Taxation Reform

The Principles

1. The Federal Government has an important role to play in maintaining social cohesion and guaranteeing equity in the community. This role requires sufficient revenue from the tax system to support vital social services and contribute to provision of services by State Governments.

2. The taxation system has a direct role to play in redistributing wealth in society towards those in greatest need. Therefore, the tax system should be progressive, so that people are taxed at different rates according to their real capacity to contribute.

3. A good tax system is as simple as possible, to allow all members of the community to understand it and to minimise the cost of administering it, especially for small businesses.

4. By taxing some activities more than others, the system can encourage outcomes which are socially and environmentally responsible.

5. To maintain existing acceptable living standards and to improve the living standards of the least well-provided members of our society, the system should encourage balanced and sustainable growth.

6. Because all people have the right to work for their livelihood, the tax system should not discourage job creation.

The Issues

1. Goods and Services Tax (the most significant tax change in recent memory)

• The GST changes the 'tax mix' by reducing income tax and increasing consumption tax.
• Income taxes are usually progressive, reflecting people's ability to pay. Consumption taxes take no account of differences in ability to pay. Therefore the new tax mix will redistribute income from low-income earners to high-income earners
• The GST is complex to administer, especially for small businesses. This extra cost leaves many small businesses worse off while reinforcing the competitive position of large corporations.
• The GST has significant negative social implications. Any new policies designed to reduce this negative impact must at the same time secure sufficient revenue to maintain adequate social services.
• The GST has the potential to lead to an inflationary cycle, which could threaten the buying power of workers, particularly those on low-incomes.

2. Income Tax Cuts ( to compensate for increased prices under the GST.)

• Income tax cuts were greatest for those on higher incomes and not large enough for families with low incomes.
• While the top marginal tax rate, 47%, was not cut, the company tax rate was cut from 36% to 30%. This cut tends to benefit higher income earners. It allows those running a business to classify their income as profit or salary and so minimise tax. If this were later used as an argument for lowering the top marginal rate, the benefit would go to the highest income earners.
• Capital Gains Tax has been reduced. Capital gains are made by buying an asset at a low price and selling it at a higher price. This form of income generation is often unproductive and can cause economic instability through speculation. Lowering the tax on this form of income can encourage greater speculation, reducing productive activity and increasing instability.

3. Poverty Traps Poverty traps occur because of the interaction of the tax system and the system of government benefits. Over the last two decades, targeting of government benefits has meant that only those with very low incomes and those in the greatest need gain access to government assistance. If they begin to earn or increase their low earnings they lose their benefits and begin to pay tax. This can mean losing almost all of the extra income acquired. This situation discourages people from taking on paid work, keeps them on benefits and prevents them from improving their standard of living.

4. Encouraging the Wrong Priorities To corporate Australia the tax system offers concessions which often allow business operators to use government funds to augment profits. At the same time, some non-profit organisations are now taxed as part of the GST and have an increased workload dealing with the documentation demanded by the tax.

Alternatives

1. Income Tax Reform Income tax can be made more progressive, through marginal rates which better reflect people's ability to pay and by measures which address the issue of tax avoidance. All income, from whatever source, should be taxed in the same progressive manner. Any changes to the Budget must not reduce the resources needed to fund social services.

2. Greater Emphasis on Income Tax Make income tax, once again, the primary source of government revenue, because this is more likely to create a fair, progressive system.

3. Several Environmental and Social Taxes have been proposed, including : Carbon Tax: which would tax producers according to the level of carbon based pollution produced. This offers an incentive to use techniques more friendly to the environment. Tobin Tax: which would tax organisations and individuals trading in currencies. One off transactions would be largely unaffected. The tax is intended to discourage regular currency trading which tends to be speculative and unproductive, and encourage more socially productive activities.

4. Eliminating Poverty Traps To achieve this a major, coordinated overhaul of the taxation and welfare systems is required. This may involve making government benefits available to a greater number of people, phasing benefits out over a greater income range, or creating tax credits for families with low incomes to offset any loss of benefits.