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Asymmetric treatment of tax losses


The current asymmetric taxation of business gains and losses causes the effective tax rate to exceed the statutory tax rate. Resulting different effective tax rates across different investment and business structure choice options distort the choices among these options with a loss of efficiency. A potentially important automatic stabiliser also is lost. An ideal solution would combine refunding losses together with the removal of tax expenditures. Neither reform component seems achievable in the immediate future. A more likely reform strategy would involve a combination of carry back of losses and indexation of losses carried forward.

This strategy would reduce distortions arising from the arbitrary annual accounting tax year being shorter than the life of investments which over time generate an economic profit, but it leaves high effective tax rates on risky investments by small businesses.

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Prof John Freebairn
Professor John Freebairn holds the Ritchie chair in economics at the University of Melbourne. He has degrees from the University of New England and the University of California, Davis. Prior to joining the University of Melbourne in 1996, his preceding career includes university appointments at the ANU, LaTrobe and Monash, and periods with the NSW Department of Agriculture and the Business Council of Australia. Professor Freebairn is an applied microeconomist and economic policy analyst with current interests in taxation reform and environmental economics. - Current at 01 November 2018
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