Why do we need taxes?
Taxation makes up majority of our government’s income. With this income the government can provide us with proper infrastructure and social services for little, if no cost at all. These include Medicare, social security and education. (These facilities are known as recurrent expenditures because it is needed time after time.)
Other expenditures include transportation, lighting, recreation etc. These services are granted to us at no costs. In many 3rd world countries where taxation is low or doesn’t exist, all of these services are to come out of one’s own pocket.
Over the many centuries, in which taxation was existent, people have cheated and avoided paying these taxes. Nowadays people with high-income put their money into trusts, superannuation, or incorporate it into businesses. Businesses would try and receive more cash transactions. This has led to a decrease in our government’s revenues, thus leading to a tax reform in hope of a more effective result.
What makes a good tax system?
There are four elements in a successful tax system. They are effectiveness, efficiency, equitability, and simplicity.
1) Effectiveness: is the performance compared to the desired effect. E.g. the number of people who pays tax, how much tax is received.
2) Efficiency: is the cost of running the system. The system may be very effective with a million tax officers, but it would cost millions to hire so many people.
3) Equitability: is the fairness of the system. This is an impossible goal to achieve. From different people’s point of views, the system will always be unfair to them in some way. Not to mention the tax cheats. The best solution is to broaden the number of people who pay the tax, which is only fair.
4) Simplicity: A tax system should never be too complexed, it is otherwise not efficient neither understandable. The income tax Act that just started off at just 120 pages in 1936 is now over 3300 pages and has doubled in size over the last 7 years. A complex system means that those who can afford expensive tax advice minimize their tax. But those that can’t, pay the full share. It is impossible to have a system where all four elements are satisfactory. Where a system may be effective and efficient it will not be equitable or simple. It is impossible to fit the whole population all under one roof. Under these circumstances the government proposed a new way of taxation- GST.
What is GST?
GST is a tax on the goods and services that each and everyday households consume. Tax is collected at each stage of production and distribution, but a credit is given for the GST on inputs. Refunds are given for GST on exports. Therefore, only households bear this tax. Australia currently has a WST in place of a GST. WST is whole sales tax this tax is levied on the whole sale price and is collected by wholesalers. A GST is in fact a VAT-value added tax. Meaning it is levied at each stage of production and distribution. Over one hundred countries in the world have a GST/VAT, but only six nations including Australia have a WST.
The advantages and disadvantages of a GST
It is hard to say whether the GST is favorable or adverse because the government hasn’t yet proposed the whole system, the exemptions and the exact figures of taxation. The following is only speculation by the many supporters and those who disapprove.
1) Lower taxes means business can buy and sell more competitively overseas.
2) The higher cost of prices will slow down inflation.
3) At each level of production and sale, except sale to a consumer, a rebate is claimable. The paperwork for these claims helps to enforce compliance. This would also stop tax evasion.
4) It will hit the black economy because the money earned will be used for consumption.
5) Replace existing distortional indirect taxes
6) Prices on some good and services will fall instead of rising. E.g. petrol
7) Less income tax gives people more incentive to work.
8) The reduction in many taxes that were of a heavy burden to businesses will be abolished thus giving the businesses more power to employ extra workers. These taxes include the WST and many other excise duties such as the taxes on many house hold goods.
10) The GST will be able to with stand tomorrow’s many challenges which the current system will not be able to handle. E.g. an aging population.
11) Current indirect taxes are levied on a limited array of goods, which are a declining proportion of household budgets. This problem can be solved only with a broad-based tax system such as the GST.
12) GST will be simpler than the existing system.
13) Last but not least, foolishly yet truthfully the liberal party claims that the robust system of taxing goods and services is to provide the government with the capacity to fund-through increased taxes and revenue.
1) Even with less income tax people will be declined to spend as much as before, consumption will decrease.
2) If the introduced GST was to be equitable and effective, it will have many exemptions, thus leading to complication.
3) Many services will lower their prices in order to receive cash thus avoiding the GST.
4) With the introduction of GST, the government also has to increase social welfare and many other government services to keep up living standards.
5) The following years in which a GST will be introduced, the inflation will stay very low thus many coin/note/bond holders will transfer their money to the government. And most importantly, yields the government billions through its impact on collection from the progressive personal income taxes. With out inflation this taxation by stealth disappears. This will benefit the community, but the government will need to raise its tax revenue is it wants to increase expenditure.
6) If assumed without any exemptions, many luxury goods that were highly tax by WST will now be cheaper, advantaging the minority rich people of Australia.
7) Higher prices on goods and services will discourage tourism. Thus unemployment will rise.
8) Higher interests due to GST will mean that current mortgage owners will have to pay more.
9) Due to the abolishment of WST, families that current rent and don’t own a property will have to pay more to buy a house and more to rent. (Real estate commission will rise, building materials will rise etc.)
10) It could lead to a state where employees feel they need more money to support their family (especially those with only one member working) and go on industrial strikes this will trigger a series of severe fund loss from the government.
11) The reduction to custom duty may advantage businesses that import from overseas but it has also left many Australian businesses unprotected from foreign funds. Overseas businesses are already more competitive than us, with the reduction to the custom duties, they will be even more dangerous to us.
12) The system will not be fair towards those with the lowest income bracket, children and those who worked all their life and have just retired to pay GST for the second half of their life.
In all, there are hundreds of arguments for each side, and there is no proof of any of it being true. We can only comment when it is put into practice, then and only then do we know if it is as good or is it as bad as they said.
Do we need any tax changes?
As mentioned before, the government has added bits and patched parts of the Australian tax system over many years. The liberal party who supports a GST thinks there needs to be changes, not only minor patches but to change the whole system. They have put up a list of reasons why our system is working badly. They put their reasons into three main categories. An unfair system, An out dated system, and a complex system.
AN UNFAIR SYSTEM
Statistics show average Australian income earners have had to pay three times more tax now than we had to forty years ago. People are paying almost half of their income to the government especially wage and salary earners who are hardest hit by this. Such high taxation reduces the incentive for people to work, save and learn but encourages them to avoid being taxed. They join the ‘black economy’ through such practices as:
Paying employees ‘cash in the hand’
Taking a job, or a second and not declaring the income
Cheating on social security, by not declaring income or
Not reporting cash sales.
Let’s face it, with such a ‘wonderful’ social security system, many families could be much better off taking the dole than working.
AN OUTDATED SYSTEM
The income tax and WST were both introduced in1930 and up till now both are encountering problems of efficiency. The WST was introduced as a method of battling the Great Depression. It was imposed on goods only at a rate of 2.5%. This 2.5% changed when it was WWII. The government introduced multiple rates as a wartime necessity measure "This Government has now found it necessary to introduce a different rate of tax, and also to vary certain principles of the tax, in order to meet the extraordinary cost of the war in which we are now involved." (Mr. Fadden, Treasurer, 10 Dec 1940). This amount never looked back. Now, household appliances such as radios, watches, tape recorders etc. are taxed at the 32% rate.
Back in 1930, Australia mainly produced goods unlike now in the 90’s services are a larger part of the economy than goods. The WST is not only old but also uncommonly used. As mentioned before, only half a dozen of nations in the world still adapt it, and most of those countries have already began to introduce VAT. But Australia remains adamant. And because of this, it was necessary for the government to increase revenue, which was lost to the lack of taxation from goods. They decided to increase sales tax. In every day households, we pay hidden sales taxes on most goods. These include: 22% on detergent/cleaners, 12% on flavored milk, juice, ice cream, biscuits etc. Milk, bread, fruit, vegetables, eggs, flour, meat and butter are the only exceptions. In the bathroom, cosmetics, shampoo, soap, deodorant, toothpaste, toilet paper etc. are all taxed at 22%. The hand basin, bath, toilet and towels are taxed at 12%. Toothbrushes and medicated mouthwashes are excepted. The list goes! on, from lounge to the garage. Manufacturers facing a price increase problem tries and classify their product into the lowest possible rate. This creates a recipe for aggressive tax practices. This often results in a windfall gain to retailers. As well, the sales tax applies to exports, thus making us less competitive leading to less job opportunities. The WST just has too many mistakes and unfairness in it we need a better, more advanced system.
A COMPLEX SYSTEM
Australia’s current taxes are a mess. As mentioned before, the income tax ACT have increased twenty seven times in size from 1936 till now. There are too many tax brackets for different people and too many exceptions that not even your tax return agent could remember. The sales tax classifies goods into one of seven hidden rates: 0, 12, 22, 32, 37, 41, or 45%. This is not only unfair and complicated, it is also absurd, leading to situations such as where toothpaste is taxed but toothbrushes aren’t. It is also costly because the combination of different rates requires businesses, the tax office and courts deciding which goods fit into which categories and which rates. And that is only sales tax! There are many other indirect taxes looked after by different levels of government. These include: WST, excise duties, custom duties which are looked after by the commonwealth government. Payroll tax, stamp duty, financial transactions taxes, motor vehicle taxes, gambling taxes, land t! axes and rates which are looked after by the state and territory government. Theses taxes may prove to be effective in that it raised sixty billion in 1996-7 (one third of total tax revenue) But it definitely isn’t simple and is very inefficient to run.
Principles of tax reform
On Nov 6th 1997, the federal, state and territory governments agreed that Australia needed a fundamental change to its tax system as we enter the twenty-first Century. Before that, the government has already set up a Taxation Task Force who prepared options for the changes to our taxation system. The following were their goals.
there should be no increase in the overall tax burden
any new taxation system should involve major reductions in personal income tax with special regard to the taxation treatment of families
consideration should be given to broad-based indirect tax to replace some or all of the existing indirect taxes
There should be appropriate compensation for those deserving of special consideration and
Reform of Commonwealth/State financial relations must be addressed.
The Prime minister has indicated that before the next election, the Australian public will have a clear idea of the government’s plans for modernization and reform of Australia’s taxation system.
In all, people believe Australia should have a tax reform. The current system does have too many loopholes for cheats to fit in. A GST may be an idealistic idea but not realistic for the time being. Through the 1992 election between Mr. Keating and Dr. Hewson, it is clear that the public fears the GST. It could be that most are not sure what it really is. There is need for time and education about GST, allowing voters to understand it. Until then, it’s going to be a long harsh process planning and considering all the aspects of a healthy and fair taxation system.