Describe about the Report for Critical Review of Australian Tax and Transfer System.
A robust taxation system is considered to be the life blood of the government since it provides the vital revenue which the government requires to dispel its myriad responsibilities. The importance of taxation system in the recent past has increased by leaps and bounds as the responsibilities of the modern state continue to grow. Hence, unlike the past, the government’s role is not limited to providing physical security but has to ensure that the citizens are able to enjoy a particular standard of life where certain basic requirements such as food, education, healthcare, shelter are taken care of. For the government to be able to discharge the above responsibilities, it is imperative that the tax system should be driven by four key principles namely equity, effectiveness, simplicity and efficiency (ACOSS, 2015).
It is noteworthy that the role of taxation is not limited to being revenue raising measure for the national government but it actually much expansive. Through the taxation system, the government aims to fulfil a host of objectives which can be easily deciphered by conducting a through and critical review of the tax and transfer policy prevalent in Australia. Additionally, this would also serve another purpose i.e. to develop a better understanding of the tax implications and any overburden present in the tax and transfer system (Treasury, 2013). As a result, the various flaws in the current system would be identified and various measures would be suggested so as to ensure that the four principles are better complied with and the policy objectives are better realised.
The core purpose of the taxation system is to act as a source of revenue to government for meeting its expenditures. However, tax revenue needs to be raised in a manner that does not penalise indulgence in activities leading to generation of income. This can be done by ensuring that any particular section must not carry a disproportional taxation burden. Therefore, it is required that the taxation laws must undergo a review on periodic basis so as to ensure that the concessions provided are appropriately targeted and not abused while the incidents involving tax evasion need to be minimised (CoA, 2015). However, while maintaining higher compliance from taxpayers, the central principles of a robust tax system must not be deviated from.
Yet another objective of the tax system is to enhance the efficiency of allocation of scarce resources so as to generate maximum output. The resource allocation is altered through the application of differential tax rates with regards to consumption and production of specific goods and services. The effectiveness of differential tax at altering the underlying consumption patterns of customers has sufficient empirical evidence to indicate that products and services that have relatively lesser tax burden tend to be consumed in more quantities. Using taxation, it is possible for the government to promote goods associated with positive externality while discouraging usage of those goods which have negative externality associated with their consumption. This process if continued for a sufficient length of time tends to bring variation in the patterns of production and consumption which is skewed towards goods with lesser tax burden. This effectively leads to an increased allocative efficiency since the country produces goods beneficial for the society (Treasury, nd).
Also, another objective of the taxation system is to cause income redistribution. The progressive direct taxation system is testimony to this as the rich have to pay tax at higher rates as compared to the poor. As a result, the income collected through tax from rich people is utilised for delivery of vital support services to the downtrodden and poor section which improves their standard of life. Hence, there is no denying the fact that income redistribution is achieved through taxation as the users of the various government schemes are the poor and vulnerable population who otherwise lack the purchasing power to avail the basic amenities (CoA, 2015). The Australian transfer system ensures that no section of the population is deprived from the usage of merit goods due to lack of purchasing power or any disability. Hence, assistance is provided to such people through cash payments which provide them opportunity to lead a normalised and prosperous life. It is estimated that almost 50% of the spending incurred through the transfer system is utilised for individuals who are either retired or disabled. Further, as the population becomes more aged in the near future, the importance of transfer system is poised to enhance which makes a valid case for enhancing their overall efficiency (CoA, 2008).
Ever since the beginning of the last decade of 20th century, the tax revenues have surgse as indicated below. The main reason for this trend is the introduction of multitude of tax particularly the GST along with Capital Gains (1985) and rationalisation of tax system through the introduction of ITAA, 1997(ACTU, 2011).
On one hand, the increase in revenue was positive news but this came at the cost of enhanced complexity in the tax regulation system. This was caused as the various taxes have their respective provisions with regards to concessions, threshold values. The effect was that that the taxpayers could not decipher the complex regulations which led to a rise in the overall compliance cost. The comparison of complexity Australian tax system in comparison with other prominent nations of both developed and developing world is presented below (ACTU, 2011).
The rise in compliance costs causes due to rising complexity of the tax –transfer system is highlighted below (CoA, 2015).
The rising complexity in the tax system is evident from the above graph and the fact that there is a dip in the compliance costs at the turn of the decade implies that the government is also aware of the extent of the problem and hence taking active measures for simplification of tax system. However, these measures have continued to remain insufficient. Even now, huge sums of taxpayer’s money is being wasted for complying with tax regulations which instead needs to be used in a productive manner so as to fuel economic growth especially in the current times when the economic growth is lacklustre. Besides, the complexity of the system also provides incentives for specific behaviour on part of the taxpayers which results in inefficient allocation of resources.
An apt illustration of the above is in the form of taxation policies towards affordable housing which have fallen short of the stated objectives. Instead these have proved to be counter-productive with a host of concessions and exemptions of payment of taxes and therefore instead of making it easier to buy a house, it has led to a frenzy which has led to the formation of a real estate bubble. This frenzy is led by the wealthy individuals and HNI (High Net Individuals) who tend to use residential property not only as an investment but as a mechanism to minimise their tax liability (ACOSS, 2015). In this regard, the IMF has advocated that the tax rebates must be used sparingly as they are in violation with the principles of equity and efficiency of a robust tax system. Despite this, Australia provides generous tax expenditure as depicted in the graph below which draws a comparison with other developed nations in this regard (Thornbill, 2015).
It is apparent from the above discussion that the tax concessions extended to the housing sector is leading to distortions and hence urgent rationalisation is required. This would cause a change in the taxpayer’s behaviour and thereby ensure that the multiply policy objectives of the tax and transfer system are met. Further, housing tax expenditures leads to a double whammy for the government as on one hand, the revenues are being lost due to concessions while on the other hand, since these concessions are not reaching the poor and vulnerable, hence government needs to provide greater support as rent assistance which is expanding the fiscal deficit (ACOSS, 2015).
It is apparent from the arguments listed above that tax and transfer system in place is inefficient and overburdened. As a result, a complete overhaul of the taxation system is required whereby emphasis is on four main taxes namely corporate tax, personal income tax, tax related to private consumption and also rent tax collected on usage of economic resources owned by the state. These four taxes have been selected as a major portion of the tax revenue is earned through these taxes only. Taxes besides the above ones should continue to exist only if a particular social/economic issue is being addressed such as the taxation on cigarettes. Other taxes which do not belong to the above shall be abolished as these lead to an enhancement in the complexity of the taxation system without significant incremental revenue (Treasury, 2013).
For attracting more foreign investors, it is required that there must be an reduction in the corporate tax rate to 25% over a period of time. Besides, the imputation policy employed for dividends also needs to be modified so as be in sync with the global practices in this regard (BCA, 2014). To make up for the loss in tax through the decrease in corporate tax rate, rationalisation of tax expenditures is the need of the hour. Additionally, for increasing the female participation rate in labour, there needs to be a marked improvement in the child care services and emphasis should be on making these affordable. Besides, for enhancing the workforce diversity, vulnerable sections should be given support in the form of payments for supporting the income (CoA, 2008).
Also, there is a strong case for rationalisation of personal income tax so that there is wider coverage and simple regulations. Further, an increase in the threshold income level to $ 25,000 is also recommended as for lower income, the compliance costs tend to be more substantial than the actual tax collected. Besides, it is imperative that no liabilities must be attached to the various transfer payments (example: allowances and pensions). Additionally, for individuals who belong to the labour force but fail to contribute fully must be given participation allowances. Also, differential threshold levels should be introduced for assistance payments extended to aged, students and the cared. This is because their needs are quite different which must be reflected in the assistance provided. Further, indexing of assistance payments for inflation must be done as currently this is not the case (CoA, 2015).
The various allowances and pension payments shall be provided not on the basis of the asset test but on the analysis of comprehensive means which would ensure better targeting. Also, the family assistance program needs to be integrated into a unified program so that the quantum of assistance is driven by the total family’s taxable income levels. Further, certain levies that the state enforces are highly inefficient and must pave way for low-rate destination cash flow tax. The revenue raised through this can be utilised by the local and state governments for public welfare. The GST that applies on financial services shall be replaced with a separate financial services tax which could result in gains if the modalities are prudently worked out based on consultations with stakeholders (CoA, 2008).
The royalty system in place currently also needs to be discontinued and a 40% resource rent tax shall instead be levied so as to ensure that volatility of prices can be reflected in the government’s revenue. Also, the employees superannuation contribution should be made tax free but the contribution from the employer in this regard needs to be brought within the tax net provided there is breach of a reasonable limit (Treasury, 2013). Based on the above discussion and the various arguments, it may be concluded that the current tax and transfer system seems overburdened and complex despite efforts by government in this regard. Also, the transfer system suffers from targeting errors due to which they are utilised by the relatively richer population and hence requires an overhaul based on the central tenets of sound taxation system.
ACTU 2011, ‘Paying our Way: Personal income tax in Australia’. Australia Tax Paper No.4 , pp. 4-37
BCA 2014, The future of tax, Business Council of Australia, Available online from www.bca.com.au/.../Future_of_Tax_Australias_Current_Tax_System_FI (Accessed on August 5, 2016)CoA 2008, Architecture of Australia’s tax and transfer system,
Commonwealth of Australia, Available online from https://taxreview.treasury.gov.au/content/downloads/report/architecture_of_australias_tax_and_transfer_system_revised.pdf (Accessed on August 5, 2016)CoA 2015,
Tax Discussion Paper, Commonwealth of Australia, Available online from https://bettertax.gov.au/files/2015/03/TWP_combined-online.pdf (Accessed on August 5, 2016)Treasury nd, 2.4 The objectives of taxation, Australian Government, Available online from https://comparativetaxation.treasury.gov.au/content/report/html/04_Chapter_2-03.asp (Accessed on August 5, 2016)Treasury 2013, 2.10
Administration of the taxâ€‘transfer system, Australian Government, Available online from https://taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/report/section_2-10.htm (Accessed on August 5, 2016)
ACOSS 2015. Fuel on the Fire, Australian Council of Social Service, Available online from https://www.acoss.org.au/images/uploads/Fuel_on_the_fire.pdf (Accessed on August 5, 2016)
Smith, L. 2015. Superannuation tax concessions poorly targeted: ACOSS, SolePurposeTest Blog, Available online from https://www.solepurposetest.com/news/superannuation-tax-concessions-poorly-targeted/ (Accessed on August 5, 2016)
Smith, G. 2013. Australian tax reform: Post-Henry, CEDA Council on Economic Policy, Available online from https://adminpanel.ceda.com.au/FOLDERS/Service/Files/Documents/15436~gregsmith_ccep032013_web2.pdf (Accessed on August 5, 2016)
Thornbill, A. 2015. Our tax systems “not so progressive” ACOSS, Private Briefing Website, Available online from https://privatebriefing.com.au/2015/01/24/our-tax-systems-not-so-progressive-acoss/ (Accessed on August 5, 2016)