In 2021 Tax Tips

What Is Tax Reform For And What Can It Do?

Tax reform has become a hot-button issue in the current political and economic context. But what does this term mean? What are the goals of tax reform? 

And how could it impact you and your business? This blog post will provide an overview of tax reform and discuss some of its potential benefits and drawbacks.

Are you curious about tax reform and what it could mean for you? Wondering how it will impact your taxes and your wallet? This post will break down what tax reform is, what it could do for taxpayers, and how to get prepared.

Nobody likes doing their taxes, but they’re a necessary evil. We all want to pay as little as possible and get the biggest refund we can, but most of us don’t know what tax reform is or how it could benefit us. In this blog post, we’ll take a look at what tax reform is and explore some of the ways it could help you save money on your taxes.

What is tax reform for? Tax reform is designed to update the tax code. Tax reform aims to make the system simpler and fairer while encouraging economic growth. So what can tax reform do? 

It can help businesses grow, make it easier for people to file their taxes, and reduce the overall burden of taxes on Australians. If you’re wondering what tax reform could mean for you and your family, read on.

Tax reform is a hot topic in the news right now. Many people are wondering what it is and what it could do for them and the country. In this blog post, we’ll discuss tax reform and give some examples of how it could help improve our economy. 

We’ll also look at some of the criticisms of tax reform and why they may or may not be valid. Finally, we’ll consider how you can get involved in the conversation about tax reform.

What is tax reform for, and what can it do? The answer to this question is not as simple as some people think. Many people believe that tax reform is simply about reducing the amount of taxes people have to pay. While this is one goal of tax reform, it is not the only one. Tax reform can also help improve the economy and make the tax system fairer for everyone.

When most people think of tax reform, they think of changes that will make it easier to pay their taxes. But what is tax reform? And what can it do? 

In this post, we’ll look at the definition of tax reform and explore some of the ways it could impact taxpayers and businesses. Stay tuned – we’ll also give you our thoughts on making sure you get the most out of tax reform if it happens!

To understand tax reform, it’s important to know what it is and what it can do. Tax reform is a change in the way taxes levied on individuals and businesses. It can simplify the tax code, make the code fairer, or reduce the amount of taxes paid. 

Although there are many different reasons for tax reform, most people agree that it’s necessary to improve the economy. Thanks to recent changes in the tax code, business owners now have more incentives to invest in their businesses and create jobs.

Let’s get started!

A Century Of Income Tax And Democracy

This year is the centenary of Australia’s Commonwealth income tax. It was introduced in 1915 by Billy Hughes, at that stage Attorney General under Prime Minister Fisher. 

The income tax was an element in a suite of federal taxes enacted immediately before and during World War I, including the land tax in 1912, estates duty in 1914 and entertainment tax in 1916. 

Only the income tax has survived. However, it is under scrutiny again in current tax policy debates, following the release in March 2015 by the Australian Government of the Re:Think Discussion Paper, aimed at a ‘national conversation’ on tax reform.

When introduced, the income tax was described by Sir Josiah Stamp. In a somewhat ambiguous remark, he was a leading economist in Europe as ‘A courageous effort by the Australian Legislature’. 

The income tax was passed with bipartisan support, albeit this was made easier because the Government, after a double dissolution, had a majority in both Houses. The Leader of the Opposition, Mr Joseph Cook (Parramatta), recognised how an ‘income tax’ is ‘peculiarly appropriate in a time of war’. 

He was cautious about the longer-term implications, observing that ‘we are, so to speak, blazing a track’ as the income tax ‘is, so far as the Commonwealth is concerned, entirely novel, and of far-reaching importance.’

However, all were not happy about it. Mr W Elliot Johnson MP (Lang) presciently observed that ‘unfortunately, there is all too much reason to believe that this taxation will not end with the war’ and continued:

To me, it seems only part of a policy of frightfulness in taxation for which the war is made an excuse by honourable members opposite.

I have not heard the phrase ‘frightfulness in taxation’ yet in our current tax policy debate, but I hope we see it renewed before it comes to an end.

The Australian federal individual and company income tax have come to provide the lion’s share of tax revenues in Australia. At federation, income taxes—levied by the states—raised only 6 per cent of Australian tax revenues. 

By 1939-40 this was 34 per cent, but the states still raised three quarters. Today, the income tax is by far our most important tax by revenue. Australia would look very different without it.

In 2013-14, the personal income tax, with the Fringe Benefits Tax and superannuation fund taxes, raised about $173.7 billion, while company income tax (including petroleum resource rent tax) raised $68.6 billion. 

The total of $242 billion comprises 70 per cent of federal tax revenues and is nearly six times the revenues raised by the Goods and Services Tax. In addition, income tax revenues are enough to fund our cash transfer (social security and welfare) system, defence and the federal government expenditure on health in the current budget.

Commonwealth spending and the budget now is about one-third social security and welfare (the transfer system); one-third health and education; what’s called ‘other purposes’ is the grants to the states, which funds health and education.

In conclusion, the income tax has been very effective; with its growing revenue collection and increased revenues from some other taxes, we have seen the growth of the public sector in Australia. 

Nonetheless, this trajectory is visible across developed countries, clear from the above chart and other OECD statistics. However, in some other countries, the tax level is much higher than in Australia. So there is a real question about where you would end up if you change this dynamic in Australia’s tax system.

Is There A Crisis Of The Tax State?

At the very time that Australia’s federal income tax became operational during World War I, Joseph Schumpeter, the leading public economist from Austria (who then went to the US) articulated the idea of the ‘tax state’: that is, a state that is developed and funded dependent on taxation

It is interesting to consider Schumpeter’s views because he is also one of the leading economic thinkers of the 20th century on issues of entrepreneurship, innovation and the ‘creative destruction’ of markets; key concerns have again reached the political and economic agenda in Australia.

In 1917, Schumpeter was worried about whether governments would be viable in the future and, in particular, whether taxes would sustain them. He foresaw a fiscal crisis of the state.

Schumpeter worried that he didn’t think taxes could sustain social expenditure. It wasn’t war or debt that he was worried about, but funding what the people wanted the money to be spent on:  the social welfare state. 

Yet, our democratic Government succeeded—after many slow and tortuous attempts, especially through the Depression—in mobilising tax revenues to fund the public services, goods and redistribution that Australians wanted, as expressed through the democratic process.

Despite the massive increase in the size of Government over the last century, we still don’t like paying taxes. So we still have this extremely difficult politics of taxation

We celebrate in Australia the rebel who avoids, resents and even steals from the state at the same time as we celebrate our education, health and welfare systems and the equal opportunity and fair go that Australia has to offer—at least, to most of its people, most of the time.

Should Tax Reform Fund The Deficit?

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The Federal Government has a fiscal deficit, as indicated in the 2015-16 Budget. However, the Budget projects that we will recover a prudent stance of fiscal balance or a small surplus, without any legislative change but as a result of bracket creep in the personal income tax, by 2019-20.

Is this the right way to go? Recently, it has been suggested that we move away from this supposedly ‘volatile’ income tax base, which goes up and down with recessions. But that is what the income tax is designed to do and one reason it is so resilient (I return to the concept of resilience later). 

Collections fall in times of recession, and the government shares, to some extent, in the losses of businesses and collects less from individuals who are earning less. 

Collections go up in good times. And without indexation of income tax thresholds or brackets (which Australia has never done, unlike Canada or the United States), the progressive personal income tax grows with real wages and inflation, over time fixing the deficit while still collecting more from those who have a higher capacity to pay.

What does this mean for tax reform? This may depend on your view about the efficiency of taxation and a different goal of tax reform being to support economic prosperity.

We could ‘fix the deficit’ by leaving the income tax system, more or less, the way it is. But, of course, even doing nothing has distributional consequences. All Australians contribute to funding the deficit through bracket creep, but the effects may be felt more strongly at low and middle-income levels. 

In any event, leaving the system the way it is will not deliver additional revenues to fund growing health and other public expenditures in future; the Government still projects significant expenditure cuts being needed in the medium term.

As has been suggested by many, we could aim to raise other taxes, such as land tax or the Goods and Services Tax (GST), to increase tax revenues and fix the deficit. However, such a change is rarely suggested as a simple addition to the current system. Rather, it is usually argued that we should reduce other taxes in making such a change.

A tax reform that raises taxes will require visible government benefits demanded by the people—and a visible lowering of other taxes—to garner sufficient support. Therefore, any increase in some taxes and decrease in other taxes will also have distributional consequences.

What Are The Principles Of Tax Reform?

As taxes are a way to draw a share of the economic return into the public domain, we clearly should care first about what is done with the funds—that the decision making about expenditures is made in a fair way and funds are utilised for the common good—and second, that taxes themselves are raised in the most efficient, fair and effective way possible.

The classic tax policy principles are equity (fairness), efficiency and simplicity. But probably most people would agree that just raising a tax is not ‘reform’. Instead, it has to be considered in light of the broader policy goals. 

On this basis, we have argued at TTPI that taxes should be designed to produce sustainable revenues while supporting or helping deliver:

  • economic prosperity
  • fairness and
  • resilience.

I want to read you a little bit from Billy Hughes’ second reading speech for the 1915 income tax in which the goals of fairness and prosperity are both discussed. To me, it sounds like this speech could be repeated today. What Hughes said was:

The Commonwealth has hitherto not resorted to taxation of income. Still, I have always regarded this form of direct taxation as particularly peculiarly appropriate to the circumstances of a moderate community. Not only as an effective means for raising money for the conduct of Government but serving as an instrument of social reform.

The ‘ability to pay’ element is a strength of our progressive income tax in delivering widely recognised fairness to the tax system. I value fairness highly, but in this lecture, I want to focus on ideas of efficiency and resilience of the tax system.

A Tax Reform Goal For Efficiency: Supporting Economic Prosperity?

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While we need revenue, when tax reforms have been done in Australia with the stated goal of increasing prosperity, they have usually been presented as a ‘revenue-neutral’ package, including substantial tax cuts and other compensation. That is more difficult when a fiscal deficit stretches into the future.

It is interesting to note that while supporting income tax as an instrument of social reform, Hughes was aware in 1915 of the potential disincentives for economic activity of the income tax. He continued:

However, it’s necessary to consider not merely the revenue requirements but also the incidence of the tax so that the economic equilibrium may be disturbed as little as possible. Australia is a very rich country, her production per capita being very great, perhaps the greatest in the world. 

A country’s productivity is the measure of its labour force, its energy and its resources. The productivity of labour depends mainly on the amount of capital available and how it is being used, and the efficiency of the labour. Therefore, it is of the utmost importance that we do nothing to discourage enterprise at this juncture.

Many are familiar with the concept that tax ‘gets in the way’ of enterprise or productive market activity and that efficiency requires a neutral and lowest possible tax. This is the basic model that economists use about the efficiency of a tax. 

You impose a tax on a good (this is your pre-tax world); in the post-tax world, the supply goes down, and the price goes up. Some of the tax goes to Government; that’s the wedge. 

So taxes impose a wedge between demand and supply. Vendors get less, buyers pay more, the difference is the tax, and that triangle in the middle is the deadweight loss because the quantity produced overall declines.

One of the key elements of economic thinking is that it aims to optimise supply using price in the market: to come to the single most efficient method for doing something, the optimal allocation 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 significant complexity across the system. 

For particular taxes, the Treasury estimates that stamp duty on transactions and insurance are the least efficient followed by company income tax; that a broad-based land tax (and council rates) on land value are the most efficient; and that a broad-based flat-rate GST and flat-rate income tax have equivalent efficiency.

The Treasury explains the many assumptions in its modelling carefully. For example, the model depends on assumptions about the responsiveness of work, investment and savings to taxation, rational behaviour with full information, and few market constraints; however, those assumptions may not reflect actual behaviour. Therefore, it is important to consider empirical evidence. 

The model also assumes households act as a single unit and does not identify individual earners in a family and their incentives or responses to tax systems. Individuals may also respond to taxes in ways that seek to reduce their tax bills—through tax planning—without changing their underlying economic behaviour.

Yet even acknowledging these limitations, it would be wrong to ignore the potential behavioural effects of taxes and broader economic costs of those responses, as empirical evidence does show that statistically, individuals do respond in various ways to features of the tax system and that tax rates—and concessions or loopholes in the system—can have real effects on economic behaviour.

Resilience

We can think about the tax system as a system that connects public and private revenues across the economy (in Adam Smith’s language)—or connects Government to individuals and businesses and creates relationships between individuals through collective decision making about resource allocation. I’m interested in a resilient tax system because I’m interested in a stable democratic government.

In applying a concept of resilience to our tax and transfer system, I adapt the approach developed by scientist Brian Walker to consider sociological and ecological systems. 

The concept of resilience has also come to the fore in an economic context after the global financial crisis, regarding ‘resilience’ of the financial and banking system globally and national markets such as housing markets.

Systems theory suggests that resilience is about the capacity of a system to recover its equilibrium. As illustrated, systems theorists use the metaphor of a ball in the bowl; that the world changes, there are shocks and crises and so on, but unless you hit that threshold, you’ll bounce back, the system will more or less recover to its equilibrium. However, the system is destroyed once over the threshold, and a new equilibrium may be established.

In the ecological context, systems resilience talks about ecosystems that are pushed over a threshold and can never recover from their previous state. 

Salinity in the soil is an example: you get to a certain threshold of salinity in the soil, it gets to within two metres of the surface, then it changes the ecosystem, and there’s no return. So this idea of recovering, or, alternatively, transitioning safely to a new equilibrium, is central.

In contrast to the economic goal of optimisation, resilience may require some diversity or redundancy of methods or approaches in the system. A key element of resilience thinking is to observe that fully optimising a system may make it less resilient. 

Therefore, we should expect that we may not be able to fully optimise the system, partly because we cannot predict which elements of the system may collapse or fail, so retaining a variety of elements in the system is important.

If we think about tax system resilience, what might be some of the features we want our system to have? First, of course, we want it to be resistant to planning, we want it to have low costs for sustainable revenues, and we want it to be adaptable to future challenges. But, of course, that also means the system must be politically legitimate and sustainable.

For example, integrity rules in tax systems are necessary to ensure resilience, although they frequently introduce complexity and cost. We may aim for simplicity and efficiency in taxation by relying on only one or a few ‘ideal’ taxes. 

But having several different taxes applying to different bases in the system—but not too many—may lead to a more resilient system in the long term, even if the different taxes do not themselves raise much revenue.

Some kinds of change in our tax system may be difficult to reverse or modify in future, and this could undermine efficiency, fairness and resilience. A historical example in our tax system of a shift over a threshold to a new equilibrium may be the abolition of inheritance taxes by all states and by the Federal Government in the late 1970s up to 1981. 

Despite increased attention being paid to wealth taxes today as a useful policy instrument and efficient tax, moving (back or forward) towards higher wealth taxation is extremely challenging politically. We seem to be in a stable state in which we under-tax wealth and assets in an era when there is an increasing concern about inequality and the efficiency of taxation.

There are other reasons why our tax system may be becoming less resilient, especially regarding the mobility of capital, increasing digital or intangible value creation, and changes in how we all work.

Tax FAQs

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1. How do I know my credit score is correct?

Your score comes from our partner million, an internationally trusted credit agency that’s been operating in Australia since 1887. 

Million follows best practice guidelines to gather all of your financial data from banks, credit card companies and auto financers, as well as public records such as property or court documents to calculate your score.

2. How do I improve my credit score?

To improve your credit score, you need to demonstrate reliability with paying back loans and limit the number of times you apply for credit.

Improving your score takes time and may take more than a couple of years. It’s a good idea to log in and check your credit score from time to time to stay up to date with your current score and make sure your efforts are helping to improve the overall score.

3. What’s the difference between a credit score and a credit report?

A credit report is a full summary of all your financial history, including bill payment history, defaults, bankruptcies and court judgements, plus any loans or credit you currently have in your name.

Your credit score is a number on the scale of 1-1000 (or sometimes 1200, depending on the agency) that indicates how reliable you are at repaying loans and managing debt. The higher the number, the better, and this number changes whenever you perform any financial activities, such as paying a bill on time or defaulting on a loan.

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With MoneyHub, your credit score and report are both available to you at no cost and can be accessed whenever you want. So log back in anytime to view. 

Plus, we’ll even send you alerts whenever something changes on your credit report including but not limited to the addition of any new accounts, defaults, increases in credit limits on any of your accounts so that you can stay on track and improve your score over time.

5. Will using MoneyHub impact my credit score or credit history?

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6. What is Spend Tracker?

Spend Tracker is a user-friendly platform designed to help you get a quick and easy snapshot of all your financial transactions so you can make better decisions about your money.

Spend Tracker lets you see where your money goes, tag taxable transactions throughout the year to make tax time easier and identify strategies that can help you make your money work harder for you.

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