Chapter 8 Although the economics of taxation has a long history, dating back to Ricardo and
Cournot, the modern theory of taxation has developed over the past thirty years, building
upon advances in microeconomic theory. Central to these are duality, general equilibrium
theory and the theory of second best. This displaced the earlier tax literature,
which had used simple rules to guide and evaluate policy. The new literature made
social-welfare maximisation the explicit goal of taxation, and demonstrated that the
rules of the earlier literature failed to take into account information and incentive constraints
that governments inevitably face when designing policy.Imperfect information about the endowments of individuals prevents governments
using personalised lump-sum taxes and transfers to redistribute.With lump-sum taxes,
no individual can lower their tax liability by changing their behaviour. Once lump-sum
taxes are ruled out, redistribution involves efficiency costs. Equity and efficiency must
be addressed simultaneously. When taxes are based on imperfect indicators of endowments,
such as income or consumption, taxation changes relative prices and this is the
source of efficiency costs.In modern tax theory, information and incentive constraints are explicit.The implications
for tax policy are wide-ranging: what can be taxed influences what should be
taxed and the optimal rates of tax; taxes with narrower bases and differential rates can
be superior in social-welfare terms to broad-based, constant-rate taxes; efficiency cannot
be inferred from counting the number of different tax rates. Empirical analysis is
now central to tax design and evaluation of reforms.While tax economics was making rapid advances in the international literature, in
Australia there was ongoing tax-reform debate that tended to draw more from the
earlier literature than the new developments.A number of prominent concerns emerged:
Patricia Apps, Glenn Jones and Elizabeth Savage
|• ||The base of personal income tax (PIT) had been eroded by the growth of untaxed
fringe benefits and capital gains.|
|• ||Self-employed taxpayers could lower tax by splitting income with their spouse. As a
result, wage and salary earners faced an increasing relative burden.|
|• ||A shift in expenditure from manufactured goods to services had eroded the base of
the wholesale sales tax (WST).|
|• ||The WST omitted many goods and services and applied different rates of tax.|
Questia, a part of Gale, Cengage Learning. www.questia.com
Book title: The Cambridge Handbook of the Social Sciences in Australia.
Contributors: Ian McAllister - Editor, Steve Dowrick - Editor, Riaz Hassan - Editor.
Publisher: Cambridge University Press.
Place of publication: New York.
Publication year: 2003.
Page number: 138.
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