I. The Options

5.2. It will be helpful first to distinguish two quite opposite destinations towards which, if so desired, it might be possible to work. Each would be consistent with whatever level of revenue-raising from time to time may be decided upon. For reasons to be noted neither can be recommended, but both are worth describing briefly as the extremes between which a range of more satisfactory possible destinations can be imagined.

5.3. Were simplicity and efficiency the only objectives, one might aim at a system overwhelmingly dependent for revenue upon a single broad-based tax on goods and services set at a very high rate, with some simple additional taxes on, for example, alcoholic drinks, tobacco, and motoring to serve the specific interventions in the private market needed for efficiency purposes. At the same time simple grants to meet the most obvious differences in individual needs—child endowment, age pensions, sickness and unemployment benefits—would deal, without much administrative complexity, with the most serious problem of equity at the bottom end of the scale. There would be no income or capital taxes at all.

5.4. If this be called the ultra-simple extreme, its polar opposite might be called the ultra-complex. The latter would be a system relying overwhelmingly for its revenue upon an income tax, buttressed in its operation by a capital gains tax and capital taxes, whether estate and gift duties or a wealth tax or even both. Again some efficiency taxes could be incorporated. There would be no place for any broad-based tax on goods and services: the income tax could be put at any desired level. The same set of grants would be included whether separately means-tested or made fully taxable; concessional deductions from income tax would be freely used. It would be a system thoroughly adaptable to the expression of very refined notions of progressivity, involving minute adjustments of relative tax liability from the bottom to the top of the scales of income and wealth, and allowing, if so desired, a very sharp rate of progressivity.

5.5. Certainly the ultra-simple system would have in full measure the attractions of simplicity. Very few individuals would directly pay taxes, and they and the enterprises on whom the task would chiefly fall would probably be able to handle the accounting without difficulty. Taxes in fact would become as nearly invisible as possible, though everybody would of course know of the level of the broad-based consumption tax. Indeed, taxes might be almost too invisible. There would be a reinforcement of that misunderstanding, already with us, which leads people to believe that what we receive from the government comes from some supra-human Santa Claus from whose bottomless sack ever more can be produced without charge to ourselves. (In a report rendered to a Treasurer it is unnecessary to argue that this myth is troublesome to the right conduct of public finances.) This system too would admirably serve the end of economic growth. With no income tax and no capital tax restraining the savings of the

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well-to-do, there would be no direct limit on accumulation and inheritance. But this, of course, would be the mere obverse of the fault that would certainly make it wholly unacceptable. The grants would make it a progressive system at the bottom of the scale, but towards the top it would become actually regressive. It would grossly offend universally accepted interpretations of the aim of equity.

5.6. The ultra-complex extreme would have to be rejected for opposite reasons. It would be even more complicated than the system we have now. Everyone would be annually involved in completing elaborate returns. With total income tax higher than at present, the problems of willing compliance would be exacerbated. The costs of enforcement, both monetary and in terms of bureaucratic intrusion into private affairs, would rise. If the one system was drawn towards the Scylla of the fallacy of Santa Claus, this would fall into the Charybdis of the burden fallacy.

5.7. Between these plainly unacceptable extremes a narrower band of alternatives can be imagined between which more serious debate is possible. The cardinal objection to the ultra-simple system, that of its regressivity at high levels of income and wealth, would be largely met by the inclusion of an income tax and a capital tax with high minimum exemption limits that effectively confined their impact to the upper end of the scales of income and wealth, perhaps with measures to improve their coverage of capital gains. The simple though now taxable grants would still deal with vertical and horizontal equity at the other end; the broad-based tax would still secure no more than a simple proportionality to consumption in the middle range; simplicity would only be sacrificed in the interests of equity at the top where, however the dividing line were placed, only a minority of the population would be found. Correspondingly, the prime fault of the ultra-complex system would be quite substantially relieved if a broad-based tax at a moderate level were added to it, combined with some efficiency taxes, and the proceeds used to increase grants (in compensation for the rise in prices) and to reduce the rates and simplify the structure of personal income tax. As long-term possibilities for a permanent structure neither of these less extreme systems, which might be dubbed the simple and the complex, could reasonably be dismissed out of hand.

5.8. It will at once be noticed that in these alternatives the list of taxes is the same. Where they differ is in the relative weights given in each to the taxes they comprise. When one imagines these weights being changed to exhibit a whole series of intermediate alternatives, one comes upon a continuum. Moving along this continuum from the complex end, the rate of the broad-based tax rises as also do grants, while the income tax is reduced in rate and coverage. Conversely, travelling from the simple end the rate of broad-based tax falls, grants fall, and income tax rises. Efficiency (in the sense of neutrality modified by some specific taxes for specific purposes) is unaffected, but simplicity varies.

5.9. The analysis of Chapter 3 points thus far. That of Chapter 4 enables the Committee to take a further step. Even in a system quite far towards the simple end of the range it is possible by varying the rates of the income and capital taxes to express a greater or less desire to be progressive at the top end of the distribution, and to improve progressivity via grants at the opposite end of the scale. Also, by variation of the rate of the broad-based tax these grants can be raised or lowered at will, to the advantage or disadvantage of those at the bottom (as well as to the advantage or disadvantage of the average level of intra-lifetime transfers for everyone). Thus provided that approximately proportional taxes are accepted as fair in the middle range,

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a simple system can serve greater or less public ambitions for redistribution at the extremes.

5.10. The analysis in Chapter 4 of such factual information as the Committee has been able to gather suggested two tentative conclusions of prime importance. First, it would appear that when all taxes are taken into account the Australian tax system is already approximately proportional in the middle ranges, though (when grants are reckoned in) progressive at the lower end and, through the impact of personal and company income tax and estate duty, progressive again at high levels. Second, it would also appear that the distribution of income is such that, accepting the need for substantial grants at the bottom end of the scale and significant progressivity at the top, there is not very much scope for change in the progressivity of the tax system in the middle range. Furthermore it was suggested in the later part of that discussion that something like proportionality in the middle range was socially acceptable in Australia, and that the spread of socio-political views chiefly concerned the extent to which those in need should be assisted through grants and the higher groups taxed more than proportionately.

5.11. If these tentative judgments of fact and value be correct, it follows that a tax system towards the simple end of the spectrum just described would suit the facts and values of the Australian community. The Committee therefore recommends such a system as the long-term target to which Australia should work and would favour a general strategy of tax reform which worked towards it.