Australian Income Tax System - Coursework Example

Running Head: TAXATION REFORMS Taxation Reforms [The Writer’s Name] [The Name of the Institution] Taxation Reforms Introduction The primary purpose of income taxation is to raise revenue for the governments. The criteria of equity, simplicity, efficiency and neutrality are the traditional criteria used to evaluate how effectively a tax system carries out its purpose of raising revenue. Since 1901 successive Australian Governments have struggled to find the "perfect" tax system to achieve those targets. (Greene, 2004, 36-41) Nowadays, there are two main types of income taxation system. One is a progressive tax system which the Australian Income taxation system is; the other is a flat tax system which the Eastern Europe (e.g. Russia) uses. Comparing with the Eastern Europe, the Australian Income tax system does not have only one single rate and has hundreds of deductions, credits, exclusions, etc. The Australian Income tax system can not produce the desired results. It sinks further into the mire of confusion, clouded by deception and self interest. Following is the brief review. The tax matter--fairness is an ideal exceedingly difficult to define and harder still to measure. The objective view of fairness is a matter of perspective, one person's viewpoint varies form another. Concepts of Reformation There is one concept of equity-vertical equity: taxpayers in different positions treated differently, the further implicit assumption being that the wealthier should bear a greater burden than the poor. Usually someone with an income 10 times higher than another would pay 10 times more. To most people, this is the essence of fairness. Under the Australian Income tax rates--the progressive tax rates( five rates for the residents, four rates for non-residents, and the top tax rate recently is 47%), someone with an income 10 times higher would pay 10 times more. It is obvious that this target of fairness can not be achieved by the progressive tax rates but it can be accomplished simply in Eastern Europe by a flat rate. There is another concept of fairness. Under "horizontal equity", taxpayers in similar positions should be treated the same. Australian current system violates this principle because one's tax liability depends not just on the amount of income, but the form of that income (wages vs. business income) and the amount of tax deductions, exclusions, credits and exemptions to which one is entitled. (Garfinkel, 2007, 95-101) Complexities immediately occur: two taxpayers with the same income may be in entirely different social positions. One may be a single male who carries no debt or dependants and the other a married woman with a disabled husband and three children, and servicing a mortgage. Clearly the affordability of the two taxpayers is enormously different, though the apparent income is identical. The government response was to introduce a "rebate" system whereby both taxpayers are assessed at the same rate but the more 'burdened' taxpayer to receive "rebate" to reduce the final tax payable. (Meade, J. et al. 2003, 14-20) The family rebate system has evolved extensively and has been used as a social welfare and grant system ever since. As of 2001 such rebates have been termed tax offsets and range from subsidies for living in remote localities, zone allowance, to child care assistance. Payments to pensioners as a Government Grant to offset the inflationary impact of the GST where also made through the taxation system in 2001. At least since Adam Smith, simplicity in taxation has been considered a virtue. By simplicity we mean not only that the tax system is conceptually easy to understand, but also that the cost of complying with its requirements is low. The Australian Income tax system fails both tests. The Australian income tax system uses two acts concurrently, the ITAA 19362 and the ITAA 19973, is sufficient evidence that the legislators appear to have taken the reverse view of simplicity. The principal cost is the time we must spend keeping records, filing forms and paying the tax. A government study estimated that Australians spend some billions hours per year just doing that. True simplicity requires more than simple forms; it requires a simple tax system as well. Creating a simple tax system requires stripping away unnecessary exemptions, deductions, credits and exclusions. It means stripping away unnecessary rates and unnecessary levels of taxation. (Hoffman, 2003, 177-80) It means moving the point of collection as close to the source as possible. And it means moving any necessary complexity away from individuals and toward businesses, which are better equipped to deal with it. Australian Income Tax System The Australian Income tax system seems so complicated. It has hundreds of deductions, exemptions, credits and exclusions. Such as in the ITAA 1936, S 23 (o) exemptions to gold producers and deductions for capital items related to drought reduction measures taken by primary producers, and in the ITAA 1997, S 8-1 provides the general deduction and S 12-5 contains a checklist of specific deductions. While in the Eastern Europe, the flat tax achieves all of these goals, and it significantly simplifies the tax system. The lower rate of a flat tax encourages compliance with tax laws, which increases revenue. Because of the flat tax's decreased rate, there is less of an inducement to evade taxes. In addition, the elimination of complicated exemptions, credits, and deductions makes it more difficult to take advantage of the tax shelters that exist under current laws. The principle of Efficiency and neutrality was not applied to the taxation system but rather to the impact of the Taxation system on the economy. (James, 2002, 56-60) That is the impact of tax should not influence economic decisions as to the production or consumption of goods or services. All taxes impose a cost on the economy over and above the amount of actual revenue collected. Economists call this the excess burden or deadweight cost of the tax system. It is in addition to the compliance cost. Although all taxes impose some deadweight cost, the magnitude of the cost varies enormously depending on how the tax system is structured. Two different tax systems raising the same amount of revenue can impose significantly different burdens on the economy. At the low end the flat tax which is used in the Eastern Europe is the head tax or poll tax. Since every taxpayer is liable for a specific dollar amount of tax, there are no penalties for those who work, save and invest. (Arnold, 2002, 124-30) At the other end is the steeply progressive income tax, under which the same income is double and triple-taxed. This is the tax Australia has now. In the Eastern Europe the flat tax achieves the goal by eliminating distortions in the tax base and the rate structure and eliminating the tax bias against saving and investment. And without progressive tax, taxpayers are no longer pushed into a higher tax bracket by inflation. (Grogger, 2001, 21-25) Conclusion Opposite to the progressive tax which Australia uses, the flat tax is a simple, fair, efficient, and effective model for tax reform. The increased incentive to work and invest combined with revenue growth and economic competitiveness makes it an attractive alternative to the complicated tax systems currently in place in Australia. It is sensible that Australia should seek fundamental change in its own tax system in order to avoid falling further behind in the race to attract foreign direct investment. Developments in the Eastern Europe provide Australia with one working model of what serious tax reform could do for economic growth. Australia should not delay in enacting meaningful tax system reform. The approach favoured by e-commerce exporters and industrialized nations, such as the United States, can be distinguished from the tax reforms espoused by some e-commerce importers and developing countries. In order to reform international tax rules and norms, we need to appreciate that the current regime for the taxation of multinational business income operates to the disadvantage of less developed countries. When dealing with cross-border e-commerce activities, the country where the consumer resides foregoes tax jurisdiction in favour of the nation that is home to the e-commerce enterprise. These treaty rules result in the potential tax revenues flow from the treasuries of poor countries to the treasuries of wealthy or developed nations. Any successful reform of international tax rules would have to involve an equitable allocation of global tax revenues among nations. (Ogley, Adrian, 2005, 110-15) According to the economists, one of the most important parts of taxation is the information that the taxpayers know about tax system. Therefore, we have to look at the centre of the problem of tax evasion, which is the government of Canada. As mentioned previously, there had been various changes in the tax policies since 1917. Government actually did not care about whether or not the taxpayers understood these changes. There are lots of technical sections within the new Income Tax Act that the taxpayers are confused about. Moreover every change in the tax policy made the taxpayers worse off, and made the government better off. Changing the tax policy in favour of itself was a way of closing the debt, made by wasteful expenditures before, for the government of Canada regarding to the size of tax revenues going in to the account. It is obvious that individuals in the economy did not understand these changes in the tax policy very well, which was a big reason for them to cheat on their taxes at an increasing rate. If government did not make wasteful expenditures in the history, then it wouldn't need to make any changes in the tax policy, which was going to be simpler for the taxpayers to understand. Government can still reduce or stop tax evasion. The only way is to stop the useless expenditures and make the tax policy simpler for the citizens to understand it. This method will certainly reduce or maybe stop tax evasion. References Arnold, Brian J. - International Tax Primer - 2nd edition, The Hague; London: Kluwer Law International, 2002; 124-30 Garfinkel, I., Huang, C.-C. And Naidich, W. (2007) "Effects of Tax Rebates on Poverty and Income Distribution," Institute for Socioeconomic Studies. 95-101 Greene, L. (2004) The National Tax Rebate. A New America with Less Government, Washington, DC: Regnery. 36-41 Grogger, J. (2001) "The Effects of Time Limits and Other Policy Changes on Welfare Use, Work, and Income Among Female-Headed Families," National Bureau of Economic 21-25. Hoffman, S. and Seidman, L. (2003) Helping Working Families: The Earned Income Tax Credit, Kalamazoo: W. E. Upjohn Institute for Employment Research. 177-80 James R. Hines - International Taxation and Multinational Activity - Chicago III; London: University of Chicago Press, 2002: 56-60 Meade, J. et al. (2003), The Structure and Reform of Direct Taxation, Allen and Unwin, London. 14-20 Ogley, Adrian - The Principles of International Tax: a multinational perspective- London: Interfics Publishing, 2005: 110-15 Read More