What makes a good tax?

By Cameron Micallef

August 04 2021
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With the economy going through an uneven recovery, an industry expert has highlighted the current failures of the tax system and what makes a good tax.

The Australia Institute said not all taxes are created equal, albeit the money raised through taxation plays an important role in everyone’s lives.

With a system that is in favour of the wealthy, especially following both parties agreeing to stage 3 income tax cuts at the next election, The Australia Institute’s senior economist, Matt Grudnoff, said the country needs to have a debate about the right tax system.

The stage 3 tax cuts will see everyone earning between $45,000 and $200,000 paying 30 per cent in tax from 2024.

The changes scrap the 37 per cent tax bracket for those earning above $120,000, making those earners the biggest winners from the cuts.

With an impending cost to the national budget of around $19 billion a year, the stage 3 tax cuts had previously been described by shadow treasurer Jim Chalmers as the “least affordable, least fair and least likely to be effective because higher-income earners aren’t as likely to spend in the economy as workers of more modest means”.

The Australia Institute’s Mr Grudnoff highlighted the growing divide between the ‘haves’ and the ‘have nots’ in this country, with a tax system helping those at the top.

“Australia taxes wealth lightly compared to other OECD nations. With inequality in Australia only getting worse, we need a debate and better policies about taxing wealth properly and reducing inequality rather than exacerbating it,” the economist continued.

However, with both parties going to the election on not changing a “tax cut for the rich”, Mr Grudnoff argued that Australia needs to look at its tax mix.

“While many are concerned about the size of our taxes, consideration must also be given to the shape of our taxes because as this research shows, not all tax measures are created equal,” he said.

The economist highlighted the current tax system is awash with voices of the self-interested instead of what is best nationally.

“What Australian policymakers need are solid tools to evaluate the pros and cons of different taxes, to sort the self-interest and ideology from the genuine constructive policy advice,” he said.

As such, The Australia Institute outlined five key steps that evaluate the strengths and weakness of different taxes:

Principle 1 – The tax measure should minimise changes in behaviour, unless the behaviour is something that as a society we would like less of (e.g. smoking), in which case it should be effective at changing that behaviour.
Principle 2 – The tax measure should reduce inequality.
Principle 3 – The tax measure should be levelled on those who are best able to pay.
Principle 4 – The tax measure should be simple to comply with, simple to administer and easy to understand.
Principle 5 – The tax measure should be difficult for those it is levelled on to avoid.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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