Below is an excerpt from the latest Australian Taxation Law title, now available on the CCH Bookshop.
Criticisms of the current Australian taxation system
Some general criticisms of the current system include suggestions that:
- it is not sufficiently equitable, because taxable income is not the best measure of economic well-being
- the neutrality of the system has been unduly eroded over time by successive governments’ attempts to appease sectional interests by granting them ad hoc tax benefits, and
- the system has comparatively low political acceptability.
These and other criticisms have from time to time generated calls for reform of the taxation system. The materials below discuss some of the proposals for reform that have been put forward.
Challenges of e-commerce
Taxation systems can generally cope reasonably well with transactions that take place physically within a country’s borders. However, traditional taxation systems have struggled to cope with the rapid development of the international digital/internet economy, where a person using a computer anywhere in the world can conduct transactions with taxpayers in multiple countries without ever having a physical presence in those countries. Taxpayers have increasingly taken advantage of these factors to avoid tax through complex multi-jurisdictional cyberspace arrangements.
These activities have provoked responses from host countries (eg the introduction of a ‘diverted profits’ tax in Australia and elsewhere)93 aimed at ensuring that taxpayers pay their ‘fair share’ of tax.
Australia has also introduced general legislation, the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (Cth), which is designed to combat such multinational tax avoidance, as well as specific legislation attempting to deal with other aspects of e-commerce.
This area is likely to see significant further development over coming years.
Guidelines for tax reform
In evaluating possible future reforms, Mathews suggested that tax reform is effective only if it achieves the ‘overriding requirement’ that the taxation system’s intended and actual effects are the same. This in turn requires that opportunities for avoidance, evasion and other manipulations are minimised.
The broad criteria that Mathews suggested for evaluating reform proposals included:
- The revenue bases should be easily identifiable and measurable, and should, as far as possible, be determined by reference to market or other objectively verifiable values.
- Transactions and transfers should, so far as possible, be taxed at the time they take place (eg by deduction of tax at source) to avoid the need for multiple records of transactions and to enable tax liabilities to be finalised when the transactions occur.
- Transactions and transfers should be taxed at proportional rates. Exemptions and concessional allowances should be consistent with social security arrangements and paid directly to eligible taxpayers.
- Tax bases should be consistent, eg between business and personal taxation.
- Generally, the broadest possible revenue base should be used, except where specific taxes are intentionally imposed to achieve vertical equity or other particular distributional, stabilisation or allocative objectives.
- As far as possible, internal checking mechanisms should be built into the taxation system as a means of verifying tax liability.
The Ralph Committee suggested that in designing a taxation system, international factors also need to be taken into account.
Given the various reform proposals that have been put forward from time to time, it may be puzzling that so few have actually been implemented. Perhaps part of the reason is that, as Edmonds pragmatically observed:
changes to the taxation system are so riddled and infected by politics, [that] changes amounting to real tax reform cannot even make it to the table for consideration and discussion, let alone be adopted as policy for implementation … For too long now, structural reform of many areas of the Commonwealth’s legislative jurisdiction has been anaesthetised by … politics.