personal income tax reform consensus outliers specifics and the longer term socio economic context
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Personal Income Tax Reform: Consensus, Outliers, Specifics and the Longer-Term Socio-Economic Context. Dr Jeff Pope Tax Policy Research Unit, School of Economics and Finance, Curtin University, Perth, Australia. Background. My interest/research in PIT reform started 2004

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personal income tax reform consensus outliers specifics and the longer term socio economic context

Personal Income Tax Reform: Consensus, Outliers, Specifics and the Longer-Term Socio-Economic Context

Dr Jeff Pope

Tax Policy Research Unit,

School of Economics and Finance,

Curtin University, Perth, Australia

  • My interest/research in PIT reform started 2004
  • Background in compliance costs and simplification issues
  • Synthesis of lengthy paper
  • More ambitious proposal than some!

(but note Pope et al recommendation for SST abolition eventuated)

presentation approach
Presentation Approach
  • Main Issues
  • Key Pope Proposals (2004-07)
  • PIT Reform Consensus
  • Outliers and Specifics (briefly!)
  • Socio-Economic Factors (longer-term)
  • Concluding Comments
1 main issues
1 Main Issues
  • Government mindset especially on difference between:

- taxpayer with complex affairs

- taxpayer with straight-forward affairs

- tax form returnee (who pays no tax)

key supporting data
Key Supporting Data:

In 2003-04 around 2.2 million personal taxpayers who lodged returns (20 %) did not pay any tax

  • The bottom 37% of taxpayers (defined as persons who submit a PIT return) account for only 3% of tax revenue
  • the middle 45% of taxpayers account for 38% of tax revenue
  • the top 18% of taxpayers account for 59% of tax revenue

(Based on 2001-02 figures; Pope, 2005)

Outdated, complex, inefficient, insufficiently automated PIT system in great contrast to private sector economic methods and performance

Around 11 million PIT returns (over 50% of population!); operating costs around 5% of revenue; average PIT rate 23%!

‘Acid Test’: 75% of taxpayers use an agent, amongst the highest in the world!

Government bias to median taxpayer and voter, especially in last 20 years or so, at expense of lower and higher income taxpayers

Thresholds in real terms since 1978-79

eg same tax free threshold would be $13,549 in July 2003 in real terms

See Warren (2004) et al

Government tolerance or encouragement of tax avoidance; economic ‘deadweight’ losses far outweigh any gains, plus equity issues
supporting evidence examples
Supporting Evidence (examples):
  • Failure to enact ANTS (1998) re. reform of trusts (abandoned in 2001)
  • 55% of ‘top rate’ tax-payers use tax avoidance (2002 figs) and 44% of lawyers
  • Continued support for negative gearing
  • See wide international economic literature, especially US, on deadweight losses
  • See (eg) Covick, Pope re. equity issues
Tax-Welfare nexus and entrenched Govt policies

See various reports, particularly those published by the Centre for Independent Studies, and generally supported to a lesser extent by reform consensus eg CPA Australia

Changed international and Australian socio-economic characteristics from the society PIT was historically ‘designed’ for

Major trends discussed later

2 key pope proposals
2 Key Pope Proposals
  • Need robust definitions of PIT reform,

in terms of PIT revenue and as a percentage of PIT revenue:

i minor, or ‘tinkering and tokenism’: costing less than 5% of net (annual) tax revenue (less than $5 billion in 2003-04)

ii moderate: costing between 5% and up to 20% ($5 billion and $19 billion)

iii significant: costing 20% or more (more than $19 billion)

Main assumptions:
  • Current Government budgetary surplus is disregarded
  • Medicare Levy disregarded
  • Revenue neutrality
  • GST compensation package
  • Political difficulties of increasing GST rate recognised
rate alignment (or equalisation), namely to equate the top marginal rate of personal income tax with the company tax rate, and also CGT, at a rate of 30%
  • an increased tax-free threshold, namely to raise the tax-free threshold significantly eg to, say, $15,000 ie over double its current level, and approximate restoration to its real 1978/79 level
original costing in 2004 05 figures economic papers 2005
Original costing in 2004-05 figures(Economic Papers 2005)
  • Approximate Cost: $22 billion
  • Funded by:

Removal of deductions including work-related deductions* $5 billion

GST increase (to 15%) $17 billion

*New Zealand abolished in 1989!

In the longer term eight studies favour a top 30 per cent rate against just two for a higher rate around 40-45 per cent, with the rest unspecified

(In the short-term about even)

The current tax-free threshold of $6,000 should remain unchanged
  • Simplification ie removal of PIT deductions and concessions
4 outliers and specifics refer paper but note
4 Outliers and Specifics - Refer Paper. But note:
  • Little business/professional support for significantly increased tax-free threshold (‘academic push’)
  • Potential revenue gains range from removal of exemptions/deductions at around $5 billion (Pope) to include wider base-broadening measures at around $10-11 billion (Freebairn; BCTR, major option). Warren: costing options
  • Elasticity/Laffer/’growth dividend’ effect – generally disregarded by Treasuries; included by some researchers; complex economic literature
5 socio economic factors longer term
5 Socio-Economic Factors (longer-term)


  • Australia was 8th most ‘globalised’ country in world in 2004 (Singapore top!)
  • Clearly part of ‘new world economy’ yet PIT system is ‘old world’
  • Richest 1 per cent of Australians increased their share of all personal income from 5 per cent in 1980 to 9 per cent in 2000: Significant difficulty for 30% top rate: US approach better? (No!; if problem consider other policies and taxes eg inheritance, wealth)
  • Around 1 million Australians (roughly 15% of current mid/upper PIT payers!), mainly professional/skilled, are working overseas, mostly in lower PIT taxed countries
  • Taxation, salary and career equally important main reasons for move
  • Higher Education Contribution Scheme (HECS) loan fee system – on graduation increases marginal PIT rate by 3% to 6% for those generally from lower/middle income families
  • Affordability of property
  • Taxation of superannuation
  • Labour supply and incomes rise mostly because of increased participation, not because those already in work decide to work more
  • Participation rates in 2000-01 were 72 per cent for males and 55 per cent for females (83 and 36 per cent respectively in 1960-61)

PIT reform debate has gender/equity issues

  • Real hourly earnings between 2002 and 2004 fell by around 20 per cent for female non-managerial workers on AWAs overall

PIT reform needs to take account of falling real wages for some lower paid workers. Supports much higher tax-free threshold.

  • In 2000-01 services accounted for 48% of Australia’s GDP, up from 31% in 1900-01
  • Manufacturing contributed 11.9% (roughly same as 1900-01), half that of 1950-51
  • Mining and construction: 5.6%; agriculture 3.7% (both 2000-01)

Supports proposal for GST rate increase

  • Revenue effect is around $2 billion in 2005-06, up from around $1.2 billion in 2000-01
  • So-called negative gearing gap has increased dramatically in the past four years, from $670 million to $4.1 billion, or around six-fold - far stronger than prevailing economic growth

Politically difficult, with wide socio-economic complications if negative gearing abolished; keep status quo but improve ATO auditing

  • Many tax agents and firms such as H & R Block would exit the market or diversify
  • Fewer financial advisers/lawyers needed for salary packaging and other tax avoidance practices
  • Longer-term economic efficiency gains
6 concluding comments
6 Concluding Comments
  • Very strong support by business groups, tax professionals and academics for PIT reform (but note some ‘backing away’ by former using macro-economic concerns as an excuse)
  • ‘Administrative reform’ focus: reduce the number of PIT payers who complete a PIT return annually to around 3.5 million
‘Rate/threshold’ reform focus: top rate of 30% and (more contentiously) a high tax-free threshold of $15,000
  • Funded by simplification (and if necessary a GST rate rise to 15% with a generous compensation package)
  • Incorporate any associated tax (eg FTB, FBT, CGT) and welfare changes
Knowledge, technology and tax administration skills exist to achieve such objectives
  • Focus on longer-term socio-economic benefits
  • Need a ‘political champion’