Academic journal article The Economic and Labour Relations Review : ELRR

Deficiencies in the Current Tax System

Academic journal article The Economic and Labour Relations Review : ELRR

Deficiencies in the Current Tax System

Article excerpt

'Would you tell me please, which way I ought to go from here?' 'That depends a good deal on where you want to get to', said the Cat. (Lewis Carroll, Alice in Wonderland)

1. Introduction

The problem posed by the current tax debate is where, if anywhere, to go on tax reform. The answer depends not just on where we want to go but also on where we are, and have been.

The future poses a number of challenges for taxation policy. Deregulation of capital, product and labour markets has created new needs for tax revenues to ameliorate unacceptable distributional outcomes from market forces.

At the same time, greater mobility of capital is increasing competitive pressures on governments to reduce taxes on business or investment, and eroding the tax base. Ownership of capital is concentrated among high income earners, further testing governments' ability to use progressive taxation as the means of achieving distributive goals. With sub-national and increasingly national governments competing along the 'least common denominator' principle of business taxation, and pervasive problems of income tax avoidance and evasion, the taxation burden risks being substantially passed from capital, which is internationally mobile, to labour, which is not (Graetz 1985:414).

Furthermore, emerging pressures on the environment require collective action to prevent further environmental degradation and pollution and to encourage frugal use or conservation of natural resources including land, water, air, minerals and energy, forests and fisheries, and habitats.

The present tax system appears inadequate to meet the challenges of revenue raising and achieving Australia's social and environmental objectives in a global economy.

The current taxation system has many deficiencies, but the most important is an increasing inability to provide revenue. Traditional revenue sources are diminishing or stagnating, amidst growing concern about rising government deficits and declining national savings. Declining public saving is at the heart of the national savings problem. Yet public opinion seems to rule out the most obvious options for increasing tax revenues--a GST, or raising personal income tax rates.

The problem is not that we are taxed too much. Nearly all other developed countries have a higher ratio of taxation to national income than Australia, while facing similar competitive pressures. The problem is one of structure, design and public perceptions of taxation in Australia.

In this paper I suggest how we might make progress in reducing deficiencies, despite the apparent deadlock in the tax reform debate. Based on the research for my book on Australian tax policy history, I draw on a broad historical perspective on how we have arrived at the current situation and how the terms of Australia's 'fiscal contract' have been drawn up. By trying to understand what has brought us here, and where we stand, I hope to make clearer where we might go.

The first section briefly outlines how we got where we are, and what lessons we might draw from that. It argues that continuing inequities in our tax system and the unbalanced revenue allocation across federal, state or local government, along with perceived inequities of reform, create a deadlock on moves to reform indirect taxes. The subsequent section identifies key deficiencies in the existing system, deficiencies that must be remedied for progress to be made on a broader tax reform front.

2. Background

'I have with me two gods, Persuasion and Compulsion', Themistocles 514-449 BC

Taxation reform proposals since the 1980s have been closely linked to improving Australia's savings performance. According to Australia's national savings and fiscal guru, Vince Fitzgerald,

   the long term decline in national savings is predominantly
   (although not solely) due to a structural decline in public
   savings, ie reduced surpluses/increased deficits on current
   transactions (1993). … 
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