Ausbuy

The Australian Tax System

August 18th, 2008

There has been much media and big business criticism of the Australian tax system in recent years. The basis of this criticism is as follows:

• The system is too complicated and compliance costs are expensive. The rates of tax are too high.
• There are too many deductions. It is estimated that these reduce the tax recovered by approximately $13 billion. Elimination of these would allow the rate of tax to be reduced.
• Fringe benefits concessions for company provided cars cost approximately $1.5 billion. The accuracy of this claim is doubtful as, if it was eliminated, people would spend more time documenting company travel.
• Capital Gains Tax should be paid on houses. If this were the case then such things as interest, repairs and inflation would have to be taken into account which hardly simplifies the system.
• The rate of company tax is too high and acts as a disincentive to attract foreign investment capital. Since the Australian Stock Exchange is one of the most actively traded in the world and Australia’s tax rate is average for OECD countries this does not seem a valid argument. However it is significantly higher than our Asian neighbours who do not provide the same level of welfare support.
• Fuel taxes are low by international standards and do not discourage use of fossil fuels.
• Our rate of Capital Gains Tax and property tax is very high compared to other developed economies but the percentage of our total tax raised from the wage earners is lower than many countries.
• Australia is not a high tax country by the OECD standards and also a low spending one but this is not true when compared to our Asian neighbours.

At this stage there is no indication that Australia intends to reduce the total tax take. When one considers an aging population, increases in health costs, global warming mitigation, defence requirements and a rundown in infrastructure more money will be required. It is wishful thinking to say that the extra money will be found in savings and efficiencies. We can therefore assume that it will be a zero sum exercise with winners and losers. There will obviously be political implications but we can start by looking at what use we make of the taxes we collect and how and why we allocate the tax burden:

• Raise money to administer Australia and provide the services its people require. Among these are law and order, defence, health care, education, welfare, infrastructure and consumer affairs. Unfortunately the cost of these services is rising faster than inflation.
• Redistribute the funds to support our welfare system and look after the most needy.
• Obtain tax from foreign investors but not at such a rate as would persuade them to direct their investment money elsewhere.
• Use the tax laws as an instrument of public policy to direct investment and resources to meet the policy aims of the government.
• Redirect wealth in such a way as to produce, as far as possible, an equitable and fair society.

Despite the recognition that taxes are necessary nobody wants to pay them. People who are otherwise honest will to everything possible to avoid paying tax. Some of these measures may be of doubtful legality but the very complexity of our system leads to uncertainty. It is obvious that it would be desirable to simplify our tax laws and reduce the cost of compliance. However the task of restructuring the tax system, while at the same time raising the same amount of tax, will produce winners and losers determined by the success of their lobbying or the number of voters who will be upset. It would be nice to think that decisions would be made on the basis of equity or economics but that would be a triumph of optimism over experience. To illustrate this we will look at the criticisms of the present system outlined above as follows:

• The rate of tax is too high. It can only be reduced by removing allowances and benefits currently enjoyed.
• Fringe Benefits Tax on cars. If we make these less attractive than the sales of the big cars manufactured in Australia will decrease and threaten the viability of our local manufacturers.
• Capital Gains Tax on houses. This would not make a political sense and would certainly not simplify the system.
• Rate of company tax. This is high but we need to raise money and there is no evidence that it acts as a disincentive for investment.
• Fuel taxes. Raising these would certainly help to fight global warming and raise more money but I do not believe that either political party would be prepared to wear the voter discontent.

These are just a few of the points that have to be considered. The major companies will undoubtedly fill the media with a special pleading but governments will remember that they don’t vote. All the special advocacy groups will also tell the public how they suffer under the present system and the ordinary voter just wants to pay less tax. By the time we reach any decisions everyone will be totally bored and we will be in the run-up to the next election. It would be nice to have a total review of tax, welfare, investment etc, but the complexity is such that I cannot see it being fitted into a three year electoral cycle. Incremental improvements can and should be debated and made in the order course of government.

The present criticism of the system is led by theoretic academics and big businesses which are only interested in their own tax bill.

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3 Comments »

1. Is company tax too high? If this is so then why do large companies (especially the multinationals) enjoy massive profits while most small business & individuals struggle to break even?

   Comment by santasuncle — September 8, 2008 @ 1:25 pm

2. Instead of arguing about who pays what share of taxes and how, why don’t we talk about all of the unnecessary and undesireable things the government spends our money on?

   For example, Multiculturalsim - the policy that immigration should be increased, and the resulting immigrants should be encouraged to preserve the culture of their country of origin and be assisted in doing so. Multiculturaists tell us that the end aim of this policy is to make Europeans in Australia a minority. Should you be paying for this?

   The “arts”. Tens of thousands of dollars paid to someone to film himself regurgitating food onto a drop sheet. $3000 for a girl to chain-saw a piano in half. $400,000 for some giant stainless-steel balls to decorate the Brisbane City Council services building. $290,000 for an ugly outdoor sculpture in Brisbane’s West End. There is much more.

   For every service or type of regulation the government sets up, money is required for clerical staff, inspectors, land and buildings, vehicles, equipment, racks of public information brochures and on and on.

   We can go a very long way down before we hit anything solid.

   You are arguing about how much money everyone gets to keep, except for the government - who is taking it.

   Comment by free_enterprise — August 22, 2008 @ 7:33 pm

3. An interesting topic and one that would be hard to do justice in a few words.

   One area I think we should look at is the tax deductions associated with negative gearing on investment properties.

   Current laws allow the interest paid on loans for investment properties to be claimed as a tax deduction. What this does is;
   1. exacerbates Australia’s housing affordability crisis, by encouraging people to buy multiple properties;
   2. Costs the public purse dearly due to lost tax revenue associated with deductions; and
   3. Benefits investors at the expense of owner occupiers who are not allowed to claim a similar deduction.

   Australia’s negative gearing laws currently operate like Robin Hood in reverse, taking from the average taxpayer to fund the private wealth of investors.

   Securing Australia’s national revenue base will be a challenge for Governments of the future, made harder by the ideologically driven decision to sell off profitable Government enterprises such as CSL.

   Calling a halt to some of the dodgier deductions - such as negative gearing on investment properties - would be a good place to start.

   .

   Comment by jingelic — August 19, 2008 @ 12:07 pm

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