There is a definition of tax in the Webster's Dictionary--"...a compulsory payment of a percentage of income, property value, sales price, etc. for the support of a government". In theory the collection of taxation should be fair, simple, efficient and neutral.
Australia inherited a convoluted and complex taxation structure from its British Colonial past. Australia's economy has become more dynamic, efficient and productive over recent decades. However, the tax system has only adapted slowly to these changes. In particular, Australia's high personal tax rates and low thresholds are uncompetitive by international standards.
Comparing the Australian Income tax system with the Eastern Europe (e.g. Russia), this paper provides an analysis and discussion of the Australian Income tax reform has become complex, inequitable, difficult to understand and almost impossible to implement effectively.
"The hardest thing to understand in the world is the income tax."1
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.
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.
1. Fairness or Equity
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.
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. 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.
The family rebate system has evolved extensively and has been used as a social welfare and grant...
1. R L Deutsch, Fundamental Tax Legislation, 2005, 13th edition
2. Michael Kobetsky, Ann O 'Connell & Miranda Stewart, Income Tax, 2005, 5th edition
Ryan Kool, the Flat Tax: A Worthy Competitor in the Global Economic Game, Sep 14, 2005
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