Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E8. Rationalising other taxes

Key points

Insurance allows people to manage their risk and provides them with the flexibility to exploit economic opportunities. Australia has high taxes on insurance, both in comparison to the taxes imposed on other products and industries, as well as compared to other countries. Imposing specific taxes on insurance adds to the cost of insurance premiums and can lead to under-insurance or non-insurance. Specific insurance taxes should be abolished.

Luxury taxes should not be used to raise revenue. They are inefficient because of their narrow base. Taxing luxury goods is also an ineffective and arbitrary means of redistributing economic resources. The luxury car tax should be abolished.

Over recent decades the importance of tariffs as a revenue source has declined dramatically. This is expected to continue into the future.

Taxes with narrow bases that raise small amounts of revenue are usually inefficient unless they effectively correct for a failure in a particular market or unless they function as charges for particular goods and services. Governments should undertake a systematic review of existing and potential user charges and minor taxes against the principles set out in this Report. This should be coordinated with the introduction of the proposed system wide Tax and Transfer Analysis Statement.

There are sometimes good reasons for governments to impose taxes on particular types of goods and services, such as where the tax addresses a spillover cost on the community (see Section E Enhancing social and market outcomes). But governments in Australia currently levy a number of taxes on specific goods and services that raise significant revenue but do not correct any market failure. Other minor taxes appear to function as user charges for specific publicly funded goods and services. Some perform this function but others simply raise revenue.

This section discusses three significant taxes — insurance taxes, the luxury car tax and tariffs — as well as a number of more minor taxes levied by the Australian and State governments.