There has been a revival of long-standing arguments that Australia relies too much on taxing income and that the main goal of tax reform is to cut taxes on income and shift the ‘tax mix’ to taxes on consumption such as the goods and services tax (GST). This paper outlines the reasons for arguing against this reform – that it would almost certainly increase inequalities of income and wealth and risk pushing many into deeper poverty, while the economic efficiency case for taxing consumption more and income less is much less clear cut. 

The paper presents a summary of arguments and evidence. It proposes that the income tax system be reformed by closing tax shelters to improve equity and the efficiency of investment at the same time.

Key points

• Increasing the GST to fund income tax cuts would shift resources from those with the least to those with the most.
• Any economic efficiency gains from taxing income less and consumption more are modest and uncertain.
• Arguments about changing the ‘tax mix’ are divisive and distract from feasible, real-world tax reform.
• Australia taxes personal income less than the average wealthy nation.

Priorities for reform of personal income tax

• Tighten the tax treatment of private trusts and companies to curb their use to avoid personal income tax.
• Halve the 50% Capital Gains Tax (CGT) discount.
• Restrict deductions for expenses relating to investment in assets attracting CGT (such as rental property and shares) to income from the same type of investment (limit negative gearing).
• Extend the 15% tax on superannuation fund investment income from accumulation accounts to retirement accounts and curb the use of superannuation to avoid CGT.