tag:theconversation.com,2011:/fr/topics/marginal-tax-rate-38179/articlesmarginal tax rate – The Conversation2020-09-09T22:57:52Ztag:theconversation.com,2011:article/1459162020-09-09T22:57:52Z2020-09-09T22:57:52ZWith their conservative promises, Labour and National lock in existing unfairness in New Zealand’s tax system<p>Ability to pay is the basic principle of tax fairness: people in a similar financial position should pay similar amounts of tax; people who can afford to pay more tax than others ought to pay more tax.</p>
<p>The first proposition is about <a href="https://www.oecd.org/ctp/glossaryoftaxterms.htm#H">horizontal equity</a> (similar treatment of similarly placed people). The second relates to <a href="https://www.oecd.org/ctp/glossaryoftaxterms.htm#V">vertical equity</a> (different treatment of differently placed people). But identifying what constitutes “similar” and “different” is not science, it’s a matter of social or political judgment.</p>
<p>For example, someone who earns NZ$200,000 a year faces a higher marginal tax rate than someone who earns $20,000 because their situations are different. But someone who earns income from employment is taxed in the same way as someone who earns the same amount from investment because their situations are considered the same. </p>
<p>So, how do the political parties’ proposals measure up from the perspectives of horizontal and vertical equity?</p>
<p>The <a href="https://www.greens.org.nz/progressive_tax_reform">Greens</a> and <a href="https://www.top.org.nz/tax">TOP</a> both propose expanding the (horizontal) tax base, as Labour did three years ago with its now abandoned capital gains tax (CGT) proposal. This is a basic form of horizontal equity. </p>
<p>ACT proposes <a href="https://www.act.org.nz/middle_income_tax_cut">broad cuts</a> to income tax and GST. But since none of the minor party policies seem likely to be adopted in their raw form by the next government, for now we must focus on the Labour and National proposals.</p>
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<h2>A dubious revenue-raising exercise</h2>
<p>By focusing on income tax rates, both major parties ignore horizontal equity and focus on vertical equity.</p>
<p>In his <a href="https://www.labour.org.nz/tax?gclid=Cj0KCQjw-uH6BRDQARIsAI3I-Ue4oqMHxS4l7hvo7yiIIaV7I3OOl_SKXjvU77dJ1_0H1QYiEpBDZhcaAlfsEALw_wcB">speech</a> announcing a new highest marginal rate of 39% for annual incomes over $180,000, finance minister and Labour finance spokesperson Grant Robertson argued the additional revenue (a predicted $550 million) will support COVID-19 recovery.</p>
<p>Robertson did mention fairness in his speech – in relation to multinational corporations not paying their fair share (by reporting profits in low-tax jurisdictions rather than the country they were earned). But despite huge amounts of work by the OECD, we still don’t really know what a fair share means. </p>
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Read more:
<a href="https://theconversation.com/forget-a-capital-gains-tax-what-new-zealand-needs-is-a-tax-on-inherited-wealth-143604">Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth</a>
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<p>Besides, the equity issue that really matters is fair treatment of individuals.</p>
<p>As a pure revenue-raising exercise, the marginal rate increase is dubious. There is <a href="https://www.business.uwa.edu.au/__data/assets/pdf_file/0006/2937822/160927-Shane-Johnson-bunching.pdf">ample evidence</a> from Australia that “bunching” of incomes occurs when marginal tax rates increase: while high-salary earners have little option but to pay at the highest rate, we are likely to see many self-employed earners with incomes capped around $180,000. </p>
<p>Similarly, while Inland Revenue has had some success in combating the <a href="http://www.nzlii.org/nz/journals/AukULawRw/2011/12.pdf">manipulation of trusts</a>, the opaque nature of such arrangements facilitates tax planning. </p>
<h2>Locking in existing unfairness</h2>
<p>So, a higher top marginal rate is a gesture of vertical equity. But it does nothing to address the implausible assumption that an extra dollar in the hands of someone earning $70,000 a year is the same as an extra dollar in the hands of someone earning $179,000.</p>
<p>National also proposes improving vertical equity by <a href="https://www.stuff.co.nz/national/politics/300074099/judith-collins-says-no-tax-cuts-from-national-this-election">combating bracket creep</a>. This occurs when tax bands are not adjusted for inflation. While not inherently unfair, bracket creep is somewhat underhanded because it draws more taxpayers into higher tax brackets when the real value of their income hasn’t increased. </p>
<p>Under National’s proposal, the current thresholds would be index-linked and automatically increase. At the current annual inflation rate of 1.5%, then, the threshold for the highest marginal rate would increase next year to $71,050. </p>
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Read more:
<a href="https://theconversation.com/new-zealand-is-violating-the-rights-of-its-children-is-it-time-to-change-the-legal-definition-of-age-discrimination-145685">New Zealand is violating the rights of its children. Is it time to change the legal definition of age discrimination?</a>
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<p>This is a modest increase, but over years indexing could be significant. Even so, the change would do little to promote fair treatment between earners at the bottom of the threshold and a person earning $500,000 a year.</p>
<p>Labour argues that its proposal will affect only 2% of people. National says the vast majority of taxpayers would gain some benefit under its policy. The problem is, while both proposals promote modest vertical equity, they lock in existing unfairness in the tax system. </p>
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<h2>A narrow tax base is the real problem</h2>
<p>It may seem intuitively unfair that the current highest marginal tax rate applies at a relatively low level of income, but there is no science to setting tax rates. Economists might argue over whether higher tax rates are disincentives to work or enterprise, but ultimately tax laws are a matter of political judgment.</p>
<p>The real unfairness in New Zealand lies in its narrow tax base. The absence of taxes on general capital gains, capital transfers and wealth all <a href="http://morganfoundation.org.nz/new-zealand-income-tax-unfair-favours-rich/">benefit the wealthy</a>, whereas GST disproportionately <a href="https://www.taxresearch.org.uk/Blog/2011/01/04/why-vat-is-regressive/">affects the poor</a>.</p>
<p>If we had an appropriately broad tax base, we could lower income tax rates – the 33% rate on income above $70,000 could be reduced, as could the 15% of GST. </p>
<p>No doubt National can’t risk looking reckless by promising tax cuts during the COVID-19 crisis and recovery, and Labour can’t risk jeopardising its current broad popularity by offering more radical ideas. </p>
<p>But the result of these conservative proposals, even if they are tempered by gestures of vertical equity, is to entrench the horizontal inequity that bedevils the New Zealand tax system.</p><img src="https://counter.theconversation.com/content/145916/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Barrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Both major parties refuse to grasp the nettle of New Zealand’s narrow and inherently unfair tax base.Jonathan Barrett, Senior Lecturer in Taxation, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1154572019-04-22T20:26:26Z2019-04-22T20:26:26ZThe budget’s dirty secret is the tax hikes you’re not meant to know about<figure><img src="https://images.theconversation.com/files/269956/original/file-20190418-28090-vaki39.jpg?ixlib=rb-1.1.0&rect=29%2C65%2C3946%2C2263&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The wheels of the economy will grind more slowly because of undeclared tax rate hikes in the budget.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>As I mentioned a few days ago, Treasurer Josh Frydenberg and Prime Minister Scott Morrison recycled <a href="https://theconversation.com/a-simpler-tax-system-should-spark-joy-sadly-the-one-in-this-budget-doesnt-115370">three pretty big tax ideas</a> in the 2019 budget, each one originally from the 2018 budget but supercharged, and in one case doubled.</p>
<p>The ideas were:</p>
<ul>
<li><p>eventually eliminating the 37% bracket to make the tax system flatter;</p></li>
<li><p>upsizing the Low and Middle Income Tax Offset to A$1080; and</p></li>
<li><p>increasing the value of business investments that may be written off.</p></li>
</ul>
<p>Today I’ll deal with the second: the Low and Middle Income Tax Offset, also known as the LMITO or <a href="https://theconversation.com/your-income-tax-questions-answered-in-three-easy-charts-labor-and-coalition-proposals-side-by-side-115450">lamington</a>.</p>
<p>In last year’s budget it was to be worth up to $530 per person, but this year the government intends to more than double that to <a href="https://budget.gov.au/2019-20/content/tax.htm">$1,080</a>. And they’d do so retrospectively, so that by the time people put in their 2019 tax returns, many will get a tax cut more than <a href="https://theconversation.com/its-the-budget-cash-splash-that-reaches-back-in-time-114188">twice as big</a> as originally expected.</p>
<p>(As it happens, the operative word is “intends”. In budget week Morrison said the Tax Office would be able to make the changes “<a href="https://thenewdaily.com.au/news/election-2019/2019/04/17/tax-cuts-explained/">administratively</a>” without the need for legislation. He didn’t have time to introduce the leglislation and Labor would broadly support it. Last week in its official pre-election overview of the government’s finances, the public service <a href="https://theconversation.com/view-from-the-hill-those-tax-cuts-should-follow-proper-process-officials-tell-government-115665">said no</a>. It would need “the relevant legislation to be passed before the increase to the Low and Middle Income Tax Offset can be provided for the 2018-19 financial year”.)</p>
<h2>The idea of the lamington</h2>
<p>But let’s examine the idea of the lamington anyway because it does have bipartisan support and will become law and part of the tax scales. On one hand, it will deliver a welcome boost to taxpayers on middle and low (but not the lowest) incomes. On the other hand, it will push up a key marginal tax rate and kill incentives in a way the Treasurer hasn’t yet acknowledged.</p>
<p>The offset is a gift of $530 (soon to be $1080) slipped into the tax returns of everyone who earns between $48,000 and $90,000.</p>
<p>People earning more than $90,000 will get less of the offset as their income climbs, up to an income of $125,000 when it the offset will vanish. Low earners will get $200 (soon to be $255), climbing to the maximum of $530 ($1080) as their income climbs from $37,000 to $48,000. People with an income too low to pay tax won’t have any tax to offset, and so will get nothing.</p>
<p>Described in dollar terms as I just have, it’s easy to understand. You can work out the tax cut you’ll get, and the Coaltion has helpfully prepared <a href="https://budget.gov.au/2019-20/content/tax.htm">tables to let you see</a>.</p>
<p>But it is possible to describe the changes in another way, not in dollar terms, but as a new set of marginal rates. And this is where they get interesting, and unattractive.</p>
<p>As a longer-term goal, the Coalition says it wants most taxpayers to pay the same unchanging marginal rate of 30% for all incomes between $45,000 and $200,000. It believes that high marginal rates and frequently changing marginal rates sap incentive.</p>
<p>By 2024 it wants the tax scale to look like this:</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=215&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=215&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=215&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=270&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=270&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269140/original/file-20190414-76831-1pdskhg.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=270&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://budget.gov.au/2019-20/content/tax.htm">Commonwealth budget papers</a></span>
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<p>Frydenberg says the lower, flatter scale would incentivise “people to stay in work, to work longer, to work more”.</p>
<p>So you would think he wouldn’t want to make it bumpy, or lift the marginal rate, which is exactly what his LMITO does.</p>
<h2>What the lamington does to those rates</h2>
<p>You won’t find the following chart anywhere in the budget papers, but it is what the offsets in this budget and in the last one will do to the tax scale for the next four years before they are replaced by the flatter scale.</p>
<p>First, here’s what we are told the rates look like today:</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=223&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=223&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=223&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=280&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=280&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269139/original/file-20190414-76840-6blxc3.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=280&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.ato.gov.au/Rates/Individual-income-tax-rates/">Australian Tax Office</a></span>
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<p>Now, here’s what they will actually be when you take account of the existing Low Income Tax Offset (or LITO) and the promised supersized Low and Middle Income Tax Offset (LMITO) in the budget.</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=205&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=205&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=205&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=257&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=257&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269929/original/file-20190418-28084-s1hkxq.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=257&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://www.budget.gov.au/2019-20/content/bp2/index.htm">Derived from Commonwealth Budget Paper 2, 2019</a></span>
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<p>The graph is lumpy in part because the LMITO is clawed back at the impressive rate of 3 cents for each extra dollar earned between $90,000 and $125,000.
This means it adds 3 cents to the marginal tax rate in that range, pushing it up from 37 cents to a high 40 cents, before at higher incomes it falls back to 37 for taxpayers earning more than $125,000.</p>
<p>Bizarrely, it means the party that has pledged to abolish the 37% rate because it saps incentive has decided to first boost it to 40% over a substantial range of incomes. </p>
<p>The graph is lumpy further down the income scale for another reason: as the LMITO climbs between $37,000 and $48,000, the separate LITO is is clawed back.</p>
<p>Below are the “including offsets” and “excluding offsets” scales together, to enable you to see the differences. The tax rates people will face are those including offsets.</p>
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<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=212&fit=crop&dpr=1 600w, https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=212&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=212&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=267&fit=crop&dpr=1 754w, https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=267&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/269938/original/file-20190418-28087-4yk2fj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=267&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.budget.gov.au/2019-20/content/bp2/index.htm">Derived from Commonwealth Budget Paper 2, 2019</a></span>
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</figure>
<hr>
<p>The graph clarifies the trade-off at the heart of the lamington: it targets tax relief at low and middle earners at the necessary cost of higher rates further up the income scale.</p>
<p>How much of a problem is it? Well, that depends.</p>
<p>It’s a classic example of what economists call the equity-efficiency trade-off. </p>
<p>Arthur Okun, an adviser to US President Lyndon Johnson, described it thusly: redistributing income is like transporting water from one place to another in a <a href="https://bre.is/2-f2eROVL">leaky bucket</a> – you can do it, but you’d better be prepared to lose some water as you are doing it.</p>
<p>In much the same way, you can restrict tax cuts to low earners, but that means high earners have to face higher marginal rates which to some degree will shrink economic activity. </p>
<p>The critical question is how much it will shrink economic activity, how leaky is the bucket?</p>
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Read more:
<a href="https://theconversation.com/mothers-have-little-to-show-for-extra-days-of-work-under-new-tax-changes-98467">Mothers have little to show for extra days of work under new tax changes</a>
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<p>It worsens incentives for the roughly 700,000 Australians earning between $90,000 and $125,000. For every additional dollar each of them earns, the government will take away an extra 3 cents. That might not sound like much, but the evidence suggests it will have an effect.</p>
<p>How? Well, the tax rate increase lowers the benefit of generating additional taxable income. And there are a range of ways to avoid generating additional taxable income. The most obvious is working fewer hours, for example by not working overtime or by working fewer days per week. Secondary earners (often women returning to work after maternity leave) are particularly prone to that kind of response. </p>
<p>But it also could mean not going for promotions or pay rises where they take effort, for example by not gaining extra skills or not putting in additional work effort. And, as I found in a <a href="https://static1.squarespace.com/static/59b0bb01f9a61e09f11924fa/t/5be5b067b8a045db2e5970c6/1541779560872/180320+-+Optimal+deductibiity.pdf">recent study</a>, it could involve claiming more deductions to put a brake on your taxable income.</p>
<h2>What will the lamington cost us?</h2>
<p>Relying on data for the Australian tax system, I find that a 3 percentage point increase in the marginal tax rate results in an average reduction in taxable incomes of around 0.6%. For someone earning $125,000 per year, that amounts to a reduction in taxable income of $750 per year, by any of the means described above or others.</p>
<p>If we assume the average affected person earns in the middle of the relevant range, that implies an aggregate reduction in taxable income of almost half a billion dollars a year from the 3 percentage point tax increase. That means around $300 million less in consumption and saving and around $200 million less in income tax revenue, all because of LMITO.</p>
<p>That half a billion per year is the real, measurable, and unavoidable cost of targeting the Coalition’s tax break. When economists talk about “distortions” or “deadweight losses” created by tax increases, that’s what they mean. It is the cost of fairness. Whether that cost is worth paying is an open question. The government has evidently decided that it is. And now we can decide at the ballot box, ideally armed with proper information.</p>
<p>But it is of concern that the presentation of the policy – while politically attractive – obscures the genuine increases in marginal tax rates the Coalition’s changes will bring about, and thereby their real economic costs. </p>
<p>Eliminating most offsets and concessions, as <a href="http://taxreview.treasury.gov.au/content/downloads/final_report_part_1/07_AFTS_final_report_chapter_04.pdf">recommended by the Henry Tax Review in 2010</a>, would do the tax system good. And it do all of us good by making it easier to see what we are being asked to vote for come election time.</p>
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<strong>
Read more:
<a href="https://theconversation.com/a-simpler-tax-system-should-spark-joy-sadly-this-one-doesnt-115370">A simpler tax system should spark joy. Sadly, this one doesn’t</a>
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<p class="fine-print"><em><span>Steven Hamilton does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government promised to eliminate the 37% tax rate. Instead, for a certain range of income, it has lifted it to 40%.Steven Hamilton, Visiting Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/848432017-10-08T19:06:38Z2017-10-08T19:06:38ZFive things senators (and everyone else) should know about changes to HELP debts<figure><img src="https://images.theconversation.com/files/188887/original/file-20171004-31791-1sts2fm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">HELP repayment arrangements have long term consequences for students and their families.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Parliament will resume on October 16, when the Senate will consider the government’s <a href="https://www.education.gov.au/higher-education-reform-package-0">proposed changes to higher education</a>. There has been a lot of discussion about many of the changes, but little about the impact of the proposed change to HELP repayments. Here are five things Senators should know.</p>
<h2>1. The HELP repayment threshold will vary according to family circumstances</h2>
<p><a href="http://www6.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/num_act/bsa2016244/sch1.html">Legislation</a> to drop the minimum HELP repayment threshold for 2018-19 from $57,730 to around $52,000 was passed by the parliament last year. The government is now proposing to further reduce it to $42,000. This is around two-thirds of annualised average weekly earnings (AWE). This threshold will not apply to everyone with a HELP debt. </p>
<p>In 1997-98, the <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hecs#Table3">Howard government reduced the threshold</a> to two-thirds of AWE. At the time, it decided that a person should not have to make a repayment if they did not pay the full Medicare Levy. Seven years later, it relented and increased the threshold, but it did not remove the link with the Medicare Levy. This provision is still in the <a href="http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/hesa2003271/s154.1.html">Higher Education Support Act</a>, but only families with three or more children benefit from it. The Turnbull government is not proposing to remove it.</p>
<p>The table below shows the income at which people in different family types will be paying the full Medicare Levy, and where they would start repaying their HELP debt if the government’s proposal had started in 2016-17. It also shows what these income levels will be if the Medicare levy is increased from 2% to 2.5%, as currently proposed. </p>
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<h2>2. HELP repayments substantially increase average effective tax rates</h2>
<p>An <a href="https://taxpolicy.crawford.anu.edu.au/publication/9083/effective-marginal-tax-rates">effective marginal tax rate</a> is the proportion of an additional dollar of earnings that is lost in additional tax and reduced government benefits.</p>
<p>It sounds reasonable to say that HELP repayments start at 1% and then gradually increase, only reaching 10% at an income of around $120,000. </p>
<p>This obscures the fact that these rates <a href="http://studyassist.gov.au/sites/studyassist/payingbackmyloan/loan-repayment/pages/loan-repayment#HowMuchWillMyRepaymentsBe">are applied to total income</a>, rather than the extra “marginal” dollar of income. HELP repayments generally increase average effective tax rates on income above the threshold by more than 13 cents in the dollar.</p>
<p>The chart below graphs the government’s proposed HELP repayment arrangement. It compares this with two alternative approaches to working out a person’s HELP repayment - one applying a 13% marginal rate and the other a 15% marginal rate, both from the $42,000 threshold. </p>
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<p>For people with income between $50,000 and $80,000, the proposed arrangement is about the same as making a HELP repayment of 13 cents of every dollar above the threshold. For people with income of around $120,000, it is about 15 cents of every dollar above the threshold. People with very high incomes may pay less than 13 cents in the dollar.</p>
<p>The logic for preferring this particular “step function” over a marginal rate approach is unclear. A marginal rate approach would be easier to integrate with other aspects of the tax transfer system and would remove the complexity associated with 19 separate HELP thresholds and repayment rates.</p>
<h2>3. There are significant adverse interactions with the tax-transfer system</h2>
<p>A person can experience a large loss of disposable income when their earnings increase. One reason this may occur is that they hit a HELP repayment threshold and their HELP repayment rises.</p>
<p>For example, if the Government’s proposal was in place in 2016-17, this would happen when the earnings of a person in a single income family with two children increased from $54,606 to $54,607. At this income, the person’s HELP repayments would commence at 3.5% of total income and they would be required to repay around $1,630. The one extra dollar would cause the person’s disposable income to go down.</p>
<p>This might not be much of a problem if the person’s disposable income only went down once, but that’s not what happens. For a single income family with two children, it would happen 15 times under the government’s proposed HELP repayment arrangement. </p>
<p>The disposable income of this family might also go down due to “sudden death” reductions in <a href="https://www.humanservices.gov.au/individuals/services/centrelink/family-tax-benefit">family tax benefit</a> (FTB). FTB Part A is paid for each child and income tested, and FTB Part B gives extra help to single parents and families with one main income. At $80,000, the family loses more than $1,450 in FTB Part A supplements. At $100,000, it loses nearly $3,200 as it is no longer eligible for FTB Part B.</p>
<p>While this family is unlikely to make a decision about whether to earn one extra dollar, the parents will likely make decisions about whether it is worth working more while also trying to care for their children. They might not bother.</p>
<h2>4. Incentives to earn will be worst for single parents and single income couples</h2>
<p>The impact of the new HELP repayment arrangements on work incentives will vary according to family circumstances.</p>
<p>Currently, the government keeps around half of every extra dollar earned above the HELP threshold for a single person with no children. The government’s proposal will lift that to 50-60% of every extra dollar. The situation is much the same for a “professional” couple where both partners have high incomes.</p>
<p>For a single person with children and a single earner couple with children, the situation is much harsher. The chart below shows how the disposable income of a family with two children would increase as the earnings of a single working partner rise. </p>
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<p>A single person with children and a single earner in a couple with children will often have average effective tax rates of over 80% for income from their new HELP threshold of around $50,000 up to $122,000.</p>
<p>In this income range, each extra dollar results in the government receiving 32.5 or 37 cents in tax, two cents in Medicare Levy and reducing family tax benefit by 20 cents. It receives additional HELP repayments averaging between 13 and 15 cents in the dollar. It also makes savings from “sudden death” family tax benefit reductions.</p>
<p>These reductions come from government cuts aimed at removing middle class welfare. HELP repayments are being tightened for a similar reason. When governments make multiple budget cuts from different social programs they interact, sometimes producing undesirable outcomes.</p>
<p>Average effective tax rates exceeding 80% over a large range of income for a family with children seems to be a punitive and undesirable outcome. There is considerable scope for a better integration of HELP repayment arrangements with other aspects of the tax-transfer system than exists with the government’s proposal.</p>
<h2>5. It will still take students one to two decades to repay their debts</h2>
<p>There are now <a href="https://www.ato.gov.au/individuals/study-and-training-support-loans/types-of-loans/">seven student loan programs</a> and most students borrow under more than one. Students study for longer than they used to and often pay full fees for “professional” postgraduate study. A two year masters course in an applied health science can add $35,000 to $50,000 in debt. A student can borrow $2,000 each year to help with study costs – a total of $10,000 over five years. </p>
<p>These schemes are administered in ways that do not draw student’s attention to how much they are borrowing or how it might affect them in future. Today’s students are unlikely to complete their higher education and enter the workforce with a HELP debt of less than $30,000. HELP debts of $45,000 to $55,000 will be more usual. Debts of $60,000 to nearly $100,000 will be common.</p>
<p>Students are likely to take a minimum of eight or nine years to repay their debts, with many taking 13-15 years, and a significant number taking close to two decades.</p>
<p>HELP repayment arrangements have long term consequences for students and their families. They will affect their living standards and ability to accumulate assets, like a home. The decisions these students take about working while they are in their 20s and 30s will affect their future income and standard of living in retirement.</p>
<p>The proposed arrangements deserve the close scrutiny of Senators.</p><img src="https://counter.theconversation.com/content/84843/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Warburton is a part-time consultant and associate of PhillipsKPA, an education industry consulting group. He worked for Universities Australia in 2015 and prior to that was a public servant for 32 years, advising both Labor and Coalition Governments on higher education. </span></em></p>Senators should consider how repayment thresholds vary depending on family circumstances, the impacts on taxes and how long students will be saddled with debt.Mark Warburton, Honorary Senior Fellow, LH Martin Institute, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/777852017-05-19T00:24:21Z2017-05-19T00:24:21ZFactCheck Q&A: does Australia have one of the highest progressive tax rates in the developed world?<figure><img src="https://images.theconversation.com/files/169707/original/file-20170517-24341-1851nin.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The AiGroup's Innes Willox, speaking on Q&A.</span> <span class="attribution"><span class="source">Q&A</span></span></figcaption></figure><p><strong>The Conversation fact-checks claims made on Q&A, broadcast Mondays on the ABC at 9:35pm. Thank you to everyone who sent us quotes for checking via <a href="http://www.twitter.com/conversationEDU">Twitter</a> using hashtags #FactCheck and #QandA, on <a href="http://www.facebook.com/conversationEDU">Facebook</a> or by <a href="mailto:checkit@theconversation.edu.au">email</a>.</strong></p>
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<p>Look, we just need to keep in mind that we have one of the highest progressive tax rates in the developed world at the moment. <strong>– Innes Willox, chief executive of the Australian Industry Group, <a href="http://www.abc.net.au/tv/qanda/txt/s4647567.htm">speaking on Q&A</a>, May 15, 2017.</strong></p>
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<p>When Q&A host Tony Jones <a href="http://www.abc.net.au/tv/qanda/txt/s4647567.htm">asked</a> if wealthy people should pay more tax, the AiGroup’s Innes Willox said that Australia already has one of the highest progressive tax rates in the developed world.</p>
<p>Is that true?</p>
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<h2>Checking the source</h2>
<p>When asked for sources to support Innes Willox’s statement, a spokesman for the AiGroup clarified that Willox was referring to top marginal tax rates.</p>
<p>The spokesman referred The Conversation to <a href="http://www.oecd-ilibrary.org/taxation/data/oecd-tax-statistics_tax-data-en">OECD tax statistics</a>, and two charts built using that data, saying that:</p>
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<p>This shows that Australia has a relatively high top marginal tax rate (49%) but not the highest among OECD countries (Sweden is top, at 60%). The rub is that our top marginal rate cuts in at a relatively lower level of income than most other OECD countries (2.2 times our average wage).</p>
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<p>You can read his full response and see those charts <a href="http://theconversation.com/full-response-from-the-aigroup-for-a-factcheck-on-how-australias-top-tax-rates-compare-internationally-77798">here</a>. </p>
<h2>Is it true? Not exactly</h2>
<p>Looking at <a href="http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I7">OECD data</a>, Australia’s highest marginal tax rate is higher than the OECD median. Out of the 34 OECD member countries in this data set, Australia ranks 13th for the top marginal rate of tax, meaning 12 countries have a higher top marginal rate, and 21 countries have a lower top marginal rate.</p>
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<p>However, a straight comparison like this can be misleading. More than half (19) of the OECD countries impose “social security contributions”. The <a href="http://www.oecd.org/ctp/tax-policy/revenue-statistics-19963726.htm">OECD defines</a> social security contributions as “compulsory payments that confer an entitlement to receive a (contingent) future social benefit”. It notes that they “clearly resemble taxes” and “better comparability between countries is obtained by treating social security contributions as taxes”. </p>
<p>When social security contributions are taken into account, Australia’s “ranking” in terms of top marginal rate of tax drops to 16 out of the 34 OECD member countries – making it still higher than the OECD median top marginal rate, but not by much. </p>
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<p>The other point noted by the AiGroup spokesman was that Australia’s top marginal tax rate applies at a relatively low level of income compared to most other OECD countries. </p>
<p>Australia’s highest marginal tax rate applies to taxable income above A$180,000, approximately 2.2 times Australia’s average wage. The AiGroup spokesman was right to say this is relatively low, with the majority of OECD countries (20 out of 34) applying their highest marginal tax rate at income levels higher than Australia (that is, at income levels higher than 2.2 times the average wage). </p>
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<p>However, it is worth noting that based on the latest <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Taxation-statistics/Taxation-statistics-2014-15/?anchor=Individuals#Figure9">Australian Taxation Office statistics</a>, for the 2014-15 tax year, only 3% of individual taxpayers fell into the highest tax bracket. </p>
<p>Where Australia <em>does</em> rank amongst the highest in the OECD is the percentage of total tax revenue that is derived from individual income taxation. </p>
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<p>In 2014, 41% of Australia’s taxation revenue came from income taxation on individuals. This is the <a href="http://stats.oecd.org/index.aspx?DataSetCode=TABLE_I1">second highest in the OECD</a> (the highest being Denmark at 54%) and significantly higher than the OECD average of 24%. </p>
<h2>Verdict</h2>
<p>The statement made by Innes Willox that “Australia has one of the highest progressive tax rates in the developed world at the moment” is an exaggeration. </p>
<p>Australia ranks 13th in the OECD for the top marginal rate of tax, and 16th if social security contributions are taken into account. </p>
<p>However, Australia does rely more heavily on personal income tax (when compared to other taxes) than all but one other OECD country. <strong>– Kathrin Bain</strong></p>
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<h2>Review</h2>
<p>I agree that the statement is an exaggeration. 13th out of 34 is higher than the median, but it would be equally true to say that more than one-third of the OECD countries have a higher personal marginal tax rate than Australia.</p>
<p>It is always problematic to try to compare tax data across different countries. Although the OECD does try to make the data comparable the differences between tax and welfare systems can lead to misleading comparisons. </p>
<p>It is generally well known that certain Scandinavian countries, such as Sweden and Denmark, have a very high marginal tax rate. However those countries also tend to have a different approach to social and welfare spending. Australia does not have a dedicated social security tax: pensions and income support are paid from general revenue. This structural difference in the tax-transfer systems does limit the comparison. </p>
<p>Australia does have a high reliance on personal income tax, and the top marginal rate is higher than the median OECD level. Although the top marginal rate is relatively low at 2.2 times the median wage, the fact that only 3% of the population are in the top bracket says that we, in fact, have a relatively flat tax structure, with most taxpayers in lower tax brackets. <strong>– Helen Hodgson</strong></p>
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<span class="caption">The Conversation FactCheck is accredited by the International Fact-Checking Network.</span>
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<p><em>The Conversation’s FactCheck unit is the first fact-checking team in Australia and one of of the first worldwide to be accredited by the International Fact-Checking Network, an alliance of fact-checkers hosted at the Poynter Institute in the US. <a href="https://theconversation.com/the-conversations-factcheck-granted-accreditation-by-international-fact-checking-network-at-poynter-74363">Read more here</a>.</em></p>
<p><em>Have you seen a “fact” worth checking? The Conversation’s FactCheck asks academic experts to test claims and see how true they are. We then ask a second academic to review an anonymous copy of the article. You can request a check at <a href="mailto:checkit@theconversation.edu.au">checkit@theconversation.edu.au</a>. Please include the statement you would like us to check, the date it was made, and a link if possible.</em></p><img src="https://counter.theconversation.com/content/77785/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Hodgson receives funding from AHURI and the ARC. Helen is a member of the Social Policy Committee and a Director of the National Foundation for Australian Women, and is on the Tax and Superannuation Advisory Panel of ACOSS. Helen was a Member of the WA Legislative Council in WA from 1997 to 2001, elected as an Australian Democrat. She is not a current member of any political party. </span></em></p><p class="fine-print"><em><span>Kathrin Bain does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The AiGroup’s Innes Willox told Q&A that Australia has one of the highest progressive tax rates in the developed world. Is that true?Kathrin Bain, Lecturer, School of Taxation & Business Law, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757752017-05-01T20:05:45Z2017-05-01T20:05:45ZRather than capping tax revenue, the government should reform the system<p>As the government pulls together the May budget, Finance Minister Mathias Cormann is <a href="http://www.afr.com/news/politics/budget-will-contain-tax-increases-says-mathias-cormann-20170402-gvc47a">aiming to cap tax revenue at 23.9% of GDP</a>. At best, this is an arbitrary cap. More importantly, it distracts from real tax reform, which could increase national productivity and income.</p>
<p>There are many potential reforms to the tax system that are revenue neutral, from broadening the tax base to replacing transaction taxes.</p>
<p>The <a href="http://www.budget.gov.au/2016-17/content/myefo/html/index.htm">2016 federal budget</a> projected that federal tax revenue would be 22.2% of GDP in 2016/17, rising to 23.5% by 2019-20. Meanwhile, the government’s <a href="http://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2015/2015%20Intergenerational%20Report/Downloads/PDF/2015_IGR.ashx">Intergenerational Report</a> projects ever-growing government expenditure as a share of GDP thanks to, among other things, an ageing population and further increases in health outlays. </p>
<p>These two trends make it hard to believe that capping tax revenue at 23.9% of GDP could ever bring the budget back to balance. Furthermore, a comparison of Australia’s tax revenue to GDP ratio with other countries with comparable living standards shows Australia as a relatively low taxed country. </p>
<p>Using the <a href="https://data.oecd.org/tax/tax-revenue.htm">latest numbers compiled by the OECD</a>, we find that tax as a share of GDP when you include all levels of government is just 27.8% in Australia. This compares to an average of 34.2% across all OECD countries. Several European countries have a share above 40%, although both the US and Switzerland are relatively rich countries with lower tax as a share of GDP than Australia. </p>
<p>The diversity of tax to GDP ratios across countries indicates the design and operation of taxation and government expenditure programs are more important than the tax share.</p>
<h2>Tax distortion</h2>
<p>Collecting a dollar of tax costs society much more than a dollar. For income and GST taxes, the distortion caused by levying a tax is <a href="http://library.bsl.org.au/jspui/bitstream/1/611/1/Costs_of_taxation.pdf">estimated by the Treasury and others</a> to exceed twenty cents per dollar raised. </p>
<p>This is because levying a tax distorts peoples’ decision making about employment, investment and saving, choice of business type, and so forth. </p>
<p>For example: a higher income or payroll tax can influence decisions about how much to work; the capital gains tax concessions given to home owners incentivises the reallocation of savings from business investments to housing.</p>
<p>As tax and government expenditure as a share of the economy increase, the costs of the additional tax rise while the benefits of the additional expenditure fall. As the tax rate rises, the tax distortion costs rise at a greater rate than the rise in the tax rate.</p>
<p>The cost of tax distortions to private sector decisions on employment, investment and so forth is a reason to constrain tax as a share of GDP. But if we are trying to enhance the well-being of Australians, setting a ceiling on taxation as a share of GDP seems an issue of second order importance. While the principle is clear, its practical application is dubious.</p>
<h2>So at what level should we tax?</h2>
<p>Identifying the right level to tax is subject to conflicting political and personal assessments. This is because, beyond funding the government, tax can serve a number of roles. </p>
<p>A progressive income tax – increasing the marginal tax rate as income rises – is one of the instruments used to redistribute income to those on lower incomes.</p>
<p>Some forms of taxation can be used to account for costs to society that may be ignored in market transactions - such as taxing pollution, or to discourage behaviour - like taxing tobacco or gambling. </p>
<p>Tax can also be one of the levers to smooth economic outcomes over the business cycle. Increasing taxes during economic booms and reducing them during recessions as part of a overarching policy to achieve full employment and low inflation, for example.</p>
<p>An idealistic benchmark to maximise social well-being would increase until they reach the point where the benefit to society of additional government spending no longer exceeds the distortion cost of raising the additional tax. There is no evidence to indicate this point is 23.9%.</p>
<p>In fact, the <a href="https://data.oecd.org/tax/tax-revenue.htm">wide range in tax to GDP ratios</a>, from the US at 25.9% to Denmark at 49.6%, illustrates there is no one answer. </p>
<h2><strong>Tax reform</strong></h2>
<p>Instead of looking at tax to GDP, there are far more important and higher value reforms that could be made to the taxation system.</p>
<p>Over the past several years we have had a number of inquiries and discussions, including the <a href="https://taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm">Henry Review</a> and the more recent <a href="http://bettertax.gov.au/publications/discussion-paper/">Re:think discussion paper</a>. </p>
<p>These have highlighted many options to improve the taxation system in roughly revenue neutral reform packages. </p>
<p>One of the ideas raised was to remove special exemptions and deductions while lowering tax rates. It would collect the same amount of tax revenue while reducing distortions and the associated losses of national income. </p>
<p>Another idea is to replace transaction taxes with broad based asset taxes, such as the ACT model of <a href="http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1543&context=buspapers">replacing stamp duty with a land tax</a>. We could also better design special purpose indirect taxes, such as with alcohol.</p>
<p>Currently there are <a href="https://www.ato.gov.au/business/excise-and-excise-equivalent-goods/alcohol-excise/excise-rates-for-alcohol/">different rates</a> for keg beer, other beer, brandy, spirits, along with the wine equalisation tax. These could be replaced with a common flat rate of tax per unit of alcohol by volume across all alcoholic beverages. </p>
<p>More challenging reforms include changes to the tax mix, such as a larger GST, which has <a href="https://grattan.edu.au/wp-content/uploads/2014/04/Game_Changers_Web.pdf">relatively small distortion costs</a>, combined with a smaller income tax.</p>
<p>There are many options to reform taxation and derive greater value from the money diverted from private use. Placing an artificial and contrived ceiling on taxation as a share of GDP has to be both a long way down the list of sensible reforms and one that is controversial in practical implementation.</p><img src="https://counter.theconversation.com/content/75775/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There are many potential reforms to the tax system that are revenue neutral, from broadening the tax base to replacing transaction taxes.John Freebairn, Professor, Department of Economics, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.