Wednesday, November 30, 2005
International Tax Systems
Elizabeth Coleman from the Center for Freedom and Prostperity writes about the possibility of an Australian flat tax system and makes several interesting points in the process. Her article looks at taxes from an international perspective rather than a local perspective. Other government officials, such as Australia's tax commissioner have taken the same perspective, and as a result have called for a "flatter" tax:
"TAX experts calling for flat personal income tax have warned that Australia is out of step with regional competitors with lower taxes and simpler laws. While outgoing tax commissioner Michael Carmody yesterday declared the 9500-page income tax act "too complex", local and international economists at a seminar in Sydney pressed the case for a flat tax. Mr Carmody told a Perth conference hundreds of millions of dollars was spent updating information technology to mask the "inherent complexity" in the income tax act."
A flat tax would eliminate subsidies and excise taxes, two tools economists use to make an economy more efficient. However, a "flatter" tax that the commissioner may be talking about could keep some important subsidies and excise taxes that do encourage efficiency while elminating many subsidies and excise taxes that were created for political rather than efficiency reasons. Since taxes are created by politicians, most subsidies and taxes are created for political reasons which actually discourages efficiency.
A second point to note about a flat tax is the tax base that is affected by it. The base of a flat tax is income. This can result in discouragement of earning money. Without an income tax, people take home $1 for every $1 they earn. With the income tax however, some people only take home $.53 for every $1 they earn (according to the article, the highest tax rate in Australia is 47%). This can greatly distort the efficient amount of work since people may think twice about earning money when they only get to keep half of it. With a flat tax though, there would be no "highest" tax rate. The tax rate would be the same for everyone and would be set based on the current government's needs, so the rate of distortion would be less than the 47% that some in Australia pay right now. As "Liberal backbencher and tax crusader Malcolm Turnbull" points out, "tax concessions were 'the major factor' complicating the system. That's why broadening the base goes hand in hand with lowering rates -- if you have a broader tax base you will raise more money and you can afford to cut taxes."
All of this is just the analysis of the Australian economy from a domestic perspective (for Australia). Ms. Coleman, however, focuses more on the international effects that a flat tax could have on Australia's economy. She writes that tax reform is "important for Australia, because in the US we compete with high-taxing European countries, but you have to compete with Hong Kong and Singapore, where the tax rate is no higher than 18 per cent." If someone is deciding where to start a business or where to work, they may take into consideration that in Singapore, every $1 they earn will make $.82 richer, while in Australia it may only make them $.53 richer.
In a global economy, nations compete with each other to attract businesses and investments in order to broaden their tax base and increase their nation's GDP. Some of these nations offer various amenities in the form of subsidies. Other nations offer lower taxes. Businesses congregate in both kinds of nations, but they generally prefer the latter group of nations. Since these businesses generate employment, a flat tax with a low rate would be a good thing for Australia and any other nation considering tax refom.
"TAX experts calling for flat personal income tax have warned that Australia is out of step with regional competitors with lower taxes and simpler laws. While outgoing tax commissioner Michael Carmody yesterday declared the 9500-page income tax act "too complex", local and international economists at a seminar in Sydney pressed the case for a flat tax. Mr Carmody told a Perth conference hundreds of millions of dollars was spent updating information technology to mask the "inherent complexity" in the income tax act."
A flat tax would eliminate subsidies and excise taxes, two tools economists use to make an economy more efficient. However, a "flatter" tax that the commissioner may be talking about could keep some important subsidies and excise taxes that do encourage efficiency while elminating many subsidies and excise taxes that were created for political rather than efficiency reasons. Since taxes are created by politicians, most subsidies and taxes are created for political reasons which actually discourages efficiency.
A second point to note about a flat tax is the tax base that is affected by it. The base of a flat tax is income. This can result in discouragement of earning money. Without an income tax, people take home $1 for every $1 they earn. With the income tax however, some people only take home $.53 for every $1 they earn (according to the article, the highest tax rate in Australia is 47%). This can greatly distort the efficient amount of work since people may think twice about earning money when they only get to keep half of it. With a flat tax though, there would be no "highest" tax rate. The tax rate would be the same for everyone and would be set based on the current government's needs, so the rate of distortion would be less than the 47% that some in Australia pay right now. As "Liberal backbencher and tax crusader Malcolm Turnbull" points out, "tax concessions were 'the major factor' complicating the system. That's why broadening the base goes hand in hand with lowering rates -- if you have a broader tax base you will raise more money and you can afford to cut taxes."
All of this is just the analysis of the Australian economy from a domestic perspective (for Australia). Ms. Coleman, however, focuses more on the international effects that a flat tax could have on Australia's economy. She writes that tax reform is "important for Australia, because in the US we compete with high-taxing European countries, but you have to compete with Hong Kong and Singapore, where the tax rate is no higher than 18 per cent." If someone is deciding where to start a business or where to work, they may take into consideration that in Singapore, every $1 they earn will make $.82 richer, while in Australia it may only make them $.53 richer.
In a global economy, nations compete with each other to attract businesses and investments in order to broaden their tax base and increase their nation's GDP. Some of these nations offer various amenities in the form of subsidies. Other nations offer lower taxes. Businesses congregate in both kinds of nations, but they generally prefer the latter group of nations. Since these businesses generate employment, a flat tax with a low rate would be a good thing for Australia and any other nation considering tax refom.
