Impact of Proposed Tax Reforms on Aggregate Output and Income in Australia

Running Head: TAXATION SYSTEM IN AUSTRALIA 1
TAXATION SYSTEM IN AUSTRALIA
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Table of content
Executive summary.................................................................................................................................3
Introduction.............................................................................................................................................4
Outline of the reform proposal...............................................................................................................4
The rationale for the proposal.................................................................................................................5
Likely impact on aggregate output and income.......................................................................................5
Likely impact on unemployment, inequality, and poverty.......................................................................6
Likely environmental impacts..................................................................................................................8
Recommendation....................................................................................................................................9
Conclusion...............................................................................................................................................9
References.............................................................................................................................................10

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Executive summary
Tax reforms have a profound impact on the economy of a country. Income tax is the
major contributor of Australia`s tax revenue. Recently, the government decided to
review its personal income tax policy. The government has come up with a tax reform
proposal where the tax system will shift from progressive tax to flat tax rate. The
intention of the government is to cut taxes and reduce tax burden on low income
earners. This paper discusses the impact of the tax reform proposal on the aggregate
income and output. With the implementation of the changes, the aggregate income
and output is expected to increase because people will be motivated to save.The
change is expected to lower unemployment levels and to have no impact on poverty
levels. The tax reform will also have an indirect impact on the environment since the
tax will encourage growth of the manufacturing sectors which could lead to increased
environmental pollution.

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Introduction
Australia`s current income tax system is imposed by the federal government on
the taxable income of individuals and corporate organization Personal income tax in
Australia in levied on progressive rates while that of corporations is at one the two
rates. Income of partnerships is taxed after it has been distributed to the individual
partners. Income tax is the most significant source of revenue for the Australian
government (Dexter, 2011). This report analyzes and discusses proposed personal tax
reforms and the theoretical and empirical rationale for the reform proposal. The
impact of the change on the aggregate income, output, employment, inequality, and
poverty are discussed. The report also analyzes the likely environmental effects of the
proposal and gives recommendations on the proposal.
Outline of the reform proposal
This paper analyzes the proposed personal tax reform where the government
intends to shift from the progressive tax system to a flat rate tax system over the next
seven years. The tax reform proposed is that the government should abandon
progressive tax policy and adopt a flat tax of 30% as well as a high tax free threshold
and a negative income tax. Currently, Australia relies on a comprehensive tax system
where realized income from all sources is combined and taxed at a constant rate
(Mirrlees & Institute for Fiscal Studies (Great Britain), 2010). The current reforms
intend to cut income tax by hundreds of billions of dollars by the year 2025. The