NCPA - National Center for Policy Analysis

TEN PRINCIPLES FOR TAX REFORM: PRINCIPLE NINE

November 25, 2009

Australia\'s tax system needs principles that go beyond efficiency, equity and simplicity, says Robert Carling, Senior Fellow with the Center for Independent Study.  For example, he recommends that taxation should be stable, predictable and sustainable.

Stability and predictability are an important principle of tax policy, says Carling:

  • Major changes should be infrequent and thoroughly and publicly explored before legislation is tabled.
  • To be stable and predictable, the tax system needs to be sustainable.
  • Tax policies need to meet the revenue needs of public expenditure policy now and into the future, subject to caps as a proportion of a country\'s gross domestic product.

Uncertainty is an unavoidable element in the economic decisions made by private individuals and businesses.  Government cannot and should not attempt to eliminate uncertainty, but nor should it add to it by frequently changing tax policy, says Carling:

  • Long-term investment decisions are affected not only by today's tax policies but also expectations of future policies.
  • Investors have come to expect that tomorrow's tax burden will be higher than today\'s, and act accordingly.
  • Additionally, governments that repeatedly take the private sector by surprise with adverse tax policy decisions create expectations of more of the same and discourage long-term commitments.
  • Changes that are frequent and unpredictable in their detail must heighten the risk profile for investments and other economic decisions of businesses and households that lock them into a course of action for long periods.

Source: Robert Carling, "Taxation should be Stable, Predictable and Sustainable," Policy, November 29, 2009.

 

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