Australian Taxation Law Regarding Tax Expenditures - Essay Example

Australian Taxation Law Regarding Tax Expenditures Name: Instructors Name: Course title: Institution: Date: Introduction Tax expenditures are spending programs that are implemented through the tax code. The programs give business and people special tax credits, exclusions, special tax credits, deferrals, exemptions, as well as preferential rates in support of different government policies. Some of the programs adopted help people to save for retirement purposes, pay for school, and buy houses. Others help companies to invest in modern activities such as building of nuclear power plants, developing nuclear power plants, or even subsidizing corporations, which drill oil or purchase real estates among other notable purposes. Brown (2010) indicates that governments are using both direct spending and tax expenditures in supporting its policies. Different spending takes place when government takes the taxpayers money and gives them to other people to be spent for other purposes. Governments make use of tax expenditures in accomplishing similar goals similar as the direct spending, although it transfers money by reducing taxes for companies or individuals rather than giving money to this people. This paper critically analyses on whether, tax expenditures in Australia are the fairest or a most effective way of encouraging retirement savings. Background on Australian Taxation Law Australia has one of the most advanced taxation system, as many forms of taxation are carried out by the government. Companies and individuals are required to pay taxes or other types of charges to all levels of Australian government, such as state, local as well as the federal government. Taxes are then collected to cater for transfer payments and paying public services. Gustman (2003) income taxes are one of the vital forms of taxation, and are collected by the federal government through ATO (Australian Taxation Office). Australian GST revenuers are collected by federal governments and thereafter paid to states under distribution formulae, which is developed by Commonwealth Grants commission (Gruber, & Wise, 2009). Personal income taxes are income taxes on the individuals that are imposed on the federal level making it one of the most significant sources of revenues. Unlike in other countries, personal income taxes are imposed on individual levels and not at family unit. Capital gain tax applies to capital gains made on the disposal on any assets except for particular specified exemptions. CGT operates through having net gains that are treated as taxable incomes in tax year the asset is sold or it has been disposed. In 2001, there was an introduction of goods and service taxes that are value added tax of the 10% on supply of various goods and services by companies registered for the GST (goods and service tax). The other forms of taxation used by government in Australia includes property taxes , exercise taxes, imposed on goods such as alcohol, petrol, cigarettes among others vital commodities. Fringe benefit is also a type of taxation applied by Australian Taxation Office and is generally non-cash benefits. Majority of fringe benefits are the employee’s payment summaries meant for inclusion on the personal income returns on taxes, which ought to be logged annually. Faricy (2011) of all these types of revenues collected by the Australian government a substantial amount is allocated to fund tax expenditures such as social welfares like retirement schemes among other notable use. This is vital for the success of the owing to the big role played by improvement on social welfares due to raised output among the citizens. In Australia, the government is encouraging people to save for retirement purpose. To achieve this, the Australian government has come up with schemes, which will create a favorable environment to encourage workers’ to invest in saving schemes. To many low incomer workers, the saving schemes adopted by the government are seen to favor the high-income earners such as the superannuation as opposed to the low-income earners, who forms approximately 70% of the entire work force in the country (Juster, 2005). Because of this, the high-income earners are able to benefit more from their savings in comparison to low-income earners. Background on tax expenditures Gustman (2003) argues that tax expenditures are different from other forms of spending made by any government. This is due to the fact tat most of the tax expenditures are usually not the subject to same annual appropriations process as compared tom other forms of expenditures, thus reduced likely hood of being scrutinized. Secondly, tax expenditures appears to be a tax cut rather than a spending as they transfer funds to individuals and businesses through the tax subsidies. It is worth noting that tax expenditures mostly alters vertical and horizontal equity of basic system, thus allowing deductions, exemptions, credits among other important aspects to the specific activities or selected group (Stanley , 2010). For instance, two individuals earning exactly the same incomes may have varying effective tax rates. This occurs when one of the individual qualifies for particular tax expenditure programs due to owning a home; receiving employer is health care, having children or having children. Tax expenditure has similar effects on budget deficit as the appropriation spending (Adam, 2010). For instance, a new program, which cost a particular government $ 100 million in the revenues, has same effects on national debt on as expansion of the social security of $100 million dollars. For most of the developed countries, such as Australia, US and other European countries, there is the general tax codes have regularly being used to encourage the public to save for the retirement needs (Juster, 2005). For instant, in US, provisions in tax code designed for encouraging retirement saving costs the US Treasury billion of dollars in terms of foregone revenues on annual basis. Although there does not exist an universal consensus, tax expenditure is widely used by many public financial experts, organizations such as the World Bank and OECD( Economic Cooperation and Development).Since the mid of 1980s, there have been a substantial rise on the cost and number of tax expenditures reported in TES (Tax Expenditure Statement). The number of TES increased over 80% from 160 in the financial 1985 to over 325 in 2008. The tax expenditures reported increased from $86.8 billion to a whopping $72 billion during the same period. This amounted for 3.6% in terms of Gross Domestic Product to 7.1% (Gruber, & Wise, 2009). It is also important to note that, not only are tax expenditures listed in form of TES growing, but they are also taking up larger slices in the federal budgets. For instance, from 195 to 2008, tax expenditures as a proportion of the public spending almost tripled as from 9.3% to 24.9% during this duration. This paper critically analyses on whether, tax expenditures in Australia are the fairest or a most effective way of encouraging retirement savings. Taxation expenditures in Australia It is impotent noting that there has been an ongoing public concerns on the way the Australian Government spends its revenues. The academics, media, as well as commentators often discuss n the efficiency and equity of the social spending. However, most of these debates tend to focus more on the visible types of discussions such as direct outlays or payments on education and hospitals, unemployment among other interesting areas, which concerns the area of social policy. The existing tax reviews provide a healthy opportunity for reviewing the shift-taking place from the area of spending to tax breaks, which is threatening inclusiveness and fairness of the Australian Welfare sate (Faricy, 2011). Because tax expenditures are less visible as compared to other types of social spending, it has become easier for most of his governments including the Australian Government to expand supports to the high-income earners and providers of private services without facing stiff political critics or political resistances. The rapid increase of inequitable tax expenditures offers Australia an opportunity to create fairer welfare state devoid of increasing operational costs (Gruber & Wise, 2009). Distribution implication of Australian Tax Expenditure Generally, Australian direct spending on the social services is quiet impressive, indicating that most of benefits goes to those people who are in need of the services. While some lobby groups have regularly complained about the middle class welfare, evidences from international bodies such as the OECD have revealed that, without adequate accounting for the tax expenditure, the country has one of the targeted systems for social insurance. Australian social spending redistributes most income to its people in need rather than to virtually all other developed countries in the globe. However, the tax expenditures largely undermines redistribution effects of the Australian Government spending through allocating more social benefit money to high income earners rather than vice versa. Tax expenditures benefits higher income earners since, they are well linked to private spending and income tax system on the social services. In Australia, tax expenditures relates to income tax systems. Due to the fact that the income tax system is not capped, there is return benefits, which is equal to national amount of the owed tax. As the higher income earners do pay more of income tax as compared to low-income earners, they receive more benefits than the latter. Although detailed figures on these facts regarding distribution of tax expenditures are not readily available, other type of available, evidences have indicated this (Brown, 2010). Superannuation This is one of the prominent examples of how high income earners benefit more from the Australian Taxation process. The Super contributors are taxed at concessional rates at 15 cents in Australian Dollar. Likewise, earnings from these funds receive a concessional rate as well as the fact that they does not exist tax levies charged on withdraws (Gruber, & Wise, 2009). For those people who earns more than $18,000 pear annum, this particular concession is equal to rebates at 30 cents for each dollar that is earned or invested ,as top marginal rates for these particular income earners gets up to 45 cents per dollar. On the other hand, for those low income-earners having less than $34,000 p.a, this scheme does not give them any type of benefit. Juster (2005) argues that potential lifetime benefits for people earning more than $72,000 on annual basis from super tax concession is higher their lifetime benefits from aged pension. This is a clear indication that the government is spending more on individual under this scheme to help the wealth of self-funded retirees as compared to helping the pensioners. The effect of all these is strengthened through linking of tax expenditures to the private spending that takes palace on social services. Gustman (2003) indicates that, not only do the higher income earners have greater capacity of spending their personally income on the social services, but they also receive greater benefits. NATSEM (National Center for Social and Economic Modeling) indicated that after extension of the tax supports to private health insurances, the leading 20% of the income earners were twice more likely than other citizen in Australia to hold insurance, thus qualifying for tax expenditures. Same effects are seen in the super, as higher income earners make more voluntary contributions. The other impact of tax concession is on structure of most of industries, which carry out human services in Australia. By rewarding the private social spending, these types of policies promote private provision like the dramatic expansion on private health insurance, private finance institutions and private childcare facilities that controls superannuation. This results to significantly hard situation for Australian government to regulate these given sectors in order to ensure conformity to standards set and provision of high quality services, while increasing total budgetary costs. Therefore, one can see that tax expenditures in Australia have a tendency of having negative distributional effects to the spending programs. This is due to the fact that they pay more to people having more income tax brackets as well as the fact that they increase individuals spending (Young, 2004). Low visibility resulting to low accountability It is important to note that, tax expenditures are relatively hidden form of a public spending, which are subject to reduced oversight arrangements as compared to the direct expenditures as well as receiving less forms of scrutiny in comparison to other form of government activities in media reports. The table below briefly indicates that tax expenditures are subject of infrequent audits for budget and they do not undergo any form of annual review. Oversight arrangements Existing direct outlays Existing tax expenditures Estimates that have been compiled according to the independent standards that are fit for purpose Yes No Indentified for entire common wealth agencies Yes No Subject to regular budgetary reviews Yes Infrequently Reported in the Budget estimates Yes, by the budget outcomes Infrequently Subject to the budget monitoring Yes, by the budget outcomes Infrequently Cost measured against measurements Yes Infrequently Subject to the annual agency reporting’s Yes Infrequently Subject to an annual audit Yes No (Brown, 2010) Tax expenditures receive little attention in the media reports as well as public debates. Low profile concerning tax expenditures is in some extents reflective of their own design. Through decreasing tax burdens of the recipients, the tax expenditure amount to a type of a public investment, which do not involve any monetary transaction? On the other hand, expenditure on taxes appears to offer recipients back their cash, instead of conferring selective benefits from government. Like wise, tax expenditures have budgetary effects on reducing state revenues rather than raising outlays that may reduce scope of public spending and government activities. While TES has enhanced visibility of the tax expenditures, it receives reduced media coverage in comparison to Australian budget (Charles, 2010). Lack of coverage by media reflects timing of it release during holiday period at start of Australian Day or Christmas. Although Treasury have stated that TES is to be published at the before the start of calendar year to inform the budget, its release during this given period, does so little in boosting profile of the tax expenditures. Due to lack of proper and effective legislatives of scrutiny coupled with low public profiles, tax expenditures have often provided Australian Government with both Labor and Liberal persuasions, with policy backdoor of increasing pubic spending. This is done while at the same time avoiding public accountability and tendency of reducing size of budget. As indicated by the Australian Treasury, in a big contrast with direct expenditures, expenditures on tax are often difficult to identify. Further, tax expenditures are exposed to a close form of scrutiny, only during the time when they have been introduced. This combined with their quick distribution and expansion effects, low public accountability on tax expenditures demonstrate the great importance of shinning light through media attention onto this hidden form of a public spending (Stein, 2000). Reforming Tax expenditure in Australia From the information given above, one can see clearly that there is an urgent need of reforming tax expenditures in Australia. Lack of accountability and transparency has resulted to decrease equitable social spending. Visible governments spending programs have reflected structures of tax expenditures are less likely to be politically defensible. Through separating out functions of social support and revenue collection, with tax system focused on latter and payments system on former, Australia can achieve a more efficient, transparent as well as more equitable systems regarding tax expenditures. This can be indicated by the FHSA (First Home Savers Account). It was a scheme that had been developed by the Labor Opposition party prior to federal elections in 2007 with an aim of introducing new scheme of tax saving in order to promote home ownerships. First Home Saving Account allowed first time homebuyers to save towards their deposits, while at the same time receiving tax benefits as the holders of superannuation accounts. As indicated above, the holders of superannuation account are currently being taxed at a flat rate of 15 percent for both their earnings and contributions. This grants account holders of this type of a scheme an effective tax concession of maximum 30%, largely depending on marginal rate of account holder. FHSA was to have similar structure, with both the earnings and contribution being taxed at 15% of concession rate (Adams, 2008). Upon gaining government, the Labor charged treasury to implement this particular scheme. Australian Treasury advice that tax concession arrangements could be administratively prohibitive, instead they advocated for a rebate scheme. Rebate scheme was supposed to involve government payments and was similar to the co-contributors as compared to tax concessions. Even this particular scheme highly resulted to a political outcry. This is because it continued to offer highest levels of government support to the high-income earners, something made more obvious through conversion of tax concessions into government spending. Following numerous submissions by the public, Australian government was forced to modify the scheme in order to offer all the contributors same level of support as indicated by the table below Taxable Income in Australian Dollar Initial Labor Policy prior to the 2007 federal elections (in percentage) Discussion Paper Model, which was released in 2008 (in percentage) Discussion Paper Model, which was released in 2008 (in percentage) 0- 6,000 0 15 17 6001 – 34,000 0 15 17 34,001- 80,000 15 15 17 80,001- 180,000 25 25 17 180,001+ 30 30 17 (Brown, 2010) Surrey (2004) argues that as structures of tax expenditures are made more transparent and explicit, so does the political imperatives push structures of social policy in an increased egalitarian direction. Using the argument, it is easy to improve on the superannuation in order to be more inclusive of different groups of people regardless of their income levels, thus resulting to equitable tax expenditure. Improving Superannuation Juster (2005) indicates that identification of the exact nature and extent of tax supports for superannuation may be difficult due to relatively poor form of reporting. Australian Treasury report total superannuation expenditure on tax, but they fail to offer complete data on distribution of tax expenditure or the breakdown of different component of superannuation tax supports. One of the most useful figures for tax concession is on employer’s contribution, which set at 9 percent to superannuation. There are some forms of support to the voluntary contributions made by low-income earners by their co-contributions schemes. However, reforming tax concessions for the voluntary contributions would less likely raise equity of Australian Government support. The table below Tax bracket Mean Y of tax bracket 2 Top margin tax rate (Cents/Dollar) Mean Value of the SCG Rate of tax discount Estimated value of the tax concession for the SCG $1- 6,000 3153 Nil 284 0 0 22312 15 1008 0 0 $ 35,001 – 80,000 51725 30 4656 15 699 $ 80,000 -200,000 109,142 40 9822 25 2456 $ 200,000 and above 419291 45 37735 30 11322 Estimated Budgetary Outlay that is equal to $ 6,061 million (Brown, 2010) By replacing existing system of the superannuation tax concessions, employers will be able to deduct taxes from superannuation contributions in similar manner as like the other type of pay (Blau, 1998). Further, the government will be able to provide rebates directly paid into superannuation accounts. It is important also to recognize the fact that, there exist large problem in-terms of promoting savings on retirements for those outside the workforce, especially women. This is a clear indication of disadvantage of Australian contributory model in comparison to other models from insurance companies, which are more inclusive. One of the ways of improving the superannuation model to cater for the needs of all Australian residents is providing rebates at a 15% flat rate on all the compulsory super contribution, same as the one of final FHSA model indicated above. This is same level of support, presently offered to people earning $ 35,000 to $ 80,000 on annual basis (Michael, 2002). The model can effectively redistribute incomes given to people earning above $ 80,000 on annual basis to the people who earn less than $ 35,000 as indicated by the table below. Tax Bracket Men Y of Tax Bracket Men Value of SCG Co-Contribution rate Estimated value of the 15 percentage Flat rate Co-contributions $1- 6,000 3152 284 15 41 $ 6,001- 35,000 222312 2008 15 301 $ 80,000 -200,000 51,727 4666 15 699 $ 200,000 and above 419290 37736 15 5661 Estimated Budgetary Outlay that is equal to $ 5 978 million (Brown, 2010) By adopting above method, net result would be the fact that, workers on minimum wage could expect to receive additional $ 381.75 on annual basis. Over their working life, workers employed on minimum wages for about 40 years can expect an increased value to their superannuation by an approximate value of $ 24,000, which is a year salary (Juster, 2005). The other model that can be employed in order to improve taxation expenditures in Australian, is provision of flat rate rebates at 20 percent support for people earning up to 80,000 Australian dollars and subsequent decreasing of rebates offered by government by 1% point for every addition 1000 Australian dollar (Hacker, 2002). This will be until being phased out fully for people earning above $ 100,000 on annual basis as indicated by the table below Taxable income Mean value of the SG in $ Percentage of Co- contribution The estimated value of the tapered co-contribution in $ 1-6000 285 20 57 6001- 35000 2009 20 40 35001-80,000 4557 20 932 80,000 7200 20 1441 85,000 7651 15 1149 90,000 8111 10 810 95,000 8551 5 428 100,000 9001 0 0 (Brown, 2010) If the Australian Government adopts the above model, workers earning the minimum wages could receive approximately $ 508 on annual basis in term of governments support, and they could raise value of the superannuation in their work life by at least $ 31,000, which is more than their annual salaries. Workers of full time averagely receive $ 1270 that will be $ 302 more than prevailing tax concessions. This amounts to $ 19,000 increase in superannuation at completion of working life, with benefits totaling $ 76,490. It is also worth to note that the model takes care of tax on earnings, which is 15% and factor of inflation. Either of the models involves same total levels of spending or lower than current concession tax arrangements. This way, it is likely that, the model would be net budgetary saving as the ones having lower income are given larger support, thus less likely to depend heavily on aged pensions. This type of arrangements could help to raise the level of transparency by the Australian government As government payment , the support of superannuation could be included in a normal budgetary process as well as being subject to the normal political scrutinizes (Blau, 1998). The approach would be also applied to other major component of superannuation such as voluntary and earning contributions. In Australia the current tax arrangements offers large incentives for the high-income earners for them to save, though these individuals have raised propensity of saving and they can already obtain retirement incomes that is excessive of pension schemes without nay form of support. In many instances, tax expenditures are mostly defended as types of government assistances promoting aspect of self-reliance through creation of positive incentives to residents to save for personal needs. Most governments have used these arguments to promote tax in some areas like insurances on private health as well as superannuation. In most cases, structures of these forms of schemes are bound to fail. This can be based on the fact that subsidies aimed for the private health insurances penalizes people who are self insured through confining benefits to certain form of insurances (Linbeck, 2006). The prevailing situation of the superannuation concession largely provide one of the greatest support to people who are able to cater for them selves, while at the same time denying support to people on middle and low income levels, who may benefit from such incentives mainly on saving. If the suggested models among others are adopted, they would greatly change the way people from middle and low-income groups save, as they are not eligible for low-income earners co-contributions, which further decrease their reliance on aged pension (Hacker, 2002). Current retirement incomes in Australia Feldstein (2002) argues that with the current changes taking place in Australian economy, the superannuation plan is also undergoing changes. Along with traditional age pension Superannuation guarantee have been put into place. Retirement incomes in Australia have been improved to include deducted contributions, Insurance and investment solutions, undedicated contributions, age among other notable forms of benefits. Deducted contributions Deducted contributions are offered to a worker has contributed over a given period to superannuation contributions. This depended on the age one can claim deduction on tax based on contribution. It is therefore advisable for one to contact retirement advisors in order to establish the types of deductibles on the retirement incomes. Investments Investments are vital sources of a retirement income. The investments ay are wide as sticks, funds, insurance policies among other notable forms of investments. For most of the money saver policies, they are integrated into average retirement income in Australia. One can upgrade their risk as well as maximize returns, although this largely depends on ones ability to understand investment opportunities, which exists. Diversities in the investment portfolio assist one to create healthier retirement income. To build strong investment profiles one is encouraged to consult a financial advisor in order to built strong strategies of the retirement wealth management (Friedberg, 2000). Age and the other Benefits Currently one can claim benefits if a person are above the age of sixty-five and above. The benefits truly could help a person to save considerably on the taxes as well as managing funds better. Some of current schemes offer improved return to the retirees, thus better investment opportunities, both in the short and long run. Factors affecting retirement income Flexibility Age is the inevitable factor as far as flexibility is concerned. One may need the retirement income but locked due to lack of being sixty-five years and above. Due to this, workers are encouraged to built up flexible options that could allow them obtain retirement funds despite the years. Liquidity One should be able to meet the set cash requirements. This includes both the short and long-term needs (Howard, 2007). Tax Savings One should be able to maximize on tax benefits being offered. Protect Your Family This aspect ensures that Retirement Income offers most monetary benefits even after contributors’ death (Feldstein, 2002). Conclusion From the case study above, one can clearly see that the tax expenditures in Australia are most effective ways to encourage savings to the citizens. Despite being viewed to favor the high-income earners as opposed to the low and middle-income earners, tax expenditures through the varying number of adopted models such as superannuation model among others like FHSA have played a big role in encouraging savings among the citizens. To improve on these schemes models like the ones suggested above should be adopted in order to fully cater for both the high end as well as low-income earners (Faricy, 2011). References Adam, S. (2010). 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