III. Alternative Tax Systems
3.45. This brief survey is a reminder that when any body of advisers is invited to formulate proposals for improving the taxation system, ‘either by way of making changes in the present system, abolishing any existing form of taxation or introducing new forms of taxation’, a singularly wide range of options is laid open for review. To raise a given revenue any of a great many permutations and combinations of distinct taxes can be used, and when one combination has been selected their relative weights can be varied and the choice of detailed provisions in each is enormous. There are legions of taxation systems to choose from when the problem is considered in a longterm context.
3.46. The short assessments just given of the principal taxes among which the choice lies assist in the classification of the options. It becomes evident that different systems or ‘tax packages’ will serve the different aims of equity, simplicity and efficiency to differing extents. Because there are unavoidable conflicts between these aims, it is essential to assess their extent, and to arrive at the preferred system after a conscious effort to weigh, or give relative values to, these ultimate aims.
3.47. In general it does not appear that, in practice, the conflict between simplicity and efficiency need be very great.
Certainly when the latter can be interpreted as
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mainly requiring neutrality, reliance upon a very simple tax, a
broad-based tax at uniform rates on all goods and services used in consumption, would produce a taxation system that was
simple and efficient. Though efficiency may undoubtedly require additional special taxes for special purposes it need not
require many if policy instruments other than taxation are also being actively directed to this aim.
3.48. The potential conflict between the ideals of simplicity and equity, by contrast, is apparently very great indeed. The taxes most obviously adapted to the requirements of equity, those technically capable of being adapted to vary the levy upon individuals in accordance with a multitude of differences in their situations considered relevant to equity, are the most complex of taxes: income tax, capital gains tax, gift and estate duties, wealth tax. Hence it appears that a country may have a simple and efficient taxation system or an equitable one but not both.
3.49. The dilemma is not however so stark as that, for two reasons. One is that, as has just been noticed, quite simple measures on the side of expenditure can to some extent be used to offset the inequities created by the indiscriminate impact of simple taxes. The other is more important yet. A great deal turns upon the precise quantitative interpretation that is put upon the ideal of vertical equity and how the application of this quantitative judgment works out in the particular circumstances of the economy being considered. These are quite cardinal issues in the consideration of taxation policy, and they will be examined at length in the next chapter. When that discussion is completed it will be possible to return in Chapter 5 to the problem of defining the alternative types of tax system that are there for Australia's choice.