What Is Tax Reform For, And What Can It Do?
In the current political and economic environment, tax reform has emerged as a prominent topic of discussion. But could you explain what this phrase means? What are the objectives of the proposed tax reform?
And how might it affect you and your company specifically? This article will provide an outline of tax reform and analyze some of the potential benefits as well as cons of the proposed changes.
Are you interested in learning more about tax reform and what it can mean for you personally? Are you curious about the effect it will have on your finances and your taxes? In this piece, I’ll explain what tax reform is, what it might mean for taxpayers, and how you can get ready for it.
The filing and payment of taxes is a dreaded chore that must yet be endured. The majority of us aren’t familiar with tax reform or how it could be of advantage to us, despite the fact that we all want to pay as little as possible in taxes and get the largest refund we possibly can. In today’s article, we’ll take a look at what tax reform is and examine some of the ways that it can enable you to reduce the amount of money that you owe in taxes.
Why do we need to alter taxes? The objective of tax reform is to bring the tax code up to date. The objective of tax reform is to achieve simplification and equity in the system while simultaneously fostering economic expansion. What are the potential benefits of tax reform?
It has the potential to encourage the growth of businesses, make it simpler for individuals to file their tax returns, and lessen the overall burden of taxation placed on Australians. Continue reading if you are interested in finding out what the recently passed tax reform might imply for you and your family.
At the moment, tax reform is one of the most discussed issues in the media. A lot of people are curious about what it is and what it could be able to achieve for them and the country in general. In this article, we will talk about tax reform and give some instances of how it could help strengthen the economy here in the United States.
We will also examine some of the objections to the tax reform and discuss the reasons why these objections may or may not be justified. At last, we’ll talk about the ways in which you can participate in the discussion about changing the tax system.
Why do we need tax reform, and what can we expect it to accomplish? The solution to this conundrum is not as straightforward as some may believe it to be. It is a common misconception that the primary goal of tax reform is to reduce the total amount of money that individuals are required to pay in taxes. Tax reform has multiple goals, and while this is one of them, it is not the only one. In addition to helping the economy, tax reform can also make the existing tax system more equitable for everyone.
When most people think of tax reform, the improvements that come to mind are ones that will make it simpler for them to make their tax payments. However, what really is tax reform? And what are its capabilities?
In this piece, we’ll take a look at the meaning of “tax reform” and investigate some of the potential ways in which it could affect businesses and individual taxpayers. Keep an eye out for our upcoming update, in which we will also provide our ideas on how you may maximize the benefits of any potential tax change.
It is vital to comprehend both what tax reform is and what it can do in order to have a complete understanding of it. A change in the way that taxes are levied on individuals and corporations is what is meant by the term “tax reform.” Simplifying the tax code, making it more equitable, or lowering the amount of taxes that must be paid are all possibilities.
Even if there are a wide variety of arguments in favour of tax reform, the majority of people believe that it is essential in order to boost the economy. As a result of recent modifications made to the tax code, company owners now have access to additional incentives that encourage them to invest in their companies and generate new jobs.
Let’s get started!
One Hundred Years of Democracy and Income Taxes
This year marks the 100th anniversary of the introduction of the Commonwealth Income Tax in Australia. 1915 was the year when it was initially proposed by Billy Hughes, who served as Attorney General at the time under Prime Minister Fisher.
The federal government implemented a number of different taxes just prior to and during World War I, among which were the land tax in 1912, the estates’ duty in 1914, and the entertainment tax in 1916. One of these taxes was the income tax.
Only the tax on income has managed to stay in place. The Australian government published the Re: Think Discussion Paper in March 2015 with the intention of starting a “national dialogue” around the topic of tax reform. Since then, it has been the subject of renewed attention in the context of current debates on tax policy.
Sir Josiah Stamp was the one who outlined the details of the income tax when it was first implemented. He was a famous economist in Europe, and he referred to what he called “A bold effort by the Australian Legislature” in a remark that was somewhat equivocal.
The income tax was approved with backing from members of both parties, despite the fact that its passage was made simpler by the fact that the government, following a double dissolution, held a majority in both Houses. Mr Joseph Cook (Parramatta), the Leader of the Opposition, acknowledged that a “income tax” is “particularly appropriate in a time of war.”
The income tax “is, so far as the Commonwealth is concerned, utterly original, and of far-reaching importance” therefore, he was wary about the longer-term ramifications. He made the observation that “we are, so to speak, blazing a track,” which means that they are pioneering something new.
On the other hand, not everyone was pleased with the decision. Mr W. Elliot Johnson, Member of Parliament for the Lang constituency, made the prescient observation that “sadly, there is all too much cause to suppose that this taxation would not cease with the war.” He continued by saying:
“It seems to me that this is merely a small component of an overall program of frighteningly high taxes, which the honourable members of the other party are using the war to justify.
I have not yet seen the phrase “frightfulness in taxation” used in our ongoing discussion over the policy of our tax system, but I hope that we do so before the discussion comes to a close.”
The Australian federal individual and corporate income tax have evolved to become the primary contributors to tax revenues in Australia. Income taxes, which were collected by the individual states, contributed only 6% of total tax receipts to the federal government.
By 1939–1940, this figure had dropped to 34%, but the states continued to provide 75% of the total. At the present time, the tax on income is by a significant margin the most important tax in terms of revenue. Without it, Australia would have a totally different appearance.
The personal income tax, together with the Fringe Benefits Tax and the taxes on superannuation funds, brought in around $173.7 billion during the 2013–14 fiscal year, while the corporate income tax, which included the petroleum resource rent tax, brought in approximately $68.6 billion.
The sum of 242 billion dollars accounts for 70 percent of all revenues collected by the federal government from taxes and is roughly six times greater than the sum collected from the Goods and Services Tax. In addition, the proceeds from income tax are sufficient to finance our cash transfer system (which includes social security and welfare), our defence budget, and the expenditures that the federal government makes for health care in the current budget.
Currently, approximately one-third of Commonwealth spending and the budget goes toward social security and welfare (the transfer system); one-third of Commonwealth spending and the budget goes toward health and education; and what is referred to as “other purposes” are grants to the states, which fund health and education.
In conclusion, the income tax has shown to be quite effective; because of the expanding revenue collection from the income tax as well as the increased revenues from various other taxes, the public sector in Australia has been able to expand.
Nevertheless, this trend can be seen throughout industrialized nations, as the graphic to the right and various other OECD statistics make abundantly obvious. On the other hand, the tax burden is significantly more onerous in a number of other nations than it is in Australia. Consequently, there is a genuine concern about the consequences that might result from altering this particular dynamic in Australia’s tax system.
Is There A Crisis Of The Tax State?
Joseph Schumpeter, the leading public economist from Austria (who later moved to the United States), articulated the idea of the ‘tax state’ right around the same time that Australia’s federal income tax became operational during World War I. A ‘tax state’ is a state that is developed and funded dependent on taxation. In this case, Australia’s federal income tax.
It is interesting to consider Schumpeter’s viewpoints because he was also one of the leading economic thinkers of the 20th century on issues of entrepreneurship, innovation, and the “creative destruction of markets.” These are key concerns that have once again reached the political and economic agenda in Australia.
In 1917, Schumpeter was concerned about the viability of governments in the future, particularly with regard to the question of whether taxes would be able to support them. He predicted that the state would run into financial trouble.
Schumpeter was troubled by the fact that he believed taxes were unable to maintain social expenditures. It wasn’t the war or the debt that he was concerned about; rather, it was the support of the social welfare state, which was what the people wanted the money to be spent on.
However, our democratic government was able to successfully mobilize tax revenues to fund the public services, goods, and redistribution that Australians desired, as expressed through the democratic process. This accomplishment came after many slow and tortuous attempts, particularly during the Great Depression.
We still dislike having to pay taxes, despite the fact that the size of the government has ballooned dramatically over the course of the past century. Consequently, the politics surrounding taxation continue to be highly challenging.
At the same time that we celebrate our education, health, and welfare systems as well as the equal opportunity and fair go that Australia has to offer—at the very least, to the majority of its people, the majority of the time—we celebrate the rebel who avoids, resents, and even steals from the state. This is something that is celebrated in Australia.
Should Tax Reform Fund The Deficit?
According to the Budget for the Fiscal Year 2015–2016, the Federal Government has a fiscal deficit. On the other hand, the Budget estimates that by 2019-20, we will have recovered either a sensible position of fiscal balance or a small surplus. This will occur not as a consequence of any changes to legislation but rather as a result of bracket creep in the personal income tax.
Is this the path that we ought to take? In recent times, it has been proposed that we shift away from this apparently “volatile” income tax base, which rises and falls in response to fluctuations in economic conditions such as recessions. However, this is precisely what the purpose of the income tax is, and it is one of the reasons why it has been so successful.
When there is a recession, the amount of money collected by the government decreases, and the government has some responsibility for the losses sustained by enterprises. Additionally, the government receives less money from individuals as a result of their decreased earnings.
When things are good, collections tend to go up. And despite the fact that Australia has never indexation of income tax thresholds or brackets (unlike Canada or the United States, Australia has never done this), the progressive personal income tax grows with real wages and inflation, which, over time, fixes the deficit while still collecting more from those who have a higher capacity to pay.
What does this imply for the overhaul of the tax system? This might depend on how you feel about the effectiveness of taxing, as well as how you feel about another objective of tax reform, which is to promote economic growth.
We could “repair the budget” by abandoning any significant changes to the income tax system from the previous administration. However, it goes without saying that even doing nothing has some kind of impact on the distribution of resources. Although everyone in Australia contributes to the funding of the deficit through bracket creep, the effects may be felt more strongly by those with incomes in the lower and medium ranges.
If nothing else, maintaining the status quo of the system will not result in the generation of additional resources to finance rising health and other public expenditures in the future; the government continues to forecast that major expenditure cuts will be required in the medium term.
As has been recommended by a large number of people, one strategy for increasing tax collections and reducing the deficit would be to seek to levy additional taxes, such as the land tax or the Goods and Services Tax (GST). On the other hand, such a modification is rarely proposed as a straightforward addition to the system that is currently in place. Instead, the argument that is typically made is that we should lower other taxes in order to make such a change.
In order to gather adequate support for a tax reform that results in higher tax rates, there will need to be apparent government benefits that the people seek, as well as a noticeable reduction in other tax rates. As a result, the distribution of tax burdens will be affected by any change in tax rates, including reductions in some taxes and increases in others.
What Are The Principles Of Tax Reform?
Because taxes are a means of channelling a portion of the economic return into the public sphere, it stands to reason that we should be concerned, first and foremost, about what is done with the funds—that decisions regarding expenditures are made in an equitable manner and that funds are utilized for the common good—and, second, that taxes themselves are collected in the most efficient, fair, and effective way that is possible.
Equity (fairness), efficiency, and simplicity are three of the most fundamental concepts of tax policy. However, the vast majority of people probably agree that just increasing taxes is hard “reform.” Instead, it has to be assessed in light of the broader policy goals.
On this basis, we have argued at TTPI that taxes should be intended to provide sustainable revenues while supporting or helping deliver:
- economic prosperity
- fairness and
Here is a little bit from Billy Hughes’ second reading speech for the 1915 income tax in which the ideals of fairness and prosperity are both highlighted. It seems that this speech may easily be given again in modern times. This is what Hughes had to say:
“To this point, the Commonwealth has refrained from imposing income taxes on its citizens. Despite this, I have always believed that this specific method of direct taxation is specially and peculiarly suited to the conditions that prevail in a moderate community. Not only as an efficient method of obtaining money for the operation of the government but also in the role of an instrument for the improvement of social policy.
The ‘capacity to pay component of our progressive income tax is a strength that helps deliver the widely recognized fairness of our tax system. This is one of our tax system’s strengths. Although I place a high premium on fairness, the concepts of efficiency and resiliency within the tax system are the ones I wish to highlight in this presentation.”
A Tax Reform Goal For Efficiency: Supporting Economic Prosperity?
Even though we need revenue, previous attempts at tax reform in Australia, with the stated objective of increasing prosperity, have typically been presented as a “revenue-neutral” package, which includes significant tax cuts and other forms of compensation. This is despite the fact that we do need revenue. This becomes a more challenging task when there is a budget deficit that extends into the future.
It is significant to note that Hughes was aware in 1915 of the possible disincentives for economic activity that the income tax may have. Hughes supported the income tax as a tool of social reform, but he also knew that the income tax could have these disincentives. He continued by saying:
However, it is vital to take into consideration not only the revenue requirements but also the incidence of the tax in order to ensure that there is as little disruption to the economic equilibrium as is humanly possible. Australia is a tremendously wealthy nation, and her productivity on a per-person basis is quite high — possibly the highest in the whole wide world.
The amount of work done in a country is directly proportional to the amount of energy and resources it possesses. The amount of accessible capital, the manner in which it is being utilized, as well as the efficacy of the labour are the primary factors that determine the productivity of labour. As a result, it is of the utmost significance that we do nothing at this point to discourage business. This is of the utmost importance.
Many people are aware of the idea that taxes “get in the way” of productive market activity or entrepreneurial endeavours and that efficiency necessitates a tax system that is both neutral and as low as possible. This is the fundamental model that economists use to determine whether or not a tax is efficient.
If you place a tax on a product, the supply of that thing will decrease in the world, which follows the imposition of the tax; consequently, the price will increase. The government receives a portion of the tax revenue; this is the wedge.
Therefore, taxes create a barrier that stands between supply and demand. The tax is calculated as the difference between the lower prices paid by purchasers and the higher prices charged by sellers; the triangle in the middle represents the deadweight loss that results from the general reduction in the number of goods produced.
One of the most important aspects of the way economists think is that they try to maximize supply by maximizing price in the market. This means that they try to determine the single most effective way to accomplish something, as well as the optimal distribution of resources.
The Treasury argues that the economic costs of the tax system (the marginal excess burden’) are higher than they need to be and that many features of the existing system make it less attractive to invest in Australia and limit job growth, affect work incentives, or add a significant amount of complexity across the system. These claims are based on the marginal excess burden.
The Treasury estimates that the least efficient type of tax is stamp duty on transactions and insurance, followed by company income tax; the most efficient type of tax is a broad-based land tax (and council rates) on land value, and the most efficient type of tax is either a broad-based flat-rate GST or a flat-rate income tax.
Careful explanations are provided for each of the several assumptions that the Treasury uses in its modelling. For instance, the model is predicated on assumptions about the responsiveness of work, investments, and savings to taxation, rational behaviour with complete information, and few market constraints; nevertheless, these assumptions might not reflect actual behaviour. As a result, it is essential to take into account the empirical evidence.
The model additionally presupposes that families function as a unified entity and does not differentiate between individual earners within a family in terms of their motivations or responses to different tax systems. Individuals may respond to taxes in a variety of ways, one of which is to strive to lower their tax payments by engaging in tax planning. However, this does not require individuals to alter their economic behaviour.
Nevertheless, even while acknowledging these limitations, it would be irresponsible to ignore the potential behavioural effects of taxes and the broader economic costs of those responses. This is due to the fact that empirical evidence does show that, statistically, individuals do respond in a variety of ways to features of the tax system and that tax rates, as well as concessions or loopholes in the system, can have real effects on economic behaviour.
In the language of Adam Smith, we can think of the tax system as a system that connects public and private revenues across the economy. Alternatively, we can think of the tax system as a system that connects the government to individuals and businesses and creates relationships between individuals through collective decision making about resource allocation.
The method that was established by scientist Brian Walker to take into consideration sociological and ecological systems is the one that was adopted in order to apply the concept of resilience to our system of taxes and transfers.
After the global financial crisis, the idea of resilience has also emerged as an important topic in the context of the economy, specifically in reference to the “resilience” of the global financial and banking system as well as national markets such as housing markets.
According to systems theory, resilience refers to the ability of a system to regain its equilibrium after experiencing disruption. Systems theorists often use the metaphor of a ball in a bowl to explain how the world changes, how there are shocks and crises, and so on; however, unless you hit that threshold, you will bounce back, and the system will more or less recover to its equilibrium. This concept is illustrated in the example that follows. Nevertheless, once the threshold is exceeded, the system is destroyed, and it may be possible to construct a new equilibrium.
In the context of ecology, the term “systems resilience” refers to ecosystems that, once pushed beyond a certain point, are unable to return to the state in which they were originally found.
The salinity of the soil is a good illustration of this: once it reaches a specific threshold of salinity in the soil, which occurs when it is within two meters of the surface, it alters the ecosystem irreversibly, and there is no way to reverse it. Consequently, the concept of recuperating, or alternatively, transitioning to a new equilibrium in a secure manner, is essential.
To achieve resilience in a system, as opposed to the economic purpose of optimisation, it may be necessary to include a degree of variety or redundancy in the methods or processes used. Understanding that perfectly optimizing a system may actually make it less resilient is a fundamental component of the concept of resilience.
Therefore, we should be prepared for the possibility that we will not be able to optimize the system fully. This is due, in part, to the fact that we are unable to predict which components of the system may fail or collapse; consequently, it is essential to maintain a diverse range of components within the system.
If we take into consideration the robustness of our tax system, what are some of the characteristics that we would like it to have? We want it to be resistant to planning, have low costs for sustainable revenues, and be adaptive to future difficulties. First and foremost, we want it to be resistant to planning. Having said that, it goes without saying that this also necessitates the political legitimacy and continued viability of the system.
For instance, in order to ensure that tax systems are resilient, it is vital to have integrity standards, despite the fact that these rules typically entail complexity and cost. It’s possible that we may achieve simplicity and effectiveness in our tax system by relying on just one or a few “ideal” taxes.
But having a number of different taxes that apply to a variety of bases in the system—but not an excessive number of them—could, over the course of time, lead to a system that is more robust, even if the various taxes do not collect a significant amount of income individually.
It may be difficult in the future to undo or amend certain sorts of changes that have been made to our tax system, which may have a negative impact on its adaptability, efficiency, and justice. A historical illustration of a change over a threshold to a new equilibrium in our tax system may be the repeal of inheritance taxes by all states and by the Federal Government from the late 1970s up until 1981. This occurred between the years of 1977 and 1981.
In spite of the fact that wealth taxes are currently receiving more attention than ever before as a valuable policy instrument and effective tax, moving (either backward or ahead) toward more wealth taxation is exceedingly difficult from a political standpoint. In a time when there is growing concern about inequality and the efficacy of taxation, we appear to be in a stable condition in which we under-tax wealth and assets. This is the case despite the fact that we are in a state.
There are further factors that could be contributing to the fragility of our current tax system. These factors include the portability of capital, the rise of digital or intangible value creation, and alterations in the ways in which we all perform our jobs.
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