NCPA - National Center for Policy Analysis


November 9, 2009

Australia's tax system needs principles that go beyond efficiency, equity and simplicity, says Robert Carling, a Senior Fellow with the Center for Independent Study.  For example, he recommends that redistribution is better pursued through the allocation of government expenditure than through the tax system.

Redistribution from higher to lower income households, to the extent it is warranted, is best pursued by  making the overall tax system as proportional as possible, and the transfer system progressive, says Carling:

  • In a proportional system, the tax burdens are approximately equal as a percentage of income at all levels.
  • And it still involves wealthier taxpayers paying larger dollar amounts than poorer taxpayers.

Proportionality is preferred in tax and progressivity in expenditure because the distribution of each has different incentive effects, says Carling:

  • Progressivity in the distributional impact of government spending does not cause as much economic harm as an equivalent impact achieved through the tax system.
  • While government benefits (e.g. social security) can have distinctive effects, they are often confined to a portion of the income range. Taxes on the other hand affect the whole income range.

Overall proportionality in the distribution of the tax burden does not mean that each and every tax must be proportional; some may be progressive.  Progressive (graduated) scales should only be applied when it makes sense to do so, as the degree of progressivity in the combined tax/transfer system reflects a country's preferences and attitudes to the trade-off between equity and economic efficiency, says Carling.

Source: Robert Carling, "Redistribution is Better Pursued through the Allocation of Government Expenditure than through the Tax System," Policy, November 29, 2009.


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