2. Evaluating Australian Taxes and the Environment

Australian governments use tax measures to effect social change. This is so prevalent that it is considered a contributory factor to the notable complexity of the federal income tax system.^[1] This social engineering aspect of taxation is driven by a multitude of factors, including ‘to correct perceived market failures’ or to reward friends and win votes in marginal seats (consider the Albanese Government’s 2024 ‘cost-of-living tax cuts’).^[2] The tax system is sometimes used to prevent rewarding unlawful behaviour (such as ITAA 1997 s 26-5 denying deductions for fines and penalties) or to improve the integrity of the system (such as the introduction in 2017 of ITAA 1997 s 26-31 limiting deductions available for travel related to residential rental properties). Tax can be used to encourage a particular type of activity, like the build-to-rent tax concessions (income tax concessions introduced by the federal government in 2024 work alongside land tax concessions provided by several states).^[3]

Government decisions to impose, exempt or provide concessional treatment for taxes on various activities to achieve specific socio-economic outcomes are frequently subject to political, academic and public critique. This dynamic is particularly evident in discussions surrounding proposed tax policies during the lead-up to federal elections. Climate conscious lawyering involves critically evaluating these decisions through the lens of their potential climate impact. We can evaluate the merits of imposing specific tax new measures, such as a Pigouvian or environmental tax, and we can consider existing tax laws and ask whether they help to meet Australia’s obligation under the Paris Agreement to reach net zero.

More broadly, it may be useful to rethink how we evaluate whether a tax is a ‘good tax’. Taxes are traditionally evaluated against the three broad principles of equity (or fairness), efficiency and simplicity.^[4] In the Australian tax policy context, the most recent comprehensive review of the Australian tax and transfer system was the Henry Review (named after the review’s chair, Mr Ken Henry).^[5] The Henry Review sets out these three principles:^[6]

• ‘Equity: The tax and transfer system should treat individuals with similar economic capacity in the same way, while those with greater capacity should bear a greater net burden.’^[7] This principle explains why Australia has a progressive tax system with marginal rate of tax increasing as the taxpayer has more taxable income.
• ‘Efficiency: The tax and transfer system should raise and redistribute revenue at the least possible cost to economic efficiency and with minimal administration and compliance costs.’^[8] The principle of efficiency recognises the behaviour-modifying effect taxes can have on the choices of businesses and individuals. Because taxes can move investment and business decisions away from those that are the most economically efficient, taxes are often described as distortionary. Efficiency also considers the administrative burden both on the taxpayer in complying (a common criticism of the Fringe Benefits Tax system) and on the revenue authority in the collection of tax.
• ‘Simplicity: The tax and transfer system should be easy to understand and simple to comply with.’^[9] In Australia, our federal income tax is self-assessed (ITAA 1936 s 161AA) and taxpayers ought to be able to easily determine the likely tax effects of courses of action both at the time of lodgement of their tax return and when making decisions about their future financial transactions.

The Henry Report also added the criteria of tax system sustainability and policy consistency.^[10]

The Henry Report recognised that the tax system must be designed with growing environmental pressures in mind,^[11] and these have only become more urgent since the report. Climate conscious lawyering would adopt another principle: climate impact — does the tax measure increase or decrease harm to the climate.^[12]