Whose reform? Which equality?
by John Nevile
Zadok Perspectives Issue No. 61
Winter 1998

The structure of direct taxation

Although Christian principles are against a switch from direct to indirect taxes, this does not mean that there is no scope for changing the direct tax arrangements. A lot has been said in the last 10 years about changing to a flat rate tax. If this means a tax where everyone pays the same rate, say 25 per cent on all the income they receive, starting with the first dollar, it is clearly against Christian criteria for a good tax system. It is the closest thing in our society to taxing the poor with levies on their grain, which so upset Amos. But if there was a large enough tax-free threshold, so that the poor did not pay any income tax, and then a constant rate of tax, say 35 per cent, on income above that threshold, this arrangement would not be against Christian criteria. As citizens, we may believe strongly that the rich should pay a higher rate of tax on marginal or extra income than do people who are merely comfortably off, but the Bible has nothing much to say on this.

Many people, including Mr Howard, want to reduce the rates of tax paid by people in the middle ranges of income. This, it is said, will make them more likely to work longer and will increase productivity. The professional economic literature is quite clear on this. It will have virtually no effect on primary income earners (usually men), but will have an effect on secondary income earners in a family (usually married women). It will not have a big effect on productivity.

The best argument for reducing high rates of income tax is that these rates provide strong incentives to cheat on one's income tax return-to break the law. It is better, from a Christian point of view, not to have a system which encourages immorality. It is quite possible to reduce income tax without increasing indirect taxes. All that has to be done is to remove some or all of the many tax concessions that allow people and companies legally to reduce their taxable incomes. Revenue could even increase rather than decrease. Superannuation concessions are usually the first to be mentioned in this context but probably even more important is the growth of partnerships and trusts which enable artificial splitting of income and postponement of tax. Cuts in income tax rates could also be financed by the reintroduction of taxes on wealth such as duties on large gifts and inheritances.

To: Should undesirable activities be taxed

John Nevile John Nevile is Emeritus Professor, School of Economics, University of New South Wales.