TEN PRINCIPLES FOR TAX REFORM: PRINCIPLE THREE
November 5, 2009
Australia's tax system needs principles that go beyond efficiency, equity and simplicity, says Robert Carling, Senior Fellow at the Center for Independent Study. For example, he recommends that tax bases should be broad, tax rates low and exemptions and concessions few.
- Tax bases such as household consumption, personal income and payroll are preferred because taxing them causes less adjustment by the private sector and involves less disturbance of resource allocation.
- For a given revenue need, more exemptions and concessions necessitate higher statutory tax rates.
- Higher tax rates in turn impose higher economic costs.
Exemptions and concessions have often resulted from the pursuit of non-revenue objectives through the tax system, particularly social and industry assistance objectives, and now increasingly environmental ones, says Carling. The more exemptions and concessions there are:
- The greater the administrative complexity of the tax system.
- The higher the compliance burden.
- The greater the distortion of economic signals to the private sector.
- The less transparent the tax system is to taxpayers.
Source: Robert Carling, "Tax Bases Should Be Broad, Tax Rates Low, and Exemptions and Concessions Few," Policy, November 29, 2009.
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