Volume 23 1998
Miranda Stewart is an Australian teaching comparative tax policy at New York University School of Law.
On Thursday 13 August 1998, Prime Minister John Howard and Treasurer Peter Costello released a 'monster' tax reform package to prepare Australia for the new millennium (and the Liberal/National Coalition for the next election).[1] The package, entitled Tax Reform: not a new tax, a new tax system, has already received massive coverage by the media. It contains, as expected, a Goods and Services Tax (GST). It also proposes many other changes to Australias tax system.
This article attempts to make sense of some of the important issues raised in the Australian tax debate and to explain key elements of tax policy discourse. The Howard package will be briefly described and some elements will be discussed in more detail. However, the main focus is on the issues and the jargon. The aim is to enable critical thinking about the Howard tax package as well as the alternative tax reform proposal that will be put forward by Labor in the near future and the contributions to the debate from the Democrats, the other political players, and the many commentators.
The politics of the tax reform debate
At the instigation of the Howard government, in November 1997, the Commonwealth, State and Territory governments agreed that 'fundamental reform' of the national tax system is needed. Treasurer Costello established a Tax Consultative Task Force chaired by Senator Brian Gibson, which has considered submissions from 650 organisations and individuals and has presented a report (in secret) to the government. Major submissions were made by the Taxation Institute of Australia (TIA), the Business Council of Australia, the Australian Council of Social Service (ACOSS) and the Australian Society of Certified Practising Accountants (CPA). The TIA and Business Council are generally conservative and business/entrepreneur-oriented organisations. ACOSS has a long history of participation in tax policy debates with a social justice goal, while the CPA has produced a thoughtful report which is a valuable contribution to the debate.
The Howard/Costello tax package contains the following key elements:
The Labor Party has been conspicuously silent about tax reform and, unfortunately, appears to be taking a mostly reactive stance. Leader Kim Beazley has said that the Howard tax package is 'unfair, and does nothing to create jobs'. He says that Labor's alternative tax proposal will be out at the end of August, and reiterates Labor's political stance against introduction of a new GST. Shadow Treasurer Gareth Evans has pointed out the defects of a GST (some of which are discussed below), but has also admitted that there are problems with the WST. Kim Beazley has proposed targeted tax cuts for families earning less than $50,000 including a 'tax credit' for low income earners and has also said that Labor may cut negative gearing and other tax minimisation techniques of the wealthy. Labor say they will review business taxes and have made some interesting suggestions for reform.
The Democrats have produced a statement on fair tax reform which focuses on the defects in the income tax. While they are open-minded about a GST, considering that it must be looked at in the context of a total package of tax reforms, they are concerned about fairness and particularly about unemployment. The Greens oppose a GST on equity grounds and advocate increased pollution taxes and income tax reforms.
What is the Australian tax system anyway?
Australia's tax system comprises a multitude of taxes at various government levels. The most familiar is the income tax levied by the federal government. In addition, the federal government collects the Medicare levy; fringe benefits tax (FBT) on non-monetary benefits provided by employers to employees; wholesale sales tax (WST) on the manufacture, use or distribution of various goods; petroleum resource rent tax on profits derived from oil and gas exploitation; the higher education contribution scheme (HECS) on tertiary-level students; and numerous customs and excise duties. The States levy payroll taxes (on employers in respect of employee wages, with various exemptions), stamp duties, land taxes, taxes on financial transactions (these are the FID and Debits Tax entries on your bank statement) and gambling taxes. As a result of the High Court decision in Ha[2] striking down NSW tobacco license fees, a temporary arrangement has been made between the federal government and the States for the former to collect franchise fees (basically, excises) on fuel, alcohol and tobacco. Finally, local governments impose rates and some other local taxes. Unlike many other countries, Australia does not have any wealth taxes - such as inheritance, gift or 'net worth asset' taxes.
The federal government also regulates Australia's superannuation regime. While not a tax as such, this scheme of compulsory contributions is a major expense of employers and working individuals and has significant distributional consequences. There have not been any suggestions for major reform of superannuation. When comparing Australia's tax system with that in other countries, it should be remembered that in many European countries and in the US, a retirement or social security tax is imposed as a tax on wages and is counted in determining the tax burden.[3]
The current Australian tax reform debate has centred on reform of taxes at the federal level, especially the income tax and WST, including possible changes in the tax mix- economist short-hand for the combination of different types of tax in a tax system by reference to the amount and proportion of revenue raised by each tax. The primary tax in Australia's tax mix is the income tax, which in 1996 accounted for 70% of all federal government revenue and 53% of all tax revenues. The next most important taxes are the various sales taxes and excises, generally labelled consumption taxes in tax policy jargon, which account for about 25% of federal taxes or around 20% of the total tax take. Although all excises and sales taxes are imposed on the manufacturer, wholesaler or retailer of goods and not directly on the consumer, economists term them consumption taxes because their incidence falls in most cases on the consumer through inclusion in the price (and the consumer is the intended ultimate bearer of the tax). The most-criticised consumption tax, the WST, comprises about 11% of the federal government tax take or 8% of total taxes.
The GST is estimated to raise about $31.96 billion in the 2001 year- at least one quarter more than the revenue it replaces from the WST and excises combined. Income tax changes are estimated to cost about one third of that amount in 2001. Kim Beazley describes the package as a 'massive tax mix switch'- while that appears to be an exaggeration, there may be an overall shift towards greater reliance on consumption taxes.
Another major issue in the current tax debate is vertical fiscal imbalance. State government expenditures far exceed the revenue they raise, forcing States to rely on grants from the federal government and raising issues of State accountability for expenditures, the distribution of revenue across States and Territories, the nature of Australian federalism and States' rights. There are strict constitutional limits on State taxing power. States cannot impose sales or excise taxes (nor most franchise fees, followingHa) and in 1942, they ceded the power to tax income to the federal government. Current State taxes are an odd, often inequitable, mix. They vary widely in their impact and produce considerable complexity.
One of the most interesting elements of the Howard package is the proposal to hand over all GST revenue to the States. The GST is what some economists term a growth tax- as the economy grows (or consumption increases), revenue increases. It is a much more effective revenue-raiser than most State taxes. This proposal does much to counter vertical fiscal imbalance and is bound to alter Federal-State relations, in perhaps unforeseen ways.
Tax policy criteria: what do efficiency and equity have to do with social justice?
While clearly taxes are intended to raise revenue for public expenditures, how to determine what is a 'good' tax and how the tax should operate is often hotly disputed. A Tax Reform Summit in October 1996, organised by ACOSS and business groups, together with other welfare groups, agreed upon the following very general principles for a good tax system:[4]
Many of these principles appear self-evident but they are often fudged in practice and no tax satisfies all of them (nor does agreement on criteria for a good tax system imply agreement on how to get there). Adequacy of the tax system seems obvious, but tax reform often focuses on tax cuts, ignoring the other side of the equation- public expenditures. Sometimes tax cuts are a deliberate strategy to force cuts in spending, as seems to have occurred in the New Zealand tax and economic reforms. Similarly, transparency or visibility is often sacrificed in a tax system. Current Australian sales taxes are invisible because they are built into the price of goods. This is also the approach taken by consumption taxes in the UK, Europe and New Zealand; however, in the US and Canada, sales taxes are highly visible additions to the price of an item.
The two most frequently mentioned criteria are efficiency and equity. The ACOSS definition of equity incorporates two different concepts, commonly called vertical and horizontal equity.Vertical equity refers to taxation on the basis of ability to pay. This is the 'element of redistribution' referred to in the definition. It is noteworthy, and an interesting contrast with the contemporary US tax debate, that a redistributive principle is generally accepted in the Australian debate. In an income tax, ability to pay is measured by the calculation of a person's income, so the definition of income is crucial (this is discussed in the next section).
On the basis that income is worth more to those who are poor and that those with higher incomes should bear more of the tax burden, vertical equity implies aprogressive tax: high income earners should pay a higher proportion of their income in tax than low income earners. The marginal rate structure of our current income tax- with a tax-free threshold and increasing rates from 20% to 47% on higher margins of income- is progressive, although its progressivity has now seriously declined for reasons discussed below. A flat rate tax- such as a consumption tax at 10%- is said to be regressive because it taxes more of the income of low income earners than of high income earners (low income earners spend all or most of their income, in contrast to high income earners).Horizontal equity refers to the basic principle of equality treat like people alike that is, impose similar tax burdens on taxpayers with similar means. What must be borne in mind when considering horizontal equity iswho is being compared and under what conditions. Do we want individuals to be treated like individuals, or married couples like single people, or families with a 'homemaker' like families with a 'working wife', or men like women, or partnerships like trusts like corporations? The tax unit which is compared in discussions of horizontal equity is often unclear.
The ACOSS definition of efficiency refers primarily to neutrality in business decisions or resource allocation- what has been termed 'freedom' from 'distorting effects in the marketplace', or 'whether a tax system interferes with production and exchange alternatives'.[5] Neutrality can mean a great many things in tax jargon, including a general economic/political stance opposed to the use of the tax system as a fiscal measure for control of matters such as inflation. The above concept of 'neutrality' is predicated on fundamental ideologies of rational choice, individual competition and a perfect market economy. If I am taxed at an effective rate of 30% whether I invest in tourism, uranium mining or shoe manufacture, the tax law is neutral with respect to that investment decision; but whether this is desirable is a policy question. Tax laws are not neutral; they direct and produce behaviour, spending patterns and structures. As a general proposition, then, neutrality is unhelpful and even absurd.
The non-neutrality of the tax system is explicit in special incentives which exist in current tax law, for example, environmental clean up deductions or Australian film investment incentives- these are often termed tax expenditures by tax theorists. The tax system is used in these provisions as a vehicle for a spending program. However, the basic tax structure is also not neutral and is based on serious policy choices, such as the decision to favour income splitting through trusts or the delineation of work-related deductions: even the definition of 'work' and 'private' is a question of policy.
Arguments based on the rhetoric of efficiency or neutrality often disguise the basic problem of deciding between different policy goals. Once this is recognised, the concept of efficiency can be useful in a limited and specific way. There is some generally accepted economic evidence that taxes may have marginal incentive or disincentive effects on behaviour. The notion of efficiency helps us ask the question: will a tax provision, such as a childcare deduction, have the intended effect of encouraging paid childcare, women's work, new childcare centres or any other policy goal? And what other effects or incentives (desirable or undesirable) could the proposed measure create?
Some additional comments on tax rates, income and the tax unit
In an income tax, the tax unit is the person or entity whose income is calculated and who is to pay the tax. The basic Australian tax unit is the individual (corporations and other legal structures are also tax units). The tax unit does not always bear the tax- for example, the corporate tax is ultimately borne by people. Consumers bear sales taxes although they are paid by enterprises.
The tax base is what items are reached by a particular tax- in an income tax, what is 'income'? A tax may be narrowly or broadly based. A broad based income tax will cover all kinds of income, gains and accretions to wealth, while a broad-based consumption tax will have no or few exemptions (for example, for food or housing). The last major Australian tax reform, in 1985, broadened the income tax base considerably to include fringe benefits and capital gains, but retained an exemption from the tax base for a taxpayer's home. The broader the tax base, as a general principle, the lower the tax rates required to produce the same revenue and the less easy the tax is to avoid by converting one type of income or category of good or service into another - a broad base thus satisfies several of the tax policy criteria listed above and is generally considered desirable (although there are exceptions).
As a result of the definition of the tax base, and of tax rebates, exemptions and deductions, theeffective tax rate (as opposed to the marginal rate) may differ widely between taxpayers. Further, the interaction between the tax system and the social security or transfer system can produce poverty traps, which are very high marginal tax rates (as much as 100%) that can arise for people who receive social security benefits (such as unemployment benefits or Family Payment) and also earn some money. This high rate applies to the extra dollars of income earned, as a result of the combination of phase-out of the benefit and the imposition of tax. Structurally, it is almost impossible to eliminate poverty traps in a system with progressive income tax rates and means-tested benefits, but measures such as tax credits and rebates can assist in compensating for the effect. Universal benefits do not produce poverty traps, but clearly raise other issues of progressivity and cost.
Finally, and importantly, tax laws (like other laws) raise issues of gender, race and sexuality which are not addressed by the ACOSS list of principles and are generally ignored in mainstream debate. In Australia, most work has been done on the gender dimension of tax reform and there has been some discussion of this in the media.[6] A regressive tax will hit most women harder than most men; most special tax deductions will benefit men more than women; even tax benefits for savings will benefit women less than men, as fewer women have disposable income for saving because they spend more of their income on necessities for their families and themselves. Women suffer proportionately more from cuts in public expenditure on housing, education and welfare. And the tax law treatment of the family, childcare costs and effective tax rates on 'secondary earners' in households are all serious issues for women.
Some major problems with the tax system and possible solutions
Many studies indicate that the Australian tax system, like systems elsewhere in the world, is broadly proportional to income: progressive taxes (such as the income tax) offset regressive taxes.[7] Redistribution of income takes place in a proportional system, although less than in a system that is progressive overall. If the income tax becomes less progressive, or more regressive taxes are introduced, then the whole system becomes less redistributive and may even end up taxing the poor higher than the rich overall.
The income tax
The most common criticisms of the income tax are that it does not raise sufficient revenue; it imposes too high a burden on low to middle income earners and on businesses; it penalises families; it is extraordinarily and unnecessarily complex; it contains too many tax shelters and loopholes; it is impeding Australia's economic growth and eroding our global competitiveness. There is a tendency to hyperbole in many criticisms of the tax system, in particular when tax is blamed for Australia's general economic woes. The economic and empirical evidence regarding the link between tax structure and economic prosperity is often inconclusive and contradictory. However, there is some basis to many of these criticisms. I focus here on three issues: progressivity, simplicity and the tax unit.
The income tax has become less progressive in recent years, primarily due to bracket creep. The top rate of 47% commences at $50,000 and a rate of 43% applies to the income bracket from $38,000 to $50,000. As a result of inflation and wage increases, many Pay-As-You-Earn (PAYE) taxpayers are paying a higher rate of tax in the 1990s than in past decades and this is only partly offset by tax rebates and family concessions. Tax brackets are typically much broader in other countries. In the US, a rate of 15% applies for income from about US$5000 to US$36,500 (about $8000 to $64,000) and the top rate of 39.6% does not commence until US$271,050. Comparisons between countries are difficult and when all taxes and benefits are taken into account, the OECD has found that the effective tax rate in Australia for an average employee is about 24%, compared to about 26% in the US (US taxpayers also pay a regressive social security tax).[8] However, the distribution of tax rates is clearly a cause for concern. Progressivity could be improved by broadening the rate brackets, expanding the tax-free threshold or replacing it with a rebate as proposed by the Democrats and, perhaps, indexing tax brackets to inflation as is the case for values of capital assets subject to tax. Progressivity is also affected by the size of the tax base, and is aided by reduction in tax loopholes and deductions available only to small numbers of taxpayers.
The Howard tax package makes some positive changes to improve the progressivity of the income tax; while the package goes to some lengths to show how this will more than compensate for the GST, this is still a matter for debate. The package reduces the 20%, 34% and 43% marginal tax rates by 3 or 4% each, to 17%, 30% and 40% respectively, while maintaining the top rate of 47% (although it will cut in at $75,000 not $50,000). Most Australians will face a maximum income tax rate of 30% (but a GST of 10% on almost all consumption). The basic tax free threshold is to be increased to $6,000 and the threshold for families with children, particularly single income families, will be doubled. The combination of changes should reduce the significance of poverty traps in the system.
Analysts and the Labor Party will be going over these changes with a fine toothcomb. In the meantime, here are three points to consider: (1)Because the top marginal rate remains high (and the company tax rate is 36% and may go lower), there is a strong incentive for wealthier taxpayers to minimise tax. However, the package does not contain many explicit measures to broaden the tax base and close tax loopholes for high income earners, except for tightening up FBT. (2)Proposals to change the taxation of companies and trusts should address some of these problems (if enacted), but Howard proposes to continue to allow income splitting through trusts. (3)Funding for the tax cuts comes (in addition to the GST), from the Budget surplus and projections of gains from improved enforcement and administration- these are uncertain sources of revenue.
Second, the tax system is complex, both in the language of the law and in its substantive rules. Australia's self-assessment system obliges all taxpayers to file returns and pay the correct tax. More and more Australians seek the assistance of an accountant in fulfilling this obligation and businesses say they are overwhelmed with tax compliance work. This problem is not limited to the income tax, and indeed, it may be other taxes and obligations - such as FBT or superannuation - that are causing the most difficulty. Considerable complexity and uncertainty also arise from the frequent changes to the tax law (more than five tax bills every year is usual): stability is important.
Attaining simplicity in the tax system is difficult. The goal of substantive simplicity in the tax law can actually obscure other policy aims. For example, calls for a simpler tax often involve calls for tax cuts and fewer tax brackets, but this would 'flatten' the tax scale and reduce progressivity, while simplifying the system only a little. The ATO Tax Law Improvement Project, an income tax law rewrite with the goal of improving, simplifying and shortening the current unwieldy law, will be consolidated by Howard.
The other main changes to improve simplicity in the Howard package are aimed at businesses. Although businesses will have additional compliance costs with the GST, the various regulatory and payment systems are to be rationalised. Provisional tax will be abolished, which will also assist many individuals. There are proposed significant improvements to collection from individual contractors (a Pay-As-You-Go or PAYG system). These all appear sensible changes.
The package rejects one possible reform canvassed by the CPA to remove the need for tax returns for the majority of PAYE taxpayers most of the time. The reform would entail the elimination of work-related tax deductions and introduction of a withholding regime for interest income, while increasing the tax-free threshold. As most work-related deductions are utilised to best advantage by higher income earners, this change could also improve progressivity. This kind of measure may have a high revenue cost, however.
The third major tax issue I discuss here concerns the tax unit and tax treatment of families. Mr Howard has said:
'[W]hen we restructure the tax system, families, dependent children, will be big winners... it has long been one of my policy goals in public life to improve the tax system to give greater recognition to Australian parents.'[9]
The Australian individual tax unit was established in 1915. While the individual unit has become the norm in most OECD countries, some countries - notably France, the US and Germany - have some form of family taxation. Australian policy on the tax unit was expressed by the Asprey Committee in 1975 as follows:[10]
'[T]he adoption of a compulsory family unit basis must be rejected on grounds of general social principle. The right to be taxed as an individual has always been accorded in Australia. At a time when women are playing an ever greater role in the economic and other affairs of society, the withdrawal of this right would certainly be regarded as a retrograde step... [S]ocial attitudes to the separate status of the sexes, rather than purely economic considerations, are involved here.'
The individual tax unit is not as robust as this statement implies (even the Asprey Committee recommended introduction of a voluntary family tax unit). Australia's tax law has always contained provisions reducing the effective tax rate for married couples with children. Most social security benefits, including Family Payment, are calculated on joint income, usually resulting in a lower payment. Australian courts have long allowed the 'professional and commercial classes'[11] to transfer property, business and partnership income from a husband to a wife who earns nil or little income in 'ordinary family dealings', thereby lowering the tax rate for wealthier families. Most wage earners cannot divide their taxable income in this way. This income splitting undermines the individual unit and reduces the progressivity of the income tax.
Mr Howard has always supported income splitting within families and in the past, has advocated introduction of a married filing unit. A major compensating element of the Howard tax package is a measure which will operate on the basis of a family unit, particularly with a 'breadwinner' and a spouse 'homemaker'. However, the package does not go as far as the TIA recommendation to introduce voluntary joint tax returns for families.
The Howard package doubles the tax free threshold for single income families with a child under age 5 and it is raised further for additional children. This measure is aimed at families who have a 'breadwinner' and a 'homemaker', although sole parents will also benefit. In addition, the income level at which Family Payment (tested on joint or family income) cuts out is increased. These tax benefits are provided via the primary income earner. At the same time, nothing in the Howard package specifically aims to prevent income splitting in wealthy families and so an effective family unit will continue to be supported at higher income levels as well.
Controversial issues of caregiving, dependency and the cost of children are raised by the tax unit debate. Feminist tax theorists, including myself, almost universally prefer an individual tax unit. Economic research into married women's workforce participation and their status as a 'secondary earner' in the family indicates that the 'second' wage is effectively taxed at a higher marginal rate under a joint taxation system and there are significant disincentives for women's paid work arising from this higher effective tax.[12] A joint unit also presumes that spouses always share income, which has been demonstrated empirically to be false.[13] Joint income taxation benefits higher income families who can afford to have one spouse at home. While a joint family unit may appear to support women as caregivers, it tends to reinforce women's traditional dependence on men and unpaid, private role in child, home and husband care. Mr Howard has not implemented recommendations of a recent report to introduce a childcare tax credit and has significantly cut public spending on childcare.[14] The package includes an 'improved' (means-tested) Childcare Benefit but this will not cover the full cost of childcare, nor address issues of availability. Childcare is exempt from the GST (see below), in contrast to New Zealand; while this is positive, it just means that its price will probably not increase.
A final important objection to a family tax unit is that it ossifies the meaning of 'family' in the tax law in a way that is out of step with contemporary norms. We are beginning to untangle and reinvent family and caregiving rights and responsibilities as a society and in the law. We should also be reimagining the ways that tax and welfare laws recognise dependency and subsidise particular caregiving relationships. Instead, the Howard government is seeking to strengthen the traditional family unit by stealth.
The WST and introduction of a GST
When Fightback! lost at the polls in 1993, the GST seemed vanquished, never to reappear in Australian politics. But the GST is back. I address here the problems with the existing WST and some of the arguments about the GST.
Australia's WST was introduced in 1930, at a rate of 2.5%, to help raise revenue during the depression. Today, the WST taxes a variety of different Australian-produced goods at widely disparate rates - from 12% for household furniture and appliances and some foods to 45% for luxury cars, with many consumer goods such as soaps, computers, cosmetics, watches and televisions taxed at 22% or 32%. Most food, clothing and books are exempt. In spite of the different rates, the WST is fairly simple and familiar to those who generally deal with it. Services are not included in the tax base although business inputs to services are taxed (for example, the computer used by a service provider). The WST is imposed, as the name implies, on the product's value at the last wholesale transaction and so it does not capture the retailer's profit margin. It is often difficult to determine the appropriate product value, particularly as manufacturers increasingly 'vertically integrate' their businesses and sales are made direct to the consumer. Classification disputes are also common; for example, when is an item food (exempt) and when is it confectionary (taxed at 12%)?
The government's position that the WST is regressive and out-dated, with an overly narrow base and high rates, is generally accepted. Practically no other country retains a WST. It fails most of the ACOSS tax policy principles and ACOSS comments that the ad hoc growth of the WST and other consumption taxes, particularly frequent hidden rate increases, has meant that low income people suffer disproportionately even though food and clothing are exempt. ABS statistics indicate that in 1994, consumption taxes levied by all governments amounted to 22.6% of the income of the poorest 10% of households.[15]
However, the WST and other consumption taxes cannot just be abolished, for revenue reasons. A shortfall of up to 20% would have to be made up through the income tax or other taxes. The question is, should the WST and/or the excises on petrol, alcohol and tobacco be replaced with a GST? If a GST is introduced, what other changes to the tax system should be funded using the extra revenue raised? For social policy reasons, we may not wish to reduce or eliminate so-called 'sin' taxes on alcohol and tobacco, or the 'environmental' tax on petrol, even though these taxes are always regressive. In fact, the cost of alcohol and tobacco (but not petrol) may increase under the Howard proposal. A GST is also not inconsistent with imposing additional high taxes, for example on luxury cars; this is also part of the Howard package, but only to maintain (not increase) prices.
The following are the key characteristics of a GST (usually termed a value added tax or VAT) as it is imposed in many overseas countries and as proposed by the government.[16]
A broad-based GST can be an effective revenue raiser but is not a miracle cure for the economy. Claims that a GST will eliminate the black economy and tax evasion are significantly overstated and the evidence is that compliance costs are quite high. Although a GST would catch some income which slips through the income tax net, it (like all sales taxes) can be avoided; one way is through purchases via the internet from overseas. There is no conclusive evidence that a GST will promote saving. The fear of long-term inflationary effects of a GST also seems to be overstated, based on the experience of other countries, though the GST does produce an increase in prices with consequent pressure on wages and there can be sharp increases in prices of particular goods. Another concern is unemployment, but the impact of a GST (especially long term) is not clear. The Women's Electoral Lobby has pointed out that most new jobs (and many womens jobs) are in services and has suggested that these are at risk if services are taxed.[17] However, support for various aspects of the service industry - for example, regional tourism - may be better done through focused direct subsidies. The wealthy use a great many services and it seems fair and effective to tax this base fully.
The major concern with a GST is that it is regressive, or unfair. A GST will be almost completely passed on in increased prices and this will have a serious impact on low income earners, particularly if the GST is imposed on all necessities such as food, utilities and housing. Tax orthodoxy requires that a GST have a broad base with minimal exemptions or zero-ratings and a single tax rate. However, for equity reasons, most overseas countries have several exemptions. Most European countries and Canada exempt or zero-rate food, non-profit services and other items and some countries impose lower rates, for example on newspapers, utilities and pharmaceutical drugs. New Zealand, unusually, exempts only housing, but a recent study has found that the New Zealand GST has had a regressive impact overall.[18] The issue of exemptions and rates is not clear cut, however. There are equity arguments against a food exemption, as higher income earners spend a significant proportion of their income on expensive food. The key is to consider a GST, at a fairly low rate (up to 10%), in the context of the whole package of changes to the tax system which will compensate for the regressive effect of the tax. As ACOSS has said, 'it is impossible to support a GST in the abstract'.
This brings us back to the income tax and other changes proposed by Mr Howard- the nature of the compensation and the whole tax package. The income tax changes are crucial; compensation should not be left to the social security system, where it is vulnerable to future budget cuts. The New Zealand GST was introduced in 1987 and increases in social security payments introduced partly to compensate for the GST were effectively cut in 1990. Julie Smith has found that the overall effect was regressive and women were particularly hard hit. She concludes:
'The moral for Australian women of the New Zealand consumption tax parable is in fact, caveat emptor let the buyer beware'.[19]
However, neither should compensation be primarily in the form of tax benefits calculated on the basis of a family tax unit and paid to the primary income earner. Instead, the individual unit should be strengthened. It can be seen that it is difficult to compensate women for a GST: direct social security transfers work but are vulnerable to cuts, while tax changes based on a family unit penalise women. A package of tax reforms which would successfully counteract the regressive aspects of a GST and improve the overall tax structure might include wider income tax brackets; possible increased tax rates at the highest brackets (which would cut in at a high level); and the elimination of many deductions and tax shelters used by the wealthy. Income-splitting should be minimised (this has been done in Canada, for example). One option would be to introduce a wealth tax, such as an estate or gift tax; this is not canvassed by the package and the Liberal Party is hostile to wealth taxes. Wealth taxes are difficult to administer and collect a fairly small amount of revenue, but a carefully designed wealth tax would tax some saved income and contribute to the fairness of the tax system.
A 'monster' tax reform?
This article canvasses just a few of the issues in the tax debate and attempts to explain key tax policy jargon with reference to the Howard tax package reform. At present, the debate is primarily in the hands of the Howard government. To give them credit, they have produced a package worth talking about. But in spite of all the talk of 'battlers', Prime Minister Howard has a wealthy constituency and strong ties to a mostly conservative business community. His agenda for families is particularly damaging for women, and his package still does not address many inequities in the tax system. There have been as yet few positive contributions from Labor and the Democrats to the debate, but this is essential if a serious alternative to the government package is to be developed. It is important that all of us interested in equality and redistribution participate in the debate, so that tax reform really does have something to do with social justice.
1.Treasury Tax Reform http://www.taxreform.gov.au
2.Pocket Brief to the Australian Tax System (Treasury) http://www.treasury.gov.au/Publications/Taxation/Pocket/Default. asp
3.ACOSS Tax Reform Pack, September 1997, http://www.acoss.org. au/documnts.htm
4.Sydney Morning Herald Tax Debate, http://www.smh.com.au/news/ content/tax/index.html
5.The Age Tax Update, http://www.theage.com.au/tax98/index.html
6.The CPA, http://www.cpaonline.com.au/library/fs_taxreform.htm
7.Australiansfor Fairer Tax, http://www.fairertax.com.au/index2.htm
8.Australian Taxation Index, http://www.law.flinders.edu.au/tax
9.Committee for Economic Development of Australia, http://www. abol.net/ceda
10.TheDemocrats, http://www.democrats.org.au/democratsstatements/ 1998/taxreform/index.html
11.ABC Tax Files, http://www.abc.net.au/news/special/default.htm
12.ALP, http://www.alp.org.au[centre]/speeches/kb98tax.htm
[1] Tax Reform: not a new tax, a new tax system, http://www.taxreform. gov.au, ; Burton, Tom, MPs see monster tax reform as a winner, Australian Financial Review 3 August, 1998 (AFR Net Services).
[2] Ha and anor v State of New South Wales and others (unreported, High Court, 24 May 1996). Available on-line, http://www.austlii.edu.au/ au/cases/cth/high_ct/unrep332.html
[3] At present, the OECD does not take Australia's superannuation system into account when determining comparative tax burdens.
[4] ACOSS, Tax Reform Pack, September 1997.
[5] Bradford, David, Untangling the Income Tax, Harvard U Press, 1986, pp.178-9.
[6] For example, Kissane, Karen, Women and the GST, Age, 5 August 1998. The only comprehensive discussion of the effect of tax laws on women of which I am aware is Lahey, Salter, Eaton, The Taxation of Women in Canada: A Research Report, Queens University, Ontario, 1988. Specific aspects of womens poverty and the impact of tax are discussed in Young, Claire, (In)visible Inequalities: Women, Tax and Poverty, (1995) 27 Ottowa Law Review 99; Smith, Julie, Tax Reform, the GST and Women, Background Paper No. 11, The Australia Institute, April 1998; Graycar, Reg and Morgan, Jenny, The Hidden Gender of Law, Federation Press, 1990, particularly Part 2 and the references cited therein; and in the US, McCaffery, Edward J., Taxing Women, 1997, Chicago U Press. One US race analysis is by Beverley Moran & William Whitford, A Black Critique of the Internal Revenue Code [1996] Wisconsin Law Review 751.
[7] Harding, A., Lifetime v Annual Tax-Transfer Incidence. How Much Less Progressive (June 1993) The Economic Record, 179 and studies cited therein; see CPA Discussion Paper, Restructuring Income Tax Rates What are the benefits? (July 1998), http://www.cpaonline. com.au/library/fs_taxreform.htm
[8] OECD, The Tax/Benefit position of employees, 1995/96, Paris, 1998; http://www.oecd.org//news_and_events/publish/pb98-o5.htm , Chart 1. See also ACOSS, above ref. 4.
[9] John Howard PM, interview with Fran Kelly, Radio National, 16 March 1998.
[10] Report of the Asprey Committee into the Income Tax, quoted in Messere, K.C., Tax Policy in OECD Countries: Choices and Conflicts, IBFD Publications BV, 1993, p.255.
[11] Judge Lionel Murphy (in dissent), Everett (1980) 143 CLR 440; Newton (1958) ALJR 187 (PC).
[12] Patricia Apps is the acknowledged expert on the tax unit policy debate in Australia. See Tax Reform and the Tax Unit, (1984) Australian Tax Forum 467 and her other writings. In the US, a recent book is devoted to analysis of the taxation of women in families, particularly the effect of the married tax unit: McCaffery, Edward J., above ref. 6.
[13] Edwards, Meredith, The Income Unit in the Australian Tax and Social Security Systems, Australian Institute of Family Studies, Melbourne, 1984; Kornhauser, Marjorie, Love, Money and the IRS: Income Sharing and the Joint Tax Return, (1993) 45 Hastings Law Journal 63. A racial effect of the joint unit has also been detected in the US: Brown, Dorothy, The Marriage Penalty in Black and White in Taxing America, NYU Press, 1997.
[14] Economic Planning Advisory Committee, Childcare Task Force Report, 13 November 1996.
[15] ACOSS, above ref. 4, Figure 5, citing Freebairn, Taxation reform some economic issues, (1997) 3(1) Australian Economic Review.
[16] See A Practical Guide to the GST, (1998) 32 Taxation in Australia 594; Cnossen, Sijbren, Issues in Adopting and Designing a Value-Added Tax, in Sandford, C. (ed), Key Issues in Tax Reform, 1992, Bath Uni Press.
[17] See Kissane, above ref. 6.
[18] Smith, above ref. 6.
[19] Smith, above ref. 6, p.17.
| This page was prepared by members of the Alt LJ Committee. Last updated: 17 September 1998 URL: http://www.austlii.edu.au/au/other/altlj/ Comments or suggestions on the pages to Liz.Boulton@law.monash.edu.au |
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