Deficiencies in the Current Tax System

Abstract

International mobility of capital and competitive pressures are challenging Australian governments to reduce taxes, especially on capital, while conflicting demands, from deregulation, concerns about national savings, and pressures to reform indirect taxes, heighten the need for higher revenues and more progressive taxes. We risk becoming a society of ‘rational fools’, where citizens value government services, but governments lack revenue to find them. Taxpayers see the system as unfair and see others dodge taxes; tax resistance increases, and the revenue base further declines. Rational behavior from an individual viewpoint is foolish from a communal perspective. Deficiencies in the tax system must be remedied to break the cycle. The inability to raise adequate revenue is fundamental. Federal/state financial imbalance is intrinsic to the problem and must be addressed. Removing opportunities for ‘tax shirking’, and addressing major inequities and concessions in direct taxes would improve prospects for indirect tax reform. Increasing overall progressivity by asset or inheritance taxes would balance regressive effects of indirect taxes.