Towards systemic reform of the Australian personal income tax: developing a sustainable model for the future

This paper provides an overview of a research project designed to develop a model of a personal income tax (“PIT”) system for Australia that is capable of commanding widespread expert and community support while still delivering the expected revenue flow and tax policy objectives that are expected from a PIT. In this way, the project seeks to inform and influence the contemporary debate about reform of the Australian PIT. The proposals developed from the project were derived using an innovative and iterative combination of research methodologies, involving micro-simulation, a Delphi technique and extensive surveys of taxpayers and tax practitioners.The preferred model of the PIT system in Australia developed from the project proposes a broadening of the tax base through the elimination of three major concessions (the current tax free threshold, the 50 per cent general discount currently given on capital gains and deductions for certain work related expenses (“WREs”) currently available to personal taxpayers), offset by reductions in tax rates, an increase in the levels at which the Low Income Offset operates, the introduction of a capital gains tax (“CGT”) annual exemption and the provision of a small annual tax credit in lieu of work related deductions. It is argued that these incremental changes to the current personal income tax system can be introduced on a broadly revenue neutral and sustainable basis, and can provide more than acceptable distributional outcomes. There are no adverse equity implications associated with the changes and potentially significant simplicity dividends. Moreover the reform provides efficiency gains in the form of reduced labour disincentives as a result of lower effective marginal tax rates (“EMTRs”) for low and middle income Australians.The results of surveys recently conducted of 3,900 personal taxpayers and over 3,000 tax practitioners suggest that there is strong support for personal tax reform. The specific proposals developed in this project would be broadly acceptable to personal taxpayers, but there would be resistance from tax practitioners who perceive that the reforms could have a potentially adverse impact on the incomes generated from their tax practices.