Characteristics of different taxes

Australia’s tax mix involves a range of different taxes, each with different characteristics.

While approaches to tax design often focus on individual principles (such as simplicity, equity and efficiency), the operation of all tax and transfer systems involves trade-offs between those principles. A tax that is simple, for instance, may not be equitable. Those trade-offs can change over time as society’s views of what is optimal for the system evolve.

Different taxes and transfers play different roles within the system. Not all taxes are necessarily implemented to increase revenue collections. Taxes may also operate as a protection mechanism for other taxes, act as an automatic stabiliser during economic cycles, or be designed to discourage certain activity. This complicates the debate around trade-offs. 

Ideally, the tax system should be assessed as a whole (including all levels of government), but the interactions between the various components are complex. Some taxes rate poorly against particular principles but still make important contributions to the system. It is important to think about the entire tax and transfer system when evaluating the overall system against particular principles.

This chapter will discuss several common principles of tax design in the context of Australia’s tax and transfers system including simplicity, equity, efficiency, influencing behaviour, volatility, compliance and visibility.

Examples are provided in Appendix B to assist in understanding each concept.