Alphacrucis College BUS102: Australian Taxation System Reform Analysis

This report analyzes a proposed tax reform in Australia, focusing on the shift from a progressive to a flat tax system. It outlines the reform proposal, discusses its theoretical and empirical rationale, and assesses its likely impact on aggregate output, income, unemployment, inequality, poverty, and the environment. The analysis suggests the reform could increase aggregate output and income by incentivizing work and investment, potentially lowering unemployment. However, it also highlights potential environmental impacts and raises questions about its effect on inequality and poverty, particularly benefiting higher-income earners. The report concludes with a recommendation on whether the proposal should be adopted.

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

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reforms will ensure that the income tax brackets reduce from five to four. The
proposal will also require all people earning between $41,000 and $200,000 a year to
pay a marginal tax rate of 32.5 percent.
The rationale for the proposal
The rationale for the personal tax reform is to reduce the burden of income tax on
taxpayers. The proposed tax reforms seek to introduce a flat tax system where all
taxpayers will be paying a percentage of their income across all income groups. The
proposed tax reforms also aim at reducing inequality in taxation as one of the
characteristics of a good tax system. The tax reform also intends to increase the output
of the country and hence increase the GDP of the country (Disney, 2010). The
government also intends that the changes in personal tax policy will help to increase
efficiency and make the tax system simpler.
Likely impact on aggregate output and
income
Personal income tax contributes a huge percentage in the earnings of the
Australian government. Reforms in income tax are therefore expected to have a great
impact on the aggregate output and input of the country. The tax reform will result in
a reduction in the amount of taxes paid by individuals in some tax brackets. Reduction

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in taxes impacts on the output of the country since it will encourage people to work
and earn more since they will retain more of their money (Ananiashvili & Papava,
2012). Reduction in taxes will help people to save more and hence increase the
savings in the country. In addition to this, people will tend to invest more, and the
disposable income will also increase. This, in turn, will contribute to an increase in
the aggregate output.
The personal income tax reforms will also have a significant impact on the
aggregate income of the country. The reforms will result in a decrease in taxes but
broaden the tax base. Generally, a decrease in taxes will mean that people have more
disposable income (Phillips, 2015). This means that the aggregate demand for goods
and services will increase. At the same time, the income of the government will
increase since broadening the tax base will help the government increase its income.
Increase in spending by people will lead to an increase in aggregate supply and the
long run, the demand and supply will be equal and hence leading to a healthy
economy since aggregate income will increase.
Likely impact on unemployment, inequality,
and poverty
The proposed tax reforms as discussed above will lead to an increase in the
aggregate output of the country. When taxes in a country decrease, people will be
motivated to invest more since they have more money to invest, and because they are
likely to be taxed less. When investments increase in a country, people open many

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more businesses and hence creating additional jobs in the economy (Ferede &
Dahlby, 2012). The assumption, in this case, is that the decrease in taxes as a result of
the reforms will motivate people to increase the amount of money they invest and not
save the money. A reduction of taxes as a result of the proposed reforms is expected
to result to increase in disposable income of individuals. When the disposable income
increases, it is expected that people will spend more on purchasing goods and
services. This means that the aggregate demand and supply in the economy will
increase. To meet the increased demand, production has to be increased, and this
means that more jobs will be created in both the goods and service market. In addition
to this since the tax reforms will lead increase in government spending in the long run.
When government spending increases, it means that economic activities will be
heightened and hence leading to the creation of job opportunities (Slemrod & Bakija,
2008). From the above discussion, it can, therefore, be concluded that the proposed
tax reforms in Australia will likely lower levels of unemployment in the country.
The proposed tax reforms are expected to favor high-income earners as compared to
lower income earners. With the introduction of the proposed income tax, taxpayers
will be split into three groups: High-income earners(20% of taxpayers), middle-
income earners(50% of taxpayers) and low-income earners(Prasad, 2015). From the
analysis of the proposal, 20% of high-income earners will get a tax reduction of 62%
after the implementation of the proposal. The very top income earners will get a tax
cut of 40 %. The middle-income earners will get tax cuts of 7% while the low-income
earners will have their taxes reduced by approximately 1.5%. For example, a person
earning $40,000 every year will get a tax cut of roughly $456 while a person earning
$200,000 will benefit from a tax cut of $7250. From the analysis, it is clear that
despite the change helping to reduce the tax burden of low-income earners, the tax

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reform will benefit high-income earners more since they are expected to enjoy high
tax cuts(Dolenc & Laporte, n.d.). It is therefore difficult to determine whether the tax
reforms will reduce or increase inequality.
The proposed tax reform will impact on the poverty levels in the country. As of
2016, approximately 13.3% of Australians live below the internationally accepted
poverty levels. This translates to approximately 2.9 million people. Taxes have a
direct impact on income. A tax policy that helps in redistribution of wealth to the poor
helps in reducing poverty levels in a country (Cowen, 2018). The introduction of the
new tax policies in Australia is expected to increase investment and hence leading to
more people getting employed. When the poor people get these jobs, they will help in
lifting them out of poverty.
Furthermore, the tax reform will ensure that lowest income earners pay the
smallest share of their income as tax and hence will get a chance to save the rest.
However, the tax reform proposal does not put into consideration resource
redistribution. There are a large number of Australians who earn below the minimum
taxable income and hence this proposal will not have any impact on their income
levels. It can, therefore, be concluded that the proposal will not have any significant
impact on poverty levels.
Likely environmental impacts
The proposed tax reforms do not have a direct impact on the environment of the
country. However, the reforms are expected to impact on the environment indirectly
in the coming few years. With the implementation of the proposed changes, the

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economy is expected to expand since investments will increase (Jurinski, 2012). This
is expected to steer growth in the manufacturing industry. The manufacturing industry
contributes greatly to environmental degradation and pollution. The growth in this
sector is therefore expected to have a negative impact on the environment.
Recommendation
From the results of the analysis done above, it is seen that the tax reform proposal
is expected to have a positive impact on the aggregate output and income of Australia.
It is also clear that the implementation of the reforms will contribute to a decrease in
unemployment since job opportunities will be created. The reforms will have zero
impact on poverty and inequality while the environment will be affected negatively.
Therefore, I recommend that the proposal should be adopted since it has more
positives than negatives.
Conclusion
Tax reforms have a huge impact on both micro-economic and macro-economic
aspects of a country. It is therefore important to carry out in-depth research and
analysis to determine the strengths and weakness of the tax reforms and how they are
likely to affect various players in the economy. The paper discusses the rationale for
the proposal of the flat tax policy. The paper also discusses the impact of the proposal
on the GDP of the country. The report establishes that the proposal will impact
increase aggregate output and income. Furthermore, the report discusses the impact of
cutting taxes on unemployment, poverty levels, inequality as well as on the
environment.

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References
Ananiashvili, I., & Papava, V. (2012). Impact of the Average Tax Rate on the
Aggregate Demand (Keynesian Models). SSRN Electronic Journal. doi:
10.2139/ssrn.2183744
Cowen, T. (2018). The complacent class: The self-defeating quest for the American
dream.

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Dexter, B. (2011). Payroll Tax Cuts v. Bush Tax Cuts: Real Relief for the Plumber
and Other Average Joes. SSRN Electronic Journal. doi: 10.2139/ssrn.1969135
Disney, R. (2010). The impact of tax and welfare policies on employment and
unemployment in OECD countries. [Washington, D.C.]: International Monetary
Fund, Fiscal Affairs Dept.
Dolenc, P., & Lapors ﾌﾌ k, S. Labour taxation and its impact on employment growth.
Ferede, E., & Dahlby, B. (2012). The Impact of Tax Cuts on Economic Growth:
Evidence from the Canadian Provinces. National Tax Journal, 65(3), 563-594.
doi: 10.17310/ntj.2012.3.03
Jurinski, J. (2012). Tax reform: A reference handbook. Santa Barbara, Calif: ABC-
CLIO.
Mirrlees, J. A., & Institute for Fiscal Studies (Great Britain). (2010). Dimensions of
tax design: The Mirrlees review. Oxford: Oxford University Press.
Phillips, M. (2015). The welfare effects of temporary tax cuts and subsidies: theory,
estimation, and applications. Economic Inquiry, 54(1), 612-632. doi:
10.1111/ecin.12223
Prasad, V. (2015). Balanced Budget Tax Cuts in a Liquidity-Constrained Economy.
The Manchester School, 83, 87-119. doi: 10.1111/manc.12115
Slemrod, J., & Bakija, J. M. (2008). Taxing ourselves: A citizen's guide to the debate
over taxes. Cambridge, Mass: MIT.