Thursday, August 7, 2008

Tax Reform A Chance To Cut The Chaos

The initial discussion paper on tax reform has been released by the Secretary of the Treasury, Ken Henry, unleashing a vigorous round of discussion. Much of the focus has been on the impact of property taxes, especially stamp duty, which have been identified as excessive, inefficient, and an impediment to the economy. There has also been some discussion of payroll taxes which discourage employment, and capital gains tax which undermines investment.

One feature of the report which may disappoint many is that there appears to be little scope for reduction of personal income tax. The discussion paper reveals that the total tax on wages is well below the O.E.C.D. average. But that is not to say that improvements cannot be made. There is scope for making the system much less complex and removing the need for many people to file complicated tax returns.

It has also been revealed that there are 125 different taxes currently imposed, displaying a level of complexity which obviously reduces efficiency. With the overwhelming bulk of revenue collected by just ten percent of the taxes it would seem obvious that the other 90 percent could very likely be abolished without much difficulty. In fact, the saving in administrative costs could well offset the modest loss of revenue.

More than anything else, it is this opportunity to reduce complexity which is of importance. Significant reforms to capital gains tax and property taxes will be of great benefit to the nation’s prosperity, but that will only happen if the government has the political will to press ahead and implement those changes. But the greatest benefit on offer is the change to cut through the chaos and untangle the tax law mess. That achieves the double benefit of making life easier for all of us, while also making possible significant savings on administrative costs for the government.

Now that would be a great outcome… tax reform where everybody is better off.

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