Income Tax System Research Articles

A Review of the 1999 Australian Capital Gains Tax Reforms

Whilst the current Australian tax system incorporates a somewhat progressive tax structure, loopholes in the income tax laws result in significant levels of tax avoidance and minimization. Thus, the tax system struggles to fulfill its critical goals of income distribution and economic efficiency. Specifically, it is contended that deficiencies in the Australian capital gains tax regime forms a significant weakness in the Australian income tax system. The recent Review of Business Taxation carried out by a committee of businessmen chaired by John Ralph , actually shifted the Australian capital gains tax regime further away from the comprehensive income ideal, with its capital gains tax discounts and other exemptions. Accordingly, the paper seeks to ascertain, whether the Ralph reforms optimised Australia’s capital gains tax? In doing so, the paper initially examines the tax policy criteria. The case for capital gains taxation is then made having regard to the three traditionally accepted canons of good taxation policy: equity, economic efficiency and simplicity. Also, fiscal adequacy is considered to be an essential criterion. The paper finds that capital gains tax is clearly justified on tax policy grounds although concerns about complexity and impact on investment are noted. Thirdly, the paper considers the design issues by comparing a comprehensive realisation and accruals CGT systems. Overall, the paper finds that accruals is well justified on tax policy grounds. However, given the liquidity concerns about accruals it is suggested that an accruals system be initially applied to marketable securities with a realisation system applying to other assets. After some experience with this system, it is further suggested that accruals be extended to other assets for taxpayers who do not have these liquidity issues. Fourthly, the paper provides a brief history of Australia’s capital gains tax prior to the introduction of the 1999 Ralph Australian capital gains tax reforms. Fifthly, the paper sets out the 1999 Ralph capital gains tax reforms. Finally, the paper reviews these reforms and finds that these reforms generally moved Australia further away from the ideal capital gains tax regime. The paper notes the tradeoffs and concludes that there is need for further capital gains tax reform and makes recommendations for implementing a comprehensive capital gains tax for Australia that includes an accruals capital gains tax for marketable securities. This study only covers some of the issues involved with the broad subject of capital gains tax. Indeed, this paper does not undertake a detailed examination of a number of aspects of capital gains tax, including: an international comparison of capital gains tax; international issues associated with capital gains tax; capital gains tax issues for partnership and trusts. The study though is sufficient to show the need for further capital gains tax reform in Australia. It also points to the need for further empirical and theoretical research on the impact of tax rules on income and wealth distribution, economic efficiency, simplicity and fiscal adequacy.

Removing Rents: Why the Legal System is Superior to the Income Tax at Reducing Income Inequality

Reducing income inequality is, in the eyes of many, one of the major political issues of this time. The conventional political approach to reduce income inequality is to raise taxes for the wealthy and redistribute the proceeds to the poor. This approach finds support in the economic literature, which postulates that redistribution through the tax system is more efficient than through the legal system.I argue instead that the legal system is intrinsically superior at reducing income inequality — at least to the extent that inequality is not caused by effort or talent differences but by rents (profits that would not have been earned in a perfectly competitive and transparent economy). The legal system is superior because it can address the specific market failures that make rents possible. This way, it can prevent income inequalities from occurring in the first place — an ex ante approach. The income tax system, by contrast, tries to correct a problem ex post — after it has already occurred.Rents can be seen as implicit commodity taxes, the proceeds of which go to private individuals or companies rather than to the government; just like explicit commodity taxes, they cause labor and price distortion. Legal rules that prevent rents therefore reduce labor and price distortion. Income taxes, by contrast, increase labor distortion and leave the price distortion unaffected. They are less efficient at redistributing income because they are an overly broad instrument, treating income from rents and hard work alike.This finding has major implications. The first is that trade-offs between equity and efficiency should be made in the legal system whenever legal rules generate or reduce rents. The second is that rents (and ‘windfalls’) should be considered as costs, rather than as zero-sum effects, in law and economics models.

Australia's Capital Gains Tax Discount: More Certain, Equitable and Durable?

The Ralph Committee, consisting of three leading Australian businessmen, John Ralph (Chairman), Rick Allert and Bob Joss, was established in 1998 to make recommendations on reforms to the Australian tax system. Relevantly, the Ralph Committee sought to achieve three national taxation objectives: optimising economic growth, promoting equity and promoting simplicity and certainty. Additionally, the Committee considered that fiscal adequacy was important as the reforms were designed to achieve revenue neutrality. In 1999 the Ralph Committee recommended sweeping reforms to the Australian income tax system. Its final report, consisted of eight parts and made 280 recommendations. Many of these have since passed into law in a staggered series of stages since 1999. Relevantly, numerous CGT-related recommendations were made and many of these have also passed into law. In accordance with the Ralph Committee’s four tax policy criteria set out above (equity, economic efficiency, simplicity and fiscal adequacy), this paper evaluates the CGT discount for individuals, trusts and superannuation funds and other related reforms that flowed from the 1999 Ralph Report. The paper finds that the CGT discount has greatly undermined equity and fiscal adequacy. Further, this policy appears to have created significant economic distortions and contributed to complexity.

Measuring Indebtedness of Greece, Italy, Portugal and Spain, (GIPS), in Terms of General Government Net Lending/borrowing, General Government Net Debt, Current Account Balance, Total Investment, Gross National Savings, General Government Structural Balance and Output Gap.

This article measures the total government indebtedness, total investment and gross national savings of Greece, Italy, Portugal, and Spain, (GIPS). Using data from the International Monetary Fund, IMF, we describe the current situation for the period 2000 to 2018. Macroeconomic indicators such as general government net lending/ borrowing, general government net debt, current account balance, total investment, gross national savings, general government structural balance and output gap would be used to show the government’s budget deficit and the monetary fluctuations. A distinction would be made between the cyclically – adjusted government budget balance and the structural budget balance. The purpose of this article is to show how government budgets could eliminate and stop poverty by stimulating investment and developing the infrastructure through gross national savings and taxation. Implementation of an equitable progressive income taxation system would be achieved in combination with the Greek Orthodox approach that redistributes incomes to the poors, the prostitutes, the beggars or any person that is financially underrepresented in the society. In other words, the effort will be to accumulate in the central bank reserves around 100 trillions of four different currencies, namely, EURO, GBP, USD and AUD. Greece should also keep around 800 trillions reserves in Drachmas as a sign of respect for the Greek citizens. Government surpluses of 100 trillions without involving any borrowing will aim to achieve equilibrium by avoiding that someone will become better-off and someone else worse-off. We want marginal social benefit to equal marginal social cost by integrating the Greek Orthodox principles in the daily routines of the households and the politicians. The prerequisite to achieve the above is to establish first class communication and collaboration between the Orthodox Church, the government and the households.

On Measuring Inequity in Taxation Among Groups of Income Units

In this paper a method for analyzing the fairness of an income tax system when portioning the population into heterogeneous socio‐economic groups is proposed. The equitable tax system is defined by the three axioms given by Kakwani and Lambert in 1998 and, as they suggest, inequity is evaluated by the negative influences on the redistributive effect of the tax associated with axiom violations. Measuring the extent of axiom violations among households belonging to different groups, we improve the Kakwani and Lambert analysis, which is able to detect only the existence of overall inequities. We propose a method that allows for evaluation of the contribution of each group to the overall inequity. Moreover, the adopted method enables disentangling the directions of violations. The obtained results allow us to judge how axiom violations discriminate among groups in their reciprocal relationships. An application to the 2010 Italian income tax reveals that inequities disproportionately penalize the household typologies. More precisely, unfairness affects households with children more severely than the other household groups.

Some considerations on measuring the progressive principle violations and the potential equity in income tax systems

Kakwani and Lambert (1998) state three axioms which should be respected by an equitable tax system; then they propose a measurement system to evaluate at the same time the negative influences that axiom violations exert on the redistributive effect of taxes, and the potential equity of the tax system, which would be attained in absence of departures from equity. The authors calculate both the potential equity and the losses due to axiom violations, starting from the Kakwani (1977) progressivity index and the Kakwani (1984) decomposition of the redistributive effect. In this paper, we focus on the measure suggested by Kakwani and Lambert for the loss in potential equity, which is due to violations of the progressive principle: the authors’ measure is based on the tax rate re-ranking index, calculated with respect to the ranking of pre-tax income distribution. The aim of the paper is to achieve a better understanding of what Kakwani and Lambert’s measure actually represents, when it corrects the actual Kakwani progressivity index. The authors’ measure is first of all considered under its analytical aspects and then observed in different simulated tax systems. In order to better highlight its behaviour, simulations compare Kakwani and Lambert’s measure with the potential equity of a counterfactual tax distribution, which respects the progressive principle and preserves the overall tax revenue. The analysis presented in this article is performed by making use of the approach recently introduced by Pellegrino and Vernizzi (2013).

Can Tax Reform Solve the “Fiscal Trilemma”?

Are the goals we have for our tax system mutually incompatible? This is the question that we posed to a distinguished group of tax economists at a conference hosted by the Murphy Institute and the Department of Economics at Tulane University in October 2012. More specifically, we asked whether the US economy faced a ‘‘fiscal trilemma’’: Can the three goals of revenue adequacy, fairness, and promotion of economic growth all be achieved, or do we have to sacrifice one of these goals to meet the others? Many of the traditional debates in tax policy are encompassed within this trilemma framework. For example, must a progressive tax system that meets our revenue needs hamper economic growth? Do progrowth tax systems that generate needed revenues come at the expense of progressivity? Would a progressive income tax system that managed to encourage growth provide insufficient revenues? Is there an unresolvable tension between the traditional Haig-Simons notion of a ‘‘good’’ tax—a broad-based, low-rate income tax base with few if any exclusions or deductions—that emerges from a largely static view of the tax system and the more growth-oriented taxes (e.g., a personal consumption tax, a value-added tax, and a retail sales tax) that emerge from a dynamic analysis of taxes? The tensions between these three goals of tax policy—fairness, growth, and revenue adequacy—are not fully understood or quantified. Our conference brought together researchers working on these issues to explore recent

OPTIMAL DYNAMIC NONLINEAR INCOME TAXATION UNDER LOOSE COMMITMENT

This paper examines an infinite-horizon model of nonlinear income taxation in which the probability that the government can commit is high, but not certain. In this “loose commitment” environment, we find that even a little uncertainty over whether the government can commit yields substantial effects on the optimal dynamic nonlinear income tax system. This result holds even though separating taxation remains optimal, as in the case of full commitment. Under an empirically plausible parameterization, our numerical simulations show that high-skilled individuals must be subsidized in the short run, despite the government's redistributive objective, unless the probability of commitment is higher than 98%. Loose commitment also reverses the short-run welfare effects of changes in most of the model's parameters, and yields some counterintuitive outcomes. For example, all individuals are worse off, rather than better off, in the short run when the proportion of high-skilled individuals in the economy increases.

A case for maximum wage

In this paper we demonstrate that supplementing the optimal non-linear income tax system with a binding maximum wage rule attains a Pareto improvement, by serving to mitigate the mimicking incentives of the high-skill individuals without entailing distortions.

Does Australia Have A Good Income Tax System?

Australia is considered to have relatively low rates of tax in comparison to other members of the OECD. This paper explores Australias tax system to see if it is a fair, efficient and simple system for income earners. The paper finds that there are major inequities in the current income tax system, which tend to favour the higher income earners and owners of wealth.

The Debt-Equity Tax Bias: Consequences and Solutions

The tax deductibility of interest payments in most corporate income tax systems coupled with no such measure for equity financing creates economic distortions and exacerbates leverage. This paper discusses the consequences of this debt bias and the possible remedies.JEL classification: H25, H32, G21, G32

Flat Tax in the EU – 'Something of Craze'?: The Bulgarian Case

Flat tax has become broadly popular in Central and Eastern Europe in recent years. Many of EU-newcomers have adopted flat tax regime. Even at first glance, however, it is evident, that there are large variations in its design, although flat tax is clearly defined in literature. The question is whether this relates to different applications of one and the same concept or to different concepts, called by the same name – flat tax. Perceived as standard the coherent tax structure of the flat tax, proposed by Hall and Rabushka, we assess the current income tax system in Bulgaria. We focus on the structure of the tax system and design of the tax bases, because even they reflect in greater extent the specificity of the flat tax. Cuts of tax rates are important; they have been not only broadly discussed, but also do not necessarily relate to the flat tax concept. After adoption of “flat tax” the income taxation in Bulgaria did not become more transparent and easier to administer. Moreover, it isn’t simple, neutral, and nondistortive. Despite the introduction of some elements of the flat tax, one cannot say that a theoretical flat tax system is implemented in Bulgaria

Personal income tax non-standard reliefs in European Union member states, Croatia and countries of the region

The paper presents an overview of the current situation in personal income tax non-standard reliefs for the EU-15, most of the EU-12, Croatia and countries of the region, as well as a comparison of them for 2006-2011. A review of personal income tax relief issues in last twenty years is given, especially concerning the reaction of the entire personal income tax system to the economic and financial crises. It is followed by comparative analysis of non-standard tax reliefs in the stated period. Despite the mostly negative attitude of tax theory (and policy), economic crisis and fiscal consolidation, they still play very significant role. The EU-15 actually broadened these reliefs in the period observed, while the analyzed EU-12, Croatia and countries of the countries of the region with less developed non-standard tax reliefs have reduced them significantly. Many of these countries, accordingly, have none today. Since the introduction of the new personal income tax system in 1994 Croatia has gone a long way, from their complete exclusion to the inclusion of almost all of them and in the end the exclusion of almost all of them.

Estimating the Social Marginal Cost of Public Funds

In this study, we recast the formula of the social marginal cost of public funds (SMCF) and highlight the role of what we call individual marginal costs of public funds (IMCF). After elaborating on aspects of distributional weights, we estimate the wage elasticity of labor supply and the IMCFs on a household basis. This allows us to explore not only the distributions of the elasticity and the IMCFs but also their relations to household income, which helps us assess the assumptions made in previous studies. Further, we use the SMCF estimates to evaluate the system of personal income taxes in Japan.

The Welfare Policy Dilemma of a Negative Income Tax System: Normative Approach

The Welfare Policy Dilemma of a Negative Income Tax System: Normative Approach

Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures

The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenueincreasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this ‘Laffer-maximum’ or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.

The New Dutch ‘Base Exemption Regime’ and the Spirit of the Internal Market

As of 1 January 2012, the Dutch corporate income tax (CIT) system provides for international juridical double tax relief (DTR) under a mechanism referred to in Dutch tax practice as the 'base exemption for foreign business profits' (author's translation). The newly introduced DTR mechanism replaces the Dutch-style 'tax exemption with progression method' in the area of corporate taxation regarding proceeds derived from foreign-source business activities. The rationale for this legislative shift, according to the Dutch tax legislator, is to arrive at an augmented level of converged tax treatment for corporate taxpayers carrying on business operations abroad either directly (i.e., through a permanent establishment; 'PE') or indirectly (i.e., through a subsidiary). One of the introduced tax effects is that current losses suffered by resident corporate taxpayers from business activities carried on abroad through a PE are no longer taken into account for CIT calculation purposes. The tax legislator implicitly justifies its amendments by labelling the immediate horizontal cross-border loss set-off possibilities as available under the former DTR mechanism as a cash flow advantage granted to Dutch resident corporate taxpayers. That characterization reveals an underlying normative consideration. We do away with an 'advantage' to arrive at a taxing system devoid of anomalies at this point. The Dutch tax legislator suggests an improvement. But has he not in fact created a disadvantage? And, by doing so, infringed upon the spirit of the internal market within the European Union (EU) in the process?

Redistributive Effects in a Dual Income Tax System

Equity issues of the dual income tax have been left aside in the field of economics. Since a dual income tax needs different modelling than a comprehensive one this paper offers firstly a quantitative framework to measure redistributive effects; it turns out that this involves both direct and indirect effects. The effects of horizontal inequity and re-ranking are also incorporated into the decomposition analysis. The approach is applicable using available income and tax statistics. Secondly, partial effects of changes in tax parameters are presented; they are channelled through the direct and indirect effects; and are not always straightforward.

The Potential Impact of Tax Reform on Farm Businesses and Rural Households

Several proposals calling for fundamental reform of the Federal income tax system have been put forth, including a report by the co-chairs of the National Commission on Fiscal Responsibility. The primary elements of reform — eliminating tax preferences, restructuring capital gains and dividend tax rates, lowering rates on individual income, and reducing the number of tax brackets — could have a significant impact on the after-tax income and well-being of both farm businesses and rural households. This report uses published and special tabulation data obtained from the Internal Revenue Service, farm-level data from USDA’s Agricultural Resource Management Survey, and data from the American Housing Survey to examine the current tax situation for farm households and to evaluate the importance of various Federal income tax policies. For farm households, the effect of reform will primarily depend upon changes to existing treatment of investment and business income, including several important business deductions. In contrast, changes to existing individual tax credits, especially refundable tax credits, will likely be of greater significance to nonfarm rural households.

The Study on the Personal Income Tax of the Policyholder Dividends and Its Impact on Chinese Insurance Industry

The policyholder dividend of participating insurance is essentially different from the usual equity and bond profit. There are disputes on taxing methods in theory and practice, and different countries adopt different taxing methods. This paper designs a basic framework of the personal income tax system on participating insurance policy. This policy is based on the reality that the participating insurance accounts for a higher proportion in the Chinese insurance market, which is conducive to increase the demand for insurance and the tax sources. The author believes that levying taxes is allowed, but there is no basis to tax on the total policyholder dividends, while tax on the part of policyholder dividends is reasonable. Finally, this paper analyzes the impact on the demand of life insurance industry and the total tax revenue to levy personal income tax on policyholder dividends. The author concludes that the taxing method designed in this paper is better than the taxing method levying tax on the total policyholder dividends.