Australia`s current income tax system is imposed by the federal government on the taxable income of individuals and corporate organization Personal income tax in Australia in levied on progressive rates while that of corporations is at one the two rates. Income of partnerships is taxed after it has been distributed to the individual partners. Income tax is the most significant source of revenue for the Australian government (Dexter, 2011). This report analyzes and discusses proposed personal tax reforms and the theoretical and empirical rationale for the reform proposal. The impact of the change on the aggregate income, output, employment, inequality, and poverty are discussed. The report also analyzes the likely environmental effects of the proposal and gives recommendations on the proposal.
Outline of the reform proposal
This paper analyzes the proposed personal tax reform where the government intends to shift from the progressive tax system to a flat rate tax system over the next seven years. The tax reform proposed is that the government should abandon progressive tax policy and adopt a flat tax of 30% as well as a high tax free threshold and a negative income tax. Currently, Australia relies on a comprehensive tax system where realized income from all sources is combined and taxed at a constant rate (Mirrlees & Institute for Fiscal Studies (Great Britain), 2010). The current reforms intend to cut income tax by hundreds of billions of dollars by the year 2025. The reforms will ensure that the income tax brackets reduce from five to four. The proposal will also require all people earning between $41,000 and $200,000 a year to pay a marginal tax rate of 32.5 percent.
The rationale for the proposal
The rationale for the personal tax reform is to reduce the burden of income tax on taxpayers. The proposed tax reforms seek to introduce a flat tax system where all taxpayers will be paying a percentage of their income across all income groups. The proposed tax reforms also aim at reducing inequality in taxation as one of the characteristics of a good tax system. The tax reform also intends to increase the output of the country and hence increase the GDP of the country (Disney, 2010). The government also intends that the changes in personal tax policy will help to increase efficiency and make the tax system simpler.
Likely impact on aggregate output and income
Personal income tax contributes a huge percentage in the earnings of the Australian government. Reforms in income tax are therefore expected to have a great impact on the aggregate output and input of the country. The tax reform will result in a reduction in the amount of taxes paid by individuals in some tax brackets. Reduction in taxes impacts on the output of the country since it will encourage people to work and earn more since they will retain more of their money (Ananiashvili & Papava, 2012). Reduction in taxes will help people to save more and hence increase the savings in the country. In addition to this, people will tend to invest more, and the disposable income will also increase. This, in turn, will contribute to an increase in the aggregate output.
The personal income tax reforms will also have a significant impact on the aggregate income of the country. The reforms will result in a decrease in taxes but broaden the tax base. Generally, a decrease in taxes will mean that people have more disposable income (Phillips, 2015). This means that the aggregate demand for goods and services will increase. At the same time, the income of the government will increase since broadening the tax base will help the government increase its income. Increase in spending by people will lead to an increase in aggregate supply and the long run, the demand and supply will be equal and hence leading to a healthy economy since aggregate income will increase.
Likely impact on unemployment, inequality, and poverty
The proposed tax reforms as discussed above will lead to an increase in the aggregate output of the country. When taxes in a country decrease, people will be motivated to invest more since they have more money to invest, and because they are likely to be taxed less. When investments increase in a country, people open many more businesses and hence creating additional jobs in the economy (Ferede & Dahlby, 2012). The assumption, in this case, is that the decrease in taxes as a result of the reforms will motivate people to increase the amount of money they invest and not save the money. A reduction of taxes as a result of the proposed reforms is expected to result to increase in disposable income of individuals. When the disposable income increases, it is expected that people will spend more on purchasing goods and services. This means that the aggregate demand and supply in the economy will increase. To meet the increased demand, production has to be increased, and this means that more jobs will be created in both the goods and service market. In addition to this since the tax reforms will lead increase in government spending in the long run. When government spending increases, it means that economic activities will be heightened and hence leading to the creation of job opportunities (Slemrod & Bakija, 2008). From the above discussion, it can, therefore, be concluded that the proposed tax reforms in Australia will likely lower levels of unemployment in the country.
The proposed tax reforms are expected to favor high-income earners as compared to lower income earners. With the introduction of the proposed income tax, taxpayers will be split into three groups: High-income earners(20% of taxpayers), middle-income earners(50% of taxpayers) and low-income earners(Prasad, 2015). From the analysis of the proposal, 20% of high-income earners will get a tax reduction of 62% after the implementation of the proposal. The very top income earners will get a tax cut of 40 %. The middle-income earners will get tax cuts of 7% while the low-income earners will have their taxes reduced by approximately 1.5%. For example, a person earning $40,000 every year will get a tax cut of roughly $456 while a person earning $200,000 will benefit from a tax cut of $7250. From the analysis, it is clear that despite the change helping to reduce the tax burden of low-income earners, the tax reform will benefit high-income earners more since they are expected to enjoy high tax cuts(Dolenc & Laporte, n.d.). It is therefore difficult to determine whether the tax reforms will reduce or increase inequality.
The proposed tax reform will impact on the poverty levels in the country. As of 2016, approximately 13.3% of Australians live below the internationally accepted poverty levels. This translates to approximately 2.9 million people. Taxes have a direct impact on income. A tax policy that helps in redistribution of wealth to the poor helps in reducing poverty levels in a country (Cowen, 2018). The introduction of the new tax policies in Australia is expected to increase investment and hence leading to more people getting employed. When the poor people get these jobs, they will help in lifting them out of poverty.
Furthermore, the tax reform will ensure that lowest income earners pay the smallest share of their income as tax and hence will get a chance to save the rest. However, the tax reform proposal does not put into consideration resource redistribution. There are a large number of Australians who earn below the minimum taxable income and hence this proposal will not have any impact on their income levels. It can, therefore, be concluded that the proposal will not have any significant impact on poverty levels.
Likely environmental impacts
The proposed tax reforms do not have a direct impact on the environment of the country. However, the reforms are expected to impact on the environment indirectly in the coming few years. With the implementation of the proposed changes, the economy is expected to expand since investments will increase (Jurinski, 2012). This is expected to steer growth in the manufacturing industry. The manufacturing industry contributes greatly to environmental degradation and pollution. The growth in this sector is therefore expected to have a negative impact on the environment.
From the results of the analysis done above, it is seen that the tax reform proposal is expected to have a positive impact on the aggregate output and income of Australia. It is also clear that the implementation of the reforms will contribute to a decrease in unemployment since job opportunities will be created. The reforms will have zero impact on poverty and inequality while the environment will be affected negatively. Therefore, I recommend that the proposal should be adopted since it has more positives than negatives.
Tax reforms have a huge impact on both micro-economic and macro-economic aspects of a country. It is therefore important to carry out in-depth research and analysis to determine the strengths and weakness of the tax reforms and how they are likely to affect various players in the economy. The paper discusses the rationale for the proposal of the flat tax policy. The paper also discusses the impact of the proposal on the GDP of the country. The report establishes that the proposal will impact increase aggregate output and income. Furthermore, the report discusses the impact of cutting taxes on unemployment, poverty levels, inequality as well as on the environment.
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