Puzzling Problems with Tax Reform Implementation - Coursework Example

TAX REFORMS Proposed economic policies by countries often receive and attract debates and arguments from key industry players who will be affected when said instruments are adopted. Such is the tax reform. Although there have been numerous studies that explored the reform’s impact on tax incidence and the new system’s progress, there still remain few unresolved arguments on the cost and benefits each key player will carry and receive, respectively. This paper thus attempts to resolve the puzzling problems of the tax reforms being implemented by developed nations, particularly that of Australia in July 2000 by looking into the various discourses of policy making bodies, the academe and newspaper accounts. Tax Reforms in Australia, where derive It is said that in order to define and understand the context of the Australian tax reform, it will be best to postpone any attempt to define it without first looking into what the country experienced as it undergo several waves of tax reform since the mid-Eighties (Smith). Under the tax regime in the mid-Eighties, the highlights were – 1) tax cuts on distributed company income; 2) widened income tax base; 3) removal of longstanding tax exemptions by cutting concession rates for plant and equipment investments; and 4) tax cuts in income tax rates of companies from 49 percent to 46 percent, and personal tax rates from 60 to 49 percent. When the new tax reform was introduced by the Coalition Government as part of its re-election platform in 1998, it argued that the old tax system implemented during the mid-Eighties needs to be replaced. It criticized that the former tax regime was “outdated, complex, ineffective, unfair, and discouraging foreign investments in Australia.” Cheung (2001) underscored that by reforming the said former tax regime would such problems be resolved, the proponents clamored. As the new tax reform was implemented in the year 2000, it concentrated highly on consumption taxes at the expense of the income tax. The new tax reform contemplated the replacement of the former narrowly-based indirect taxes with a broadly based Goods and Services Tax (GST). Such tax scheme is a value-added tax and was introduced at the single rate of 10 percent on a broad base. The reform calls for the exemption from this program of the following range of health and medical goods and services, education and childcare, fresh or certain lightly processed foods and charitable activities. Additionally, the government only stands to earn on the 10 percent rate of the GST about 12 percent in total tax revenues. By adopting tax reforms, developed nations like Australia viewed the said instrument as one of the means that government may use in collecting tax revenues and ensuring that it remains robust over time. In like manner, the tax programs are ways state can avert any adverse effect that such taxation may bring in the economy and growth of a country. Tax Reform Policy Debates Despite the current reforms on Australia’s taxation scheme, several problems relating to the country’s objectives – revenue adequacy, equity and economic efficiency – remained and new ones emerged which made such reform a major issue for the different sectors and industries. McClelland (1999) argued that the tax reform package introduced by the government is lacking with two essential elements. He scored on the absence of relevant income tax base broadening changes as unaffordable and unfair. The reform package, he noted, is also unfair because the inclusion of food makes the impact of the reform scheme on low-income people’s living standards highly uncertain. Warren (1998) expressed that in Australia where expectations are not often met, the tax reform’s success will obviously be questioned too. The government, he stressed, set a very high expectation that it would overcome all the country’s fundamental economic problems through one, single tax reform package. Currently, however, the tax relief reform imposed by government has led many observers to wonder whether the Australian government believe it will work or whether what economists termed as supply-side economics is actually only a smoke-screen rhetoric by the Coalition Government for rolling back the taxes of upper-income earners while starving the government to the point where substantial spending cuts and other revenue efficiency measures will have to be adopted in order to finance crucial social needs. U.S. economist Brian Roach, who is also researcher at Tufts University, Medford, Mass, finds such tax reform attractive for some high-earner taxpayers because it will benefit mostly them. The result, he noted, would inevitably increase a nation’s income inequality, already at a historic high and greater if not at par with any other developed countries. This is coupled with the pressure that the Australian government needs to address to balance demands for the developed nation’s economic prowess to be globally competitive with its determination to protect its people’s welfare and capacity to cope with profound economic and social transformation. The government programs implemented over the last two decades has in effect alleviated poverty and inequality, which studies have shown to have benefited from an improved social wage (Johnson et al. 1995). But few observers noticed where the problem lies – that critical poverty alleviation and inequality reduction measures has been paid for in unsustainable ways in the past. The economic boom in the late 1980s and early 1990s, McClelland noted, were at least partly financed by the selling of assets, deficits and excessive targeting. Another drastic measure that the Howard government exercised was the reduction, if not completely removing, critical services such as labor programs for the unemployed people and some welfare scheme (dental-health) for low-earning taxpayers, among others. The administration argued such income-distribution analysis is irrelevant, then citing that such tax cuts will propel the economy due to the trickle-down principle. It maintains that since small businesses who will benefit from such tax relief will generate more tax savings which it can eventually invest in job-creating activities. The theory also contemplates that when more jobs were created, the people from almost all income level will benefit and earn. Countering that such statements by administration as mere rhetoric, Roach elaborated that when the tax cuts or tax reforms were aimed at low-income groups, it will benefit the economy more since these people tend to spend nearly all extra income. Additionally, the high-income earners proportionately save more. It is generally that, business with large amount of excess capacity will need more customers than adding more and new capacity. Conclusion: If major newspaper accounts and policy papers by the academe and economic policy body produced in the last two decades will be reviewed on the design of major tax reforms embraced by the world's developed nations, it can be summed up in a phrase: tax cuts. Clearly and particularly in Australia, the nation's decision makers are convinced that a significantly lower tax rates is the key to its long-term economic health and vitality. More clearly, this entails a return to hefty budget deficit (as ABC News reported that economists projected that budget deficit will shoot up to about $200 million and others predicted the figures may double as the economy continue to contract). However, as Commonwealth administration's economic experts insist, this situation will eventually reverse itself, as the projected economic growth (fueled by these very same tax cuts) causes tax revenue to improve again. Overall, the tax reform package was prepared with higher preference to the high-income taxpayers than the low-income earners, but at the same time requiring large budget cuts in social programs. Makers of the reform would often cite the “average” monetary benefits that would accrue to large segments of the population. Economists projected a dimmer future with the tax reform package adopted globally by developed nations like the United States and Australia. It is seen that such drastic tax reduction approaches may in the long term hurt the employment condition of the nation because more jobs will inevitably be destroyed. When tax revenues fall and deficit rises, the interest rates will rise, and will result in higher cost of borrowing that eventually will impede business investments and hiring. Mankiw (2007) in his Principles of Economics, explained that when a government runs a budget deficit it “pulls resources away from investment in new capital and, thereby, depresses the living standards of future generations.” Despite several researches that explored the impact of the tax reform in Australia on tax incidence and the new system’s progress, in relation to the general economic outlook in general, this paper highlighted the need to further look into the importance of including the affected taxpayers in any study on the cost and benefits each key player will carry and receive, respectively. References Book Mankiw, N. G., 2007. Principles of Economics . 4th Ed. Ohio: Thomson-Southwestern Journal Abstract from a database Olekalns, N. 1997 Australian Evidence on Tax Smoothing and the Optimal Budget Surplus. Economic Record, [Online]. Abstract from Questia.com database. Available at: http://www.questia.com/googleScholar.qst;jsessionid=LZNJr9fQLjjQK2v5Rfcc2nHWmW1yqWnLvvNqBLny1ZHGSdWpzhVM!1872540008?docId=5000574484 [Accessed 21 September 2008]. Journals Cheung, Y.H., 2004. Will a Rise in Consumption Tax Share Increase the Effectiveness of Government Spending? Edith Cowan University, [Online]. Available at: http://www.business.ecu.edu.au/schools/afe/wps/papers/pdfs/wp0406yhc.pdf [Accessed 20 September 2008] Dabner, J., 2001. Japan’s income tax system – Lessons for Australia. Australasian Legal Information Institute, [Online] Available at: http://www.austlii.edu.au/au/journals/RevenueLJ/2001/6.pdf [Accessed 20 September 2008] Fullarton, A.R., 2002. The Apparition of Tax Reform: A Paper that examines the issue of taxation reform in Australia. Bigpond, [Online]. Available at: http://www.users.bigpond.com/crossover/Tax%20Reform%20paper.htm [Accessed 21 September 2008]. Ganghof, S. 2001. Global Markets, National Tax Systems, and Domestic Politics: Rebalancing Efficiency and Equity. Max-Planck-Institut für Gesellschaftsforschung, Germany [Online] Available at: http://www.mpi-fg-koeln.mpg.de/pu/mpifg_dp/dp01-9.pdf [Accessed 20 September 2008] McClelland, A., 1999. Tax agendas: The position of the welfare sector. Centre for Public Policy, Univ., of Melbourne, [Online]. Available at: http://www.bsl.org.au/pdfs/taxagend.pdf [Accessed 20 September 2008] Smith, G., 2003. Taxation In Australia. Banca D’ Italia, [Online]. Available at: http://www.bancaditalia.it/studiricerche/convegni/atti/taxpolicy/ii/181-198_smith.pdf [Accessed 21 September 2008] Warren, N., 2008. A Review of Studies on the Distributional Impact of Consumption Taxes in OECD Countries. OECD Social, Employment, and Migration Working Papers, [Online]. Available at: http://www.oecd.org/dataoecd/34/57/40986444.pdf (Organization for Economic Co-Operation and Development) [Accessed 21 September 2008]. Newspaper Articles Casidy, J., 2003. Bushnomics. The New Yorker, 12 May. Clift, E., 2003. What is He Thinking? Newsweek, 7 February 2003. Francis, D, 2003. Partisan Lines Harden in Debate Over Tax Cuts. Christian Science Monitor, 31 March. Herbert, B., 2003 The Faces of Budget Cuts. The New York Times, 5 May. Lizza, R, 2003. Wealthy Choice. The New Republic, 20 January. Read More