000) Introduction: taxation and political debate in The Labour Party and Taxation, Cambridge University Press.
Serfs in medieval times resented paying taxes for a very good reason. The way the taxes were collected and the fact they saw little return. At the top of the tax chain stood the monarch and his court that enjoyed a lifestyle considerably better than any of his subjects. This fundamental perception of unfairness persists today. As Whiting (2000) has observed, successful taxation to redistribute wealth to achieve equity ‘ought to be a desirable good not a necessary evil’. There has to be an element of consent. There has to be a fairness argument for efficient taxation to be accepted by the taxed. This is essentially not about high tax versus low tax but what is fair tax. Treat people with different levels of income the same and treat equally different sources of income. This is a type of horizontal calculation compared to a vertical calculation which more favors the view good taxation generates greater equality. High income should be reduced to create a more stable society. The re-distributing of wealth is the object. For Kaldor the main issue is also to address inequality particularly through the principle of progressive taxation. Hayek disagreed with this progressive principle, arguing these taxes acted as a disincentive to improve monetary reward for effort. This view has been disputed in light of recent data.
Income distribution in the UK and Australia has shifted towards the higher income group in the last two decades.(Goodman and Webb, 1994., Jenkins, 1995 in Laramie, A. J. (2000) p184) However, not only have capitalists increased their income share, they have substantially increased their propensity to consume. (Laramie, A. J. (2000 p.185). Capitalists no longer seem to be behaving in the traditional capitalist manner and are increasingly substituting consumption for investment. Investment in the UK has leveled off whilst capitalist income has continued to grow strongly.
Capital has redefined fiscal policy to provide for low inflation in a moderate growth environment. To stabilize the economy around a zero trend rate of investment with a balanced budget (another new goal) requires the government to raise the tax rate on wage income or cut the tax rate on profits. The empirical evidence from the US suggests strongly that changes in tax rates on wage income have a much more potent effect on investment than changes in tax rates on profits. Thus, in practice, the fiscal burden of stabilization would be borne by the recipients of wage income but only if they are unable to shift their increased tax burden. (Laramie, A. J. 2000. p189)
This leads to some discussion on tax shifting. In many cases the incidence of the tax may be shifted from the initial impact to someone else. Taxes initially falling on businesses must eventually be shifted to individuals. The final burden may fall on consumers in the form of higher prices, on workers in the form of lower wages or on suppliers of other inputs in the form of lower prices or rent or on stockholders in the form of lower dividends. (Winfrey, J.C. 1998, p56). If corporation income taxes were paid by the firm’s owners the tax would be progressive. There is disagreement among economists as to who actually bears the burden however. Some studies claim that most corporation income tax is passed on to consumers in the form of higher prices. This would indicate the tax is regressive and it would indicate that increases would add to inflation. Other studies claim that corporations have not raised prices in response to increases, and therefore, the burden must reside with the owners. Although it is widely assumed that employers and employees both pay their designated parts of payroll tax, economists are nearly unanimous in their belief that employees bear the entire burden. The incidence of property taxes is also disputed. It is generally held that homeowners bear their part of the tax but that owners of rental housing are able to pass their burdens on in the form of higher rents. It is argued sales taxes and excise taxes are regressive. (Winfrey, J.C. 1998)
Two points about compliance costs are relatively well accepted and are not surprising. Firstly they tend to be much larger than the direct costs of the Australian Taxation Office. Secondly, compliance costs are usually regressive affecting small taxpayers and businesses to a much greater extent than large firms.
No matter what action was taken to reduce compliance costs, these features may persist. Some reductions in compliance costs are likely to be achievable by focusing not only on the complexity of tax law and the operations of the ATO, but also on the response of different types of businesses to prevailing tax laws and rules. This could help identify management structures and characteristics that are associated with lower tax compliance costs. Planning costs which are incurred by taxpayers to reduce tax liabilities show up as tax compliance costs. (Pope, 1993). Planning costs have the effect of increasing compliance costs and reducing total taxation revenues, thus increasing the ratio of compliance costs to total taxation paid. Indeed, the relatively high tax compliance costs in Australia are likely to result in part from the complexity of the tax system providing scope to minimize tax liabilities by incurring substantial planning costs. The obvious way to reduce planning costs is to reduce the scope for tax planning to minimize tax liabilities.
Voluntary compliance costs are incurred for a variety of reasons, including the complexity of the tax system and because of the large number of deductions that are currently available. These costs could be reduced, in part, by continuation and extension of current initiatives to simplify tax regulations.
Causes of compliance costs include:
• Increasingly complex economic activity
• The design of tax law is often constrained by equity considerations (for example complex transitional provisions preserving pre-existing benefits)
• The tax system is being used to achieve a variety of other non-tax objectives (for example, education and industry assistance)
• Ad-hoc development of tax law over time
• Governments prescribe in legislation arrangements that will apply in most circumstances, rather than allowing a large measure of bureaucratic discretion. This increases the transparency and certainty of the tax system. However it also increases its complexity
• The ongoing need to develop, draft and refine complex anti-avoidance provisions to close off tax minimization practices. (Rimmer, S. & Wilson, S. 1996)
This writer agrees the ultimate test of taxes is not whether they benefit the economy or some section of the economy but whether they promote a better society. The tax system should be structured in ways which will raise revenue fairly. A caring attitude not only develops social cohesiveness but also assists economic performance, not least in facilitating ongoing structural change. The tax system should be uncomplicated and with general perceptions that the arrangements are basically fair will help to deliver high levels of compliance. (Evatt Foundation Group. 1999 p6)
Income taxation is the logical place to look for sustained revenue growth. It is currently the largest generator of government revenue contributing about 70 percent of total Australian Commonwealth Government revenues in the last decade. About 50 percent of this is income tax collected from individuals. It follows the tax reform process should address the factors contributing to the erosion of this tax base. The myriad of tax benefits which individuals and business derive through tax exemptions, deductions, rebates and other concessions are as real as any provided through direct expenditure programs but they tend to be less transparent and subject to less public and private scrutiny than direct expenditures. These supports are viewed as incentives whereas supports through the welfare system are viewed as handouts. Substantial tax expenditures are provided to vested interests in mining and agriculture for narrow political and ideological gains. It is suggested tax expenditures in each functional area of the economy should be combined with direct expenditure in the same area and relevant ministers could be pressed to justify their combined outlay and tax expenditure.
In the interests of fairness the current preferential tax status of capital gains – which benefits mainly high income earners-should not be allowed to continue. With professional help, income streams are being readily converted into capital gains streams which attract preferential treatment. Gains from investments in property, including the family home, dividends, sale of shares and the roll-over of small businesses should be taxed as income.
Negative gearing should be abolished. This form of tax avoidance has grown dramatically in the last decades. Typically used to claim deductions for expenses associated with income producing properties against income from other sources, it facilitates tax shifting into the future and to the lower capital gains tax rate. It benefits the higher income groups and according to ACOSS (2004) does nothing to provide low rental properties, the reason often cited for its continuance.
The absence of taxes on net wealth and wealth transfers in Australia needs to be addressed. One of the few countries in the world not to have such taxes, Australia exhibits a case on equity grounds for such a tax.
All work related expenses of employees should be disallowed. It is expected employers would move to pick up the legitimate expenses of employees and adjust their take home pay, leaving both parties unaffected. Deductions for self-education expenses should be disallowed. More direct and better targeted measures are needed to ensure life-long learning in the community.
The Pay-As-You-Earn system of taxation is being eroded reflecting several factors. Deficiencies in the taxation of fringe benefits, contracting out and interposing a company or trust are the main culprits. All these techniques to minimize, delay or avoid income tax should be banned.
The major problem with the perception of the tax system as unfair is in the provision of artificial tax minimization schemes to those high income and wealthy individuals best able to use them. Using private companies and trusts offer flexible mechanisms for income splitting and shifting income and losses to the best tax advantage. It also facilitates hiding true asset ownership which is one of the current tests for welfare recipients. This promotes middle class welfare at the expense of those who truly need it.
Poverty traps have resulted from the increase in complexity of the tax system over the last decades. This complexity is the result of labor market changes including an increase participation of women, decentralization and deregulation of the workplace, expansion of part-time and part-pay arrangements, downwards pressure on minimum pay rates and increased unemployment. The number of social security and tax based assistance programs has doubled, all major social transfer payments have been subject to increased targeting and composite wage-tax-social income packages were negotiated under the Accords of the 1980’s and the early 1990’s. Many people now receive a composite income made up of wages and social transfers. As a persons hours of employment increase, the combination of taxation of the market income and the social transfer withdrawal imposes high effective marginal tax rates. This can lead to tax rates of over 100% in some cases. Perhaps the most pernicious result of this inequality is the number of recipients forced to work in the underground economy. This has further revenue implications from the avoidance of income tax but more importantly adds to the perception of unfairness held by those caught by these traps and from their relatives, friends and members of the community alerted by the media.
Individual income tax rates and thresholds needs to be reviewed. Given the measures outlined above broadens the income tax base and additional revenue could be expected from ongoing economic growth, bracket creep and enhanced compliance it is appropriate to consider reductions in rates and increased income banding. The only recipients for such consideration should be low income groups further demonstrating real progress towards a fairer tax system. In contrast, Keating argues for an increase in rates across the board. He says the present taxation ceiling is essentially politically determined, and the economic case against an increase in the level of taxation is not strong. The principal problem with our arbitrary tax ceiling is that it does not reflect any serious consideration of the future needs of the country and their relative priority. In these circumstances if the present size of government was considered to be about right twenty years ago, it should not altogether be a surprise that taxation might rise in future, given the nature of the challenges that our society is facing. Indeed our willingness to pay for some increase in the size of government might well influence our capacity to increase employment participation and achieve the desired rate of future economic growth.
The problem with continuing the present limits to taxation and spending is that we risk fooling ourselves that these limits are sacrosanct and that they are capable of reflecting our future priorities. But the reality is that by limiting taxation from the outset, without any serious consideration of what it implies, we are more likely to distort our priorities. (Keating, M. 2004)
There is no compelling evidence lowering the company tax rate increases the desirability of Australia as a destination for investment. Comparisons with other low tax jurisdictions such as in Asia are specious because international companies are in a position to manage their affairs with profit shifting, transfer pricing, numerous exemptions, concessions and special rules. Australia should not be in a race to the bottom as companies shop for the best option in tax reduction techniques particularly given the increased dominance of multi-nationals in the global economy.
More needs to be said about the broadening of the indirect tax base. The introduction of a value added tax in the form of a Goods and Services Tax was made on the argument it provided a simpler and cheaper tax collecting device because it effectively turned every consumer into a tax collector and it is supposed to catch tax lost through income tax revenue reductions. The major equity argument against such a tax is it is regressive, hitting the least well off the hardest. A switch to GST, it is suggested, might encourage a little more saving, because income taxes tend to reduce the net rate of return on saving while consumption taxes have no impact on this rate of return. As yet there is no evidence to support this view. On the contrary, Canadian experience has demonstrated a ballooning of the cash economy. For a lot of people the GST is just another tax to dodge with the wealthiest more adept than poor people in doing so. On the other hand the battle to expand the income tax base in the face of a lack of political will and popular support combined with the demographic imperative of a decline in the number of potential taxpayers and an increase in the number of older citizens may make some move in this direction inevitable. It can never be the preferred option when fairness is the main objective of the tax system. (Evatt Foundation Group. 1999)
All proponents agree on the need to compensate low income earners for the regressive nature of a consumption tax. Consumption based compensation is not straightforward. Like the rest of the social security system should the compensation be family based or individual. Individual consumption patterns change and are expensive to track. Family based compensation faces intra-family redistribution problems. Groups like the self-employed and low income young people would not be easy to compensate through the existing tax and transfer mechanism. Other difficulties arise for part-rate pensioners and beneficiaries in which the scope and adequacy of compensation arrangements conflict with cost and equity considerations. Unfortunately some groups will miss out on full compensation in a compromise that stops overcompensation and will not be expensive. (Saunders, P. and Whiteford, P. (1990 p1)
Regressive taxes more effectively increase the state funding capacity that results from flat rates and a tax base resistant to erosion. Politics preclude an efficient direct transfer from the rich to the poor and needy who lack a majority support, and prevent progressive taxation from raising large revenues by increasing loopholes and special tax measures. At the same time, however, the formation of the state funding capacity is a historical product and path-dependent upon a peculiar pattern of tax policy development. Among the existing industrial democracies, the early institutionalization of regressive taxes is a critical cause of a self-enforcing process of high tax and high welfare: both policy makers and the public accepted high taxes to finance high welfare after the expansion of state funding capacity during the high growth of the 1950’s and 1960’s. (Kato, J. (2003)
This paper has detailed a substantial overhaul of the tax system in line with suggestions from the Evatt Foundation and ACOSS. I argue for a re-emphasis on income taxes in the interests of fairness and efficiency. Compliance costs need to be reduced. Whilst recognizing the need for a consumption tax work on compensatory redistributions needs to be done. With Keating, I present an argument for higher tax rates and suggest urgent attention needs to be paid in the interests of a more equitable society.
References
ACOSS Info 351, 2003) Taxation, Fairness and Public Opinion. Accessed April 14 2004
http://coss.net.au/news/upload/info351_tax_fairness_1.doc
ACOSS (2004) ‘ACOSS calls for tax loopholes to be plugged’ Matt Wade, Sydney Morning Herald. Website accessed 12 April 2004
http://www.smh.com.au/articles/2004/04/12/
1081621896896.html
Evatt Foundation Group. (1999) Bernie Fraser, Trevor Boucher, John Freeland, Professor Bob Gregory, Alison McClelland. A Fair and Adequate Tax System. Evatt Foundation. Sydney
Goodman, A and Webb, S (1994), ‘For richer, for poorer: the changing distribution of income in the UK. 1961-1991’. Fiscal Studies, 15 (4), 29-62
Jenkins, S.P. (1995), ‘Accounting for inequality trends: decomposition analyses for the UK, 1971-1986 Economica, 62,29-63
Kaldor, N. ‘Taxation for Economic Development’
Kato, J. (2003) Regressive Taxation and the Welfare State. Cambridge University Press. Cambridge.
Keating, M. (2004) The Case for Increased Taxation. Academy of the Social Sciences in Australia. Canberra
Laramie, Anthony J (2000.) A dynamic theory of taxation : integrating Kalecki into modern public finance Edward Elgar Publishing Cheltenham, UK
Leibfritz, W., Thornton, J. and Bibbee, A. (1997) Taxation and Economic Performance. Economics Department Working Papers. No. 176. OECD. Paris.
National Welfare Rights Network (2004) website accessed 2 May 2004
http://www.welfarerights.org.au
Pope, J. Fayle, R and Chen, D.L.(1993) The Compliance Costs of Employment Related Taxation in Australia. Australian Tax Research Foundation. Sydney.
Rimmer, S. & Wilson, S. (1996) Compliance Costs of Taxation in Australia. Office of Regulation Review. Industry Commission. Canberra.
Saunders, P. and Whiteford, P. (1990) Compensating low income groups for indirect tax Reforms. Social Policy Research. UNSW. Australia
Winfrey, J.C. (1998) Social Issues: The Ethics and Economics of Taxes and Public Programs. Oxford University Press. Oxford.
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