Australian Tax Reform: Which Way Ahead?

Article excerpt

While the 1980s saw major changes to the Australian tax system which sought both to reduce avoidance and evasion and to reform the base structure of income tax, there are design deficiencies in some of these changes which must be attended to. Also a much closer approach to comprehensive and consistent taxation of investment income should be attempted. On the side of indirect tax the replacement of the wholesale sales tax by a broadly based value added tax is highly desirable, but is unlikely to be achievable politically unless Ipart of a strategy which combines sales tax reform, tax mix change and income tax reform. In any case, meaningful and durable reform of the tax system requires a basic community consensus which cuts across sectional interest groups and political parties.

1. Introduction and Overview

After the very considerable efforts devoted to reform of the Australian tax system during the 1980s, first to stem the tide of avoidance and evasion carried over from the 1970s and subsequently to reform the basic structure of the personal and company income taxes, it would be comforting to be able to declare the 1990s a period for quiet consolidation and reassessment As a society we do not benefit from continuing and divisive debate, and associated uncertainty, regarding the basic parameters of the revenue structure. Unfortunately, however, the achievements of the 1980s, although significant, have not been decisive and major issues of principle and procedure remain to be resolved.

In the income tax area significant steps have been taken to move the tax base away from arbitrary legalistic distinctions inherited from the British income tax towards the application of a modern economic income concept. Even after recent reforms, however, the income tax base remains an awkward and possibly unsustainable hybrid of income and consumption elements; and the progressive rate scale still exhibits unpleasant features such as low cut-in points and is the subject of continuing debate. In spite of our best efforts--and a veritable mass of new and complex legislation in such areas as capital gains, fringe benefits, foreign source income, company tax imputation and retirement saving--it could hardly be said that a settled income tax structure has as yet been achieved.

In the sales tax area we are now quite unique among industrialised western countries in our reliance upon the narrowly based wholesale sales tax and the associated excise tax system. With the defeat of Option C at the Tax Summit in 1985 the issue of sales tax reform was for the time entirely lost. However, dissatisfaction with the existing structure remains strong and sales tax reform, whether in the context of tax mix change or in the context of a revenue-neutral reform of the commodity tax structure, is very high on the tax reform agenda of prominent business groups, the National Farmers' Federation and now also of the Federal Opposition parties.

As we enter the 1990s, therefore, it seems clear that in the area of tax reform, as in so many other major policy areas, Australia still stands very much at the crossroads. Although little has yet been definitively resolved, the debates and tax reform initiatives of the past decade have sparked some useful research into the effects of the present tax system and into the alternative options which might be pursued. As a result of this work the distortions and inequities of the prevailing income and commodity tax system have been much more fully analysed and where possible quantified. Although significant gaps and uncertainties in our knowledge remain, there is now a much better understanding of the serious economic damage which has resulted from our neglect of basic design principles of comprehensiveness and uniformity in the income tax and commodity tax systems.

With the rising sophistication of the public debate a variety of alternative options have been proposed and costed, often inspired by major tax reform studies and developments overseas-though with some characteristically Australian features. …