As the Henry tax review gains momentum, here is a discussion of a few concepts and issues that provide some background for a meaningful debate on tax reform. I also have a novel idea (presented in the usual 5 in 5 format) to get you thinking about possible changes to Australia’s taxation system.

1) To regress or progress?

It goes without saying that the debate over tax reform is particularly polarised and often ideologically driven. While all sides call for reform the policy changes put forward reflect very different beliefs about tax and what the tax system should look like.

For example, those who call for lower income taxes for the biggest earners hope that such a reduction will attract and retain highly skilled professionals who can add to Australia’s competitiveness and economic growth. It is argued that this would also have the added benefit of reducing tax minimisation as it would bring income tax more into line with company tax.

On the other side are those who call for more taxation (often on the wealthy) so that money can be redistributed to provide better social services that often go under-funded. The intention is ‘lift’ those at lower socio-economic groups up thereby benefiting all of society (for a interesting debate on this issue click here).

These two simple examples belie vast differences about what tax is and what government revenue should be used for. Those calling for tax cuts for high earners see tax as an impediment to development and government services as an inappropriate way to deliver societal benefits. Those who want greater distribution see government as the driver behind improvements in society.

Of course both arguments have their merits. High quality professionals are drawn to places where they can benefit the most. However, there will always be people drawn for other reasons and in any case the present system doesn’t reward some of society’s most valuable workers.

On the other hand, helping those at the lower end does benefit society as a whole quite substantially. At the very least it helps mitigate the many social problems that are so costly to individuals and society.

My point is not to take a side or argue that a particular perspective is right. Obviously there will always be some sort of taxation but our beliefs on whether tax is a hindrance or a source of help will ultimately be reflected in the tax system we have and in our society more generally.

2) Structure not just levels

More often than not the debate about tax reform is dominated by discussions about taxation levels. More or less tax seems to be the only point of discourse, or at least the only one that is politically palatable. A narrow debate such as this doesn’t address the real issue of how tax should be structured.

Tax levels can be adjusted to suit economic conditions but having an effective tax system, or tax structure, can deliver far-reaching benefits that can be shared by everyone. Onerous compliance obligations, numerous taxes, and complicated exemptions and reductions can impose huge costs on businesses and individuals.

Structures rather than levels are therefore really at the heart of tax reform. For example, Australia has over 100 different state and federal taxes. Of the revenue collected by government 90% comes from only 10 of these.

Once an appropriate structure is in place the final numbers can be adjusted to suit the prevailing economic conditions. But what is taxed and how it is taxed are the key issues.

More information on tax structures can be found here.

3) Tax facts

Often solutions to problems or opportunities for reform are found by looking at the history of the issue. To give you an idea of how Australia ended up with the current tax system, here are some facts about taxation in Australia.

• Before federation, each colony had separate tax systems which focused predominantly on excise duties and other trade related taxes.
• In 1902-03 tax revenue were 5 per cent of GDP, in 2006-07 it was 30 per cent. This is among the lowest in the OECD.
• Between 1915 and 1942 incomes were levied at both state and federal level.
• In 1971 the federal government ceded control of payroll tax to the states. This supplement the revenue that was lost when income taxes became a federal preserve.
• In 2003, Australia has the highest corporate tax burden of the OECD-10 at 5.3 per cent of GDP.
• Australia’s tax‑transfer system is highly redistributive by OECD standards.
• Taxes on labour income account for 40 per cent of revenue, capital income about 33 per cent, and taxes on consumption around 27 per cent.
• In 2002-03 total taxation revenue in Australia was $194 827 million, in 2007-08 it was $285 627 million.

4) Family unit taxation

The idea is taxing family units rather than individuals. Simplified, it is the calculation of tax based on the total income of a family divided by the number of its units.

It’s interesting because such a method implicitly recognises that the costs of living – and indeed consumer spending – is achieved through the pooling of family resources.

This method is very different to the individual income tax system that is prevalent in most countries around the world. Depending on the number of children, a family unit may be subject to less tax than if they were being taxed on an individual basis.

You can calculate your income based on this system by using the simple the table on this page. Remember that different children represent different unit values.

They tried it in France, where it forms the basis of the personal income taxation system.

Read more at good old wikipedia.

5) Tax can be fun...

Although it is designed for an American audience, this site allows you to build your own tax system based on beliefs about government, general taxation concepts and personal and political aspirations. It’s a little bit of fun.