{"id":82717,"date":"2025-08-20T15:21:07","date_gmt":"2025-08-20T15:21:07","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/82717\/"},"modified":"2025-08-20T15:21:07","modified_gmt":"2025-08-20T15:21:07","slug":"how-do-we-decide-if-a-tax-is-good-or-bad-and-which-ones-are-damaging-australias-economy-tax","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/82717\/","title":{"rendered":"How do we decide if a tax is good or bad? And which ones are \u2018damaging\u2019 Australia\u2019s economy? | Tax"},"content":{"rendered":"

How do we judge whether one tax is better than another? That question will lie at the heart of the tax reform agenda at the economic reform roundtable<\/a> on Thursday.<\/p>\n

Four principles have guided tax reform over the decades: efficiency, equity, simplicity and sustainability (or revenue adequacy).<\/p>\n

All are important. But with productivity growth the name of the game, let\u2019s focus on the first: efficiency.<\/p>\n

Stephen Bartos, a professor of economics at the University of Canberra and a former deputy secretary at the Department of Finance, says taxes inevitably affect behaviour \u2013 but \u201csome taxes are a lot better for the economy than others\u201d.<\/p>\n

Bar chart showing taxes ranked by efficiency<\/a><\/p>\n

When it comes to efficiency, a core concept is to design a tax system as simple as possible to not discourage productive activities such as work and investing.<\/p>\n

Chris Murphy, an honorary senior lecturer at the Australian National University, has for decades been a central figure in modelling the impact of tax reform, including the introduction of the GST and the landmark Henry tax review.<\/p>\n

Calculating the burden of a tax<\/p>\n

Murphy has updated his estimates of various taxes\u2019 \u201cmarginal excess burden\u201d \u2013 the additional economic cost of a tax beyond the revenue raised.<\/p>\n

His modelling suggests raising the rate of the GST<\/a> imposes an additional 30c cost to the economy for every dollar raised. Broadening it, he says, comes with a marginal excess burden of 13c.<\/p>\n

That makes the GST more efficient than personal income taxes (a 48c loss of economic welfare for every $1 of revenue raised) and company taxes (65c).<\/p>\n

Sign up: AU Breaking News email<\/a><\/p>\n

Speaking at the National Press Club<\/a> this week, Danielle Wood, the chair of the Productivity Commission, explained that \u201cgenerally, anything that switches out higher cost, higher economic-drag taxes for lower cost, more efficient taxes will give you a productivity dividend\u201d.<\/p>\n

\u201cEqually, anything that broadens the base of a tax, which winds back concessions but then reduces the rate, will give you an economic kicker.\u201d<\/p>\n

The \u2018worst\u2019 taxes<\/p>\n

Four of the five least efficient taxes are at state and territory level. This makes it difficult to coordinate shifts away from more damaging but highly lucrative taxes.<\/p>\n

The \u201cworst\u201d taxes on Murphy\u2019s measure are the land tax on investment properties (92c of economic damage for every $1 in revenue raised), followed by stamp duties on the purchase of homes (74c) and taxes on insurance (69c).<\/p>\n

Wood said it was \u201cvery clear\u201d from modelling that \u201cstamp duties stand out as kind of exceptionally economically damaging taxes\u201d.<\/p>\n

When experts talk about switching from inefficient stamp duties to a land tax, they are talking about a broad land tax that applies to all homeowners.<\/p>\n

Murphy says a broad land tax is equivalent to municipal rates \u2013 which, as the analysis shows, is a very efficient tax (a 4c offset in extra economic welfare per dollar of revenue raised).<\/p>\n

State pain for national gain<\/p>\n

Efforts to transition to a more stable and less distortionary land tax have proved a step too far for even the most willing of state leaders.<\/p>\n

That\u2019s why any commonwealth-led discussion on tax reform has to include the states and territories, Bartos says.<\/p>\n

\u201cThe only way to get the states on side is if you compensate them,\u201d he says.<\/p>\n

\u201cProbably the only way to do that is to increase the GST rate or broaden its base\u201d to include excluded items such as fresh food, education and health services.<\/p>\n

\u201cBroadening the GST would have the added benefit of simplifying the system.\u201d<\/p>\n

Luke Yeaman, the Commonwealth Bank\u2019s chief economist and a former Treasury deputy secretary, says there is theoretically a strong case for using increased GST revenue to pay for income tax relief \u2013 a switch that has wide support among many experts.<\/p>\n

But cash-strapped states were unlikely to want to make this deal with the commonwealth.<\/p>\n

\u201cIf you want lower income taxes, you\u2019d have to do some other broader deal with the states, for example, around health funding or education funding, where you agree to provide less on the health and education side, and they claim the extra GST revenue,\u201d he says.<\/p>\n

\u201cI think that proves very difficult at the moment in a world where the states are cash-constrained.\u201d<\/p>\n

Yeaman agrees there could, however, be scope to use any increase in GST revenue to pay for states to get rid of inefficient taxes such as stamp duties.<\/p>\n

Royalties v rents<\/p>\n

While state-level mining royalties schemes are lucrative for governments such as Queensland, Murphy\u2019s analysis shows they are much more inefficient than federal mining \u201crent\u201d taxes, which target excess profits.<\/p>\n

The petroleum resource rent tax, for example, has an offsetting 8c for the economy for every dollar raised. That\u2019s in part because foreign owners of the gas companies pay the tax, Murphy says.<\/p>\n

The economic reform roundtable meets at Parliament House on Tuesday. Photograph: Mick Tsikas\/AAP<\/p>\n

Bartos explains that \u201cthe problem with royalties is basically you are taxing production, and so that acts as a direct disincentive\u201d.<\/p>\n

\u201cA rent tax taxes super profits over and above normal profits, and in that sense they don\u2019t distort production at all. That makes them a much better form of tax.\u201d<\/p>\n

Tax income less and wealth more<\/p>\n

Bartos\u2019 high level verdict on Australia\u2019s broad tax settings echoes the expert consensus: \u201cAustralia\u2019s tax system is weighted too heavily to taxing income and not wealth.<\/p>\n

\u201cThat encourages people to salt away wealth in unproductive things.\u201d<\/p>\n

Labor is already chipping away at overly generous tax concessions for Australians with more than $3m in superannuation.<\/p>\n

But it has balked, at least so far, at suggestions for trimming tax breaks for residential property investors, which also overwhelmingly favour the rich.<\/p>\n

\u201cSadly, the least likely to be on the agenda is inheritance taxes,\u201d Bartos says.<\/p>\n

\u201cThat doesn\u2019t distort behaviour \u2013 people are not going to put off dying because they have to pay tax.<\/p>\n

\u201cAnd it actually is a very efficient tax to levy and Australia is really unusual to be one of the few countries to not have some form of inheritance tax. It is very much a political no-no in Australia.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"How do we judge whether one tax is better than another? That question will lie at the heart…\n","protected":false},"author":2,"featured_media":82718,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[64,63,99,164],"class_list":["post-82717","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-au","tag-australia","tag-business","tag-economy"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/82717","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=82717"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/82717\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/82718"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=82717"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=82717"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=82717"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}