TEN PRINCIPLES FOR TAX REFORM: PRINCIPLE EIGHT

November 23, 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 Studies.  For example, he recommends that the tax system should forge a link between public spending and taxing.

Taxation is the price the community pays for the benefits of public expenditure.  The link between government spending and taxing decisions needs to be clear if this discipline is to work, says Carling:

  • The democratic process balances demands for more government spending against the willingness of taxpayers to pay for it.
  • Even though taxpayer willingness is limited, the force of the constraint can only be fully effective if the tax burden is both transparent and widely spread.

The taxpayer willingness is greatly weakened if a large segment of the population (voters) is allowed a free ride by being beneficiaries of government spending programs while bearing little, if any of the tax cost, says Carling:

  • In relation to income tax, this is one problem with high tax-free thresholds and generously defined low income tax offsets that, combined with graduated tax rate scales, loads most of the burden onto a minority of the population.
  • Against that, 'churning' can be a problem in the tax/transfer system if there are substantial numbers of households that have both an income tax liability and an entitlement to receive cash transfer payments from government.

Source:  Robert Carling, "The Tax System should Forge a Link between Public Spending and Taxing," Policy, November 29, 2009.

 

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