BUS102: Economics - Environmental Impacts - Case Study Assessment Answer

Economics Case Study Assignment

Assignment Task

Your task is to

(i) Outline a reform proposal

(ii) Discuss the theoretical and empirical rationale for the reform proposal.

(iii) Discuss the likely impact on aggregate output and income

(iv) Discuss the likely impact on unemployment, inequality, poverty.

(v) Discuss the likely environmental impacts.

(vi) Weigh the different impacts and give a reasoned recommendation about the reform proposal.

Introduction

Australia, the country which is well known for its sustained economic growth has enjoyed a consecutive growth even during the time of recession. To improve the social and economic benefits of Australia, the governments try to manage the situation with method of tax reforms within the country. It is a process of modifying the procedures in which taxes are collected and managed today. There are also other reforms in which the proposal is to attempt tax systems dealing with externalities. There are many options which can be regarded to simplify Australia’s current tax system for improving its fairness. Many of the existing properties of tax system used in Australia today are making it less attractive and thus reduce the chances of investment in Australian Economy. According to PwC, there is a precise need for new tax reforms immediately (PwC Australia, 2017). It is quite unfortunate that there are several evidences which highlights that the present tax system is pulling Australia back. The main reason identified is that the cost of economics of Australia’s Tax System is considered higher than the levels they need to be.

Problem Statement

The current tax system of Australia was designed and implemented in an older era (Australian Government, 2017). During that time the economy, which was a taken as a reference was entirely different. The previous design was not included with multinational trade, high global competition for investment, digital and internet economy. This all factors lead to the requirement of a fresh approach towards tax in Australia. The present required problem statement can be formulated as follows: “What will be the required options in Australia’s new tax reform policy for achieving a sustained economic growth”.

Theoretical and Empirical Rationale for the Reform Proposal

It is a well-known fact that Australia economic growth had never gone down even during the time of recessions and other critical times. There were many times, when other prominent countries like US and UK have faced huge financial crisis. But over the last few decades, the rate of growth of Australian financial economy had lowered at a considerable rate. The major reasons for the steady slow in this rate are the outdated tax policies which were formulated several years ago. Considering the problems and the reasons behind the current state of Australia’s economic growth, tax reform is considered as an opportunity or option to unleash the living standard improvement, economic potential and continuity in the prosperity. In light of the basic and other structural deficiencies in the existing Australian Taxation method which are outlined above, a number of possible and effective tax reform options are proposed and the detailed explanations of each of them are provided below.

The Reform Proposal

Down payment option for employees

On addition to all the criticisms made in the problem statement, the lobby groups of superannuation have made a vast contribution to the public policy based debate by proposing the down payment proposal by ASFA (PwC Australia, 2017). The increase in 5% to reach the 15% GST will suit the down payment option. This can be covered to areas like stationary items, health and education. According to the down payment proposal made by ASFA, all the selected employees are required to contribute an additional one percentage from their salary. An expected increase in finance revenue due to this option is around 42 billion AUD. This could happen only if the government matches the contribution by avoiding the existing 15 percent tax on contributions made by employer.

Retain of Investment Income

The Institute of Actuaries of Australia is regarded as the professional body of actuaries belonging to Australia. The option of model of taxation proposed by Institute of Actuaries of Australia consists of taxation of superannuation which is based on benefits only. This option is similar to an expenditure tax model. The expenditure tax revenue will be equally divided by both state and federal governments. In order to maintain the government revenue for a very shorter term, some levels of current taxes on investment income will be retained and there will be well cleared structure of targeted revenues across the states and nation. Similar to the previous model, this model will also abolish the superannuation surcharge tax of 15 percent and superannuation contribution tax on employers (CPA Australia, 2015). According to the option, all of the annual limit of superannuation contribution will receive a debate or will be regarded as deductible.

Coherent Income from Retirement

This option is proposed by the ASFA to government for the tax reformation in Australia. It was consisting of a strategy for the development of coherent income from retirement to ensure the viability in future. The proposal was in such a way that ASFA was considered to be model that is comprehensive for retirement income in the long run. The superannuation included will be having a gradual transition system that is purely based on taxation of benefits. The method is expected to be much fairer and equitable with increase in efficiency and cost (Government of Australia, 2016). It was also argued that the proposal made by ASFA was merely making attempts in returning the taxation form of superannuation. This was applied previously before the tax reforms done in 1988.

Impact on aggregate output and Income

Even though the down payment method proposed abolishes the one level of taxation, it failed to deal with many other current structural limitations that are present in the system now. Some of the examples of these systems are lack of transparency, equity, complex taxation and simplicity. One of the major negative externality identified for above three options is the lack of superannuation pensions. It was also identified that these proposed systems were having no considerations on the handling of revenue shortfall from the contribution tax abolishment. There were many negative externalities for each of the above option proposed like the unavailability of the policy to be considered for the characterization under the title expenditure tax. This is due to retain of taxation of earnings. It is also likely to attain a much greater rate on taxes of earnings. The main advantage of down payment system proposed by the ASFA on reforming the Australian Tax is that, it can be considered as a method to increase the amount of money that flow into the funds maintained by lobbies of superannuation.

While deducting the superannuation contribution, the annual limit considered would be higher than the maximum limit provided by deductible contribution. The benefits of superannuation acquired after tax changeover date is taxed at income tax rates that are marginal. Along with this some level of threshold of tax-free will be retained. The benefit tax that is transitional would be used for the protection of tax position benefits that are accrued in accordance with the tax changeover date. It can involve an off on benefit tax calculation in order with present rules of the tax changeover date. There will be a benefit of dollar value in the overall tax rate and it would be retained to calculate the payable tax on due on the payment date (Weight, Makeham, & Watt, 2016).

Impact on unemployment, inequality and poverty

The major bad affect was on the job sector. It had limited the growth of Australia’s continuing prosperity. This effect had also created a bad impression in foreigners to choose Australia for work. There was a significant complexity in the tax system from the beginning till the end. The reduction of unemployment, inequality and poverty are considered as the macro objectives of economic growth. The new reform tax policy with equitable distribution of income is reduce the poverty in the nation and had created a vast number of employment opportunities. The down payment proposal made by the ASFA was claimed that there were around 87 percent of supporters. The huge increase in the percent of support was analyzed as a result of the survey conducted by ASFA regarding this new proposal (Mankiw, 2008). The increase in percent of such proposals clearly state that the people living and belonging to Australia are in great need to have a modified taxation system.

Environmental Impacts

The increase in the rate of tax of benefits could create a substantial impact because of the computing effects on people who are in ages closer to their retirement. Another group of people affected will be those who get benefits that will grow faster due to the change in earnings of compounding. The lump sum of retirement benefits obtained by retirees is often ignored by the tax authorities. Even though the option called blue skies was a proposal made by ASFA was focused on benefits, ASFA have failed in answering a question raised about the steps taken by government in avoiding the shortfall caused by the abolition of tax contribution. Due to the absence of suitable recommendations required the revenue was politically challenged and thus elevated the budgetary fiscal responsibility. Making the changes required unlikely, the blue sky policy suggested by ASFA or the IAA would be adopted by the Australian government.

Recommendations

The option proposed by the Institute of Actuaries of Australia for reforming the tax of Australia is suggested as the best option available so far after. The conclusion was obtained after the careful considerations of all the circumstances that will occur after the implementation of this tax reform option. The option mentioned above is having some merits such as it reduces the anomalies and complexities of present tax treatment of various types of tax contributions for both funded and unfunded arrangements. It could also reduce the anomalies and complexities of tax contribution made by employees, employers and self-employed officials during their pre-tax and post-tax contributions.

The second main advantage is that the option proposed will allow the 13 different existing benefit tax components to be lowered to two-pre and post-changeover for securing entitlements that are accrued. Another use of the option is application of a marginal benefit tax consisting of income streams and lump sums will encourage much larger number of people to bring their entitlements as a stream of income.