Taxation
A good tax system raises the revenue needed to
finance government activities without imposing unnecessary costs on the economy. Australia’s tax mix involves a range of different
taxes, each with different characteristics. While approaches to tax design often focus on individual principles (such as simplicity,
equity and efficiency), the operation of all tax and transfer systems involves trade-offs between those principles.
A tax that is simple, for instance, may not be equitable. Those trade-offs can change over time as society’s views of what is optimal for
the system evolve. Link.
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Simplicity is the idea that the tax and transfer system should
be easy for most people to understand and interact with. Simplicity, by design, makes compliance easier and reduces costs for both
taxpayers and administrator. Certainty is also linked to simplicity – it should be clear what is being taxed, the
amount or rate of the tax, the timing and circumstances under which that tax is applied, and who pays it. Uncertainty and complexity can
lead to poor decision-making by individuals, resulting in inefficiencies and inequities, as well as cases being litigated in the court
system at the expense of taxpayers and the government.
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The principle of equity in a tax system is perhaps the most
difficult principle to precisely define because it reflects the values of the community, may vary from individual to individual and may
change over time. Equity is best considered from the whole perspective of the tax and transfer system rather than by looking at each
component individually.
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Personal income taxes in Australia are progressive, i.e. those
with a higher ability to pay tax, pay proportionately more tax, which is considered fair or equitable.
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GST is a consistent rate of tax, so is a regressive
tax, i.e. it takes a larger percentage of income from low-income earners rather than high-income earners so the tax rate
decreases as income increases.
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Efficiency refers to how the tax system distorts economic
activity. Most taxes result in some economic efficiency loss. For example, a tax may reduce incentives for people to work or invest, or
induce them to alter their consumption patterns. For the tax system to be efficient, it should aim to reduce distortions as much as
possible. For example,
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if different types of fuel are taxed at different rates, drivers may choose to
buy vehicles that use the lower taxed fuel, even if they are otherwise less appropriate for the drivers’ needs, or even pay to convert
their vehicles to a different fuel. In Australia, the fuel exise tax is the same on petrol and diesel, but there is no tax on the
electricity to fuel an electric car
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an important factor for tax efficiency is the extent to which people can modify
their behaviour to avoid paying the tax. A business subject to high taxes may relocate to a lower taxing country, even if other costs are
higher. People wishing to move house to reduce their travel time and costs may choose not to because the tax on moving (stamp duty) is too
high
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some taxes are deliberately designed to encourage or discourage
behaviour. ‘Sin taxes’ such as the excise tax on tobacco, are intended to be passed onto consumers (with no accompanying compensation)
as pricing signals to discourage consumption of these products.
Bracket creep
