The best way to tax?

23 August 2024

The word ‘reform’ is something of an all-purpose descriptor. It can apply to positive and sensible developments yet just as easily refer to something malign — after all, many autocratic leaders have called their brutalities ‘reform’. The word describes a process of changing something, not whether or not it is beneficial. Paul Tilley’s detailed and thorough book Mixed Fortunes: a history of tax reform in Australia is affected by this ambiguity. It suggests that the processes of changing the nation’s tax system have been patchy. But when it comes to clearly outlining what should have been the best approach, the author tends to be non-committal.

That is hardly surprising. There is no obviously ‘correct’ approach to taxation. The choice is very much bound up with abstract ideological and political questions. Should the aim be to make the economy efficient? Should it be to create equity of opportunities or equal outcomes? How much do disparities of wealth matter? Should the tax system build on a nation’s comparative advantages or remain neutral? These are vexed questions and the fact that developed countries opt for very different approaches demonstrates that the answers are far from self-evident.

Choosing the best approach to tax has become especially problematic as the world economy starts to shift on its axis, moving towards economic nationalism. United States Presidential candidate Donald Trump, for example, is proposing to aggressively apply tariffs and use the revenue raised to reduce, or even eliminate, income tax. While that is unlikely to be achieved, it indicates how much the debate is altering and how many approaches there are to tax ‘reform’. No Australian government of the last 50 years would have even considered making such a proposal, but if it is applied in the United States, it will be seriously considered here.

The ability of Western governments to raise enough tax revenue to pay their debts is becoming an urgent problem. In Australia it is less of an issue, with government debt below 40 per cent of GDP. Here, it is household debt that is out of control.

But in the US, Japan and many European countries, debt is over 100 per cent of GDP and there are massive unfunded pension liabilities. About three-quarters of US income tax goes to paying interest on debt and that situation will only worsen, especially with the country spending $US1.5 trillion, about a third of its total tax take, on its military. Such pressures are

ECONOMICS

The best way to tax?

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