Smith RS43 ATRF Page 1 Thursday, November 11, 2004 3:00 PM
TAXING POPULARITY
The Story of Taxation in Australia
Julie P. Smith
All public expenditure is popular, all taxation is unpopular.
(Sydney Herald, 1860, quoted in Lamb 1967)
AUSTRALIAN TAX RESEARCH FOUNDATION
Research Study No 43
Smith RS43 ATRF Page 2 Thursday, November 11, 2004 3:00 PM
The views expressed in this and other publications of the Foundation are not necessarily those of
the Foundation or those who sponsor its publications. They are published on the basis that they
represent a significant contribution to public understanding of aspects of taxation policy.
Taxing Popularity: The Story of Taxation in Australia
ISBN 0 949482 82 X
ISSN 0 817 4679
© The
Australian Tax Research Foundation and the author, 2004
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form or by any means, without the prior permission of the Foundation.
Other ATRF publications can be viewed at www.atrf.com.au
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CONTENTS
Acknowledgements
5
Preface
6
Packing The Public Purse Taxing For Revenue
7
Compulsion and Persuasion — the Basis of Taxation
Taxing Problems of Orphans and Gaols
Eureka! A Tax Revolt
The Custom of Protection and Excising Spirits
8
9
14
7
Robbing Peter to Pay Paul Taxing for Justice
21
The First Direct Taxes — Duties on Death
Strangling the Goose — A Single Tax on Land
Income Tax — A Tax on Public Extravagance or the Work of the Devil?
24
28
36
The Constitution and the Allocation of Australian Taxation
45
Tax Sharing and Fiscal Tears
Taxes on Earth — the Commonwealth Land Tax of 1910
Wartime Tax Invaders — the First Commonwealth Income Tax
Two Suns in Heaven — Commonwealth and State Tax Competition
Taxing Times and Unproductive Taxes — Taxation in the Depression
Taxing Paul to Pay for Justice — The National Welfare Fund
An Excise (sic) in Semantics — The High Court and State Taxing Powers
Stabilising and Destabilising Taxes Taxing for Macroeconomic
Management
48
49
51
54
59
63
68
73
Keynesian Demand Management — The Tax Multiplier
74
War on Uniform Taxes — The Commonwealth v. The States
74
Taxation and the Business Cycle — The Ebb and Flow of Postwar Taxes 77
State Taxes and Postwar Taxation (Im)Balances
Exorcising the Single Tax Ghost
The Death of Death Taxes
‘Ad Hoc’ Taxation — Old Taxes, New Taxes and New Forms of
Federalism
A Right-Royalty Shame — The Tax Competition in Mining
Postwar Tax Progression The Base for Taxation Reform
Regression in Progressive Income Taxation
Taxation by Misrepresentation — the Effect of Inflation
The Can’t on Indirect Tax
79
82
85
89
96
102
103
108
114
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Not Giving Unto Caesar
The Summit of Taxation Reform
The Syntax of Sin Taxes
Gambling Taxation — Public Equity in the Gambling Business
Excising Cigarettes and Tobacco
The Tax Take on Grog
Excised Fuel Taxes
Momentous or Momentary Tax Reform
ANTS in the Pantry – Consumption Tax Fights Back
The Business of Taxation — Ralph’s Radical ‘Revue’
Charitable Taxation Acts
Taxing Truthfulness and Terrorising Taxpayers
Global Tax Termites, Tax (Shirking) Havens and Harmful Tax (Hiding)
Practices
Epilogue Unfinished Taxation Business
The Tense Past, and Future Directions
116
119
126
127
133
139
144
147
148
160
164
176
181
192
199
Bibliography
206
Appendix: Taxation Policy In Australia A Chronology
227
List of Tables
Table 1: Budget Paper No. 1, New South Wales 1805
Table 2: New South Wales Taxation 1875
Table 3: Taxation 1896–97
Table 4: Taxation 1901–02
Table 5: Taxation 1918–1919
Table 6: Taxation 1928–29
Table 7: Taxation 1938–39
Table 8: Taxation 1938–39
Table 9: Taxation 1948-49
Table 10: Taxation 1958–59
Table 11: Motor Taxes, Share of Taxation and GDP
Table 12: Company Taxation
Table 13: Taxation 1975–76
Table 14: Taxation 1984–85
Table 15: Taxation 1990–91
Table 16: Taxation 1999-00 and 2002–03
Table 17: Taxation as a percentage of Gross Domestic Product 1849–2003
11
14
43
47
54
59
62
67
77
90
91
106
116
118
125
159
205
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ACKNOWLEDGEMENTS
I would like to offer sincere thanks to Professor Neil Warren and the Australian
Tax Research Foundation for the opportunity to prepare a revised edition of this
book, originally prepared with the support and assistance of Cliff Walsh and
Brian Galligan at the (former) Federalism Research Centre, Australian National
University. I would like to express my appreciation to several people who
reviewed and commented on the original draft manuscript, especially Professors
John Freebairn, Peter Groenewegen, Bob Wallace, Frank Castles and Russell
Mathews, Dr Alan Boxer, Justice Rae Else-Mitchell, and Sir Leslie Melville.
The revised edition benefited again from helpful comment by John Freebairn
and Peter Groenewegen and also by Fred Argy, Glenys Byrne, Cynthia Coleman,
Margaret McKercher, Myles McGregor-Loundes, Howard Pender, Bin Tran
Nam, John Quiggin and Neil Warren. I thank Stephanie Hancock and Barry
Howarth for applying their skills with patience and good humour to the editing,
preparation and revision of the manuscript. Responsibility for remaining errors
and omissions is solely mine. Thanks are also due to my family, especially my
partner Mark Dunstone for his practical assistance and encouragement over the
period I have been writing and revising this book.
This revised edition of Taxing Popularity is dedicated to the memory of
Professor Russell Mathews, a devoted and prolific scholar of Australia’s public
finance and tax policy history, a passionate and effective advocate of an equitable
and efficient tax system, and a man of immense generosity, courage and integrity
who made an immeasurable contribution to Australian taxation and public
finance, and to this book.
5
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PREFACE
This book grew from research on Australian taxation policy for a broader history
of economic policy in Australia. The intention was to make accessible to social
scientists interested in economic policy and history the background to current
patterns of taxation in Australia. I hope that, by bringing together the diverse
historical, economic and other material on taxation policy in this way, readers
can gain a fuller understanding of what drives taxation policy and how this has
affected the Australian economy and society, without their having to tackle the
more esoteric and technical texts that tend to dominate the literature. I hope too
that the book will encourage readers to delve more into the subject, and will
further a greater understanding of the role of taxation in our society.
Starting with the first European settlement at Botany Bay, the book draws out
the key features of the evolution of taxation in Australia, with their implications
for the current debate on the future direction of taxation policy. The first chapter
looks at taxation in the early days when taxation was solely a means of raising
revenue. In chapter 2, I trace the emergence of significant direct taxes such as
death duties, the land taxes, and income taxes, as Australian politics and taxation
policy responds to democratic, redistributive and budgetary pressures.
Chapters 3 and 5 feature the linkages between federal and state taxation
policies since Federation, tracing the gradual loss of tax powers by Australian state
governments. A chapter on the economic management role of taxation looks
briefly at the impact of the Keynesian revolution on Australian tax policy.
Chapters 6 and 8 concentrate on the postwar evolution of taxation policies and
the developing pressures for major tax reform, with the increasing dominance of
the income tax and difficulties created for tax policy by accelerating inflation and
a changing economy. Chapter 7 reviews the changing role of ‘sin taxes’.
Finally, as the present draws closer to the past, I ponder the contribution of
taxation policy, past, present and future, to Australia’s social and economic goals.
6
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PACKING THE PUBLIC PURSE
TAXING FOR REVENUE
The power to tax is the one great power upon which the whole national fabric
is based. It is as necessary to the existence and prosperity of a nation as is the
air he breathes to the natural man. It is not only the power to destroy, but the
power to keep alive.
(US Supreme Court, quoted in Mills 1925, 1)
The art of taxation consists in so plucking the goose as to obtain the largest
amount of feathers with the least amount of hissing.
(Jean Baptiste Colbert 1619–83)
In the days before democratic government, judging the merit of a tax was easy —
a good tax was productive of revenue, and easy to collect. Nevertheless, the need
to frame taxes so as to avoid fermenting rebellion or revolution has been a
dominating principle of taxation policy throughout the ages. Monarchs, feudal
or authoritarian leaders, and modern democratic governments alike ignore at
their peril the popular view of ‘fair’ taxation. In the words of British Chancellor
of the Exchequer Disraeli in 1852: ‘On taxation the feelings of the people must
be considered, as well as the principles of science’ (Hansard 30/IV/1852, quoted
in Sabine 1966, 65). There is truth in the adage ‘the only good tax is an old tax’.
For in surviving the test of time, an aged tax has passed the most fundamental
test of taxation policy, the feelings of the people.
What taxation is considered ‘just’ depends, of course, on what governments
do with the revenue; modern democratic governments have been able to increase
taxation to very high levels to improve community facilities and welfare. And, as
eminent American tax economist E.R.A. Seligman observed in 1900, in a
democracy,
We pay taxes not because the state protects us, or because we get any benefits
from the state, but simply because the state is a part of us. (72)
As he continues,
the constitutional history of England is to a large extent a history of the struggle
of the people to gain control of the Treasury. (76)
By a peculiar twist of history, British colonisation of Australia was closely linked
with popular tax revolt. The first convict settlement was associated with reaction
7
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8
T AXIN G P O P U LARIT Y
against the unpopular British policy of taxing American tea. Taxpayers in Britain’s
North American colonies, at that time the disposal unit for the Mother Country’s
social refuse, had hissed loudly at the excessive plucking of their financial
feathers. They revolted, and after a wild impromptu Tea Party at Boston they
fought their War of Independence on a battle-cry of ‘no taxation without
representation’. As a consequence, British Prime Minister Pitt established a new
dumping ground for his convicts in the Antipodes.
Compulsion and Persuasion — the Basis of Taxation
I have with me two gods, Persuasion and Compulsion.
(Themistocles, 514–449BC)
Taxation policy in Australia did not start with a clean slate. English laws applied,
and taxes could only be levied on the authority of an Act of Parliament. 1
However, New South Wales Governor Phillip had been given only a vague,
military authority to raise money to meet the expenses of administration
‘through the issue of warrant’. Appeals to establish more formal fiscal
arrangements to meet the civil expenses of the fledgling colony fell on deaf ears. 2
Successive governors did what they could with what powers they had, for more
than two decades. As it turned out, the British parliament did not pass the first
law legalising taxes in New South Wales until 1819.3 This was, in effect, nearly
two decades after the first taxes were actually levied (Mills 1925). Relations
between the taxman and the Australian taxpayer thus did not have auspicious
1.
2.
3.
The British Constitution declares that ‘no subject of England can be constrained to pay any aids or taxes,
but such as are imposed by his own consent or that of his representatives in Parliament’. In the many years
before universal suffrage was introduced, the term ‘his representatives’ was very liberally interpreted to
refer to the British Parliament, unrepresentative as it was at that time.
The British Chancellor in London being preoccupied at that time with waging a costly war with France.
By the early 1820s, the colony’s growing numbers of free settlers had begun to challenge the military
authority of the Governor in several spheres. In 1818 one such challenge to the Governor’s taxing powers
brought to the attention of the British authorities that the existing bevy of taxes on the good citizens of
Sydney were illegal — they were levied not by an Act of Parliament, but rather, on the Governor’s military
authority. When Governor Macquarie directed his clerks to take court proceedings against certain citizens
for recovery of unpaid duties, the Judge of the Supreme Court discreetly advised him of the risks of such a
course.
May I be forgiven if an anxiety to prevent the public discussion of a question in which I might perhaps be
forced to give an official opinion against the present legality of such duties induces me to request Your
Excellency to instruct the solicitor for the Crown to forbear to proceed in the suits in question for the
present.
The Governor was not slow to take the hint, and arranged for some fast legislative footwork in the British
Parliament. This saw the passage in the following year of several Acts of a temporary nature. These Acts in
effect legalised the previous taxes, and placed future taxation on a firmer legal basis (Mills 1925, 27–29).
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PA CKING THE PUBLIC PURSE 9
beginnings. Such retrospective taxation makes modern parliamentary distaste for
back-dating anti-avoidance provisions seem squeamish. And hardly a good
example of law-abiding behaviour for a population of convicts and former felons,
it might be noted.
Taxing Problems of Orphans and Gaols
Perhaps reflecting their amateur status as de facto treasurers, the military
governors were no innovators when it came to taxation. Under New South Wales
Governors Phillip, Hunter and King, taxation followed English traditions.
The biggest tax policy issue, at least in the early years of the colony, was that
there was really nothing to tax. To raise revenue, the governors needed a taxable
surplus, that is ‘taxable capacity’. In the very early days, the government
appropriated all the colony’s production as well as imported supplies. It then
provided it free to meet the essential needs of soldiers and prisoners. This being
the case it was pointless to levy taxes, as was done in England, on items of
consumption or even imports. Nor was there yet sufficient private wealth in the
colony to provide a capacity for taxes on property.4Accordingly, the budget for the
colony of New South Wales was for several years roughly like this — expenditure,
one hundred thousand pounds, revenue, nil. The balance of official expenses over
revenue was met, grudgingly and in arrears, by the British Treasury in London. 5
However, by Governor Hunter’s day (1795–1800), there were — at least in
his eyes — the beginnings of taxable wealth in the colony. Money was desperately
needed to build a new gaol, the old one having inexplicably burned down.
Faced with this need for revenue, the governor turned to the tried and trusted
process of the Old Country for funding a worthy public purpose — voluntary
subscriptions by prominent and wealthy citizens. In a public address in 1799,
Governor Hunter pleaded that ‘colonists should take up the same responsibilities
as men of substance shouldered in England’ (Barnard 1962, 370). However, even
admitting its worthy purpose, contributions to the public fund from the
propertied classes fell well short of the cost of the gaol. As the colony was itself an
open air prison created by the government, free colonists resented suggestions they
should bear the heavy burden of financing law and order. Persuasion proving
insufficient, the human governor therefore had resort to Themistocles’ other
4.
5.
The other possible tax base distinguished by modern economists — income — was as yet an innovation
waiting for a war to happen.
The balance of public expenditure over receipts in the colony was met by the issue of Treasury bills drawn
on London, and accepted by creditors as settlement. The British Colonial Office ultimately funded these
issues.
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10
T AXIN G P O P U LARIT Y
deity, Compulsion. Thus with the dawn of the new century came the first taxes,
collected not from the propertied classes, but coming rather from taxes on
consumption, borne by the population as a whole.
The governor’s first taxes were levied on imports, with assessments of
wharfage fees on each item landed, and duties on spirits, wine and beers. 6As it is
always easier to levy taxes for particular public purposes, the revenues were earmarked for policing expenses. The ‘Gaol Fund’ was the beginning of punitive
taxation, one might say. Not surprisingly (New South Wales being known as the
‘Rum Colony’) most revenue for the Gaol Fund came from the duties on alcohol.
As one author observed dryly, the treasurer must have been well satisfied — ‘the
more the citizens drank, the more money there was to control them’ (Barnard
1962, 370).
Not unrelated to the drinking habits of the colonists was the other pressing
public need, an orphanage. Governor King, influenced by his persuasive wife
Anna, wanted to establish a local orphanage. By that time (1800–1804), there
were 400 or so ‘abandoned and neglected’ children roaming the colony. 7To pay
for the orphanage, Compulsion again supplemented the charitable contributions
elicited by Themistocles’ gentler god, Persuasion. From 1802, King established
the Orphan Fund (Mills 1925, 24–5). Like the Gaol Fund, the Orphan Fund
relied heavily on revenue from taxes on rum. It also benefited from a 5 per cent
ad valorem duty on goods of all kinds from the Far East, port entry and exit fees,
liquor retailing and auction licence fees, wharf fees, fines and confiscations, fees
on all grants of land and leases. For five years only it received quit-rents from
Crown lands.
The taxation legacy of Governors Phillip, Hunter and King was the 1805
Australian budget, shown below.8
6.
7.
8.
These first duties, known as ‘specific’ duties, were calculated as an amount per gallon. Being invariate to
price such duties typically indicate a purely revenue tariff policy. Later, but not much later, came the first
ad valorem tariff, which set duties ‘as a per cent of the price they were laid in at’.
King’s wife Anna was actively involved in charities for children and was known as a woman of strong views
(Windshuttle 1980, 60, 62). As governor of Norfolk Island, King had introduced an orphanage financed
by land revenues (Barnard 1962, 90).
Since taxes once begun are rarely discontinued, these ‘temporary’ tax impositions long outlived the gaol.
According to the Financial Statements of the Treasurer of New South Wales, 1855–1881, this impost was
‘with slight modifications... collected under proclamations of successive governors until the year 1840’
(quoted in Mills 1925, 24). The Gaol Fund was found necessary for other public works and expenses of
the colony, such as building bridges, paying policemen and pensioning civil servants. To avoid
embarrassment after the gaol was completed, the fund was renamed the ‘Police Fund’. Similarly the
Orphans’ Fund became the source of funds for education and relief.
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PA CKING THE PUBLIC PURSE 11
As we have seen, these first taxes reflected the interests of the rich and powerful
in early colonial society. They were also in keeping with ideas about taxation
policy in other countries at the time the Australian colony was established. Taxes
on imports — known as customs duties or tariffs — are, in the words of Mills,
‘the class of taxation which is commonly the first to be levied by a young
community’ (1925, 5). Customs duties were readily collected and enforced at the
wharfs as goods entered the country. In those days, before the creation of the Tax
Department, this was important as taxes were collected by novices working on
commission (Sabine 1966, 17). Customs duties and ‘excise duties’ (taxes levied on
the equivalent locally produced goods) also met other important criteria for
taxation. Levied on ‘necessities’ or items for which there were few substitutes, they
easily produced revenue. They were also considered less likely than direct tax
measures to provoke revolution or revolt; being relatively invisible the exactions
of taxation were more cheerfully carried by the taxpayer.
Table 1: Budget Paper No. 1, New South Wales 1805
Revenue
£ sterling
For the Gaol Fund
Assessments or duties on Spirits
1570
For the Orphan Fund
Fees on entry and clearance of vessels,
Licences to retail spirits and Auction duties
Duty of 5 per cent, ad valorem on articles
Fines levied by Courts of Justice
Total Revenue, exclusive of quit-rents
Source: Mills 1925, 26
596
531
86
2783
These indirect9taxes had been fashionable in England in Governor Phillip’s day.
However, some costly military skirmishes with European neighbours caused
some disquiet by the turn of the century at the heavy burden of such taxes on the
poor. This concern, that taxes ought more closely to reflect ability to pay,
reflected pragmatism as well as altruism: around that time concerns over taxation
9.
The terminology ‘indirect’ or ‘direct’ taxation is used by tax administrators to label taxes on commodities
such as sales taxes or customs duties, which are charged indirectly on the ultimate taxpayers — often
consumers — although legally levied on and collected through a producer or retailer. ‘Direct’ taxes such as
income or wealth taxes are assessed directly on, and collected from the tax-payer (Hicks 1946, in Musgrave
& Shoup, 1966, 217).
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12
T AXIN G P O P U LARIT Y
had helped precipitate revolution in France as well as in Britain’s American
colonies. As Seligman observed, ‘liberty has been intimately bound up with the
contest against unjust taxation’ (1900, 76).
On the Continent in the late Middle Ages, pressures from reformers for more
‘just’ taxation had resulted in the development of broad-based consumption taxes.
This was because, in Europe, the politically powerful nobles and privileged classes
had succeeded in securing ‘virtual immunity from taxation’.10Broad-based
taxation, by taxing items other than the necessities of life, levied the influential
rich as well as the powerless poor in order to fund essential public functions such
as defence. According to Sir William Petty,
Every man ought to contribute according to what he taketh for himself, and
actually enjoyeth... the very perfect Idea of making a Leavy upon
Consumptions, is to rate every particular Necessary just when it is ripe for
Consumption.
(Petty, 1662, quoted in Groenewegen 1985, 187)
However, in England, ‘where the democratic instincts maintained themselves
somewhat more strongly, and where the power of the aristocracy was held in
check by a strong monarchy’, indirect taxes on consumption had been resisted
more strongly (Seligman 1900, 9). By the time taxes were first levied in Australia,
England had returned to a policy of taxing luxury expenditures, items consumed
by the poor often being exempt (Sabine 1966, 16). As the philosopher David
Hume (quoted in Groenewegen 1979a, 139) argued in 1752, such indirect taxes
were politically expedient as well as fair and efficient:
The best taxes are such as are levied on consumptions, especially those on
luxury; because such taxes are least felt by the people. They seem in some
measure, voluntary; since a man may chuse how far he will use the commodity
which is taxed. They are paid gradually, and unsensibly: They naturally
produce sobriety and frugality if judiciously imposed: And being confounded
with the natural price of the commodity, they are scarcely perceived by the
consumers.
When the expense of the wars with Napoleon meant that taxing luxuries
produced insufficient revenues for the chancellor of the exchequer, the extra
revenues were found by extending ‘assessed’ expenditure taxes on luxury
consumption items.11
10. Seligman 1900, 10.
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PA CKING THE PUBLIC PUR SE 13
However, such assessed taxes required an administrative capability that was
lacking in the Australian colonies. Here such direct, progressive taxes on persons
did not emerge until compelled by the emergence of more democratic sentiments,
after the abolition of transportation and the 1850s gold rushes. The colony had
only a few equivalents to Britain’s assessed taxes, such as licence fees. Although
there were also stamp duties, probate fees and stock taxes, these imposts were of
the nature of fees, or ‘benefit taxes’.12
Instead of direct taxes on persons, the main development in Australian
taxation over the first fifty years of the colony was the expansion of customs and
excise taxes (Shann 1948, 191). By the 1850s, customs and excise made up nearly
all of the 3 per cent of national income accounted for by taxes.13
Customs duties were to remain the mainstay of Australian taxation until the
first world war (Copland 1924, 36). By this time however, they had been extended
beyond the imported luxury items listed in the first tariff schedules. Setting the
pattern for the next fifty years, rates of duty on imported goods had been raised in
New South Wales in 1840. Duties were extended for the first time to essential
items such as tea, sugar, flour, meal, rice or grain and pulses (Mills 1925, 33). 14
As had been the case in England, revenue from taxing luxuries no longer
sufficed in the colonies by the middle of the nineteenth century. However
powerful conservative interests were to delay the introduction of direct taxation as
a revenue alternative. The influence of wealthy landowners and commercial
interests was also evident in the distribution of Australia’s taxation burden, this
11. British ‘assessed taxes’ had expanded in the eighteenth century, and the British forerunner of the income
tax, the Triple Assessment, was levied in 1798 (Sabine 1966, 23). In 1799 the Triple Assessment was
replaced by the first income tax to finance the war with Napoleon. Also called ‘excise taxes’ (as distinct
from excise duties, a distinction which has caused considerable heartache to High Court judges and state
governments in Australia), assessed taxes were imposed directly on households according to surveys of how
many assessable items were contained therein. The infamous English hearth tax and, later, the tax on
windows were of this kind, as were taxes on manservants, carriages, and hair-powder. Trade licences such
as on brewers, sellers of tea, attorneys and sellers of gloves were also known as ‘assessed taxes’ or ‘excise
taxes’ (Dowell 1888).
12. Stamp duties were fees charged by government clerks for validating contracts, and probate fees were
service charges for the issue of probates and letters of administration by public legal clerks and judges. The
1839 stock tax was a ‘user pays’ levy on sheep numbers, which funded border police to protect squatters’
runs from the raids of displaced and disgruntled Aborigines.
13. This was around half that prevailing in Europe around that time (Peters 1991, Table 2.2).
14. Excise taxes had also been introduced on local production in the 1820s. Reflecting the limited production
base of the economy before the gold rush, however, most revenues came from tariffs on imports: in 1850,
just before self-government in New South Wales, 219,298 pounds of revenue came from customs duties,
while excises on the locally produced equivalents raised just 2,850 pounds (Mills 1925, 34). In 1910, the
ratio had gone from 1 in 10 to 1 in 5. By the late 1960s, customs duties were to raise only around 40 per
cent of the revenues from excise duties (Mathews & Jay 1972, 83, 296).
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14
T AXIN G P O P U LARIT Y
being carried by the poor till long past Federation. Unlike in Europe, where
broad-based taxes reflected a democratic tradition, Australia’s revenue excises were
concentrated on the pleasures of the working man — alcohol and tobacco. These
taxes also levied items for which demand was inelastic — the necessities of
working-class life. Democratic emphasis on direct taxes reforms meant that new
pleasures enjoyed by the affluent were rarely thrown into the consumption tax net.
Indirect tax remained a levy on the poor and, in this way, came in Australia to be
synonymous with ‘regressive’ or unfair taxation.
Table 2: New South Wales Taxation 1875
Customs and excise duties
Income tax
Probate and stamp duties
Land tax
Licences and duty on gold
Total
Note: na = not applicable.
Source: Mills 1925
$
%
2,028,542
na
9,452
na
206,010
2,244,004
90.4
0
0.4
0
9.2
100
Eureka! A Tax Revolt
Taxation Without Representation is Tyranny.
(attrib. James Otis, quoted in Fraser 1988, 197)
The first sign of the changes democracy was to bring to Australian taxation came
with the miners’ ‘tax revolt’ at Eureka in 1852. During the transition to selfgovernment in the 1850s15 the Australian colonies had been inundated by a
massive wave of migrants searching for gold. Significantly, the newcomers were
voluntary exiles; unlike their predecessors, they were not driven by the law or by
abject poverty at home. The influx of population saw one crisis after another in
the finances of the colonies as the authorities engaged in a desperate search for
taxation revenue to finance the new demands for public spending.
Apart from the increased revenue requirement, the gold rushes had no direct
impact on taxation policy in the colonies. Taxes continued to be levied mainly
15. The governments of New South Wales, Victoria, Tasmania and South Australia achieved self-government
shortly after gold was discovered, in 1855 (1856 in South Australia).
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PA CKING THE PUBLIC PUR SE 15
through the traditional policy instruments — indirect taxes — with the same
sprinkling of benefit taxes and direct assessments (such as gold licence fees).
However, the migrants of the 1850s gold boom gave volume to the previously
timorous political voice of the working class. With the miners came the popular
demand for more progressive taxation, and new taxes on land, income or other
taxes on wealth or economic power.
On news of the first gold finds, at Bathurst, New South Wales, Governor
Charles FitzRoy had made a proclamation emphasising that all gold on Crown
land belonged to the Crown. The next day, having reflected further on the likely
response of Her Majesty’s colonial subjects, he issued a somewhat more
enforceable proclamation. This established the post of Gold Commissioner and
required each miner to purchase a 30 shillings per month mining licence, 16to meet
the desperate need for revenue, as well as to gain some recompense for what was,
after all, the Queen’s gold. Victorian Governor La Trobe followed the lead of New
South Wales shortly thereafter, with a gold licence fee of 30 shillings a month.
Although the Victorian levy differed not at all from the New South Wales impost,
it was before long to be the catalyst for popular revolt and for far-reaching political
changes in the Australian colonies.
A gold licence fee was not a novel taxation instrument. It fell into the same
category as licence fees already levied, for example, on merchants permitted to sell
liquor. However, a gold licence fee was an unfortunate instrument of taxation on
the goldfields. Although intended as a kind of benefit tax, the fee paid by each
miner bore little relation to the actual cost of providing public services and
meeting the special needs of the mining towns.17At the same time the flat-rate fee
failed to extract any substantial part of the profits of successful diggers, making it
a less than optimal revenue-raiser. The fee also taxed those who did not find gold
as heavily as those who did, this inequity being bitterly resented by the former.
The Victorian gold miners made their feelings clear to the legislature:
Who ever heard of such an absurd and unjust tax as the one in question? The
man that obtains no gold is taxed to the amount as he that obtains a
hundredweight! Is this politic, statesmanlike, or just? Is it in accordance with
16. Later reduced to 30 shillings a quarter as the diggings ran out. See Barnard 1962, 252.
17. In a parliamentary inquiry following an unsuccessful 1853 attempt to double the Victorian fee, Governor
La Trobe gave evidence that the cost to the colony of the diggings was 136,000 pounds a year more than
revenue from the licences (Barnard 1962, 261).
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our recognised principle of taxation? There can be but one opinion as to the
mode of levying it; and the sooner it is discontinued the better.
(W. Hall, quoted in Barnard 1962, 260)
Against the miners’ opposition and with only a handful of ex-ruffians as
temporary tax collectors, the tax was also very difficult to administer. 18The
Victorian governor agreed the licence fee was unjust and would have preferred an
export or production tax on gold. However, that was a form of duty; such excises
could only be levied with the approval of the Legislative Council. The Council,
dominated by wealthy, pastoral interests, and described by Shann as ‘a house of
caretakers under notice to quit’ (1948, 142), had declined to raise revenue for
administering the gold towns. The Council saw the gold miners as a threat to the
pastoral industry and to the squattocracy’s power and influence in the colony; it
rather hoped that, if ignored, the miners might go away.
By 1854, however, with the easily mined alluvial gold running out, miners
had grown restless. They were also angry at the often arbitrary and sometimes
insensitive enforcement of the gold licence fee by the brigand tax-collectors. The
prospect of widespread unemployment also started to touch nerves as unsuccessful
diggers began drifting back to the cities.
Political injustices came to fuel the grievances of the miners. Those who had
come to Australia in search of the Promised Land began casting resentful eyes on
the ‘land monopolists’: stump orators compared the cost of licences with the
peppercorn rents paid by the rich squatters on huge pastoral runs. In the battles
in the Victorian legislature, it also became clear that the miners’ lack of political
representation worked against them. The Council obstructed tax reform at every
turn. Before long, miners were demanding ‘a vote in the laws they make’ as well
as ‘a home on the land I till’.
Attempts to enforce the licence fee on the goldfields of Ballarat provoked riots,
rebellion and the loss of thirty lives at the famous Eureka Stockade. In 1855 the
hated ‘tax’ was abolished in Victoria; revenue from the gold licence fee was
belatedly replaced by a gold export tax of 2s 6d per oz., alongside the more
acceptable impost — a miner’s right of 1 pound a year. In 1857 New South Wales
followed suit. These taxes were easier to collect and enforce, more efficient in
impact, and more equitable in incidence. Such a regime would have been better
levied at the start of the gold rush rather than at its end. The gold licence fee was
18. Having only five policemen and forty four soldiers to keep order once the gold rush began, La Trobe had
to make do with a voluntary police force, recruited from ex-convicts from Tasmania and anyone on the
spot who was willing, ‘men of the better type not offering’ (Barnard 1962, 260).
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the first but not the last example of the ‘Devil howling “Ho!”’ — powerful
interests opposing much-needed reform in order to preserve the status quo of
inequity and privilege:
Nature and Nature’s Laws lay hid in Night:
God said: ‘Let Newton be!’, and there was Light.
(A. Pope, Epitaph, quoted in The Oxford Dictionary of Quotations,
London, 1941, 299)
It did not last: The Devil, howling ‘Ho!
Let Einstein be!’, restored the status quo.
(H. Belloc, Answer to Pope’s Epitaph for Sir Isaac Newton, ibid., 26)
The Custom of Protection and Excising Spirits
In Australia ‘the poor man’s tea’ has generally been safer from attack than ‘the
poor man’s beer’ while kerosene, as the illuminant of the man on the land, has
never lacked champions to support the claim that it should be immune from
taxation.
(Mills 1925, 100)
Ironically, while the gold rushes stimulated democracy and cries for progressive
taxation, the increase in population led to expansion of the regressive system of
customs and excise taxation. By the turn of the century, ‘the poor man’s tea’ was
an important part of colonial revenues.
The need for revenues grew substantially after the gold rushes. Governments
not only found themselves with expanded roles in national development
expenditures (Butlin 1959), there were also pressures for new expenditures on
social policy, such as education. At the same time, declining prosperity and falling
imports made revenues from the traditional customs and excise duties increasingly
shaky. Faced with these pressures, a new policy became apparent — higher
indirect taxation. In the circumstances of the time this meant expanding the role
of customs duties.
In the relatively undeveloped colonies of Queensland and Western Australia,
traditional duties generally provided sufficient revenues until around Federation.
In the wealthiest colony, New South Wales, the demands on government revenues
for public development expenditures were deflected onto the capital account; by
selling off the public estate, the pastoralist politicians of New South Wales
deferred the evil day of land and income taxes, while maintaining their morality
through free-trade tariffs only. Without the great expansion of population that
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occurred in Victoria and New South Wales, and with a wider sharing of political
influence, South Australia got by with a modest and occasional resort to
protectionism. This was supplemented by early resort to income and land
taxation.19Thus it was in Victoria, where the population growth was greatest in
relation to land and other revenues, and where direct taxation was fought tooth
and nail by the pastoralists, that taxation through tariffs was most appealing. To
make the policy more palatable to the working classes, on whose broad shoulders
such taxation mainly fell, it was dressed up. High tariffs became an employment
policy to be marketed to the masses by protectionists in the nascent labour
movement.20
The new tax policy raised new problems of tax administration and morality.
Like the later income taxes, protectionist tariffs were described in the Queensland
parliament in 1874 as having ‘serious and grave objections of a moral character’,
as such ad valorem tariffs depended on the importer/taxpayer to accurately value
imports. As importers now had a strong incentive to understate the value of
imports, ad valorem tariffs were accused of contributing to the ‘demoralisation of
the community’.21
Although all the colonies relied heavily on customs duties for revenue, the first
intentionally ‘protectionist’ tariff was in Victoria, where a fiscal crisis led the
government into ‘a revision of the tariff’ in 1866. The main feature of the 1866
tariff was the imposition of an ad valorem duty at a rate of 10 per cent. A wider
range of goods also became dutiable at fixed rates. The level of duties was only
mildly protective and could have been justified as a revenue tariff. However, the
government chose to call it a protective tariff to meet popular demands for tax and
tariff reform (Gollan 1960, 60).22Driven by protectionist sentiments and
19. According to Shann, ‘“fiscal indecision” was the normal state both of leaders and tariff ’ in South Australia
(1948, 271).
20. The instrument of protectionist fiscal policy was an ad valorem tariff; duty was a percentage of an item’s
value rather than levied per unit. The custom of protection was also to levy duties on goods other than the
traditional revenue-raisers — spirits and tobacco — at a level designed to encourage local industries.
Lower levels of excise duties on locally produced equivalents, and a policy of limiting excises to such
necessities as beer, tobacco, liquor, starch and sugar, ensured a margin favouring local manufacture of most
goods (Mills 1925, 80).
21. In Queensland in 1874, the treasurer was shocked to find that even a relatively low ad valorem tariff of 10
per cent had prompted firms in other colonies to furnish false invoices to importers ‘for the purpose of
evading the due payment of duty’ (Mills 1925, 101).
22. ‘Representatives of the gold-field constituencies demanded the abolition of the existing export duty on
gold, and there was an important group of members in the Assembly who, apart from the Gold Duty
question, were anxious to see the enactment of import duties of a protective character’ (Mills 1925, 70).
Obstruction by the pastoralists in the undemocratic Legislative Council meant that the protectionist tariff
was only implemented after a three-year political and constitutional crisis (Gollan 1960, 50–68).
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PA CKING THE PUBLIC PUR SE 19
recurrent fiscal crisis, the Victoria tariff wall rose from ad valorem rates of around
10 per cent in 1867 to the dizzy height of 35–50 per cent by the mid
1890s.23However, rates had been increased sharply on a depressed trade and as a
result of the rise in rates revenues actually fell. This precipitated another financial
crisis and the ad valorem tariff was reduced to around 30 per cent. Victorian
Treasurer George Turner, also to be the first Commonwealth treasurer, was to
replace its revenues with his 1895 tax on incomes.
Victoria’s policy of protective tariffs was bitterly opposed by New South
Wales as well as by free-trading Mother England (Gilbert 1943, 5). As economic
historian Edward Shann reminds us, in New South Wales ‘abundant revenue
from the sale of Crown lands left its rulers relatively untempted by the ease with
which big sums might be raised at the Customs House’ (1948, 271). New South
Wales introduced a model free-trade tariff in 1855, levied on essentials such as tea,
sugar and treacle, as well as coffee, cigars and tobacco; and they were the usual
duties and excises on spirits. As in other colonies, an ad valorem tariff of 5 per cent
was later introduced on most imports. However, ‘the history of Indirect Taxation
in New South Wales during the last thirty years of the nineteenth century... is one
of changes dictated entirely by revenue requirements only’ (Mills 1925, 51). Land
sales under the selection Acts rescued New South Wales public finances from crisis
after the 1870s. By crediting to revenue the money from selling the public estate
under the Land Selection Acts, the colony could trumpet its free-trade ideology
and put off land and income taxation. Although a mildly protectionist tariff
emerged briefly in New South Wales in the 1890s Depression, this lasted only
four years: it was replaced by Reid’s 1895 Land and Income Tax, and a return to
the pure revenue tariff. Even so, in 1900 New South Wales revenue from customs
and excise equalled that from the sale of land (Mills 1924, 204).
In Australia as a whole, the share of taxation in national income had risen to
over 5 per cent by the mid 1890s; in most colonies more than three-quarters of
that was still collected from excise and especially customs duties.24There were
pressures to move away from protecting tariffs and excising spirits, because of their
effect on the cost of living and the burden on the poor. However, the Victorian
custom of protection and import taxation was a habit adopted with enthusiasm
by the Australian federal government from 1901.
By then, with the rising strength of labour in Australian politics, supporters of
the status quo in taxation were retreating to the darker corners of history. Taxes
23. Victorian tariff levels rose substantially in 1871, and again between 1889 and 1893 (Mills 1925, 80).
24. However, average tariff rates ranged from 17 per cent in New South Wales to 47 per cent in Tasmania;
these were offset in varying degrees by local excises (Gilbert 1943, 7).
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were no longer simply to raise revenue for limited public expenditures;
government revenue now paid for more than the care of orphans and upkeep of
gaols. Taxation was now to be an instrument of social reform.
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TAXING FOR JUSTICE
A Government which robs Peter to pay Paul can always depend on the support
of Paul’.
(G.B. Shaw)
Any equitable reform of our fiscal system should include the introduction of
the principles of direct taxation, based on the well-known axioms of Paley and
Adam Smith — that the burden should be born in just proportion to the
ability to bear it, and the advantages enjoyed for which it is imposed.
(NSW Parliamentary Legislative Committee 1859, quoted in Goodwin
1966, 102–3)
As democracy took hold in Australia, established ideas about taxation and the
role of government came under challenge. When customs revenues collapsed
with the 1890s Depression, unbalanced budgets forced direct taxation on the
reluctant Legislative Councils. By Federation most Australian colonies had passed
laws to impose income and land taxes.
This trend to more redistributive taxation reflected developments overseas.
There was, the Englishman Symes noted in the 1890s,
a growing tendency to regard it among the functions of Government to do
something towards redressing inequalities of wealth. The principle of the Poor
Law and Education Acts may be defended on various grounds, but they
evidently involve the idea that the State is in some cases justified in taxing the
rich for the direct benefit of the poor’
(Hurst 1893, 304, in Butlin et al., 1986)
New social spending commitments from the 1860s had added to the existing
demands on Australian colonial governments for public infrastructure spending.
The power of landowning interests was diminishing by the 1890s, with the
emergence in Australia of the political labour movement. Under pressure from
the movement, colonial legislatures turned to direct taxation to raise revenue for
the path-breaking social reforms of the late nineteenth century. Thus the spread
of democratic ideas and political institutions altered taxation as well as fiscal
policies.
21
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Until now, governments had evaluated taxes according to their efficacy in
raising revenue — indirect taxes, levied on the consumption requirements of the
masses, had been the tax plucker’s favourite tool. By contrast, equity was now
becoming more important to taxation policy. The new emphasis on equity
encompassed more than the traditional equity concerns: ‘just taxation’ had
formerly relied heavily on the ‘benefit’ principle — as all benefited similarly from
public policing and defence spending, all should pay similar taxes.
Taxing persons directly rather than indirectly through commodity taxes made
it possible to vary tax liability according to income or wealth, or ability to pay.
This had not become entrenched in English taxation until the 1870s, when,
according to Sabine (1966, 124), the flat-rate income tax ‘was absorbed into the
fiscal system almost in a fit of parliamentary absence of mind’.
When income tax got the nod from the British chancellor of the Exchequer,
the revolutionaries and radicals moved in. They argued for progressive taxation to
reduce income and wealth inequalities. ‘Money is like muck, not good except it
be spread’ (Frances Bacon, quoted in Fraser 1988, 14: 20).
Many now accepted the principle of proportional-rate land and income
taxation. Such taxes made a rich person pay more than the poor by virtue of the
larger income or property. These early direct taxes rarely touched on any other
than the very affluent.
By around the turn of the century taxation policy debate had moved on to
progressively structured taxes with the more sophisticated strategies of
‘graduation’ and ‘differentiation’ in taxation rates. Under this extension of the
progressive principle, those of greater means were now called on to pay not only
more tax, but proportionally more tax than others in relation to their means.
Progressive taxation gained support partly because of its ‘scientific’ basis. A
supposedly ‘scientific’ argument based on marginal utility theory had now been
established which supported tax progressivity (Fagan 1938, in Musgrave & Shoup
1959; Groenewegen 1988). Based on the idea that the value of a dollar of income
or wealth diminishes the more one has, equality of sacrifice in taxation was said to
require progressive taxation.
Accumulated wealth had been the obvious target for higher taxation in
England as democratic ideas took hold.25The idea spread naturally to the
Antipodes. As accumulations of wealth became more apparent in Australia from
the 1850s, there came the first taxes on wealth transfers. These were the easiest
way to tax wealth. Later came land taxes, often with incomes taxes attached.
Unlike in the Mother Country, more sophisticated progressive rate structures
were adopted in some colonies. By the end of the century, most colonies
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‘differentiated’ property income by taxing it at higher rates and some also imposed
‘graduated’ tax rates on incomes, land or estates.
In spite of these legislative taxation initiatives, the rise of democracy did not
quickly overturn the existing structure of taxation. Governments had valued the
old indirect taxes, as we have seen, for their invisibility and their productivity. By
the end of the nineteenth century, these invisible levies had been pushed so high
that they were clearly visible to the workingman. Such taxes were criticised as
‘regressive’ by the single taxers and those campaigning on behalf of the poor. But
at that point taxation became ‘the Fiscal Issue’ of the Federation debates: the
working man was persuaded to tolerate high taxes in the name of protecting jobs
for skilled artisans.
Having plucked the indirect tax goose nearly clean, governments had to make
a virtue out of the fiscal necessity for new taxes. Thus by the turn of the century
colonial treasurers found arguments to justify direct taxation. While indirect taxes
had been preferred for their invisibility, direct taxes were now acclaimed for the
opposite reason. As J.S. Mill had argued to the English establishment:
The very reason which makes direct taxation disagreeable makes it
preferable... if all taxes were direct, taxation would be much more perceived
than at present; and there would be a security which now there is not, for
economy in the public expenditure.
(John Stuart Mill, quoted in James 1981, 178)
The progressive principle continued to spread through state taxes after
Federation. But the politically powerful could still enforce their preference for
customs and excise taxes. They could also dictate the form of new direct taxes.
25. Taxes on wealth were relatively easy to levy, property being difficult to conceal as well as desirable to
flaunt. Wealth was a good measure of ability to pay and provided a reasonable guide to the owner’s ‘fair’
contribution to revenue. Wealth taxes were also something of a ‘benefit’ tax — those with most to lose
from the breakdown of the existing regime benefited most from public spending on law, order and
defence. However, for governments with only limited administrative capability, taxes on wealth transfers
from one person to another were much easier to levy than general wealth taxes. Wealth taxes seek to tax
capital at regular intervals, so regular assessments of the value of assets must be made; this may be
intrusive, as well as imposing a significant ‘compliance cost’ on the taxpayer. As values can be disputed,
wealth taxes may lead to considerable litigation. Wealth taxes may, for such reasons, be costly to
administer. Taxing unrealised as well as realised assets, wealth taxes may require the taxpayer to sell the
asset to pay the tax. (This may operate harshly on those with their entire wealth in one item such as a farm
or home. This feature of wealth taxes has contributed to vehement opposition to any form of wealth
taxation by rural interests, as well as the fact that land represented a significant share of total wealth in
Australia; relatively low and fluctuating rural incomes and the capital-intensity of primary industries
might justify special treatment for primary producers. Double taxation due to the existence of land taxes
was also been cited by farmers opposing wealth taxes, although most rural land was exempted from land
taxes after the second world war.)
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Not till the Commonwealth income tax of 1915 was the previous balance of
indirect over direct taxation revenue reversed. Even then, the political influence
of wealthy landowners left the large pastoralists and graziers largely unscathed by
Australia’s new property and income taxes.
The First Direct Taxes — Duties on Death
While the need of revenue is the motive usually assigned for the enactment of
Probate Duties, the first, at least, of such enactments in a young country may
be regarded as a Parliamentary declaration that a sufficiently high degree of
development and of wealth has been reached to make such duties productive.
(Mills 1925, 83)
The first significant direct taxation in each of the Australian colonies was the
taxation of the estates of deceased persons. Probate duties are the simplest and
usually the first form of death taxes, and Australia was no exception. Probate fees
were fees charged by courts for granting probate or letters of administration on a
will. Originally a ‘user charge’ for registering a property transfer, the level of
probate fees gradually increased to take on the nature of a tax. The ‘tax base’ was
the assets to be administered under the will.
Like taxes on trade such as customs and excise duties, the transfer of estates
was a relatively simple base to tax. The documentation customarily required of the
passage of property at death made it an easy mark. Liberal as well as socialist
reformers could argue that taking a share of an estate was fair. Paying tax on an
inheritance was an exchange for the state protecting and enforcing laws of
property and inheritance. Taxing bequests was also consistent with the feudal view
of all property rights belonging to the Crown. In this sense death duties were
‘benefit taxes’.
Death taxes ranked highly in the newly emerging Australian democracy. Fear
of discouraging wealth creation and accumulation gave death duties a
considerable advantage over other forms of wealth taxation in a newly settled
country. Death duties are a wealth tax imposed just once in a generation on
realised assets only. Wealth is taxed when it is most convenient to value and realise
the assets, if need be, to pay the tax. The effects on the accumulation of capital
and work effort are uncertain. However, they are surely less than most other taxes
on capital or income. Some have even suggested that taxes on inheritance may
increase individual efforts to save and create wealth, as taxpayers are less able to
rely on the efforts of their ascendants. Certainly death taxes inflict on the taxpayer
the least pain of all taxes.
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As people became sophisticated at avoiding death taxes, more sophisticated
taxes were needed. Taxation policy also became more ambitious, and more
sophisticated taxes — estate duties26and inheritance taxes — joined probate in the
death tax procession.27
Initially a revenue measure, from the middle of the nineteenth century death
duties served a wider social purpose — that of wealth distribution. As Francis
Bacon observed, ‘fortunes come tumbling into some men’s laps’ (quoted in Fraser
1988, 13, 21). The liberal democratic case for tax discrimination against inherited
wealth was put by J.S. Mill from the mid 1800s and was well known in Australia
in the second half of the century. Death duties furthered equality of opportunity.
They also encouraged those with wealth to share it in their lifetime, rather than
when death was staring them in the face.
At first death taxes did not apply to real estate. However, by the turn of the
century, realty as well as personal estate was part of the tax base.28The structure of
death taxes also changed to reflect evolving attitudes to marriage and women’s
property rights, by exempting transfers to spouses.29By the beginning of the
twentieth century, most state death taxes were of the estate duty type, although
they were thus rather like succession taxes as rates of tax usually depended on
consanguinity.
New South Wales introduced Australia’s first death duty in 1851 as part of
the move to self-government. At that time, the government took out of the courts’
hands the power of setting probate fees. A new law fixed a schedule for probates
and administrations. As the taxes got more sophisticated, administration got more
26. Estate duties differ from probate duties by including in the tax base the ‘notional’ estate of the deceased as
well as the actual. Notional estate includes property over which the deceased has some or all characteristics
of ownership. (Modern gift duties levy transfers of property to another person during the taxpayer’s
lifetime. They go hand in hand with estate duties, preventing death-tax avoidance by transfers ‘in
anticipation of death’.) On the other hand, succession duties, inheritance taxes and legacy duties are
calculated according to what a person inherits from the dead person.
27. Inheritance taxes, succession duties and legacy duties were forms of death taxes designed to increase the
number of recipients of bequests, being levied on the amount inherited rather than the undistributed
estate. In the case of inheritance taxes, the tax may depend on the financial status of the inheritor. Some
taxes of this kind have different rates of tax for different categories of beneficiaries, such as near relatives.
Such taxes could also be instruments for furthering other social objectives, such as encouraging husbands
to make adequate provision for their surviving family.
28. Often in the nineteenth century duties on estates only covered personal property, and not ‘real’ estate.
Tied up with the question of taxing real estate was the existing law of inheritance and, in particular,
primogeniture. Land passed by the father to the eldest son was initially not subject to estate duties under
English laws. As the principle of primogeniture came under challenge, this gradually became part of the
tax system there despite strong opposition from the landed gentry. As laws intended to preserve
inheritance by the first born son were replaced and the political influence of landowners waned from the
middle of the nineteenth century, real property came to be treated the same as personal property in
English and colonial Australia’s taxation laws.
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complex. The wider tax base also made it more likely the tax would overlap with
other levies such as stamp duties on transfers of property. By 1865, the New South
Wales government felt it necessary to try to simplify existing death duties,
introducing the Stamp Duties Act.30Later amendments to this Act got caught up
in a political crisis in 1874.31The New South Wales death tax then languished
until 1886. At that time the need for revenue produced a rise in rates. It also
resurrected the graduated tax structure.32
Labelled a succession duty, the first death tax in Tasmania came in 1865.
However, to pass through a parliament dominated by landowners, the tax applied
only to personal property. It did not touch ‘realty’.33It was not until 1894 that
landowners paid probate duty on their estates. The Tasmanian treasurer was well
aware of the special interests opposing his reform. He justified the policy thus:
no doubt the same forces there stood on the defence for realty, when it was
threatened with a tax as had been marshalled against it here34 . . . In
consideration of what the State did for an individual who inherited property,
there would be ample reasons why the State should claim a small share of such
inheritance. The State carries out the intention of the deceased person, protects
29. The design of death taxes in all states was complicated by the issue of marital property rights and the
transfer of property to the surviving spouse and children. In those days married women’s property rights
were very limited and widows did not necessarily have any legal entitlement to their husband’s estate.
However, the law regarding matrimonial property was undergoing steady reform in line with the evolving
concept of equality for women and joint ownership of marital assets. On this view, the spouse of the
deceased is deemed to have an equal share of an asset because it was marital property. In this case part of
the estate should not be subject to estate taxes, being actually the property of the surviving spouse
(assuming that the objective of the tax was intergenerational transfers of wealth not wealth transfers per se).
A similar effect was achieved by, for example, the New South Wales’ Act of 1886. This levied widows (and
children of the deceased) at half rates. Similarly, the Victorian duty of 1870 applied concessional rates to
immediately family as distinct from ‘strangers in blood’, although the rates were more complex than in the
later New South Wales tax. The South Australian Act of 1893 also indicated a strong legislative interest in
influencing the pattern of bequests, with special rates for various categories of relatives (widow, ancestor,
descendant, sister, nephew, etc.) as well as for non-relatives. For example, ‘direct issue and ancestors’ might
be taxed at lower rates than ‘strangers in blood’. There was, however, a wide diversity of rates between the
states for different degrees of consanguinity.
30. This incorporated existing stamp duties which, like probate fees, were fees for validating legal documents
and contracts. Whether this succeeded in rationalising death taxes appears debatable — according to
Mills, ‘simplicity gave way to complexity. Some influential but undiscriminating admirer of the jumble of
Acts relating to Probate, Legacy, and Succession Duties then on the British Statute Book appears to have
thought it would be a good thing to have all the complex provisions for those Acts brought together in one
Statute, and a complacent Parliament allowed this to be done’ (Mills 1925, 56).
31. No probate or similar duties were thus in force in New South Wales from then until 1880. The Stamp
Duties Act of 1880 resurrected death duties but levied only very low rates of duty at a single flat rate. This,
according to Mills (1925, 59), was because the treasurer did not need much revenue, times being
prosperous.
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the property, and hands it over to the heirs as directed, and carries out other
duties, which clearly entitles it to some percentage.
(Hobart Mercury, 28 March 1894, quoted in Mills 1925, 185–6)
Meanwhile, in Victoria the first tax of the dying kind emerged in 1870. As in
New South Wales it levied estates, at graduated rates, and included both the real
and personal estates of deceased persons.
South Australia introduced its probate and death duties in the one Act, with
the Probate and Succession Duties Act in 1876. In 1893, the probate duty was
abolished. However, succession duty remained, the view of the parliament being
that ‘a man should leave his property to several persons instead of one only’ (Mills
1925, 140). The 1893 schedule of succession duties remained in force well past
Federation.
In Queensland, a death tax emerged in 1886 from existing stamp duties of 1.5
per cent on transfers of personal estates. This Act, the Succession Duties Act,
brought real estate into the tax base for the first time in that colony. 35
The Western Australian gold rushes produced the first death duties there, to
pay for gold town facilities such as piped water. Until 1895, the young colony had
not had enough inherited wealth to tax.36As the attorney-general explained at that
time:
We have hesitated to introduce a measure of this description, because we thought
the amount to be collected under it would be rather small, and up to this year
the Bill would be premature. Now that people have grown richer and have
money to leave behind them it may be well to try and get a little revenue...
(Mills 1925, 160)
32. The latter was most controversial; graduation, said its opponents, was ‘a bad system in every country, and
in every age’ (Mills 1925, 59). Nevertheless, the progressive principle survived and was retained in
subsequent Acts. Rates ranged from 1 to 5 per cent. Rates of duty under the 1899 Probate Duties
(Amendment) Act ranged up to 10 per cent of the value of estates above 100,000 pounds.
33. Making it more like a legacy duty. The two forms of duty were in effect combined in a complex duo of
Acts relating to various types of property introduced in 1903 and 1904.
34. In Britain it was not till 1894 that death duties applied to inheritance of land.
35. Strictly speaking, the 1886 succession duty was a probate duty — duty was on the value of the whole
estate, not the succession passing to each individual. This error was partly redressed in a 1892 Act. This
law added a flat-rate probate duty to the duties in the Succession Duties Act 1886, increased the rates of
‘succession’ duty and called the result the Succession and Probate Duties Act 1892. Queensland retained this
Act and associated schedules for well over a decade. Rates of ‘succession’ duties in the 1893 Act ranged
from 2 per cent to 10 per cent, on total estates valued at 200 pounds or more, rates being halved for estate
passing to widow or children, but doubled for ‘strangers in blood’. In addition, a probate duty of 1 per
cent was payable on estates of 300 pounds or more.
36. There had been, however, a 1 per cent stamp duty on land transfers, which partially taxed estates.
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Strangling the Goose — A Single Tax on Land
Sponsors of land tax were content to lose the golden egg provided it strangled
the goose.
(Gilbert 1943, 65, quoting Garland 1934, 160)
In nineteenth century Australia, wealth and economic power were visibly
connected with control over land. Since the first settlement of convicts at Botany
Bay, land was assumed to belong to the Crown, pushing aside the complication
of prior Aboriginal ownership and occupation.
In the predominantly rural economy, the major form of wealth was land
ownership. Large scale immigration into Australia led to early recognition of how
population and community growth enhanced land values (Mathews 1992, 1).
Land taxes were advocated as early as the 1840s (Goodwin 1966, 103; ElseMitchell 1974, 10).37
However, ineffectual land policies allowed the speculative accumulation of
land in a few hands to continue. By the 1870s, much of the best public land in the
colonies had passed to private freehold title at bargain basement prices. Over this
period, in fact, land policy had been ‘a shield behind which pastoralists, through
their domination of the colonial legislatures, converted their tenure from freehold
to leasehold’ (Clark 1979, 15).
By the 1870s, sentiments such as ‘land rights belong to the people’ had
became common. By then the pastoral monopoly was a major barrier to closer
settlement and was hindering the expansion of agriculture in the Australian
colonies (Garland 1934).
There was strong public discontent about the wholesale alienation,
aggregation and speculative holding of land. In 1870 a prize-winning essay on
New South Wales land policy, The Future of Land Policy in New South Wales,
described public feeling thus:
In this colony no question has been more largely discussed than that relating
to the administration of the public lands. There is none out of which more
37. As early as 1835, a land tax was advocated as a means of abolishing customs duties on imports in
Tasmania. ‘The whole of the colonial revenue ought to be chargeable upon the land: by this means the
ports of the colony would be free in every sense... and in the establishment of a new Colony such a
property tax may well be enforced without any difficulty’ (Henry Melville, The History of Van Dieman’s
Land, 1835, quoted in Else-Mitchell 1974, 10). By the 1870s, when massive public expenditure on
railways was pushing up property values, land tax also had a particular logic as a source of government
revenue. The first South Australian tax on land was ear-marked for spending on public works (Mills 1925,
144).
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political capital has been made — none in regard to which cant has been more
potent. Men have magnified small grievances, and shrunk from providing a
remedy for great ones. They have mourned over others which were merely the
creations of fancy or the subterfuges of ambition. Politicians have fought, and
the country has suffered. Noise and clamour have often drowned the voice of
reason and prudence.
(S. Cook, quoted in Else-Mitchell 1974, 8)
With no guarantee that a fair price had been paid for Crown land during the
‘fire-sales’ of the previous decades, it is not surprising that land taxes were some of
the first taxes proposed by the popularly elected assemblies from the 1870s. All
Australian colonies introduced taxes on land between 1877 and 1915. Revenue
was an important motive for the taxes. In some colonies diminishing revenues
from land sales forced land taxes on unwilling treasurers. In others, the occasion
was a fall in customs duties. However, an important feature of the colonial land
taxes was that revenue was not the only motive — the logic of these levies was
that the perfect tax would raise no revenue — the plucker would strangle the
goose.38
In fact the original colonial land taxes were mainly concerned with
development. The land taxes were primarily to ‘unlock the land’ for closer
settlement and agricultural development by the small man (Else-Mitchell 1974,
26; Mathews 1992, 1). As the century drew to a close a more radical objective
became apparent: forcing the land monopolists to ‘burst up’ their estates might
reverse the concentration of landed wealth that had occurred over previous
decades. In this sense Australia’s early land taxes were also tools of social justice
and wealth redistribution.
In other countries such as Britain, land taxes were levied on improved or
capital values of land. However, colonial reformers were understandably nervous
that such traditional land taxes might reduce incentives for wealth creation and
accumulation. As Catherine Spence, Australia’s first female candidate for political
38. As a tax which fully captured the unearned increment would reduce the unimproved value of land to zero,
the tax being borne by the landowner and capitalised into its value. To the extent the progressive land taxes
were successful in their aim of breaking up large estates, land moved out of the taxable range and revenues
would also diminish. There was therefore an intrinsic contradiction between fiscal concern for the
maximum revenue and more general policy objectives of encouraging the subdivision and development of
land. However, which took precedence was clear. Members of the Australian Economic Association did
their own sums: one estimate was that a single tax on unimproved land values would require a tax rate of
84.5 per cent to replace existing state revenues (A. Forsyth, ‘Land Taxation and Nationalisation’, The
Australian Economist, 1(11) March 1890, 1–6). It is clear from discussion at the time such taxes were
enacted, however, that the policy objective of compelling subdivision took precedence over revenue.
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office, argued in opposition to land taxation: ‘Capital is a beneficent genius, but
she is shy, and can easily take wings and fly from land to land’.39
Reflecting such concerns, Australia’s nineteenth-century land taxes were
distinctive in targeting unimproved — rather than capital — land values for
taxation. This approach can be traced to the influence of classical economists and
reformers such as J.S. Mill on taxation policy in the colonies.40From the late
1880s, the preachings of American single land taxer and social reformer Henry
George propelled the colonies in the same direction.41
According to the former, a proportional tax on unimproved land values was
just. It was, after all, an ‘unearned’ increment, arising from the growth and
progress of the community rather than from individual effort or
enterprise.42Reformers such as Mill considered that, as in the case of inheritances,
the government could justifiably tax such windfall gains. Land supply being fixed,
the tax could not be shifted to tenants or evaded by leaving land idle. 43Unlike
traditional land taxes, which discouraged improvements, taxes on unimproved
values might even improve the efficiency of land use by penalising speculative
holdings.
Taxing the ‘unearned increment’ was advocated with religious fervour by
Henry George, for rather different reasons. Like the classicists, George viewed
such a tax as levying ill-gotten land gains rather than hard-earned accumulations
of capital. However, he saw the land tax as the essential ingredient in his recipe for
progress without poverty. His proposal for a single tax on the unearned increment
in land value was an ethical as well as political issue. George argued that all
39. She continued: ‘And if by over-taxation of the wealthy we make the colonies distasteful to those whose
present interests are so strongly bound up in their prosperity, they and their property — all but their land
greatly reduced in value by their absence — would take their departure for a newer or an older country,
and the loss would be ours rather than theirs’ (quoted in Goodwin 1966, 125).
40. Pronouncements on land theory and the justification for taxing the ‘unearned increment’ in land value by
classical political economists Smith, Ricardo and Mill were already well known in Australia by the 1860s
(Goodwin 1966, 101). The ‘unearned increment’ was a concept based on Ricardo’s long-run theory of
land rents. Land being in fixed supply, Ricardo argued, the return to land — ‘the original and
indestructible powers of the soil’ — would rise faster than returns to other factors of production, such as
labour. Thus the unimproved value could justifiably be taxed, with the tax would be borne by the
landowner, rather than passed on to tenants. If the tax was on unimproved values only, it would not
discourage land improvements. On this basis much influential economic thought in the nineteenth
century favoured taxation of land ‘rents’ (Groenewegen 1979, 9). Although dismissing Ricardo’s concerns
about the problem of how to determine the unimproved component of land value, and possible adverse
incentives to land improvement, Mill followed Ricardo in advocating a tax on the unearned increment in
the value of land. Mill was particularly influential in Australia, pointing out the magnitude of unearned
increments benefiting landowners in such countries of recent settlement. He argued that the tax was well
suited to young countries because, unlike in established communities, the introduction of a land tax
inflicted no loss on existing landholders (Groenewegen 1979, 9).
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economic progress eventually found its reflection in land values. Hence a single
tax on land was sufficient to tax equitably all sources of economic power. 44Any
other taxation confiscated the fruits of individual effort. This was unethical,
amounting to stealing. A single land tax would allow all such ‘confiscatory’ taxes
(and here he included customs and excise duties, as well as income or wealth taxes)
to be abolished.45
As individuals come together in communities and society grows, integrating
more and more its individual members, a value is created by the community
as a whole, and which attaching to land, becomes tangible, definite and
capable of computation and appropriation. As society grows so grows this
value, which springs from and represents in tangible form what society as a
whole contributes to production, as distinguished by what is contributed by
individual exertion... here is a fund belonging to society as a whole from
which, without the degradation of alms, private or public, provision can be
made for the weak, the helpless, the aged; from which provision can be made
for the Common wants of all as a matter of common right to each... by making
land private property, by permitting individuals to appropriate this fund
which nature plainly intended for the use of all, we throw the children’s bread
to the dogs of Greed and Lust; we produce a primary inequality which gives
rise in every direction to other tendencies to inequality; and from this
perversion of the good gifts of the Creator, from this ignoring and defying of
His social laws, there arise in the very heart of civilisation those horrible and
monstrous things that betoken social putrefaction.
(George, quoted in Clark 1979, 14–15)
41. While not the first nor even most influential advocate of unimproved land value taxation in Australia,
Henry George gained an extensive popular following in Australia from the late 1880s (Else-Mitchell 1974,
10–16; Mathews 1992, 3; Goodwin 1966, 101–22): he galvanised many with reformist aspirations into
political action following his visit to Australia in 1890 (Else-Mitchell 1974, 16; Goodwin 1966, 114). In
his widely read book, Poverty and Progress, George argued that land ownership in private hands was the
root of poverty in society; because the supply of land was fixed, landlords appropriated the unearned
increment in land values, and economic progress as reflected in rising land values was at the expense of the
rest of society. Basing his argument on Ricardian land theory, George advocated taxing the increased value
of land due to community growth — the ‘unearned increment’. However, in spite of their influence in the
decades immediately before and after Federation, the Single Taxers came to be isolated as a political force
by their dogmatic adherence to the single tax doctrine.
42. The case for taxing the unearned increment in land value was part and parcel of the general case for taxing
capital gains (Prest 1983, 12).
43. However, as Garland (1934) demonstrates, the actual incidence of the land taxes depended on climatic
and other factors affecting its potential for subdivision. Seligman — author of the seminal work on tax
incidence — pointed out that if the tax was not part of a wider system of property taxes, landlords could
shift the tax (1900, 91).
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Land taxation also gained prominence during the 1890s because of the spread of
socialist thought and the popular reaction against the pastoralists after the
shearers’ strikes. Unlike the classical economists, who accepted only proportional
rates of taxation, these labour advocates of land taxes favoured graduated rates of
tax. For them, the redistributional objective of land taxes were paramount, and
progressive rates gave even further encouragement to large landowners to
subdivide their land — perhaps even beyond the point where it was economic to
do so. Allowing a generous exemption from taxation for holdings of lower value
also spared the small man from the exactions of the tax.
This was where the labour movement parted company with followers of
Henry George. Progressive rate structures and exemptions were an anathema to
the latter — making the taxes into confiscatory levies on individuals or property
rather than on the unearned land increment.
Unlike in other countries, however, the land taxes introduced in the late
nineteenth century were conceived more as income taxes than property taxes of
the American kind. They were part of wider schemes of income taxation and were
to be paid from the income accruing to land, rather than by eroding the original
capital. As the weaknesses in their design became apparent in subsequent decades,
there were claims — some accurate — that land taxation was double taxation.
Nevertheless, the original land taxes on unearned increments were intended as
complements to the income tax, levying taxability that the latter could not reach
or did not effectively tax.46Reflecting this complementarity, Tasmania’s first land
tax accompanied a scheme of dividend and rent taxation. In South Australia, New
44. While Labor men such as Holman supported land taxation, they did not necessarily agree with George’s
view of the problem. For the latter, the land monopoly was more fundamental than the capitalist
monopoly of production: ‘To George, man and life were meaningless without land; man was a very part of
the earth and to take away from man all that belongs to man would leave him but a disembodied spirit’.
However, influential figures in the labour movement argued that concentration of capital ownership also
impoverished the working classes. As the Australian Labor Party was trying to widen its appeal to ‘the
petty capitalists of the countryside’, it was antagonised by the Georgist rejection of progressive rates and
exemption provisions in land taxes. Labor’s land taxes, with progressive rates and high exemption levels,
were condemned by the doctrinal Georgists as confiscatory and unethical. In the bad books with both
free-trader landowners and protectionist land taxers, the Georgists had become isolated politically by
1910. By then the Victorian and Commonwealth land taxes had been implemented by Labor
governments, and the protection/free trade issue ruled Australian political alignments.
45. In this he gained a considerable following from the free traders, such as Henry Parkes, who wished to see
customs duties — the main existing taxes — abolished. There were also hopes among some labour
reformers that the tax might replace indirect taxes because such taxes were a particularly heavy burden on
the working classes. However, the Labor protectionists, who came to dominate the movement, did not
agree with the single taxers’ call to abolish tariffs. At the same time, land-owning free traders were offended
by the single taxers unrelenting advocacy of land taxation.
46. As time passed double taxation was possible and was indeed to occur (Mathews 1992, 15).
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South Wales and Western Australia, land tax came in tandem with general income
taxes. But for the strength of opposition of ‘Devils howling Ho!’ in the Legislative
Council, Victoria’s 1895 income tax would also have included a land tax (Mills
1925, 90).
Victorian radical protectionist Sir Graham Berry had been responsible for the
first Australian land tax in 1877. The tax sparked open political warfare between
the Legislative Council, dominated by landowning and commercial interests, and
the more democratic Assembly (Gollan 1960, 59). Berry’s tax was part of a
package to rationalise and hold down the tariff. The tax was also introduced to
offset diminishing revenues from land sales in Victoria. According to its
proponents, the Landed Estates Tax Act was a tool for ‘breaking up the great
estates’ and taxing the land monopolists. However, unlike later colonial land
taxes, the Victorian land tax was a capital tax, levied on productive capacity or
rental value. This made it a land tax of the traditional English type. However, it
had a distinctly pastoral touch, assessing land for taxation according to the sheepcarrying capacity.47In spite of its idiosyncrasies, the Victorians retained their 1877
tax in this form until 1910.48
Finding itself in dire financial straits, Tasmania was the next Australian colony
to introduce a land tax, in 1880. The Real and Personal Estate Duties Act imposed
the tax. (This Act also brought Australia’s first income tax, albeit a partial one, on
company dividends and rents.) As in Victoria, this early Tasmanian land tax was
on capital, or annual rental value. Aware of the benefits of taxing only the
unimproved value of land, the penurious Tasmanian government was constrained
by its need for revenue:
If it were possible to realise revenue enough from the unimproved capital value
of land to meet all requirements of the Colony, [ministers] would be content
to levy a tax on that and on that alone, but it would be utterly unfair to place
so heavy a tax on the unimproved value of land as would yield sufficient
revenue.
(Hobart Mercury, September 12, 1880, quoted in Mills 1925, 189)49
47. The tax was charged only on large country lands. Land carrying less than one sheep per acre had a value of
one pound, that carrying two or more was deemed worth four pounds. All was taxed at 25s for every
hundred pounds of capital value above 2,500 pounds. This amounts to a tax assessed on the productivity
or capital value of land, rather than on unimproved land values as suggested by the theories of Ricardo,
Mill and Henry George. It reflected the traditional English method of taxing land.
48. In that year, the Holman Labor government introduced a tax on unimproved land values, bringing it into
line with other states and the Commonwealth land tax. Unlike the latter, however, it was levied at a flat
rate, rather than at graduated rates.
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South Australia introduced Australia’s first tax on unimproved land values in
1884. South Australia was less inhibited than the eastern colonies by a
‘squattocracy’, and it was severely pressed for revenues. A budget deficit of half a
million pounds, equalling perhaps 6 per cent of the colony’s total product, helped
persuade the landed classes to accept a property tax. The South Australian
treasurer balanced his land tax with a levy on trade, the professions and invested
capital: an income tax (Driesen & Fayle 1987). In the liberal tradition, the South
Australian land tax was a flat-rate tax, levied on unimproved values. Unlike other
Australian land taxes, the South Australian land tax applied to virtually all land in
the colony.50
In New South Wales, opposition from property owners in the Legislative
Council prevented the passage of the 1886 Land and Income Tax Bill. This
delayed such taxes for a decade in that colony. After unsuccessful attempts to pass
legislation in 1888 and 1894, a general election in 1895 returned Sir George Reid
with a clear mandate to introduce land and income taxation. This tax reversed the
New South Wales customs duties increases in the early 1890s. Even so, Reid’s
land tax only emerged after it had been emasculated by extensive exemptions and
deductions.51Some exemptions were concessions to farming interests (for
example, the exemption of vast areas of Crown pastoral leases acquired under the
Selection Acts). An exemption was also allowed for small landholdings, conceding
to the increasing influence of Labor in New South Wales politics. Such
concessions were bitterly opposed by the Georgists. They were also strongly
criticised by those adhering to the ‘unearned increment’ rationale for land
taxation. Indeed, Andrew Garran, then a member of the New South Wales
Legislative Council, argued that,
... if a Land Tax is proposed as a charge on the unearned increment that is,
on the increase of the value of the land since it became private property the
49. Reflecting its low fiscal capacity, Tasmania retained capital value as the land tax base for many years,
although it introduced a progressive rate scale in 1905.
50. Even in the 1970s, the South Australian land tax had fewer exemptions, and was levied at a lower rate,
than in other states (Neutze 1977, 312.) An amending Act in 1894 introduced an additional tax of one
halfpenny on land valued above 5,000 pounds, essentially making it a graduated tax. See Official Year Book
of the Commonwealth of Australia, no. 2, 1909, 835. The South Australian land tax — the first Australian
tax on unimproved values — was well integrated with its income tax. Under the South Australian income
and land tax of 1884, tax was levied on the unimproved value of all land in the colony, with no exemption
level. Income from land was generally exempt from the income tax of 6d in the pound. However, income
tax was levied on rental income exceeding 5 per cent of the capital value of the land (Mills 1925, 144).
51. Such complications helped raise its collection costs to 10 per cent of revenues.
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exemptions are opposed to the economic doctrines on which the tax is based,
and are only defensible as a political dodge.
(Mills 1925, 64)
Reflecting the compromises in its drafting, revenue yield from the New South
Wales land tax was dismal, and the aggregation of estates continued unabated
(Clark 1979, 27). Nevertheless, the tax was successful in its primary object,
increasing land under cultivation especially after the 1906 Local Government Act
extended the effective reach of the tax.52
Vocal howling devils in the Western Australian Legislative Council stymied
the first three attempts to introduce a land tax there (Driesen & Fayle 1987).
However, in 1907 the collective mind of the legislature was sharply focussed on
the issue by the state’s fiscal crisis. After Western Australia’s special tariff expired
in 1906, the state faced a massive 300,000 pound budget deficit. 53The tax forced
on the landowners mimicked the now conventional Australian land taxes of New
South Wales and South Australia.54Outraged by the new constraints on its fiscal
choices, the state parliament passed its first but not last resolution to secede from
the Australian Commonwealth.
In Queensland, where secession was also in the air, land tax took even longer.
Indeed, the political influence of landowners held off a land tax for more than
forty years from when the tax was first debated in the legislature (Mills 1925, 125).
Attempting to raise revenue from a land tax in 1890, the Morehead government
had lost office. Land taxation in Queensland was thus delayed until 1915, by
which time Labor had became a power in Queensland politics. Scanning the work
of the more quick-footed colonies, the Queensland parliament went the whole
‘socialistic’55hog with its land tax. Its tax was a progressive tax on unimproved
52. An authoritative study by New South Wales Statistician Sir Timothy Coghlan concluded that it had forced
much unproductive land into use without producing any slump in land values. He observed that ‘the
people of New South Wales are well satisfied at the change that has taken place and the holders of idle land
do not complain as they perceive that the remedy for a condition of which they may be tempted to
complain lies in their own hands’ (T.A. Coghlan, Taxation and Rating of Land in NSW, in Papers Bearing
on Land Taxes and on Income Tax in certain foreign countries and on the Working of Taxation of Site Values in
certain cities of the U.S. and Canada, London, 1909, quoted in Clark 1979, 26).
53. Because Western Australia relied almost totally on customs duties for revenues, and because of the
relatively high per capita contribution that it made to national tariff revenues at Federation, the state was
particularly disadvantaged financially by Federation. Hence, although the new federal government was
allowed exclusive power to levy customs and excise taxes, the states also agreed Western Australia could
levy its own tariffs on goods from other states for a further five years. Revenues from Western Australia’s
special tariff ended in 1906.
54. It came packaged with an income tax, was levied on unimproved values, at a flat rate, and was only applied
above a low threshold level of value. Reflecting the importance the state placed on revenue, the tax set an
exemption of 50 pounds. This compares with the 200 pound exemption common in other states.
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values similar to the equally socialistic Fisher land tax of 1910.56Perhaps reflecting
the need to compromise, the tax made a substantial concession to the cattlemen
and local squattocracy, excluding the vast tracts of leased pastoral land owned by
the rich and powerful of Queensland politics.
In spite of their common origin and purposes, these colonial land taxes varied
considerably in their incidence and effect (Garland 1934, 127). The proportional
taxes, and those with low exemptions, would have been amortised in land values
and borne by landowners when the tax was introduced or increased. For the
progressive taxes, the story is more complex. Falls in the value of land suggested
progressive taxes failed their mission of breaking up the estates: this amortization
of the tax signalled landholders had been trapped by the impracticality of
subdivision and had to take the tax on the chin. Because of the different design of
the taxes, there were important inequities between landholders with similar value
land in different states. Before long, taxes on unimproved land values were
duplicated by local governments in the form of municipal rates (although these
levies were more akin to benefit taxes or user charges than levies on unearned
increments). The overlaps with colonial income taxes also produced their own
problems. But, regardless of objectives or impact, the colonies were well pleased
with their land taxes. By the turn of the century Australia’s distinctive land tax
design was firmly inscribed in the tax landscape.
Income Tax — A Tax on Public Extravagance or the
Work of the Devil?
Necessity drove us to the income tax in 1842, and necessity has attached us to
the use of it. When I use the word attached, I mean not as a bridegroom is
attached to his bride, but as a captive is attached to the car (sic) of his
conqueror.
(British Chancellor of the Exchequer Gladstone, Hansard, 12 November
1861, quoted in Sabine 1966, 81)
From small and tentative beginnings, income tax has endured to become
Australia’s single most important tax. A mere 7 per cent of taxes before
55. The definition of ‘socialism’ given by the editor of the Banking and Insurance Record was: ‘every doctrine
which teaches that the state has a right to correct the inequality of wealth which exists among men’ (21
August 1903, quoted in Clark 1979, 29).
56. The tax began at 1d in the pound for land valued at less than 500 pounds, and rose to a maximum of 6d
in the pound for values above 75,000 pounds.
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Federation, it was over half of tax revenues by the late 1980s. By then it singlehandedly provided three-quarters of Commonwealth taxation.
Unlike in Britain, Australia’s first income taxes were not introduced to pay for
wars. Income tax in Australia was born of a different kind of battle — financial
and budgetary crisis. After the gold rushes, colonial budgets were swollen by
democratic pressures for more spending. Resisting the widely franchised
Assemblies’ proposals for income and land taxes were the less democratic
Legislative Councils. These were dominated by property owners and commercial
or professional interests. Naturally enough, these groups objected to popular
demands for new taxes — ‘the people’ voting for taxes which they themselves did
not have to pay.
However, even in less prosperous times, falling revenues from import duties
had squeezed colonial budgets. The poorer, economically precarious colonies,
such as Tasmania and South Australia, had boarded the income tax carriage early,
in the 1870s. Major financial crises in the 1890s Depression forced even the
wealthier colonies to abandon their scruples about income tax. Even so, it took
budget deficits of 6–7 per cent of output to attach the powerful interest groups
opposing the measures to the income tax carriage.57
Again departing from Britain’s experience, Australian income taxes were
married to land taxes in most of the colonies.58If the taxes were conceived as twins,
however, the union was not always successful. As we have seen, landowning
interests laboured hard to ensure that any land tax was either overdue, miscarried
or stillborn.59
Tasmania, perpetually short of revenues, introduced the first Australian tax on
income — albeit a partial one — in 1880. It took the form of a withholding tax
on the distributed income of companies. The indigent island state thereby laid the
first piece in the income tax mosaic. Also captive to financial necessity, South
Australia succumbed to the pecuniary charms of an income tax in 1884. In this
case, however, it was a general income tax (along with a tax on land). By 1907, all
57. In Queensland, the colony where the deputy premier doubled as an official in the Pastoralists’ Association
during the 1890s shearers strike, even a fiscal crisis on such a scale in the early 1890s did not overcome the
squatter parliamentarians’ antagonism to direct taxation.
58. New South Wales had its 1895 Land and Income Assessment Act, as did Western Australia (Land and Income
Tax Act 1907). Tasmania disguised its first income tax in the Real and Personal Estate Duties Act 1880,
which also levied a land tax. So too did South Australia, although its unassuming Taxation Act 1884
initiated a general scheme of income taxation as well as a land tax.
59. In most colonies, Legislative Councils stalled income and land taxes for at least a decade. In Victoria and
Queensland, landed interests managed to prevent the new taxes on land values until a decade or more after
Federation.
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Australian states had tied their future, for better or worse, to the income tax
chariot.
South Australia’s reason for introducing income tax was primarily economic
and budgetary distress. It also reflected the government’s desire to avoid raising
customs duties to a protectionist level.
The South Australian income tax applied its tax to individuals, rather than
households. This approach implicitly acknowledged that married women had
separate legal rights to income and property.60It was an unusual break with
traditional tax practice. British tax laws classed married women along with
‘infants, lunatics, idiots and the insane’ (Asprey 1975, 6) and included them in
their husband’s tax return.61The explanation for the South Australian act of daring
was perhaps the coincidence of its Taxation Act with reforms giving married
women rights to own property.62Other colonies and then the federal government
adopted this practice.63
The South Australian tax of 1884 was designed according to the liberal
conception of progressive taxation policy then current in England. The doctrines
of those such as J.S. Mill were increasingly reconciled to ‘differentiation’ —
levying higher rates of taxation on ‘permanent’ incomes (from owning capital or
property) than on ‘precarious incomes’, those from personal exertion in
60. The South Australian Income Tax Act of 1884 also included a novel provision acknowledging what has
remained to the present day a difficult problem of equitable income taxation. Under the Act, taxable
income was calculated as the average of income over the previous three years, rather than on the previous
year, as remains the case for most income tax systems and taxpayers. Various averaging provisions were
attempted in the years to come to tax those taxpayers with unusual variations in their year-to-year incomes
on something more closely aligned to their usual, ‘permanent’ income, rather than annual income.
However, such well-intentioned provisions often gave rise to significant opportunities for tax avoidance, as
the timing of deductions or income was manipulated to the taxpayer’s considerable advantage. By the late
twentieth century, it was mainly primary producers who retained the privilege of being taxed on
something resembling their permanent income under income averaging provisions.
61. There, a woman’s income was deemed to be ‘stated and accounted for by her husband’. The English
common law rejected the concept of community of property of man and wife. ‘At common law, upon
marriage the legal personality of the wife in many respects merged in her husband and they became one
person. During the marriage, the husband acquired an estate in his wife’s lands and became entitled to the
whole of the rents and profits thereof. His wife’s movables became the sole property of the husband. The
wife had no power of disposition over property for her own benefit without her husband’s concurrence.
The husband could dispose of his wife’s lands for the estate which he held therein and which was liable for
his debts in his lifetime. During the marriage the wife could not enter into a contract on her own behalf.
Without the wife’s concurrence the husband could sue for and recover all debts which were due to her...’
(Asprey 1975, 3). It was natural, then, that when the first direct taxes were introduced in England, a
married women was not taxed personally but thorough the ‘head of household’, her husband. Her income
or property was aggregated with her husband’s to assess tax owing. The 1935 Law Reform (Married Women
and Tortfeasors) Act provided that any married woman was capable of acquiring, holding and disposing of
any property in all respects as if she were a single woman. However, this change apparently escaped the
notice of the English taxation authorities, which continued the principle of joint taxation until recent
times.
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employment (Sabine 1966, 141). However, ‘graduation’ — marginal rates of
income tax rising with income — was still very controversial. Under the influence
of such liberal tax philosophies, the South Australian tax was levied at a flat rate
on income above a certain level. However, the rate on property income was twice
that on income from exertion.64The exemption level of 300 pounds was also well
above the level of most wages and salaries, so that the tax touched only very high
income earners.
Exempting wage and salary earners from income tax did not merely reflect
contemporary views on tax justice. It was also based on administrative reality.
Taxing incomes is an art, best practised on the obviously wealthy and preferably
on the compliant. Extracting an annual income tax payment from the general
population, with small and often precarious incomes — the day-labourers, the
shearers or the shop assistants — was an administrative skill not yet acquired by
colonial tax offices. Indeed, in Queensland, the government excused the absence
of a general income tax by arguing it was unable to enforce one:
The Income Tax to be fair must be a general tax. If we were to impose such a
tax now, the honest man would declare his income and would pay on it, but
the dishonest man would not pay. We might be able to collect an Income Tax
in Brisbane and in the large towns, but who would go all over the country to
ascertain the incomes of the people? Have honourable members any knowledge
of the machinery in England for collecting the income tax?
(Mills 1925, 105)
Associated with a long political struggle over the ‘fiscal issue’, New South Wales
introduced a general income tax in 1895. The legislation was packaged with a
long-awaited land tax law.65The New South Wales income tax differed from the
62. The 1884 tax coincided with the passage of South Australia’s Married Women’s Property Act (1884). This
Act generously gave a married woman the right to keep her own wages, as well as property given to her
personally after marriage (Edwards 1984, 28). The South Australian income tax was also levied at a flat
rate, so summing the incomes of a couple made little difference to the total tax owed by the couple.
63. However, by that time, with the introduction of graduated tax rate structures, the matter was of greater
policy significance. The New South Wales Land and Income Tax Act of 1895 cites the English Finance Act
of 1845 as the basis for the provision that ‘the income of a married women shall be liable to assessment
and taxation in like manner as if she were unmarried’. Ironically, the relevant section of the English Act
leads to the opposite conclusion, reading as follows: ‘Any married women acting as a sole trader by the
custom of any city or place, or otherwise, or having or being entitled to any property or profits to her sole
or separate use, shall be chargeable to such and the like duties, and in like manner, except as hereinafter is
mentioned, as if she were actually sole and unmarried: Provided always, that the profits of any married
woman living with her husband shall be deemed the profits of the husband, and the same shall be charged
in the name of the husband and not in her name or of her trustee’ (Asprey 1975, 5).
64. By 1903, South Australia had progressed to graduated income tax.
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T AXIN G P O P U LARIT Y
Victorian tax of the same year. Like the tax south of the border, it levied property
incomes at rates higher than income from personal exertion. Also like Victoria,
there was a general exemption of 200 pounds for personal taxpayers. However,
the New South Wales income tax was levied at a flat rate. Companies paid the
same flat rate, but with no exemption.66Writing in 1925 Mills commented on the
New South Wales tax:
Looked at from the point of view of the present enormous and duplicated
burdens of taxation, that earlier period seems a Paradise of financial ease, but
to many of the New South Wales taxpayers of 1895, a Land Tax of 1d in the
pound and an Income Tax of 6d in the pound appeared to be extremes of fiscal
Tyranny. (67)
In New South Wales the newly elected Reid government had a clear political
mandate for such a levy. However, there was still much resistance to the
introduction of income tax. Taxpayers objected (as they do today) to the
‘inquisitorial’ nature of income tax. Others opposing the tax feared its effect on
public morals. As such moral folk pointed out, any system of income taxation
relied to a considerable extent on the honesty of the taxpayer and placed them
under irresistible pressure to cheat. According to an early parliamentary
opponent of income tax in New South Wales:
If the Devil himself had sent a representative here to institute a means of
destroying the morality of the people, he could have found no better instrument
than an income tax.
(1886, NSW Parliamentary Debates, quoted in Mills 1925, 66)
Others, although supporting the principle of income taxation, feared the possible
damage to the economy. A highly progressive income tax, some argued, would
encourage capital flight, reduce thrift and capital accumulation, and discourage
industry and work effort (Groenewegen 1988, 21). Victoria’s 1895 income tax
was such a progressive levy. Like the earlier South Australian levy, it was daring
for its time.67The design incorporated all three avenues for achieving tax
65. Both taxes had been first mooted as early as 1886. According to Mills (1925, 66), the introduction of the
tax at the same time as land tax over-extended the colony’s administrative capabilities and was the cause of
considerable public discontent.
66. Dividend income was exempt from tax in the hands of the shareholder.
67. This was a decade before Britain introduced this form of progressive taxation. In another daring provision,
the 1907 amending Act taxed the implicit rental income of owner-occupied housing by deeming
residential land used by its owner to return an income equal to 4 per cent on its actual capital value. A
similar provision was briefly included in the 1915 federal income tax (Official Year Book 1909, 838).
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progressivity, including the controversial graduated rates.68Drawing the line at
such an income tax, however, the landowning interests in the undemocratic
Legislative Council threw out the land tax part of the Bill. Making the best of a
tricky situation, Victorian Treasurer Sir George Turner rationalised his new levy
on incomes as improving the accountability of governments. He attributed
previous financial slackness and extravagance to the indifference engendered by
relying on invisible, indirect taxes for revenue. Against those who saw progressive
taxation as fiscally irresponsible, the treasurer echoed J.S. Mill’s argument for
direct taxation. Direct tax increases by profligate governments would be more
fiercely resisted because they were more visible. With direct taxation, Turner
argued:
the people and people’s representatives will not take the estimates for granted,
but will look more carefully and more cautiously at the various items of
expenditure than they have been accustomed to do in the past.
(Mills 1925, 89)
Although Tasmania had been the first colony to introduce a tax on dividend
income, in 1880, its general income tax took longer. The wider tax carriage came
in 1894, a year in which ‘the necessities of revenue were specially urgent’ (Mills
1925, 191).69
In Queensland too, a withholding tax on dividends in 1890 tested the waters
for a more general tax.70The plunge into general income taxation came after
Federation, in 1902. An income tax was then necessary to replace customs and
excise duties, the prerogative of the new Commonwealth government.
Even so, the conservative state legislature could not bring itself to endorse the
new-fangled progressive tax principle. The government made the Queensland
income tax substantially different from that in other states. Resentful at the federal
parliament’s decision in 1902 not to levy duties on ‘the poor man’s tea and
kerosene’, the Queensland legislators designed a tax to replicate the previous
incidence of customs and excise taxes as well as to replace its revenue. ‘In paying
Customs duties there are no exemptions, and this Bill equalises taxation as if
68. There was also a separate company tax. Dividend income was exempt from tax in the hands of the
shareholder (Mills 1925, 91).
69. Tasmania’s first general income tax followed the South Australian pattern, being levied at a flat rate on
personal exertion income above an exemption level, with higher rates to property and company incomes.
Tasmania was also noteworthy for its ingenious ‘ability tax’ levied from 1904 to 1906, when the tax
collapsed under the weight of public protest. This tax was levied according to the annual value of the
property occupied or the amount paid for board and lodging.
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T AXIN G P O P U LARIT Y
Customs duties (that is, state Customs duties) had not been interfered with’,
declared government leaders (Mills 1925, 118).
As the treasurer explained,
The loss which the State will sustain through the change in the Tariff... will
amount to at least 300,000 pounds per annum... As all classes have been
relieved through the reduction in the tariff, it is only reasonable to ask that all
classes shall pay their quota by way of direct taxation.
(Mills 1925, 117–18)
Like the customs and excise taxes it replaced, the new tax was particularly harsh
on low incomes. There was no exemption even for very low income earners.
Instead of the proportional or graduated rates found in other states, Queensland
imposed a peculiar combination of fixed lump-sum levies and flat tax rates on
personal incomes.71
The Queensland public denounced the fixed payment as a poll tax. Like other
taxes offensive to the public view of fair taxation, it soon followed other poll taxes
into oblivion. A few years later Queensland replaced its income tax with a more
conventional income tax, allowing a 160 pound exemption for lower incomes.
70. Queensland retained its dividend tax until 1904. The tax had attempted to tax only income sourced in the
colony, levying only that part of the dividend relating to a company’s Queensland operations (Mills 1925,
116). In 1904, the government changed the basis of company taxation from source to residence, for
consistency with other personal income taxes. Companies resident in Queensland paid tax at the property
income tax rate. Dividends were exempt from tax in the hands of the personal taxpayer so as to avoid
double taxation of distributed company income. (This was fairly typical of state company taxes in the
early decades of this century.) In 1915 a distinctive company tax structure replaced this flat-rate tax. There
were particular concerns at that time, especially with the Labor state government, at the excess profits of
monopolies. The new tax rates also reflected a desire to tax Queensland’s overseas mining companies. The
tax differentiated between ordinary companies and companies with potential to earn substantial
monopoly profits. For ‘companies controlling public utilities, and monopoly companies’, there was a more
severe, graduated scale of company tax rates, ranging up to 3 shilling in the pound. It applied to profits
exceeding 6 per cent of capital. The tax was levied at the previous flat rate of 1 shilling in the pound on
profits equal to up to 6 per cent of the capital invested for both categories of company, equal to the
property rate of tax. This innovative attempt to tax pure profit, or ‘economic rent’, was conceptually
similar to Henry George’s tax on the ‘unearned increment’ in the value of land, and in some ways was a
forerunner of the Resources Rent Tax foreshadowed in the 1970s and introduced in 1984. The RRT, like
the Queensland tax, was introduced to collect for the community some of the ‘economic rents’ or ‘excess
profits’ accruing to some mining companies from their exploitation of community-owned mineral
resources, particularly energy resources, after the 1970s oil price ‘shocks’.
71. It had a fixed tax of 10s on incomes from personal exertion below 100 pounds and 1 pound on incomes
between 100 and 150 pounds. Only males were subject to this poll tax (one of the peculiar privileges of
life for the real men of Queensland), although wealthy females with incomes above 150 pounds a year
were taxed. On all incomes above 150 pounds the tax was a fixed amount of 1 pound plus 6d for every
pound of personal exertion income over 150 pounds (1 shilling in the pound for property incomes).
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Large gold-mining company profits in the 1890s gold rushes brought on
Western Australia’s first income taxes, the Company Duties Act of 1899 and the
1902 Dividend Duties Act.72According to Mills (116), such dividend-withholding
taxes ‘being collected at the source, would, it was hoped, not attract too much
attention on the part of shareholders’. These company and dividend withholding
taxes were the precursor of the general income tax of 1907. As in most other states,
this also brought a land tax.73
Table 3: Taxation 1896–97
NSW
Vic
$mill
%
$mill
%
$mill
%
3
0.6
0.7
0.3
0.2
4.8
63
13
15
6
4
100
4
0.4
0.6
0.2
77
8
12
4
0
100
2.5
0.1
0.2
na
0.1
3.0
86
3
7
0
3
100
Customs and excise duties
Income tax
Probate and stamp duties
Land taxes and rates
Other taxes
Total
SA
Customs and excise duties
Income tax
Probate and stamp duties
Land tax
Other taxes
Total
Qld
5.2
WA
Tas
All Colonies
$mill
%
$mill
%
$mill
%
$mill
%
1.3
0.2
0.3
0.2
65
10
15
10
0
100
2.2
na
0.1
na
96
0
4
0
0
100
0.7
0.1
a
0.1
a
0.9
78
11
0
11
0
100
113.8
1.3
2.9
0.7
10.5
18.1
76
7
10
4
3
100
2
2.4
Notes: a Less than $50,000
Source: Mathews & Jay 1972, Table 5.
72. The Dividend Duties Act 1902 levied tax on the dividends or profits of incorporated companies. By these
Acts, Western Australian companies were levied a 5 per cent withholding tax on dividends only, while
other companies were taxed on profits.
73. The general income tax was 4d in the pound with a 200 pound exemption level as in Victoria and New
South Wales. As was the case in other states, income already effectively taxed under the land tax was
deductible for the purpose of income tax. Dividends were already levied under the dividend withholding
tax and were thus exempt from company income tax under the 1902 Act. After the general income tax was
introduced in 1907, a rebate of tax was allowed to shareholders for company tax already paid on dividend
income.
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44
T AXIN G P O P U LARIT Y
The various state dividend withholding taxes, company taxes and personal
income taxes produced a veritable tangle of income taxes across Australia.
Different definitions of assessable income were one major complication; different
rates of tax applying to different categories of company income were another.
Some states taxed income according to where it was earned; some taxed it
according to the taxpayer’s residency. The taxation of company income also
reflected conflicting principles of corporate taxation.74
Some of these differences in company taxes diminished after federation,
hurried along by state government competition for the benefits of business
investment. The expanded role of federal income taxation also made some
rationalisation necessary from 1915, adding to the complexity and potential for
federal/state tax rivalry. Even so, the increasing movement of company and
personal taxpayers between states made the problem more pervasive after
Federation. As Greenwood was to comment, ‘labour had federated and capital had
federated’ (1949, 54). But colonial representatives dragged their feet.
74. Until the first decade after Federation, there were two different systems for taxing corporate income in
Australia. The two systems derived from different motives and principles. The simplest and most primitive
were the taxes on distributed company income. Such dividend withholding taxes applied in Western
Australia, Queensland and (for a while) Tasmania. These dividend taxes aimed to tax income earned
within the colony, rather than only the income of the very few companies actually resident there. It left
undistributed profits untouched. In such colonies a substantial share of industry was foreign-owned, with
much profit (and therefore taxation) on business activity therefore accruing outside the colony. While
there were some technical differences, both the Queensland dividend tax of 1890 and that of Western
Australia of 1899 levied dividend tax at 5 per cent for local companies. However, for non-resident
companies Western Australia also applied a 5 per cent company profits tax (Mills 1925, 116, 161). The
other system of taxing companies, eventually adopted by all states along with general income taxes, was to
apply income tax to total company incomes at the rates applicable to property income. This was the
system in South Australia, New South Wales and Victoria. These separate corporate taxes, levied on
undistributed as well as distributed profits, viewed companies as legal entities distinct from their
shareholders. Thus in these jurisdictions, company tax was more like a ‘benefit tax’, a payment for the
substantial advantages conferred on companies by corporate law — for example, allowing limited liability
of shareholders. Corporate profit taxes were also an offset to the non-taxation of capital gains, which
provided shareholders with a tax advantage if a company retained profits rather than paid dividends.
While dividend taxes were directed primarily at taxing dividends paid to foreign shareholders, the practice
of exempting dividend income of shareholders (or allowing a rebate for company tax paid) in Victoria and
New South Wales emphasises that undistributed, rather than distributed, profits of companies may have
been the primary target of corporate tax in these larger, more industrialised states. Tasmania’s dividend tax
of 1880 taxed the dividends only of public companies: when a general income tax was introduced in 1894,
company income was taxed separately, at the same rate of tax as property income (Mills 1925, 191). While
the first general income tax was levied in 1884 in South Australia, it was not until 1887 that the income of
a company was declared to be income from property and thereby taxable (Mills 1925, 144). In that year,
an amending Act declared the income of a company to be income derived from property. The 1895 New
South Wales income tax levied company incomes at the same flat rate as personal income, but, like South
Australia, did not allow companies to claim the general exemption. Victoria was similar, except that there
the income tax rate structure was a graduated one, with property income taxed at twice the rates applicable
to income from personal exertion (Mills 1925, 90–1).
Smith RS43 ATRF Page 45 Thursday, November 11, 2004 3:00 PM
THE CONSTITUTION AND THE
ALLOCATION OF AUSTRALIAN TAXATION
He ain’t much to look at now, but wait till he grows.
(Nurse Barton in Hop’s Bulletin cartoon, 1900)
Taxation policy was at the centre of the Federation debates. The solution that was
written into the federal constitution apparently left the states with most of their
taxing powers intact. However, this was not how it turned out in practice. As
Alfred Deakin predicted in 1902, the states were to become ‘legally free but
financially bound to the chariot wheels of the Central Government’ (1902).
By federating under a national tariff collected by the federal government, the
states gave up their major tax base.75Desiring free trade and a uniform external
tariff, they drafted the Australian Constitution to give exclusive control over
customs and excise duties to the Commonwealth.76
The monopoly of customs and excise gave the central government far more
revenue than it needed at that time. The colonies therefore specified that the new
central government return most customs and excise revenue to them. However,
they could not easily agree on how to distribute this revenue between them. How
much revenue would be available from the new federal tariff was anyone’s guess;
the level and structure of the tariff would depend on the balance between the free
traders and protectionists in the new Commonwealth parliament. The loss of
customs and excise duties also affected each colony differently. Filling the large
hole in state budgets was much more difficult for some poorer, less developed
colonies such as Tasmania or Western Australia.77
The ‘founding fathers’ nevertheless felt that, in time, the fiscal wounds of
Federation would mend. The economic development and taxable capacity of the
federation’s financially weaker states would catch up and other taxes would be
75. At the time of Federation, an average of three-quarters of colonial revenues came from customs and excises
duties. Most of that was from customs duty, with excises accounting for a steady 20 per cent of revenues
up to the second world war (Gilbert 1943, 18).
76. At the 1891 Federation Convention, it was only customs duties that were to be handed to the
Commonwealth. Deakin later added excises as an exclusive central government power, but with the
limitation that such duties should only apply to ‘goods the subject of customs duties’. The Constitution as
finally drafted gave the Commonwealth the exclusive power to levy excises, apparently so that it could vary
customs duties without changing the level of protection afforded to industry by the tariff (Mathews & Jay
1972, 25, 131). This also aimed at preventing free-trade states from thwarting Commonwealth control
over (protective) commercial policy by imposing countervailing excise duties (Arndt 1952, 377; Sawer
1974b, 199).
45
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46
T AXIN G P O P U LARIT Y
expanded. In the meantime, the states protected their fiscal position by a provision
(section 87) in the Constitution. This guaranteed them at least three-quarters of
federal customs and excise revenue. It also gave them a bonus if there was any
surplus after meeting the Commonwealth’s commitments. This arrangement
applied for a transitional period of ten years. The Constitution also allowed the
new central government to make additional grants to individual states as it saw fit,
thus providing the means to help any state in financial distress.
The federating colonies were uneasy at losing so much of their traditional tax
kit. They comforted themselves with the thought that their access to direct
taxation gave them considerable financial flexibility. Most of the colonies had
already introduced land and income taxes by Federation, and the others did soon
after. While the Constitution allowed the Commonwealth to levy direct
taxes,78the federal government was not expected to need or want to levy such taxes
in competition with states’ taxes. Indeed, Australia’s first prime minister and
father of Federation, Edmund Barton, assured the states that the federal
government would leave the direct tax territory to them:
The power of direct taxation of the Commonwealth... is a power not to be
lightly or rashly exercised
... [A]s the States will upon the passing of the uniform tariff lose the power to
raise revenue by Customs or excise duties, the Commonwealth Parliament
would be doing them a wrong by invading that province of taxation wherein
alone they can augment their income. We ought not to cripple them using our
power of direct taxation, unless under the stress of some great emergency; we
ought to leave them free to enlarge their revenues by direct taxation, seeing that
77. Prior to Federation, each colony had different taxation policies. For example, some colonies, such as South
Australia, made greater use of direct taxes, such as land and income taxes, while others, such as
Queensland or Western Australia, were almost totally dependent on indirect customs and excise revenues.
The rates of customs duties and the items subject to duty also differed from one colony to another, so that
the average tariff level varied dramatically between, for example, freetrading New South Wales and
protectionist Victoria. In the less prosperous states such as Tasmania, the burden of taxation was heavier
than in the richer states. In Western Australia, on the other hand, the high cost of providing services for
the goldfields had required high rates of taxation — but on a prosperous but itinerant population.
Distributing the federal tariff revenue according to where it was collected did not solve the problem, as the
new tariff would be very different from the previous set of duties applying in that colony. Some colonies,
where the entire revenue base was to be taken up by the Commonwealth, felt the distribution formula
should compensate for their revenue loss.
78. Section 51(ii) of the Constitution gave the new federal government a general and unlimited power to raise
taxes ‘for the peace, order and good Government of the Commonwealth’, so long as such taxation did not
discriminate between states or parts of states.
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T H E CO N ST IT U T IO N A ND THE A LLOCA TION OF A USTR A LIA N TA X A TION
47
they will have no power to resort to Customs or excise duties if they want
additional revenue.
(Maitland Daily Mercury, 18 January 1901, in Crowley 1973, 1–3)
In spite of their qualms, the states viewed thus the infant federal government as
their child. And like most parents they expected to exercise reasonable control
over their offspring. They retained control of most public spending, and the
Commonwealth government’s income, other than customs and excise revenues,
would be trivial.
And, beside, the state treasurers were not keen to extend direct taxation. Very
visible to the taxpaying population, taxes such as those on incomes and land were
also very unpopular among the most powerful and influential citizens. State
politicians judged that they were already approaching the political limits of direct
taxation. As South Australian Treasurer Frederick Holder had commented in
1897:
We might increase our direct taxation, but I should be very sorry to be the
Treasurer to propose it, as the people are already sufficiently burdened.
(quoted in Mathews & Jay, 1972, 33)
Thus, at the time of its birth, important aspects of the federal child’s financial
future — notably, who would expand direct taxes to meet popular demands for
increased social spending — were left unsettled. As a result, there commenced at
Federation a game of ‘pass the tax parcel’. In negotiations extending over most of
the next three decades, both states and Commonwealth tried to manoeuvre the
other into expanding unpopular direct taxes, while avoiding such taxation
themselves.
Table 4: Taxation 1901–02
Commonwealth
Customs and excise duties
Income tax
Probate and stamp duties
Land taxes
Other taxes
Total
Source: Mathews & Jay 1972, Table 6.
State & Local
Total
$mill
%
$mill
%
$mill
%
18
0
0
na
0
18
100
0
0
0
0
100
0
1
2
1
1
5
0
25
46
19
10
100
18
1
2
1
1
23
77
6
10
4
2
100
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48
T AXIN G P O P U LARIT Y
Tax Sharing and Fiscal Tears
The revenue sharing guarantee provided to the states in the Constitution only
lasted ten years. During that time the uncertainties of the Commonwealth’s tariff
policy dominated the states’ budget planning. At the same time, having to make
payments to the states according to the unwieldy ‘bookkeeping’ rules of the
Constitution severely constrained federal financial management.
The founders of the Commonwealth had not envisaged these arrangements as
a permanent feature of the federation. However, by halfway through the first
decade after Federation, the states were pressing for the transitional revenue
guarantee to be the permanent basis of federal finance. After Barton’s words, the
possibility of federal taxation pushing them out of the direct field seemed remote.
Their attention focussed on the grants issue, the states were still unconcerned at
the clouds brewing on their tax horizon. As one scholar of Australian federal
finances observed:
Even at that early stage, it was clear that the States’ prime concern was not
with maintaining financial autonomy but with making sure of having
sufficient revenue to meet a desired level of expenditure and, if this was raised
for them by another government, all the better.
(May 1971, 5)
On the other hand, the federal government was impatient to tackle its own
political agenda without the financial constraints imposed by a 25 per cent limit
on retaining customs duties revenues. Time, and the rising influence of Labor,
was expanding the Commonwealth’s spending ambitions. Eschewing direct tax
measures to meet demands for national old-age pensions, the Commonwealth
government of Deakin had attempted in 1905–06 to negotiate less open-ended
and more flexible financial arrangements with the states.
The states’ however, saw no reason why the Commonwealth’s social
ambitions should eat into their income. They, like the Commonwealth, were
fearful of being forced into increasing income and land taxes. As far as they were
concerned, the existing revenue guarantee was reasonably satisfactory, and could
be best improved by becoming permanent (Gilbert 1973 31–44; May 1971, 3–4).
However, the promise of a national old-age pension had been an important
element of popular support for Federation. The problem, as before Federation,
was how to finance it. Frustrated at the intransigence of the states, Prime Minister
Deakin in 1908 created his own surplus revenue. Ignoring the tears and scoldings
from the states, he passed the Surplus Revenue Act, spiriting away any ‘surplus’ into
special Commonwealth trust accounts, reserves for financing the pensions
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scheme. To their horror, the states now received only the minimum grants
constitutionally guaranteed to them.
This went only part of the way to financing the old-age pensions and in 1909–
10 the federal government faced its first ever budget deficit (Sawer 1972,
75).79After the Deakin government lost its majority, the first majority Labor
government, led by Andrew Fisher, thumbed its nose at its constitutional parents.
In 1910, over the objections of his former ally Alfred Deakin, Fisher implemented
the unthinkable, a national land tax.
Taxes on Earth — the Commonwealth Land Tax of 1910
Heaven cannot brook two suns, nor earth two masters.
(Alexander the Great (356-323), Plutarch, Apothegms)
The federal land tax was no surprise, Labor having signalled in 1906 that it
would impose such a tax to help finance the proposed pensions scheme. Fisher
won the 1910 election on a promise to bring in a land tax (Sawer 1972, 62, 88). 80
If the introduction of the tax was no surprise, neither was its nature. The tax
followed the pattern of the states’ land taxes in its main features — like the
colonial land taxes, Fisher’s tax was on unimproved values. Like those earlier taxes,
the 1910 land tax aimed to encourage land subdivision and redistribution. And as
in the states, the tax applied only above a certain value. In this case the exemption
was a particularly generous one bringing forth the condemnation of the doctrinal
single taxers (Clark 1979).81
The tax was also different because of its graduated rate structure82— ‘one of
the most progressive taxes that Australia has ever had’ (Mathews 1992, 15). The
progressive rates were to help ‘break up large estates’ and ‘make lands available on
79. The pension scheme, legislated the same year by Deakin, took effect in 1909 during the period of the
Fisher government. The states were now caught between a rock and a hard place on the issue of federal
finances, the unattractive alternative to a federal land tax being a federal public borrowing program,
implying loan market competition with state governments. In these circumstances, the states in 1909 had
to negotiate with the Deakin government, finally agreeing to replace the revenue sharing arrangements by
a system of per capita grants from 1910.
80. The tax was to be levied at a rate of a penny in the pound on land with an unimproved value above 5,000
pounds, and with rates rising on a continuous progressive scale to 6d in the pound (2.5 per cent) on land
valued above 75,000 pounds (Mills 1925, 235).
81. With more than a little post-hoc rationalisation, Fisher later justified this high exemption level as leaving
‘room’ for state land taxes (Mills 1925, 236). However, the exemption mainly reflected an attempt to
increase the Labor Party’s appeal in rural areas (Clark 1979, 26).
82. The rate scale showed the influence of Commonwealth statistician (and mathematician), Sir George
Knibbs. The 1914 Commonwealth estate duty as well as the 1915 income tax — publicly acknowledged
to be the work of Knibbs — were also to have a similar continuously rising marginal rate structure.
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T AXIN G P O P U LARIT Y
more reasonable terms for the people who desire to use them’ (Fisher, quoted in
Mills 1925, 234). As Labor’s Billy Hughes observed, 1/450th of the population
owning three-eighths of the entire landed wealth of Australia ‘comprised a sermon
more eloquent than the finest oration ever given’ (Clark 1979, 31).
Another novelty of the 1910 land tax was that it encompassed that previously
sacred cow, the extensive pastoral and grazing land held under crown leases in
western New South Wales, Queensland, the Northern Territory and the north of
Western Australia. These leases had so far escaped the state land taxes, even
though the low rentals on the leases gave a substantial ‘unearned increment’ in
value to the leaseholder.83
Needless to say, the 1910 Fisher land tax was bitterly controversial. Not
surprisingly, organised landholders and rural interests, including the big finance
and pastoral companies, strongly opposed the tax.84Former prime minister Alfred
Deakin and his followers argued the tax was both unconstitutional and
unnecessary (Clark 1979, 31). State governments appealed to the umpire in such
Constitutional conflicts — arguing before the High Court that the
Commonwealth was intruding on land policy, the Constitutional preserve of the
states. However, the Court (presided over, incidentally, by a former Queensland
land tax advocate, Sir Samuel Griffith) declined to intervene.85
The precise effect of the 1910 land tax is debatable; the tax was a many
splendoured thing. Its various objectives included taxing the unearned increment;
collecting revenue; ‘bursting up the estates’ and redistributing wealth; and
opening the way for closer settlement and intensive cultivation (Else-Mitchell
1974, 18; Clark 1979, 18; Mathews 1992, 1). The land tax was clearly successful
in encouraging subdivision and more intensive production (Garland 1934;
Mathews 1992, 16).
However, it is less clear whether the tax fulfilled its purpose of redistributing
wealth. Fictitious transactions were one problem (Gilbert, 63); the other was the
83. Another interesting feature of the tax was the option of self-assessing values — the catch was that, after
due legal process, the land could be compulsorily acquired by the Commonwealth at a price 10 per cent
above the value submitted by the taxpayer. This provision was similar to ‘Banjo’ Paterson’s earlier
suggestion (A.B. Paterson, Australia for the Australians, Sydney, 1889) of self-assessment of land values
with ‘periodic purchases to ensure honesty’ (Goodwin 1966, 115). New Zealand adopted a similar
provision in the 1890s (Seligman 1900, 319). As Gilbert (1943, 57) notes, ‘the fact that both the states
and the Commonwealth are extensive owners of land, and neither is averse to extending its holdings,
makes the provision a wholesome check on the owner’s insistence on low assessments’.
84. These pastoral interests mustered their flocks to even greater effect when from 1914 the Commonwealth
amended the original legislation to get around the High Court’s reservations about taxing the wealthy
squatters’ runs. See note 14 below.
85. In Osborne v. The Commonwealth. See Mathews & Jay 1972, 95.
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possibility that the land tax was shifted to purchasers or tenants, rather than borne
by landowners at the time of the tax (Garland 1934, 121–53).
As for raising revenue, the tax was very successful: in spite of fears the tax
would strangle the golden goose,86 federal land tax revenues were substantial and
kept rising for another two decades.87
In spite of the similarities between state and federal land taxes, lack of
harmony created considerable practical difficulties in land taxation over the next
four decades (Gilbert 1943, 53). And, as the uproar over the 1910 land tax
emphasised, taxation was no longer merely about revenue. It was also about social
and economic policy. That, according to the states, was still their ‘baby’. Between
the first and the second world wars, both the Commonwealth and the states were
levying income, land and estate taxes on the same incomes, lands and estates.
Having two suns in heaven whipped up storms and tempests in the Federation’s
tax policy domain.
Wartime Tax Invaders — the First Commonwealth Income Tax
The States found the Commonwealth to be a strong child and they could not
stop it growing.
(Gilbert 1973, 37)
During the first world war, the Commonwealth government’s spending increased
from virtually nothing to nearly a fifth of national product. However, the federal
government’s only source of tax revenues, customs and excise, collapsed due to
the disturbance of trade.
With a national war deficit to finance the federal government had the cause it
needed to reimpose the land tax on Crown leaseholds. This was done through
legislative amendment in 1914.88 The wartime foray into new tax territory also
saw the first national estate duty introduced the same year; the irony of
introducing a death tax to help finance a war was lost on the Australian public. 89
86. To the extent the federal land tax did ‘break up the great estates’ or tax away the ‘unearned increment’, its
revenue base should have declined (see chapter 2, note 14. The government itself had played down the
revenue prospects for the tax when it introduced the tax (Clark 1979, 31). The tax’s structure also limited
its yield: the high exemption level meant it only touched the largest estates.
87. In spite of the Commonwealth government’s policy of reducing its land tax in the 1920s. As part of its
general policy of reducing its direct taxation, the Bruce–Page government progressively reduced land tax
rates from 1921–22. By 1933–34, rates were 55 per cent below wartime levels. Throughout its existence,
revenue from the federal land tax exceeded state revenues from that source. The increase in federal land tax
revenues was due to rises in the effective rate of taxation from higher wartime tax rates as well as the shortlived extension of the tax to leaseholds. It also reflected, after the war, population-related rises in the
unimproved value of land (Mathews 1992, 4–5).
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In 1915 the first national income tax was introduced by the Hughes
government. The tax included a company income tax on undistributed company
profits.90Contrasting with the heated reception for federal land and estate taxes,
commentators saw the income tax as a sensible move to finance Australia’s
involvement in the conflict.91
In keeping with this pragmatic philosophy, the treasurer disavowed any
redistributive intent for the 1915 Commonwealth income tax:
This measure is to be regarded merely from the fiscal aspect. It is a Bill to
impose a tax upon incomes for the purpose of obtaining revenue, and must be
considered from that point of view.
(Mills 1925, 237)
Such claims notwithstanding, this first national income tax was whole-heartedly
a redistributive instrument.92Designed by Commonwealth Statistician Sir George
Knibbs, the tax earned the admiration of leading British tax expert, Sir Josiah
Stamp. It was, he said, a ‘courageous effort of the Australian legislature’, although
its complexity offended Adam Smith’s certainty principle (Groenewegen 1988,
25). Continuously rising marginal rates were a distinctive Australian invention
— along with the stump-jump plough. They made income tax rates, in theory at
least, closely match capacity to pay. The federal income tax was also progressive
in only touching the rich, for most wage and salary earners escaped through a
general exemption.93 In addition, this avowedly non-redistributive tax taxed
88. The High Court had ruled unconstitutional the taxation of Crown leases under the 1910 legislation; it
considered that if the Commonwealth were subsequently to resume the lease, the tax could represent
uncompensated confiscation of private property. This loophole in the land tax base excluded from taxation
much of the Crown land alienated at low rents under the land selection Acts of the previous half-century.
The pastoralists’ hue and cry over the 1914 amendment was such that the Bruce–Page government
overturned it in the early 1920s; the squatters thus retained for posterity the value of this low rent public
estate (Gilbert 1943, 47–8). Page’s attempt to retrospectively abolish previously assessed liabilities of
Crown land under the 1914 amendment was so vehemently opposed by Labor that this concession was
dropped (Sawer 1972, 236).
89. The Commonwealth’s wartime death tax levied estates on the value above 500 pounds; this exemption
level was considerably higher than in most of the states, thus making the Commonwealth tax irrelevant for
all but the largest estates. With the fashion for progressivity at that time, and in this case in keeping with
the teachings of J.S. Mill, the duty was levied at graduated rates. The estate duty’s Siamese twin — gift
duties — was not added to the Commonwealth’s armoury of death taxes until the next occasion of mass
death and destruction, the second world war. Death duties typically include anti-avoidance provisions, by
including in the estate property disposed of by a person in a period prior to death. Such transfers may
occur inter vivos — that is, during the lifetime of the deceased — to avoid the tax on death, and in the case
of the 1914 tax, gifts made inter vivos were assumed to be made ‘in contemplation of death’ if made up to
one year before the death of the deceased. The gift inter vivos provisions of the 1914 Act were
supplemented by specific gift duties in 1942, reflecting a desire to tighten up avoidance of tax inter vivos,
even if contemplation of death was at that stage for many, unavoidable.
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property income at higher rates than earned income. It thus incorporated all
strategies available for progressive income taxation.94
When the government introduced the federal income tax, no one could
anticipate how much revenue it might raise eight decades hence. ‘No doubt’, the
attorney-general had concluded after extolling the virtues of the wartime income
tax, ‘this Bill reaches the high-water mark of income taxation’ (Mills 1925, 237). 95
As Cromwell observed, ‘No-one rises so high as he who knows not where he
is going’ — the high-water mark of taxation was to rise by 25 per cent the
following year. It rose by another 30 per cent in 1918, and by 5 per cent in 1920.
Tax reductions in 1922 and 1924 left the rates a mere 38 per cent above 1915
levels (Mills 1925, 239). Not surprisingly perhaps, the attorney-general who had
introduced the federal income tax, Billy Hughes, was by then rather unpopular
with voters. For his sins he was replaced as prime minister by S.M. Bruce in 1923.
He, along with his treasurer, Dr Earle Page, was to spend the next five years trying
unsuccessfully to push back the federal income tax tide.
90. The company tax rate was levied on undistributed profits at a flat rate, fixed according to the average rate
of individual taxpayers. Dividends were taxed as personal income but with a rebate to shareholders at a
rate depending on their personal marginal income tax rate. At that time, the states, by contrast, ‘imposed a
flat rate of tax on undistributed profits and, with the exception of Western Australia, do not follow their
dividends at all’ (Commonwealth Treasurer Page 1923, quoted in Mills 1925, 244). In 1923 all states
imposed tax on total company income. Only Western Australia taxed dividend income in the hands of
shareholders, allowing a rebate of tax paid by the company. The other states exempted dividend income
from personal income taxation. Company taxes were generally levied at flat rates. However, in Queensland
there were graduated rates on Queensland companies and flat rates to non-Queensland companies (Mills
1925, 245).
91. There were also moves, albeit ultimately unsuccessful, to introduce a form of general wealth tax — a levy
on capital. After all, if labour were to be conscripted, why not capital?
92. Other progressive income taxes including state income taxes and income tax in the Mother Country were
invariably based on a stepped rate structure. Under Australia’s tax, each successive pound of income was
taxed at a slightly higher rate. This subjected a taxpayer not only to an increasing average rate of taxation
as income increased, but also to a continuously increasing marginal rate (see Carslaw 1941–47, in Prest &
Mathews 1980, 270).
93. The exemption applied to income below 156 pounds. In principle this amount was determined by
reference to the level of the recently born living wage, the minimum ‘subsistence’ income level (Garran
1894, 456). Taxpayers with incomes below 500 pounds were allowed an exemption of 156 pounds,
reducing at a rate of 3 pounds in every 10 that income exceeded 500 pounds.
94. As a result of the new tax, nearly half of federal tax revenues were collected on a progressive basis from
1915. In this sense, it was said that, while working people financed the 1909 old age pensions because of
the dominance of regressive customs and excise taxation, after 1914 higher income earners paid for the
pension (A.A. Caldwell, later a minister in the Curtin government Commonwealth Parliamentary Debates
173, 3 March 1943, quoted in Kewley 1972, 86).
95. The income tax’s sibling, the 1914 Commonwealth land tax, was increased by the addition of a surcharge
in 1918, peaking along with the income tax around 1922.
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Table 5: Taxation 1918–1919
Commonwealth
Customs and Excise duties
Income & Wartime profits
tax
Estate duties
Stamp duties nei
Land Taxes
Other taxes
Total
Total
State & Locala
$mill
%
$mill
%
$mill
%
35
23
53
35
0
12
0
50
35
35
39
40
2
0
4
2
66
3
0
6
2
100
4
4
2
2
24
17
17
8
8
100
6
4
6
4
90
6
4
7
4
100
Note: a Excludes state semi-government authorities
Source: Mathews & Jay 1972, Table 14.
Two Suns in Heaven — Commonwealth and State
Tax Competition
For the Australian states, the significance of the first world war lay in the federal
invasion of direct taxation.96Seven different governments taxing income, land
and deceased estates set the scene for extended tax conflict between the two tiers
of government.
Even at the end of the war income taxes were still relatively low by modern
standards; income tax was only 40 per cent of Australian taxation revenues. Taxes
of all kinds accounted for a mere 8 per cent of national income. However, the
upward march of taxation during the war had highlighted tax competition and
conflict between Commonwealth and state authorities. The complexity and
inconvenience of paying taxes to more than one government also produced
political pressures to rationalise tax assessment. During the 1920s, the assignment
of taxing powers between the federal and state governments was at the centre of
major controversy between the Commonwealth and the states. Although the
Commonwealth’s policy was to withdraw from direct taxation, it was able to reach
no agreement with the states on the matter of offsetting changes to grants. 97When
96. After the estate and income tax, the federal infiltration of direct taxation was completed with its foray into
taxing ‘entertainments’ (with a tax on amusements such as theatre tickets) in 1916, and a wartime excess
profits tax in 1917. The latter taxed all company profits, distributed or not, that exceeded a specified rate
of return on assets. In this way it was very similar in design to Queensland’s 1915 company tax.
97. Reflecting this policy, direct taxes fell from 34 to 28 per cent of Commonwealth taxation between 1923
and 1926. The problem was the federal government could not hand over such taxes and reduce grants
without leaving the poorer states worse off in revenue terms.
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taxes rose in the late 1920s as the Depression hit, the complexity and
inconvenience of the federation’s ‘double taxation’ again became a public
concern.
Concurrent taxation nevertheless produced significant attempts at
intergovernmental cooperation and coordination, with intensive negotiations on
tax coordination up to the Financial Agreement in 1927. The states’ nostalgia for
financial autonomy, and Page’s opposition to the per capita grants system, kept
alive impractical hopes for a Commonwealth withdrawal from income taxation.
Ironically, however, a constitutional provision to protect the states prevented
direct solutions and propelled the states towards financial subordination. 98A
peculiar form of ‘tax competition’ also complicated the talks: both
Commonwealth and states tried to keep the least unpopular taxation fields and
give the most unpopular to the other (Gilbert 1973, 75).
In the event, however, such manoeuvrings were fruitless. In the words of
Gilbert,
A readjustment of taxation proved impossible to achieve without coercion and
that method could not be used; such an arrangement would have been easy to
achieve if the Founders’ hopes of an equal taxable capacity between the States
had been realised or if the Commonwealth was not obliged by the Constitution
to tax uniformly in all states.
(1973, 83)
There was first the urge to coordinate state and federal income and land taxes
during the disharmonious years of the war.99In 1916, the Premiers’ Conference
asked tax officials to prepare a uniform scheme for collecting land, income and
estate taxes. After several conferences of officials, a uniform taxation Bill emerged
the following year. However the bureaucrats dared make no recommendations on
which level of government should collect the taxes. In the absence of agreement
on this aspect, the Uniform Tax Bill failed to run the gauntlet of state legislatures.
At the 1919 Conference, the Commonwealth floated the idea of withdrawing
from income tax as an alternative to continuing grants to the states. The
opposition from the states was such that this suggestion was pursued no further.
Commonwealth Treasurer William Watt also offered to collect all direct taxes on
98. The lower tax capacity of the outlying states combined with the Commonwealth’s constitutional
obligation to tax uniformly meant that negotiations about tax assignment and state fiscal autonomy stalled
in 1926.
99. See Mathews & Jay 1972, 118–23; Copland 1924; Mills 1928; Gates 1974; and Gilbert 1973, ch. 6, for
accounts of the very complex federal/state financial negotiations in the interwar period.
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behalf of the states at a third of the cost. This was an offer the states could refuse.
Victoria in particular opposed passing tax administration to the federal
government, suggesting instead that the states collect all Commonwealth direct
taxes. When other states did not follow up the offer, the matter went again on the
political back-burner.100
Disagreement continued on where responsibility for direct taxation should lie.
As Copland commented in the mid 1920s,
Everybody is agreed that there should be uniformity in taxation and collecting
authorities for any one tax, and a uniform return. But every proposal has
broken down on the question of control.
(Copland 1924, 41)
The Commonwealth, in alliance with the smaller states, appointed its first Royal
Commission on Taxation in 1920. The Commission, chaired by W. Warren Kerr,
had a brief to examine the direct tax mess. It was to suggest ways the ‘double
taxes’ might be standardised and disentangled. ‘It was all mere patchwork, and
nothing less than a complete review of the whole problem would suffice’
(Copland 1924, 36).
The Commission’s 1923 report, ‘Harmonisation of Commonwealth and
State Taxation’, recommended giving income tax exclusively to the
Commonwealth. It argued that other direct taxes should be kept for the states
(Mills 1925, 242). It rejected joint collection arrangements as a permanent
solution to the problem. Its view was that ‘only by delimitation of spheres or
allocation of subjects of taxation between the Commonwealth and the states can
an ordered and satisfactory system of taxation be brought about in Australia’
(Copland 1924, 41).101
The Commission’s recommendations were consistent with the thinking of
economists and public finance experts such as Seligman. They viewed income
taxes as being best levied at the national level (Copland 1924, in Prest & Mathews
1980, 42). However, the reaction from governments to the Commission’s Report
was uniformly critical. In particular, the Commonwealth gave it the cold
shoulder; by then, the new Commonwealth government of S.M. Bruce, with Page
as treasurer, had taken the opposite approach in tax talks with the states.
100. Western Australia did, however, take up the Commonwealth’s offer and, from then until 1942, direct taxes
in that state were administered by the Commonwealth on the state’s behalf.
101. Recognising that the states would in the short term lose twice as much revenue as they would gain under
its proposals, the Commissioners proposed transitional arrangements extending over ten years.
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Earlier, in 1919, the Commonwealth had indicated it would withdraw from
income taxation if that was what it took to abolish revenue grants to the states.
The latter was a principle of federal finance which Page abhorred. However, by
1923 it had become apparent that the Commonwealth needed at least some
income tax to repay the war debt. Page moderated the earlier offer on income tax
to one of taxing only personal incomes above 2,000 pounds. When the states
insisted on complete withdrawal from income taxation, the Commonwealth
instead persuaded four of them that it should abandon all personal taxation. In
return it asked the states to vacate the field of company taxation in favour of the
Commonwealth.102
A final decision was deferred until better tax revenue statistics were compiled.
Meantime, however, the states thought better of such arrangements. A particular
objection was that it would leave the Commonwealth with the least unpopular
elements of taxation — that on high incomes and companies — while leaving
most of the electorate subject to income taxation by the states. It was also
becoming clear that not all states would benefit as New South Wales and Victoria
would from retrieving income taxation.103
Commonwealth proposals along the lines suggested by the Royal
Commission were again vetoed by the states in 1926. The premiers asserted their
moral right to share in Commonwealth customs and excise revenues. 104 For Page,
the 1923–26 period was ‘a long process of negotiation, bluff and counterbluff,
which reached no issue’ (Sawer 1972, 243).
While efforts to assign taxing powers more sensibly failed, there was some
progress in limiting Topsy’s growth. In 1923, the Commonwealth agreed with all
states but Western Australia that the states would administer Commonwealth
income taxation on its behalf.105Another small advance was the Commonwealth
102. The proposal was that the states evacuate the field of company taxation to the extent necessary for a
Commonwealth company tax of up to 12.5 per cent to be put on without increasing the total tax paid by
companies.
103. Recognising the difficulties they would face under the original 1919 proposals, Tasmania and Western
Australia had made separate approaches to the Commonwealth for special assistance by that time.
104. Because of the difficulties a handover of income tax would present to both the Commonwealth and the
smaller states, Page had suggested the Commonwealth withdraw from land, estate and entertainment
taxation, and reduce income taxation, in return for ending the grants system. From 1926 negotiations
moved to another sphere, producing instead the 1927 Financial Agreement on state’s debts and
borrowing.
105. Under Western Australia’s earlier joint collection agreement with the Commonwealth, the opposite
arrangements applied, with the Commonwealth collecting state land, income and totalisator tax under the
state’s tax laws. If a taxpayer earned income in more than one state, the Commonwealth collected its own
tax (Laffer 1942, 298).
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taking over administration of company tax at the same time (Copland 1924). 106
These arrangements continued essentially unchanged until 1942.
The Depression increased tax friction as well as creating social tensions. So far
the limited coverage of income taxation had confined the extent of the tax
problem. However, with the advent of the Depression, both tiers of revenuehungry government tried to extend their taxation to a wider range of incomes.
Even aside from federal/state tax conflicts, ‘the state income taxes themselves were
uneasy bedfellows’ (Laffer 1942, 298).107 Topsy’s growth was also fertilised by the
depressing new income and land taxes.108 It reached its peak in 1935 when
taxpayers could pay as many as fourteen different income taxes.109
With the Depression creating such further tax discord, another Royal
Commission began in the early 1930s. The Commission, like its predecessor, was
to review the existing multiplicity of direct taxes. The government asked for ideas
on better ways of coordinating them. In 1934 this second harmonising Taxation
Commission reported. Unlike its controversial predecessor, it spurred some
improvement. By 1937, following a series of conferences of state and federal tax
officials, some uniformity was achieved and anomalies removed for the assessment
of ordinary income at least. A uniform income tax Act was adopted nationally and
applied for both state and federal tax assessments from 1936–37.110 The 1937
nationwide adoption of this Act was the most significant result of the search for
tax harmony in the interwar period.
106. The Commonwealth took the opportunity to rationalise its own company income tax and bring it into
line with that of most states. Instead of taxing only undistributed company income directly, and
distributed income in the hands of shareholders, the Commonwealth from 1923 began taxing all
company profit. It then allowed a rebate to the shareholder for company tax paid. This arrangement,
which by now applied in most states, was more rational and fairer than the previous arrangements.
However, it was still irritating to the taxpayer in its complexity. It also remained inequitable to lower
income shareholders. A taxpayer whose marginal tax rate was less than the company tax rate did not
receive a refund. The company tax rate being 1s in the pound through most of the 1930s, taxpayers whose
marginal rate was 1s in the pound or more claimed the rebate. The lower income shareholder saw the
value of the tax rebate ‘wasted’.
107. State governments by the early 1930s found it necessary to negotiate ‘reciprocal agreements’, akin to the
tax treaties applying between countries today. However, while such reforms reduced anomalies, they did
not make the system simpler.
108. Both the Commonwealth and some states clashed in attempting to tax for the first time incomes earned
outside their own jurisdictions (Gilbert, 1943, 39). Some special taxes were assessed on the basis of state
residency, producing problems of overlap with ordinary income taxes, which taxed according to where
income was earned. While some state governments allowed rebates of tax paid to the federal or other state
governments, some did not. Some limited rebates to certain types of income taxes (Laffer 1942, 299).
109. They could also receive so many rebates and amended assessments from various governments that income
tax might take three or four years to acquit (Laffer 1942, 299).
110. This relieved taxpayers of the need to make multiple returns, assessments being made for Commonwealth
and state taxes at the same time, and largely on the same basis.
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Nevertheless, the uniform tax assessment Act orchestrated only an imperfect
harmony. It did not end complexity, and many difficulties of tax concurrency
remained. Nor did it remove the lingering gloom and complexity of the
Depression taxes. In 1940–41 Western Australia felt far enough away from its
financial emergency to abolish its Financial Emergency Tax. In 1941, and with
unemployment approaching zero as war production geared up, New South Wales
too felt able to rescind its unemployment relief and social service taxes; Tasmania
gave up its special income tax around the same time. However, some special state
income taxes would not go away. In just a few short years, tinkering with the
uniform tax Act in individual states had also eroded some of its uniformity (Laffer
1942, 300; Gilbert 1943, 40). And alas, the new war was to bring with it new
federal direct taxes such as gift duties, taxes on dividends and the gold tax. By the
time the Committee on Uniform Taxation brought down its report in 1942, there
were still twenty-six separate income taxes levied by the states and the
Commonwealth in Australia (Laffer 1942, 300). By then, the multi-limbed
income tax creature was a hindrance to the war effort and a prime candidate for
emergency surgery. Within the decade, income tax concurrency was to be excised
in one stroke of the surgeon’s knife. However, the radical form this surgery took
left state treasuries permanently disabled in their taxation endeavours.
Table 6: Taxation 1928–29
Commonwealth
Customs and excise duties
Income taxes
Estate duties
Stamp duties
Land taxes
Other taxes
Total
Total
State & Locala
$mill
%
$mill
%
$mill
%
82
20
0
4
6
1
113
73
17
0
4
5
1
100
0
32
8
8
4
13
65
0
49
12
12
6
21
100
82
52
8
12
10
14
178
46
29
4
7
6
8
100
Note: a Excludes state semi-government authorities
Source: Mathews & Jay 1972, Table 14.
Taxing Times and Unproductive Taxes — Taxation in the
Depression
While complaints are loud and frequent about the steeply progressive scale
imposed on incomes and estates, the fact remains that four-fifths of the total
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60
T AXIN G P O P U LARIT Y
burden is sustained by taxes which are shifted in such a way as to become
regressive in effect... The regressive nature of the tax system is surprising in the
light of the influence of labour in Australian politics. The explanation may lie
in the fact that under the Australian system, the burden of indirect taxes is
more effectually disguised than elsewhere, and the goose submits to plucking
with the minimum amount of squawking.
(Gilbert 1943, 29)
Taxation policy was a divisive issue during the Depression. Australia already
relied heavily on indirect taxation compared to other countries (Gilbert 1943, 5).
However, the regressive indirect tax base was extended during the Depression
years. With the Bruce–Page government’s strategy of reducing the
Commonwealth’s direct taxes during the 1920s, and the rise in the protectionist
tariff, customs and excise duties accounted for more than half of national taxes by
1928–29, the highest level for more than a decade. By the outbreak of the second
world war, indirect taxation — the new sales tax, customs and excise duties —
was to rise to 40 per cent of Australian taxation.
From the revenue point of view, tax rate increases during the Depression
could be unproductive. Imports fell off dramatically as foreign lending dried up
from 1929, falling in a single year from 30 million pounds to a mere 18 million.
The sharp rises in customs duty rates in 1929, 1930 and again in 1931 failed to
arrest, and perhaps contributed to, the decline in customs revenues.
Early in the downturn, in 1929, both state and Commonwealth governments
had raised existing direct taxes. The Commonwealth introduced a 10 per cent
income tax surtax. However, income tax revenues, now the mainstay of state
budgets, declined along with incomes as the Depression deepened. There was a
drastic drop in income tax revenues over the period 1929–30 to 1931–32. All
governments except South Australia imposed new income taxes to replace the
revenues. To increase their public acceptability, these special taxes were notionally
set aside to pay for unemployment relief (Butlin et al., 1982, 183; Murphy 1928,
279). The unemployment taxes were usually flat-rate taxes with very low
exemption levels (30 shillings a week in Western Australia, 1 pound a week in
Victoria). Liability for tax was typically irrespective of annual income or how
many weeks were worked during the year. This made these taxes particularly
inequitable. Partly reflecting their unpopularity, as well as the practical difficulties
of annual tax payments for low income earners, the special taxes were collected by
a more invisible method than ordinary income tax. Instead of being collected
annually in one lump sum, the wages taxes, as they were known, were collected
weekly by various pay-as-you-earn (PAYE) tax-withholding arrangements. 111
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In spite of the higher direct tax rates, the crisis in Commonwealth finances
forced the introduction of a sales tax in 1930 to replace falling customs and excise
revenues. The initial rate of tax was 2.5 cent. The tax was of the manufacturers’,
wholesalers’, and importers’ type, ‘the two-fold object of this type [being] to
simplify the administration and at the same time obscure the final incidence’
(Gilbert 1943, 21).112However, raising only a fraction of the revenues it was
expected to, because of the sharp fall in national spending, the rate was increased
to 6 per cent a few months later in 1931. Surprisingly, the introduction of the new
consumption tax appears less controversial than the increases in direct taxation,
even though the tax was intended to be passed on to consumers and was likely to
burden the poorest most severely. The most violent reaction came from
wholesalers; it was difficult in the depressed conditions to pass on the tax to
consumers and feelings intensified when the tax was raised so soon after its
introduction (Gilbert 1943, 22). In keeping with the previous character of
Australian indirect taxes, the sales tax was narrowly based, and allowed from the
very start substantial exemptions. These included, notably, rural activities, to
provide relief for farmers badly hit by the Depression. As Gilbert observed in
1943, ‘Experience has shown that the principle of exemption, once introduced,
tends to extend and aggravate itself’ (1943, 23). By the last year preceding the
second world war, taxable sales were 183,296,000 pounds while those exempt
were 280,282,000, or 60 per cent of the tax base.
The Premiers’ Plan to deal with the Depression, when agreement was finally
reached in 1931, included cutting incomes all round.113There were strong
political pressures to reduce the incomes of government bondholders by forcing
them to redeem their holdings. Instead, a tax was imposed on those who failed
‘voluntarily’ to exchange their higher interest bonds for the newly issued 3.5 percenters. A 10 per cent tax surcharge was also imposed on property incomes. A tax
on shipping fees — a 2.5 per cent ‘primage’ duty — was introduced to help plug
the gap in customs revenues.114
111. This was so that tax was collected before it was spent. Budgeting for annual tax payments placed too heavy
a burden on their household spending. PAYE collection arrangements became increasingly necessary as
ordinary earners became subject to income tax.
112. Regardless of whether a tax is levied on the producer or directly on the consumer, economic theory
suggests that the final incidence of the tax will be the same. It will be shared between producer and
consumer in a proportion which depends essentially on how easily either producers or consumers can take
their business elsewhere. In the case of the Australian type of sales tax, as Gilbert (1943, 23) noted,
‘although the ultimate incidence may be the same, the burden is disguised and the consumer is spared the
irritation of repeated reminders of successive inflictions’.
113. Wages had already been cut by decisions of the Commonwealth Arbitration Court.
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To cheer landowners up, the Commonwealth land tax was cut by a third in
1932. The Commonwealth tax on entertainments was also abolished, providing
more widespread cheer, in 1934. The states, spoilsports that they were, took the
opportunity to introduce their own entertainment taxes. Now was no time to
enjoy oneself.
There then was, as now, much public hyperbole about ‘sharing the burden’,
even in the face of the inequitable new taxes. But, in taxation as in other areas of
depression policy, the intention was belied by the reality.
Table 7: Taxation 1938–39
Commonwealth
$mill
Customs and excise duties
95
Sales tax
19
Income taxes
24
Estate duties
4
Stamp duties nei
0
Land taxes
3
Other taxes
7
(Payroll)
(Motor taxes)
Total
152
Source: Mathews & Jay 1972, Table 21.
State and Local
Total
%
$mill
%
$mill
%
62
16
16
3
0
2
5
na
na
100
0
0
60
10
7
3
52
0
0
45
18
5
2
40
na
(11)
100
95
19
84
14
7
6
59
33
7
30
5
2
2
21
284
100
132
Policies to increase taxation were essential to meet the demands of Australia’s
financiers. The orthodoxy was that government’s first priority was to restore
sound finances: that is, balance their budgets. Higher taxes were, however,
unproductive in managing the wider economic problem. There is, nevertheless, a
sad irony in introduction of the various unemployment relief taxes. By reducing
disposable incomes and consumer demand, the unemployment relief taxes may
have themselves contributed to the increase in unemployment — they were in
fact the opposite to what was later prescribed as the way out of Depression. 115
114. A novel variant on the theme of ‘sharing the burden’ was the flour tax, a disguised form of unemployment
relief for poor wheat farmers, paid for by consumers, rich and poor alike. This tax applied for two periods.
Firstly, from December 1933 to May 1934, and again from January 1935 to February 1936. The rate was
4 pound 5 shillings per short ton on flour production, stocks and imports. The tax paid for 3 million
pounds of assistance to wheat farmers whose taxable incomes were too low for them to benefit from
income tax relief.
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Indeed, by further reducing private demand, increasing taxation during the
Depression may have worsened the effect of falling export earnings and
exacerbated the economic collapse. But, as the saying goes, beggars can’t be
choosers. With their crippling burden of overseas debt, Australian governments
had few choices in 1931.116
Taxing Paul to Pay for Justice — The National Welfare Fund
Until the late 1920s, income tax did not extend to ordinary wage and salary
earners. In most cases only incomes above 250 pounds were subject to tax (Butlin
et al. 1982, 183; Murphy 1928, 279). In 1928, for example, no Commonwealth
income tax was paid on wages or salaries of less than 300 pounds a year, while,
for most state taxpayers, incomes below 200 pounds were exempt. At that time
the Commonwealth basic wage — ‘the living wage’ — provided an annual
income of just below 52 pounds (Withers et al. 1987, 155).
However, the wage taxes of the Depression years changed that. The point of
the special taxes was for wage earners to fund the public cost of their
unemployment — they were a ‘benefit tax’. Most of the unemployment taxes were
structured to fall on ordinary wage and salary earners. Some of these regressive
income taxes had been abolished by the late 1930s. However, others remained or
had merely been amalgamated with ordinary state income taxes (Laffer 1942, 300;
Butlin et al. 1982, 183). In 1941, the Menzies government began taxing poor Paul
indirectly as well, through a 2.5 per cent tax on the value of employers’ payrolls.
Employers paid the tax into a National Welfare Fund for a new system of national
child endowment.117 The scheme was driven by wages policy considerations. It
was introduced mainly to defuse emerging pressures for wage increases as the
economy geared up for war. However, it was also an attempt to reduce the
complexity and inconsistencies in state and Commonwealth basic wage
systems.118 Trade unions and the community believed child endowment was paid
for by employers, through the levy on their wages bill. However, the cost of the
levy was at least partly passed on in higher prices. So Paul rather than Peter also
financed the introduction of national child endowment. By the late 1930s, wage
115. Ceteris paribus, as economists say: ‘all else remaining the same’. Special unemployment taxes were again
proposed in 1991–92, this time levied on higher income earners, to fund programs for the unemployed.
116. Some other governments less burdened by debt, for example, Sweden and the United States of America,
used Keynesian type policies to ameliorate the Depression.
117. At the same time, the Commonwealth income tax deduction for each child was replaced by a rebate for all
taxpayers supporting any dependent children. This was consistent with the structure of child endowment,
as all but the first child in a family received child endowment.
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and salary earners had by such devices been accustomed to paying income tax. No
longer was a progressive income tax applied merely to rich Peter to redistribute
income to poor Paul.
This policy was entrenched by the second world war. Driven by the need for
revenues, the first attempt to formalise the taxation of low incomes came in 1940.
The Fadden government at that time tried to lower the Commonwealth’s income
tax exemption from 250 pounds to 150 pounds. This was approaching the level
of the sacred ‘living wage’, and was very nearly death to the Government. After
reaching a compromise with the Labor opposition, the exemption was lowered to
200 pounds.119
A further attempt to increase tax rates on lower income earners in the
September 1941 budget was defeated, although the dividend rebate allowed
personal income taxpayers was abolished.120 A month later Curtin’s Labor
government came into office, with Chifley as treasurer. Other increases in taxation
in 1941 and 1942 were confined to high income earners.
Differences in state taxation rates and the impossibility of levying unused
taxable capacity in low-tax states without imposing unacceptable burdens on
taxpayers in other states saw the introduction of a uniform national income tax in
1942. The uniform tax replaced separate state and federal income taxation. The
new schedule of rates resulted in high incomes earners and those with property
118. The basic wages determined by the state and federal arbitration tribunals usually included a component
for the support of dependents. The amount and basis for this allowance varied according to the state and
the wages award under which an employee worked. The wages policy set down by the Commonwealth
Arbitration Court in 1907 had aimed to provide enough for the support of children, although it was paid
to all (male) employees whether or not they had children. Commonwealth income tax also allowed
deductions for each dependent child. As a result of the Depression, it had become clear, if it was not
already apparent, that the Commonwealth basic wage placed an impossible burden on some employers, as
well as creating inequities between families. Precedents for financing child endowment with a payroll tax
had been set by the Commonwealth public service in 1920 and New South Wales in 1926. In both cases
the charge was an alternative to general wage rises. In both cases too, the move followed recommendations
by inquiries into the wage system by New South Wales Justice A.B. Piddington (Butlin et al. 1982, 179).
119. Modifications to the rate scale also reduced the progressivity of the 1915 tax, narrowing the extended and
progressive scale so that the maximum rate cut in much earlier (Carslaw 1941–47, in Prest & Mathews
1980, 333).
120. This move gave rise to the well-known complaints about ‘double taxation’ of dividends under the classical
system of company taxation — being taxed first at the company level, then as income to the shareholder.
Maintained until 1987, this system is known as the ‘classical method’ of taxing company income.
Whether this in fact represents ‘double taxation’ depends on whether the company is viewed as a separate
entity from its shareholders, and whether all profits are paid out as dividends, as well as who actually pays
the tax. If the company is a separate entity from its shareholders, then it should be separately taxable and
there is no double taxation. Also, the lack of effective taxation of capital gains has meant that, in the
absence of a separate company tax, company income would go completely untaxed if the company
ploughed its profits back into the firm rather than paying taxable dividends. (In this way it increased its
market value, allowing its shareholders to realise capital gains when they sold their shares.)
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income paying more tax (Bailey 1944, 317), while reducing the overall tax paid
by most ordinary wage and salary earners.121 As part of the change, the
government also replaced all existing concessional deductions with rebates,
thereby increasing the progressivity of the income tax; such a move also benefited
low and middle, rather than high, income earners.122
Opposition to imposing even the ‘war tax’ on low and middle income earners
was strong. However, the economic and financial pressures of war were
compelling. By 1943 additional steps were taken to extend the income tax base:
The Labor Cabinet faced up to the necessity of increasing income taxes on the
bulk of the people, both to raise revenue and to restrict demand in a time of
rapidly growing shortages in civilian supplies.
(Mathews & Jay 1972, 177)
Personal incomes of just 105 pounds a year became liable for tax under the 1943
scale, compared to incomes of 200 pounds previously. At that time the basic
wage was around 4 pounds 17 shillings weekly, or about 60 pounds a year.
Collecting the mass income tax was made easier by a new system of tax
collection. Following the scheme of tax instalments introduced along with the
1941 tax scales, a new pay-as-you-earn (PAYE) system of withholding tax on wage
and salary incomes was introduced in 1944.123 The system had been pioneered by
South Australia, which had been forced to accept tax paid in instalments during
the Depression because of the very high taxes it levied on low income earners at
that time (Hytten 1932, 283–6). As modern Treasurers have found, taxing
incomes at source in such a manner is not only more convenient, but increases the
acceptability of taxation, being less onerous to the taxpayer.124 Another
121. In spite of returning the tax exemption level from 200 pounds to its 1915 level of 156 pounds, as the
previous Fadden government had tried to do.
122. Where income tax rates are fairly flat, as was the case for the early income taxes, tax rebates and tax
deductions gave similar benefit to high or low income taxpayers. However, as the principle of progression
and steeply graduated marginal tax rates took hold, concessions provided in the form of tax deductions
undermined the progression of the income tax system, because such deductions provided greatest benefit
to taxpayers on the highest marginal tax rate. The rebates were calculated by applying the taxpayer’s
average rate of tax to a given amount of expenditure.
123. The scheme was adopted together with provisional tax, interim tax on income from sources other than
wages or salaries. See Downing 1964, 14, note 1.
124. By forming ‘group schemes’ under which employees remitted their tax payments via their employer, it also
became possible to collect tax evenly throughout the year. Apart from the convenience of instalment
payments automatically deducted from income, this makes the payment of tax more closely aligned to
current income. This is especially important for taxpayers whose incomes varies markedly from year to
year, and where the burden of last year’s tax liability might be very painfully felt in the subsequent year of
lower income.
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unexpected bonus of the new system was the income tax evasion that it revealed. 125
It also permitted a larger revenue to be raised from given tax rates.126 As Hytten
observed of the 1930 South Australian experiment,
the method had given our most important direct tax the feature that has
always made indirect taxes so dear to the hearts of financiers: the feature of
causing the minimum ‘feeling of hurt’ to the victim. (1932, 286)
To reduce public ‘feelings of hurt’ for the extension of income taxation, a portion
of the revenue from the new tax structure — 25 per cent — was earmarked for a
National Welfare Fund, to meet future expenditure on social welfare benefits.
The Fund provided for Commonwealth widows’ pensions (introduced in 1942),
and unemployment benefits (introduced in 1944). It also continued to provide
for child endowment.
It was a Labor government which extended taxes to virtually all adult workers
through ‘temporary’ increases in wartime taxation: ironically, it was the same
Labor government which glued the wartime levy on low income earners into the
income tax structure at the end of the war. From 1945, Chifley converted the
1943 tax increase into a ‘Social Services Contribution’ — effectively a 7.5 per cent
tax on all incomes above 220 pounds, tapering off to 2.5 per cent on incomes of
105 pounds per year (Mathews & Jay 1972, 176).
The move was to deflect political pressures for tax cuts (Artis & Wallace 1971,
413–14). Postwar inflationary pressures made such cuts economically
irresponsible. However, there was by the end of the war ‘a fairly widespread
attitude among working people that they were ‘sick of working for “Chif” (Ben
Chifley held the position of Treasurer throughout most of the war and early
postwar years).127 The government preferred maintaining expenditures on
postwar reconstruction and welfare spending, to the alternative — providing a
reduction in taxes.
In Governor King’s tradition, the social services contribution was set aside for
a specific, and popular, purpose to help reduce the unpopularity of the new levy.
Along with payroll tax and some other revenue, it was ‘hypothecated’ for the
National Welfare Fund (Mathews & Jay 1972, 177). However, in the early 1960s,
125. A point that has not been lost on governments attempting to introduce withholding tax on other forms of
income such as interest income, and business incomes taxed since 1984 under the Prescribed Payments
Scheme of taxation — see below.
126. The move brought forward a year’s tax payments, providing a revenue windfall to the government. See also
Downing et al. 1964, 71.
127. See L.F. Crisp, Ben Chifley, Longmans, 1960, 301, quoted in Artis & Wallace 1971, 413.
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with the principle of mass taxation well-established, the Menzies government
quietly absorbed the social security tax into general income tax rates. In this way,
according to the benign interpretation of the move, ‘the wartime increase in rates
of income tax on the whole range of incomes [were] preserved for the expansion
of welfare expenditure’. In return for paying income and payroll tax, wage and
salary earners might now benefit from a national unemployment benefit, child
endowment and widow’s pension, as well as the 1909 old-age pension. But,
overall, the main benefit to the Pauls of Australia, as well as to the Paulas, was the
effect of the government’s high spending on postwar employment.
Demobilisation produced some increase in unemployment, and many married
women were despatched to their kitchens when the boys came home. But the
lessons that had been learned about managing the economy meant that the evils
of mass unemployment were avoided. Unemployment on the scale and severity of
the 1930s had been eradicated: this was an economic advance that represented
genuine social progress.
Viewed in this way, the burden of the income tax on low- and even middleincome earners was not severe — a fair price to pay for benefits received. But the
price increased greatly from the late 1960s, as inflation pushed Paul and now
Paula up the income tax scale, and having a job again became a privilege.
A study of this changing incidence of taxation and welfare remains to be done.
However, taxing perhaps achieved most redistribution in these early postwar
years, when most income tax was collected from the very affluent and most
benefits paid to the down and out.
Table 8: Taxation 1938–39
Commonwealth
$mill
Customs and Excise duties
95
Sales Tax
19
Income taxes
24
Estate duties
4
Stamp duties nei
0
Land Taxes
3
Other taxes
7
(Payroll)
(Motor taxes)
Total
152
Source: Mathews & Jay 1972, Table 21.
State and Local
Total
%
$mill
%
$mill
%
62
16
16
3
0
2
5
na
na
100
0
0
60
10
7
3
52
0
0
45
18
5
2
40
na
(11)
100
95
19
84
14
7
6
59
33
7
30
5
2
2
21
284
100
132
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An Excise (sic) in Semantics — The High Court and State
Taxing Powers
Excise A Hateful Tax Levied Upon Commodities.
(Samuel Johnson 1709–84, quoted in Kent 1985, 88)
Meanwhile the High Court had been quietly going about its business.
Interpreting the Constitution, it had, in the way of lawyers, first to decide what
was and was not ‘a tax’. Then it was to debate what was meant by ‘excise duty’. By
the time the Court had satisfied itself on the meaning of ‘excise’, it had barred the
states from sales taxation. In doing so it also placed in doubt their ability to
impose many other levies, taxes or fees (Arndt 1952, 392). It was precisely such
levies, largely ‘indirect’ and invisible taxes, that the states viewed as the acceptable
alternative to direct taxation.
The High Court had first looked at the question of what was, and what was
not, an excise tax in 1904, in D’Emden v. Pedder. The difficulty was that the term
‘excise’ had no definite meaning either in law or economics. As the ‘living wage’
judge, Justice Henry Bourne Higgins, was to point out in the 1926 Petrol Case,
‘excise is not a technical term in the law, and the popular meaning is not rigid’
(Arndt 1952, 387). The Constitution itself does not precisely define what the
founding fathers meant.
In 1901, the pre-eminent interpreters of the Constitution, Sir John Quick
and Robert R. Garran, explained the term ‘excise duties’ as follows:
They were taxes on the production and manufacture of articles which could
not be taxed through the customs house, and revenue derived from that source
is called excise revenue proper... in the course of time licences were required
from the makers of and the dealers in excisable commodities. The next step was
to require persons to take out licenses, who neither produced nor manufacture
nor disposed of excisable commodities, and these license fees also became
known as ‘excise duties’.128
The Court deferred to the wisdom of Quick and Garran and a transitional
provision in the Constitution.129 It decided in its first glance at the question that
a brewer’s licence was not an excise duty. This, they explained, was because it was
128. Mathews & Jay 1972, 47–8. But the customary English usage, which had extended the term ‘excise
licence’ to the array of taxes on various kinds of licence fees, was only the secondary and enlarged use of
the term.
129. Section 93 refers to ‘duties of excise paid on goods produced or manufactured in the State’ (Arndt 1952,
387).
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not ‘imposed upon goods either in relation to quantity or value when produced
or manufactured’ (Arndt 1952, 387). On this early, narrow view of the excise
power, a state was forbidden merely from taxing just the production of its own
industries. A state could not impose taxes solely on goods imported from another
state. The free trade provisions of the Constitution (section 92) barred that.
Likewise, the prohibition on states levying customs duties (section 90) forbade a
tax on imported goods. That was a customs duty.
Logically though, if the tax was imposed regardless of whether the commodity
came from overseas, from interstate or was locally produced, it was not an excise.
The states should therefore be able to levy a general tax on goods passing into
consumption, such as a retail sales tax.
Quick and Garran were confident ‘it was never intended to take from the
states those miscellaneous sources of revenue improperly designated as “excise
licences” in British legislation’ (Mathews & Jay 1972, 47). However, as Mathews
and Jay (1972, 132) scathingly comment:
The High Court however, never addressed itself to the logic of its decisions or
to the intentions of the men who drafted the Constitution. Legal arguments
have always revolved around the literal meaning of the words employed, and
dictionary definitions, however contradictory, have been more important than
intentions.
The High Court prevented itself from conducting any systematic interpretation
of the founding fathers’ intentions for excise duties. It did this by a ‘self-denying
ordinance which dismissed the most obvious documentary evidence, the record
of the Convention Debates, as improper’ (Arndt 1952, 387). The Court thereby
limited itself to interpreting the ‘words’ of the Constitution. Ironically, this
approach was to lead to the Court judging the legality of a tax by the intention of
the state legislature as to who ultimately should bear the tax.130The Court arrived
at this point along a long and tortuous semantic route, which we briefly skate
below.
The High Court reversed its 1904 decision in a series of Constitutional
interpretations from the mid 1920s. These decisions effectively excluded the states
from levying any form of sales taxes (Mathews & Jay 1972, 131–2). The first of
these was the Petrol Case in 1926, the second just a year later when the Court
confirmed its 1926 judgment in the Newspapers Case (Gilbert 1943, 19).
130. This was surely a more difficult and less proper way of defining an excise than reading the Convention
Debates. Who bears the tax is not the same as who the tax is legally imposed upon. There is no agreement
among economists even as to who does bear the burden of the different types of taxes.
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Dictionary in hand, the Court commented in 1926 that ‘any tax on a commodity
was an excise tax’. It later confirmed this broad definition of an excise tax in
Matthews v. The Chicory Marketing Board (60 CLR 263, 1938) and Parton v. Milk
Board (80 CLR 229, 1949).
In the South Australian Petrol Case a sales tax was dressed up as an income tax.
Thus the Court explored the difference between ‘direct’ and ‘indirect’ taxes. That
distinction is one with no theoretical basis, being, rather, a convenient way for the
tax authority to categorise revenues (Hicks 1959). It does, though, lead into one
of the most complex and controversial areas of taxation theory — tax incidence
— because it was believed that an indirect tax distinguished itself from a direct tax
by falling only indirectly on the intended victim. The writings of classical
economist J.S. Mill on this issue led the Court through a century-long wild goose
chase. Thus diverted, the Court decided that the South Australian tax was not a
direct tax, as the legislature did not intend the burden of the tax to fall on the
petrol retailer. The Court made the logical leap of arguing that, if it was not, for
this reason, a direct tax, it must therefore be a tax ‘on a commodity’ — an indirect
tax.
However, over the next three decades (culminating in the Chamberlain
Industries case of 1970 (121 CLR 1), the Court made the illogical leap to the
conclusion that an excise being an indirect tax, and a tax on a commodity being
an indirect tax, any tax on a commodity was therefore an excise. On this reasoning
any state tax falling on a commodity at any stage of the distribution process
became unconstitutional.
Fiscal tears have since flown freely in the states, with state treasurers fighting
a losing battle to defend their indirect taxation base. The main battleground, as
we will see, has been in the field of stamp duties (The State of Western Australia v.
Hammersley Iron Pty Ltd (March–September 1969) (120 clr 42), and The State of
Western Australia v. Chamberlain Industries Pty Ltd (December 1969–February
1970) (121 clr 1), business franchise fees (Dennis Hotels Pty Ltd v. Victoria (104
clr 529 1960), and consumption taxes (Dickenson’s Arcade v. Tasmania 1974
(1130 clr 117). Only concerning business franchise fees has there been any joy for
the states,131 and this, as we shall see, was shortlived.
Curiously, from an economic viewpoint, the validity of state taxes on services
has never been in doubt. Economists view both goods and services as consumer
items — a tax on goods goes with a tax on services. Furthermore, this distinction
opened up another fruitful occupation for lawyers in defining the difference
131. See also Sawer (1974a,b), who was briefed to represent Tasmania on this issue.
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T H E CO N ST IT U T IO N A ND THE A LLOCA TION OF A USTR A LIA N TA X A TION
71
between ‘a good’ and ‘a service’. But as Sawer (1974a, 182) among others has
pointed out, the states have not fully flexed their tax muscles in this area. The fate
of the Victorian hotel tax in the 1970s was no doubt food for thought by the more
venturesome state treasurers.
In defining excise taxes widely to include any tax on commodities, the High
Court nevertheless stumbled towards the essential economic distinction, that
between taxes on income and taxes on outlays. In the 1938 case, debating whether
a tax on the value of chicory planted was a direct or indirect tax, Chief Justice Sir
John Latham argued that for an excise tax, ‘a specific amount which has been paid
as tax can be assigned to each and every article taxed’. The distinction was that ‘a
tax which has no relation to the quantity or value of goods cannot be said to be an
excise duty’ (Arndt 1952, 392). However, this more coherent and economically
consistent definition would bar the states from all taxes on outlays, including
consumption taxes which it has also permitted (Sawer 1974b). This would apply
whether they are charged separately and directly to the consumer
(‘consumption taxes’) or collected from the manufacturer or trader and
charged in the price, and whether they are imposed at the point of production
or sale or use.
(Arndt 1952, 392)132
However, this modern distinction between income and outlay taxes would
probably not have been acceptable and justifiable as an interpretation of the term
‘excise’ in 1901. It was certainly more than was necessary to give the
Commonwealth control of commercial policy. Only if the ‘founding fathers’
intended to give the Commonwealth a monopoly on taxing commodities would
it make some sense.133
Perhaps it would have been better for the Court to have relied on the intention
of the founding fathers to develop a definition of an excise. The 1929 Royal
Commission on the Constitution took this approach, suggesting an amendment
to the Constitution to define excises as only taxes on items which as imports
would be subject to customs duties (Mathews & Jay 1972, 134). At least this
might have avoided the embarrassment of one judge having his own dismissal of
the narrow interpretation of excises in the 1937 Flour Mills Case quoted back at
him when he later took such a view.134
132. In the 1949 Parton’s Case, the Court pronounced that ‘a tax on consumers or upon consumption cannot
be an excise’.
133. Even then it is inconsistent to allow the states to tax services which are part of the base for taxes on outlays.
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T AXIN G P O P U LARIT Y
As Professor Mathews has noted, ‘the irony of the Court’s decision was that
they finished up disallowing broad-based consumption taxes, which are clearly
not “excises”, and allowing franchise taxes, which are the classical “excise
taxes”’.135Perhaps, however, the final word on this exercise in semantics should go
to Professor Colin Howard, in his classic work on the Australian Constitution.
The definition of excise duty cannot be counted among the High Court’s
successes. No escape from the morass of judicial disagreement now seems
possible by curial action alone. The main consequences have been lasting
uncertainty, and consequential litigation, in a significant area of liability to
taxation and now a severe and unnecessary restriction on the taxation revenue
of the States... The case law on s. 90 suggest[s] that the High Court is by and
large unsympathetic to State revenue and expenditures problems generally.
(Howard 1985, 437, quoted in New South Wales Tax Task Force 1988,
48)
134. The judge in question argued in the Parton’s Case that a sales tax was not a tax on production or
manufacture (see Arndt 1952, 395–6).
135. Personal correspondence with the author, August 1992.
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STABILISING AND DESTABILISING TAXES
TAXING FOR MACROECONOMIC MANAGEMENT
The century-long trend to redistributive taxation culminated in taxation’s
successful debut during the 1940s as an instrument of economic stabilisation —
with its objective, full employment. After the Depression, taxes became
important tools of economic management. By increasing taxes, the government
could restrain private demand. In this way, it might slow the rate of economic
growth and thereby inflation. Alternatively, by lowering taxes, it could increase
disposable income and household spending and give the economy a boost.
In the 1930s, the British economist John Maynard Keynes had explained how
governments might maintain aggregate demand and full employment through
judicious use of monetary policy and deficit financing. Only a few governments
in the Depression — the United States of America, Sweden and Nazi Germany
— had the nerve to try the Keynesian remedy. However, by the 1940s, as Keynes
pointed out in his pamphlet, How to Pay for the War, the same logic could be
applied to the management of public finances in a country at war. Instead of
insufficient demand, the risk was now of excess demand, with private
consumption and government military demand competing for limited resources.
The experience of the first world war had taught that, especially where the war was
financed by the government printing money, inflation would result.
Taxation policy took on a new importance in this new world of Keynesian
economics. By raising taxes, and reducing private consumption, it would be
possible for the government to manage the level of demand to maximise
production and employment, without causing inflation.
Keynesian economists also stressed the particular stabilising function of
graduated taxes, such as income taxes, which took an increasing proportion of
income as the national income rose. The more progressive taxes were, the more
strongly the ‘tax stabiliser’ worked; as the economy boomed, income taxes rose
and slowed the economy down — as incomes fell during depression, taxation
levels fell as well, protecting disposable incomes and consumer spending. This
automatic stabiliser effect provided a new justification for progressive taxation.
Furthermore, it was suggested, the presumed higher propensity to save of the rich
justified increasing the progressivity of the tax scales as a means of stimulating
consumer spending and — through a ‘multiplier’ effect on other sectors —
national expenditure and economic growth.
73
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74
T AXIN G P O P U LARIT Y
Keynesian Demand Management — The Tax Multiplier
These additional objectives of policy introduced new complications into the
taxation system from the 1940s. It required the structure of both sales tax and
income taxes to be modified early in the second world war, to improve their
flexibility in managing demand and restraining the booming war economy. For
example, the Commonwealth was to use sales tax to control consumer spending,
but desired to soften the regressive impact of the tax (Groenewegen 1980, 16). To
this end, in 1940, the government introduced a three-tier system of sales taxes,
exempting essential items such as food from tax and adding a new rate to tax
‘luxuries’ more heavily. It was hoped that the new structure would protect lower
income groups against sales tax increases on basic necessities.
This policy, for all its good intentions, meant that, by the mid-1940s, the sales
tax legislation had degenerated to unbelievable complexity; by then the manual of
exemptions and related rulings alone accounted for 342 closely printed pages
(Gilbert 1943, 24). The move also advantaged those whose consumption habits
favoured the exempted items and taxed those who were unfortunate enough to
prefer some of the highly taxed items in their consumption ‘basket’. Ignoring
Aristotle’s exhortation to tax equals equally, the changes reduced horizontal
equity. At the same time, they also worsened the distortion to production and
consumption decisions by subjecting just a few specific items to high and variable
rates of sales or excise tax.
The income tax, as we have seen, was also gradually extended to the whole
adult working population by 1943, partly to restrict demand. War, it might be
noted, has been a costly business for taxpayers, in Australia as well as in other
countries. The macroeconomic advantages claimed for uniform national taxation
also meant that war was to be costly for the Australian states; they were soon to
become only marginal participants in the Australian taxation system.
War on Uniform Taxes — The Commonwealth v. The States
The second world war saw the end of state income taxes. The need for reform
had been recognised before the war. However, it was the pressing needs of war
finance that led to the change. With taxation now an instrument for varying
aggregate demand, a Commonwealth monopoly of income taxes seemed
important for macroeconomic management. The high level of taxes needed to
control purchasing power in a booming war economy also meant the
Commonwealth sought greater control over how the national tax burden was
distributed across income groups.
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STA BILISING A ND D ESTA BLISING TA X ES 75
In the previous war-to-end-wars, state and federal taxes were still relatively
low. Now, however, high rates of Commonwealth tax in combination with state
taxes could mean taxation of more than 20 shillings in the pound. A further
problem arose because each state applied different tax rates to the various income
groups. In some states, such as Queensland, taxes on high income earners were
very high, while in others, such as South Australia, lower income classes were
comparatively heavily taxed. This ‘maddening maze’ of taxes meant that the
Commonwealth could not levy an income tax that was uniform across the states
without imposing unfair and unreasonable tax burdens on certain classes of
taxpayers. Constitutionally the Commonwealth could not charge different
taxation rates for taxpayers in different states — it was limited to levying uniform
taxation (Laffer 1942, 302).
Early in 1941, the Commonwealth government had, in the interests of
efficient prosecution of the war, pressed the premiers to agree on more uniform
income taxes (Laffer 1942, 302, 334). The reasoning behind its suggestion was
that its ‘power to increase taxation on any particular group was limited by the rates
obtaining in the highest taxed State’ (Laffer 1942, 302).
The states’ response lacked enthusiasm. The Commonwealth tried again at a
Premiers’ Conference in June 1941. This time it proposed that the states retire
from income taxation for the duration of the war and one year after. The
Commonwealth would pay them compensation of about 10 per cent less than
their current collections.136 Treasurer Arthur Fadden’s final proposal to deal with
the problem, an ingenious tax credit system, failed to gain parliamentary support
and the Government lost office in late 1941.
Curtin’s Labor government took over the reins. By now, the states had missed
their opportunity. The new government appointed a committee of experts and in
1942; the experts recommended the federal government become the sole income
taxing authority ‘for the duration of the war and for one year afterwards’. Under
the plan the Commonwealth would pay compensation to the states for lost
revenue according to average income tax levels in 1939–40 and 1940–41
(Committee on Uniform Taxation 1942).
This plan was essentially the same plan as had been put to the states by Fadden
in 1941 (Bailey 1980, 310). It too was put to the states, and duly rejected.
Nevertheless, over the dismayed howls of state governments, the Commonwealth
136. An important consideration was that states’ unemployment obligations were declining and railways
revenues increasing because war spending increased national income. It was felt the states should not be
able to increase expenditure merely because defence spending had improved their finances (Laffer 1942,
302).
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76
T AXIN G P O P U LARIT Y
introduced legislation which gave the states no real choice but to submit to the
scheme.137
The states were not amused. But, although they immediately challenged the
legislation, it passed muster in the High Court.138 In the view of the Court, the
states were being ‘tempted’ to give up income tax. However, temptation was not
compulsion and so the legislation stood.139
This legal challenge was not popular with the public. To the contrary, the
Commonwealth’s move was politically well received, even in Victoria where the
most unpopular increase in taxation fell (Bailey 1944, 317). Overall, the uniform
tax schedule imposed harsher taxes on higher income earners and property
owners. In New South Wales, the Sydney Morning Herald had commented:
There can be no doubt that the overwhelming majority of the Australian
people approve of the uniform taxation plan in principle if not in all its
details... it is hard to avoid the conclusion that the opposition of State political
bodies to the plan is prompted not by consideration of the people they represent
but by anxiety over their own political power.
(21 May 1942, quoted in Greenwood 1946, 272)
The move was also well received because the ‘uniformed income tax’ was tied to
legislation introducing a national scheme for widow’s pensions. Curtin also
promised the new tax rates would be unchanged for the current financial year. As
a contemporary observer, K.H. Bailey, noted, ‘the Treasury damsel was dressed in
the most politically attractive manner’ (1944, 317).
137. Constitutional problems were avoided by using a combination of Commonwealth powers. One Act
imposed the uniform tax schedule. Another Act took over the income tax administrative facilities of the
states. The third piece of legislation paid a grant equal to average income tax levels in 1939–40 and 1940–
41 to states that did not levy any income tax. The final piece of legislation gave Commonwealth tax
precedence over state income tax. In combination, these laws made it impossible for the states to levy their
own income taxes — not only would their taxpayers be liable for both Commonwealth and state taxes,
they would also lose their grants. The Commonwealth replicated its takeover of income tax with
entertainment taxes later in the same year.
138. South Australia v. Commonwealth (First Uniform Tax case) 1942, 65 CLR 373. Only the last of the four
aforementioned laws was ruled invalid in 1957 by the High Court.
139. Moreover, the states found to their horror that the Commonwealth’s defence powers were not essential to
the legality of the arrangement, which might easily be extended into peacetime.
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STA BILISING A ND D ESTA BLISING TA X ES 77
Table 9: Taxation 1948-49
Commonwealth
$mill
Customs and excise duties
252
Sales Tax
78
Income taxes
545
Estate and gift duties
11
Stamp duties nei
0
Land taxes
6
Other taxes
58
(Payroll)
(Motor taxes)
Total
950
Source: Mathews & Jay 1972, Table 24.
State and Local
Total
%
$mill
%
$mill
%
27
8
57
1
0
1
6
(4)
0
0
0
20
14
3
90
0
0
0
16
11
2
71
na
(16)
100
252
78
545
31
14
9
148
23
7
51
3
1
1
14
1,077
100
104
na
127
Taxation and the Business Cycle — The Ebb and Flow of
Postwar Taxes
In the immediate postwar period, the need to restrain demand dominated
taxation policy, as it had during the war. There were, however, powerful public
pressures to ease the prohibitive wartime tax measures. Reflecting this, taxation
policy was little used as a demand management instrument: in the main,
expenditure restraint rather than increased taxation was used to prevent postwar
price pressures from erupting.140
In the late 1950s taxation was actively used as an instrument of
macroeconomic management. The Commonwealth government introduced a
number of contractionary taxation measures, including sharp increases in sales
taxes on motor vehicles and an increase in company tax. Unfortunately, these were
ill-timed, at the tail end of an economic boomlet. Within a few months, the
economy went into a deep downturn. In early 1961, the tax policy instrument was
cautiously put into reverse to stimulate the economy; the previous severe sales tax
increases were eased. These measures were, however, too late to prevent further
substantial decline in the economy. It was not until early 1962 that the
government took determined steps to slow the downturn. To pump-prime the
economy and produce a multiplier effect on national spending and output,
Treasurer Fadden reintroduced his 1959–60 rebate of personal income tax and
140. Although in 1951 and 1956 sales taxes were increased as part of anti-inflationary fiscal policies.
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T AXIN G P O P U LARIT Y
reversed the previous year’s sales tax increases; he also introduced a generous 20
per cent investment allowance.141 However, these measures came too late to do
more than stoke the upturn already underway (Artis & Wallace 1971, 460). In
1964–65, with the economy returning to full employment, the tax rebate was
withdrawn and sales taxes again increased.
Practice makes perfect, but by the mid 1960s, the fiscal problem had changed
considerably. With the economy at full employment, and with little excess
capacity, the challenge was now to achieve a large increase in public expenditure
(Artis & Wallace 1971, 465). As the government geared its finances to fund the
military conflict in South-East Asia, there were not the extreme swings from boom
to bust that had occurred in the early 1960s. The budgets of the mid 1960s have
been characterised as ‘classical’ type full employment budgets, with the increased
rates of government defence spending achieved by switching resources away from
the private sector through substantial tax increases (Artis & Wallace 1971, 476).
For the next few years there were severe increases in both indirect taxes (sales
taxes as well as customs and excise duties) and income taxation. A 1965–66 tax
surcharge of 2.5 per cent was lifted only in the early 1970s when public concern
at the cost of Australia’s involvement in the Asian war was politically
overwhelming. By then, it was nearly ‘time for a change’.
141. In addition to normal depreciation provisions, companies could in the year of purchase deduct 20 per cent
of the cost of new equipment from their income.
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STATE TAXES AND POSTWAR
TAXATION (IM)BALANCES
We thank you for the offer of a cow
But we can’t milk and so we answer now
We answer in a loud resounding chorus
Please keep the cow and do the milking for us!
(Attributed to Sir Robert Garran, Commonwealth Solicitor-General,
1951, quoted in Groenewegen 1985, 225)
Until income taxation was ‘uniformed’ as part of the national war effort in 1942,
the states had substantial financial autonomy. In 1938–39, they collected half of
all taxes in Australia; only one tenth of their revenues came from the
Commonwealth. At the same time, the states provided most government goods
and services, accounting for around two-thirds of all public spending.
When the Commonwealth’s uniform tax policy conscripted their income tax
systems, the states’ financial and budgetary independence was shattered.
Demoralised state treasurers lost interest in taxation policy in the ensuing decades.
States’ taxation policies since then can best be described as ‘ad hoc’ — tax policy
and new taxes driven by revenue considerations only. Stunned at public
indifference to their mortal fiscal wounds, and saddened by the High Court’s lack
of concern at their financial vitality, they accepted a subordinate role in Australian
taxation policy for most of the next few decades. As a result, they have levied less
than one-fifth of taxes in Australia since 1942. Grants from the Commonwealth,
which generally accounted for over half of states’ revenues, made up the revenue
shortfall.
As it turned out, however, financial dependency suited the state governments.
The states had been shy of visible taxes from the early years of Federation when
direct taxation was a bothersome novelty for the undemocratic legislative councils.
Both the Commonwealth and the states passed by opportunities to address the
federal financial imbalance, as Professor Gates commented:
On the one side because of a myopic preoccupation with immediate financial
advantage and on the other side because of contentment with the exercise of
political power.
(1974, 159.)
79
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T AXIN G P O P U LARIT Y
For the states, the vertical imbalance in federal finances meant they could avoid
the odium of levying direct and visible taxes such as income tax, but still get
political kudos from providing services demanded by their public.
Attempts to return income taxation to the states were also hindered, as they
had been during the 1920s, by divisions between the states. Ironically, as Professor
Mathews observes,
Those States which were most vocal in their defence of State rights and in their
criticism of the Commonwealth’s centralising policies were often the States
which objected most strongly to any suggestion that Commonwealth grants
should be replaced by State-imposed taxation.
(Mathews 1977, 265)
Barred from sales taxes by the High Court, and from income taxes by the
Commonwealth, faint-hearted state treasurers aimed their policies at the quiet
life. Under pressure from particular pressure groups, such as small businesses,
rural producers or motorists, they reduced or even abolished their other major
taxes. On occasions, Commonwealth grants substituted for state tax revenues. 142
As in other federations, the chilly political winds of interstate competition
constrained the states’ progressive taxes the most severely. Although there was no
constitutional barrier to widening the scope of taxes on land wealth, the prospect
of migration by capital or population also kept wealth taxes at bay.
The lack of enthusiasm with which the states embraced the available revenue
instruments suggests their prime concern was not financial independence. Indeed,
for most of the years since Federation, state taxation policies could be summed up
in the words attributed to former Queensland Premier Joh Bjelke-Petersen ‘the
only good tax is a Commonwealth tax’.
Unlike the single-taxing federal and local governments, Australian state
governments followed the more ancient taxation tradition, levying a myriad of
little taxes — incognito. With the major modern tax bases denied to them by the
High Court, the Commonwealth or their own political scruples, the states also
returned to their nineteenth-century taxation haunts. In the postwar era, new state
taxes have been resurrected versions of very old colonial taxes — the age-old ‘sin’
taxes, or respectable elderly taxes based on the ‘benefit principle’.
142. Tasmania’s 1974 venture into the brave new world of consumption taxing was cut short by a new grants
agreement with the Commonwealth. The states’ abandonment of death taxation from the mid 1970s also
followed close on the heels of new and relatively generous Commonwealth–state financial arrangements.
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ST A TE TA X ES A ND POSTWA R TA X A TION (IM)BA LA NCES 81
Mainly charged on businesses, such as gambling levies, stamp duties and
payroll taxes, state taxes are thus only indirectly and invisibly levied on the
intended taxpayers — consumers (Mathews 1977). Motor taxation, the main
direct levy on consumers, declined in importance in the 1970s. This no doubt
reveals the greater vulnerability of such direct levies to the influential squawking
of motorist and transport lobby groups.
Like their ancestors, these ‘old’ state taxes are regressive in their impact. 143
Progressive taxation has typically been left to the central government, with a
national concept of fair taxes. In only a few cases do modern state taxes fall
proportionately on taxpayers’ incomes as perhaps they should.144 Taxes on sinners
and ‘users’ are often criticised as regressive, as well as for unfairly imposing on
devotees of a particular taxed item. (Against this it may be replied that such taxes
may produce a more proper assessment of the social, rather than just the private,
costs of a particular activity.)
A more traditional concern — voiced when liquor taxes paid for gaols and
orphanages and gambling taxes were suggested to pay for old-age pensions in New
South Wales — has been that ‘taxing sin’ taints the revenues so gained, while also
giving the lawmakers a perverse financial interest in sin’s continued existence.
Not all states have taken the same taxation route. Indeed, some differences in
state taxation policies may be inevitable and are perhaps a desirable feature of a
federal political system. Nevertheless, the lack of harmony in the details of state
taxation systems has masked a degree of similarity in effective tax burdens
(Vaillancourt 1992). That is, special assistance provided by the Commonwealth
Grants Commission may have kept the wolf away from the door of the
‘mendicant’ states. It may also, however, have removed one of the most powerful
forces for diversity and innovation in state taxation policy. At the same time, such
tax harmony has not prevented states bidding against each other in wasteful
attempts to attract industry and development away from other states. Rather than
competing by varying tax rates, the line of least resistance has led states down the
more economically damaging route of eroding the tax base, through specific
exemptions and concessions.
143. For example, a recent survey of the eight main New South Wales taxes found that all but payroll tax were
likely to be regressive in their impact. See New South Wales Tax Task Force 1988 (75–87) and the
associated consultant report, N.A. Warren, ‘Spatial Incidence of Selected NSW Taxes’, New South Wales
Tax Task Force 1988 (vol. 2).
144. The federal and state tax systems in combination mean that progressive taxation at the federal level only
serves to offset the regressive effect of other taxes for higher levels of income. At middle income levels
taxation was found to be proportional, and at lower income levels, quite sharply regressive (Bentley et al.
1974; Warren 1979, 1983; summarised in Groenewegen 1985c, 67–71).
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82
T AXIN G P O P U LARIT Y
State treasurers no longer include redistributive or stabilising taxes in their tax
policy kit-bag. Nevertheless, state taxes are important enough to affect the
allocation of resources and the efficiency of industry. They may also, on occasions,
be enough to hinder the federal government’s redistributive or stabilisation
taxation policies.145
Exorcising the Single Tax Ghost
The Menzies government abolished federal land tax in 1952. This was intended
to soften the blow to the states’ fiscal autonomy from the loss of income taxation.
The dogmatic Henry George as well as J.S. Mill and founding federalists such as
Alfred Deakin would all have cheered at seeing the progressive land levy exorcised
from the federal landscape.
However, the gesture was not appreciated by the states. The simple beauty of
their own land taxes was fading with age.146 Over the following decades the states
allowed the visionary taxes of the land reformers to vanish altogether, to be
reincarnated as mere revenue raisers in the 1980s. By the mid 1970s, as ElseMitchell was to comment:
No political party now seems anxious to allow the land tax to operate as a
means of taking from the landowner any part of the value of land as an
unearned increment or for that tax to produce the effect of compelling owners
of large or valuable holdings to dispose of or subdivide them. (1974, 19)
Inflation and the spread of progressive land taxes weakened the rationale for land
tax on the unearned increment in land values. Changes in economic conditions
in the postwar period made it increasing unlikely that such taxes fell only on
Ricardo’s pure ‘land rents’.147 Higher interest rates made land taxes into taxes on
capital. As with income tax, inflation resulted in more taxpayers crossing
145. For example, although the Commonwealth government has since the war had the responsibility for
economic stabilisation, state taxes and charges can significantly influence business costs and prices. State
taxation policy also has an important impact on industry, affecting business locational decisions and the
viability of various modes of transportation and other production or consumption decisions. Mining
revenues payable to the states affects the fortunes of a major Australian industry, as well as representing a
major source of potential community gain from Australia’s mineral wealth.
146. Although improved or site values remained the classic base for state land taxes, the proportional rate
structures of the colonial taxes were all replaced by progressive rates by the early postwar period.
147. Land values were rising not just from population or migration pressures, but also because farm prices and
profits rose, or because changes in inflation or interest rates altered the rate of return for those ‘investing’
in landownership. Although the tax was supposedly on the increase in land values, in practice taxes were
always applied to the total value. It had also long been acknowledged that the tax was imperfect because of
differences in land fertility, and because its productivity was influenced by changing farming technology
— such factors meant that the supply of land was not really as fixed as had been supposed.
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ST A TE TA X ES A ND POSTWA R TA X A TION (IM)BA LA NCES 83
thresholds into higher tax rate categories. Politically embarrassing cases of
hardship to or inequity for some taxpayers were the unfortunate result. In
addition, there was the problem of overlap with other taxes. Although they were
legislative blood brothers, land and income taxes were never effectively
integrated.148 At times George’s single tax on land merged with the income tax to
became one of a pair of hated identical twins known as ‘double taxation’.
Thus, as for the income tax in the 1970s, inflation damaged the political
viability of land taxation.
As Australia’s economy changed, with fortunes made in industry and mining
as well as from working the land, more of Australia’s accumulated wealth took the
form of assets other than land. Land taxes came to operate as partial and
discriminatory wealth taxes.
As the nature of the tax changed to a tax on capital or wealth, the tax became
less justifiable on horizontal equity grounds. This also fuelled strong political
pressures to exempt rural and residential land from the tax. Impaired by
exceptions and concessions, the visionary land tax became a mere shadow of its
former self.149 Progressively exempting various categories of landowners during
the severe inflation of the 1970s reduced the tax’s revenue (Neutze 1977, 311).
Already unfair because of variations in state policies on taxing leased, residential
or rural land, such exemptions also undermined its equity as a tax on unearned
increments in land values.150
As the tax became substantially one on urban land, it became less attractive as
a state revenue base. Increased revenues could only be achieved by raising the
already high rates on a small and influential group of taxpayers. With the
narrowing of the land tax base, revenues also became dominated by movements in
the dynamic and volatile urban property market. State governments wanted
predictable, ‘growth’ taxes, and cast envious glances at the federal income tax.
Together with inflation, the progressive income tax provided the federal Treasury
148. In some cases the tax was an effective offset to gaps in income tax, such as for primary producer or
imputed rental income where the income tax was ineffective.
149. State politicians were severely limited in raising revenue from taxes on the only immobile form of wealth
— land — by the fact that landowners were the main identifiable political grouping on which politicians
depended to get elected. Exemptions and concessions to the state land tax are so pervasive that in New
South Wales, for example, it is estimated five-sixths of its taxable land value is exempt (Walsh 1990, 67).
150. For example, some states such as South Australia and Victoria taxed land including Crown leases, others
such as Queensland exempted vast tracts of leased pastoral land from land tax. In some cases, all primaryproducer land was exempted; in other cases, rural land was given concessional treatment but not exempted
(Mathews 1992, 7). Some states exempted all owner-occupied land, others, only principal residences
(Albon 1990, 45).
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with ever-higher revenues without the inconvenience of raising tax rates or
extending the tax to new areas.
Combined with these factors was the outdated and inequitable land tax
administration.151 There had been few innovations in the administration of land
tax since the nineteenth-century. The tax was needlessly costly to collect and
inconvenient to pay; archaic billing and payment methods rubbed salt into
taxpayers’ wounds.152
Henry George’s aspirations for land tax as a ‘single, perfect tax’ were proven
unrealistic. Political constraints on taxing land held revenue growth below
changes in land values: land taxes now represent less than 5 per cent of state tax
revenues. Postwar economic and political influences have also exorcised the
reformers’ redistributive ambitions.153 As but a partial tax on wealth, the taxes are
unlikely to be borne by landholders (Neutze 1977, 322–3; Prest 1983, 19–20:
Mathews 1992, 21–30), although our land taxes are counted by the OECD as
wealth taxes. Nor do the land taxes any longer influence land development
(Mathews 1992, 32). They are primarily revenue measures and a means of
charging for local government services. Calls to reform land taxation to ensure its
modern relevance have generally fallen on deaf ears.154
Australia’s utopian and idealistic young land levy has thus matured into a grey
and grizzled revenue tax. A charge for government services, an apology for the
151. Mathews (1992, 29, 32) notes improved valuation procedures in recent years have helped remove some of
the adverse distributional effects of the tax.
152. The variety of valuation procedures in different states produced inequities and anomalies between
similarly placed taxpayers in different states. Where valuations were only carried out every three or more
years, land price inflation led to sharp and apparently arbitrary jumps in land valuations, and tax
assessments that were not paralleled by increases in incomes or tax capacity. This also led to inequities
within states. In other states, complicated adjustment factors lessen inequities within the state, but reduce
the transparency of tax assessment and emphasise differences with interstate equivalents. Likewise, the
practice of requiring payment of the tax as an annual lump sum, like prewar income taxes, increases
taxpayer awareness and resentment of the tax.
153. The postwar economic and technological trend towards increasing scale in agriculture has operated against
one of the original intentions for the tax, to reduce aggregation of land holdings (Mathews 1992, 16).
154. Proposals by the 1976 Commission of Inquiry into Land Tenures to reserve all development rights to the
Crown, were considered too radical by the Fraser government: along with other tax reform proposals of
that era, it was shelved and left to gather dust (Commission of Inquiry into Land Tenures 1976). The
Commission distinguished between increments in land values resulting from changes in use, which should
be reserved for the community through the Crown’s retention of development rights, and increments
flowing from other sources such as inflation, improvements of neighbourhoods or properties. It
considered that leasehold as against freehold tenure was not the main issue for land policy; rather, it
revolved around enforcing improvement conditions, control of land use, and reservation of development
rights (Mathews 1992, 20). Recent revenue pressures have led, however, to minor reform of the tax in
some states. There has been a tendency for rate structures to be made flatter in response to inflation in
land values; Tasmania and Victoria have also moved to broaden the tax base slightly in recent years
(Mathews 1992, 8–9).
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absence of any wealth tax, it is but a reminder of the grander visions of nineteenthcentury liberals and social reformers. Nevertheless, hopeful reformers of modern
times see a continuing — albeit less ambitious — role for land taxation. In the
words of Professor Groenwegen, one of Australia’s leading tax economists and
exponents of wealth taxation:
Landownership, particularly if we include the wealth of mineral resources, is,
and will remain to be, and important source of inequality even if it is not the
only source of such inequality. Hence land taxation will maintain its role as
part of general property and capital taxation, and windfall gains (such as
increased land values and windfall profits form rising mineral prices) remain
appropriate tax bases in an equitable tax system... the tax on rent as a single
tax is not a feasible proposition; the role of land and rent taxation in a tax
system is indisputable.
(Groenewegen 1979b, 11)
The Death of Death Taxes
Death taxes remained an important state tax for seven decades after Federation.
At times they accounted for up to 30 per cent of state tax revenues (Saunders
1983, 39). But the importance of death tax revenues diminished as a share of
national income from the 1950s. By the mid 1970s, the taxes were very
unpopular. Failing to reform the tax structure in response to inflation and blatant
tax avoidance had distorted its impact. As a consequence, from the mid 1970s,
governments across Australia were pressured into granting concessions for special
interest groups. By the early 1980s, both federal and state governments had
abolished all estate and gift duties in Australia.155
In an immediate sense, death taxation’s demise was due to competition
between the states. Instead of implementing necessary reforms to their death taxes,
most states followed Queensland and Western Australia in pursuing the shortterm gains in political popularity from abolition. The federal government of sheep
farmer Malcolm Fraser followed the states. As Professor Head observed:
The states admittedly can plead that they were forced to this course by the
pressures of interstate tax competition. The Commonwealth decision, first to
ignore the Asprey recommendations and then to follow the states’ example and
155. Similar tax competition between the Canadian provinces led to the abolition of state death taxes in that
country. However, this occurred in the context of a widening of the federal taxation base to include the
taxation of capital gains. Most importantly in this context in Canada, the federal tax deemed assets to be
realised at death for the purposes of the capital gains tax (Shoup 1983, 390).
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abolish the federal estate tax, remains, however, totally incomprehensible,
short-sighted and irresponsible.
(Head 1983, 14)
The rot had set in after the Queensland government of Bjelke-Petersen abolished
its probate and succession duties in 1977. Other states feared an outflow of
taxpayers and their wealth and hopped on the bandwagon. A number introduced
exemptions for property passing to the spouse of the deceased. This was not in
itself at odds with the objective of taxing intergenerational transfers of wealth. It
was also in keeping with changing community views and laws on matrimonial
property.156 However, by the early 1980s, the momentum against any death
taxation in Queensland carried all other state death duties to the grave.
Perhaps more surprising than the competitive abolition of death taxes by the
states, as Professor Head makes clear, was the accompanying move at the
Commonwealth level. Three independent reviews up to the mid 1970s supported
the continuation of the federal duty (Groenewegen 1985c, 212). As the chairman
of another wide-ranging Commonwealth taxation review commented, ‘abolition
of death and gift duties must surely rank as one of the most extraordinary
developments in Australian taxation policy’ (Mathews 1980, 42).157
The death of death taxes can be traced to tax policy inertia, which allowed
popular support for these taxes to dwindle. From the 1960s, inflation had altered
the effect of the existing structures of estate and gift duties. Unchanged tax
structures brought more and more small estates into the purview of the tax. Some
state taxes had no exemption at all, assessing all estates for duty. Imposing the tax
on the ‘small fry’ in this way produced little revenue and was very costly to
administer. It made the cost-effectiveness of the existing system questionable. 158
The extent of tax avoidance had also created public cynicism about the taxes.
Evidence of the many arrangements which could be made to avoid the tax was
156. The intransigent approach to this issue taken by the tax assessors had contributed to the need for
legislative reform.
157. The Australian Financial Review predicted (23 November, 1977) incorrectly so far, that popular pressures
for social justice would resurrect the tax at a future date.
158. Saunders (1983, 400) noted that by bringing many small estates into the tax net, inflation raised
administrative costs. Pedrick (1981, 125) also pointed out that state government administration costs were
around 2–4 per cent of revenues in the mid 1970s, Commonwealth costs being around 4 per cent. These
costs of collection are not excessive compared to other state taxes; in New South Wales for example, total
tax collection costs average around 0.6 per cent of revenue, with land tax administration costing around 3
per cent of revenues (New South Wales Tax Task Force 1988, 89). According to an study of United
Kingdom taxes by Sandford (cited in Peters 1991, 260) operating costs of tax administration averaged
between 2 and 4 per cent of revenues for local and central government respectively.
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presented in the 1970s to the Asprey Committee (Hill 1975, 75–6). The
Committee agreed
[the Australian death tax] is certainly at present a tax which can be avoided
by well-advised persons with ease, and which might almost be said to be paid
principally from the estates of those who died unexpectedly or who had failed
to attend to their affairs with proper skill.
(Taxation Review Committee, June 1974, 115)
In addition, the failure of governments to properly integrate state and federal
levies had contributed to the unpopularity of death taxes. Although the issue first
arose in 1914, double death taxation became a significant source of taxpayer
resentment from the 1960s as the effective burden of the taxes rose with
inflation.
Most importantly, the combined effect of these trends was to make death
taxes increasingly inequitable. Indeed, rather than falling only on the estates of the
wealthiest, there were many examples where the tax, or the inflexible
administration of it, caused genuine hardship. Without reform to make the tax
fair, the community would not support it (Pedrick 1981, 119–20).
Even while governments around Australia were rushing to abolish their death
taxes in the mid 1970s, there were viable proposals for reform. A Senate
committee inquiry in 1972–73 and 1974 recommended the Commonwealth
alone abolish its estate duties, leaving the states to negotiate a uniform tax base and
rates (Senate Standing Committee on Finance and Government Operations
1974). In 1975, the Asprey Review suggested reform along slightly different lines.
Perhaps more conscious of the damage wreaked by tax competition between the
states, Asprey suggested a reformed and integrated estate/gift duty. Rather than
return the tax to the states, the Committee suggested the Commonwealth collect
and administer all of the duties. The states would determine their own rates and
the Commonwealth would return to them the appropriate share of revenues
(Saunders 1983, 400–2; Johns & Sheehan 1977, 347–8).
Nevertheless, such proposals came too late. By 1975 powerful rural interests
had targeted the tax for abolition (Pedrick 1981, 120–2: Groenewegen 1985b,
311–12). The delayed policy response meant popular support for redistribution
by death taxation had been undermined by the obvious flaws in the state and
Commonwealth levies.
With persistent and vocal opposition to death taxes from influential rural
interests and indifference and suspicion elsewhere, bidding for elusive political
popularity took priority over much needed reform.159 Desperate to regain
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popularity, the Whitlam government promised to abolish the tax if re-elected in
1975. Not to be outdone, in the lead-up to the 1977 election, the Fraser
government also promised to abolish the federal duty by 1980. By 1981 the
federal tax had been phased out and it had also met its doom in all states. 160 In the
words of an Australian authority on death taxation, Sydney barrister Hill:
[D]eath taxes were never popular; caused hardship in particular cases and
were, in their form in Australia sufficiently easy to avoid that they might well
have justified the label of voluntary taxes. These criticisms were, however,
capable of being met in ways that militated against hardship while
eliminating the areas of avoidance. Instead, and one suspects for temporary
political motives politicians of both complexions committed themselves to
complete abolition.
(quoted in Pedrick 1981, 140)
In spite of their worthwhile role as a redistributive tax, no state or federal
government has since felt embarrassed enough to re-introduce death duties. For
any individual state to reintroduce such taxes would be unrealistic. Federal as well
as state governments remain petrified with fear at the unpopularity of death
taxes.161 Death taxes remain unpopular because of the complex and often
inequitable form in which they had previously been levied. With the popular
myth that there is no major concentration of wealth in egalitarian Australia, it
has been easy for wealthy opponents of such taxes to question the need for such a
tax.
For the state and federal treasuries, it was much ado about nothing — death
taxes only produced relatively small amounts of revenue. Their concern was
revenue, not redistribution. And besides, the wealthy goose makes so much fuss
when plucked. The Treasury collective could pluck more feathers with less
squawking from other tax geese, the federal income tax, or the new state taxes on
payrolls.
159. Other countries faced with the same pressures chose instead to reform their death taxes rather than
completely abolish them (Pedrick 1981, 135).
160. See Pedrick (1981) for a detailed account of these events and the pressures leading to the abolition of
death taxes across Australia.
161. Brennan (1977) argues against death taxes on theoretical grounds, and notes that as the incidence of the
tax can be quite arbitrary it can be difficult to design an equitable estate or inheritance tax.
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‘Ad Hoc’ Taxation — Old Taxes, New Taxes and New Forms of
Federalism
As land taxes lapsed and death taxes died, other direct taxes levied by the states
disappeared into the ‘too-hard’ basket. Labor Prime Minister Chifley had refused
to return income taxes to the states at the end of the war. However, in the early
1950s the Menzies government made a belated attempt to ‘demob’ the
conscripted federal income tax.162 In 1953 state and federal treasury officers
prepared a report on the technicalities of the move. But the technicalities were
daunting, not least because states with lower income tax capacity demanded
supplementary assistance to ensure financial equality with the two wealthier
states, New South Wales and Victoria. The perennial issue of whether to tax by
source or by residence was made more pertinent by the tendency of economic life
to span state boundaries. The going got too tough and the proposal to return
income taxes to the states lapsed.163 By that time, the Commonwealth Grants
Commission had been established as the guarantor of federal finance. With the
poorer states well catered for by the system of special grants and other federal
assistance, their hunt for new taxes lost momentum.
In 1952, the Commonwealth abolished Fisher’s 1910 land tax, leaving this
field vacant for the states. As we have seen, most states showed little interest in
filling the tax gap. The following year the Commonwealth also returned
entertainment taxes to state treasuries. This tax, levying cinema tickets at 1 penny
tax a time, was also a highly unpopular tax and most states were reluctant to
exploit it. The last of these wartime taxes on pleasure and leisure was abolished in
1976.
There were other attempts to tax pleasure, such as the valiant attempt by
Victoria to impose a hotel tax in the early 1970s.164 However, the main new taxes
on sin or pleasure in the postwar period were gambling taxes. For the states such
taxes were attractive because they could be well hidden from the consumer, the
intended tax prey.165 Gambling was also eminently suitable for taxation because
victims were largely indifferent to the cost. Taxing windfall gains was also more
162. The High Court in 1949 had overthrown the narrow interpretation of the meaning of ‘excise’ in the
Parton v. Milk Board case
163. In 1955, Victoria resumed its 1952 High Court challenge to the federal takeover of income tax after these
negotiations failed to resolve the issue. New South Wales later joined with the Victorian challenge.
However, the Court, while upholding a technical aspect of Victoria’s appeal, ruled in 1957 (The State of
Victoria v. The Commonwealth, 99 CLR 575) that there was no constitutional objection to the
Commonwealth making grants conditional on states not levying income tax (Mathews & Jay 1972, 229).
This was the last constitutional challenge to the uniform tax arrangements.
164. Other states failed to take Victoria’s lead and the government dropped this tax after industry protest.
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T AXIN G P O P U LARIT Y
acceptable than taxes on the results of effort. Besides, the High Court’s semantic
difficulties with state taxes did not extend to problems with the syntax of ‘sin’
taxes.166
Table 10: Taxation 1958–59
Commonwealth
State and Local
Total
$mill
%
$mill
%
$mill
%
Customs and excise duties
616
Sales Tax
287
Income taxes
1,214
Estate and gift duties
31
Stamp duties nei
0
Land taxes
na
Other taxes
117
(Payroll)
(Motor taxes)
Total
2,265
Source: Mathews & Jay 1972, Table 34.
27
13
54
1
0
0
5
0
0
0
54
57
31
323
(4)
na
465
0
0
0
12
12
7
69
616
287
1,214
85
57
31
440
100
2,730
23
11
44
3
2
1
16
na
(18)
100
100
Benefit taxes can play a significant economic role by ensuring the private costs of
an activity match its social expenses. If taxing a destructive act makes it a less
desirable pursuit for individuals, there may be social and economic gains. A tax of
this type which expanded as a state revenue source in the postwar period world
was motor taxation.
The states adopted motor taxation as soon as the car emerged as a mode of
private transport in the 1920s. Adopting Governor King’s tradition of smoothing
taxpayers’ ruffled feathers by earmarking such ‘benefit’ taxes for popular uses,
federal and state motor levies helped fund road building and maintenance until
the early 1950s.167 In this sense they had some characteristics of a ‘benefit tax’.
165. Most gambling taxes were legally imposed on businesses, as levies on government agencies — TABs and
state lotteries — or on enterprises and clubs — for example, bookmakers, private lotteries and soccer
pools. Other such taxes are turnover taxes such as stamp duties on betting tickets (Mathews 1977, 268).
166. Tasmania has led the way since Federation in taxing gambling, being at the centre of a political brawl in
1902 over its national ‘Tattersall’ lottery (Sawer 1974a, 25), and succeeding in altering the federal income
tax in 1924 to exempt windfall income such as that from lottery prizes (Gates 1974, 160). In the postwar
period, while Tasmania licensed a casino as a novel means of expanding its fiscal reach, New South Wales
daringly extended its sin taxes to cover a new form of gambling — poker machines. In the 1960s new
taxes were introduced on off-course betting.
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Cars were a novelty and luxury item at that time, but, as the motor spread
through the suburbs, motor taxes also came to be a lucrative mass consumption
levy. In the postwar period some states extended motor taxes with a surcharge on
third-party insurance premiums. In the early 1960s, New South Wales led the way
with stamp duties on new and transferred vehicle registrations. Motor taxes at
their peak in the 1960s accounted for around a fifth of state taxation. Since that
time, however, with OPEC policies lifting petrol prices, raising motor taxes has
required more political courage. Like petrol, such courage tends to evaporate
when confronted with heat. Explosions sometimes follow. Attempts by New
South Wales and South Australia to levy a new form of petrol tax in 1974 met
such heated opposition from the influential motor lobby that the levies were
dropped.168
Table 11: Motor Taxes, Share of Taxation and GDP
% of State and
Local Taxation
1918–19a
1928–29
1938–39
1948–49
1958–59
1967–68
1974–75
1988–89
1990–91
a
% of Total
Taxation
% of GDP
–
–
–
13
5
0.5
14
17
18
19
13
10
9
6
2
3
3
3
2
2
0.8
0.5
0.6
0.8
0.8
0.6
0.6
Note: a excludes state semi-government authorities
Source: Mathews & Jay 1972; Butlin 1987; Foster & Stewart 1991; ABS.
Nor have the states used such taxes fully as a charge for economic benefit, mainly
because of their effect on the poor. As a mass tax, such lump-sum motor taxes as
registration and licence fees are accident prone. Such lump-sum taxes are
especially burdensome for lower income groups — they are typically regressive in
impact (New South Wales Tax Task Force 1988, 81). There have also been
167. These taxes were also intended to prevent the car undermining profitable state-owned transport
operations, such as trams, buses and trains.
168. The extent of user-pays taxation that has passed the scrutiny of the motor lobby now seems to be limited
to ‘earmarked’ taxes, such as the New South Wales fuel levy, which might be termed ‘highway robbery’ to
fund the building of new roads.
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practical difficulties to motor taxes playing a more useful economic role. It was
hard enough to overcome the conceptual problems of pinning down costs and
benefits. After all, motor cars dominate so much of modern life. In addition, the
High Court’s vetoes on state ‘excise’ taxes, and its interpretation of the
Constitution’s free trade clauses, hindered even the most essential reforms to
interstate transport taxes. As a result, road tax structures rarely attribute even the
most obvious costs of motoring such as roads to major beneficiaries or users. The
various levies are mostly unrelated to the nature or extent of costs imposed by
particular groups of motor vehicle users. Nor do existing motor taxes account for
the wider costs imposed on society by motoring, such as from traffic, accidents,
motor policing, pollution or urban sprawl.
Whether parading as benefit taxes or mere revenue measures, current motor
taxation might in fact be labelled as ‘defective’. With the structure showing signs
of weakness with the passage of time, motor taxes are long overdue for a tune up
and service. Perhaps they may emerge as they have in some other counties, as
(green) taxes, thereby increasing economic efficiency rather than reducing it.
As regards the few indirect taxes permitted by the High Court, the states were
more venturesome from the mid 1960s. While politically inhibited from fully
exploiting certain taxes, the states invented some new indirect taxes to help redress
the federation’s revenue imbalance. In 1964 a Victorian attempt to introduce its
own income tax foundered on Commonwealth opposition (Mathews & Jay 1972,
246). By the late 1960s, states were tempted to try and second-guess the High
Court on new taxes without attracting its withering glare. To date, stamp duties
— the nineteenth-century taxes on documents — had been deemed legal by the
Court. So in 1967 Western Australia ventured to introduce a new stamp duty —
a 0.1 per cent turnover tax on personal and commercial transactions. The tax
covered all business receipts and was in addition to the usual duties on cheques
and other transactions. Victoria introduced a similar levy in 1968. The
Commonwealth objected to the levying of the tax on wage and salary receipts. So,
in following their tax leaders, the other states dutifully excluded such incomes
from their sights when they introduced their own versions of the tax. 169
The following year, the High Court struck down all such duties, pronouncing
that these imposts were forbidden fruits of the excise variety (Sawer 1974b). 170
Being kind and merciful, the judges on high ruled at the same time that the part
169. South Australia, New South Wales and Tasmania introduced such a tax at this time.
170. The State of Western Australia v. Hammersley Iron Pty Ltd (March–September 1969) (120 CLR 42), and
The State of Western Australia v. Chamberlain Industries Pty Ltd (December 1969–February 1970) (121
CLR 1).
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of the receipts duty on wages and salaries was acceptable, being a tax on services.
Nonetheless, fearing the wrath of the almighty Commonwealth, the chastened
states abandoned their new tax altogether.
By that time, however, the tax had expanded to the point where receipts duties
had made stamp duties the bulwark of state tax revenues. The damage to state
finances was such that the Commonwealth took pity. Trying to hoodwink the
Court by collecting the duty for the states, it was stopped by the Senate, the ‘states’
house’. With a new grants arrangement bringing things to a head, the states
pressured the Commonwealth in 1971 to give them its least favourite tax, the
payroll tax.171
The states in the late 1960s had been demanding such a ‘growth’ tax. But, like
children with a shiny new toy, they seemed unaware they might wear it out.
Immediately and in unison, the state premiers increased the rate from 2.5 per cent
of payrolls to 3.5 per cent, and then to 4.5 per cent and 5 per cent in September
1973 and 1974 respectively.
By the mid 1970s, even uniform increases in tax rates were less productive for
the states, as they had eroded the tax base. From around a third of state taxes at
that time, the Commonwealth’s ‘gift’ of payroll tax had dwindled to around a fifth
of states’ taxes by the 1990s. A queue of employers had formed to seek exemptions
from the burden of the levy and payroll tax became like land tax and death duties,
riddled with holes. Not surprisingly, the tax became one of the most unpopular
state taxes, declared by businesses to be a tax on employment.172
Even so, it remained the largest single tax of state governments, with its
nearest rival, stamp duties, accounting for around 15 per cent of the total.
Meanwhile, island Tasmania introduced a tobacco consumption tax in 1973.
This courageous little tax was accompanied by a business franchise fee on
tobacco.173 An eminent constitutional lawyer, Geoffrey Sawer, gave courage to the
Tasmanian Tax Tigers, advising that such a levy might test the High Court’s tax
171. Ironically, pay-roll taxes were safe from the High Court’s forbidden list because they were taxes on services.
Most recently in 1983 in the case of Hermatite v. Victoria (Pipeline Fees case), it was held against the state
of Victoria that a tax was an excise if in substance it was a tax on goods (1983 151 CLR 599). See
Saunders, 1985.
172. It is not clear whether payroll tax falls on employees, employers/shareholders or consumers. Most
economists see it as effectively a tax on consumers, being passed on by employers to consumers in the
prices of products. Some, notably the High Court, view it as a tax on consumption of services. Others see
it as a tax on a factor of production — labour — which results primarily in lower levels of net wages and/
or employment. Alternatively, it may be borne by company profits and shareholders. The High Court’s
habit of striking out taxes levied by the states according to certain economically arbitrary and uncertain
criteria may have led to a certain timidity in defining the precise nature and incidence of the tax. Certainly
the tax seems a ‘master of disguises’, turning up in political debates dressed as any one of these several tax
characters.
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acumen (Sawer 1974a: 1974b). Tasmania’s tax on ‘fags’ was indeed only just
faulted by the Court on judgement day.
A new agreement with the Commonwealth on FAGs (Financial Assistance
Grants) for Tasmania extinguished this light on the state tax hill the following year
(Sawer 1974b, 203–4). However, by then four other states (excluding
Queensland, ironically the home of no death taxes) emulated its success. 174
Perhaps gaining Dutch courage from the tobacco as well as liquor taxes, New
South Wales and South Australia added petroleum franchise fees in 1975. These
taxes produced such a political headache that they were abolished after only a year
or so, although South Australia continued its franchise fee on piped gas sales.
Since then business franchise taxes have steadily expanded on a shaky legal base to
account for a tenth of state taxes.
Stamp duties are very old taxes, as we have seen, and can be designed to tax a
number of aspects of economic life. State taxes on financial services are an
extension of the earlier stamp duties on cheques and similar financial documents
of a bygone era. In modern times, the habit of taxing documents through stamp
duties has also led the states into the area of taxing financial services.
State stamp duties, such as on cheques, were labelled very bad taxes by the
Campbell inquiry (Campbell Committee 1981, ch. 16). Such taxes affected the
efficiency of Australia’s financial system because they distorted the pattern of
financial transactions. As a result, in 1982 New South Wales and Victoria jointly
replaced a number of taxes on bank and financial transactions with a single duty.
The financial institutions duty (FID) is levied at a flat rate on the receipts of
financial institutions, including retailers offering consumer credit. Described by
enthusiasts as ‘the most innovative move in the history of state taxation’ (New
South Wales Tax Task Force 1988, 266) all states but Queensland adopted the
173. The professor had suggested that the states still had possible taxes that the High Court had not barred.
These other taxes, he suggested, were also outside ‘the limitations on direct tax created by the joint
operation of state pusillanimity and Commonwealth political pressure’. One of these was consumption
taxation, the other was business franchise fees. The Denis Hotels Case had opened the door to the latter in
1960, when the Court had treated such fees as the price of the privilege to carry on a class of business.
Most states had taken advantage of this chink in the Court’s armour to impose liquor licence fees over the
subsequent decade. Sawer suggested this chink could be forced open. To avoid the risk of puncturing the
Court’s holy excise relic, ‘a franchise tax on productive enterprise should begin with a ringing declaration
that a particular trade is altogether prohibited (subject to the requirements of section 92 of the
Constitution), unless a licence or permit is obtained, and then the charge for the licence should be based
upon something other than current production or sale’ (1974b, 181). He also advised that the ‘logic’ of
previous High Court edicts suggested a carefully designed consumption tax might also be feasible.
174. In 1975 and 1976 respectively. Queensland’s refusal to contemplate a tobacco tax at that time made it very
difficult for neighbouring New South Wales to prevent cross-border smuggling to avoid the tax.
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tax. It has been widely accepted by the business world. However, it has been
something of a disappointment to state treasurers in its revenue yield.
The FID was accompanied by a federal grab for the same field with another
bad tax, the bank account debit (BAD) tax of 1982.175 This tax was also a
distorting and discriminatory tax, taxing only trading bank — and not savings
bank or building society — transactions.
However, intense international competition in the 1980s has pressured state
and federal governments to rationalise taxes on finance and pushed them into new
forms of tax subsidy for the finance industry. In a rare burst of generosity, the
Commonwealth retreated from this BAD tax minefield in favour of the states in
1992. As a concession to the finance industry, it made a further withdrawal from
the field in 1992, announcing income tax concessions for off-shore banking. The
states now wage a lonely battle to tax international financial services in an
increasingly competitive tax world. In Professor Sawer’s words, ‘the State
Treasurer who wishes to live of his own has to tread even more delicately than
Agag, when he comes unto the High Court’ (1974b, 207).
On the defensive for most of the postwar era, some states took a long, hard
look at their tax systems from the early 1980s. In 1977, the Fraser government had
introduced a new set of arrangements for ‘tax sharing’, as part of its ‘new
federalism’ policy. Under the arrangements, the Commonwealth formally agreed
with the states to share income tax revenues. The Commonwealth had also passed
laws allowing individual states to impose a separate state income tax surcharge or
— if they wished — tax rebate as part of the Commonwealth tax. The agreement
had been welcomed by most concerned with federal finance in Australia because
it offered the hope of addressing the issue of federal financial imbalance and fiscal
responsibility. However, horrified cries of ‘double taxation’ from New South
Wales political leaders helped ensure no state was inclined to take up the offer. In
spite of its good intentions, the federal government also gave the scheme the kiss
of death. By keeping its own income tax high, it had precluded any additional
state levy being imposed under the agreement. Surveys of the barren state tax
landscape revived proposals for the states to levy their own broad-based
consumption or income taxes.176
Such proposals met with a cool reception from the Commonwealth in spite
of the ‘new (cooperative) federalism’ in vogue in the early 1990s. In late 1991,
negotiations on the issue stalled because of federal concerns about state income
taxes making macroeconomic management more difficult.177 As in 1953, talks
175. It taxed trading bank transactions on a graduated scale.
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T AXIN G P O P U LARIT Y
also focussed attention on how the present system quietly redistributes revenues
from ‘rich’ and ‘poor’ states. This reopened the contentious, century-old issue of
how to allocate grants between the states.
Whether the much heralded arrival of this ‘new federalism’ will be the old
federal sheep dressed up in wolf’s clothing remained to be seen. In the early 1990s,
the states were apparently enthusiastic about levying income tax for themselves.
However, as Professor Gates reminds us,
There have been occasions when a firm display of unity might have achieved
substantial autonomy in the setting of State income tax rates. There have been
occasions when a sustained stance by as few as two States might have secured
a thorough review of the allocation of taxing powers. But there has been no
Ontario and no Quebec. There has been talk of principles, but practice has
concerned itself with the quantum and distribution of federal grants. The
short term has held sway. It has been a recurring triumph of expediency.
(Gates 1974, 168)
A Right-Royalty Shame — The Tax Competition in Mining
Mining royalties and taxes collected by Australian governments are significant
not only for revenue, but because they affect economic efficiency and the
important Australian mining industry.
Strictly speaking, mining royalties are not taxes. They are rather the price paid
to the Crown for transferring a valuable property right to private ownership. But,
unfortunately, the sale and taxation of natural resources178 in Australia has had
176. There were suggestions, for example, of amending the Constitution in a way that would produce a more
coherent High Court interpretation of an ‘excise’ tax, or of introducing uniform collection and
reimbursement arrangements for such a tax through the Commonwealth. The federal issue has emerged
again since 1991, when the federal opposition proposed a federal goods and services tax (GST) to replace
existing indirect taxes. This included some state payroll taxes, as well as the federal wholesale sales tax and
fuel excises. It remains to be seen whether this form of federal tax reform is acceptable to the states. In view
of the history of the Commonwealth commandeering customs- and later income-tax revenues for its own
purposes, state treasurers would hardly relish the prospect of handing over one-fifth of their remaining tax
base to the Commonwealth on the promise of tax reimbursement grants. The dismal track record of
constitutional reform in Australia had also led in the 1980s to the more practical if more controversial
proposals for a state to be able to levy a limited form of income taxes as part of the Commonwealth tax
structure (Walsh 1990, in Walsh ed. 1990).
177. R.J. Hawke 1990, ‘Towards a Closer Partnership’, Speech by the Prime Minister to the National Press
Club, Canberra, 19 July. Most economists would also argue that redistributive taxes are most
appropriately levied at the national level, because tax base mobility will produce a state tendency to
proportionate rather than progressive taxation. However, the 1991 proposals retained Commonwealth
control over the progressive elements of the personal income tax system — thresholds, rebates and the
general rate structure — as well as over the definition of the tax base.
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ST A TE TA X ES A ND POSTWA R TA X A TION (IM)BA LA NCES 97
much in common with the cynical distortion of land policy and land taxation to
provide sectional advantage.
As with land, the ‘common wealth’ in Australia’s natural resources has been
squandered by governments over the last century and a half. Like the land tax —
on the ‘original and indestructible powers of the soil’ — effective mineral or
resource rent taxation179 might have filled Henry George’s ‘community fund’
without major hindrance to investment or development. However, failing to
separate ‘earned’ from ‘unearned’ components of income and wealth clouded
debate on resource taxation, as it had for land taxes.
Most importantly, like land sales in the nineteenth-century (Lamb 1967),
free-and-easy resources policies provided governments with easy alternatives to
taxation and fiscal responsibility. Indeed, the opportunities presented by
Australia’s resource wealth have, at considerable loss to the community, been
frittered away since the first gold finds in the 1850s. After Federation,
governments sparred with each other in their resource tax haven while the ‘Devil
Howling “Ho!”’, as previously, rubbed his hands with glee. To paraphrase E.O.
Shann on land policies: ‘And it came to pass that the demagogues dispersed the
public estate and the miners and timber companies gathered up the freehold
thereof’ (Shann 1948, 14).
Land rights in Australia had passed largely into private hands by the turn of
the century. However, the Crown retained ownership of minerals on most private
land. State governments, the major players in the resources tax game, typically
exercised the community’s rights over its natural resource wealth through ‘taxing’
mining. Sometimes this ‘tax’ took the form of intervening in mine planning and
investment decisions.180
178. More recently dwindling supplies of natural resources such as timber and valuable wilderness areas have
brought such publicly owned assets into the same category.
179. In modern day parlance that wealth is ‘resource rents’ being the unearned or excess profit to the miner
after taking into account a return for a normal profit on capital and other mining costs. Mineral rents are
akin to Ricardo’s unearned land rents, and according to economic theory can also be taxed to retain most
of the value of the wealth for the community while at the same time leaving the incentive to develop the
mine and earn a normal profit. (The term ‘normal profit’ has a specific meaning to an economist, being a
profit calculated only after a suitable return to shareholders is taken out. This return must be equivalent to
the risk-adjusted return from investing elsewhere in the economy.) In theory, resource rents can be
appropriated by competitive bidding for leases, although this is unlikely in practice (see Smith & Ulph
1979; Swan 1979 and Garnaut 1979 for discussion on these issues).
180. Since Federation, control of onshore minerals has been vested in state governments. In the late 1960s, the
High Court tentatively vested off-shore mining rights in the Commonwealth. Until then the
Commonwealth exercised its role indirectly by taxing mining company profits, by associated interest and
dividend withholding taxes and through its control of foreign investment policy. The Commonwealth has
also used its powers to levy excise taxes to keep a foot in the mining taxation field.
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T AXIN G P O P U LARIT Y
Most taxation of mineral rents in Australia has levied the value or level of
mining output (Livingstone 1979). Less often such royalties were related to
profit.181 This predominance of royalties, combined with numerous income tax
concessions for mining investment,182 has meant that the value of minerals has
been transferred to private shareholders at bargain-basement prices. Fearful of
scaring away jobs and capital, state politicians have sometimes used low royalties
to subsidise and compete for mining development.183
At the same time the form of state and federal mineral levies has damaged
mining industry efficiency. Unit or ad valorem royalties encourage inefficient
patterns of mine exploitation.184 The level and structure of mineral taxes have also
varied considerably and arbitrarily between states, between mines, and between
different types of minerals. This has again created artificial distortions in the
patterns of mining exploration, development and exploitation.
The damaging effect of royalties has not been justified by higher state
revenues. The share of mineral taxes in state revenues has been remarkably low
(Livingstone 1979). The ‘unearned increment’ manifests itself as higher returns to
mining company shareholders.
Mineral taxation policy attracted little attention in Australia until the
1960s,185 the durability of the royalty system of taxation owing something to the
standoff in the resource taxation heaven. The allocation of mineral rights between
181. A novel but significant aspect of Queensland’s 1915 land tax had been a provision levying the value of
marketable timber and the value of coal contained in the land, a feature which taxed ‘resource rents’ along
with the conceptually similar unearned increment in land (Mills 1925, 27).
182. High risk exploration activities and high capital investment and start-up costs — as well as apparently
‘excess’ profits — have often been used to justify special taxation treatment for mining. For example, the
first company income taxes in some states treated mining and exploration companies differently from
other taxpayers. Income from certain types of mining, such as gold, has at various times been completely
free from federal income tax.
183. Alternatively, since the 1970s, governments such as Queensland have taxed mining companies indirectly
— through excessive state rail-freight charges — using the ‘unearned increment’ in railway profits to
subsidise other users of state railways.
184. Taking no account of the price received for the minerals, or of variations in the cost of extracting them,
unit royalties are economically distorting. As the cost of producing a given volume of minerals from a
mine usually increases as the mine is used up, unit or ad valorem royalties can induce companies to use
wasteful mining practices, closing mines prematurely, or choosing mining technologies, such as open-cut
mining, which extract only the highest grade ores. Ad valorem royalties at least take into account cyclical
variations in prices received and avoid some of these pitfalls. In the case of rail freights, the differences in
rates of taxation has distorted the location and type of mining undertaken.
185. For example, the Kerr Royal Commission in the 1920s questioned provisions in the federal income tax
providing tax concession for shareholdings in mining companies. The provision was a relic of the ‘boom
period’: its only precedent appeared to be a provision in the 1895 Victorian Income Tax Act. Yet, in 1985,
this same tax shelter still lurked in the federal income tax Act, estimated by Treasury to cost the revenue
around $13 million per annum.
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ST A TE TA X ES A ND POSTWA R TA X A TION (IM)BA LA NCES 99
several governments has been a touchy aspect of federal finance. The
Commonwealth government has from time to time chosen to contest the states’
claim to supremacy in taxing the industry. Joint occupancy of the field has, as in
other tax fields, produced considerable conflict and controversy. But, in mining
taxation in particular, the clash has hindered the formulation of consistent,
equitable and efficient taxation policies.
After the ‘tax revolt’ of 1853, mining taxation was not a major public issue
until the sharp rise in commodity and oil prices from the late 1960s. Over 1972
to 1974, Australia’s energy export values rose dramatically in sympathy with the
OPEC-inspired rise in oil prices. These international factors fuelled public
concerns about the apparently excessive profits being earned by foreign companies
from exploitation of Australian mineral commodities.
Attention focussed on the substantial tax concessions enjoyed by mining
companies under both Commonwealth and state taxation regimes. An official
inquiry into the mineral industry (Fitzgerald 1974) found federal revenue from
the industry was negative, due to generous income tax concessions for mining.
Part of the profitability of mining merely reflected the high returns needed to
attract investment in what has always been a risky business, with high up-front
capital costs. However, part of the profit was also clearly a windfall due to an
unexpected rise in commodity prices. After this inquiry into the industry, and
with the report of the Coombs Task Force focusing on the revenue loss from other
tax expenditures, the Whitlam Labor government removed many such
concessions.
Along the same lines, in 1975, the Whitlam government caused bedlam in the
federal tax heaven by imposing an export tax on coal. The levy was as a means of
taxing some of the ‘resources rent’ accruing to coal mining companies and their
overseas customers. If the states would not tax this ‘unearned increment’, the
Commonwealth would. The Commonwealth crude oil levy — a $2 per barrel
excise on oil production — was also introduced in 1975. The tax was to encourage
oil conservation and reduce the imbalance between imported and domestic
sources of crude. However, the levy was flawed in the same way as state royalties.
As the government adopted a policy of pricing Australian oil at the same level as
imported oil over the next two years, a new variant of the levy emerged. The new
levy was specifically to tax the windfall gain to petroleum mining companies. 186
However, like the state mining royalties, this was a complicated, inefficient and
186. In 1977, following two IAC inquiries into the industry, the Fraser government introduced a complicated,
multi-rate excise on oil which attempted to avoid the exploration disincentives of the flat-rate levy by
exempting all new oil finds from the tax.
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T AXIN G P O P U LARIT Y
inequitable way of taxing petroleum rents. It increased calls for a new form of
mineral taxation collected — like a Henry George land tax — from unearned
mineral rents (Garnaut & Clunies Ross 1975).187 Such a tax, levied on the
‘unearned increment’ in mining, was dubbed the resource rent tax (RRT).
Acknowledging the imperfections of its crude oil levy the Fraser government in
1977 flagged its intention to replace the crude oil levy with the more sophisticated
RRT. Nevertheless, in keeping with the pattern of other tax reform measures in
the 1970s, the Fraser government backed down in the face of opposition from
mining interests and state governments.
The RRT would have been an important development in Australian taxation
policy. However, in the event the major significance of the crude oil levy was in
the billions of dollars a year revenue it provided in the early 1980s. This revenue
windfall allowed the federal government to postpone increasingly urgent reforms
to income and other taxes.
In 1984, the new Commonwealth government led by R.J. Hawke sought to
replace the existing shameful mess of mining imposts with a uniform national
system of resources rent taxation.188 However, the states opposed RRT, being
mistrustful of the Commonwealth’s intentions and jealous of their own
autonomy. There was also vociferous opposition from mining companies to the
tax. The failure to negotiate a solution with the states left most of Australian
mining under the traditional state taxation regimes. Only in areas of
Commonwealth jurisdiction did the RRT apply.
Even this minor victory for good taxation policy was ‘too little, too late’. By
1985 the boom had passed, windfall profits from the commodity price rise having
long since been spent by company shareholders. The alienation of yet more of
Australia’s public estate had given yet another victory to the ‘Devil Howling
“Ho!”’
And so, to the death of death taxes, and the loss of land taxes, was added the
renunciation of a national resource tax. Australian governments — trustees of the
Australian estate — lost yet another opportunity to reclaim it from private hands.
187. Resources Rent Tax had been advocated by economists in the mid 1970s as a means of extracting the
unearned portion of company profits (Garnaut & Clunies-Ross 1975). By only taxing profits above a
certain minimum rate of return to shareholders, the tax theoretically raised revenues with no economic
distortion, falling only on unearned mineral ‘rents’. See Smith & Ulph, and Swan in Smith 1979; also
Nellor 1983, for some practical difficulties of such a tax).
188. The tax was specifically designed to fall only on resources ‘rents’, taxing only profits which exceed a certain
threshold of risk-adjusted return on assets. To avoid discouraging exploration and investment, the tax
allows losses to be carried forward at a specified rate of interest and offset against future taxable profits. In
this way it is conceptually similar to the early Queensland income tax applied to monopoly companies or
utilities, as well as to the tax on the unearned increment in land values.
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ST ATE TA X ES A ND POSTWA R TA X A TION (IM)BA LA NCES 101
The fortunes of Australia’s billionaire mining magnates — derived substantially
from cheaply acquired and substantially untaxed ‘unearned mineral rents’ — were
now bequeathed, along with the great land estates, to their ‘deserving’ heirs.
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POSTWAR TAX PROGRESSION
THE BASE FOR TAXATION REFORM
Taxation is never popular but, until the late 1960s and early 1970s, Australia
had a tradition of strong taxpayer compliance. This tradition is being
threatened, in large part because increased revenue demands are being placed
on a system that contains some basic structural flaws and a tax base that has
been whittled away through special concessions and tax minimisation
arrangements. The system has been criticised by officially commissioned
inquiries, (including the Asprey, Mathews, and Campbell Committees),
academics, the media and, increasingly, the general public. The system’s basic
unfairness, its complexity, and its adverse effects on incentives to work, save,
invest and take risks are widely recognised. In short, respect for the system,
which is essential for voluntary compliance, has been seriously undermined.
(Draft White Paper, Reform of the Australian Taxation System, 1985,
18)
By the end of the second world war, all of Australia’s current major taxes were in
place. By then too, governments in Australia and around the world had become
more ambitious in their objectives for taxation. While primarily taxing to raise
revenue, governments were also using taxation to redistribute, to encourage
some activities and discourage others and to achieve full employment through
macroeconomic management. Taxation policy and the tax system were becoming
ever more complex. The expanded role of government also meant more
ambitious revenue-raising targets. In most European countries, taxation was to
increase dramatically in the postwar period.
In Australia the increase in both taxation and public expenditure was less
dramatic, constrained perhaps by the constitutional division of public expenditure
responsibilities.189The political unpopularity of taxes was also exaggerated in
Australia by the single-minded reliance on that most visible of taxes, the income
tax.190
189. The states, while having the major responsibilities for providing public services according to the
Constitution, had little access to substantial tax revenue of their own to meet growing community needs
and expectations. Hence, the Commonwealth income tax revenue also financed the growth in stateprovided services, in the form of an expansion of Commonwealth grants to the states. From the
complaints of the states, it would appear the federal government’s miserliness constrained the states’
spending and service provision.
102
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POSTWA R TA X PROGR ESSION 103
Increasingly though, relying on income tax as a revenue-raiser was to make
this progressive tax less effective in meeting other policy goals. Purposeful income
tax concessions as well as tax evasion and avoidance had compromised the tax as
a redistributional instrument. In the inflationary conditions of the mid 1970s, the
income tax was to become a destabilising rather than a stabilising element of
economic policy. By the 1980s, the Australian taxation system was also widely
perceived to be economically destructive in its effects on production,
consumption, saving and investment decisions.
Regression in Progressive Income Taxation
Income tax began life as a pure revenue raising mechanism; it was revived as
a means of subsidising free trade; it developed, along with allied taxes, and
exists today as still potentially the most powerful weapon for redistributing the
national income. It would almost seem to possess a built-in resistance to
distortion for its yield should provide a tell-tale sign of over exertion of pressure
on any one section of the community or any one interest. Whether that
resilience will last another four generations depends on whether it is matched
by an equal resilience in economic growth and political common sense.
(Sabine 1966, 254)
Since the early days of income taxation in Australia, there have been fears that,
unless used with care and common sense, income taxation might cause social and
economic harm (Groenewegen 1988). Viewed from the perspective of the 1890s,
such concerns seem premature. But as the tax burden rose and the revenue
collected by the tax expanded, the damaging effects of the income tax also
multiplied. Governments in postwar Australia rarely announced higher tax rates
to expand income tax revenues. Even with the income tax scales frozen for nearly
two decades in its 1954–55 shape, income tax revenue rose steadily. With a
progressive tax, rising real incomes meant higher tax collections; unaided by
legislative change, inflation could push taxpayers up a progressive tax scale. The
higher taxation rose, the greater the possibility of unintentionally affecting
equity, economic efficiency and, most importantly, taxpayer morality.
190. Taxation in Australia was virtually stagnant during the 1950s and 1960s, at around 22 per cent of GDP,
although the Vietnam war occasioned some increase in taxation. Unlike in other OECD countries, in
Australia the significant upward trend in taxation did not begin until the early 1970s. Even then, it
remained below OECD norms. The expansion in Australian taxation was more evident in the interwar
period, although Australia appears to have remained through most of its history a ‘low tax’ country (see
Peters 1991, Table 2.2.).
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T AXIN G P O P U LARIT Y
During its extended absence from the policy arena, the equity of taxation
altered substantially. Rather than a tax falling on higher income earners, the tax
raised an increasing share of its revenue from low- and middle-income taxpayers.
At the same time, the value of such concessions as dependent and medical
allowances fell due to inflation. The tax burden thus shifted substantially towards
those with a lesser capacity to pay because of factors such as ill health or family
responsibilities.
Although its hegemony was largely unheralded, income tax was to become
Australia’s modern single tax. By the mid 1980s, it accounted for some two-thirds
of Commonwealth tax revenue and more than half of all taxes. Before the war, by
contrast, income taxes had been barely a quarter of Commonwealth taxation and
no more than a third of total taxation. Two-thirds of revenues had come from
indirect taxes, such as sales tax and customs and excise (Downing et al. 1964, 10).
The first significant postwar reforms of taxation had been in 1950, and were
the brain-child of the newly elected Menzies government. So that taxpayers could
calculate their tax bills without a degree in mathematics, a conventional steppedrate system replaced the remnants of the original smoothly progressive tax scale.
Overturning the wartime progress towards a fairer system of tax allowances,
Menzies also reintroduced concessional deductions191as his tool for equalising the
tax burden across similarly placed taxpayers. This was followed, in 1953, with the
demise of the progressive principle of ‘differentiation’; the long-standing
differential tax rates on incomes from property were abolished. (They were to
make but a brief appearance in the 1970s before disappearing into tax oblivion.) 192
There were some income tax rate changes in 1955, but little changed in
Australia’s taxation policy from then until the early 1970s. Professor
Groenewegen has characterised the official attitude to taxation policy in that era
as ‘benign neglect’ (1980, viii). Apart from Downing’s 1964 study and some
discussions in the 1950s of some technical matters, there was rarely any public
191. Since 1942, taxation rebates had replaced concessional deductions as a more equitable means of allowing
for dependants, medical, dental and funeral expenses, life assurance and superannuation payments, and
education expenses. However, the method of calculating the rebates, at the average tax rate for each
taxpayer, was unwieldy. It was ostensibly for administrative reasons that the less equitable system of
concessional deductions was reinstated. By now, with increases in the marginal income tax rates, this
policy had very significant implications for the equity of the tax system. In 1915, the top marginal rate of
taxation had been just 60 pence in the pound, or 25 per cent, whereas under the tax rate schedule applying
from the mid 1950s the top marginal rate was 66.7 per cent. This meant that deducting their concessional
expenditures gave top rate tax-payers relief of 66.7 per cent compared to between only 0 and 20 per cent
for lower- and middle-income earners with lower marginal tax rates.
192. The 70 per cent surtax on property income was feasible when the top rate of income tax was low (for
example, 5 shillings in the pound (25 per cent) in 1915), but with top marginal rates rising to 66.7 per
cent in the 1954–55 scale, the change became inevitable.
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POSTWA R TA X PROGR ESSION 105
debate on taxation policy until the early 1970s.193With inflation low, there was no
pressure to alter income tax rates and allowances. The growth of the public sector
in Australia was slow by international standards, providing less impetus than
elsewhere for tax increases. Hence, the few changes in taxation from 1955 until
the early 1970s were for economic stabilisation or revenue purposes.
There was, however, some movement in the back rooms of taxation policy —
the Australian courts. By the 1960s the colonial courts were following the view,
expressed by the Lords of Britain in 1935, that, ‘Every man is entitled to order his
affairs so that the tax attaching under the appropriate Acts is less than it otherwise
would be’ (Duke of Westminster v. CIR, 19 TC 490 at 520, per Lord Tomlin, cited
in Downing 1964, 129).
There were complaints of tax avoidance even at the tax rates prevailing in the
1930s and earlier (Groenewegen 1988, 23). However, it was in the 1960s that tax
avoidance emerged as a threat to the taxation system. When rates of taxation were
relatively low, tax avoidance and evasion were not profitable. However, capital was
becoming easy to move around the world and there were growing opportunities
for high income earners and professionals to avoid income tax.194Enforcement
became more difficult as income tax turned into a mass tax. Mass taxation meant
the Tax Commissioner had to spread his auditing energies over a much larger
taxpaying population. Also, the burden of income tax crept up after the second
world war. The government also took deliberate steps to reduce the tax base in
order to stimulate investment or give indirect support to particular industries or
business activities. This made it even easier to avoid paying tax. For example, a 20
per cent investment allowance was introduced in 1962, supposedly to stimulate
the economy but in fact to provide a semi-permanent public subsidy for private
shareholders. Various other concessions slipped into the personal tax rate
structure, establishing ‘Pitt Street farming’ and the other tax rorts of the
1970s.195But most important in facilitating tax avoidance were court
interpretations. The legal beagles’ view of what were ‘taxable’ capital gains and
fringe benefits opened up gaping holes in the company tax net.196
193. The Australian Institute of Political Science sponsored a forum on taxation in 1953 (see Mountain et al.
1953) and there were the largely invisible Spooner (1950–54), Hulme (1954–55) and Ligertwood (1959–
61) Committees established by the Commonwealth.
194. Income-splitting, income-spreading, and forming companies and trusts so as to benefit from the lower
corporate tax rate were just some of the avenues for high-income Peter to pass the burden to low- and
middle- income Paul.
195. For example, concessions for primary producers and life insurance contributions, the exemption of
imputed income from owner-occupied housing, deductions for calls to mining prospectors and
afforestation companies, deductions for oil exploration shares and rebates on investment in Government
shares (Downing et al. 1964, 159).
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T AXIN G P O P U LARIT Y
As well as losing revenue, tax avoidance altered the distribution of the tax
burden. For wage and salary earners, tax was automatically deducted under the
1944 PAYE system. They were unable to avail themselves of avoidance
opportunities available to high-income-earning professionals and the selfemployed. By the mid 1960s, the company tax also had several other features
facilitating tax avoidance.197Symptomatic of dry-rot in the tax system, the
contribution of company taxation to tax revenues began to decline.
Table 12: Company Taxation
Company
tax as %
of Total Tax
Company
tax as %
of Inc Tax
1918–19
3
7
1938–39
11
4
1946–47
13
26
1948–49
14
27
1958–59
16
36
1967–68
14
28
1974–75
14
24
1983–84
8
15
1988–89
9
17
1990–91
13
23
Note: For 1918–19, ‘company tax’ data refers to wartime profits tax only.
Sources: Mathews & Jay 1972; Foster & Stewart 1991; Butlin 1987; ABS.
Company
tax as %
of GDP
2
2
3
3
4
4
4
3
3
4
By the early 1960s the Menzies government had become mildly concerned at the
extent of avoidance activity. In 1959 it appointed the Commonwealth
Committee on Taxation (the Ligertwood Committee) to advise on reducing
196. Notwithstanding sections 26 (a) and (e) of the original income tax law, capital gains and fringe benefits
were not to be taxed (Downing 1964, 105–6).
197. For example, it had a mildly progressive rate structure ranging from 20 to around 40 per cent (lower than
rates on persons), with separate provisions for public and private companies (Downing et al. 1964, 25).
(This differential in tax rates was abolished in 1973.) Where the company tax rate was less than the
marginal personal tax rate of its shareholders, shareholders were advantaged by reinvesting profits in the
company; shareholders reaped their investment rewards as untaxed capital gains as the value of the
company’s shares increased: even if capital gains were taxed, they would benefit from the lower income tax
rates applied to companies. In private companies, shareholders — being fewer — are especially able to
manipulate dividend policy to their particular interests. Because of this, and reflecting the strong
incentives to retain dividends from ineffective capital gains taxation and misalignment in company and
personal income tax rates, private companies were subject to an ‘undistributed profits’ tax unless they
made a ‘sufficient’ distribution to shareholders.
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POSTWA R TA X PROGR ESSION 107
taxation avoidance. However, academic dissatisfaction at Ligertwood’s narrow
terms of reference, and unease at broader trends in the taxation system, saw a
major academic study, commissioned by the Social Sciences Research Council in
1963 (Downing et al. 1964).
The theme of the Downing Inquiry, as it became known, was that major tax
reforms were long overdue. The report was unashamedly concerned with the
overall equity of the taxation system. It had little to say on indirect taxes or
taxation by the states. Arguing that Australia might well rely more heavily on
income taxation, it noted emerging weaknesses in the income tax system. It
commented, for example that
the substantial degree of progression of tax paid in relation to taxable income
is significantly abated by erosion of the income tax base, and by avoidance and
evasion of tax liability, all of which favour high income groups relatively to
lower income groups. (171)
To reduce the extent of income-splitting as a means of avoiding tax, the Inquiry
recommended aggregating all family income other than wages and salaries and
adding this aggregate amount to the highest wages or salary income in the family.
It also suggested improving the fairness of dependents allowances by substantially
increasing child endowment payments while abolishing tax deductions for
dependent children.
The study also identified major defects in the taxation of companies,
including ways to exploit the company form to avoid tax. On company taxation,
the study commented that a substantial part was probably passed on in the form
of higher prices charged to the customers of companies, so having no impact on
shareholders’ incomes. Nevertheless, it criticised the double taxation of dividends
and recommended radical changes in corporate taxation.198The Downing team
also identified a variety of other forms of tax avoidance. Partly to capture such
untaxed forms of property income and capital gains, it advocated a net worth tax.
However, the main reason the Downing study gave for its support of wealth
taxation was horizontal equity:
198. It nevertheless suggested the retention of a company tax system, replacing the existing tax with a split rate
system and encouraging the distribution of dividends through a high rate of undistributed profits tax
equivalent to the top marginal rate of income tax on individuals. With a degree of prescience, the
Downing Inquiry also observed that since interest paid on borrowed funds is deductible for purposes of
company tax, companies might be induced to rely to an imprudent extent on fixed-interest finance
(Downing et al 1964).
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T AXIN G P O P U LARIT Y
[C]apacity to pay would be more adequately measured if property, as well as
income, were included in the tax base... The taxable capacity of an individual
with a given income is greater if that income is derived from property than
from personal exertion, since property income is obtained with less effort and
is usually more permanent. [Also] property confers advantages on its owner
independent of, and additional to, the income it yields: it serves as a reserve of
spending power in emergencies and thus reduces the need to save out of income,
it provides security for old age and heirs, it provides opportunities for reducing
income tax liability by income splitting, it gives the owner access to credit, it
is a necessary condition of business enterprise, and it confers social status and
prestige. (109)
Notwithstanding, the inequities and cracks emerging in the taxation structure by
the early 1960s, successive government made only token attempts to carry out
Ligertwood’s recommendations (Mathews & Jay 1972, 191). There was no
response to the issues raised by the respected Downing study.
As a United States congressman commented on his own country, ‘like a
patient suffering with fever, the Treasury’s attitude toward reform comes in fits
and starts, interspersed with periods of profound coma’ (Henry S. Reuss, quoted
in Kent 1985, 295). The 1955 changes to income tax marked the beginning of
such a coma in Australia. From the mid 1950s the income tax giant was to doze
undisturbed for nearly two decades.
Taxation by Misrepresentation — the effect of Inflation
Inflation is the one form of taxation that can be imposed without legislation’
(Milton Friedman, quoted in Kent 1986, 97)
In framing a review of taxation in Australia, someone has to make a
judgement as to the kind of policy we want. In theory at least, one would expect
these judgements to be made by the elected decision-makers. If not, then the
appointed committee must either make heroic assumptions or be so indefinite
in all but the most clearly administrative aspects of their review that their
report becomes only a discussion paper for any other body of review set up to
actually make a judgement about taxation policy for Australia.
(Thomson 1976, in Groenewegen 1980, 182–95)
Governments around the world discovered a new gilded revenue egg in the
1960s, known as ‘the inflation tax’. The discovery was a significant boon for
successive Australian governments. A silent but effective revenue-raiser, inflation
Smith RS43 ATRF Page 109 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 109
made it unnecessary to announce and legislate for unpopular tax increases
(Morgan 1977 1983). However, inflation was to irreparably damage the income
tax in the same way that it undermined the viability of the other progressive taxes
— estate and land taxes.
Along with inflation, the ambitious social reforms of the Whitlam Labor
government contributed to rising tax burdens from 1972. The heavier tax burden
also forced open the emerging cracks in the tax system. High average and marginal
income tax rates worsened the tax avoidance problems identified in the early
1960s. As marginal tax rates increased and average wages crept into the top
marginal tax brackets, various forms of income-splitting became prevalent. For
the first time since the income tax was introduced, the unit of taxation became the
focus of debate. 199As Sir Josiah Stamp observed in 1936,
the defects of a photographic negative are often less negligible, or at any rate,
tolerable, until we enlarge the picture, when they become clear to all. Taxation
is now rapidly developing from a merely unpleasant incident into a
dominating feature of daily life... the blemishes which were insignificant may
now be intolerable. (1936, 1–2)
Tax changes in 1970 and 1972 made tentative attempts to reduce tax rates on
lower income earners, who were being pushed by inflation into higher marginal
tax rate brackets. However, these changes still left the majority of wage and salary
earners moving into the top tax brackets. To ameliorate the effects of the
progressive scale on the average wage and salary earner there was another
simplification and lowering of the rate scale in 1974, but these changes merely
served to emphasise the need for more far-reaching reforms to taxation.
By the mid 1970s the ‘excessive’ reliance on consumption taxes noted by
Downing (1964, 170) had been more than redressed by ‘bracket creep’ and ‘fiscal
drag’.200It was now income taxation that was excessive.
199. There was also concern that the steeply graduated rates of income tax combined with the generous tax free
threshold meant families where both adults were in the paid workforce paid less tax on their total family
income than families where a single adult earned the same total income. Whether this is inequitable
depends on whether the unpaid work of the so-called dependent spouse is acknowledged to be of
significant economic value to the household. If it is, then there may be no inequity, as the capacity of that
household to pay tax is increased by their unmeasured but implicit income from additional leisure or from
valuable unpaid household services. On the other hand, if a ‘dependent spouse’ is seen as a net economic
drain on the household unit, then family taxation would be seen as more equitable between families. At
the same time individual unit taxation was a major benefit for most women whose income was from their
own employment. Because individual taxation is more consistent than joint taxation with modern
principles of equality and independence for married women, governments were hesitant to tax couples
jointly to prevent tax avoidance by a minority of couples. Joint taxation effectively taxes the lower income
earner at the same rate as the higher income earner.
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T AXIN G P O P U LARIT Y
By this time, there had come to be an increasing sense of urgency about tax
reform. Nevertheless, there was increasing disharmony over the what the reshaped
tax creature should look like. Faced with making unpalatable choices about which
taxpayers should face the taxation ogre, the McMahon government in early 1972
set up the Asprey Taxation Review Committee to make such judgements for it.
This was the first comprehensive taxation review since the 1934 Royal
Commission on Taxation. A preliminary report was provided in time for the 1974
budget, by this time with the new Whitlam government in power. The Coombs
Task Force on spending priorities, set up by the new government in 1973, had
meanwhile highlighted the revenue cost of the numerous perks adorning the
income tax structure. With all this activity, the 1974 budget saw substantial tax
changes, including a drastically simpler personal tax scale, a comprehensive capital
gains tax, a surcharge on property income and a concessional deduction for home
mortgage interest. Many industry concessions were abolished in the same budget.
In November 1974 the Whitlam government established another committee
to examine the specific problems created for the tax system by inflation. The
Mathews Committee was to report by May 1975 on how to redress the effects of
inflation on taxation paid by individuals and business.
The issues raised in the 1975 Taxation Review Committee’s Final
Report201were but the second coming of those identified by the Downing team in
1964.202However, an important difference was the importance placed by Asprey
on rejuvenating the consumption tax base. As well as resuscitating income tax, the
higher revenue needs of the 1970s also necessitated revamping the unproductive
sales tax. With the weary and overburdened income tax teetering under the load
of financing most Australian government expenditure, Asprey suggested reducing
its relative importance in Australian taxation. Replacing the existing wholesale
sales tax with a value-added tax (VAT) would share the tax load more broadly
between the different tax bases. Integral to Asprey’s strategy of shifting to indirect
taxation was a reformed system of death duties. The reform and national
integration of existing estate and gift duties was important to maintaining overall
tax progressivity. The government had already announced an ambitious and farreaching capital gains tax as part of its package of reforms in 1974. However, it
200. Automatic and large increases in income tax revenue from the effects of inflation is known as ‘fiscal drag’
(originating from the expression ‘the fisc in drag’ perhaps).
201. An interim report was released by the Asprey Committee in mid 1975. This allowed its recommendations
to be considered in the 1975–76 Budget deliberations, along with those of the Mathews Report.
202. See Boxer (1985) for a comparison of the Downing study, the Asprey Report and the 1985 Draft White
Paper.
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POSTWA R TA X PROGR ESSION 111
did not proceed with the tax. Nevertheless, to repair the damage done by tax
avoidance, and also to offset higher indirect taxes, the Committee tentatively
endorsed a capital gains tax. The report also suggested replacing the existing
‘classical’ system of company taxation by a partial imputation system to end socalled ‘double taxation’ of dividends.203
As part of its suggestions for restructuring the personal tax scale the Taxation
Review Committee had suggested higher marginal rates of tax on low earners. To
protect the ‘genuine poor’ from these rates, the Committee had recommended a
tax rebate for low income earners. Partly reflecting the Committee’s suggestion,
the Whitlam government introduced a personal income tax rebate in 1975. This
more than doubled the level of exempt income for low income earners from
$1,040 to $2,520. It increased marginal tax rates on lower incomes, with the
bottom tax rate lifted from 7 per cent to 20 per cent. Compressing the tax scale
from 29 steps in 1973–74 to a mere 7, the 1975 changes merely reflected what
had already happened de facto to the progressive income tax. The 1975 budget also
adopted the Committee’s suggestion to replace tax deductions with the fairer
system, concessional rebates.204 At the same time the dependent child rebate was
combined with the child endowment paid to mothers to become the new family
allowance payment. The new payment was fairer in that it assisted all families with
children rather than only the relatively well-off group who were taxpayers. 205
Tax reform took second place to more exciting affairs of government until
1977. With an election campaign looming, the unpopular Fraser government
203. Ironically such reforms had been advocated as early as 1964, by one of the Asprey Committee’s members,
in response to the proposals put forward by the Downing Agenda for Tax Reform. See Bensusan–Butt,
1964.
204. The Committee’s recommendations had been supported by the conclusions of the contemporary
Henderson Inquiry into Poverty in Australia. They were also consistent with the recommendations of the
Downing report of a decade earlier (Commission of Inquiry into Poverty, Poverty in Australia: First Main
Report, AGPS, Canberra, April 1975).
205. The new policy also acknowledged the similarity of taxation and social security measures. However, the
allowance counted as a social security expenditure: because of damage from inflation and successive
budgets it was to be one of the horizontal equity casualties of the next decade and a half. The dependent
spouse allowance, introduced as a response to high unemployment in 1936 just after the Depression, was
retained in the form of a taxation rebate. Like income taxes levied jointly, that is, on the aggregated
income of husband and wife, the dependent spouse rebate is controversial because of the effect it has in
reducing the benefit from labour force participation of the lower income earner, usually the wife. It also
ignores the economic value of the contribution made by the so-called ‘dependent’ spouse in the form of
household production. This contribution increases the economic income of the household. Nevertheless,
the dependent spouse rebate has been justified as a rough form of ‘justice’ for families with only one cash
income, who benefit from just one zero rate income tax threshold, compared to two income earner
families where the tax paid by each separately reflects the concessional value of the income tax threshold.
The prevalence of income-splitting for tax avoidance purposes by the self-employed and professionals is
also used to justify the concessional tax treatment of ‘dependent’ adults as a horizontal equity measure.
Smith RS43 ATRF Page 112 Thursday, November 11, 2004 3:00 PM
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T AXIN G P O P U LARIT Y
considered all taxpayers ‘genuinely poor’. In a 1977 election package labelled ‘a
fist full of dollars’, it promised the limited rebate suggested by Asprey to all
taxpayers in the form of a general exemption.
The 1977 changes, while dressed up as tax reform, worsened many problems
identified by Asprey. In fact, the Committee found itself ‘a shady ghost in the
background’ of taxation policy for the next decade (Thompson 1976, in
Groenewegen 1980, 18). By then, at least one integral element of Asprey’s
recommendations — the restructuring of estate and gift duties — had been
overtaken by events.
The 1977 package worsened horizontal equity by abolishing most
concessional expenditures to fund the general exemption. It also added to the
problem of tax avoidance and income-splitting, the higher threshold increasing
the benefits of the latter.206 As a means of encouraging work effort and thrift, the
1977 reforms also went rather astray.207 More damaging, however, was the fact
that this expensive electioneering bribe delayed more fundamental reforms, such
as tax indexation, for another decade.208
The Mathews Committee’s review of inflation and taxation was somewhat
more successful in stirring governments from their tax slumber. The Committee’s
Report recommended measures to effectively subject only real income to taxation.
Without such changes, the Report’s authors foresaw dire consequences for the
corporate sector from the interaction of inflation and taxation. The Report also
206. Once the Fraser government abolished gift taxes along with estate duties from 1976, it became more
difficult to monitor and prevent this type of tax avoidance. The Draft White Paper noted the difficulty of
enforcing such measures in the absence of estate and gift duties (62, 72). The Asprey Committee had
compromised on competing views of the appropriate income tax unit; like the Downing study, it had
suggested all income other than wages and salaries be aggregated and taxed at the rate of the highest
income earner to address the problems of income-splitting between members of family units. However,
apart from some tentative moves against minor children in 1980, it was left to the drafters of the 1985
Draft White Paper to half-heartedly and ineffectually resurrect Asprey’s proposals for eliminating incomesplitting.
207. As a concession to the ‘flat-rate tax’ advocates, the package reduced the number of tax brackets to three.
But while the top marginal tax rate was lowered, the majority of taxpayers still paid tax of either 33.5 or
47.5 per cent for every extra dollar they earned. While the higher exemption level reduced average rates of
tax, marginal rates for ordinary taxpayers were unchanged or even higher. Marginal rates at the bottom of
the income tax scale were increased in the 1977 election package, so that, for those whose income took
them just out of the tax-free zone, the reforms meant higher marginal tax rates, of 20 per cent.
208. It was not until 1990–91 that government returned to the issue of tax indexation. Even then, the revenue
cost meant that indexation had only partial coverage — extending to just family allowances and the
dependent spouse rebate. Unchallenged for sixty years as a horizontal equity measure paid to male
breadwinners, the 1975 family allowance payment had by been sacrificed for indexation in 1976
(Groenewegen 1981, 10). Eroded by inflation and budget cuts to ‘middle class welfare’ in the 1970s and
1980s, the real value of these allowances declined dramatically. On the other hand, the dependent spouse
rebate, well hidden in the taxation system and protected by the income-splitting debate, emerged from the
tax reform processes of the 1970s and 1980s relatively intact in real value.
Smith RS43 ATRF Page 113 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 113
highlighted the arbitrary distributional effects of inflation — inflation had shifted
the tax burden to large and low-income families by raising the tax burden on lower
incomes and eroding the value of child allowances. In the words of the
Committee:
whatever measure of distribution is considered most appropriate, inflation
results in a violation of legislated horizontal and vertical equity prescriptions...
it is unlikely that the personal tax redistributions caused by inflation are those
intended or preferred by society.
(Committee of Inquiry into Inflation and Taxation 1975, 56)
By the mid 1970s, as the Committee pointed out, the relentless increase in
income taxation was destabilising the economy. Even personal income tax was
creating problems for wages policy and economic management. High marginal
tax rates were being passed on in the form of higher prices for services. Now not
only professionals but wage earners too were raising their wages demands to
anticipate the effects of the income tax system on after-tax wages. As rising prices
and wages pushed more people into the top marginal income tax brackets,
unions pressed for larger wage increases to increase take-home pay rather than
just pre-tax wages. Higher wages paid by employers in turn added to
unemployment, and, in particular, to inflation. With Australia’s system of
indexing wages regularly for price rises, higher inflation meant even higher wage
claims. According to Mathews,
The combination of a progressive income tax and a wage bargaining process
directed to the maintenance of real disposable income is thus a time bomb in
the heart of the economic system. (1983b, 23)209
The Mathews Committee’s major recommendation was indexing the personal tax
system. Electorally very popular, indexation was, however, very costly. Indeed,
the Treasury, fierce and determined guardian of the Commonwealth ‘fisc’, was
vocal in its opposition to tax indexation. Controlling the budget deficit was by
now heavily dependent on ‘fiscal drag’. Nevertheless, in avid pursuit of that
elusive quarry of political popularity, and in spite of advice to the contrary, the
Fraser government decided to implement personal tax indexation in one fell
swoop in 1976. However, after the initial euphoria, the decision became rather a
liability for the government. Indexation took away the government’s opportunity
209. Indeed, because income taxes were passed on in this way, Mathews (1983b) has argued that the income tax
was more inflationary than increases in indirect taxes.
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T AXIN G P O P U LARIT Y
to appear generous through regular ‘Claytons’ tax cuts. After a gradual backdown beginning in 1977, personal tax indexation was quietly abolished in 1982.
Other reforms to business taxation implemented on the recommendation of the
Mathews Committee were, like personal tax indexation, short-lived. 210
Sidestepping the issues raised by the Committee, the government introduced as
its palliative a costly 40 per cent investment allowance in early 1976. 211
Another sound of silence on tax reform came with regard to capital gains
taxation, again a significant distortion of company financing and investment in
inflationary times. The Fraser government was ideologically opposed to taxing
capital gains as recommended by its advisory committees. Once again, the forces
of darkness prevented a much needed reform from illuminating the tax horizon.
The Can’t on Indirect Tax
There is a prodigious amount of cant on this topic... There is nothing
inherently bad about indirect tax, nor is there anything inherently good about
a direct tax. It depends entirely on what kind of direct or indirect tax it is. A
direct tax on the labourer is not necessarily good because it is direct; an indirect
tax on the luxury of the rich is not necessarily bad because it is indirect. It
happens, indeed, that most of the indirect taxes of the past have been devised
by the powerful in order that their burden might fall on the weak; but it is by
no means impossible to frame a system of taxes on consumption which will
supplement other taxes and do substantial justice to all.
(Seligman 1900, 11)
To the liturgy of woes about the record on income tax reform from the 1960s
could be added inaction in other important areas, notably in reforming
Australia’s ‘effectually disguised’ but highly regressive indirect tax system
(Groenewegen 1983, 346–7). In spite of its pretensions as the sole, all-powerful
210. The committee’s recommendations on business taxation had been to adjust the company income tax base
to reflect real profits, rather than income boosted by inflation. They therefore recommended two new
allowable deductions from company income for inventories and that depreciation be valued at an actual
cost basis. These were a ‘cost of sales’ valuation adjustment and ‘depreciation valuation’ adjustment. The
spirit of the former of these recommendations, was implemented in the 1976 Stock Valuation Adjustment
(Groenwegen 1980, 121).
211. Combined with historical depreciation provisions, this taxpayer subsidy of some forms of business
investment created a massive hole in the company tax base that was not plugged for nearly a decade.
Another major distortion of the tax system identified by Mathews was the practice of allowing deduction
of debt interest payments from company income, but not deduction of equity finance costs. This
encouraged companies to borrow rather than issue new shares. However, it has been argued that by
neglecting business liabilities in indexing the tax base, new distortions would be introduced (Swan 1978).
Smith RS43 ATRF Page 115 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 115
means of progressive taxation, the income tax in Australia has only barely offset
the particularly regressive effect of Australia’s indirect taxes for most taxpayers
(Groenewegen 1985c, 67–71).
More than in other countries, the popular will has resisted the extension of
indirect taxation (Mathews 1983b, 21). Its unpopularity is attributable to the
Australian tendency to tax selective activities rather than a broad consumption
base. Although Australia has had a similar balance to other countries in its mix of
direct and indirect taxes, more than three-quarters of revenue from goods and
services taxation comes from four commodities — tobacco, alcohol, petroleum
products and motor vehicles (Head 1983, 12; Groenewegen 1980, 16). Heavy
taxation of alcohol and tobacco is generally regressive, although such taxes may be
justified on the grounds of the social costs of such activities (Groenewegen 1980,
25). With extensive exemptions a feature of the wholesale sales tax from its early
days, even this supposedly general tax had a very narrow base; it covered only onethird of the potential tax base, private consumption, by the mid 1980s and most
of its revenue came from two or three items (Groenewegen 1985c, 189). Taxing
such so-called luxuries as cars and televisions at a high rate, while taxing other
items such as services — consumed predominantly by the better-off — lightly or
not at all, is thus likely to also particularly disadvantage lower income groups.
Following the recommendations of the Asprey Review in 1975, and several
official investigations into consumption tax reform in the 1970s, tentative
attempts were made to replace the wholesale sales tax with a broader based and
more equitable form of consumption taxation. After the Australian Taxation
Office investigated in 1978, it suggested a retail sales tax replace the wholesale sales
tax. However, the Australian public viewed any forms of consumption tax as a
regressive step: there was lack of interest in, if not antipathy to, proposals for
change. Opposition by retailers and lack of government commitment to reform
saw consumption tax reforms disappear into the overflowing ‘too hard’ tax reform
basket by the late 1970s (Groenewegen 1985c, 242–3). By 1983, Australia’s
system of consumption taxation was aptly described by Professor Head as
a rare old mess based on a mind-boggling and contradictory mixture of cynical
revenue-maximising motives (in the case of the excises) and a possibly wellintentioned but totally misconceived attempt to ‘humanise’ the wholesale sales
tax. (12)
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T AXIN G P O P U LARIT Y
Table 13: Taxation 1975–76
Commonwealth State and Local
Customs and excise duties
Sales tax
Income taxes
Estate and gift duties
Stamp duties nei
Land taxes
Other taxes
(Payroll)
(Motor taxes)
(Gambling)
(Business franchise)
Total
Total
$mill
%
$mill
%
$mill
%
3,375
1,406
11,813
87
0
0
255
20
8
70
1
0
0
2
na
na
na
na
100
0
0
0
227
551
200
3,406
0
0
0
5
13
5
78
16
7
55
1
3
1
17
4,384
100
3,375
1,406
11,813
314
551
213
3,648
(26)
(12)
(8)
(4)
21,320
16,936
100
Source: Taxation Revenue Australia, ABS Cat. No. 5506.0, various .
The government had no shortage of advice throughout the 1970s on improving
the taxation system. But very little of lasting consequence was done. As David
Hume commented of the eighteenth century (quoted in James 1981, 177), tax
policy seemed based on the presumption ‘that every new tax creates a new ability
in the subject to bear it, and that each increase of public burdens increases
proportionably the industry of the people’.
Such policy inaction and timidity was sustained by that tax manna from
Heaven ‘the crude oil excise’ which, after the 1979 ‘oil shock’, more than doubled
Commonwealth excise tax revenues in less than four years.
Not Giving Unto Caesar
Render therefore unto Caesar the things which are Caesar’s; and unto God the
things which are God’s.
(Matthew, 22:21)
The honest taxpayer would willingly bear his fair share of the burden, but even
he cannot concede his obligation to pay other men’s taxes.
(Seligman 1900, 31)
Introducing income taxes in the nineteenth century rested on judgements that
taxpayers would be honest enough for the tax to be enforceable. However, as the
Smith RS43 ATRF Page 117 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 117
burden of the tax rose, the Devil’s representative renewed his immoral
whisperings to taxpayers with greater effect.
Tax avoidance became a particular problem in Australia in the 1970s. Partly
this was due to judicial and enforcement weaknesses, partly it reflected gaps in
income tax law (Kesselman 1985, 21). Technological change, the expansion of
international trade and investment, and the abolition of capital controls had
meant Catherine Spence’s flighty capital flapped more easily around the postwar
world. If a cheque’s trip around the world reduced a company’s tax bill, then so
be it. Transfer pricing and international tax havens became a major concern of
taxation authorities from the 1960s. Governments resorted to foreign investment
restrictions and withholding taxes on dividends and interest to enforce taxes on
international businesses.
The taxation of foreign-source income had been a major gap identified in the
income tax base by the 1970s’ ‘research and review’ missions. Such income had
traditionally been excluded from Australian taxation and, at a time when capital
controls prevented Australians investing overseas, this was seen as a minor issue.
As these controls began breaking down from the 1970s, the matter of
international tax avoidance became more urgent. A foreign tax credit system had
been announced by the Fraser government to bring home to taxation the overseas
income of Australians. However, the government succumbed to business pressure
and subsequently dropped the measure. It likewise had folded in an attempt to tax
housing fringe benefits for miners.
The essential elements of tax avoidance in the 1970s and 1980s were little
different from those in the 1960s. They revolved around the non-taxation of
capital gains, fringe benefits and foreign-source income; and other income tax
concessions; and opportunities to shift profits and deductions between one period
and another, or from taxable to exempt or lower taxed forms of income or income
units. Tax avoiders grasped with enthusiasm and wielded with vigour the
instruments provided by successive governments in the form of specific industry
tax concessions and exemptions. Such tax preferences served an easy disguise for
those camouflaging their loot from Caesar’s exactions. In some cases, income tax
concessions allowed the full cost of industry investment expenditures to be passed
to the taxpayer.
By the late 1970s, the Australian High Court under Chief Justice Sir Garfield
Barwick was also taking an increasingly narrow view of tax authority powers. Its
approach led to the rapid expansion of artificial ‘paper’ tax avoidance
arrangements, better known as ‘bottom of the harbour’ schemes. Combined with
the effects of high marginal tax rates and inflation, the aversion of some senior
Smith RS43 ATRF Page 118 Thursday, November 11, 2004 3:00 PM
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T AXIN G P O P U LARIT Y
members of the judiciary to crack down on tax avoidance virtually disabled Caesar
in the battle to collect his dues. It was, in the words of a persistent critic of
Australian tax administration, ‘one of history’s most loaded battles’ (Grbich 1983,
in Head 1983, 417).
Recurrent public scandals over tax avoidance in the late 1970s forced the
government to appoint a Royal Commission (the ‘Costigan Commission’) to
investigate artificial tax avoidance schemes. It found little comfort there, with the
involvement of even respected members of the community indicating the depth
to which tax morality had sunk. The Costigan report was a damning indictment
of the lack of government action to redress the problem.
The Fraser government tried in 1980 to plug some of the most gaping tax
loopholes. Reflecting growing community resentment at tax avoidance through
income-splitting, the government also belatedly took action to prevent incomesplitting along the lines suggested by Asprey, assessing the investment income of
children as if it were their parents’. Although highly controversial because of the
retrospective application, new laws in the early 1980s wiped out the worst of the
artificial schemes.212
Table 14: Taxation 1984–85
Commonwealth
$mill
%
State and Local
$mill
Customs and excise duties
12,051
23
0
Sales tax
4,966
9
0
Income taxes
35,303
67
0
Estate and gift duties
1
0
13
Stamp duties nei
216
0
2,027
Land taxes
0
0
507
Other taxes
359
1
10,928
(Payroll)
na
(Motor taxes)
na
(Gambling)
na
(Business franchise)
na
Total
52895
100
13,476
Source:Taxation Revenue Australia, ABS Cat. No. 5506.0, various.
Total
%
$mill
%
0
0
0
0
15
4
81
(27)
(11)
(8)
(8)
100
12,051
4,966
35,303
13
2,243
507
11,287
18
7
53
0
3
1
17
66,370
100
Even so, by the early 1980s the income tax base was shrinking — the result of
decades of neglect and misuse. Most significantly, as Head (1983, 15)
212. Not the first time taxes have been retrospective in the Antipodes, as we have seen.
Smith RS43 ATRF Page 119 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 119
emphasised, ‘a major public asset in the form of taxpayer compliance and
community acceptance ha[d] finally been disastrously eroded’. There was a
perception, not altogether unfounded, that many people were not paying their
dues. For wage and salary earners: it was ‘pay-as-you-earn’ for many others of
greater means, it was ‘pay-as-you-like’.
The redistributing income tax had become an inequitable tax tool. The
essential problem was now, as Professor Mathews pointed out, ‘not to make the
rich pay higher rates of tax, or even more tax, than the poor; it is to make the rich
pay any income tax at all’ (Mathews 1980, 106).
Lo! Thy dread Empire, Chaos is restor’d;
Light dies before thy uncreating word:
Thy Hand, Great Anarch! lets the curtain fall;
And universal Darkness buries All.
(A. Pope, quoted in Fraser 1983, 204)
The Summit of Taxation Reform
Deem not the irrevocable past
As wholly wasted, wholly vain
If rising on the wrecks at last
To something nobler we attain.
(Henderson 1893, 347)
By the mid 1980s taxation reform was long overdue. As Mathews summed it up:
Far from having a tax system that pays due regard to the stated objectives of
taxation policy, we have developed a system which operates perversely in
relation to every major criterion. (1985d, 4)
He continued,
It would be difficult to improve on the present arrangements if we deliberately
set out to design a tax system that required the poor to pay more taxes than
many of the rich; if we deliberately wanted to discriminate against wage and
salary earners and the proprietors of small businesses; if we deliberately decided
to distort production decisions and consumer choice; if we deliberately sought
to destroy incentives to save, invest, innovate, take risks, and undertake
productive activity while simultaneously rewarding speculative activity and
providing incentives as well as opportunities for avoiding and evading tax:
Smith RS43 ATRF Page 120 Thursday, November 11, 2004 3:00 PM
1 20
T AXIN G P O P U LARIT Y
and if we deliberately set out to make the tax system as complex, cumbersome,
confusing and costly to administer and comply with as possible.
From 1984, there were signs of the dust being brushed off the tax policy
instrument. Taxation once again became, in a novel way, a tool of
macroeconomic management. Under the Hawke government’s Prices and
Incomes Accord with the trade union movement, taxation policy was to buttress
wages policy by linking lower taxes with more moderate wage claims. Tax policy
was to be revived as a stabilising rather than destabilising policy instrument.
The new government also had ambitions to finance new public expenditure
programs. Increased government spending on public services (such as for
Medicare), were also an important part of the Accord. With the focus of wages
policy shifting to the ‘social wage’, the government explicitly linked wages, taxes
and social security measures.213It became apparent, however, that government
spending options were severely constrained by the crumbling tax structure.
Windfall revenues from the oil import parity pricing policy no longer masked the
problem: Australian oil was running out. Tax avoidance and evasion was seriously
undermining revenue-raising capacity. Tax ‘avoision’ was also contributing to
public resentment at the existing and highly visible income tax burden. Soon after
coming to office, the government introduced a series of specific tax reforms. These
reforms included extending withholding tax arrangements to the building
industry through the prescribed payments tax. However, it was clear that broader
tax reform was needed to repair the rot in Australia’s tax system. Many in Australia
were coming to argue, like American tax economist William E. Simon, that ‘the
nation should have a tax system which looks like someone designed it on purpose’
(quoted in James, 1981, 179).
Taxation issues were prominent during the 1984 election campaign, with
numerous complaints about the existing income tax system. There was also debate
on particular taxation issues. These included proposals such as the government’s
moves to tax previously exempt lump sum superannuation payments, and antiavoidance measures involving capital gains taxation. It became clear from the
election campaign that much needed reform could easily be stymied by the usual
combination of constraints political opportunism and cynicism. Features of
213. For example, along with changes to taxation, it also made significant reforms to the social security system.
This included increasing Family Allowance — created in the mid 1970s, as we have seen, from combining
‘child endowment’ and ‘dependent child’ tax concessions — which provided some benefits of the Accord
to non-earners and families with children. This latter measure went some way to addressing one of the
most pressing horizontal equity issues arising from the previous decades of neglect in personal taxation
policy.
Smith RS43 ATRF Page 121 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 121
Australian political institutions were said to give these attributes ample
operational scope (Groenewegen 1985a 3–4). To avoid these constraints, and
tackle tax reform as a package, the prime minister announced a new approach the
‘summit of taxation reform’.
In preparation for the ‘National Taxation Summit’ of July 1985, the
government reviewed federal taxation in detail. The agenda set down in its Draft
White Paper on Reform of the Australian Taxation (1985), became the basis for
discussion at the Summit.214 The first two options the government proposed
involved, as a minimum, widening the income tax base to include capital gains,
fringe benefits, and foreign source income.215 Most industry concessions would be
abolished. Option B also included rationalising and widening the consumption
tax base. Together such reforms would finance limited income tax cuts for low
income earners.216 The third option (Option C), and the one preferred by the
government, was to replace the current wholesale sales tax system with a 12.5 per
cent broad-based consumption tax (BBCT). The government proposed
comprehensive compensation for the loss of spending power through social
security payments or income tax cuts. With this package, the government claimed
the vertical equity of the tax system would be enhanced.
In supporting Option C, the Draft White Paper argued that personal income
tax rates must be reduced. This could only be achieved by substantially
broadening Australia’s income and consumption tax bases. A wider revenue base
would allow tax rates to be reduced and equity improved. At the same time, the
tax avoidance and evasion holes could be repaired and faith in the system
restored.217
Widening the income tax base was a key feature of the proposals. This
approach had credentials stretching back to Henry Simons’ perfect income tax. It
was also reflected in the earlier Downing and Asprey reviews. The Draft White
Paper documented Australia’s heavy reliance on personal taxes; these now
214. The Summit itself was a formal gathering of invited business, union and community representatives,
together with state and Commonwealth leaders at Parliament House in Canberra (See Groenewegen
1985a for details on the background and organisation of the Summit).
215. Known as Option A, which allowed little income tax relief for most wage and salary earners.
216. Through introducing a 5 per cent broad-based consumption tax (BBCT) while retaining the existing
wholesale tax for a limited range of goods (Option B)
217. Estimates of revenue lost from tax avoidance and evasion, and the various legal gaps in the income tax
base, ran into several billions of dollars (Draft White Paper 1985, 37). Tax avoidance produced ‘vertical’ as
well as ‘horizontal’ inequity. The increasing use of trusts, income-splitting and other mechanisms by
higher income taxpayers to avoid income tax had taken its toll on the progressivity of taxation: while in
1954–55 more than half of all revenues came from the highest income earners, by 1984–85 only one-fifth
of taxes came from this group (those with incomes more than 1.6 times average earnings) (19).
Smith RS43 ATRF Page 122 Thursday, November 11, 2004 3:00 PM
1 22
T AXIN G P O P U LARIT Y
accounted for more than half of Commonwealth tax revenues. The priority, as
seen by advocates of reform, was to reduce high marginal rates on wage and salary
earners with moderate incomes.218 Earning two-thirds of national income, this
group was nevertheless paying 80 per cent of income taxes. In more normal times
during the late 1960s, they had paid around two thirds of such taxes (Mathews
1983, 9).
In fact, as Mathews pointed out (1985b), the once proud system of graduated
rates was now a damp squib. Tax avoidance by higher income earners meant
effective rates of tax were rather different from those set down in the statutes. Even
without taking this into account, the potent 1915 income tax did not offset
indirect tax regressivity (Groenewegen 1985c, 67–71; EPAC 1987, 37–9). It was
now mainly the tax-free zone that made the tax progressive — representing a
return to the less ambitious redistributive strategy of South Australia’s 1884 flatrate income tax.
The Draft White Paper saw reform of company taxation as urgent. There was
a need to remove the many avenues for avoidance and erosion of the company tax
base and reduce the distorting effects on financing, dividend and company
structuring policies. Falling company taxes showed the rot in the system: company
tax revenues as a share of taxes fell by about 7 percentage points between the early
1970s and 1983–84 (Draft White Paper 1985, 190).
The Draft White Paper also saw the existing indirect tax base as inequitable
and needlessly complex. The sales tax, like the income tax, had high and variable
rates of taxation on a narrow and arbitrary range of goods and services. This
distorted consumption and production decisions and increased collection and
compliance costs. Originally intended to improve the progressivity or flexibility of
the sales tax, these features opened the way to demands for concessions by special
interest groups. The Draft White Paper conceded that the heavy use of income tax
had not made the overall tax system any more equitable. A system raising more
revenue by indirect taxation (Option C) could achieve the same redistribution
from rich to poor at a lower cost to economic incentives, tax avoidance and
evasion, and administrative complexity. The Draft White Paper argued
redistribution was better achieved through the social security system rather than
through the tax system.
However, the government ruled out introducing any new form of wealth
taxation, including any form of death duties. Although land taxation and local
218. High personal tax rates had crept up on a much larger group of taxpayers. Only 1 per cent of full-time
income earners faced a marginal rate of 46 per cent or more in 1954–55; 39 per cent did by 1984-85
(Draft White Paper 1985, 19).
Smith RS43 ATRF Page 123 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 123
rates had long since faded away as instruments of wealth taxation in Australia, the
Draft White Paper put forward these nineteenth century remnants as Australia’s
wealth taxes (1985, 190).219 Although wealth taxes, death duties and capital gains
tax are complementary rather than alternative taxes (Groenewegen 1985b, 306;
Saunders 1983, 403), Senator Don Chipp, known for ‘keeping the bastards
honest’, failed to detect the deceit:
If just taxes are levied on all income earned and a fair tax is levied on some
capital gains, as I have outlined, there is no room in Australia for wealth taxes
or death duties.
(National Taxation Summit 1985, 48).
As to be expected, there was a strong consensus for tax reform at the 1985
National Taxation Summit. Equally predictably there was no consensus on what
reform there should be. Representatives at the Summit agreed on eradicating
avoidance and evasion, and there was also considerable support for broadening
the income tax base.
There was also a consensus on ‘Option C’. However, this consensus was not
to the government’s liking. None of the major interest groups supported this
radical change to the existing tax base. The strong fear that the change would be
unfair to low income groups was dominant, although some emphasised that the
change would be inflationary. Others on the conservative side of politics feared
such a tax would allow the government to raise taxes for higher public spending.
Community groups and trade unions were less concerned by this latter
feature. However, they were reluctant to dramatically increase indirect taxes as the
government proposed. The ACTU preferred to expand the tax base through
wealth tax and inheritance tax, although it would consider alternatives. As they
noted, ‘tax reform must be paid for’ (National Taxation Summit 1985, 44). Others
expressed their concerns at future increases in the consumption tax rate, noting
that ‘systems introduced invariably outlive their makers to wreak their havoc’
(22). There was a mistrust of future governments’ commitment to compensate for
consumption tax increases. In the words of one politician: ‘it is not good enough
to expect low income earners to take future governments on trust’ (46). Women’s
219. For a reformist Labor government such a policy was especially surprising. It was also inconsistent with its
position on the abolition of death taxes in the 1970s. Nevertheless, there was a near deathly silence on the
issue at the Tax Summit; the Australian Council of Trade Unions (ACTU) was the only major interest
group calling for tax base broadening to include wealth taxes (Groenewegen 1985a, 9; National Taxation
Summit 1985, 44).
Smith RS43 ATRF Page 124 Thursday, November 11, 2004 3:00 PM
1 24
T AXIN G P O P U LARIT Y
groups also focussed on compensation issues, raising doubts that compensation
would be fairly spread within, as well as between, households:
The theory of money in the pocket to meet extra demands on the purse is all
very well — as long as the pocket and the purse belong to the same person. (16)
Nevertheless, it was business opposition to the government’s package that
sounded the death knell for consumption tax reform. Although ‘committing
ourselves to tax reform’, business representatives opposed all three of the
government’s proposed reform packages. Business argued the base-broadening
income tax reforms increased costs on business. In a unilateral declaration of
independence from the tax reform process, the president of the Business Council
of Australia declared, ‘We are not on the government’s cart. We are on another
cart’ (5).
As the treasurer emphasised at the Summit, ‘the option of doing nothing does
not exist’ (27). In September that year the government announced its package of
reforms to income tax, based on the Summit proceedings. There was to be a
capital gains tax of sorts and a fringe benefits tax, and the rate of company taxation
would be raised to the top personal marginal tax rate. Concessional expenditure
rebates for personal taxpayers were replaced. The Holy Grail of the 1985 reforms,
a lowering of personal income tax rates was obtained. Various industry
concessions were abolished, the investment allowance reduced slightly and gold
profits finally became subject to taxation in 1991.220 Some of the extravagant
concessions to superannuation were also curtailed.
Partly as a sweetener for these changes, most of which were vehemently
opposed by the business community, a new system of full tax imputation 221 was
announced. This would integrate the personal and company tax system and end
double taxation of dividends. This was a fundamental change to the principles of
company taxation.222
Introducing a foreign tax credit system from 1987–88 effectively taxed
income earned overseas by Australian residents for the first time. This reform
220. Some backtracking was evident on such measures by 1992, with a previous government decision to
abolish the 150 per cent company tax deduction for research and development expenditures reversed.
221. Full imputation meant that, where companies had paid company tax on profits, the company tax paid was
credited to individual taxpayers against their personal tax liabilities when they came to pay tax on their
dividend incomes (which were augmented for tax purposes by the amounts of the imputation credits).
222. Tax imputation had been an issue much stressed in the Campbell Committee report (Committee of
Inquiry into the Australian Financial System 1981), and there had been little dissent at the Tax Summit to
proposals — albeit more limited — for an imputation system.
Smith RS43 ATRF Page 125 Thursday, November 11, 2004 3:00 PM
POSTWA R TA X PROGR ESSION 125
made it more difficult for Australian companies to avoid tax. It also put in place a
means of tackling the pressing problem of overseas tax havens.
The changes were also to include a more determined and strategically focused
tax enforcement. Moves such as self-assessment aimed to free tax auditors to
pursue the larger tax geese.
Despite the fears of the Chicken Littles, the sky did not fall in when these
reforms were introduced. While critical of the failure to do more on other taxes,
Australia’s eminent public finance expert, R.L. Mathews, concluded:
Whatever their shortcomings, [the September 1985 taxation reforms]
probably represent the most far-reaching and politically courageous shift in the
direction of taxation policy ever attempted in Australia. Certainly the reforms
have tackled problems of avoidance and evasion head on and will improve the
fairness of the tax system, its effectiveness in terms of taxpayer compliance, its
efficiency, its neutrality and hence its capacity to improve Australia’s dismal
economic performance.
(Mathews 1985c, 424)
Table 15: Taxation 1990–91
Commonwealth
$mill
%
State and Local
$mill
%
Total
$mill
%
Customs and excise duties
14,924
16
0
0
14,924
13
Sales tax
9,365
10
0
0
9,365
8
Income taxes
66,377
71
0
0
66,377
56
Estate and gift duties
0
0
0
0
0
0
Stamp duties nei
229
0
3,983
15
4,212
4
Land taxes
0
0
1,602
6
1,602
1
Other taxes
2,428
3
20,373
78
22,801
19
(Payroll)
na
(22)
(Motor taxes)
na
(9)
(Gambling)
na
(7)
(Business franchise)
na
(10)
Total
93,323
100
25,958
100
119,281
100
Notes: Until 1988–89 the ACT was included in the Commonwealth sector, and from 1989–90 it was
included in the state and local sector. Land taxes excludes local government rates
Source:Taxation Revenue Australia, ABS Cat. No. 5506.0, various
Smith RS43 ATRF Page 126 Thursday, November 11, 2004 3:00 PM
THE SYNTAX OF SIN TAXES
The greatest art of a politician is to render vice serviceable to the cause of
virtue.
(Lord Bolingbroke, English statesman 1678—1751)
There has long been an uneasy marriage between government as regulator of
societal behaviour and government as collector of taxes on ‘sin’. Sumptuary or
‘sin’ taxes have been a politically preferred tool of societal improvement for
centuries, not least because the more entrenched the sin, the greater the revenue
reward. Australian sin taxes, including taxes and levies on gambling, tobacco and
alcohol, became respectable during the 1990s, while fuel taxes were propelled
into the sin tax club by growing public concern about the environment.
For the economist, taxing recalcitrant sinners is efficient taxation leaving
behaviour unchanged. Sin taxation may also have merit as the next best thing to
taxing leisure. A sin tax can also be the perfect tax if it improves on ‘the market’
through scientifically raising consumer prices of defined ‘sins’ to mirror the extra
harm to others from overindulgence. On this ‘Pigovian’ view,223 however, harm
to self and household members counts for nothing as it is a consumer ‘choice’. For
others of a more moral persuasion, sin taxes are about fairness not efficiency, and
justice requires that ‘users pay’ for harm caused by sin to society. If sin taxes also
reduce excessive indulgence, then that is also deemed ‘a good thing’. As J.S. Mill
commented, ‘the indulgences of the poor are as fit subjects for taxation as the
indulgences of the rich’ (Holloway 1973, 38). In practice though, sin taxes seem
highly regressive and are often proclaimed on this count to be unfair. The periodic
tendency of governments to protect revenues by promoting sin can give such taxes
an unwarranted bad press.
Nevertheless, the merits of a sin tax must be carefully judged. Sin taxes,
especially those on the indulgences of the ever-plentiful poor, can raise much
revenue and — if levied on committed sinners — at minimal economic cost.
Lowering sin taxes may leave excess profits in the hands of monopolists or with
enterprises living off bad habits, without necessarily making indulgence cheaper
or less regressive. Alternative tax measures may be more seriously regressive and
less ‘just’ or ‘improving’ of society than an appropriate sin tax. Viewing the issue
from this perspective, for example, it seems peculiar to have used revenues from
the new GST on children’s clothes, tampons and lactation aids to pay for lower
223. Named after a British economist, A.C. Pigou, who argued for such corrective taxes (Pigou 1918).
126
Smith RS43 ATRF Page 127 Thursday, November 11, 2004 3:00 PM
THE SYNTA X OF SIN TA X ES
127
gambling taxes or fuel excise. Apparently regressive sin taxation may also benefit
the poor overall if their numbers include those most sinned against. Using the
revenues to ameliorate the harm can make the overall fiscal incidence of a sin tax
progressive, and this may explain the common practice of earmarking (or
‘hypothecation’) of sin taxes. Sadly though, it seems that sin tax revenues are
usually earmarked less to help those injured by the taxed transgressions than to
mute community criticism of public profit from ‘sin’, and to ease government
guilt about garnishing ‘dirty money’.
Gambling Taxation — Public Equity in the Gambling Business
The gambling of some people is punished for the purpose of maintaining public
morality, and the gambling of others is legalised for the purpose of obtaining a
public revenue. This contradiction is sharpened by the very form of the
monopoly; for the monopoly unites, in the person of the State, the agency which
is called on to combat the vice, with the one which derives profit from it...
There is a fiscal stake involved; this predominates, and paralyses any attempt
at repression by the public authorities.
(Antonio de Viti de Marco 1936, 331)
The dual roles of government as a social guardian and as a gambling operator
place it under conflicting pressures to both discourage and encourage gambling.
In the past decade, Australian state governments’ role in regulating gambling to
prevent social harm has been visibly compromised by its fiscal stake in the
industry. Unlike for most other taxes, government can increase gambling
revenues by expanding the gambling tax base rather than by raising the tax rates
on a pre-determined tax base. Alternatively, it can raise revenue by selling off
(privatising) rights to future revenue streams of government-created gambling
monopolies. While gambling taxes have long been an element of Australian
taxation, cash-strapped state governments substantially expanded gambling and
associated revenues in recent decades, with little regard to the social harm. 224
Although insignificant in Australia’s overall tax system — a mere 2 per cent
of national revenues — gambling taxes became increasingly important to
Australian state governments during the 1990s (Smith 1998a). With a 27 per cent
fall in the real value of general revenue grants in the decade from the mid 1980s,
the states increased revenues from their own taxes (Mathews and Grewal 1997).
State and local government own-source taxes increased from around 20 per cent
224. For more detailed discussion of gambling taxation in Australia see Smith (1998a and 2000a).
Smith RS43 ATRF Page 128 Thursday, November 11, 2004 3:00 PM
1 28
T AXIN G P O P U LARIT Y
of national taxation in the 1970s and 1980s to around 24 per cent by 1997–98
(Australian Bureau of Statistics 1998). Gambling taxation played a significant role
in this expansion. Since 1996, states have collected around 11 per cent of their tax
revenues from gambling taxes, around $4 billion annually. This excludes casino
or gaming machine licence fees which, at around $360 million between 1993–94
and 1996–97, were equivalent to around one third of annual gambling tax
revenues in Victoria over that period.225
The dramatic growth in Australian gambling tax revenues during the 1990s
reflected the rapid expansion of the industry due to gambling deregulation and
privatisation, not higher gambling tax rates.226 Until this time, most states banned
gaming machines and casino gambling. Real per capita gambling losses more than
doubled in real terms during the decade to 1995–96, while the average amount
gambled per head of population rose to $5,375 a year (Tasmanian Gaming
Commission 1997). Average gambling tax rates fell due to state rivalry to attract
gambling businesses through tax concessions and a shift in gambling activity away
from lotteries and racing towards lower-taxed casino and gaming-machine
gambling.227
Gambling has long been a productive revenue base, although whether
gambling taxes are ‘fair’ is a central focus of gambling tax policy debates.
Gambling tax incidence is a complex question that depends on industry structure
as well as on the characteristics of gambling demand.228 Some would argue that
gambling taxes are a particularly regressive and discriminatory levy on the leisure
pursuits of the disadvantaged, which ignores the gambles favoured by high income
groups such as investments in shares and on the futures markets (Quiggin 1998).
On the other hand, gambling taxation has generally been perceived by the public
as ‘fair’ because it is ‘voluntary’ taxation of discretionary spending (Rubner 1966).
It can also be argued that the fairness of gambling taxation must also be judged for
how the revenues are spent — many gambling taxes are ‘earmarked’ or tied in
some way to expenditures for worthy social purposes. However, the main reason
for earmarking gambling tax revenues appears to be political, allaying public
225. Curiously, the High Court was prepared to tolerate state taxes on alcohol and tobacco if they could pass as
regulatory fees, but its semantic criticism of state tobacco and alcohol ‘excises’ in 1997 paid no attention to
fees of a comparable kind on gambling enterprises.
226. State governments may have been nudged into this gamble by the way Commonwealth grant shares are
assessed (Smith 1998a, note 28)
227. National gambling revenues would be around $80 million or 2–3 per cent higher if 1987–88 average
gambling tax rates for individual gambling applied to actual expenditures on these products in 1995–96.
Note that the Australian Bureau of Statistics counts payments of initial licence fees, such as casino or
gaming machine licences, as asset sales rather than taxation and this contributes to the apparently lower
tax rates on these types of gambling.
Smith RS43 ATRF Page 129 Thursday, November 11, 2004 3:00 PM
THE SYNTA X OF SIN TA X ES
129
disquiet about community coffers profiting from gambling, while neutralising
opposition from socially concerned groups and creating a political constituency in
favour of gambling.229
As well as debating the equity of gambling taxes, some argue that high rates of
gambling taxation distort consumption or production decisions — consumers
perceive value in gambling and the discouraging effect of taxes on gambling
counts as an economic loss (Albon 1997a).230 However, the 1990s gambling
revenue boom came mainly from the growth of gambling not higher taxes, so the
effects of gambling deregulation and promotion may be more relevant to
economic efficiency than gambling tax policies.231 Conventional economic
analysis assumes a fully informed and rational consumer, and the supposition of
economic benefit from consumption becomes questionable if turnover is
sustained by the decisions of ‘children’, ‘madmen’ and ‘fools’ (or at least the illinformed or irrational), (Clotfelter and Cook 1989). Furthermore, high gambling
tax rates may imply efficiency gains. Discouraging consumption of a ‘demerit’
good may improve social welfare, and gambling taxes may improve efficiency by
attributing the social costs of gambling to the individuals or enterprises which
generate the costs. A ‘user-pays’ tax on gambling may also serve fairness by
228. Governments commonly create excess profits or scarcity rents in the gambling industry by restricting the
number of licensed operators. If gambling taxes fall on these gambling monopoly profits, they may
improve the fairness of taxation. For example, in Victoria capturing such publicly created economic rents
for the public purse was shown to be the main role of gambling taxes (Chapman et al. 1997). Conversely,
privatisation of gambling monopolies reduces the future capacity of governments to regulate and tax the
industry (Quiggin 1998). On this view, the level of gambling taxes mainly determines the government
share of gambling operators’ profit rather than the weight of the tax burden on gamblers. In practice,
however, gambling operators may pass on the tax to consumers. Enterprises with significant market power
may charge ‘monopoly prices’ for gambles and, if consumer demand for gambling is unresponsive to the
price of the bet (‘price inelastic’), the price increase may effectively pay the operators’ taxes. If this is the
case, then gambling taxes may be regressive. With gambling spending heavily concentrated among
relatively few households, and with as much as a third of Australia’s gambling spending being by
compulsive or pathological gamblers, a large (and increasing) share of gambling tax revenues in the 1990s
derived from gambling addicts (Smith 1998a).
229. Earmarking is rarely effective as it does not prevent legislatures reshuffling government spending and
revenues or raiding gambling revenue funds. Earmarked revenues are usually only a minuscule proportion
of total funding for social services, such as for hospitals or education. Evidence from North America also
suggests the benefits of such earmarked programs are not focussed on low income groups (Campbell and
Ponting 1984; Livernois 1987).
230. Taxes on gambling were generally relatively low compared to rates for other excisable goods; ad valorem
rates of taxation were around 89 per cent on beer, 234 per cent on spirits, and 42 per cent on wine in
1997, while tobacco paid 212 per cent, while petrol and cars paid around 120–130 per cent. However,
gambling tax rates were usually higher than sales tax at 22 per cent, and compared to rate on most other
recreational expenditures or entertainment services (taxed at low or zero rates until the GST).
231. For example, vigorous advertising and promotion of gambling can mislead consumers about the odds of
winning. Such promotional activity could breach the Commonwealth trade practices Act or state
consumer laws and may in fact come under legal challenge (Smith 1998a, p. 83, note 101).
Smith RS43 ATRF Page 130 Thursday, November 11, 2004 3:00 PM
1 30
T AXIN G P O P U LARIT Y
compensating the public for the social and economic costs it incurs from gambling
addition.232 However, there is little evidence that such ‘sumptuary’ or Pigovian tax
objectives underpin the design of Australia’s gambling taxes, as the most socially
harmful forms of gambling are levied relatively lightly and the most benign are
taxed harshly (Smith 1998a).
Taxation is an excessively blunt instrument to rely on when the major costs of
gambling arise from the financial stress it causes gamblers and their families and
the resulting criminal behaviours. Nevertheless, the major problem with gambling
taxation is perhaps the risk of government gambling addition. Governments’
intrinsic role in sustaining a viable gambling industry, and its significant revenue
stake in industry profitability, risks making the public effectively shareholders in
the industry, and an important hidden social cost of gambling may be the
potential for the corruption of democratic processes through these close industry/
government links (McMillen 1996). Experience has shown that governments are
are easily drawn into sponsoring or promoting gambling to protect their revenues,
whether or not the gambling operator is a public enterprise.233 Gambling is
especially prone to criminal involvement, cheating and fraud. While consumer
protection is a legitimate reason for heavily regulating and restricting gambling, it
may ironically legitimise and expand the ‘market’ for gambling by making it seem
less risky and disreputable. Indeed, taxes on gambling may be seen as ‘user charges’
for the legitimacy of such operations and may imply a government guarantee of
operator probity. Regulation may thus serve the interests of operators more than
consumers, and develop excessively close relations between the gambling industry
and governments. Where this results in opportunities for various tax or other fiscal
favours to the operator,234 the public contributes financial equity to the gambling
enterprise.
As Professor Quiggin’s overview of Australian gambling concluded,
Initially the behaviour of the monopoly gambling enterprises was consistent
with the paternalist rationale under which they had been established.
Gambling was not advertised and there few attempts were made to expand the
market. Moreover, having provided legal outlets for gambling, in the form of
232. Such costs may include reduced work productivity, increased crime and fraud, and other costs imposed on
gamblers’ families.
233. This is because trends in gambling tax revenues are more volatile and more subject to marketing and
product life-cycle effects than broader based taxes (Alchin 1989; Haig and Reece 1985). Heavy promotion
and advertising is a key element in maintaining the profitability of gambling enterprises (Clotfelter and
Cook 1989; Haig 1985), and marketing typically aims at encouraging more usage among established
players rather than at recruiting new ones. Indeed industry viability may rely on attracting and
encouraging problem gamblers (Clotfelter and Cook 1989).
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a public monopoly, governments were fairly effective in suppressing illegal
alternatives. Thus, the policy change was generally seen as successful. However,
the income stream associated with these monopoly enterprises has proved
irresistible and has been exploited both to extract steadily increasing amounts
of revenue from gamblers and to confer a variety of political favours.
Constraints on advertising were abandoned and new forms of gambling were
introduced, not to suppress illegal alternatives but to increase the total flow of
revenue.
(Quiggin 1998, 3)
Corporatised public enterprises increasingly focussed on maximising profits
regardless of social consequences. The final stage of this process, privatisation, it
is said, was for governments to ‘convert cash flows into lump sums by selling their
monopoly powers to private individuals and corporations’ (Quiggin 1998, 3).
However, because the newer and more addictive forms of gambling impose
higher social costs, the higher gambling revenues of the 1990s were subject to
‘diminishing fiscal returns’. By 1998, a strong public backlash had emerged
against the wide accessibility of gaming machines and casino gambling, and
governments’ complicity in gambling trends. This forced an inquiry into the
gambling industry by the Commonwealth government’s Productivity
Commission (PC). Critics argued the inquiry was to quieten public criticism
rather than remedy underlying problems.235 The PC’s politically incorrect
findings exposed the potentially large magnitude of the social costs of gambling
and the need for the restructuring of gambling taxes (Productivity Commission
1999).
The Commonwealth Government showed an uncharacteristic reluctance to
use its fiscal dominance to coerce states into the suggested reforms. It instead
234. This can encourage pressures for public financial support and other concessions to preserve the
profitability of gambling concerns. Potential monopoly and geographic market power from holding a
casino or gaming machine licence provides incentives for ‘rent seeking’ by gambling operators and
encourages ‘directly unproductive profit seeking’ (Grinols 1996). For example, negotiations between
potential operators and a state government make it difficult to assess whether the full market price of
granting a casino licence is reflected in the fee paid by the winning tenderer. Governments may reduce
licence fees as an implicit subsidy to operators to meet objectives such as promoting development or
tourism. There may be significant public infrastructure costs in establishing and expanding a gambling
operation that are not fully charged to the operator. Regulations may be watered down or the
administration and enforcement of licence requirements weakened. Governments may accede to pressure
for release from contractual obligations which operators find onerous.
235. For example, see Smith (1998a). As a Commonwealth body inquiring into an area of state government
responsibility, with no jurisdiction over state gambling policies, the PC was asked only to provide an
information report, ‘to assist government decision making’, rather than to make policy recommendations.
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chose a more ‘politically correct’ national gambling policy, treading lightly on
regulation and taxation of internet gambling, and limiting its interventions in
gambling tax reform to ensuring gentle GST treatment of high-roller gamblers at
casinos (Smith 2000).236 The 1975 Asprey Report on Taxation had recommended
retaining specific taxes such as those on alcohol, tobacco and gambling if the
Australian sales taxes were replaced by a broad-based valued added tax such as the
proposed GST. However, the 1998 ANTS package envisaged reducing state
gambling taxes by around $500–600 million per annum, with lost revenues to be
recouped by state governments through their receipts of GST revenues. The 1999
Agreement on Reform of Commonwealth-State Financial Relations between
Australian governments stated that:
the States will adjust their gambling tax arrangements to take account of the
impact of the GST on gambling operators
(Australia. Treasury 1999).
Rather than setting out a transparent process which would give weight to issues
raised by the PC inquiry,237 the nature of this adjustment and the principles
which would underpin it were not publicly stated. This was despite the
potentially major implications for gambling policy and the effective tax burden
on different parts of the gambling industry. Tax revenue from gambling peaked
in 1999–2000 at $4.4 billion, and were reduced to $3.7 billion by 2001–02.
That is, the lower gambling taxes heralded by the 1999 agreement were
effectively financed by revenues from new taxes on ‘necessities’ under the GST
from June 2000, while winnings from this ‘reform’ were distributed on an ad hoc
basis in behind the scenes negotiations with gambling operators.
While gambling revenues are significant to state governments they are only a
small component of the total tax system and are unlikely to have major
significance for the overall regressivity of the Australian tax system. However, the
aggressive marketing of gambling to low income groups and heavy gamblers raises
236. An amendment to the 1999 GST legislation defined ‘rebates’ on losses by ‘high roller’ casino gamblers as
‘winnings’, and therefore outside the GST. An associated amendment specified that such rebates to highroller gamblers are not ‘a consideration’ for GST purposes, despite the casino paying such rebates to the
gambler as a consideration for his custom. The amendment resulted in revenue losses of around $30
million per annum. Such a gift to the gambling greats would clearly increase the regressivity of gambling
taxation and the GST.
237. Taking account of the PC findings, for example, would have seen downward relative adjustments to the
taxation of lotteries, and upward adjustments in the taxes on club gaming. There was also no indication
from the PC report that maintaining the relative value of tax concessions for ‘high-roller’ gamblers was
justified by any significant economic or fiscal benefits.
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important economic, political and moral questions about Australia’s gambling
policies. The defence of gambling taxation as ‘voluntary’ or ‘efficient’ is severely
undermined where demand is created by intensive marketing at the gullible or
uneducated, and where the consumer ‘choices’ are those of gambling ‘addicts’.
The Commonwealth shares responsibility through allowing gambling promotion
to be deducted from gambling corporation taxes — deductibility legitimises the
costs of ‘junkets’ for high roller gamblers and underwrites the cost of marketing
to ‘children, madmen and fools’. The large share of gambling tax deriving from
addicted gamblers challenges governments to ensure gambling tax revenues are in
fact ‘voluntary’ or ‘painless, and to consider the fairness and ethics of governments
and industry colluding to extract perhaps a third of Australia’s $4 billion annual
gambling revenues through exploiting the vulnerability of around 200,000
gambling addicts and their families.
The late 1990s provided an opportunity for gambling policy to be made in a
coherent social and economic framework, rather than as ad hoc and short-term
solutions to the states’ revenue problems. Australian parliaments had the chance
to reassess the costs and benefits of governments’ gambling policy habits, and
compare gambling’s demonstrated social, economic and fiscal costs, with the wellpublicised — but largely illusory — employment and investment benefits, and the
highly visible but tainted gambling profit to government and commercial stakeholders. However, the GST was a lost opportunity for reform.
Reducing temptation and minimising harm from states’ faulty gambling tax
policies now requires the Commonwealth to deal a new gambling tax policy for
the states. Tighter gambling regulation, including bans on gambling advertising,
marketing and promotion, would drastically shrink socially-harmful gambling
and reform states’ gambling tax habits, but would also reduce state revenues.
Offsetting these fiscal costs with a Commonwealth ‘revenue replacement’ package
would be a good deal for Australia’s gambling victims. However, like any dealer
contemplating an addict’s weakness, the Commonwealth may secretly cherish
states’ dependence on gambling taxes, and a bet on the prospect of Australian
government gambling tax reform may be a risky gamble.
Excising Cigarettes and Tobacco
Governments benefit significantly from the existence of smokers
(James 1998, p. 5)
For over a century, Australian smokers have coughed heavily into government
coffers. In 2001–02, taxes on tobacco products raised $5.1 billion, around 1–2
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T AXIN G P O P U LARIT Y
per cent of Australia’s tax revenues (Australian Institute of Health and Welfare
2002, Tables 6.1 and 6.2). Tobacco is well suited for taxation and was
enthusiastically cited by Adam Smith as an ideal tax target as it relieved the poor
of more burdensome taxes upon the necessaries of life, or the materials of
manufacture. The World Bank also endorses taxing tobacco:
It is not a necessity, it is consumed widely, and demand for it is relatively
inelastic, so it is likely to be a reliable and easily administered source of
government revenue.
(World Bank 1999, 6)
The Australian colonies had levied tariffs on tobacco before Federation, and the
new Commonwealth government wasted no time in imposing a federal excise at
a shilling per pound on tobacco (cigars at a higher rate) in 1901. For most of the
twentieth century the federal excise on tobacco products was a significant source
of general taxation, with real revenues peaking during the 1970s at around $170
per head of population (Winstanley, Woodward and Walker 1998).
Also, since Federation, tobacco tax concessions have promoted the local
industry. Indeed, tobacco growing was endorsed by governments as an ‘engine of
development’ during the 1950s and 1960s.238 The tobacco industry’s political
influence prevented significant tobacco control measures in Australia throughout
the 1960s, contrasting with overseas where governments responded as the health
costs of smoking became apparent from the early 1960s (Ballard 2001; Studlar
2003). During the inflationary 1970s in Australia, tobacco tax increases were
allowed to lag behind prices and wages, making smoking more affordable, and
financial support from tobacco interests shaped political party policies throughout
the 1980s and 1990s (Studlar 2003). As late as 2004, cheap fags at the ‘duty free
shop’ remained a favoured fiscal reward for Australian travellers.
However, Australian governments were playing increasingly uneasy dual roles
as tobacco regulators and partners in the tobacco business. During the 1980s,
smoking became a major public health issue. Radical action groups set out to
‘BUGA UP’239the smoking promotion habits of the tobacco industry, and public
238. The profitability of tobacco growing in Queensland, New South Wales and Victoria, and for a time
Western Australia, was financially underwritten by governments’ enthusiasm for ‘home grown’ tobacco,
perhaps responding to the experience of post-war shortages of imported tobacco. Until the mid 1970s,
tobacco leaf growing was the most heavily subsidised sector of the Australian agricultural economy
(Winstanley, Woodward and Walker 1998). During the postwar decades, cigarette manufacturers WD &
HO Wills, Rothmans, and Phillip Morris obliged their political benefactors by establishing production
facilities in New South Wales, Queensland and Victoria (Studlar 2003).
239. BUGA UP — Billboard Utilising Graffitists Against Unhealthy Promotions.
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opinion strengthened in favour of regulating tobacco promotion and advertising
(Ballard 2001). Political affiliations and tobacco industry funding of political
parties also came under critical scrutiny. By 1995 protection of domestic tobacco
production had been phased out and, notwithstanding strong political allegiances
to tobacco money, Australia would move within a decade from ‘laggard’ to ‘leader’
on tobacco control (Studlar 2003).
Although the primary motive for tobacco taxation is fiscal, a key element of
Australia’s tobacco control leadership in the past decade has been its purposeful
wielding of the tobacco tax weapon. Enhancing their ‘sumptuary tax’ status,
tobacco taxes have gained popularity as a cost-effective policy response to a global
epidemic of tobacco use, with evidence that smoking by children, adolescents and
low income earners reduces substantially in response to price rises. A recent World
Bank study concluded that cigarette price increases were highly effective in
reducing smoking, notwithstanding the overall inelastic demand:
Higher taxes induce some smokers to quite and prevent other individuals from
starting. They also reduce the number of ex smokers who return to cigarettes
and reduce consumption among continuing smokers. On average, a price rise
of 10 per cent on a pack of cigarettes would be expected to reduce demand for
cigarettes by about 4 per cent in high income countries and by about 8 per cent
in low and middle income countries, where lower incomes tend to make people
more responsive to price changes.
(World Bank 1999, 6)
Since 1983, the rate of excise has been indexed for inflation. In 1992
Commonwealth tobacco taxes were raised specifically to encourage quitting
(James 1998). By 1997, smokers contributed $1.7 billion annually to
Commonwealth revenues. Meanwhile, having given up tobacco excises in 1901,
most states had abstained from the smoking tax habit until the 1970s. However,
from 1974, the imposition of ‘regulatory’ fees on wholesalers and retailers of
tobacco products emerged as a lucrative source of funds in all states except
Queensland, Australia’s largest tobacco-producing state. By 1997, when the
patience of the High Court ran out, state governments were collecting $2.9
billion in revenue from ‘regulating’ tobacco merchants (Winstanley, Woodward
and Walker 1998).
The combined effects of federal and state tobacco taxes meant that, by the mid
1990s, the effective rate of taxation as a proportion of the wholesale tobacco price
was around 211 per cent. For consumers, the tax share of the tobacco price rose
from 50 per cent of the retail price in 1990 to 64 per cent by 1995–96 (Albon
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1997a). This was around the average for high income countries, but the World
Bank argued that the right tax rate might well be higher:
Policymakers who seek to reduce smoking should use as a yardstick the tax
levels adopted as part of the comprehensive tobacco control policies of countries
where cigarette consumption has fallen. In such countries, the tax component
of the price of a pack of cigarettes is between two-thirds and four fifths of the
retail cost.
(World Bank 1999, 6)
Governments had been warned off tobacco control by threats of collapsing tax
revenues, and tobacco companies also attempted to engineer a ‘tobacco tax revolt’
(Studlar 2003; Winstanley, Woodward and Walker 1998). The industry argued,
with the support of some economists (for example, see Albon 1997b; Baldry,
1995; Viscusi, 1994), that the high taxes were excessive and unfair. Excessive tax
rates were said to violate smokers’ fully informed rights to choose tobacco
addiction and ill health. Furthermore, tax revenues exceeded the marginal
‘external’ health costs of tobacco use (so smokers paid their way), and the poor
were the main victims of a regressive tax. Regulation of public smoking, not
taxation, was the way to prevent smokers from inflicting harm on unwilling
companions, and smoking ‘in private’ was a matter for individual choice, not
public policy or prohibitive taxation.240
Strangely, however, as Australia’s tobacco taxes got higher, public support for
them rose too (Winstanley, Woodward and Walker 1998). Combined with
innovative and effective health promotion campaigns and restraints on
advertising, tobacco tax increases were associated with smoking levels falling by
more than half between 1971 and 2001 (Australian Institute of Health and
Welfare 2002). Tax increases raised, rather than reduced, tax revenues within the
short time frame relevant to most governments, because addicted regular smokers
account for most tobacco consumption and find quitting hard (James 1998).
While tax revenues have fallen in real terms since the 1970s due to declines in
smoking, tobacco company tax dodging was also a factor — to avoid tobacco
excises assessed on weight, local smokers were sold the lightest cigarettes in the
world (Winstanley, Woodward and Walker 1998). In 1999 the Commonwealth
treasurer announced that tobacco excise assessment would change from a ‘per
240. For discussion of the distinction between private and social costs of tobacco use, see Collins and Lapsley,
(2002).
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weight’ to a ‘per stick’ basis in line with concerns that the industry was marketing
high volume and more unhealthy low weight brands to escape tax.
Economists recognise that, as is the case for gambling, the smoking decisions
of ‘children, madmen and fools’ do not produce a socially efficient allocation of
resources to tobacco production. Because they are less able to make informed, far
sighted decisions about the future, young people are commonly restrained by law
from taking certain risky decisions — ‘Paternalism Rules’ for children
notwithstanding the usual principle of ‘consumer choice’ (World Bank 1999, 6).
Preventing children taking up smoking and becoming tobacco addicts is a central
goal of tobacco tax policy. A 10 per cent rise in price will produce around a 14 per
cent reduction in smoking among youth, and hence in future smokers (James
1998). It is true that directing tax policy at this end inflicts potentially inefficient
heavy taxes on adults whose smoking is less immediately responsive to
price.241However, adult smoking will fall substantially in the longer term as tax
increases discourage new starters, maintain the resolve of quitters and reduce the
consumption of even the addicted. Proponents of high tobacco taxation argue that
even adults are far from fully informed about the effects of smoking and
underestimate the risks and costs including to themselves. Thus there are a
number of reasons why the apparently high efficiency costs and ‘excess burden’ of
Australia’s taxes on tobacco (Albon 1997a) overstate the actual reduction in
economic welfare, although views will differ on whether adult ‘fools’ should be
protected from themselves.
‘User pays’ in tobacco taxation reflects a second precondition for
economically efficient consumer choice — that the consumer bears the full cost
of consumption decisions. The social cost of tobacco use was estimated at $21
billion in 1998–99, of which health costs were around $1.1 (Collins and Lapsley
2002).242Even if tobacco tax revenues exceed the health costs borne by the public
sector, the effect on governments’ budget deficits does not proxy compensation to
the community for the social costs of smoking (Collins and Lapsley 2002).
Furthermore, while regulation of smoking in public places could be a useful
response to the harm inflicted on others by passive or involuntary smoking (Albon
1997b), the asserted superiority of regulation over tobacco taxation assumes that
only smoking in public places, and not at home or in cars, inflicts costs on others.
As the World Bank study (p. 45) pointed out, the biggest burden of passive
smoking is borne by the children and spouses of smokers. Yet,
241. Arguments also put by tobacco companies to the Industry Commission. See Winstanley, Woodward and
Walker (1998).
242. Health costs are after accounting for savings due to premature deaths of smokers.
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since some economists consider the family to be the basic decisionmaking unit
in society, they regard spouses’ and childrens’ exposure to tobacco smoke as an
internal cost that is taken into account in the family’s decisions about smoking,
rather than an external cost imposed by smokers on others.
(World Bank 1999, 45)
In Australia, around 1.7 million children may be involuntary smokers due to the
private smoking of their parents (Australia. Department of Health and Aged Care
1999), and children are estimated to bear a high proportion of the morbidity and
mortality costs of involuntary smoking (Collins and Lapsley 2002).
Furthermore, it can be argued that the ‘user pays’ argument has been
misdirected.
It is, to a very large extent, the tobacco industry which imposes the social costs,
not the smokers. The question “Do smokers pay their way?’ is, in fact, the
wrong question. The correct question is, “Does the tobacco industry pay its
way?”. This question is easily answered in the negative. … the demand for
cigarettes is price inelastic. Tax analysis shows that in these circumstances a
high proportion of the tax is borne by the buyer not the seller. This implies that
the industry which is responsible for the imposition of high social costs pays only
a small proportion of the tobacco tax revenue.
(Collins and Lapsley 2002, 24)
Perhaps related to this, Australia’s tobacco manufacturers have been among the
most profitable industries in Australia (Winstanley, Woodward and Walker
1998).
The most compelling argument used by industry against tobacco taxes is that
they are regressive. However, as observed elsewhere, policymakers should look at
the overall effect of the tax system not any one tax — tobacco tax may be less
harmful than the alternative source of revenue.
Tobacco taxes, like any other single tax, need to work within the goal of
ensuring that the entire system of tax and expenditures is proportional or
progressive. Currently, the tax systems of most countries are a mix of many
different taxes, where the overall goal is to be progressive or proportional, even
though there may be individual taxes or elements of the system that are
regressive.
(World Bank 1999, 75)
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While tobacco tax increases are most felt by poorer groups, so too, for the same
reason, are the health and financial gains from quitting smoking. The true
regressivity of a tax depends on how its revenue is used. As the World Bank
continues:
To offset the regressivity of a tobacco tax, governments could introduce more
progressive taxes or other transfer programs. Provision of well targeted social
services, such as education and health programs, would tend to offset the
regressivity of tobacco taxation.
(World Bank 1999, 75)
While the track record of earmarking is not persuasive, hypothecating tobacco
tax revenues to effective anti-smoking programs and activities could offset
regressive tobacco taxation if it increased funding above what it would otherwise
have been. Although tobacco tax remains mainly a lucratic source of general
revenue and a price disincentive to a harmful indulgence, there is growing
support for using tobacco tax earmarking to stub out the smoking habit (Alcohol
and other Drugs Council of Australia 2003; James 1998).243
The Tax Take on Grog
The productivity of the Australian workforce was once seen to be increased by
liquid rewards of rum. However, by the 1970s, there was rising concern at the
health, social and economic costs of alcohol abuse, which led public pressure to
use tax policy to discourage and remedy the societal harm.244
Australia’s first grog taxes were customs and excise duties on ‘rum’. The main
object was raising revenue and only to a lesser extent reducing sin. 245Apart from
the states’ shortlived dalliance with franchise fees and the ‘wine tax’ of the early
1930s, there was little substantial change to this revenue-related alcohol tax policy
until the ‘beer and cigs up’ budgets of the 1970s and the indexation of alcohol
excise duties from 1984.
By 2002, excise and other taxes on alcoholic drinks flushed out around $2.9
billion of revenue annually from Australian drinkers,246and taxes on grog gained
243. For example, nicotine replacement therapy has recently been included on the Pharmaceutical Benefits
Scheme, at concessional rates for low-income earners.
244. For example, it is estimated that more than 80 per cent of alcohol consumed in Australia is at levels which
puts the health and safety of the drinkers at risk of acute and/or chronic harm (Chikritzhs et al. 2003), and
some 20 per cent of national alcohol consumption may be by alcoholics (Collins and Lapsley 2002).
245. Nevertheless, early governors deliberately encouraged local distilling and beer drinking through excise tax
concessions.
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favour with economists as a roundabout way of taxing leisure (Cook and Moore
1994), as well as taxing harmful ‘externalities’ of drinking. The cost to the
community of health care, work productivity, alcohol-related crime, and road
injury related to alcohol abuse was estimated to be around $7.5 billion (Collins
and Lapsley 2002). In particular there was concern at a striking increase in
harmful drinking by young people, and widespread drinking at levels harmful to
health (Chikritzhs et al. 2003). As the ‘user pays’ principle took hold of tax policy
in the 1990s, policy debate shifted from a revenue focus to whether different
taxation rules for wine, brandy and ‘designer’ or ‘ready to drink’ products
minimised the harm from excessive drinking.
Successive Australian governments have set taxation rates for various alcoholic
drinks ‘under the influence’, so to speak. Reflecting the historical outcomes of
pressure by domestic producers, tax rates on alcoholic beverages lurch from 73
cents a standard drink in the case of most spirits (except for brandy) 247and fortified
wines to a staggering 6 cents per standard drink on a typical cask wine, with wine
taxed at 28 cents a drink and beer at between 21 and 33 cents a drink (Alcohol
and other Drugs Council of Australia 2002). At various places in the alcohol tax
mix are ‘ready to drink’ beverages such as wine coolers, beer in cans and stubbies,
premixed spirits, cider and alcoholic soft drinks, which face various combinations
of sales tax and excise.248It is difficult to deny the complaint that
The current alcohol taxation system is complex, inequitable and does not work
to maximise public health and safety.
(Alcohol and Other Drugs Council of Australia 2003, 1)
Wine production was briefly levied at 2.5 per cent under the 1930 wholesale sales
tax, but was discharged from tax duties in 1931 due to the Depression. Sparkling
more brightly from the 1960s due to innovations in production and marketing,
246. Although the exact cost of alcohol use is controversial, the most recent estimates are in damage by drinkers
to their health, lost work output and the costs of road accidents, crime and premature deaths, some $7.5
billion annually (Collins and Lapsley 2002).
247. Brandy made wholly from grape spirit is taxed at $3.84 less per litre of alcohol or at around 85 per cent of
the excise rate on spirits (including fruit brandy, whisky, rum and liqueurs) to encourage the use of surplus
grape production to produce brandy instead of glutting the winegrape market. Hence brandy is taxed at
around 69 cents per standard drink.
248. See Scales, Croser and Freebairn (1998, Table 12.1) where it is shown that wine coolers, cider and
alcoholic soft drinks are taxed like wine (26 per cent sales tax, zero rate of excise) and premixed spirits are
taxed under the excise as spirits ($34.69 per lal) but at a concessional rate (22 per cent) of sales tax. Beer
stubbies faced the same sales tax as wine but concessional excise ($14.90 per lal), and qualify for a zero rate
of excise on alcohol content below 1.15 per cent, a concession denied to some others of the
aforementioned ‘ready to drink’ products.
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wine revelled in its tax free status until 1984 when application of the wholesale
sales tax at 22 per cent ended the tax-free wine drinkers’ party.249A policy of
raising the sale tax rate on wine to 31 per cent announced in 1993 was
temporarily shelved, then watered down by industry lobbying to a rate of 26 per
cent applying from 1995. That year, the Industry Commission entered the wine
tax arena, having been commissioned as umpire during the 1993 wine tax affray
(Scales, Croser and Freebairn 1998). Its expert committee agreed that taxes on
wine should be restructured to comprise both a revenue-raising component
(levied through sales tax) and a ‘sin tax’ or ‘user pays’ component (applied
through excise levied on alcoholic content). However, as the experts couldn’t
agree on the right level of wine taxation needed for efficient wine taxation, 250the
government was able to ignore the unanimous recommendation to change how
wine was taxed. Instead, it maintained the status quo on wine taxation on the
pretext of avoiding wine and winegrape industry turbulence.
Amidst the political smokescreen created by ANTS, the federal government
announced a wine equalisation tax (WET) policy for wine and beverages
consisting primarily of wine, which amounted to retaining wholesale sales tax at
29 per cent.251As this decision maintained the favourable relative tax price status
of cask wine at the expense of premium wine producers and exporters, the 1999
WET inquiry by the Senate Committee which was investigating ANTS opened
up divisions within the wine industry, as well as between regions in different states
on the structure of wine taxation. As an ad valorem tax policy, WET reduces price
pressure on cask wine and designer drinks such as wine coolers, while increasing
pressure on premium wine prices (Australia. Parliament Senate Select Committee
on A New Tax System 1999). Hence premium wine producers in some states
249. WST applied at 10 per cent until 1986 when the general rate of 20 per cent was applied to wine. For a
brief period from August 1970s to 1972, wine was subject to excise, but was found difficult to collect and
enforce on an unwilling and highly dispersed industry comprising mainly small establishments.
250. The majority rejected the view that taxes on wine should be raised to comparable levels with beer and
spirits, requiring evidence that wine was substituted for other alcoholic drinks, or that comparable harm
could be attributed to its consumption to justify changing the status quo. Against the view that alcoholic
beverages could be complements with each other, the minority argued this was ‘counter intuitive’ as ‘it
would imply that following an increase in the price of wine, the demand for beer, as well as for wine,
would fall’. The minority also pointed out that denying substitutability between beer and wine
contradicted the wine industry’s previous argument against taxing wine, as well as representatives of the
brewing industries arguments for it, and cautioned against leaning on the thin reed of econometric studies’
for making important policy decisions’.
251. The rationale was that this was equivalent to the previous wholesale sales tax rate of 41 per cent plus 1.9
per cent, the general price increase expected to be associated with the ANTS. The Winemakers’ Federation
of Australia argued for a rate of 24.5 per cent, which they estimated would raise equivalent revenue to the
existing WST and avoid critical damage to the industry.
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favoured volumetric wine taxes along the lines recommended by the Industry
Commission.
This presented a delicate political problem sufficient to drive some senators to
drink, as under such a regime premium wine states such as Tasmania, Western
Australia and South Australia would benefit at the expense of cask wine producers
in the Riverina, Riverland and Sunraysia regions of Victoria and New South
Wales. The diverse interests of the various players in the wine industry are revealed
in the submission by the National Small Wineries Coalition that,
the system should ensure a socially responsible course by placing the tax more
directly on the very area where alcohol addiction occurs — the cheap wine
casks. Tax by volume, not value. … As it currently stands, the proposed ad
valorem tax benefits the Alcoholic Beverage Industry, the ‘big end of town’, the
large corporate wineries and disadvantages the small regional wineries’
(Australia. Parliament Senate Select Committee on A New Tax System
1999, 5)
Finding unaccustomed allies in the makers of premium wines, anti-drug
campaigners argued for volumetric taxation based on evidence that consumption
of cask wine is more closely associated with higher levels of violence, injury and
illness than consumption of other alcoholic drinks (Alcohol and other Drugs
Council of Australia 2002). The Winemakers’ Federation of Australia naturally
rejected volumetric taxation, claiming it would increase prices, diminish
employment and investment, and be highly regressive. Having twisted the WET
structure to their taste, wine industry lobbyists turned their attention to
‘improvements’, pushing to exempt the first 600,000 litres of a company’s
domestic sales.
Meanwhile, a promise to tax untaxed cider and alcoholic soft drinks like wine
survived the collapse of the 1993 wine tax deal. The Keating government’s 1995–
96 budget proposed bringing fruit-based products — alcoholic cider, alcoholic
lemonade, and so-called designer drinks marketed to appeal to the young — onto
the excise. However, prior to the 1996 federal election, this policy was scotched
by both major political parties. Resuscitated in the 1998 ANTS package, the
excise plan for cider and designer drinks was again diluted. This time cider was
billed as a wine, and a dispirited distilled spirits industry lamented how the
expanding excise-free WET net252now encompassed their competitors’ wine-
252. The WET applies to grape wine, grapewine products such as marsala, vermouth, wine cocktails and
creams, fruit and vegetable wines, cider and perry, mead and sake.
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THE SYNTA X OF SIN TA X ES
143
based cream products and cider-based designer drinks (Commonwealth of
Australia (Senate Select Committee on A New Tax System) 1999). Furthermore,
ready to drink products with less than 10 per cent alcohol, such as wine coolers,
designer drinks and alcoholic sodas, were advantaged over most other spirit
products by an excise at $34.22 per litre of alcohol, equivalent to full strength
beer, rather than at the $57.97 charged for spirits. With one in ten 15 to 17 yearold boys and one in five girls indulging in these premixed alcoholic drinks, the
Commonwealth government is reviewing their marketing with a critical eye
(Alcohol and other Drugs Council of Australia 2003). Despite their marketing to
young people, such products are nonetheless denied access to the tax-free zone of
1.15 per cent granted low alcohol beer.253
The Alcohol and Other Drugs Council of Australia pointed out that
tax breaks [for beer and brandy] do not apply to any other alcohol product.
The tax break for brandy is an outcome of advocacy by the brandy industry
over many years and does not appear to serve any useful or equitable purpose.
(Alcohol and other Drugs Council of Australia 2002, 5)
Taxation is just one policy instrument for dealing with alcohol abuse and needs
propping up with other measures. The traditional object of alcohol taxation is
revenue. However, further reform of alcohol taxation, assessing alcohol content
rather than price, would tax consumers more fairly and simply and would
discourage harmful consumption of alcohol. Alcohol taxation yields high revenue
because demand for ‘the demon drink’ is notoriously impervious to price.
However, research also shows that higher prices reduce alcohol consumption.
Tax-induced price rises would particularly reduce alcohol abuse in vulnerable
low-income groups such as young people and indigenous Australians, even if
adult drinkers were undeterred and ‘overtaxed’. While these groups would be
hard hit financially by higher alcohol taxes, their communities would benefit
most from reduced alcohol abuse.
Like the tobacco companies, makers of alcoholic beverages find it convenient
to remind governments that heavier taxation of alcohol may reduce tax revenues
by discouraging drinking (Australia. Parliament Senate Select Committee on A
253. This concession is an inexplicable hangover from 1998, when an excise-free threshold was introduced to
lubricate the production and consumption of low alcohol beer. A national excise scheme for beer was
introduced in 2002 to remove anomalies resulting from rebates for wholesalers offered by state
governments, which had resulted in full strength beer attracting lower tax than low or mid strength beer.
The 2002 scheme introduced three tiers of excise to different alcohol strengths of draught beer and two
tiers of excise for different strengths of packaged beer, replacing the previous three-tiered excise rate
structure for low, mid and full strength beer.
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T AXIN G P O P U LARIT Y
New Tax System 1999, 4). However, it would be impolite to explain government
distaste for reforming alcohol taxation this way, and the current pattern of
taxation suggests rather that governments are too well wined, dined and primed
by the industry to make sober decisions on alcohol taxation.
Excised Fuel Taxes
Despite offering ample opportunity to both improve economic efficiency and
reduce environmental harm, fuel excise is an ‘unfinished story’ of
Commonwealth tax reform. Fuel taxation raised a net revenue of around $9.3
billion in 2001–02. Exemptions from excise for petroleum product substitutes
cost around $1 billion a year, and abolishing indexation of fuel taxes cost a
similar amount. The high revenue cost of such concessions should draw future
governments back to the road of fuel tax reform, even if the increasing political
heat from global warming does not.
Traditionally fuel taxation (Commonwealth customs and excise taxes on
petroleum products) has been a way of funding road infrastructure. Introduced in
the 1920s, Commonwealth fuel taxation lost its links with funding roads in the
1950s and became a general tax providing around 7 per cent of Commonwealth
tax revenue by the 1980s and 1990s. Various tax concessions for petroleum
substitutes were introduced after the oil price ‘shocks’ of the 1970s exposed
Australia’s fuel dependence. Such concessions were also intended to encourage
alternative fuel use because of concern with the adverse health and environmental
effects of petroleum fuels.
In 1983, the Commonwealth government began indexing nominal fuel excise
rates, aiming to maintain the real value of excise revenues and avoid the large and
destabilising discretionary increases experienced in the past. Indexation also
reduced the government’s exposure to yearly fuel industry lobbying to prevent a
rise in the excise. However, fuel tax indexation was abolished in March 2001
during the tropical heat of a Queensland election campaign. At the same time, the
government established a review of the structure of fuel taxation, to report after
the election.
The Fuel Taxation Inquiry found that,
Not surprisingly, only a small number of submission to the Inquiry explicitly
supported the proposition that revenue raising remained appropriate.
((Trebeck) Fuel Taxation Inquiry Committee 2002, 15)
While motoring interests saw no need for any Commonwealth fuel taxes in the
post-GST world, and the petroleum industry favoured abolishing existing tax
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THE SYNTA X OF SIN TA X ES
145
concessions for alternative fuels, the producers of the latter felt their past
investments and substantial regional benefits justified the large ongoing subsidy.
The inquiry concluded, however, that the fuel tax should be kept mainly for
revenue-raising — fuel tax was neither an appropriate tool of industry policy nor
an effective instrument of regional development. There was, on the other hand, a
limited place for fuel taxation to charge for some ‘external’ costs of fuel use —
fuel excises thus joined the official club of ‘sin’ taxes. Significantly,
The strong relationship between fuel consumption and greenhouse gas
emissions makes fuel tax an appropriate instrument for charging for the costs
of climate change attributable to fuel use.
((Trebeck) Fuel Taxation Inquiry Committee 2002, 73)
Noting the government’s stated policy that more taxes were not the answer to the
problem of Australia’s greenhouse emissions, the inquiry argued that addressing
greenhouse objectives through fuel taxation must await Australia’s signing of the
Kyoto Protocol. It must also await more robust estimates of the costs of
greenhouse gas emissions and of the relative contribution to emissions of various
sectors. Little was also said about the role of fuel tax as a user-charge to fund
roads and tax congestion externalities. Global warming is not the only petrol-use
externality. In the case of roads there are significant two-car accident, congestion
and ‘local’ noise, smog, health’ externalities (Pender 1999). Measures to address
global warming would also need to address off road use, and especially coal
burning for electricity, such as through a carbon tax.
The main recommendations of the Inquiry were to restructure fuel excise so
it was on the energy content of fuel rather than fuel volume. The resulting four
cent a litre drop in petrol cost was to be funded by restoring fuel tax indexation
and replacing excise tax concessions for petroleum substitutes with targeted grants
and subsidies. The inquiry concluded that the cost of assistance to alternative fuels
including ethanol was not justified by significant environmental benefits.
The government initially rejected these recommendations for taxing fuel
content and reintroducing indexation. Curiously, however, in the 2003–04
budget, Treasurer Costello announced that the fuel excise would be applied to
petroleum substitutes such as liquified and/or compressed natural and petroleum
gases from 2008 (Australia. Treasury 2003). The concessional tax treatment for
ethanol would also be phased out, although the industry would be more than
compensated by the extension of temporary subsidy arrangements to 2008, and
by the change to taxing fuel content. The treasurer foreshadowed a petrol price
rise in 2006 to fund the new subsidies on low sulphur petrol and diesel fuel. The
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T AXIN G P O P U LARIT Y
changes took some heat out of the political debate on fuel taxation, but tax breaks
for ethanol remained a controversial sweetener for Queensland sugar and a sweettalking ethanol producer (Roarty 2003).254 The package also left undone the
decision to reintroduce indexation of excise, an omission that was estimated to
cost $1.1 billion by 2004–05 (Webb 2003).
The Commonwealth’s fuel excise is just one tool for reducing environmental
damage. With greater oil insecurity and some biofuel producers left out of sugary
deals, federal fiscal favours for ethanol and unexcising the real price of fuel may be
sweet or sour pork barrelling. Special income tax provisions for primary
producers, which actively encourage environmental harm, rank alongside the
sinful excision of fuel tax indexation as a high priority for environmental reformers
(McKerchar and Coleman 2004), as do costly FBT concessions for company car
use which tempt excessive fuel use and environmental sin.255 State government
taxes also have an role in countering environmental harm such as pollution, road
congestion and land degradation although, of course, ‘the primary role must be
with the Commonwealth’ (Victoria. State Business Tax Review Committee 2001,
119).
Sadly Australia lags the developed world in this field of taxation, and
environmental vice remains to be converted to a significant public virtue. Despite
the scorching political heat generated by environment taxation, European reports
that higher energy taxes have enabled lower labour taxes (European Communities
Eurostat, 2004) may yet turn Australian governments ‘green’.
254. Manildra, the dominant producer of ethanol, lobbied the Howard government unsuccessfully to mandate
ethanol in automobile fuel in early 2003, a short time after making a major donation to the Liberal and
National Parties (Fraser 2004). The other dominant player in the ethanol market is CSR, which uses cane
sugar for ethanol production.
255. The concession relates to the use of a generous statutory formula used to value use of company cars, which
cost over $1 billion in lost revenue by 2003-04 (Australia. Treasury 2004).
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MOMENTOUS OR MOMENTARY
TAX REFORM
Countries face public spending obligations and constraints because they have
to finance outlays on, for example, national defence, education, social security,
and other public services. Investors in tax havens, imposing zero or nominal
taxation, who are residents of non-haven countries may be able to utilise in
various ways those tax haven jurisdictions to reduce their domestic tax
liability. Such taxpayers are in effect ‘free riders’ who benefit from public
spending in their home country and yet avoid contributing to its financing. In
a broader sense, governments and residents of tax havens can be ‘free riders’ of
general public goods created by the non-haven country.
(Organisation for Economic Cooperation and Development (OECD)
1998)
As Australians focussed on A New Tax System (ANTS) during the 1990s,
eradicating ‘fiscal termites’ preoccupied tax policy-makers overseas. Fiscal
termites evolved from the tax morality of the 1970s and spread as barriers to
international finance and trade fell during the next two decades. At first national
revenues had been protected through reducing tax rates and removing tax
preferences, although competitive pressures to reduce taxes on business and
investment shifted the tax burden onto labour incomes (Swank 1998). However,
by the 1990s, ‘fiscal termites’ were eroding the very foundations of tax systems. In
June 2000, the Organisation for Economic Cooperation and Development
(OECD) blacklisted tax heaven [sic] countries that fed fiscal termites with
‘harmful tax practices’. While governments debated pest control treatments, the
need for robust revenue systems grew. Deregulation of capital, product and
labour markets, along with privatisation of public utilities and enterprises, put
new demands on fiscal systems to ameliorate the unacceptable distributional
effects of market processes as well as to finance the social investments and services
of a ‘civil society’ (Nevile 1995). Emerging pressures on the environment also
called for collective action including tax measures.
However, the Australian tax system was increasingly inadequate to meet these
challenges. Just as the international community faced problems with tax parasites
and tax escapees, so too did the Australian tax system suffer from ‘free riders’ and
tax shirkers. While globalisation and deregulation were eroding the income tax,
growing spending on services was shrinking the sales tax. This produced renewed
147
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T AXIN G P O P U LARIT Y
pressure for indirect tax reform by the mid-1990s (Davidson 2000). Business
complained that current indirect taxes raised costs and reduced competitiveness,
and community organisations warned that Australia risked becoming a society of
‘rational fools’ if its tax structures were not strengthened.256
ANTS in the Pantry – Consumption Tax Fights Back
History teaches us that men and nations behave wisely after they have
exhausted all other possibilities.
(Abba Eban, Israeli diplomat 1915–)
The ‘can’t’ on indirect taxation silenced discussion of major reform from 1985,
but a consumer shift to services, and shrinking customs revenues, sustained
pressure to repair or replace the wholesale sales tax (WST) (Smith 1999a). Broadbased consumption taxation (BBCT) reentered the political theatre in November
1991, with release of Fightback!, the fiscal manifesto of the Liberal/National Party
coalition. Central to Fightback! was replacing most indirect taxes (WST, states’
payroll taxes, import tariffs, and fuel excises) with a 15 per cent goods and
services tax (GST), and making large cuts to income tax and government
spending (Hewson and Fisher 1991). The Keating government responded in
February 1992 with the One Nation income tax cuts (by ‘L-A-W’) — but with
no GST.257 The Opposition fought back with a revised Fightback!, which
retreated from public spending cuts and gave up on taxing food and childcare
(Hewson and Fisher 1992). Continued piecemeal reform in 1993 resulted in
consumption tax increases which were more regressive than the reformed
Fightback! GST (Quiggan 1998a; Davidson 2000).
Sniffing the political wind in 1996, the new prime minister, John Howard,
declared he would ‘never ever’ introduce a GST. The Government’s tax policy
consisted of reviewing tax concessions in line with its newly adopted Charter of
Budget Honesty (National Commission of Audit 1996; Smith 2003). However,
from 1997 the Howard Government was being criticised for ‘going slow’ on
microeconomic reform. Major tax reform centred on a comprehensive GST was
an ideal way to prove its ideological virility. Opportunity knocked with the High
256. See Australian Chamber of Commerce and Industry & Australian Council of Social Services (1996).
Extending the analysis of Sen (1977) it was argued that tax shirking by supposedly utility maximizing
rational actors leads to the spread of a tax shirking ethic, and a cycle of declining public revenue capacity,
under-funding of valued public services and deteriorating tax compliance, resulting in declining standards
of living in an unenviable society of ‘rational fools’ (Smith 1997).
257. The L-A-W tax cuts were later diverted to subsidising private superannuation.
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 149
Court’s historic Ha decision in 1997. Just a year later, the Howard government
announced A New Tax System (ANTS) from 1 July 2000 (Australia. Treasury
1998). ANTS foreshadowed a comprehensive GST, but with special treatment for
health and medical services, education, childcare, charitable activities, religious
services, financial services and residential rents. Unlike the revised Fightback!,
ANTS proposed a GST on food. The package also included reforms of social
security and family assistance,258 substantial personal income tax cuts, and reforms
of business taxes. An essential ingredient was securing the agreement of state
governments to abolish certain state taxes and to forge Commonwealth grants in
return for receiving all GST revenues.
Great claims for competitiveness, fairness and simplicity were made for
ANTS, and the evils of the WST and the merits of GST were more than fully
exposed (Cooper and Vann 1999; Quiggin 2000). The new GST and the
compensating changes to social security had momentous potential to improve
efficiency and benefit lower income households and public revenues. However,
these beneficial distributional effects were momentary, as the business tax reforms
(including anti-avoidance measures) collapsed, and excessive income and capital
tax cuts further eroded the progressive tax revenue base. Although the Financial
Agreement with the states was trumpeted as historic, its most memorable feature
would be the Commonwealth’s bizarre attempt to dress up the GST as a state tax.
The High Court’s capital decisions on excise
The expression ‘duties of excise’ is one which has no fixed connotation and it
has been necessary to attribute some rather artificial meaning to the expression
where it appears in s 90. … State taxes on the sale and production of goods
have been held to be duties of excise but licence fees calculated by reference to
sales and purchases made in a period other than the licence period, and
imposed in relation to the sale of tobacco and alcohol, have been held not to be
excises. However, licence fees calculated in that way have been held to be
excises when imposed in relation to the processing of fish or the slaughtering of
meat. The distinction seems irrational, and the whole question of whether
licence fees imposed in that way are duties of excise is under consideration in
the High Court at the moment.
(Gibbs 1994, 6)
258. See Ingles (2000) for an examination of the effects of the ANTS proposals on reducing poverty traps and
work disincentives for low income families.
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While the academic debate on indirect taxation continued, the High Court took
legal action, so to speak, against states’ business franchise fees on petrol, tobacco
and liquor. On 5 August 1997, the Court reasserted its tradition of reincarnating
such nineteenth century excise taxes as twentieth century consumption taxes and
ruled that the states could not impose them. By then, the states and territories
collected $5.2 billion or one-fifth of their tax revenue from the disallowed
business franchise fees.
A warning shot had been fired across the bows of the states and territories in
Capital Duplicators v. Australian Capital Territory in 1993, and governments had
made contingency plans in the event that franchise taxes were struck down (James
1997). In fact the High Court had rejected its previous Dennis Hotels formula259
but, in a ‘capital’ ruling for states and territories, did not apply the Capital
Duplicators decision to liquor and tobacco because, for nearly two decades
governments had structured their finances around Dennis Hotels.260 However, by
taking too much, the states had exposed the fiction that their exactions were mere
regulatory fees. As the High Court judges explained in the 1997 Ha and
Hammond cases, when the tobacco industry challenged tobacco franchise fees,
The States and Territories have far overreached their entitlement to exact
what might properly be characterised as fees for licences to carry on business.
The imposts which the Act purports to levy are manifestly duties of excise on
the tobacco sold during the relevant periods.
(Dick 1998, 33)
For some it was a delicious irony that the ‘extravagant extrapolation that had
foundered on substantive reality’ for tax shirkers had tripped up state
governments too. A leading tax law journal declared gleefully that ‘the Business
Franchise Licence (Tobacco) Act was just another overcooked and failed tax
scheme’ (Pagone 1997a, 112). However, Ha decimated the states’ financial
autonomy. The day after the decision, the Commonwealth government plugged
free-falling state and territory revenues with a hastily legislated ‘safety net’. This
imposed a Commonwealth tax on the affected commodities on behalf of the
states, and arranged for the revenue to be returned to states (net of
administration costs) as ‘Revenue Replacement Payments’. The Commonwealth
259. The High Court had determined that a licence fee calculated by reference to the value of the previous
year’s sales was not an excise.
260. In the case of the last indulgences, a regulatory role for fees apparently remained a plausible defence for
franchise taxes, although the decision cast doubt on the validity of taxes on petroleum products and gas.
See James (1997, 7).
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 151
also imposed a 100 per cent ‘windfall gain’ tax on any successful tobacco industry
claim against the states for a refund of business franchise fees.261
Commonwealth/state financial relations were back on the agenda. Ha and
Hammond v. NSW were a narrow 4:3 decision. Former High Court judge Sir
Harry Gibbs had previously commented that without agreement as to the
constitutional purpose of the section barring state excise duties, there was no
constitutional reason to give it a wide interpretation. In such circumstances,
S 90 should be amended so that the power of the Commonwealth to impose
duties of excise is no longer exclusive. The section in its present form places
arbitrary and unnecessary restrictions on the extent of State taxing powers
without conferring any real fiscal or economic advantage on the
Commonwealth’
(Gibbs 1994, 8).
The Commonwealth could have sponsored a constitutional amendment.
However, neither the Commonwealth nor the state governments viewed this as
desirable. After the Commonwealth’s generous rescue operation, the states were
grateful to endorse the Commonwealth’s indirect tax reforms. ANTS would also
deliver a more coherent system of exactions on the various indirect tax bases.
Nevertheless, the High Court’s prolonged exercise in semantics would leave the
states fiscally speechless from 1 July 2001. Just a century after its creation, the
Commonwealth became the only true god in the Australian tax heaven as it
moved into the states’ indirect tax room.
Fiscal fibs and political games, or ‘pin the tax on the government’
Finance is, as it were, the stomach of the country, from which all the organs
take their tone.
(William E. Gladstone 1809-98, British statesman)
ANTS had promised historic reform of Commonwealth–state financial relations,
but its most memorable feature was the Commonwealth’s fiscal fib that made an
unwanted gift of the GST to the states as proof of their subordination.
In an intergovernmental agreement on 22 June 1999, the Commonwealth
promised all GST revenues to the states. The states agreed to phase out their
‘nuisance taxes’262 by 2005, and Financial Assistance Grants from the
Commonwealth would cease.263 GST revenues would be divided up between the
261. For details of the relevant legislation see Dick (1998)
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T AXIN G P O P U LARIT Y
states according to established Commonwealth Grants Commission principles.
But, the Commonwealth government insisted, the GST was ‘not a
Commonwealth tax’. The rate of GST could only be changed by an Act of the
Commonwealth Parliament, and only with the prior agreement of all states. 264
The GST, said the Commonwealth, was A State Tax and the Commonwealth
merely the states’ taxing agent.
The move was condemned as a cynical ‘fiscal falsehood’ by former
Commonwealth Treasury Secretary John Stone (1999). The effect of
characterising GST payments in this way was that around $24 billion of its tax
collections were disowned by the Commonwealth. Using this fiscal fabrication,
‘Commonwealth’ taxation apparently fell to 21 per cent of GDP in 2001–02, its
lowest level for a decade, rather than the historical peak of 25 per cent of GDP
measured using conventional reporting (Table 17). The Commonwealth
Treasury explained that its Budget figures were different from the Statistician’s
because
The clear policy intent of the Intergovernmental Agreement on the Reform of
Commonwealth–State Financial Relations is that the GST is collected by the
Commonwealth, as an agent for the States and Territories, and appropriated
to the States
(Australia. Treasury 2003d).
However, the Australian Bureau of Statistics (ABS) courageously gave a
dissenting ‘constitutional’ opinion that the Commonwealth government owned
the GST. In its expert judgment ‘the GST should be treated as a Commonwealth
tax for government finance statistics purposes…’ (Australian Bureau of Statistics
2000, 32).265 Likewise, the Auditor-General was discomforted by the
Commonwealth’s ‘tax avoidance’, and qualified his 2001 audit of the
Consolidated Financial Statements (CFS):
262. Such as ‘bed taxes’ (abolished from 1 July 2000), financial institutions duties, and stamp duties on
marketable securities (abolished from 1 July 2001). Gambling taxes would be adjusted to take account of
the impact of the GST. Debits taxes would be abolished by June 2005. See previous chapter ‘The Syntax
of Sin Taxes’.
263. Transition arrangements guaranteed each state a minimum level of revenues. The Commonwealth also
kept a ‘service fee’ for itself.
264. But see Williams (1999).
265. The ABS reasoned that the Commonwealth was not an agent, having the ultimate role in determining and
distributing the GST, and the tax was imposed and administered under Commonwealth law. The states
and territories had little influence or discretion over the GST and how it was distributed, and the revenue
distribution did not depend on where it was derived. The ABS reinforced its defences by citing the
formidable authority of the OECD and the IMF.
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 153
Constitutionally, the Goods and Service Tax (GST), which came into
operation on 1 July 2000, is a Commonwealth tax as it is imposed under
Commonwealth legislation and the Commonwealth Government controls the
revenue raised. The CFS do not recognise, as revenue, the taxes associated with
the GST nor do they recognise, as expenses, the associated payments to the
States and Territories of the moneys raised through this tax. This accounting
policy does not accord with Australian Accounting Standard AAS 31
Financial Reporting by Governments which requires that all of the
Government’s assets, liabilities, revenues and expenses be recognised in its
financial statement
(Australia. Auditor-General 2001, paras 57-60).
The Auditor-General pointed out that this treatment of the GST contradicted
that adopted by the Australian Taxation Office (ATO) and the Department of the
Treasury in their 2001 financial statements.266 In sum, the CFS were not a true
reflection of the Commonwealth’s accounts; and, ‘the financial effects of not
recognising the GST as a Commonwealth tax are to understate the result for the
period and to overstate net liabilities as at period end [by $3.7 billion]’.
Notwithstanding the impressive line up of expert opinion exposing its political
games, the Commonwealth government continues to disown the GST, and the
tax tail is not yet pinned on the political donkey. Meanwhile, the Treasurer who
introduced the Charter of Budget Honesty lives with the embarrassment of the
auditor qualifying his financial accounts.
Whether the ANTS reforms to Commonwealth–state finances are
‘momentous’ or a cynical political charade will become clear when the
Commonwealth ‘renegotiates’ the 1999 Intergovernmental Agreement or specific
purpose grants to the states.267 One consequence of the Agreement was the
welcome impetus it provided to review of state business taxation. Despite political
hedging on flat land taxes and gambling on high gaming profits, such review
generated sensible proposals for base broadening, rate-reducing and simplifying
reform of state land and payroll taxes, as well as greater harmonisation of state tax
266. These recognised the GST as a Commonwealth revenue when the tax was imposed, and treated associated
amounts payable to the states and territories as grant expenses.
267. As GST revenues are to be distributed according to ‘horizontal equalisation’ principles established by the
Commonwealth Grants Commission, the Commonwealth’s discretion in determining individual state
shares is theoretically reduced. However, the new intergovernmental financial arrangements increase the
scope of equalisation, which redistributes from wealthier states such as New South Wales to poorer states
such as Tasmania (Collins 2000). ‘Donor’ states can thus be expected to challenge how GST grants are
shared out. This has already begun. See FitzGerald and Garnaut (2002).
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T AXIN G P O P U LARIT Y
bases, abolishing a range of nuisance taxes and streamlined administration
(Victoria. State Business Tax Review Committee 2001; Western Australia.
Department of Treasury and Finance 2002).
Nonetheless, with around a half of states’ revenues coming from the
Commonwealth, the main game remained in the field of federal-state financial
arrangements. In a sign of things to come, when the earlier Agreement had been
‘renegotiated’ in May 1999 to reflect reduced GST revenues from the removal of
food, the seven Labor premiers just couldn’t say ‘no’ to Commonwealth income
tax cuts for high-income earners, and agreed to retain regressive state taxes to pay
for them. In 2001 the Commonwealth rubbed salt in the premiers’ fiscal wound,
abolishing fuel excise indexation at a cost to ‘state’ GST revenues of several
hundred million dollars. As Robert Garran predicted at Federation, the
overwhelming fiscal dominance of the Commonwealth tempts it to gain cheap
popularity either by ‘a policy of extravagant expenditure’ or ‘by an equally reckless
remission of federal taxation’, while state treasurers are left ‘demoralized’ (Garran
1897, 164; Smith 2002a).
Whether or not the reform was ‘historic’, the Commonwealth now occupies
the whole of the federation’s tax heaven and the states’ tax autonomy is history.
The (increasing) taxes paid to the well-to-do Commonwealth remain detached in
the public mind from (diminishing) public services of the impecunious states),
and citizens remain blind to the inconsistency of demanding better state
government services while resisting higher Commonwealth taxes. The annual
braying of state premiers and their disregard by the Commonwealth only
highlights that the real GST donkey has still not stepped forward.
Essential goods and services tax reform
The capacity of the tax system to raise sufficient revenue to fund such
[government health, education and welfare] services is an important equity
consideration. Tax reforms that broaden the tax base or increase the capacity
of the revenue raising system are likely to enhance equity. On the other hand,
funding income tax cuts for middle to higher income groups by reducing
government services is likely to reduce the overall equity of the system.
(Harding 1998, 75)
After the High Court’s Ha decision sent the states’ tobacco taxes up in smoke,
indirect tax reform became essential. The 1998 ANTS proposed a GST raising
$32 billion per annum to replace $12 billion of state taxes and the $18 billion
WST. After the states agreed to the plan, progress depended on negotiating
Smith RS43 ATRF Page 155 Thursday, November 11, 2004 3:00 PM
MOMENTOUS OR MOMENTA R Y TA X REFOR M 155
democratically with Opposition parties in the Senate. However, substantial
personal income tax cuts plus a GST on food signalled a controversial
change in tax mix. Tasmanian Senator Harradine’s ‘I can’t stomach a tax on food’
speech exterminated this ANTS package in May 1999, and the price of
democratic reform was basically GST-free food and (ironically for the devout
Senator) condoms.268
The case against taxing food was simple and longstanding. Taxing food is
highly regressive, equal to a 3 per cent income tax on the lowest income
households and a 1 per cent tax on the highest (Quiggin 1998a). 269 Adequate and
comprehensive compensation was unlikely and could not be guaranteed into the
future (Disney et al. 1998).270 Inelastic demand for food meant little gain in
efficiency from taxing food, while compensating the disadvantaged through
means-tested social security and family payments would reduce economic
efficiency (Apps 1999) and worsen existing employment disincentives for mothers
(Beer 1998).
The case for a GST including food was simple and longstanding too. Allowing
GST-free food would open the floodgates for other claims for special treatment.
The equity effects of exempting food could be achieved by including food and
making targeted compensation payments (Warren 1998; Warren et al. 1999). As
exempting food cost over $4 billion in revenue, a wider base could allow lower
rates of GST.271 It would also be simpler to administer, as ‘food’ would not need
to be legislatively defined.
The politics was predictable (Smith 1999). As producers of food, farmers
would be adversely affected, and their opposition made taxing food politically
indigestible for a Liberal/National coalition. Church criticism of taxing food gave
public legitimacy to the distaste of farmers, welfare groups, unions, academics,
and ‘Just Say No’ parliamentarians.272 Government promises of compensation
were insufficient to convince a sceptical public that future equity was
secured.
268. For details of how the GST was implemented see Cooper and Vann (1999)
269. Professor Quiggin has shown that per capita expenditure on groceries scarcely varies with household
income. Hence, ‘a food tax is equivalent to a poll tax, the most regressive tax of all’ (Quiggin 1998).
270. Experience in New Zealand was instructive, as unaffordable cuts to income tax to sweeten the
introduction of the GST led to later cuts to social security benefits and public services and an
uncompensated rise in the GST from 10 per cent to 12.5 per cent (ACOSS 1997; Smith 1992). The likely
erosion of compensation was confirmed by Treasury during the Senate inquiry into the GST. See the
Senate Report (Australia. Parliament Senate Select Committee 1999).
271. Although in practice introducing the GST at a rate lower than 10 per cent was unlikely.
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T AXIN G P O P U LARIT Y
In the event, ‘the politics of the Senate defeated the administrative nirvana
and the consumer’s nightmare’ (Cooper and Vann 2000, 261). Wide-ranging
inquiries into the GST by Senate committees, and a high profile government
advertising campaign did not unchain enough hearts. The first Senate report set
the tone for others:
Labor found that the government’s claims on the economic effects of the GST
were all wrong and the government senators that the claims were correct. The
Democrats agreed with much of the claims but considered that the effect on
low income earners was understated which would be solved by not taxing food,
while the WA Greens were concerned.
(Cooper and Vann 1999, 342)
On 28 May 1999 the government agreed with the Democrats to remove ‘basic
food’ from GST. The $4 billion revenue cost was met partly by slimming the
sumptious personal tax cuts for higher income earners, but mainly by retaining
some state taxes. Proponents of a ‘broad-based’ GST found the ‘basic food’
exemption hard to swallow. The ‘park ranger’ of the tax system, Tax
Commissioner Michael Carmody, had dreamed of a new millennium in which
the tax system did not turn ‘on the size of the chocolate dots on a gingerbread
man’ (Carmody 1999) and the grief of an administrator who now needed recipes
for bread and biscuits was understandable. Nevertheless, many countries exempt
food (Messere 1993) and food was ‘no more than another blemish on an already
well cratered surface’ (Cooper and Vann 1999, 263). The main base-broadening
and efficiency benefits of the GST lay in taxing services and encompassing value
added beyond the wholesaling stage, not in taxing food; and even these gains
were contentious once account is taken of the unpaid household economy
(Smith 1992, note 27).273 Critics of a GST on food were thus unconvinced by
the park ranger’s plea:
272. The ALP distinguished itself from the government by proposing luxury taxes on caviar and four wheel
drive vehicles instead of a GST. It also promised modest anti-avoidance measures and an ‘earned income
rebate’. The latter would apply a family income test to all but high-income taxpayers. The latter continue
to be granted privileged access to individual unit taxation and income splitting opportunities for tax
avoidance, with the blessing of both major political parties. See Smith (1994) and Lambert, Smith and
Beer (1996) for detailed analysis of income splitting as a tool for assisting families with dependent
children.
Smith RS43 ATRF Page 157 Thursday, November 11, 2004 3:00 PM
MOMENTOUS OR MOMENTA R Y TA X REFOR M 157
The claim that low income households should pay billions of dollars in food
taxes because the government is incapable of distinguishing between a bag of
groceries and a restaurant meal is not worthy of consideration.
(Quiggin 1998a, 8)
Turning a comprehensive GST into a test of ideological purity was
counterproductive as well as illogical. Many Australians viewed taxing such
household ‘necessities’ as intrinsically unfair. The eventual exclusion of basic food
confirmed that the aim of simply wiping the indirect ‘tax slate’ clean with an
untarnished, new tax was naïve and unrealistic.274 Mixing up indirect tax changes
with income tax cuts also needlessly increased opposition to essential reform.
There was no logical reason to tie the GST and the reform of indirect taxes to
income tax cuts or to regressive moves to tax food (Quiggin 1998a). Indeed, the
logical complement to higher indirect taxation is enhanced taxation of assets and
inheritances. As Professor Freebairn observed, a package which raised
consumption taxation to cut income taxes would distribute taxation more
regressively but produce only debateable economic efficiency gains (Freebairn
1998).275 Such tax mix changes require complex means-tested compensation
packages —’a policymaker’s nightmare’ (Harding 1998). The economic
efficiency gains from replacing the sales tax and the states’ nuisance taxes could
have been achieved without significant adverse equity effects by avoiding a tax
mix change.
273. Even the 1998 ANTS package imposed several different tax rates by the time various exemptions and the
non-taxability of household production is taken into account. In any case, a uniform rate GST is not a
perfect tax for economic efficiency. It is said to benefit efficiency by reducing distortions to consumption
and production decisions. However, this ignores the distortion to work and consumption choices from
unpaid household production. An empirical study by Piggott and Whalley (1998) shows that the
efficiency benefits of an uniform comprehensive GST, which taxes services, are outweighed by its
additional incentive for substituting home production, do-it-yourself, and ‘cash economy’ services such as
haircuts, garden care, and house repairs. See also the Savage (1998) critique of arguments for a flat rate
GST from an optimal tax perspective.
274. Unyielding pursuit of ‘the perfect tax’ through the supposed ‘ideal’ of a single-rate, comprehensive GST
may well have resulted in a more bastardised tax than if a theoretically ‘less than perfect’, but more socially
defensible and therefore politically robust, GST had been put forward in the first place (Smith 1999a).
The price of the government failing its self-imposed ‘Viagra’ test with food was that it was forced to agree
to a range of ad hoc exemptions from the GST, including sunscreens, contraceptives and manufactured
baby rusks or milks. Criticism of the complexity and compliance costs of the GST were as much a
response to the effect of such arbitrary exemptions as to the effect of exempting food, with evidence that
the additional compliance costs of excluding food from the GST are not substantial (Australia Parliament
Senate Select Committee 1999, Chapter 4).
275. Economic modelling showed that the efficiency gains of the original tax package were small, if any, at
between minus $30 million and $600 million annually (Australia Parliament Senate Select Committee
1999, chapter 2).
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T AXIN G P O P U LARIT Y
Whether the ANTS tax mix produced a more equitable or more efficient tax
system remains food for thought. The tax package introduced on 1 July 2000
comprised $2 billion compensation for social security recipients, $2.5 billion in
family assistance, and $12 billion of income tax cuts. Half of the $12 billion of the
income tax cuts went to high-income households (Australian Council of Social
Service 2000), setting the direction for personal and company income tax cuts
over the next four years. Although the original ANTS preference for high income
earner tax cuts were watered down, only a quarter of the $4 billion cost of
exempting food was met by reducing the proposed income tax cuts (Davidson
2000). Early estimates (Australia. Treasury 2003b) showed average gains in
disposable income for major family types for 2000–01 as a result of the ANTS
package.276 However, there is little doubt that the changes increase financial
dependency for women with children (Smith 1992).Welfare organisations predict
greater income inequality and vulnerability of low-income groups. The priority
given to tax cuts for high income earners reflects chauvinistic wishful thinking that
high effective marginal tax rates penalise work effort by high-income earners
rather than the evidence that the problem mainly punishes employment among
married mothers (Gittins 2004). Although ANTS had laudable ambitions to
reduce work disincentives caused by increased targeting of social security since the
1970s, the greatest tax disincentives still fall on middle-income parents rather than
high-earning elites (Beer 2003). As Ingles pointed out
Dealing with effective marginal tax rate problems is like dealing with a
rubber ball that bulges in places: pushing in the bulge at one spot inevitably
causes it to bulge somewhere else. High effective marginal tax rates can be
levelled down only by raising tax rates for others, or taxes in general.
(Ingles 2000, 1)
276. Such calculations are hazardous for assessing tax incidence changes. Changes in disposable income do not
capture the full effect of the changes on household consumption and wealth. In particular, Australian
households spend substantially more on average than they earn, while small survey sample sizes for smaller
subgroups of the population such as sole parents with children can make results inaccurate (Harding
1998).
Smith RS43 ATRF Page 159 Thursday, November 11, 2004 3:00 PM
MOMENTOUS OR MOMENTA R Y TA X REFOR M 159
Table 16: Taxation
1999-00
Commonwealth
Customs and Excise duties
Sales Tax
Income taxes
Estate and gift duties
Stamp duties nei
Land Taxes
Other taxes
Total
State and Local
Total
$mill
%
$mill
%
$mill
%
18441
15644
114520
0
0
0
3970
152575
12
10
75
0
0
0
3
100
18
0
0
0
7282
6078
30457
43835
0
0
0
0
17
14
69
100
18459
15644
114520
0
7282
6078
34159
196142
9
8
58
0
4
3
17
100
2002–03
Commonwealth
$mill
Customs and Excise duties
27041
Sales Tax
32153
Income taxes
131278
Estate and gift duties
0
Stamp duties nei
0
Land Taxes
0
Other taxes
3841
(Payroll)
(3085)
(Motor taxes)
(0)
(Gambling)
(0)
(Business franchise)
(0)
Total
194313
Source: ABS, Taxation Revenue, 2004.
State and Local
Total
%
$mill
%
$mill
%
14
17
68
0
0
0
2
(0)
(0)
(0)
(0)
100
3
0
0
0
10133
2553
30815
(10147)
(4691)
(3843)
(10)
43504
0
0
0
0
21
5
71
(24)
(11)
(9)
(0)
100
27044
32153
131278
0
10133
2553
34315
(12894)
(4691)
(3843)
(10)
237476
12
14
55
0
4
1
14
(5)
(2)
(2)
(0)
100
The proof of the 2000 tax reform pudding is, so to speak, in how future
governments consume GST revenues and whose work efforts shall be
discouraged, rather than on how big was the ANTS compensation cake. As
economic growth slows the growth of income tax revenues, the full implications
of the ANTS package and subsequent income tax policies will become evident.
The additional GST revenues can be used to sustain a robust revenue base and
maintain public services, or reduce the importance of progressive income
taxation (Table 16). The result depends in part on complex interrelationships
Smith RS43 ATRF Page 160 Thursday, November 11, 2004 3:00 PM
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T AXIN G P O P U LARIT Y
between Commonwealth and state finances, as well as the fiscal policies and
priorities of Australian governments. The states have hastened to reduce
gambling taxes with their new GST income. The Commonwealth’s priority (up
to 2004-05) of reducing tax on high-income earners restores the most regressive
ingredients of the original ANTS package. As revenues from the Ralph Review’s
tax avoidance chickens were counted before they were cached, the 1999 business
and capital gains tax (CGT) cuts have also become Trojan horses for a future shift
in the tax burden. However, ANTS has achieved what the Tax Summit and
Fightback! could not, chronic tax reform fatigue and the prospect that the torrent
of tax reform has, for a while at least, subsided.
The Business of Taxation — Ralph’s Radical ‘Revue’
Tax is politics with a dollar sign in front.
(Grbich, pers. comm., 2003, quoted in Evans (2003, 214))
Shortly after releasing the 1998 ANTS package, the Howard government
announced a review of its business tax proposals. As ‘tax law improvement’ had
foundered on complex tax policies and structures, the Review (headed by
businessman John Ralph) was asked to fundamentally redesign Australia’s
business taxation — at no cost to revenue. Within a short time, however, political
termites and chronic tax reform fatigue had made a piece-meal of Ralph’s
package. Lower company tax rates, financed by abolishing accelerated
depreciation, reduced investment distortions and improved incentives. However,
plans for taxing discretionary trusts withered in the political heat as ‘Devils
howling, Ho!’ prophesied doom, death and destruction for the family farm, and
capital gains tax reform became no more than unprincipled election bait and a
blow to first home buyers. Ralph’s flirtation with radical reform, the ‘tax value
method’ (TVM) of assessing business income, was quietly stripped bare and
buried by expert and business opinion which exposed its practical revenue risks
and compliance costs.
The report of the Ralph’s Review was delivered in September 1999. The 1998
ANTS package had included proposals for company tax cuts, unified entity
taxation and group consolidation, refundable imputation credits, and changes to
fringe benefits tax (FBT) and accelerated depreciation. Performing a delicate
balancing act with the Treasurer’s ‘revenue neutral’ edict, Ralph brought forward
a two-stage package of business tax reforms. Firstly, it proposed reducing the
company tax rate and capital gain taxes, the revenue loss to be offset by ending
accelerated depreciation, taxing nominal rather than real capital gains and
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 161
abolishing averaging, and tackling tax avoidance. ‘Tax integrity’ measures, such as
unified entity taxation, featured in the second stage of the package. The
recommended ‘entity taxation’ would tax trusts and other entities such as life
insurers, cooperatives and limited partnerships like ordinary companies. 277
‘Consolidation’ of related business groups for tax purposes would limit the
creation of artificial tax losses by loss duplication and value shifting. A radical new
‘tax value method’ (TVM) for determining taxable income was also proposed to
simplify tax law by applying commercial accounting principles.278
The government accepted the key major recommendations of the Ralph
Review report. However, with an election due, the staging of reforms was
determined by their political palatability. High profile capital gains and company
tax cuts were served up immediately, while less delectable morsels like TVM and
bitter pills addressing tax avoidance were to be tasted later. The Treasurer
announced a company tax rate of 34 per cent for the 2000–01 income year, which
was to be reduced to 30 per cent from July 2001.279 To reduce its compliance
costs, small business could access special tax rules, such as for depreciation
although, ironically, the new capital gains tax concessions for small business
owners drastically raised their tax compliance costs (Evans 2003). The
Government also introduced a 50 per cent capital gains tax discount for
individuals and trusts, with additional capital gains tax concessions for small
business, superannuation funds and venture capital investors.280 While the
existing anti-avoidance provisions were viewed by some tax practitioners as
sufficient to deal with increased contracting out and consultancies, the second
stage measures included a new regime to prevent tax avoidance through alienation
277. Unified entity taxation would enable refundable imputation credits for resident individuals and
superannuation funds. It also would result in trust distributions to charities being made out of taxed rather
than pre tax income, requiring an endorsement system for charities.
278. The Tax Value Method proposed replacing the definition of income in tax law with a concept based on
cash flows and changes in the tax values of assets and liabilities. This was to bring tax value and
commercial value more into line. See Grbich and Warren (2001), and Evans, Tran-Nam and Jordan
(2002) for an analysis of compliance cost effects.
279. A lower corporate tax rate was the Holy Grail sought by large corporations, although some industries
(service and finance) benefited more than others (manufacturing and mining) because accelerated
depreciation was abolished at the same time. However, the Treasurer’s ‘option of targeted investment
allowances’ for large projects flagged a worrying ad hoc process for negotiating new depreciation
concessions.
280. Capital gains tax concessions for small businesses introduced in 1985 (goodwill) and extended in 1996
(asset roll-over relief; 50 per cent exemption on sale of goodwill; exemption on active asset disposal for
retirement) were in 1999 streamlined and expanded as recommended by Ralph, and also added to by the
Treasurer to include a CGT exemption at retirement on active assets held for 15 years. See Evans (2003)
for a critique of these measures and evidence on their adverse compliance cost, efficiency and equity
effects.
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T AXIN G P O P U LARIT Y
of personal services income.281 The first stage measures were to be broadly neutral
in 2000–01. The second stage would also aim at revenue neutrality. However,
critics argued that the cost estimates for Ralph’s recommendations did not meet
the ‘robust’ or ‘credible’ standards usually required of government agency
forecasts (Kehl 1999).282
Indeed, once the 1999 company and capital gains tax cuts were in place, the
government exercised a discretion not to tax discretionary trusts, thereby trusting
high-wealth individuals to determine their own income and capital gains tax bill
and creating a large funding gap in the business tax package. As Professor Richard
Krever had observed in 1998, trusts had been the cornerstone for tax
minimisation for almost eight and a half decades in Australia.
The so-called ‘ordinary family trust’ has become an accepted euphemism for
an arrangement whose primary, if not sole, justification is tax reduction, and
the so-called ‘flexibility’ of trusts as commercial and investment vehicles is the
commonly used code-word for facility as a tax minimisation vehicle.
(Krever 1998, 26)
From the late 1980s, under the new imputation system, trusts and limited
partnerships were to have been either taxed like companies or their distributions
were to have been taxed as capital gains in the hands of beneficiaries. 283 Soon
after, however, a technical tax lawyer convinced the Commissioner for Taxation
that beneficiaries had no legal ‘interest’ in a discretionary trust (Krever 1998). A
temporary white flag was raised with a tax ruling confirming tax ‘clawback’
281. This was one of the Democrats’ conditions for agreeing to a GST.
282. The ‘revenue neutral’ description depended on ‘growth dividends’ from tax cuts, included ‘Lafferbly’
elastic assumptions about net revenue gains from capital gains tax realisations and implausibly low
estimates of revenue losses from the diversion of taxable income into capital gains. The costings offset
(transitory) increases in government cash flow from abolishing accelerated depreciation to pay for the
(ongoing) cost of cutting company tax rates. The revenue neutrality of the package relied heavily on future
implementation of ‘tax integrity’ measures including the unified entity regime, which the government first
deferred, then abandoned.
283. This ‘washout’ policy was adopted to ensure the many remaining business tax incentives did not ‘pass
through’ to individuals sheltered from commercial risk. Until 1985, income was taxed in the hands of
beneficiaries, and the benefit of concessionally taxed or exempt income derived by a trust ‘flowed through’
to beneficiaries. With the introduction of imputation, Australia adopted a policy of allowing imputation
credits only against income that had been fully taxed at the company level. Public trading trusts and
limited partnerships were deemed to be companies for tax purposes. Otherwise non-taxable distributions
from trusts were to be assessed as capital gains in the hands of beneficiaries. This meant that investors in
most trusts, including trading trusts, widely held investment trusts, property trusts and share trusts, were
subject to the ‘claw back’ rules. These tax rules ‘clawed back’ the benefit of concessions and loopholes
when income was distributed out of a company or trust to individual investors. That is tax preferences
‘washed out’ rather than ‘passed through’.
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 163
would not apply to such trusts. Nevertheless, by 1998 the ATO investigation of
high-wealth individuals had confirmed that much of the massive tax avoidance
by high-wealth individuals involved use of discretionary trusts. Discretionary
trusts offered investors the benefits of incorporation and — unlike companies
and similar entities — could also channel the benefit of business tax concessions
to individuals. The Commissioner of Taxation developed a renewed passion for
taxing discretionary trusts (Kehl 1999). The problem might have been fixed by
changing a few words in the relevant tax laws. The government instead
introduced a requirement for trustees of discretionary and closely held trusts to
identify the ultimate beneficiary and provide their tax file number, and passed the
problem to the Ralph Review. Solving this discretionary tax problem thus
became tied to implementing Ralph’s recommendation for unified entity
taxation.
With many trusts and limited partnerships largely unaffected by the new
regime, the government was soon persuaded to exempt them from it. As the
various limbs were cut off the entity tax regime, discretionary trusts became the
focus of a large and complex tax bill. This, it was argued, was using a
sledgehammer to crack a nut, and advocates of discretionary trusts howled
discrimination. Although 70 per cent of trusts were in the property industry,
farmers and small businesses were paraded as victims. In February 2000, the
government put the entity taxation regime on hold, and the cheers of victory from
Caesar’s tax army turned to wails of despair. Fixing the problem directly through
amendments to existing legislation was too weak to suit the purists and too strong
to suit trust beneficiaries. By 2001 it was clear that entity taxation was dead.
Facing a choice of taxing all entities as companies or amending the existing rules
for trust distributions so as to bring discretionary trusts under the company tax
umbrella, the government did neither. The public was left wondering whether the
trust in discretionary trusts reflected parliamentarians’ own widespread use of
such entities (Quiggin 1998c).
Related to this breach of trust on trusts were the 1999 CGT changes.
Although capital gains taxation is spreading in most OECD countries because of
its benefits for equity and investment allocation, the 1999 CGT discount for
individuals and trusts signalled bipartisan abandonment of accepted principles for
capital gains taxation in Australia (Evans 2003). Rather than preserving public
respect for the CGT by reducing its excessive and unnecessary compliance burden
on low- and moderate- income earners, the discount directed a tax cut costing
$2.5 billion a year (Australia. Treasury 2004) to a small number of high-wealth
individuals and trust beneficiaries.284 While the parliamentary guardians of tax
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T AXIN G P O P U LARIT Y
justice were fixated on a food-free GST and less regressive income tax cuts, the
stage was thus set for widespread and regressive conversion of income into capital
gains, and for a future public revolt against a needlessly onerous and arbitrary
CGT. In the meantime, the cuts fuelled a destabilising boom in investor housing,
to the detriment of housing affordability and first home buyers.285
While international tax arrangements were dispatched for review by the newly
established Board of Taxation, the big questions on how corporate taxation
should respond to globalisation remained unanswered. Although the efficiency
benefits of imputation were proving short-lived, and integration tied the hands of
policy-makers in determining personal tax progressivity, the merits of integrated
company and personal income taxation systems remained unquestioned. The
review, which might have debated how the company taxation goals of efficiently
taxing foreign direct investment flows, capital gains and economic rents might be
best balanced with domestic equity objectives and investment efficiency, simply
became a postbox for business demands that an efficiency-enhancing billion dollar
tax cut for shareholders, in the form of imputation tax credits on foreign source
income, be paid for by ‘the other fellow’.
When the Government finally announced in 2002 that the frail TVM infant
had been fatally injured during delivery, it became clear that Ralph’s radical
reforms had been little more than a wearisome ‘revue’ — a dramatised business
tax tidy-up and a public political recital on reducing business tax compliance costs
with various charitable tax Acts introducing unheralded but radically regressive
shifts in tax distribution.
Charitable Taxation Acts
The basic function of a tax system is to collect those revenues which are to be
allocated to the public sector and expended for publicly determined purposes.
A tax system may also be used by government as a tool to implement policies of
government that require the expenditure of funds. Thus when government
desires to provide a financial incentive for individuals or businesses to engage
284. For example, by introducing an appropriate threshold. As the United Kingdom has a substantial tax-free
threshold, removing ‘nuisance’ taxation of capital gains, capital gains taxation affects one in a hundred
taxpayers in the UK compared to one in ten in Australian. In Australia some 75 per cent of CGT revenues
are collected from a small number of individuals with taxable income above $50,000 per annum, while
only 25 per cent are collected from the hundreds of thousands of low- and moderate-income earners
whose asset sales trigger a CGT liability in a given year (Evans 2003).
285. A Productivity Commission inquiry subsequently recommended a review of taxation as it affected
housing, especially the 1999 capital gains tax changes (Productivity Commission 2004). This placed the
issue safely beyond the next election.
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 165
in a particular course of action or to share costs in hardship situations, it may
employ either direct spending programs or special provisions in the tax system.
(McDaniel 1989, 167)
Tax concessions or tax incentives are a many splendoured thing. To the diehard
conservative, any tax concession, however wasteful or inequitable, is a good
thing, as it constrains the tax Leviathan. To those of the opposite political
persuasion, such tax dispensations are often regrettably regressive in practice, but
a useful device for doing ‘good deeds’ without attracting criticism for profligate
public spending or meddling with industry. Regular estimates of their revenue
cost were first published in Australia in 1986. A decade later the Liberal–
National Party coalition government introduced the Charter of Budget Honesty
Act 1998, which required annual publication of the estimated revenue cost of tax
concessions.
The number and revenue cost of such ‘tax expenditures’, as they are known, 286
have risen considerably during the past decade, and their role is changing (Smith
2003).287 Equal to around one-fifth of direct government outlays, tax
expenditures amount to twice Australia’s defence budget and are comparable with
Commonwealth government expenditure on health. The proliferation of tax
concessions is blamed for holding up tax rates for the general taxpayer (Gittins
2002). While there are fewer ‘social’ tax expenditures than ‘business’ tax
expenditures, social tax expenditures now have a larger cost to revenue. This
mirrors trends in the United States (Toder 1999a, 2000). In Australia, tax
concessions have become more ‘fragmented’ during the past decade, a political
strategy often used to reduce tax visibility (Peters 1991).
Public or parliamentary scrutiny and evaluation of tax expenditures are less
than that for direct outlays as tax concessions have not traditionally been viewed
as government spending. Wide use of the tax expenditure tool may also
compromise the efficient allocation of public resources and undermine
government financial management. Tax concessions, for example, for primary
producers, may work directly against spending program goals such as protecting
the environment (McKerchar and Coleman 2004).288 Although they have some
286. The OECD defines a tax expenditure as a departure from the generally accepted or benchmark tax
structure which produces a favourable tax treatment of particular types of activities or taxpayers.
287. The rise in the cost of social tax expenditures in Australia in recent years partly reflects the income tax side
of the tax system providing GST compensation for families with dependent children. However, it can also
be argued that Treasury estimates of Commonwealth tax expenditures understate their value by several
billion dollars annually. See Smith (2003).
288. As a result of tax concessions, the primary producer sector had a negative net tax rate. See Warren ((1979).
Smith RS43 ATRF Page 166 Thursday, November 11, 2004 3:00 PM
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T AXIN G P O P U LARIT Y
potential merits as a tool of public policy,289 tax expenditures generally weaken the
tax system by increasing complexity, facilitating avoidance and hindering tax
administration.290 The National Commission of Audit concluded in 1996 that tax
expenditures were inconsistent with the new government’s Charter of Budget
Honesty and proper fiscal decision-making:
This lack of transparency makes less visible the effect of tax concessions on the
budget and reduces accountability. It also increases the likelihood that poorly
targeted concessions will remain on offer. This lack of transparency is also
inconsistent with the Charter of Budget Honesty’s objectives to ensure greater
transparency for the decisions and operations of government. Treasury’s
submission to the Commission also noted that ‘lack of transparency and
minimal accountability for tax concessions have made them a popular vehicle
for those seeking government assistance’. (National Commission of Audit
1996, 296)
Tax concessions are useful for reducing political controversy over interventions in
non-traditional areas or where political consensus is lacking. Their special fiscal
magic enables political leaders to reduce spending and taxes whilst pursuing an
activist policy that promotes popular programs:
Tax incentives are popular because they represent a way of increasing Federal
support for social policy, while seeming to be tax cuts rather than increases in
spending. Compared to direct outlay programs with similar goals, they better
meet the need of politicians to appear to favour spending restraint and in some
circumstances can be financed at a lower political cost.
(Toder 1999b, 5)
The politics of tax expenditures are different and tax expenditures grow for
different reasons to direct spending programs (Poddar 1989). Social tax
expenditures and business tax expenditures are shaped by different bureaucratic
pressures: tax concessions for superannuation are typically shaped by the
priorities of treasury/finance ministers, while ‘business’ tax expenditures tend to
289. A tax measure may sometimes better achieve public policy goals than equivalent assistance delivered
through direct spending. For example, in some circumstances, using the tax system to deliver fiscal
benefits may result in better targeting, more cost-efficient administration, or greater efficacy in reaching
the intended beneficiaries than a direct grants program. Some also argue that providing general business
subsidies through the tax system also helps avoid opportunities for political influence in the dispensation
of grants or tenders.
290. For example, tax concessions for superannuation, capital gains and fringe benefits are observed to facilitate
tax avoidance and promote unethical behaviour (Kohler 18 April 2000).
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 167
reflect the influence of economic ministers and industry interests. In the past
decade, the growth of tax expenditures has reflected expansion of the ‘hidden
welfare state’ (Howard 1997) — a regressive shift in social policy that can more
easily pass the political popularity test if dressed as ‘tax relief ’ rather than ‘welfare
for the wealthy’. Growing tax subsidies for the private provision of services such
as health care and retirement income also reflect changing economic structures
and patterns of political influence (Smith 2002b).
It is perhaps not surprising then, that the foreshadowed review of tax
expenditures announced after the National Commission of Audit in 1996, was
apparently overtaken and devoured by ANTS. Tax expenditures in Australia
continue as an invisible fiscal charity for governments’ favourite causes
notwithstanding the worthy aims of the Charter of Budget Honesty and unmet
aspirations to ‘best practice’ budget processes (OECD 2004b).
Charitable Taxation Acts, Scene 1: ‘Self funded’ seniors, ‘self
funding’ private health insurance, and tax bonus babies
It is a general popular error to imagine that the loudest complainers for the
public to be the most anxious for its welfare.
(Edmund Burke, 1729–97)
The rising cost of tax expenditures in Australia over the past decade is mainly due
to new and more generous tax incentives for private superannuation and health
insurance. Private superannuation has been the federal government’s favourite
charity during the 1990s. By 2001–02, the annual revenue cost of tax
concessions for private superannuation was over $10 billion (Australia. Treasury
2004), around a third of the cost of the public age pension.291 Such generous
political benefaction has contributed tax breaks for the rich and tax compulsion
for the poor to the superannuation cause. Rather than making superannuation
work, such charitable ‘Acts’ have encouraged industry dependency and
ingratitude. A minority of relatively well-off individuals now enjoy tax subsidies
for retirement exceeding what they would have received on the age pension, but
291. See O’Connell (2000) for a succinct summary of the tax treatment of superannuation. The industry
maintains it is overtaxed, not concessionally taxed. Having several components to the taxation of
superannuation is said to represent ‘over-taxation’. However this is misleading—the taxation of each
separate element of superannuation (contributions, earnings and payouts) is concessional and the overall
tax treatment remains highly concessional to superannuation (Kehl 2001). The industry also argues
superannuation should be taxed on an expenditure tax rather than an income tax basis, comparable with
concessionally taxed housing (Access Economics 1998; Association of Superannuation Funds of Australia
Ltd (ASFA) 2002). However, this would further increase distortion of investment decisions.
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still the industry demands more concessions.292 The decline in national savings
and the fiscal cost of population aging have been enlisted to aid the cause.
However, tax persuasion and compulsion for superannuation are a risky and
regressive remedy which is especially ineffectual at providing safe and adequate
retirement incomes for women.293 Savings to the government are long distant
and depend precariously on an anticipated reduced pension take-up and higher
superannuation tax revenues offetting the escalating cost of tax concessions for
superannuation (Antolin et al., 2004).
The Keating government legislated for compulsory employer contributions
from July 1992 through a superannuation guarantee charge (SGC) scheme, after
employers had collectively snubbed their noses at the policy of extending
occupational superannuation via wage awards. The charge was progressively
increased, though the plan for a 3 per cent employee contribution and cocontribution by the government did not become law.294 By 2002–03, the SGC
levy was appropriating 9 per cent of employment earnings for the superannuation
savings cause. 295
As its flat rate public pension avoided the high fiscal cost of overseas’ earningsrelated social insurance schemes, Australia’s retirement income system had been
lauded as ‘world class’ in the early 1990s (World Bank 1994). However, the
growing high-class tax subsidy to private superannuation became increasingly
politically indigestible by the mid 1990s. From 1996 the inequity of
292. At an annual cost of $26 billion the means tested pension provides retirement income support to around
70 per cent of Australians. More than half the value of tax concessions for superannuation contributions
goes to the top one-sixth of employees earning over $50,000 per annum (Australian Council of Social
Services (ACOSS) 2002)
293. Lower income earners receive minimal if any tax benefits from superannuation contributions, as tax
advantage depends on having high marginal tax rates. Low- and moderate-income earners are also taxed
heavily on their benefits through the means test on public pensions. Compulsory superannuation
payments are at the expense of day-to-day needs, or investment in education or assets such as a car or
home. The existing policy directs half the value of tax concessions to subsidizing the retirement incomes of
a small number of high-income males (Australian Council of Social Services (ACOSS) 2002; Davidson
and McClelland 1996). This is because of the broken work patterns, marginal employment arrangements
to satisfy caring responsibilities and lack of pay equity which influence women’s superannuation
entitlements (MacDermott 1997; O'Connell 2000).
294. This originated in the ‘L-A-W’ tax cuts, which were promised by the Keating government as an alternative
to the coalition’s Fightback! Package but withdrawn after the 1993 election.
295. Unlike social insurance schemes overseas, there is no redistributional element in the SGC, which simply
compels a minimum share of employment earnings to be contributed to an approved private fund. While
the Australian age pension acknowledged on an equal basis the lifetime contribution by all senior citizens
to the progress of the country, an individual’s potential benefit from contributing to private
superannuation (and ability to access the substantial tax concessions) is directly related to previous market
activity and earning capacity. Hence it is structurally disadvantageous to those without substantial wealth
or with lower lifetime market earnings such as mothers and low-income earners.
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 169
superannuation tax concessions convinced the incoming government to impose a
‘superannuation surcharge’ of 15 per cent on the contributions of high-income
individuals. The surcharge has high compliance costs (Pope, Fernandez and Le
2003); superannuation funds judged the move as ‘about as desirable as the
introduction of the cane toad’ (Clare 2001, 39).
The new government was unenthusiastic about the SGC, preferring
‘persuasion’ — that is tax incentives — to compulsion. It promised to allow
choice of fund and superannuation savings for home ownership. However, it was
soon captivated by superannuation tax deals, falling for the widely used marketing
pitch ‘spend now and save!’. Growing ‘grey power’ saw a Senior Australians’ tax
offset introduced in 1996 (extended in 2001–02), reducing the taxation of socalled ‘self-funded’ retirees, and tax concessions for superannuation were extended
to Retirement Savings Accounts in 1997.296 ANTS brought further gifts to the
not-so-poorly endowed elderly, including a one-off ‘savings bonus’ for senior
Australians and the 1999 capital gains tax concessions for retiring small business
owners.297 Incentives for friends and relatives to make superannuation payments,
including for babies, was announced in 2002, and divorced women were given
new rights to their husband’s superannuation. The following year, a means tested
but costly new superannuation ‘co-contribution’ rewarded superannuation
contributions by low income members of high wealth families.
Compulsory superannuation meanwhile underpinned a massive expansion of
the superannuation industry. Tax compulsion more than doubled the proportion
of employees who were fund members, from to 40 per cent in 1988 to 90 per cent
by 2002.298 By then, the scheme was adding around $50 billion annually to
superannuation assets and had boosted funds under management from around
296. The Howard government introduced a short-lived tax rebate for savings in 1998 by abandoning the
1995–96 Keating government’s plans for matching SGC contributions. The rebate was set at 7.5 per cent
of undeducted superannuation or net personal income from savings and investments up to a maximum of
$225 annually. This was a windfall for wealth rather than an incentive for private savings, and cost public
sector savings around $870 million with no evidence it increased savings. It was abandoned a year later.
297. This was to compensate for the loss in the real value of savings arising from the inflationary effects of the
GST. That the bonus was not extended to savers in other age groups highlights the fact that full
compensation for the effects of the GST would have negated most revenue and economic efficiency
benefits — the transition costs of moving to a consumption tax without substantial redistributions of
income may well make it fruitless economically (Slemrod 1994). See also Smith (1999a) for a discussion
of the transition costs and efficiency gains of the GST.
298. Some have argued that the SGC is an abuse of the Commonwealth’s tax power (Alpins 1999). The High
Court’s view, ironically revealed by its decision in the1911 federal land tax case, is that questions arising
from the oppressive operation of a tax are not relevant to the question of the Commonwealth’s legal
authority. ‘Questions of the abuse of power are for the people and the Parliament’ (Justice Edmund
Barton, quoted in Morabito (1999, 82)). Ironically, the states lost favour with the High Court in 1997 for
overusing their regulatory powers to tax.
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$120 billion in 1990 to around $530 billion. Around $2.5 billion a year of this
was absorbed by administration costs (Pope, Fernandez and Le 2003). As a result,
around one-tenth to one third of employees’ compulsory contributions will be
dissipated in superannuation fund fees (Bateman 2001). As the public pension
becomes increasingly the last resort of the impecunious and of aged mothers, the
labour movement may well regret setting this superannuation precedent for
privatising social security in Australia (Toohey 1992).
Whether these super solutions pay the best return on the substantial public
investment remains open to debate. Through the SGC, the Commonwealth uses
its constitutional tax powers to conscript nearly one tenth of the nation’s wage and
salary earnings into the service of private superannuation funds every year. As
revenues are not available to the public sector, the OECD does not count the
scheme as taxation, although it takes up ‘tax room’ that would otherwise be
available to the Commonwealth government. Despite compelling contributions,
the Commonwealth makes no guarantee against fraud or fund insolvency. 299
Directing the proceeds of tax compulsion to private control also diminishes the
capacity of the public sector to direct and finance important investments in public
infrastructure (McAuley 2003), and facilitates a concentration of capital that has
worrying implications for the efficiency of investment.
A comparably charitable tax gift to industry is represented by the spectacularly
wasteful and inequitable private health insurance rebate, introduced in 1999.
Paralleling the costly public subsidy for superannuation fund management,
several hundred million dollars of taxpayer funding underwrites health fund
administration costs, mainly advertising and marketing. Despite evidence that
fund membership and industry profitability could be propped up at virtually no
cost (Butler 2000; 2001), that the tax subsidy accrued substantially to highincome earners and their families (Smith 2001a; 2001b), and that the costs of the
subsidy are unlikely to be offset by savings to the public health system (Duckett
and Jackson 2000), the taxpayer provides a fiscal subsidy of over $2.4 billion a
299. As pointed out in 1992, ‘those people with most cause for concern have assets tied up in an employer,
industry or wages fund where there can be some doubt about the financial security of the employer or
fund managers and those with a poorly chosen superannuation plan. Buyers of widely marketed personal
super plans need also to understand that the government provides no guarantee as to the final pay-out of
those plans and sets no limits on the amounts that can be taken out as fees and charges’ (Dixon 1992).
Massive growth of funds under management emphasises the need for effective prudential regulation of the
3000 or so public superannuation funds, but belated moves to strengthen the administration and
accountability of superannuation funds in 2001 were opposed by the industry. Only failure of a major
fund at the payout stage of the industry life cycle will reveal whether the Commonwealth government
accepts a ‘mutual obligation’ to protect wage earners against the financial risks it imposes through the
SGC.
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year. Like superannuation funds, private health insurance funds have also been
granted privileged access to taxing powers through the Medicare levy surcharge
(Smith 2001b).300 Registered health funds further benefit from a $220 million per
annum exemption from income taxation.
A more perplexing charitable tax act was the introduction of the first-child
rebate (the ‘Baby Bonus’) in 2001. Although family assistance was ripe for reform
(Smith 1996; 1998b), the ‘Baby Bonus’ was a needlessly ugly child reflecting its
hasty (mis)conception. Many new mothers were ineligible, as 40 per cent return
to work in the first year, and the scheme was structured so that prenatally highincome rather than the most needy mothers got the maximum annual payment of
$2500. With near universal criticism of its design, the infant’s survival was always
in doubt, but like tax incentives for private health insurance and superannuation,
its flawed character as wasteful welfare for the well-off hid its social policy defects
from view by dressing it in the attractive tax clothes for public presentation.
Charitable Taxation Acts, Scene 2: Taxing charity
‘When I use a word’, Humpty Dumpty said, in a rather scornful tone,
‘it means just what I choose it to mean — neither more nor less’.
(Lewis Carroll, Through the Looking Glass, 1982 [1872], 184)
At the beginning of the twenty-first century, Australian charitable organisations
received donations of around $2.8 billion annually, with over three million
individuals claiming tax deductions for donations to charity (McGregorLowndes 1998). In 2001–02 the revenue cost of giving charitable tax treatment
to donations and not-for-profit bodies was around $1.1 billion.301 However, the
1990s were taxing times for charities (Hooper 1999; Howard et al. 2001). Trust
in the worth of such charitable tax treatment was undermined by untrustworthy
trusts exploiting charitable tax privileges for uncharitable purposes — helping the
undeserving avoid income tax — and by corporate complaints of ‘unfair
competition’ from charities which were too businesslike at fundraising or too
300. The Medicare Levy surcharge applies to high income taxpayers, with an exemption for those purchasing
private health insurance. The exemption provides a substantial tax benefit to those purchasing private
health insurance. Strangely enough this exemption, which costs several hundred million dollars a year in
lost revenue, is not counted by Treasury as a tax expenditure, despite its obvious intention to favour a
particular class of taxpayers and notwithstanding the legislative design of the scheme (Smith 2001c).
301. In 2001–02 the income tax exemption for non-profit bodies cost an estimated $275 million in foregone
revenue (mainly for registered health benefit funds), while the deductibility of charitable donations to
PBIs cost around $330 million (Australia. Treasury 2004). Fringe benefits tax concessions for PBIs and
non-profits cost around $450 million.
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effective at advocacy. Significant changes to the taxation laws impinging on
charities imposed a heavy compliance burden (O'Connell 2002). Achieving
proper accountability and targeting of charitable tax privileges remains an
important challenge for the tax authorities, as taxing charity poorly risks great
harm to invaluable charitable activity.
Early Australian income taxes excluded charities and non-profit organisations
from taxation and allowed all donations to charity as a deduction from taxable
income. Charities’ welfare and educational activities were favoured for reducing
pressure on taxation and encouraging private provision and choice (Chesterman
1999). Charities, by definition, were not ‘profit-making’ bodies, so taxing their
profits was nonsensical. However, during the 1930s Depression in Australia, the
scope of tax-deductible ‘charitable’ donations was limited to ‘public benevolent
institutions’ (PBIs) to prevent a large loss of revenue (McGregor-Lowndes
1995b). Only donations to institutions for purposes of public benefit and for
direct relief of poverty were allowable deductions.302
The growth of publicly funded social security fundamentally changed the role
of charities after World War II. However, the relevant tax law was slow to adapt
to changing community values and operating environments for charities. 303
Professionally uncharitable taxation authorities — intent on defending The
Revenue — established what was and was not ‘charitable’ through an ad hoc
process of appeals to the courts. Responding to the fiscal context of cases, and with
the experience that ‘the history of tax concessions for charities is one of abuse’
(Abery 2000), the courts defined ‘public benevolent institution’ very narrowly. As
parsimonious tax officials enthusiastically rejected claims by various popular
causes for tax-deductible-charity status, Commonwealth parliamentarians
benevolently gained popularity by case-by-case support of deductibility for new
charities. As Professor McGregor–Lowndes commented, ‘those who may argue
that the political pressures in this area are trivial just have to review the list of
specific PBIs and how they obtained that status’ (McGregor-Lowndes 1995b,
131). Similarly, the courts rather than legislatures were responsible for the main
302. ‘Public benevolent institution’ is not defined in legislation. Its meaning is determined by common law. A
public benevolent institution has as its object the relief of poverty, sickness, suffering, distress, misfortune,
destitution or helplessness; its activities are carried on without the purpose of private gain for particular
persons; it is established for the benefit of a section or class of the public; it offers relief without
discrimination to every member of that section of the public which the organisation aims to benefit; it
gives aid directly to those in need: and it ensures that its non-benevolent activities are minor and ancillary
to its basic operation.
303. For example, charitable work came to include shaping public welfare policies and preventing suffering, as
well as running soup kitchens or shelters for the homeless.
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‘acts’ defining an income tax exempt charity.304 This led to anomalies arising from
inconsistencies in the definitions used to determine PBI status. As a result,
The charity boundary is characterised by fuzzy borders caused by strained legal
logic, perverted and competing public policy demands, historical
misappropriation and inconsistent legislative intention. It has given
commentators material on which to launch a tirade of comment on the
injustice and economic inefficiency of inappropriate boundaries of charity’.
(McGregor-Lowndes 1995b, 128)
Charity work was also becoming unwelcome in some quarters, as charities
became more ‘businesslike’ at fundraising in the 1980s. Some opened up niche
markets related to their cause. Others raised funds by selling goods and services
made from donated time and products. Governments also began contracting out
social services and charitable organisations tendered against for-profit businesses.
In this environment businesses complained of unfair competition from taxexempt charities and non-profit organisations. Ruthless exploitation of the
charitable title by some bodies gave some grounds for complaint. There were
increasing calls for greater scrutiny of charities’ operations and greater
accountability for the use made of their tax privileges.
The fiscal fabric of charitable enterprise clearly needed a little repair
(McGregor-Lowndes 1995a). In 1995 the Industry Commission was asked to
assess whether the non-profit sector deserved its tax privileges. It concluded there
was no ‘level playing field’ for charities, with some enjoying tax deductibility
status for some or all their activities while similar causes or organisations were left
out in the cold. Whether the financial interests of mainly wealthy shareholders in
for-profit companies should or can be treated in the same way as with the
‘beneficiaries’ of charitable enterprises is debatable (Smith 2000a). The revenues
of not-for-profits or individuals’ income donated to charity are arguably outside
the income tax base and therefore are not a tax concession:
A non profit organisation has no owners who benefit (it is non profit by
definition). The ultimate recipients are the beneficiaries of its activities. Since
the beneficiaries of charitable organisations are usually poor and
304. An income tax exempt charity is conducted on a not-for-profit basis and is established to benefit the
community, or some section of it, through: the relief of poverty or sickness or the needs of the aged; the
advancement of education; the advancement of religion; other purposes beneficial to the community.
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disadvantaged, tracing benefits through them would usually have the result
that little or no income tax would be paid.
(McGregor-Lowndes 2000, 15)
The Industry Commission concluded that the income tax privileges of charities
and non-profit organisations should be retained (Industry Commission 1995).
However, the tax treatment of charity remained controversial (Abery 2000).
Charitable tax treatment not only benefits the poor, but also well-endowed
patrons of the arts, medical researchers, private school students, high-income tax
avoiders and inefficient charity administrators. While poorer taxpayers donate a
similar share of their income to charity as higher income earners, tax
deductibility provides a greater tax benefit to the affluent due to their higher
marginal tax rates (McGregor-Lowndes 2004). Similarly, the introduction of
prescribed private funds in 2001 has resulted in large gifts to private foundations
— and increased tax deductible donations — by very wealthy taxpayers. 305 With
donations by the wealthy accounting for much of the fiscal cost of deductibility,
there is a fiscal bias to supporting ‘causes’ favoured by the wealthy (Krever
1991).306 Recent emphasis on tax-deductible philanthropy to enhance social
welfare may in effect ‘privatise’ public monies, with significant equity and
transparency implications (McDonald and May 2000).
Meanwhile, the prospect of a GST had haunted charities and non-profits
since the Fightback! package (McGregor-Lowndes 1992). ANTS had promised
GST-free status for ‘charitable activities’ and ‘religious services’ (without defining
either). The Vos Committee was asked to define GST-free activities under the
GST. Mindful of business complaints of ‘unfair’ competition, it recommended
that only the ‘non-commercial’ activities of tax deductible charities be GST-free
(Tax Consultative Committee 1998). This definition produced anomalies
between charities that had tax deductibility status and those that did not, and
access to the concession was ultimately extended to all income tax exempt charities
and gift-deductible entities.307 A drafting error in the GST legislation also gave
305. Until 2000, funds could only gain gift-deductible status if they sought and received funds from the public
and were strictly controlled by members of the public. Other tax concessions have also been introduced to
encourage philanthropy, such as allowing cash donations to deductible gift recipients (DGRs) to be spread
over a period of up to five years, announced in December 2002.
306. Such ‘upside down’ equity effects and resource allocation might be fixed by replacing deductibility with
tax rebates. However, others challenge the efficiency of this approach in targeting potential donors
(Feldstein 1980).
307. The A New Tax System (Goods and Services Tax) Act 1999 made GST-free the ‘non-commercial’ activities of
‘a charitable institution, a trustee of a charitable fund, or a gift deductible entity’.
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political parties unintended access to the ‘charitable activity’ concessions (Smith
2000a).
As GST-day approached, there was heated public debate about whether
charities would be better or worse off under the GST, and what activities of
charities were ‘commercial’. While some charities benefited from GST
registration, many feared the GST would tax their fundraising.308 Most charities
faced high GST compliance costs but gained no significant offsetting cash flow
benefits or lower input costs from the GST (Smith 2000b).
With continuing controversy over the definition of a charity, the government
appointed an expert inquiry to report on the definition of charities and related
organisations (Committee of Inquiry into the Definition of Charities and Related
Organisations 2001). It found that the common law meaning of charity had been
uncharitable to charities:
The environment in which charities and related entities operate is changing.
Their focus is shifting from the provision of relief to those in need to prevention
and early intervention and developing the capacity of communities to address
their own needs. They are facing increasing competition for funds and changed
arrangements for government funding. Some are in competition with the for
profit sector.
(Committee of Inquiry into the Definition of Charities and Related
Organisations 2001, 4)
Although Australia’s income tax free treatment of the commercial activities of
charities was more generous than in some other countries, the Inquiry concluded
that
Conducting commercial enterprises as a fundraising activity can be an
important, at times, essential, element in enabling a charity to achieve its
charitable purpose.
(Committee of Inquiry into the Definition of Charities and Related
Organisations 2001, 228)
The inquiry recommended a new, statutory definition of charitable, a distinction
between ‘ordinary’ and ‘benevolent’ charities, and a ‘charities commission’ to
308. With nearly half of charities’ income deriving from commercial sales and fees for service, taxing charities’
commercial activities under the GST may reduce economic efficiency by reducing charitable
contributions. Charities enhance economic efficiency by drawing into economic usage resources that may
not otherwise be available for productive use, such as volunteer contributions of time and goods. See
Smith (2000b).
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relieve the ATO of the burden of administering the definition. In 2003, the
Howard government introduced a Bill to define charity in statute. The
government also proposed endorsement of the requirements for charities to
access all relevant tax concessions, including FBT.309 However, the Charities Bill
also contained suspiciously worded restrictions on charities’ advocacy.
Coinciding with news the government had appointed a conservative ‘think-tank’
to audit charities’ political lobbying, this provoked a strong reaction from
charities (Tomar 2003). In the U.S. from the mid-1990s there had been
sustained attempts by conservatives to limit charities’ advocacy (Smith 1998a).
This provoked the response that the so-called ‘Gucci crowd’ could spend as much
as it wanted to lobby government, yet: ‘legally speaking, disability groups,
hospices, community health centres and others ... are regarded as something of a
threat to the integrity of our political process’ (Professor Jeffrey M. Berry in the
New York Times, 30 November 2003, quoted in Tomar (2003). To the contrary, it
was argued, charities and not-for-profits strengthened democracy and, along with
the press, played a vital role as alterantive sources of power and influence and
checks and balances in a society (Steuerle 2002).
Charity dropped off the political agenda by mid-2004. After receiving the
Board of Taxation report, the government abandoned its Charities Bill and the
controversial advocacy clause. Charities were more than just costly democratic
cheques endorsed for ‘bearer of good news only’. Nevertheless, with the Charities
Bill ruined, ‘charity’ still meant whatever somebody wanted it to mean, and the
ATO was still charged with dispensing it.
Taxing Truthfulness and Terrorising Taxpayers
Let them hate, so long as they fear.
(Accius 170–c.86 BC, Atreus)
Mr Average Citizen, who would naturally obey the law, derives his eventual
attitude from his observation of the manner which officialdom treats the
309. Charities and non-profit bodies had previously assessed their own tax-exempt status but ANTS had
brought new requirements for charities to access tax concessions. The definition of a charity also became
important because of the Ralph Review’s entity taxation regime. To protect the integrity of the tax system
from uncharitable tax rorts, most charities and non-profit bodies had to be ‘endorsed’ by the ATO from
July 2000 if they were claiming exemption from income tax (ITEC) or deductible gift recipient (DGR)
status. Significant numbers of the tens of thousands of charities applying were refused endorsement, with
many having wrongly assumed they qualified for DGR status. These charities were so well known that the
government specially named them in legislation (thereby relieving them of the need to apply for
endorsement) or created new categories to accommodate them.
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outlaw and the venturesome and, of course, the way in which it treats him,
Mr Average Citizen. Mr Average Citizen requires that outlaws be treated as
outlaws and that intentional but merely venturesome violators be chastised.
To gain and retain the respect of the mass of people law enforcement must be
drastic with the defiant law-breaker.
(E. Barrett Prettyman, circuit judge, US court of appeals for the district
of Columbia, quoted in Slemrod (1998))
The growing complexity of economic life and public policy has meant an
increasingly complex tax system and heightened irritation at the cost of
complying with it. In 1951, High Court judge Sir Frank Kitto had warned that
provisions against tax avoidance were ‘long overdue for reform by someone who
will take the trouble to analyse his ideas and define his intentions with precision
before putting pen to paper’ (Kitto 1951, 596). However, the legislative tax
jungle kept growing, fertilised by tax-minimising decisions of the High Court.
Any given tax structure can be as simple or as complex as taxpayers want it to
be. As long as taxpayers are utility or profit maximisers, they will search for
ways to minimise their tax liabilities (providing that the benefits exceed the
costs) and, in so doing, make the tax system more complex than otherwise
necessary.
(Tran-Nam 1999, 514)
Complexity was also deliberately added with the proliferation of tax concessions
from the mid-1990s, and the addition of the GST in June 2000. ‘The hopes that
we had that the law would be simplified in content and expression have not been
realized.’ said Sir Anthony Mason in 2002. ‘Public confidence in the system has
unquestionably declined. Lack of simplicity and accessibility are part of the
reasons for that decline (quoted in Hill 2002, 63).
Individual taxpayers are mainly concerned to ‘do the right thing’, so
complexity results in over-compliance and over-payment (McKerchar 2003). Tax
complexity fuels resentment that the honest taxpayer bears the compliance costs
of measures targeting the tax cheat. Arbitrariness and uncertainty for the taxpayer
about tax enforcement also undermine the perceived fairness of taxation.
Nevertheless, the ‘terrorist’ approach to tax compliance can also make tax
administration more cost effective (Scotchmer and Slemrod 1989). It leaves the
tax authorities free to concentrate resources on those gambling that tax
transgression escapes detection (Andreoni, Erard and Feinstein 1998).
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Tax compliance costs became a political issue when compliance costs were
first measured in the early 1990s. Most such costs were incurred by business and
were felt more heavily by smaller enterprises than large. As small business was also
becoming more important politically, the issue quickly gained government
attention. Compliance costs in Australia are said to be high relative to other
countries, at around 7 per cent of tax revenues (Evans et al. 1997; Evans and
Walpole 1999).310
Treasurer Paul Keating pulled some simplifying tax law levers in February
1990 and established a Tax Simplification Task Force. This resulted in ‘selfassessment’. Self-assessment was not popular. Taxpayers felt unfairly threatened
by penalties for breaching laws that were incomprehensible. Tax lawyers argued
the ATO’s withdrawal from assessment left it an ‘armchair critic’, losing expertise
and respect (Inglis 2002), and, in 2003, the Treasurer agreed to reassess selfassessment.
Tax compliance costs were a concern of the Joint Committee on Public
Accounts (JCPA), which reviewed tax administration in 1993:
The greater the cost of compliance, the greater the incentive for taxpayers not
to comply. Compliance costs can therefore be considered to include the
additional cost arising from obscure, complex or uncertain law. While it is
difficult to calculate the cost of complying to any given law for any given
taxpayer, it is reasonable to consider compliance costs as a factor in the
efficiency of an economy — though not necessarily one which of itself is critical.
(Australia Parliament Joint Committee on Public Accounts 1993, xxvii)
As a result, a Tax Law Improvement Project (TLIP) was established in December
1993. The project was rewriting the 1936 Income Tax Assessment Act. In 1997, a
new Income Tax Assessment Act partly replaced the previous income tax law.
However, writing income tax law in plain English turned out not to improve it,
and the TLIP was overrun by ANTS (Smith and Richardson 1999). Since 1997
Australia has had a new ‘improved’ income tax law operating alongside the old.
Not surprisingly, a despairing tax lawyer complained that the brutal,
unenlightened approach to tax compliance problems had for two decades been
‘law, law, law’:
310. While the practical burden on small business taxpayers may have been overstated in earlier studies
(Wallschutzky and Gibson 1993), the magnitude of such costs are estimated at 12 per cent of tax revenue
for the early 1990s (Pope 1995).
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When stressed, when challenged to do something new — in the face of long,
proven failure of familiar methods — a common human response is to
continue to adopt those same discredited methods, only harder. Nothing could
sum up more aptly the route taken by those responsible for the decline and fall
of the Australian income tax system.
(Inglis 2002, 70)
The Howard government ‘placed a high priority on freeing small business from
the constraints of crippling taxes and red tape’ and from March 1997 required
new tax legislation to be accompanied by a taxation regulatory impact statement.
Tax complexity was also cited as a rationale for the ANTS tax reforms (Australia.
Review of Business Taxation (Chair John Ralph) 1999; Australia. Treasury 1998).
The GST was to simplify indirect taxation, and integrate several separate tax
withholding and payments systems using the new Australian Business Number
(ABN).311 Nevertheless, simplicity is not a feature of value added taxes. The GST
brought many more taxpayers and transactions into the indirect tax system,
although some larger businesses benefited from reduced GST compliance costs
compared to those under the WST.312 Lawyers billed the GST legislation as less
understandable than even the income tax (Richardson and Smith 2002). The
new GST system costs about $1 billion per annum more to operate than the
rickety old WST (Tran-Nam 2000a, 2001).313
Meanwhile, fragile confidence in the reformed income tax system314 was
undermined by revelations in the mid-1990s that tax avoidance and evasion was
again widespread. Tax shirking by prominent Australian businessmen also became
an issue in the 1996 election and the following year the ATO established the High
Wealth Individuals Task Force to study how and why the wealthy avoided taxes.
Over the period 1989 to 1993, the Auditor-General had qualified his audit of the
ATO because he lacked confidence that all tax revenues legally due to the
311. The PAYG system was to replace five existing payment and reporting systems: Pay As You Earn (PAYE),
the Prescribed Payments System (PPS), the Reportable Payments System (RPS), provisional tax, and
company tax instalments. This was through the mechanism of a quarterly Business Activity Statement
(BAS).
312. Some 2.2 million enterprises registered for GST compared to the 1.6 originally estimated. Some 3.7
million enterprises have obtained an ABN (Australia. Treasury 2003b).
313. The net effect on business compliance costs is controversial as some larger businesses benefited while small
businesses faced new compliance burdens (Pope 1999). Little attention was given to the substantial net
costs imposed on all but the largest charities and non-profit organisations (Smith 2000b).
314. A spotless High Court decision in 1996 helped remove some blemishes in the interpretation of the antiavoidance provisions of income tax law, concluding that, if a transaction made no sense without the tax
benefit, it was indeed tax avoidance of the ‘artificial, blatant, or contrived’ type that parliament had in
1981 declared unlawful (Stephenson 1997).
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Commonwealth were measured and collected. There were calls for the regular
publication of official estimates of this ‘tax gap’ (Pulle 1998). There was also
evidence that the ‘cash economy’ was growing, with estimates it was between 3.5
and 13.4 per cent of GDP in the mid-1990s, and the ATO established a Cash
Economy Task Force. It found widespread acceptance that evading tax on cash
was acceptable. The Task Force suggested working with tax practitioners, industry
and the community to tackle the problem (Australian Taxation Office 1998), but,
by 2001, the equivalent of 15 per cent of tax revenue was lost from tax evasion in
the ‘cash’ economy. The major culprits were wage and salary earners and small
businesses, notably in the New South Wales construction industry (Bajada 2001).
‘Who complies?’ asked the tax lawyers, declaring that the income tax was dead
(Inglis 2002). Tax lawyers argued (without apparently blushing) that
The fear of the tax cheat has for too long been the model against which our tax
laws have been enacted. Our wise legislators now need to confront the fear of
dysfunction, disrespect, uncertainty and confusion in the tax laws which the
fear of the tax cheat has produced.
(Pagone 1997b, 206)
However, rumours of the death of income tax proved to be grossly exaggerated.
The level of income tax collections suggests that, compared to tax lawyers or
economists, taxpayers are generally not rational, but honest.315 In fact to the tax
economist,
the puzzle is not to explain why people evade, but rather why people pay taxes
– in the context of the standard economic model, people who voluntarily
comply are exhibiting nothing short of ‘pathological honesty.
(Slemrod 1998, 485)
Terrorising taxpayers works, but for how long? Good tax policy balances
compliance costs against other tax criteria. Simpler tax law is not the same as
better tax law, nor is simplicity the sole criterion for a good tax. Indeed, a simple
tax can be both inefficient and inequitable (Tran-Nam 1999, 2000b).
315. Economists link tax cheating with high marginal tax rates and excessive compliance costs. In the perfectly
competitive world of rational economic man, taxing capital income is fruitless, as no taxes can be collected
on such mobile factors (Stiglitz 1985). On this logic, progressive income tax is futile and its associated
compliance costs tax honesty and reduces tax collections. United States studies show that tax lawyers are
more aggressive advocates for their clients than other providers of tax assistance (Andreoni, Erard and
Feinstein 1998). In some widely publicised recent cases of tax avoidance in Australia, a number of leading
Sydney barristers were deregistered for failing spectacularly and deliberately to meet their tax obligations.
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If tax compliance is motivated by a sense of duty, moral responsibility and
trust rather than audits and penalties, the essentially voluntary income tax is
highly vulnerable to destabilisation by the foolish rationality of tax ‘free riding’
(Smith and Disney 1996). Tax compliance is an important part of Australia’s
social capital, its value estimated at over $2000 billion over a lifetime (Smith
1999b). It is now recognised that taxpayers will contribute what they consider a
‘fair thing’, but evaluate this against the public services provided, the fairness of
the tax structure, and the extent of tax shirking by others (Slemrod 2003). Those
valuing the services provided by government and trusting the tax honesty of others
are less likely to engage in evasion (Pommerehne, Hart and Frey 1994).
Straining citizens’ cooperativeness by needlessly complex taxation may
undermine tax morality and fatally undermine the political viability of progressive
income taxation. On the other hand, responding to business complaints about tax
compliance burdens by turning a blind eye to tax avoidance and evasion may
worsen, not improve, public confidence in and compliance with the tax system.
Global Tax Termites, Tax (Shirking) Havens and Harmful Tax
(Hiding) Practices
The most important rule of international taxation is that there are really no
explicit rules of international taxation.
(Bird and Mintz 2003, 418)
At the beginning of the twenty-first century, economies were closely linked by
trade in labour, capital and products, increasing the need for international tax
policy cooperation. By the early 1990s international experts were warning that a
spreading plague of ‘fiscal termites’ was ‘forcing countries to reform their tax
systems in directions that will have implications not only for the structure, but
the level of taxation’ (Tanzi 1996a, 1). Traditional international rules for dividing
up the tax pie were becoming unworkable as fiscal termites gnawed through
existing arrangements for taxing global commerce. With tax havens and tax gaps
driving down effective tax rates on capital incomes, progressive tax systems —
able to levy internationally mobile high fliers, professional, financial and
electronic services, and investment incomes — had become an endangered
species. As governments wrestled with pressures from powerful industry
constituencies, and nations jostled for strategic trade advantage in new global ecommerce and service industries, policy-makers muddled towards A [Not Really]
New Tax System for taxing cyberspace and the virtually global economy.
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During the previous several decades, nations had fashioned rules that balanced
the claims of capital-exporting ‘home’ countries to tax their residents’ worldwide
incomes with the demands of capital importers to tax earnings at source.
Consensus had evolved around attributing taxing rights to the country of tax
‘residence’, with home countries giving taxpayers credit for withholding taxes paid
in source countries (such as on dividends and interest), or where a permanent
establishment created the entitlement to tax the profit in the source country. In
this way, nations avoided inequitable double taxation and ensured decisions on
accumulating, acquiring and investing capital were not unduly biased by the
competing tax claims of governments. However, by the beginning of the twentyfirst century, several species of virulent global ‘fiscal termites’ were forcing these
international tax rules to change a mega-bit (Tanzi 1996b; Tanzi 2000).
Firstly, the growth of foreign activities and intra-company trade expanded
existing problems of taxing multinational corporations whose world income and
expenses could be accounted for internally in ways that minimised their world tax
bill.316 Minimally regulated offshore financial centres and tax havens — tax
termites ‘nests’ — were also facilitating large-scale laundering of ‘dirty money’
such as from political corruption and illegal trade in drugs and arms (Tanzi
1996b). Tax competition and tax havens made it easier for individuals and
companies to use subsidiaries in another country to avoid tax in their home
country by holding income offshore indefinitely. With certain categories of
income taxed only when repatriated, and even then ineffectively,317 many wealthy
individuals avoided paying taxes at home by having an address in a tax haven.
Thirdly, financial deregulation and innovation have made it difficult to ‘pigeonhole’ investment incomes in line with how treaties tax them. International tax
rules identify some categories of income (such as interest or dividends) for
withholding tax, and others for taxing on repatriation to the home country.
‘Financial engineering’ and ‘product innovation’ can blur the distinction so
income escapes both tax traps.318 Combined with tax preferences encouraging the
316. For example, tax authorities have long battled techniques such as transfer pricing and ‘thin capitalisation’,
which account for interest and other expenses and revenues in a way that attribute net profit to whichever
jurisdiction best minimises the entity’s worldwide tax liability.
317. Under traditional international tax sharing arrangements, incomes such as interest, dividends and royalties
are typically taxed only when repatriated to and identified for taxation in the home country of the
investor. Unless taxed through withholding taxes in the source countries, it is difficult in practice for the
home country tax authority to identify the income, especially for non-persons and portfolio investment
incomes. However, the conventional tax treaty framework allows minimal source taxation even on
incomes channeled to tax haven countries. The rates of withholding taxes, which are ‘gross’ rather than
‘net’ taxes, are low to reduce the likelihood of overtaxing ‘net’ income, but also to prevent source countries
effectively raiding the treasuries of residence countries through high source tax rates.
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growth of tax-exempt pension funds, this has pushed capital income tax rates
down around the world (Alworth 1999; Bird and Mintz 2003; Head 2003). 319
Such arbitrage problems create a ‘horror-scope’ for tax authorities when
combined with the predicted growth in electronic commerce and transactions. It
has been said for example, that
All laws stand on the twin pillars of territoriality and enforceability, and tax
laws cannot exist outside this framework. Yet, when we enter the world of
cyberspace, these twin pillars become loose at their foundations. How does one
mark territory in a seamless, digital world? How does one map nations and
taxing jurisdictions in a world that is not based on geography? This throws the
application of tax laws into disarray.
(Ajay Thakkar, quoted in Dressel and Goulder 2000, 2333)
In the e-world, says the OECD’s chief tax termite huntsman, ‘plucking the tax
goose is not just a question of how many feathers but also of finding the goose’
(Owens 2000, 103). E-commerce tax termites are grinding away the subtle tax
treaty fences distinguishing types of taxable income and transactions (Doernberg
2000). As e-businesses can earn income from sales without a physical presence in
the foreign market, e-commerce also eats away at the revenue base of source
countries. ‘Where is e-commerce income earned on earth?’ is the riddle
perplexing taxing the OECD (Li 2000, 321). This serves up the question of
‘when is a server a permanent establishment?’, as e-commerce and capitalimporting countries have tried to locate a place in cyberspace on which to secure
their tax claim over ‘local’ business (Cockfield 2000).320 Residence taxes fare little
better in the path of the e-termites as the taxpayer too can be relocated — ‘virtual
offices, virtual stores and virtual workplaces can be virtually anywhere’ (Li 2000,
322).321 While negotiations have been mainly about income taxation, there is
also e-trouble looming for valued-added taxes such as Australia’s GST because of
the potential for double taxation or double non-taxation (Owens 2000).
318. As company tax is calculated after deducting debt interest payments, and financial wizardry can rebadge
interest as dividends or royalties or vice versa, the tax treatment of interest creates particularly difficult
design issues for tax authorities. See Head (2003) and Alworth (1999).
319. Although tax avoidance is often seen as the source of downward pressures on tax rates (such as
withholding taxes on dividends, and interest, and company taxes) a major driver has been the growth of
tax-privileged private pension (superannuation) funds, the expansion of which has been encouraged by
governments to solve ‘the aging problem’.
320. This made it difficult to determine which jurisdiction should tax or which form of taxation should be
imposed (for example, sales, withholding or company taxes), and it ‘disintermediated’ the traditional
business structures through which taxes had traditionally been enforced and collected.
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Meanwhile, tax authorities brace themselves for the spread of digital cash, a
termite generating highly combustible fuel for the cash economy, tax evasion and
destabilising ‘hot money’ (Tanzi 2000).
Amidst such signs that the international tax architecture is crumbling, the
treaty-based international tax consensus has come into question. So long as the
rules fairly allocated tax revenues between capital-importing and exporting
countries and reduced the double taxation of a country’s residents and investors,
there had been benefits for most countries in conforming. However, the gains to
source countries from obeying tax treaty club rules diminished rapidly during the
1990s as fiscal termites began demolishing their main structures. In particular, the
easy path to tax havens increased the rewards for entering the world tax
competition.322 Developing new rules to clarify the situation has been hampered
by lack of international agreement on how much the rules need to be changed,
and which rules needed to be strengthened. While some saw urgency in
developing new multilateral rules and institutions, others were confident that
existing ‘residence’ or ‘source’ principles and tax treaty systems could be adapted
to the virtual global world.323 And while some argued that investment incomes
were best taxed by strengthening the enforcement capacity of the country of
residence, practical difficulties of identifying and enforcing residence taxes on
offshore incomes led others to argue for widening the scope of source taxes.
As the dark side of globalisation emerged during the past decade, the OECD
took action to stop ‘harmful tax practices’ and ‘tax competition’ from wrecking its
international tax treaty system. In June 2000, it drew a line in the sand between
tax competition and tax shirking, and presented new international tax rules
against the ‘tax heavenly’ strategies of world tax escapees. It also posted a
‘cooperation wanted’ list, identifying thirty-five tax havens and forty-seven
potentially harmful regimes, and set dates for their extermination (Organisation
321. Trying to extend existing rules emphasising geographic space by defining servers as permanent
establishments is open to manipulation and may backfire on attempts to protect the revenues of source
nations — ‘neither the software within the servers nor the servers themselves necessarily has to have any
connection with income-producing activities’ (Cockfield 2000, 2415).
322. In this ‘race to the bottom’, countries compete to provide the cheapest investment finance by charging the
lowest taxes on the most mobile income-earners, and in this way entice other countries’ industries,
investors, and tax bases to a new home (Tanzi 1996a).
323. E-commerce was placed under the microscope by governments from 1996, including in Australia
(Australia Parliament Joint Committee of Public Accounts 1998). Additional complications arise from the
lack of agreement on the desirable conceptual framework for corporate taxation, and taxation generally, in
a world of mobile capital (Head 2003). Meanwhile, those concerned by the harmful effects and
practicality of both income and expenditure taxes in taxing mobile factors point to the significant and
unexploited possibilities for taxing land values (Dwyer 2003).
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for Economic Cooperation and Development (OECD) 2000). Embarrassingly,
Australia was on the wanted list, its concessional offshore banking tax regime one
of the parasites infesting the world fiscal system.324
However, not everyone trusted the OECD’s benevolence, and not all wanted
to curb world tax competition. That same year, free market think-tanks in the
U.S. leapt to the defence of (selected citizens ‘residing’ in) tax havens, and accused
the OECD ‘rich man’s club’ of self-interested collusion against poor, resource-less
developing countries. Opponents claimed that the OECD initiative
contradicts international norms and threatens the ability of sovereign
countries to determine their own fiscal affairs … [and] would create a cartel
by eliminating or substantially reducing the competition these high tax nations
face from low tax regimes.
(Mitchell 2000, 1799)
The international tax advice industry also relished publicising the potential costs
to the U.S., on whose support the OECD initiative depended. A scathing
critique laid bare the undeclared but blatant ‘tax havens’ operating in major
OECD countries, including much-loved provisions granting tax-free status to the
bank interest of foreigners and enticing hundreds of billions of dollars a year into
U.S. banks. According to one international tax lawyer,
If the U.S. Congress ever tried to tax this interest paid on these deposits, that
money would immediately disappear from U.S. banks and probably move to
other OECD countries. Almost every country in the world similarly exempts
bank deposit interest paid to foreigners. … The United States, Britain, and
many of the other OECD member states are significant tax havens. The
OECD countries should not attack other jurisdictions unless and until they
first clean up their own act, something I suspect many of them will never really
do.
(Langer 2000, 2839)
324. The key factors in identifying a tax haven or harmful preferential tax regime were: no or low effective tax
rates; lack of effective exchange of information; lack of transparency; and either the absence of a
requirement for substantial activities or ‘ring fencing’ of regimes in the case of tax havens and harmful
regimes respectively. All such species were targeted for eradication by December 2005. Strangely enough
there was unexpectedly high interest in cooperation. A much smaller list of uncooperative tax havens
(UTHs) was published four years later (Organisation for Economic Cooperation and Development
2004a).
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That same year, shadowy campaigners for ‘tax competition’ and ‘freedom and
prosperity’ quoted back to Dick Cheney (former Republican leader in the House
of Representatives and currently Vice-President in the Bush Administration)
that:
The OECD effort is misguided. It is designed, in effect, to create a tax cartel
for the benefit of a small handful of high tax nations. These countries are
seeking to impede the flow of global capital, and the U.S. economy, with its
comparatively attractive tax system, will suffer if they succeed.
(Dick Cheney, Republican leader in the House of Representatives, quoted
in Correy 2001, 8)
Speaking for the poor in poor countries, Oxfam disagreed (Correy 2001), but the
golden rule of international taxation is that gold rules. By late 2001, the U.S. had
watered down its support, and the unprecedented OECD initiative was
refocused ‘to place the primary emphasis on obtaining effective exchange of
information and improving the transparency of tax systems’ (Weiner 2003, 234).
Willingness to ‘show and tell’ now sufficed for being in the tax treaty club.
Blacklisting the loathsome UTHs (‘Uncooperative Tax Havens’) was now
unneighbourly. Nevertheless, ‘show and tell’ is unlikely to be sufficient. As capital
exporters benefit more from exchanging tax information than capital importers,
it is unlikely to be implemented if left to individual countries. The problem
might be overcome if there were the political will to adopt standardised systems,
‘but it needs some form of central authority or multilateral mechanism to impose
such a system’ (Zee, quoted in Fabro 2004).
A multilateral fiscal body had already been proposed with the purpose of
either addressing the potential erosion of national fiscal systems (Tanzi 1999,
2000), or resolving disputes over tax jurisdiction and developing impartial rules
for apportioning and allocating corporate income taxes (Vann 1991a; Vann
1991b). According to a leading proponent of such a World Tax Organisation,
There is no world institution with the responsibility to establish desirable rules
for taxation and with enough clout to induce countries to follow those rules.
Perhaps the time has come to establish one.
(Tanzi 1995, 140)
However, OECD officials preferred to rely on the familiar bilateral tax treaty
system and imaginary ‘arms’ length’ deals,325 and derided these competing visions
of a new world tax system.
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This hypothetical global body could use one set of accounting standards to
calculate the global profits of a multinational, and then a formula to
determine how these profits should be allocated among the many countries in
which a multinational operations. What simplicity! What conceptual clarity!
But how different is the real world! I can think of no country that would accept
the constraints on national sovereignty that such developments would require.
(Shelton 1997, 222)
Nevertheless, tax history provides ample scope for such dreaming, and the
absence of such institutions in a global economy already compromises sovereign
nations’ ability to determine their own tax policies. Experience with state income
taxes in federations suggests that such international institutions may ultimately
be needed to resolve the essentially similar taxation issues now arising from global
economic integration.326 Sub-national governments have long wrestled with the
problem of taxing mobile capital, developing various arrangements ranging from
tax treaties to tax harmonisation, and ultimately the unitary taxation of the
‘global’ profit of corporate groups, apportioned according to a formula.327 The
European Union’s attempts to harmonise member countries’ corporate tax bases
to prevent tax shifting is a contemporary testing ground for extending federal
solutions to the international sphere (Tanzi and Zee 1998). While negotiating
agreement on such arrangements can be difficult without bringing other
potential pay-offs or side-payments into the negotiations (Bird and Mintz 2003),
the history of Australia’s fiscal equalisation arrangements may signal directions for
325. Although around half world trade is already conducted through multinational companies operating on a
global basis, the OECD aims to treat these related enterprises as if they were independent entities buying
and selling goods and services from each other at a ‘market’ price, preferring to use its ‘arms length’ pricing
principles when dealing with transfer pricing.
326. In the early stage of income tax development, most Australian state income taxes were source-based (see
Chapter 2, ‘Taxing for Justice’). The increased mobility of capital and attempts to tax residents’ interstate
income during the 1930s Depression and interwar period exacerbated problems of double taxation and
placed downward pressure on tax rates for investment income. Tax competition and double taxation
undermined the states’ fiscal capacity and flexibility at a time when demands for governments to fund
social protection had increased (Smith 2002a). This was initially managed through bilateral tax treaties,
but growing complexity and anomalies led to proposals by the Royal Commission on Taxation for the
States to legislate for a uniform income tax base, aggregating taxable capital incomes and centralising tax
collection. After coordination of tax base reform proved unworkable, the growing complexity, inequity
and inefficiency of state income taxes led to the unification of the income tax by the federal government in
1942.
327. Such a formula may reflect either the ‘benefit (for example, apportionment according to costs, such as
payroll) or a ‘profit’ principle which determines tax shares according to where the capital of the company is
applied (such as by the location of sales or assets).
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developing such arrangements between economically integrated but sovereign
governments (Smith 2002a; 2002b).
Meanwhile other dreams include radical new ways of taxing the $300-500
billion a year of ‘dirty money’ that disrupts and distorts national economies. A ‘sin
tax’ on money laundering has been mooted to clean up tax havens (Tanzi 1996b),
and a novel ‘Tobin tax’ on international money flows has been devised to throw
sand into the cogs of the destabilising international money machine (Tobin
1994). 328
Speculative and self-serving’ international capital flows, running at perhaps a
trillion dollars a day and swamping commodity trade and productive
investment, are making it impossible for governments to govern in the interests
of their own people. If the world’s governments are to regain control of
economic policy from the financial and foreign exchange markets, it is time
that they considered what role taxation itself might play to this end. In
particular, they might take up the proposal of Nobel Laureate James Tobin for
a world-wide, low-rate tax on all foreign exchange transactions.
(Mathews 1994, 131)
Meanwhile, expanded cyberspace and the problems of taxing e-commerce
provoked new tax treaty tussles about jurisdiction over e-commerce, along with
proposals for new ‘bit’ taxes, and an internet equivalent to the ABN. Although
expert witnesses doubt it is sufficiently flexible, the OECD judges that the rules
of its bilateral treaty system of residency and sources in the physical world can be
adapted to taxing cyberspace and is sticking to its ‘arms length rules’ for dealing
with global enterprise. The possibilities of applying the more flexible and simpler
formulary approach to e-commerce remains, as yet, unpalatable (McNab 1998).
However, the U.S.-led push to extend ‘residence-based’ taxation disadvantages
countries (such as Australia) that are net importer of IT services and capital by
eroding the source principle. As one observer commented:
328. Tanzi’s proposal (1996b) was for countries to financially penalise other countries that were not abiding by
international rules to control money laundering. This Pigovian approach penalises uncooperative, taxcompeting nations for the spill-over effects (negative externalities) of their harmful tax tactics by depriving
UTH residents of the tax reliefs available under most international tax treaties. It was reflected in the
abortive OECD action against tax havens and harmful tax practices. The OECD proposed, for example,
that transactions with UTHs be denied deductions, exemptions, credits or other allowances, and that
special withholding taxes be imposed on certain payments to tax residents of UTHs (Organisation for
Economic Cooperation and Development (OECD) 1998, 2000). The Tobin tax aims to reduce
potentially harmful spill-over effects from large international money flows, whilst also producing revenue
for governments (Tobin 1994). See also Quiggin (2003).
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 189
Because the United States is the largest exporter in e-commerce and all other
countries are source countries, it is not difficult to appreciate why the United
States position has not been echoed by the ATO, Revenue Canada, or the
OECD.
(Li 2000, 317)
Taxing ‘bits’ has also been proposed as a way to locate and assess taxable
economic activity according to where the bits go (Cordell 1997). However, such
‘new’ taxes are unwelcome in major countries (McNab 1998).329 Although
OECD countries had agreed that e-commerce should be taxed comparably with
other businesses, ‘no new taxes’ were words still on powerful leaders’ lips. 330 For
the Humpty Dumpty of world e-commerce, the words meant whatever he meant
them to say, and ‘tax neutrality’ meant ‘no taxes on e-commerce’. The OECD
taxman had indeed cometh to cyberspace (Owens 1997), but failed to conquer,
so that the privileged infant e-industry was left to fatten on a diet of fiscal
favours.
Whilst some dream of a world tax office, some want bigger tax ‘bytes’ on online sin, and some chase the perfectly immobile land tax, (Dwyer 2003), others are
sceptical both of radical schemes and theorists’ pursuit of ‘principles’. A
multilateral agreement rather than an international administrator could achieve
unitary taxation of an appropriate formulary tax base (McNab 1998). Thus some
argue, the best prospect may be to develop new international tax arrangements as
we have in the past, by developing an agreed process for improving existing fiscal
institutions and ‘muddling through’ to a solution:
The argument for pragmatic modesty rather than utopian idealism in
approaching this question is essentially that the fundamental problem in
taxing capital income in the global economy seem unlikely ever to be resolved
except by the application of arbitrary solutions and that the only way we know
329. Such ambiguity, for example, allowed establishment of literally offshore ventures such as ‘Sealand’, a
floating server on the sovereign territory of a ship that facilitated online global trade in gambling, pyramid
schemes, pornography, anonymous banking, and any other pariah industry seeking unregulated space,
privacy, and tax-free status for clients (Cockfield 2000).
330. The policy of major countries has been for ‘neutrality’ in the taxation of e-commerce for both fairness and
efficiency reasons (Li 2000; McNab 1998). The absence of sales tax on e-commerce in the United States
has thus drawn criticism from the OECD. Nevertheless, the U.S. and the European Union have
successfully argued for minimum government interference if e-commerce is to grow, which has been
interpreted as supporting the status quo rules of no taxes on e-commerce.
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to make such solutions tolerable — ‘fair’, if one will — is by ensuring that
those who are affected agree to them
(Bird and Mintz 2003, 425).
On this view,
What is really at issue in sharing the international tax base is the difficult and
controversial concept of fairness in an international context. ‘Fair shares’ for
all relevant claimants to the tax pie appear to be an essential element of any
acceptable (and hence sustainable) international tax system’.
(Bird and Mintz 2003, 426)
It is not yet clear whether the current international tax system can develop into a
system suitable for the uncharted tax territories of the twenty-first century or
whether we need a new one. As Bird and Mintz observe, the current ‘Big Boys’
rules were developed by the major countries to suit their own interests, and then
others agreed to play by the same rules. However, economic interests and
alignments have changed, and, with the U.S. a capital importer,
The question now is whether a three-bloc world (United States, European
Union, and Eastern Asia) will have the same incentives to reach a consensus
that will be both relatively efficient and ‘fair’ enough to be sustainable not only
for these players but ultimately for other affected countries as well.
(Bird and Mintz 2003, 426)
Castigating such negotiated agreements as ‘international tax collusion’, some
argue (by analogy with market competition) that ‘tax competition’ benefits
citizens, prosperity and freedom by keeping taxation down and government
waste to a minimum (Mitchell 2000). Nevertheless, efficient governments are not
always low-tax governments, and extravagance is not the exclusive preserve of
governments in high-taxing countries. Likewise, prosperous democracies
typically have high taxation while poor dictatorships often have low-yielding but
corrupt tax systems. The need to finance essential government services and
infrastructure and the arbitrary and regressive equity effects of international tax
competition leave little doubt that greater international cooperation and perhaps
a new international tax system will eventually be needed. On the other hand,
there is little dispute that the necessary degree of cooperation between nations is a
long way off. The competing interests of the dominant players may instead lead
us through a tax muddle towards a world occupied by rational fools. However,
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MOMENTOUS OR MOMENTA R Y TA X REFOR M 191
time and experience may overcome obstacles to cooperation. The prediction is
that
The true merits of a multilateral agreement to apportion tax would become
obvious once Internet commerce begins to reach its full potential and countries
taxation bases are affected.
(McNab 1998)
According to the OECD, ‘big business’ recognises the benefits of constructive
engagement with civil society on tax matters (Hammer and Owens 2001).
Businesses rely on the rule of law to protect property rights. A secure
environment for investment also relies on social cohesion and stability. The
productivity of private investment is likely to be lower in a ‘rational’ and low-tax
society with under-funded and inefficient public services and infrastructure
(Munnell 1992). A good corporate citizen also suffers competitive disadvantage
against tax shirking rivals and risks strangulation by the ever more bothersome
tax net needed to catch them. According to the OECD,
Law abiding businesses are concerned that such [tax avoidance] opportunities
can skew the competitive environment unfairly in favour of the tax abuser and
against the company that plays by the rules.
(Hammer and Owens 2001, 1)
For some, global cooperation of the world’s tax Leviathans remains a nightmare
of oppressive tax collusion – rational governments can be trusted only to oppress
their citizens and waste public money on self-serving schemes. Nevertheless,
some contemplate a socially rational future for taxation, looking to past successes
in fiscal federalism and nation-building for future directions. Even international
tax bureaucrats may dream:
Perhaps, as we move into the new millennium, governments will need to reach
out and develop a social compact with citizens. They would undertake to
provide the service requested by citizens in an efficient and cost-effective
manner and to minimise the complexity and compliance costs of tax systems.
In turn citizens would seek to meet their tax obligations. Civil society would
put peer pressure on those who wish to avoid their obligations. Illegal tax
behaviours would be seen for the crime that it is. Aggressive tax planning by
tax advisors would be considered sociably unacceptable.
(Owens 2004, 2)
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UNFINISHED TAXATION BUSINESS
Whoever hopes a faultless tax to see, hopes what ne’er was, or is, or e’r shall be.
(McCulloch, quoted in Groenewegen 1985b, 322).
Because taxable capacity depends on the incomes that citizens earn, the
amounts that they spend, and the wealth that they own, a balanced taxation
system needs to include taxes on earnings, consumption and capital, but these
taxes should be designed in such a way as to minimise their influence on
decisions to earn, spend or accumulate wealth.
(Mathews 1985c, 424)
Despite two intensive episodes of reform since the mid 1980s, tax policy is still a
distance away from the economist’s ideal of equity, efficiency and simplicity.
Practical and political reality is one barrier to reform. As Professor Head
observed:
What is true for the textbook, off-the-shelf system once it is fully operational
may not... be true when we take account of the many modifications and
transitional provisions, to compensate losers, ameliorate windfalls and, more
generally, to buy off the opposition in order to implement the move from where
we now are to where we would ideally like to be.
(Head 1991, 3)
Another barrier to reform is fear of higher taxes. Whether taxes are too high, or
too progressive, is matter for judgment — a ‘values added’ taxation issue.
Australia is, and typically has been, a low tax country by OECD standards. 331
The balance of taxes between direct and indirect taxes has also been similar to
that in other OECD countries. However, our fascination with the magic of a
single tax is reflected in the heavy use we in Australia have made of the income
tax compared to other countries. Unlike other countries, which include wealth,
property or inheritance taxes in their repertoire, Australia continues to levy
331. For example, the share of taxes in relation to the Australian economy is around 32 per cent. This compares
with 37 per cent in the United Kingdom, 38 per cent in Germany, 45 per cent in France, and from 49 to
54 per cent in the Nordic countries. Only the U.S. (30 per cent), Ireland (31 per cent) and Japan (27 per
cent) have a lower tax share of GDP than Australia among OECD countries. Australia’s unique flat rate,
means-tested system of social security is an important reason for the low cost of government in Australia,
with social security taxes a feature of high taxing OECD countries.
192
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EPILOGUE 193
virtually all direct taxes in the form of personal and corporate income taxes. 332
This reliance on the highly visible income tax, and the rarity of ear-marked taxes,
appears to have contributed to popular resentment of tax in Australia. As E.
Burke commented around two hundred years ago, ‘To tax and to please, no more
than to love and be wise, is not given to men’. ‘Ear-marking’ taxes can soothe
public resistance to taxation and mistrust of public spending (Peters 1991, 5, 34,
237). Ear-marked taxes such as the social security levies common in other
countries are uncommon in Australia, but misleading comparisons which exclude
other countries’ social security and state income taxes help explain the persistent
myth that Australians pay high income tax (Australian Council of Social Services
(ACOSS) 2003).333
The future of the income tax as a tool for protecting tax equity and
progressivity looks somewhat brighter now the GST has lightened its revenueraising burden. However, inflation, new tax concessions, and tax avoidance are
eroding progress made since the 1970s. The (substantial) attraction for
governments of income taxation is that its revenues creep up as incomes grow and
thereby avoid the odium from raising taxes to fund services at the level and of a
quality that the public expects. On the other hand, an income tax incidence
determined by the march of prices and tax shirkers, rather by parliament,
inevitably undermines public trust in this progressive tax tool. The long-term cost
of such a ‘taxation by misrepresentation’ approach is thus unacceptably high.
The fear of tax partisanship also creates public resistance to major tax change.
The ailing income tax was rejuvenated during the late 1980s and early 1990s by
capital gains and fringe benefits taxation and by abolishing special ‘rates for mates’
treatment for various categories of taxpayers or activities. However, its ongoing
recovery is impeded by recent radical surgery to CGT, and by disproportionate
cuts to tax rates on high income individuals, alongside not-so-benign neglect of
many remaining tax loopholes, and the global spread of fiscal termites. Cuts to the
332. With around 55 per cent of tax revenues collected from such taxes, Australia is well above the OECD
average of 39 per cent. However, if social insurance contributions and payroll taxes — which are of the
nature of income taxes — are included, the extent of Australia’s reliance on income-type taxes is about
average.
333. Most other developed countries make extensive use of ear-marked social security taxes, in contrast to the
Australasian system of non-contributory means-tested benefits and pensions. For example, in OECD
countries revenues from such levies, averaging 24 per cent of taxes, almost equal those from income tax
proper at around 39 per cent (Peters 1991, Table 2.3). One example is the Medicare levy, which accounts
for just 3 per cent of tax revenues. Since 1992, tax legislation has imposed a substantial (currently 9 per
cent) payroll levy in the form of the Superannuation Guarantee Charge. However, the OECD does not
count this as a tax because the proceeds – around $50 billion annually – are directed into private
superannuation funds rather than to a publicly controlled social insurance fund where benefits are shared
among fund members.
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T AXIN G P O P U LARIT Y
top marginal rate of tax are relatively cheap—but not meaningful—reform. Two
decades of stringent means-testing and new tax preferences has wreaked havoc on
tax simplicity, work incentives, and the patience of the mass of ordinary income
earners. Reducing top marginal income taxes rates provides a cosmetic boost to a
government’s tax image, but leaves the real challenge for tax policy unmet –
protecting the mass of taxpayers with low or middling incomes from a
disproportionate share of the tax burden and from high effective marginal tax rates
arising from means testing of family assistance. Measures to prevent tax avoidance
through income-splitting were announced in 1985, but have remained ‘under
study’ in the school of hard decisions ever since (Covick 2004). The pretence is
meanwhile maintained that Australia uses the individual as the unit for tax
assessment. Yet in practice, tax liability is now assessed on joint income for most
couples with children. Playing favourites with families created unnecessary
rigidities, complexity and taxpayer resentment. As competing ideologies
attempted to manipulate mothers’ paid and unpaid work choices, multiple new
tentacles grew on the family assistance octopus during the past two decades.
Families have faced substantial tax compliance costs and high effective marginal
rates of tax, alongside arbitrary and often inequitable allowance for the economic
value of unpaid household and caring work.
Despite superficial repairs to taxes on investment income, gaps in the tax base
present an open door to global and local fiscal termites. Full imputation of
company income provided substantial untaxed windfall gains to existing
shareholders, but successive governments failed dismally to extract public value
from the system (Head 2003; Head and Krever 1997). Despite much being made
of its advantages, premature cuts to the corporate tax rate during the past decade
stranded the supposedly integrated personal and company tax systems on separate
islands, and rebuilt the company structure as a useful tax shelter for high marginal
rate taxpayers. As financial innovation and economic integration accelerate capital
mobility and widen existing investment tax loopholes, separate ‘schedular’ or ‘dual
tax’ systems — which tax investment incomes at lower, flat rates — may better
reconcile commercial pressures for international tax neutrality with domestic
equity objectives (Head 2003). The imputation system also ultimately relies on
effective taxation of capital gains. Introducing the 1985 CGT was a significant
feat in view of the trenchant opposition to the tax, despite its generous
‘grandfathering’ provisions for pre-1985 asset purchases. Being largely paid by
high income earners, the new capital gains tax contributed to vertical as well as
horizontal equity and curbed the worst excesses of tax avoidance. However, the
ghosts of grandfathers have cast a debilitating pall over CGT long after its
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EPILOGUE 195
introduction. While undying opposition from farmers and small businesses to any
form of ‘death duties’ had forced the Hawke government to concede that assets
would not be deemed as ‘realised’ on death, ‘Devils howling, Ho!’” achieved
further excisions during the subsequent decade.334 Ostensibly promoting small
business enterprise and expansion and ‘innovative’ or ‘venturesome’ capital, these
CGT concessions instead promote early retirement, mouldy old tax schemes and
less than novel speculation in real estate, as well as extraordinary tax complexity
(Evans 2003).
Tax preferences for savers also still sap the virility of the personal income tax,
confusing the underlying principles of the taxation system and distorting the
allocation of savings and investment. Tax concessions for owner-occupied
housing, for example, include complete exemption from capital gains tax, and the
non-taxation of implicit rental income. The over-generous tax treatment of
owner-occupied housing has only recently gained the attention of tax-deprived
state governments, with New South Wales moving its land taxation into the field
of millionaire mansions left vacant by the Commonwealth’s capital gains tax
retreat (Martin 2004). Yet tax support for the housing industry cause is dwarfed
by the fiscal powers and privileges accorded superannuation, and its near relative,
private health insurance. Superannuation has long been one of Australia’s most
sacred cows and its influence has grown with age. Despite evidence from across
OECD countries that the fiscal returns to these tax incentives are hugely negative
on any reasonable estimate of savings elasticities (Antolin, Serrin and Maisoneuve
2004), powerful industry lobbying sustains a bipartisan agreement to maintain
and extend the existing wasteful, inequitable and ineffective concessions, and its
insidious exploitation of tax compulsion. Meanwhile, the myriad special
concessions for superannuation mean its complexity is both notorious and
worsening. ‘Pressure-cooked’ bipartisan political support has similarly locked
unhealthy levels of industry assistance for private health insurance funds into the
income tax system, notwithstanding the potential for less costly, ‘harm
minimising’ injections of public largesse.
Despite fine words and good intentions, tax reform in recent decades has not
delivered on promises of simpler taxation. This problem is, in part, an old one of
balancing equity with operational costs. For example, as was argued for a capital
gains tax in 1964:
334. Saunders (1983, 409) warned that ‘the power and the ability of the agricultural lobby in Australia to
extract special concessions should not be underestimated’. Groenewegen (1985b, 306) observed that a
capital gains tax was ‘the maximum concession on the subject of wealth taxation which farmers’
associations are prepared to make’.
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T AXIN G P O P U LARIT Y
To the extent that the tax structure is made more equitable by the imposition
of capital gains taxes it is usually also made more difficult to administer, while
the adoption of simplified administrative procedures usually involves a
considerable loss of equity. In practice it is therefore necessary to compromise
between equity and administrative practicability.
(Downing 1964, 122)
The 1985 reforms introduced additional complexity in the form of the CGT and
the FBT, while the ANTS reforms added the complications of the GST. An
important recent reason for tax complexity is the growing use of the tax system to
promote or implement currently favoured social or industry ‘causes’ —
superannuation, capital gains, private health insurance, fringe benefits on
company cars, babies, and compensation for the GST such as to families or to
‘seniors’. Substantial tax simplification — in the form of reduced numbers of
taxpayers having to file returns — requires extending withholding tax procedures
to all forms of income including investment income. Attempts to apply quarterly
withholding taxes to investment incomes during the late 1980s and more
recently as part of the ANTS reforms would founder, as governments shrivelled
in the political heat.335 Tax simplification also awaits a change in tax morality,
which would result in a commensurately reduced need for the tax legislators to
plug every conceivable tax loophole.
For most of the past two decades, Australia has been unusual in the western
world in the form of its consumption taxes. All OECD countries apart from the
United States replaced such taxes with broad-based consumption or value-added
taxes in recent years (Heady 2004). While some regarded a shift in the tax mix as
more urgent than others, it was clear that consumption tax reform was necessary
and beneficial, independent of any change in the direct/indirect tax mix.
Piecemeal measures had only limited success in reducing the economic
inefficiencies and inequities of the existing system. With growth in services
consumption, lower inflation and dwindling crude oil revenues, there were strong
pressures to replace existing narrowly based indirect taxes with taxes having a
broader and more productive revenue base.336 Reforming consumption taxation
in 2000 was long overdue, but nevertheless raises concerns for the future
335. The unequal treatment of employment versus investment incomes adds to the tax imposition on labour as
well as increasing compliance costs overall. The proposed alternative route to simplification, floated in
recent years, is to replace deductions for work related expenses (which are highly skewed towards high
income earners) with a rebate, and thereby tax employment incomes essentially on a gross rather than net
basis. While this measure would reduce inequity between wage and salary earners it would widen the
inequity in treatment of labour versus capital incomes.
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EPILOGUE 197
progressivity of the taxation structure. The usefulness of the GST in the longer
term depends on how it will be used, or abused. There is a risk the ample revenues
from a GST may reduce governments’ resolve to tackle politically difficult areas
of tax policy such as tax avoidance, or otherwise induces ‘reckless remission’ of the
Commonwealth’s progressive income taxation.
While the consumption and income tax reform strategies proposed by the
Asprey Taxation Review Committee have largely been implemented, its related
proposals for wealth or inheritance tax reform have been neglected. The
Committee saw some form of capital taxation as essential to the proposed strategy
of shifting from income towards goods and services taxation (1975, 530). Many
economists acknowledge the importance of wealth taxation in a balanced tax
system (for example, see Mathews 1983b; Groenewegen 1985b; Head 1991). 337
The former head of the Commonwealth Treasury and Queensland National Party
senator, John Stone (quoted in Groenewegen 1985b, 207) noted the great
revenue and administrative advantages of estate duties in Australia, and according
to the Commonwealth Treasury (1974, 3),
some form of a tax on assets [is] an essential component of the tax system to
recognise the advantages which accrue from the ownership of wealth.
Inherited wealth is an important source of inequality in the distribution of wealth
and economic power, including in Australia, and is highly distributive per dollar
of revenue raised. The revenue directly forgone by not levying a wealth tax is
substantial.338 Wealth taxes can also raise the yield from other taxes; for example,
the estate-gift tax provided information deterring income splitting and tax
avoidance (Saunders 1983; Mathews 1980). As Eisenstein said, ‘if the income tax
fails only the estate tax can assure an eventual day of reckoning’ (quoted in
Pedrick 1981, 127). Including wealth in the national tax base could benefit
efficiency by allowing other taxes to be lower; levying death duties may have less
336. The evidence from overseas suggests that some of the most redistributive countries in the world, in
Scandinavia and Western Europe, levy broad-based consumption taxes as an uncontroversial and perhaps
unnoticed means of funding generous social security programs. It is noteworthy that the Fraser
Government’s temporary interest in expanding sales tax in 1981 and 1982 was driven by revenue motives
(Groenewegen 1983, 339).
337. A tax mix change associated with greater indirect taxation produces windfall gains to high income earners
whose expenditure is substantially less than their income.
338. Also see Saunders (1983, 403). In most countries wealth taxes raise around 1 per cent of taxation (Shoup
1983, 386). In Australia, John Stone, as head of the Commonwealth Treasury in 1984, estimated that
such a tax would raise from a half to three-quarters of a billion dollars in three years (Groenewegen 1985b,
207). Other estimates during the 1990s ranged from around $500 million to around a billion dollars of
revenue a year (Groenewegen 1985b, 308).
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T AXIN G P O P U LARIT Y
damaging and distorting effects than other existing taxes (Johns & Sheehan,
1983, and Brennan 1977). While some assume wealth taxes discourage capital
accumulation and saving, a tax on capital is not necessarily a tax borne by capital
as wealth taxes at a low rate will be paid out of income (Groenewegen 1981). A
wealth tax may also be less likely than income or profit taxes to divert investment
away from economically valuable but risky ventures.339 As Professor Geoffrey
Brennan has observed, ‘the practical policy question is not so much whether a tax
is perfect, but rather whether it is less perfect than the alternatives’ (1977, 63). A
combination of capital and consumption taxes may be more effective in
achieving equity and progressivity in the tax system than overusing the income
tax.
Australia’s progressive death taxes did not die naturally but were assassinated
by creeping inflation and tax policy neglect. Many mourned their passing.
Although the Asprey Review Committee recommended reform of the estate and
gift tax system, and reintroducing some form of inheritance taxation was
considered as a response to concerns about falling national savings during the
1990s (FitzGerald 1993), successive governments have ‘played dead’ on this issue.
Yet few would argue that possession of wealth does not confer a taxable capacity
over and above the income (if any) produced by that wealth. While the imposition
of a wealth tax raises some significant issues of administration and valuation, these
are not insuperable. The OECD Committee on Fiscal Affairs concluded after
reviewing member countries that ‘no country with a net wealth tax considered it
more difficult to administer than income tax and some specified that it was less so’
(OECD 1979, 127, quoted in Mathews 1980, 41).
Tax reform also raises important issues of federal finance. Under Australia’s
federal system, during the post war period, the states have raised between one-fifth
and one tenth of Australian taxes. Although the unbalanced allocation of taxes
between the federal and state governments has worked reasonably well for most
purposes, it creates a significant imbalance in the division of revenues and
expenditure responsibilities. While some would argue that Commonwealth-state
financial arrangements have encouraged excessive expenditures by governments,
it can equally well be argued that the opposite has resulted (Smith 2002b).
Regardless of the truth of the matter, Australia become a laggard in the taxation
stakes since state income taxes became Uniform Taxation in 1942, and leadership
in social services disappeared (Tanzi 1997). Despite Prime Minister Hawke’s
339. In fact it may force the wealthy to invest in economically productive assets rather than in antiques and
jewellery.
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EPILOGUE 199
1992 ‘new federalism’ initiative, and the reforms brought by ANTS in 2000,
Australia’s federal financial arrangements remain troublingly reminiscent of Sir
Robert Garran’s prediction that federation would institutionalize ‘reckless federal
tax remissions’ and ‘demoralized state treasurers’. The federal fiscal farce of the
Commonwealth disowning the GST can only demoralize Australian public
finance even further.
Even so, if the Commonwealth’s ANTS now fully occupy the major tax fields,
this still leaves ample room for state treasurers to take on challenging new tax
assignments in land, payroll and environmental taxation, with a range of reforms
offering worthwhile alternatives to resignation or repeal (Warren 1999).
The Tense Past, and Future Directions
‘Would you tell me please, which way I ought to go from here?’
‘That depends a good deal on where you want to get to’, said the Cat.
(Lewis Carroll, Alice in Wonderland, 1982 [1872], 62)
Strolling through the history of taxation policy in Australia reveals the tensions
between intent and reality in our taxation system. Convinced of the infallibility
of our taxation ‘king’, we tend to accept our tax system as faithfully performing
its stated goals and contributing to Australian’s economic and social vision. Our
perception is blinded by the prejudice that old taxes are necessarily good taxes
and all new taxes are bad taxes: unlike the child in the fairy tale, we do not
observe that the aging taxation ‘king’ is no longer fully clothed. With a cynicism
born of close contact with Australian tax policy-making, Professor Russell
Mathews mused in the early 1980s that;
Many of those responsible for public policy view the taxation system merely as
a symbol, which can be used to defuse complex and controversial issues of social
and economic policy so long as it gives the appearance of contributing to stated
goals. Whether or not this is so, it is time that we began to evaluate the tax
system by reference to the effects which it actually achieves and not the effects
which governments say they intend to achieve.
(Mathews 1983b, 24)
Historically Australia’s economic growth and development ambitions have made
tax neutrality – minimising the economic distortions of taxation – an important
stated ambition of government taxation policy. However, it has been common for
Australian taxation policy to compromise this objective without commensurate
rewards of more just or more certain taxation. Contrary to common
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T AXIN G P O P U LARIT Y
misconceptions it is not the level of Australian taxation that has hindered growth
in our economic capacity: rather, it has been its unbalanced composition and
structure. Opportunities to tax at low economic cost (and even with some
economic gain) have often been passed by; ineffectual taxation of resource and
land rents or other windfall gains including inheritances has diverted us to more
damaging alternative revenues — increasing the overall economic cost of
taxation. Confining its tax vision to the consumption and income tax field, and
limiting these bases through exemptions and concessions, Australia’s distinctive
habit has been to tax bases that are peculiarly narrow. With variable and
necessarily high rates on a narrow base, Australian income and consumption
taxes have thus managed to be very distorting of economic incentives whilst also
rating poorly on equity.
In spite of a professed objective of avoiding inflation and unemployment,
taxation is a rarely used instrument of economic stabilisation in Australia. With
few exceptions, taxation has been ineffectually wielded as a stabilising economic
policy weapon, used either too little or too late; it has, less rarely, helped worsen
the ebb and flow of prices, wages, employment and output.
Even in its most basic function, that of raising revenue for public purposes
(including redistribution to the less advantaged), Australia’s taxation system has
been failing its public purpose (Smith 1997). In spite of early ambitions as a social
reformer, Australia has been at the tail end of successful revenue-raisers in the
world tax stakes throughout the past five decades. More effectual ‘plucking of the
goose’ has been constrained by taxpayer squawking at the use of direct — and
visible — taxes, such as those on income, estates and land. The more invisible and
revenue-productive indirect taxation system had been, through neglect and
through its partiality, turned into an enemy of the people and — unlike in Europe
— of the Welfare State. The problem of raising revenue and pleasing the taxpayer
has also been made difficult by tax conflict in the federal system — competition
to levy low or no taxes or, often, competition to levy the same taxes or the same
taxpayers.
As a more subtle instrument of equity, the reality of Australian taxation also
disappoints the ideals of its believers. Although the income tax has only ever been
partly effective in transferring wealth from rich to poor, its potency has declined
over time. Its progressive decay can be attributed to the postwar creep of income
tax into the lower income brackets, the gradual erosion of the tax base by a
combination of neglect with legislative design and judicial interpretation, and the
associated decline in tax morality. Its compulsory powers are drained by the
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EPILOGUE 201
unrequited task of promoting private pensions and health insurance, and a range
of other causes.
The income tax is hindered in its work for justice by the absence of anything
other than an apology for wealth taxation. Wealth taxation is one of the most
redistributional forms of revenue-raising per dollar raised and is an important
means of achieving Aristotle’s ‘same treatment of similar persons’ (Aristotle, 384–
322 BC, quoted in James 1981, 79). The postwar neglect and resultant demise of
estate and gift taxation stands in stark contrast with Australia’s nineteenth-century
tax reformer ideals of equality of opportunity, and with our modern-day national
self-image of egalitarianism.
Taxes, as noted by Franklin D. Roosevelt, are ‘the dues that we pay for the
privileges of membership in an organised society’ (quoted in James 1981, 179).
The Australian public has shown increased willingness during the past two
decades to accept taxes at current levels to properly maintain valued government
services. Yet our taxation system remains like David to Goliath in facing even this
most basic test in the years ahead — meeting the revenue needs of government.
The most fundamental challenge for taxation policy lies in effectively restoring the
powers of those twin gods of tax collection — compulsion and persuasion — to
collect their dues for the common good. Many who can well afford it have not
paid their membership dues: ‘dodging the fiscal fiend’ remains, if not an honoured
pursuit, at least widely tolerated in Australian society. Individual governments are
hard pressed to hold the line against the ‘attorneys and accountants’ (Graetz 1985,
413).
However, rational taxpayers will not comply with a tax system that is seen to
be inequitable, poorly enforced and which wastes public revenues on unworthy
causes — ‘the lone honest taxpayer in a country of shirkers is a fool not a moral
paragon’ (Scholz 1994, p. 21). If some can opt out of paying tax, as it seems they
can, the very basis of the tax system is threatened because a viable tax system
requires the voluntary cooperation of taxpayers. Since everyone benefits from
public expenditures whether or not they pay, the rational player will avoid paying
and free ride on others, ensuring that everybody is worse off, as valued public
goods and services can not be provided (Smith 1997). If taxpayers cannot trust
governments to tax fairly and consistently and to spend wisely, tax policy inertia
becomes more likely than reform, and an important part of our social capital
depreciates.
The increasing international mobility of capital has increasingly disturbing
implications for national taxation policy (Tanzi 2000). Although a major
importer of investment capital, Australia not has been particularly successful in
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T AXIN G P O P U LARIT Y
converting foreign profit on Australian development into tax revenues for its
citizens. Furthermore, the free flow of international money in the postwar era has
confronted the ability of the citizenry to decide the fair distribution of taxes within
their own country, and fuelled a T-I-N-A (‘There is no alternative’) mythology.
With governments pushed towards the ‘least common denominator’ principle of
business taxation, the taxation burden risks being substantially passed from
capital, which is internationally mobile, to labour, which is not (Graetz 1985,
414). International coordination and harmonisation of tax policies remains
largely an aspiration, although the problem of ‘disappearing taxes’ is not a new one
facing treasurers in federal countries.
With the rapid economic structural changes of recent years, almost
continuous taxation reform is needed to maintain relevance to contemporary
conditions. However, achieving sensible reform of taxation is notoriously difficult
and unrewarding. Bursts of reform scattered through the decades have typically
been followed by decades of lethargy and neglect, and increasing tax obsolescence.
The flurry of reform in recent years has plugged some of the largest leaks in a bentout-of-shape tax sieve, but added several new gaps to the fabric.
In its various manifestations — raising revenue, redistributing income and
wealth, contributing to economic stabilisation and growth — taxation policy
affects private interests. Tax policy is also shaped by the changing economy, and
as the old manufacturing interests give way to new industries such as finance and
services, so too is the tax system adapted to suit. However, as Professor Head
reminded us:
If genuine reform of the Australian income and commodity tax system is to be
achieved, a more principled approach is clearly required, in which the
familiar politics of short term sectional self-interests must give way to wider
considerations of equity and efficiency which go to the heart of rational
budgetary decision making in a democracy.
(Head 1985, 5)
Competing vested interests often create block comprehensive and principled
reform, despite prospects of overall efficiency and equity benefits. The New
South Wales Tax Task Force warned in 1988 that,
the tax reform process will usually involve both gains and losses... potential
losers from the process are usually well aware of their likely losses while
potential beneficiaries are frequently unable to readily identify the benefits
accruing to them. [This] tends to shift the political balance against reform.
(New South Wales Tax Task Force, 1988, 156)
Smith RS43 ATRF Page 203 Thursday, November 11, 2004 3:00 PM
EPILOGUE 203
Equally, a period of rapid and extensive tax upheaval provides a rare but
potentially damaging opportunity for well-placed lobbyists to shape the tax
system to suit predominantly private, rather than genuinely public, interests. As
economic and social change results in the ‘old’ manufacturing industries being
displaced by new service and finance industries, the tax system is being
restructured by a new political economy. Whether Australia’s tax history, with its
pattern of tax reform, tax inertia and decay, will repeat itself remains to be seen.
While some expect a ‘tax crisis of the state’ to results in new institutions
responding to current social, economic and political needs (Schumpeter 1954),
others anticipate the continuing ‘march of folly’:
A phenomenon noticeable throughout history regardless of place or period is the
pursuit by governments of policies contrary to their own interests. Mankind it
seems, makes a poorer performance of government than of almost any other
human activity.
(Tuchman 1984, 2)
Some American observers envy the apparent ability of the Australian political
system to adopt changes ‘without total capitulation to special interests that
seemed inevitable in the United States’. Nevertheless, the Australian experience
provides ‘ample evidence of the inherent political difficulty of tax reform in any
democratic Government’ (Graetz 1985, 413). Experience with consumption
taxation suggests that the public may not trust governments with a mandate for
reform unless there are institutional safeguards against substantial shifts in the tax
burden (Smith 1999). Although Australia’s federal system presents an important
and sometimes frustrating constraint on taxation reform, such institutions have a
positive role to play in ensuring reforms are well considered and soundly based. A
degree of institutional inertia also prevents damaging and sudden swings in
taxation policies – where taxation becomes almost an engine of political revenge
with shifts in political power:
Extreme tax policy often invites an extreme reaction. Taxpayers, their
accountants and lawyers, and tax administrators are whipsawed... Morale
and efficiency drop, evasion increases... Extreme policy oscillation is almost
certain to destroy a tax system’s acceptability to taxpayers, their advisers and
tax administrators. Without such acceptability the system seems to decay. The
price paid to accommodate extreme tax philosophies seems too high.
(Shoup 1983, 392)
Smith RS43 ATRF Page 204 Thursday, November 11, 2004 3:00 PM
2 04
T AXIN G P O P U LARIT Y
A major obstacle to improving Australian tax policy has been our national
characteristic of self delusion, our adherence to what has been called our
‘mythology of taxation’. In the words of Professor Mathews, we pretend, in spite
of the compelling evidence to the contrary,
that the tax system is concerned with... equity in both its vertical and
horizontal aspects; efficiency involving neutrality in relation to production
decisions and consumer choice; economic incentives and their effects on levels
of economic activity, stability and growth; administrative simplicity with
special reference to the costs of collection and compliance; and political
acceptability.
(Mathews 1985d, 1)
In reality, it has been shaped as often by inflation, tax shirking and political
inertia or paralysis than it has by careful and balanced design. Thus, our greatest
delusion rests in the belief that the best policy is to do nothing. Australia’s history
of taxation policy is like that of many countries, a tale of high ideals as well as
fateful errors, ruthless pursuit of self-interest as well as public-spirited reform.
Taxation requires governments to make difficult choices about levels of taxation
and spending and the forms taxation should take. Most difficult of all, our
elected representatives take responsibility for deciding who will shoulder the
heaviest burden.
As Pedrick has emphasised:
Revenue acts are not the acts of a hostile enemy of occupation. They are the
means by which the community maintains itself as a community responding
to the needs of its members
(Pedrick 1984, 134).
Such choices may require the wisdom of Solomon, and the political rewards are
few. But, as the history of Australian tax policy shows, the worst policy is neglect.
For, if tax policy is not made, then, like Topsy, it jes’ grows — unregulated by
criteria of fairness, efficiency, simplicity or the moral obligations of citizenship.
Smith RS43 ATRF Page 205 Thursday, November 11, 2004 3:00 PM
EPILOGUE 205
Table 17: Taxation as a percentage of Gross Domestic Product
1849–2003
Commonwealth
State and local
Total
1849
1896–97
1899–1900
1901–02
1909–10
0
0
4
4
4
3
5
1
1
1
3
5
5
6
5a
1918–19
6
2
8a
1928–29
7
4
11a
15
21
25
21
21
27
29
30
30
(30) 31
31
(32) 30
(30) 31
(32) na
1938–39
8
7
1946–47
19
2
1948–49
22
3
1958–59
17
4
1968–69
18
4
1976–77
21
5
1984–85
24
5
1988–89
24
6
1995-96
24
7
1998-99b
24
7
1999-00
(25) 24
7
2000-01
(26) 24
6
2001-02
25
6
2002-03
(26) na
(6) na
Notes: a excludes state semi-government authorities
b ABS data published in Taxation Revenue changed to accrual accounting methodology (accrual figures in
brackets) from 1998-99. Where accrual and cash figures are the same, only cash figures are presented.
Sources:
For 1849, Mills 1925 and Butlin 1985; for 1896 to 1959, Mathews & Jay 1972; for 1968-69 to 2002-03,
ABS, Taxes Received (cash series), (unpublished), and Taxation Revenue (2002), (2003), and (2004)
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Smith RS43 ATRF Page 227 Thursday, November 11, 2004 3:00 PM
APPENDIX: TAXATION POLICY IN AUSTRALIA
A CHRONOLOGY
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1800
1819
1823
First import duties and charges
levied in Australia to build a gaol
and orphanage in Sydney
British Act of Parliament
provides retrospectively for
the Governor to levy existing
duties, and to levy equivalent
excise on production of
spirits within the colony up
to 10s a gallon
Power to tax vested in
Governor advised by Council
with end of military
government; power to tax
constrained by requirement
of local purposes only, with
tax to be ear-marked for such
purposes
1825
1828
Proclamation levied duties
on spirits and tobacco and ad
valorem tariff of 5% on
foreign goods
British Act of Parliament
continues requirement that
taxes and duties to be
imposed for local purposes
only, and requires Governor
to seek advice of Council on
levy of customs and excise
duties
1851
First death duties introduced in
Australia in form of NSW probate
and administration fees, levied on
the value of personal estate;
Introduction of gold licence fee in
NSW and Vic.
1865
Tas. introduces first Australian
succession duty, on personal
property only; NSW reforms
probate and administration fees
by bringing under the one Act
1866
1870
Other
Vic. introduces Australia’s first
death duty on value of real and
personal estates
227
NSW probate fees set by
Legislative Council, varied
with size of estate,
exemption of £30
First protectionist tariff
schedule introduced in Vic.
Vic. death duty levied at
graduated rates
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2 28
T AXIN G P O P U LARIT Y
Date
1876
1877
1878
1880
1884
1886
1887
1890
1894
Judicial/Constitutional Tax Policy Legislation and
Changes
SA introduces death duties
(probate and succession duties)
on real and personal property
First Vic. land tax, levied on capital
value (specified as sheep carrying
capacity)
Tas. Legislative Council rejects
partial income tax on mortgage
interest and dividends, and
alternative of tax on real property
and incomes. SA Parliament
rejects succession proposals for
taxes on incomes and land in
1878, 1879 and 1883
First Australian income tax
introduced with Tasmania’s
withholding tax on dividends,
annuities and rents
First Australian general income
tax and land tax based on
unimproved value introduced in
SA, after rejection of 1883
proposal for general property and
income taxes
Other
SA duties levied at graduated
rates.
Vic. land tax levied at
proportional rates on value
above exemption level of
£2500
Tas. income tax levied at flat
rate of 9d in pound; NSW
probate duty levied at
proportional rate of 1%
SA income tax has
proportional rate of 3d in
the pound (1.25%) on
income above £300 p.a., and
differentiated rates of 6d in
the pound (2.5%) on
property incomes; land tax
levied at proportional rate of
1/2d in the pound
Qld probate duties introduced,
Qld probate duties levied at
levied on total value of real and
graduated rates with
personal estate; NSW Income Tax exemption of £100
Bill defeated in Legislative
Assembly and Land Tax
component of Bill defeated in
Legislative Council
SA income tax amended to
levy companies at property
income tax rates
Dividend income tax introduced Qld dividend tax levied at
in Qld
proportional rate of 5%
Tas. introduces general income
Tas. income tax levied at
tax;Vic. Legislative Council rejects proportional rates of 8d in
Land Tax component of Land and the pound (3.3%) over
Income Tax Bill
exemption level of £150,
differentiated rates of 10d
per pound (4.2%) on
property and company
incomes
Smith RS43 ATRF Page 229 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
1895
1899
Judicial/Constitutional Tax Policy Legislation and
Changes
229
Other
Vic. introduces general income
tax after Legislative Council
rejects land and income tax bill;
NSW introduces general income
tax and land tax on unimproved
value;WA introduces death duties
on the value of real and personal
estates
Vic. linear income tax levied
at graduated rates from 1.7%
to 3.3% on income above
general exemption of £200,
with differential rates for
property incomes at twice
earned income rates; NSW
introduces linear income tax,
levied at proportional rate of
6d in the pound (2.5%) on
income above general
exemption of £200 and
differentiated rates one-third
higher on property income;
NSW land tax levied at
proportional rate of 1d in
the pound on unimproved
value above exemption level
of £240; WA death duties
levied at graduated rates
with £1500 exemption.
WA introduces withholding tax
WA dividend withholding tax
on dividends and mining company and mining profits levied at
profits
proportional rate of 5%.
January
1901
Commonwealth of Australia
established, with
Constitution giving the
Commonwealth concurrent
power with the states to levy
taxes (s. 51(ii)) and exclusive
power to impose duties of
customs and excise (s. 90).
October Uniform national tariff
1901
introduced, net customs and
excise revenues credited to
the state where consumed
(‘bookkeeping’ system) (s. 89,
s. 93); minimum of 75% of
revenues guaranteed to
states for 10 years, plus any
‘surplus revenue’ after
Commonwealth expenses
met (s. 87)
1902
Commonwealth government
abolishes customs duty on tea and
kerosene in first tariff schedule
passed in 1902; Qld introduces
general income tax
1903
WA introduces death duties on
real and personal estates
Qld income tax levied
with no exemptions and
fixed tax of 10s and £1
for personal and property
incomes below £150,
proportional rate of 6d in
pound (2.5%) on incomes
above £150, with differential
rate of 1s (4.17%) on
property incomes
Smith RS43 ATRF Page 230 Thursday, November 11, 2004 3:00 PM
2 30
T AXIN G P O P U LARIT Y
Date
1904
1906
1907
1908
1909
1910
1911
Judicial/Constitutional Tax Policy Legislation and
Changes
High Court in (Peterswald v. Qld dividend withholding tax
Bartley) adopts restrictive
incorporated in general income
interpretation of excise duty tax
in Constitution
Other
SA amends 1884 income tax
by introducing graduated
rate scale; exemption of
£150; retains differentiated
rates on property incomes
Special WA tariff provision (s. Local Government Act in NSW
Qld income tax amended in
95 of Constitution) ended, 5 vacates land tax in favour of local 1906 and 1907 to introduce
years after Uniform Tariff
governments. WA Legislative
exemption of £200 and
introduced
Council rejects bill imposing land graduated rate scale with
tax
rates from 6d in pound
(2.5%) to 8d in pound (3.3%)
and flat rate of 9d in pound
(3.75%) on property income
Commonwealth Protectionist
WA income tax at
(Lyne) Tariff adopted; WA
proportional rate of 4d in
introduces general income tax
the pound, with general
and land tax on unimproved
exemption of £200; WA land
values after Legislative Council
tax levied at proportional
rejects and tax bill earlier in 1907 rate of 1.5d
in the pound (6.25%) with
exemption of £250
High Court (Wire Netting
Case and Steel Rails Case)
validates Commonwealth
imposing customs duty on
imports by state
governments; Surplus
Revenue Act limits revenue
distribution to states by
diverting ‘surplus revenue’ to
trust funds to pay for
introduction of
Commonwealth old age
pension
Commonwealth agreement with
state Premiers to distribute
customs and excise revenue
according to 24s per capita
formula
Surplus Revenue Act replaces Commonwealth introduces land Commonwealth land tax
bookkeeping system with per tax on unimproved values;Vic.
levied at progressive rates
capita grants to the states of replaces 1877 tax on capital value with exemption of £5000;
25s after referendum rejects of land with tax on unimproved
Vic. land tax levied at
incorporating 25s per capita land value; Bank Notes Tax Act
proportional rate of 1/2d in
grants to states into
introduced, taxing private
the pound with exemption of
Constitution
banknotes at prohibitive rates
£250
Narrow view of excise duty
undermined by High Court’s
rejection of implied immunity
of powers regarding state
trading enterprises in EngineDrivers Case.
Commonwealth land tax
rules valued in Osborne v.
The Commonwealth
Smith RS43 ATRF Page 231 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1912
1914
1915
Commonwealth national estate/
succession duty introduced;
Commonwealth land tax
amendment to tax Crown
leaseholds
Commonwealth introduces
personal income tax and tax on
undistributed company profits
(dividends assessable as personal
income); Qld introduces land tax;
Qld introduces graduated rates of
company tax, and differentiated
rates for public utilities and
foreign companies
1916
Commonwealth entertainment
tax introduced
1917
Commonwealth wartime profits
tax introduced
1918
1919
1920
1921
231
Other
WA introduces graduated
income tax scale
Commonwealth estate duty
levied at progressive rates
with exemption of £1000
Commonwealth company
tax rate 1s 6d in the pound
(6.25%); income tax at
continuously progressive
rate up to £7600 for
personal exertion and £6550
for property income; highest
marginal rate 25%, lowest
rate 3.004%, exemption level
£156 plus £13 for each
dependent child, £104 for
single person; deduction for
employers contributions to
pension funds and for
personal contribution to
superannuation and life
insurance premiums
Surcharge of 25% introduced
on Commonwealth income
tax; exemption level for
single person reduced to
£100, dependent child
exemption raised to £26
Uniform Commonwealth–
State Income Tax Bill
formulated and
recommended to
governments by conference
of officials
Surcharge introduced on
Commonwealth land tax;
Commonwealth income tax
surcharge of 30%
Commonwealth proposes
it administer and collect states’
income taxes at 1/3 of cost
High Court in Engineers
Commonwealth income tax
(Warren Kerr) Royal
Case overturns doctrine of surcharge of 5% brings tax to 71% Commission into Taxation
implied prohibitions and
above 1915 levels
(1920–23) begins inquiry into
undermines narrow
incidence of Commonwealth
interpretation of excise
taxation; Commonwealth
duties by extending scope of
and WA agree for
Commonwealth power to
Commonwealth to collect
state industrial activities
state income tax
General tariff increased from
average rate of 21.1% to
25.86%
Smith RS43 ATRF Page 232 Thursday, November 11, 2004 3:00 PM
2 32
T AXIN G P O P U LARIT Y
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1922
Reflecting Royal Commission
views Commonwealth introduces
new Income Tax Assessment Act
with changes to non-resident,
overseas and business income
taxation; 3-year averaging of
business incomes and
discretionary undistributed profits
tax introduced
Royal Commission recommends
income tax be entirely vested in
the Commonwealth, other direct
taxes in the states.
Commonwealth offers to
withdraw from personal income
tax in return for abolition of per
capita grant to the states.
Commonwealth aligns its
company tax with states by taxing
net company profit (at 1s
in the pound or 5% and allowing a
dividend tax rebate (of 1s in
pound) for personal taxpayers.
State company taxes levied at flat
rate but dividend income exempt
from personal tax (except for WA
which allows dividend tax rebate)
Commonwealth lowers income,
land and entertainment taxes by
10% in 1922 and 1924, 12.5% in
1925
1923
1922–25
1924–26
1926
1927
1929
Other
Company tax rate 2s 5d
in the pound (12%) on
undistributed profit
States other than NSW (and
WA see above) agree to
collect Commonwealth
income tax; abolition of
Commonwealth land tax
surcharge and repeal of
provision taxing 5% of
owner/occupied housing
value; dependant child
deduction raised to £50
Further cuts in
Commonwealth income,
land and entertainment tax;
introduction in 1924
of deductions for medical
expenses for taxpayers with
incomes less than £900 and
for funeral expenses up to
£20. General exemption for
all taxpayers raised to £300
High Court in Petrol Tax
Case and Newspaper Case
excludes states from levying
sales tax by defining any tax
on commodities to be an
excise
Commonwealth customs duty
imposed on imported petroleum
and oil to finance roads grants to
states
Commonwealth introduces excise
duty on petroleum and oil to
supplement 1926 customs duty
Commonwealth income tax
raised by introducing
surcharge on income above
£1,200; states raise income
taxes; emergency increase in
tariff for revenue
Smith RS43 ATRF Page 233 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1930
1931
2.5% primage duty introduced;
Commonwealth begins taxing
income not sourced in states;
states begin taxing non-resident
derived income
1932
1932–34
1933
1936
1936–37
Uniform Income Tax Act
introduces unified
Commonwealth and state income
tax return following
recommendation of Fergusson
Royal Commission
233
Other
Further emergency increase
in tariff; Commonwealth
introduces 1.5% sales tax in
August to offset fall in
customs revenues
Further emergency increase
in tariff; sales tax raised to
6% in July; Commonwealth
super tax of 10% on
property incomes; changes
to Commonwealth income
tax shorten continuous
progression of scale for
property income up to
£3700 (£6900 for personal
exertion incomes)
Reductions in
Commonwealth and State
Unemployment Relief taxes,
company tax, sales tax,
customs duties and primage
duty; exemption from
Commonwealth income tax
raised to £250 for earned
income, £200 for property
income
(Fergusson) Royal
Commission into Taxation
(1932–34) on simplifying and
standardising direct taxes;
Commonwealth reduces its
land tax 55% below wartime
levels
Flour tax introduced to pay
for assistance to wheat
farmers (applied Dec. to May
1934 then Jan. 1935 to Feb.
1936); reduction in rate of
Commonwealth super tax
on property income to 5%,
modified to 6% to provide
revenue for wheat growers’
relief, but reduced to 5% in
1935; sales tax rate reduced
to 5%
Commonwealth tax
deduction for dependent
spouse introduced; sales tax
reduced to 4%
Smith RS43 ATRF Page 234 Thursday, November 11, 2004 3:00 PM
2 34
T AXIN G P O P U LARIT Y
Date
1937
1938
1939
1940
1941
Judicial/Constitutional Tax Policy Legislation and
Changes
High Court ruling in A.G.
(NSW) v. Homebush Flour
Mills Ltd. Flourmills Case
widens excise duty definition
to where the tax was
imposed in substance on
production
High Court in Matthews v.
Chicory Marketing Board
widens excise duty definition
to include any tax in respect
of a commodity
Other
Sales tax rate raised to 5%
Commonwealth introduces gold
tax and raises other taxes
Differential rate scale introduced
for sales tax
Sales tax rate raised to 6%
Commonwealth lowers
income tax exemption to
£200; Commonwealth raises
general rate of sales
tax to 10% after increase in
same year to 8.5% and levies
differential rates of 15% on
non-essential goods and 5%
for essential goods
Chifley Government introduces
Commonwealth War Tax
war tax in Dec., replacing Fadden introduces new rate scale
Government’s abortive national
which reduces range of
contribution on all incomes above continuous graduation to
£100; Commonwealth introduces between £400 and £1500;
source deduction of wages and
sales tax on luxuries raised
salaries; 2.5% payroll tax
to 20%
introduced by Commonwealth to
fund child endowment at a rate of
5 shillings a week for all children
other than the first; National
Welfare Fund (NWF) established;
Commonwealth proposes states
vacate income tax field for 1 or 2
years, in return for fixed per
capita grant; states refuse; gift
duties introduced and estate
duties revised; dividend rebate
equal to company tax rates of 1s
per pound (5%) abolished
Smith RS43 ATRF Page 235 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
1942
Judicial/Constitutional Tax Policy Legislation and
Changes
High Court in Uniform Tax
Case rules valid
Commonwealth takeover of
income tax under Income Tax
Act, Income Tax Assessment
Act, Income Tax (Wartime
Arrangement) Act, States
Grants (Income Tax
Reimbursement) Act
Commonwealth takes over all
income tax and entertainment tax
by withholding grants from noncomplying states; Commonwealth
company tax rationalised at 30%
rate, replacing wartime (Company
Profits) Tax, Supertax and
Undistributed Profits tax; gold tax
replaced by general company tax
on gold mining industry;
Commonwealth income
tax rebates replaced concessional
deductions
1943
Introduction of new
Commonwealth income tax scale
extends tax to adult wage
earners; partly funds payment to
NWF for extending social
services after the war
1944–45
Pay-as-you-earn (PAYE) tax
system of periodic tax payments
through the employer introduced
for wage and salary earners by
Commonwealth; provisional tax
system introduced for non-wages
and salary income
1945
Social Services contribution
introduced and paid with payroll
tax to National Welfare Fund
1946
Commonwealth announces to
states it will retain war-time
income tax arrangements in postwar; investment depreciation
allowance of 20% introduced for
manufacturing plant
1949
High Court in Parton v Milk Coverage of sales tax and general
Board Case overthrows
rate reduced to 8.33% in Sep.
narrow interpretation of
1949; luxury items still taxed at
excise duty by classifying tax 25%; investment allowance
on retail sales as an excise
increased to 40%
duty
1949–50
235
Other
Report of Commonwealth
Special Committee on
Uniform Taxation
recommends
Commonwealth become
sole income taxing authority
for duration of war, paying
compensation to states at
level of average state income
taxes in 1939–40 and 1940–
41; sales tax levied at 12.33%
and rate on luxuries raised
to 25%
Commonwealth income tax
exemption lowered to £104;
sales tax increased to 12.5%
and 7.5% on essentials
Sales tax general rate
lowered to 10%; rate on
necessities lowered to zero
Company tax rate lower for
first £5000 net income, 35%
on balance (30% for private
companies)
Smith RS43 ATRF Page 236 Thursday, November 11, 2004 3:00 PM
2 36
T AXIN G P O P U LARIT Y
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1950
Stepped rate income tax
structure replaces continuous
progression
in rates; top marginal tax rate
raised to 75%;
1951
1952
1953
1954
1956
Vic. legal challenge to
Uniform Tax legislation, but
not pursued until 1955
Other
Payroll tax link with NWF
abolished in 1950 and 1952
when Social Services
Contribution merged with
income tax, with changes to
the NWF; (Spooner)
concessional deductions replaces Commonwealth Committee
income tax rebates
on Taxation (1950–54)
established; restoration of
discriminatory sales tax with
3 higher rates of 10%, 25%
and 33.5% established;
general sales tax remains at
8.5%
First peacetime attempt to
General sales tax rate raised
repress economic activity by fiscal to 12.5% and discriminatory
action
rates raised to 20%, 25%,
33.33%, 50% and 66.66%;
company tax rate increased
by 1s (to 45%); investment
allowance revoked
Commonwealth land tax
Negotiations between
abolished in favour of states;
Commonwealth and states
Commonwealth briefly introduces on returning income tax to
export duty for macrostabilisation states; lapsed in August 1953
purposes; partial reversal of
contractionary budget measures
of 1951; sales tax restored to
general plus 3 discriminatory
rates
Higher rates of income tax on
Company tax rate returned
property incomes abolished
to 35%; rate of tax on first
alongside substantial personal tax £5000 30% for public
concessions as part of overall
companies; sales tax
expansionary fiscal policy;
restructured to levy single
Commonwealth abolishes
discriminatory rate of
entertainment tax
16.66%
Significant reductions in personal (Hulme) Commonwealth
income tax and sales tax on
Committee (1954–55)
motor vehicles in leadup to
established (Report on Rates
elections
of Depreciation); top
marginal personal income tax
rate 66.7%; Commonwealth
income tax scale
for 1954–55 to 1969–70
introduced minimum rate
0.42%; exemption threshold
£208; number
of steps in tax scale 29
NSW reintroduces state land tax; Increases in sales tax on cars
disinflationary Commonwealth
and return to 4
taxation measures in
discriminatory rates of sales
supplementary budget in March
tax ranging from
10–30%; rate of company tax
raised to 40%
Smith RS43 ATRF Page 237 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
1957
1958
1959
1959
1960
1961–62
1963–64
1963–64
to
1972–73
Judicial/Constitutional Tax Policy Legislation and
Changes
In Second Uniform Tax Case
unsuccessful challenge to
conditionality of income tax
grants in (The State of
Victoria v. The
Commonwealth).
In Dennis Hotels Case High
Court rules States can levy
franchise fees
Excise applied to diesel
237
Other
Company tax rate reduced
to 37.5% and changes to
depreciation provisions in
response to Hulme Report
Introduction of temporary 5%
personal income tax rebate for
macroeconomic management
purposes; introduction of 30%
dividend withholding tax on nonresidents
(Ligertwood)
Commonwealth Committee
on Taxation (1959–61)
established, reports 1961
Taxation changes used to
slow economic boom with
increases in Nov. in company
tax rate to 40% and
increased sales tax on cars
from 30% to 40% and
withdrawal of 5% personal
income tax rebate
Sales tax on cars reduced to
22.5% after reduction to 30%
in early 1961; 5% personal
income tax rebate, and 20%
manufacturing investment
allowance introduced in
February 1962 as antirecession device
Top personal marginal
income tax rate 66.7%;
minimum rate 0.42%;
exemption threshold £416,
number of steps in scale 29
20% investment allowance
allowed for primary
producers except for onroad vehicles.
Smith RS43 ATRF Page 238 Thursday, November 11, 2004 3:00 PM
2 38
T AXIN G P O P U LARIT Y
Date
1964
Judicial/Constitutional Tax Policy Legislation and
Changes
Vic. attempts marginal
income tax but fails as
Commonwealth refuses to
collect the tax
Social Science Research
Council of Australia
publishes study on Taxation
Reform (Downing Report);
in response to Ligertwood
recommendations, measures
introduced to prevent tax
avoidance; government
withdraws 45% personal tax
rebate; sales tax increased
on cars; company sales tax
rate raised to 42.5%
Personal tax surcharge of
2.5% introduced
1965
1967
WA introduces a turnover tax
(stamp duty) on personal and
commercial receipts
Vic. follows WA in introducing
General sales tax rate raised
turnover tax/receipts duty;
to 15%
Commonwealth forces states to
withdraw from receipts duties by
threatening to reduce Financial
Assistance Grants; introduction of
10% interest withholding tax on
non-residents
1968
1969
Other
High Court rules states’
receipts duty is excise duty
and therefore
unconstitutional in The State
of
Western Australia v.
Hammersley Iron Pty Ltd
1970
1970–71
1971
1972
Excise duty introduced on wine,
abolished in 1972
First of series of changes
simplifying personal income tax
rates, concentrating on bottom of
income scale
Tax surcharge of 2.5%
increased to 5% for
1971–72 (later reduced to
4.375%); company tax raised
to 47.5%
Commonwealth passes payroll tax
to states after states request
access to income tax; increased
immediately to 3.5%
Further cuts to personal
income tax rates for1972–
73; relief for estate and gift
duty; (Asprey) Taxation
Review Committee
established; Senate
Committee examines estate
duties
in 1972 and 1974
Smith RS43 ATRF Page 239 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1973
Tax concessions to mining,
primary industries, life insurance
and wine industry curtailed
following Coombs Task Force
Report 1973
1973–74
1974
Investment allowance abolished
Personal income tax rate scale
simplified to 14 steps and made
more progressive; adoption of a
property income surcharge
(discontinued in Feb. 1975);
capital gains tax foreshadowed,
but not proceeded with;
concessional deduction for home
loan interest payments
introduced; state payroll tax rates
raised to 4.5% from June 1974;
concession to mining industry
further curtailed following 1974
Fitzgerald Report on mining
industry
1974–75
1975
Radical personal income tax
restructuring for
1975–76, rates on middle incomes
lowered and rates lower down
scale increased; dependant and
concessional deductions abolished
and general, concessional and
dependant rebate system
introduced as suggested by Asprey
Report; Commonwealth coking
coal export levy and crude oil levy
introduced; investment allowance
reintroduced at 40% to boost
investment
239
Other
Changes to company tax
abolishes progressive rates
on public companies and
introduces common rate of
45% for public and private
companies for 1974–75; Tas.
introduces tobacco tax
Preliminary Report of Asprey
Committee in mid-1974;
exemption threshold at
$1040; number of steps in
rate scale reduced from 29
to 14
(Mathews) Inquiry into
Inflation and taxation
appointed; top personal
marginal income tax rate
67%; minimum 1%
Asprey Final Report in June
1975; Mathews Report in
May 1975; unsuccessful
attempt to tax company cars
as fringe benefits; temporary
cut in sales tax on cars from
27.5% to 15% to stimulate
spending; state payroll tax
rate increased to 5% from
June 1975; top personal
marginal income tax rate
reduced to 65%; minimum
rate raised to 20%; exempt
income threshold $2520,
number of steps in rate scale
reduced to 7; company tax
rate lowered to 42.5%
Smith RS43 ATRF Page 240 Thursday, November 11, 2004 3:00 PM
2 40
T AXIN G P O P U LARIT Y
Date
1976
1977
Judicial/Constitutional Tax Policy Legislation and
Changes
Commonwealth and states
As response to Mathews Report
agree to income tax revenue recommendations on
sharing
depreciation value adjustment,
40% income tax investment
allowance introduced; personal
income tax indexation introduced;
stock valuation adjustment (SVA)
introduced; dependent child
rebates abolished and combined
with child endowment increase to
create family allowance;Vic. death
duties abolished 1976–80; NSW
death duties abolished in 1976–81
Personal tax indexation reduced
to half; general personal income
tax exemption (‘tax free
threshold’) replaced general
rebate system; transitional rate
scale applied for 19977–78 only;
estate duties abolished in Qld;
Commonwealth promises to
abolish estate and gift duties
Other
Resource rent tax
foreshadowed in Budget as
part of introduction of
import parity pricing policy
for oil; top marginal tax
rate reduced to 61.07%;
minimum rate raised to
33.07% tax free; threshold
$3893; number of steps in
scale excluding threshold
reduce to 3; company tax
rate increased to 46%
1978
Legislation passed to allow
Investment allowance
States to impose income tax
reduced to 20%; sales tax on
surcharges or rebates under
motor vehicles cut to 15% to
Commonwealth income tax
stimulate spending;
law
government considers
introduction for foreign tax
audit system; inquiry by
Australian Taxation Office
(ATO) and Treasury into a
broadbased consumption tax
(BBCT)
1979
Personal tax indexation
Commonwealth
temporarily abolished; home loan Government rules out BBCT
interest deductability abolished;
investment allowance and SVA
abolished; Tas. abolishes death
duties 1979–80; Commonwealth
abolishes death duties; WA and
SA abolish death duties
1980
Top personal income tax rate
60% minimum rate 32%;
exemption threshold $4041;
number of steps in scale 3
1981–82
Investment allowance
reduced to 18%; Treasurer
announces ATO and Treasury
inquiry into tax options in
response to election debate
on opposition’s CGT
proposal
Smith RS43 ATRF Page 241 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
1981
Judicial/Constitutional Tax Policy Legislation and
Changes
Personal income tax indexation
abolished; general anti-avoidance
provision (Part IVA) introduced
along with other anti-avoidance
measures
1982
1982–83
1983
1984–85
June–
July
1985
Sept
1985
Concessional rebates for home
loan interest payments
introduced, phased out from 1983
Film industry concession reduced
to 133/33 from 150/50 writeoff
and exemption regime; Indexation
of rates of excise duties:
introduction of WST on wine at
general rate; Prescribed Payments
System (PPS) introduced to
withhold income tax in building
and other industries;
superannuation lump sum
payments subjected to tax
Commonwealth introduced
Resources Rent Tax (RRT) on
offshore ‘greenfields’ petroleum
projects
Commonwealth–state tax
Government publishes White
sharing agreement expires on Paper on tax reform; National Tax
30 June
Summit (NTS)
Following NTS government
announces broadening income tax
base by introduction of tax on
real
realised, capital gains, fringe
benefits tax levied on employers,
limitation of negative gearing on
rental property and abolition of
concessional rebates except for
net medical expenses; PPS tax
rate raised from 15 to 15%;
quarterly provisional tax system
introduced; government
announces introduction of full
imputation system for company
taxation from July 1987
241
Other
Final Report of Australian
Financial System (Campbell)
Inquiry
(1979–81) after interim
report in 1980; general sales
tax raised to 17.5%
discriminatory rates raised
to 5–30%, and new 2.5% rate
levied on some goods
previously exempt (reversed
in 1982)
General sales tax raised to
20% other rates raised to
7.5%–32.5%
Reports by (Niewenhuysen)
Victorian Committee of
Inquiry into Revenue Raising
Top personal marginal
income tax rate 60%;
minimum rate 26.67;
exemption threshold $4595;
number of steps in scale 6
Changes to income tax rates
announced for
1985–86; investment
allowance abolished
Smith RS43 ATRF Page 242 Thursday, November 11, 2004 3:00 PM
2 42
T AXIN G P O P U LARIT Y
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
Other
1985–86
Wage tax tradeoff in context of
wages policy response to
exchange rate depreciation:
licensing of casinos in
Queensland, South Australia (SA)
and Western Australia (WA) in
1985–86 and subsequent
introduction of gaming machines
in most states including SA by
1994-95
1987
Top marginal tax rate 49%;
minimum rate 24%;
exemption threshold $5100;
number of steps in rate scale
4
Foreign tax credit system (FTCS) Personal income tax cuts
and imputation system company with move to simplified
taxation introduced; petroleum
4-step personal income
resources rent tax introduced;
tax rate system; increase in
limitation on negative gearing of company tax from 46%
rental properties announced in
allows alignment of company
1985 abandoned
and personal tax rates at
49%; abolition of
undistributed profits tax
Report of NSW Tax Task
Force on Review of the State
Tax System
Further broadening of company
income tax base with accelerated
depreciation allowance abolished;
exemption of income of
superannuation funds replaced by
15% tax rate
Company tax rate lowered
to 39%; top personal
marginal income tax rate
lowered to 48%; minimum
rate 21%; exemption
threshold $5100; number of
steps in rate scale 5
Overseas tax havens targeted by Top personal income tax rate
controlled foreign companies
47% minimum rate 20.5%;
(CFC) legislation for taxing
exemption threshold
foreign source income in low tax $52550; number of steps in
countries on accruals basis;
rate scale 7
foreign branch profits of
Australian companies in listed
countries exempted from
Australian tax; indexation of
dependent concessional rebate
and family allowances; changes to
superannuation to limit access to
tax concessions
1987–88
1988
1988–89
1989–90
1990–91
Top personal marginal
income tax rate 60%;
minimum rate 25%;
exemption threshold $4595;
number of steps in rate scale
5
Smith RS43 ATRF Page 243 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
1991–92
Judicial/Constitutional Tax Policy Legislation and
Changes
243
Other
States pressure
Commonwealth for return
of partial income tax powers
to states; top marginal
personal income tax rate
47%; minimum rate 20%;
exemption $5400; number of
steps in rate scale 4
1991
Further company income tax base JCPA recommends taxing
broadening including removal of trusts and companies in a
gold mining industry tax
similar manner; Liberal/NP
exemption from Jan. 1991; tax
coalition releases Fightback!
allowance for research and
package proposing 15% GST,
development expenditures
income tax cuts and
reduced to 100% from 150%
spending cuts
(decision reversed in 1992);
1992
SGC compulsory superannuation Fightback! II modifies
introduced; One Nation package proposed fiscal package
introduces ‘L-A-W’ tax cuts;
(excluding food and childcare
accelerated depreciation for plant from GST)
and equipment acquired after
February 1992; tax concessions
for offshore banking units, private
infrastructure bonds, investment
companies (Pooled Development
Funds); tobacco excise increased
as health promotion measure
1993
High Court rejects Dennis
Foreign investment fund accrual
Company tax rate reduced
Hotels formula underpinning rules apply Australian tax to
to 33% from 39%
states’ business franchise fees residents’ income and gains in
fuel excise and WST
certain foreign companies and
increases following review
trusts;
announced in 1990-91
budget; wine tax raised to
31%, later reduced to 26%;
Tax Law Improvement
Project announced
1993-94
First stage ‘L-A-W’ tax scales in
Top marginal personal
to
place;
income tax rate 47%;
1999-00
minimum rate 20%;
exemption $5400; number of
steps in rate scale 4
1994
Tax deductibility for costs of
setting up a regional
headquarters in Australia
1995
Company tax rate raised to
36%; planned ‘L-A-W’ tax
cuts (stage 2) replaced by
proposed government cocontribution to compulsory
private superannuation
(SCC)
Smith RS43 ATRF Page 244 Thursday, November 11, 2004 3:00 PM
2 44
T AXIN G P O P U LARIT Y
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1996
1997
1998
High Court decision on Ha
and Hammond confirmed
broad concept of excise and
rules States business
franchise fees
unconstitutional;
Commonwealth imposes
replacement excises and
makes revenue payments to
States;
Other
Family Tax Initiative - Family Tax
Assistance, Parts A & B
introduced higher tax free
threshold for families with
children; Senior Australians’ tax
offset replaced low income aged
persons rebate; small business
CGT rollover relief, 50%
exemption on sale of goodwill and
exemption on sale of small
business at retirement
ITAA 1997 begins operation;
superannuation surcharge
introduced on high income
earners’ contributions; incometested tax rebate for private
health insurance; Medicare levy
surcharge on high income earners
without private hospital insurance
Medicare levy increased from
1.5% to 1.7% in 1996-97 to
fund firearms buyback
scheme
R&D concession reduced
from 150% to 125%
Charter of Budget Honesty Act;
concessional treatment of Y2K
related software and equipment
expenses; infrastructure
borrowing tax offsets scheme
replaced infrastructure bonds
scheme; non means-tested
personal savings tax offset
replaces planned government cocontribution to superannuation;
tax rebate for expenditure on
landcare works for primary
producers with incomes up to
$20,000
Release of ANTS package of
tax reform proposals
including 10% GST including
on food, all GST revenue to
states in return for
elimination of state
transaction taxes: Ralph
Review of Business Taxation
appointed to assess cutting
company tax rate to 36%
Taxpayers’ Charter
introduced; Prime Minister
Howard announces review of
the tax system
Smith RS43 ATRF Page 245 Thursday, November 11, 2004 3:00 PM
A PPEND IX
Date
Judicial/Constitutional Tax Policy Legislation and
Changes
1999
Intergovernmental
Agreement on the Reform of
Commonwealth-State
Financial Relations; Royal
Assent for GST legislation
Non means-tested 30% rebate on
private health insurance
premiums; first phase of WST
abolition; most goods previously
taxed at 32% reduced to 22%
rate; tobacco excise changed to
per stick from weight basis; first
stage of business tax reforms
including capital gains tax changes
(50% discount for individuals and
trusts for assets held more than
one year, removal of averaging,
indexation frozen; 50% CGT
exemption on goodwill sale of
active small business assets held
for 15 years, exemption for sale of
small business at retirement;
venture capital concessions, scripfor-scrip rollover relief) and
replacement of accelerated
depreciation
2000
Royal Assent for New
Business Tax System
legislation
GST replaces WST and some
state and territory taxes such as
hotel bed taxes; wine equalisation
tax and luxury car tax introduced;
fuel and alcohol excises adjusted;
Family Tax Benefit (FTB) replaces
Family Tax Assistance, Parts A & B;
one-off aged persons savings
bonus and self-funded retirees
supplementary bonus;
depreciation pooling for low value
assets; PAYG replaces existing
payment and receiving systems
(PAYE, PPS, provisional tax) with
withholding tax of 48% applied if
no ABN is quoted; new provisions
to limit income tax avoidance
through alienation of personal
services income;
245
Other
State premiers sign
agreement, later revised to
reflect changes to GST, for
states to receive all GST
revenues net of
administration costs, and
Commonwealth to cease
paying financial assistance
grants and revenue
replacement payments; ATO
takes over collection of
excise; (Ralph) Review of
Business Taxation reports;
(Vos) Tax Consultative
Committee reports on
scope of GST exemptions
for health services,
education, religious services
and non-commercial
activities of charities, and
transitional arrangements for
motor vehicles; changes to
proposed GST treatment of
charities
Government announces East
Timor levy of 0.5% on
incomes above $50000 and
1.0% on incomes above
$100000 (not implemented)
Company tax rate 34% for
2000-01 tax year; top
marginal personal income tax
rate 47%, minimum rate 17%;
exemption $6000; number of
steps in scale 4; draft entity
tax legislation released then
deferred; review of state
business taxes in Victoria
Smith RS43 ATRF Page 246 Thursday, November 11, 2004 3:00 PM
2 46
T AXIN G P O P U LARIT Y
Date
2001
2002
2003
2004
Judicial/Constitutional Tax Policy Legislation and
Changes
States’ FID and stamp duties on
share transactions abolished;
further business tax reforms
including introduction of
consolidation regime for company
taxation, refundable excess
imputation credits for individuals
and super funds; CGT relief for
investors in listed investment
companies; Simplified Tax System
(STS) for small businesses
(turnover <$1 million p.a.); first
child tax rebate (‘Baby Bonus’);
FBT concessions to non-profit
organisations capped, primary
producer concession for remote
housing expanded; new
endorsement requirements for
charities and non profit
organisations; charitable tax
concessions for donations to
Prescribed Private Funds; fuel tax
indexation abolished; national
beer excise system agreed by
Commonwealth and States;
Personal income tax cuts through
raising tax thresholds; tax relief
for demergers of companies and
trusts
Other
Company tax rate 30% for
2001-02 tax year; indefinite
deferral of implementation of
tax value method (TVM);
entity legislation for taxing
discretionary trusts deferred
for 12 months; R&D tax
offset for small companies;
premium tax concession for
additional R&D expenditure;
refundable tax offset for
large scale film production;
(Trebeck) Fuel Tax Inquiry
appointed; OECD report
identifies Australia’s tax
concession for offshore
banking as a potentially
harmful tax practice;
Charities Definition Inquiry
reports; review of state
business taxes in W.A.
reporting February 2002.
Senior Australians’ tax offset
extended; superannuation
tax concessions extended for
self employed, spouses,
children and recipients of the
first child tax rebate; Board
of Taxation recommends
against entity tax regime
Changes announced to fuel excise Top marginal personal
taxation from 1 January 2008;
income tax rate 47%,
diesel fuel rebate scheme and
minimum rate 17%;
customs and excise concessions exemption $6000; number of
and grants for fuel ethanol and
steps in scale 4;
biodiesel replaced with new
grants scheme
Personal income tax cuts through Top marginal personal
raising tax thresholds; NSW
income tax rate 47%,
extends and restructures land
minimum rate 17%;
taxation
exemption $6000; number of
steps in scale 4; FTB income
test liberalised; lump sum
payment of $600 to FTB
recipients; Bill to replace
common law definition of a
charity with statutory
definition abandoned; first
child rebate abolished and
replaced with $3000
maternity payment
Smith RS43 ATRF Page 247 Thursday, November 11, 2004 3:00 PM
BOARD OF GOVERNORS,
RESEARCH DIRECTOR AND SECRETARIAT
Chairman
The Hon. L.J. Priestley Q.C. BA, LLM (Hons) (Sydney), Grad Dip Hum,
BA Latin (Hons) (UNE), FTIA
Board of Governors
D J Collins B Com (Hons) (Birm)
Adjunct Professor in Economics, Macquarie University
G S Cooper BSc. (Econ) (Hons) (Ulster) FCA, FTIA
Director, Greenwood & Freehills
P G Dowling BA (Acct)(Canberra), FCPA, FTIA, FAICD
Company Director and Consultant
R A Gelski BA, LL B (Hons) (Sydney), LL M (London), FTIA
Partner, Blake Dawson Waldren
I Langford-Brown FCA, FTIA
Chartered Accountant
G J Lehmann BA, LL M, FTIA
Partner, Pricewaterhouse Coopers
J H Momsen LL M(Hons) (Sydney), FTIA
Barrister-at-Law
D G Russell RFD, QCBA, LL M, FTIA
Barrister-at-Law
A M Soutter BA (Monash), MBA
Consultant
K Spence B Econ and Commerce (Hons) (Melb) Gd Dip Tax Law (Monash),
FTIA
Partner, Shaddick and Spence
Secretary
N Rowland, FTIA
Chief Executive Officer, Taxation Institute of Australia
Research Director
N A Warren BCom (Hons), Ph.D (UNSW)
Associate Professor of Economics, Australian Taxation Studies Program,
Faculty of Law, University of New South Wales
Smith RS43 ATRF Page 248 Thursday, November 11, 2004 3:00 PM
INDEX
Barton, Edmund
on direct taxation, 46–7, 48
basic wage, 63, 64 note
benefit taxes, 13, 23 note, 24, 63, 80, 90
see also earmarking; hypothecation
Berry, Sir Graham
and land tax, 33
Board of Taxation
report on charities, 176
and review of international tax arrangements,
164
Boston Tea Party, 8
'bottom of the harbour' schemes, 117
bracket creep, 109
broad-based consumption taxes (BBCT), 95, 148
in Europe, 12
High Court and, 72
Option C and, 121
see also consumption taxes; GST; value-added tax
Bruce, S. M., 53
see also Bruce–Page government
Bruce–Page government
and direct taxation, 60
and income tax, 56, 57
and land taxes, 51 note, 52 note
business cycle
and taxation, 77–8
business franchise fees, 70, 94, 150–1
1975–76, 116
1984–85, 118
1990–91, 125
2002–03, 159
business tax expenditures, 165
business taxes
reform of, 149, 153–4, 160–4
A New Tax System (ANTS), 148–60, 178, 179, 196,
199
and cash economy, 180
and charities, 176 note
and company tax, 160
and gambling taxes, 132
and savings bonus for seniors, 169
social effects of, 158
and tax avoidance and evasion, 179
and wine equalisation tax, 141
see also GST
Accord see Prices and Incomes Accord
ad valorem royalties
mining, 98
ad valorem tariffs, 18–19
alcohol
duties on, 10, 139
government role in industry, 143–4
social costs of abuse of, 139
taxation and abuse of, 143
see also liquor taxes
Asprey Taxation Review Committee, 110–11, 112,
121, 197
and death taxes, 87, 198
and 'sin' taxes, 132
assessed taxes, 13
Auditor-General
on GST as Commonwealth tax, 152–3
Australia
colonisation of and taxation, 7–8
Australian Bureau of Statistics (ABS)
on GST as Commonwealth tax, 152
Australian Business Number (ABN), 179
Australian Council of Trade Unions (ACTU)
and taxation, 123
Australian Democrats
and GST, 156, 162 note
Australian Labor Party
and GST, 156 note
and land taxes, 49
see also Curtin government; Fisher government;
Hawke government; Keating government;
Whitlam government
avoidance see tax avoidance
capital gains
non-taxation of, 44 note, 64 note, 105, 106
note, 114, 117
taxation of see capital gains tax (CGT)
capital gains tax (CGT)
taxation of, 110, 111, 121, 123, 124, 160, 161,
162, 163–4, 193, 194–5
capital taxes, 180 note, 181, 183, 187
and consumption taxes, 197
carbon tax, 145
cash economy
Baby Bonus see first-child rebate
bank account debit (BAD) tax, 95
248
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ANTS and, 180
Cash Economy Task Force, 180
casino licence fees, 128, 131 note
charities
definition of, 174–6
GST and, 174–5
tax deductions for donations to, 171–2, 174
taxation and, 171–6
Charter of Budget Honesty, 148, 165, 166, 167
Chifley, Ben
and income tax, 66
Chifley government
and income tax, 89
child endowment, 67, 111
National Welfare Fund and, 63, 64 note, 66
cigarettes see tobacco taxes
coal
tax on export of, 99
colonisation of Australia
and taxation, 7–8
commercial interests
and taxation, 13–14
see also propertied classes
Commission of Inquiry into Land Tenure 1976
(Commonwealth)
and land value, 84 note
Committee on Uniform Taxation
report of (1942), 59
Commonwealth land tax (1910), 36, 49–51, 52
note, 89
1914 amendment, 51
Commonwealth–state relations
ANTS and, 151–4
and customs and excise, 45, 46, 57, 79–80, 150–
1
financial, 46–7, 48, 55, 79, 80, 102 note, 151,
154, 160
and revenue sharing, 46, 48
tax competition, 46, 54–9, 74–6
mining taxation, 99
and tax sharing under 'new federalism', 95
and taxation, 45–6, 51, 54–9
taxation reform and, 198
see also grants system; uniform taxation
Company Duties Act 1899 (WA), 43
company tax, 42 note, 44, 52, 53, 57, 58 note, 64
note, 77, 105–6, 107, 111, 124, 194
avoidance of see under tax avoidance
cuts see under tax cuts
Draft White Paper and, 122
revenue from see under revenue
see also business taxes
competition between states
death taxes and, 85–6
tax concessions and, 81, 98
complexity of taxation system, 177–9, 181, 195–6
compliance see tax compliance
compliance costs see tax compliance costs
compulsion
and taxation, 10, 201
concessional deductions, 104
see also tax concessions
concessional rebates, 124
and tax deductions, 111
concessions see tax concessions
the Constitution
and customs and excise, 45–6, 68–9
and grants to states, 46
and revenue sharing, 46, 48
and tariffs, 45
consumer choice
and tobacco taxes, 136, 137
consumption taxes, 10, 11, 110, 121, 196–7, 203
and capital taxes, 198
in England, 12
reform of, 115, 124, 196–7; see also Option C
the states and, 70, 71, 94 note
see also broad-based consumption taxes; GST;
sales tax
Coombs Task Force
and revenue costs in tax system, 110
corporate taxation see business taxes; company tax
Costigan Commission see Royal Commission on
Activities of the Federated Ship Painters and Dockers Union (1980–85, Commonwealth)
crude oil levy, 99–100, 116
Curtin government
and income tax, 64, 66
and uniform income taxation, 75–6
customs and excise duties, 13, 17, 35 note, 45, 46
note, 48, 60, 78
1896–97, 43
1901–02, 47
1918–19, 54
1928–29, 59
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
Smith RS43 ATRF Page 250 Thursday, November 11, 2004 3:00 PM
2 50
T AXIN G P O P U LARIT Y
1990–91, 125
1999–2000, 159
2002–03, 159
the Constitution and, 45–6, 68–9
and income tax, 41–2
New South Wales, 19
1875, 14
on petroleum products see fuel taxes
revenue from see under revenue
customs duties, 11, 60
and direct taxation, 21
see also customs and excise duties
cyberspace
taxation of, 182, 183, 188
see also e-commerce
Deakin, Alfred
and financing of old-age pension, 48–9
and land tax, 50, 82
death taxes, 24, 25–7, 51, 52 note, 85–8, 86, 87, 88,
110, 122, 123, 195, 197–8
avoidance of see under tax avoidance
revenue from, 85
see also estate duties; gift duties; inheritance taxes;
wealth taxes
defence spending
and taxation, 78
demand management
taxation and, 77
see also Keynesian demand management
democracy
and broad-based taxes, 14
and direct taxation, 14, 21
and indirect taxation, 12
and taxation, 14
dependent child rebate, 111
dependent spouse rebate, 111 note, 112 note
Depression (1890s)
and income tax, 37
and taxation, 21
Depression (1929–30s)
and income tax, 58
and indirect taxation, 58, 60
and taxation, 59, 60–3
deregulation of capital, product and labour markets,
147
development
land taxes and, 29
differentiation of taxation rates, 22, 23, 38, 104
direct taxation, 11 note, 13, 14, 22, 23, 46 note, 48,
200
Bruce–Page government and, 60
Commonwealth and, 46–7, 54, 55–6, 59, 60
and social reform, 21
and tax incidence, 70
see also death taxes; income tax; land taxes; wealth
taxes
dirty money see money laundering
discretionary trusts
taxation of, 160, 162–3
Disraeli, Benjamin
on taxation, 7
Dividend Duties Act 1902 (WA), 43
dividend income
tax on see withholding tax on dividends
donations to charities
and taxation, 171–2, 174
double taxation, 23 note, 32, 83, 187 note
of dividends, 64 note, 107, 111, 124
international tax arrangements and, 182, 184
Downing Inquiry
and tax reform, 107–8, 110, 121
Draft White Paper on Reform of the Australian Taxation, 121–3
duties on alcohol, 10, 139
see also liquor taxes
e-commerce
and taxation, 183–4, 188–9
earmarking
of tax revenue, 193
of gambling tax revenue, 127, 128–9
of tobacco tax revenue, 139
see also benefit taxes; hypothecation
economic growth and development
taxation system and, 199–200
economic stabilisation
taxation and, 73–8, 200
employment
income tax and, 67
entertainments taxes, 54 note, 62, 89
entity taxation, 161, 163
environmental concerns
and fuel taxes, 126, 144, 145, 146
equity
taxation and, 22, 200
see also social reform
estate duties, 25, 51, 85, 87, 110, 112, 197, 201
1918–19, 54
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IND EX 251
1928–29, 59
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
inflation and, 86
ethanol
tax concessions for, 145, 146
Eureka Stockade, 14, 16
European Union
and corporate taxation, 187
excise duties, 11
High Court and, 68–72, 96 note
see also customs and excise duties
exemptions
from fuel taxes, 144
from income tax, 39, 40, 42, 52, 53 note, 64
from land taxes, 34, 83
from payroll tax, 93
from sales tax, 61, 74
and tax avoidance, 117
from wholesale sales tax, 115
Fadden government
and income tax, 64
family allowance, 111, 112 note, 120 note
family assistance, 149, 158, 171, 194
Federation
taxation and, 23, 45
Fightback!, 148, 160
financial autonomy/subordination of the states, 55,
79, 80
Financial Emergency Tax (Western Australia), 59
financial institutions duty (FID), 94–5
financial services
taxes on, 94–5
first-child rebate, 171
first world war
debt from, 57
financing of, 51
fiscal drag, 109, 110 note, 113
'fiscal issue', 23, 39
Fisher, Andrew
on land tax, 49–50
see also Fisher government
Fisher government
land tax, 36, 49–51, 89
flat-rate tax
company, 44, 53
income, 39, 40, 41 note, 42, 112 note
land, 33, 34
unemployment, 60
flour tax, 62 note
food
GST and, 154, 155–7
foreign-source income
taxation of, 117, 124–5, 164
see also international tax arrangements
foreign tax credit system, 124–5
franchise taxes, 150
High Court and, 72
Fraser government
and crude oil levy, 100
and death taxes, 88
and foreign tax credit system, 117
and tax avoidance, 118
and tax indexation, 113–14
and tax reform, 111–12, 113–14
and tax sharing, 95
free trade
the Constitution and, 45, 92
High Court and, 92
and protection, 17–18
fringe benefits
concessions for company car use, 146
non-taxation of, 105, 106 note, 117
taxation of see fringe benefits tax (FBT)
fringe benefits tax (FBT), 124, 193
Fuel Taxation Inquiry, 144–5
fuel taxes, 96 note, 126, 144–6
exemptions from see under exemptions
indexation of, 144, 145, 146, 154
full tax imputation, 124, 194
gambling
government role in, 127, 130–1, 132–3
social costs of, 130, 131, 133
gambling taxes, 81, 89–90, 126, 127–33, 160
1975–76, 116
1984–85, 118
1990–91, 125
2002–03, 159
rates of, 129 note
revenue from see under revenue
gaming machine licence fees, 128
Gaol Fund, 10, 11
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T AXIN G P O P U LARIT Y
Garran, Andrew
on land taxes, 34–5
Garran, Robert R.
on excise duties, 68, 69
George, Henry
and land tax, 30–1, 32, 42 note, 82, 84
mining tax and, 97
see also single tax and single taxers
gift duties, 25 note, 85, 110, 112, 197, 201
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
inflation and, 86
globalisation
and business taxation, 164, 184, 201–2
gold licence fees, 15–17
New South Wales 1875, 14
gold profits
taxation of, 124
gold rushes
and taxation, 14–16, 27, 43, 46 note
goods and services tax (GST) see GST
graduation of taxation rates, 22, 23, 39, 122
Commonwealth land tax, 49
and economic stabililisation, 73
grants system, 46, 48, 49, 55, 57, 80, 89, 93, 96,
102 note
and state taxation policy, 81
see also per capita grants system
group schemes
and income tax, 65 note
GST, 96 note, 196, 197
and charities and not-for-profit organisations,
174–5
and e-commerce, 184
and economic efficiency, 155 note
Fightback! and, 148
and food, 154, 155–7, 158
and gambling taxes, 132, 133
and income tax, 193
and income tax cuts, 155, 157, 158, 160, 193
and simplification of indirect taxes, 179
and 'sin' taxes, 126–7
as 'state' tax, 152, 199
see also A New Tax System (ANTS)
harmonisation of Commonwealth and state taxation,
58
see also uniform taxation
Hawke government
and death duties, 122, 195
resources rent taxation system, 100
taxation reform, 119–25
and wealth tax, 122
see also National Taxation Summit; 'new (cooperative) federalism'; Prices and Incomes Accord
health insurance
subsidy for, 171
tax incentives for, 167, 195
see also private health insurance rebate
Higgins, Justice Henry Bourne
on excise, 68
High Court of Australia
and 1910 land tax, 50
and broad-based consumption taxes, 72
and excise duty, 68–72, 92, 96 note, 149–51
and franchise taxes, 72, 150
and free trade, 92
and liquor and tobacco taxes, 128 note
and payroll tax, 92 note
and receipts duty on wages and salaries, 92–3
and sales tax, 68, 69–70, 80
and stamp duty, 92
and state taxing powers, 68–72, 92
and tax avoidance, 117
and tobacco consumption tax, 93
and uniform income taxation, 76
High Wealth Individuals Task Force
and tax avoidance by the wealthy, 179
Holder, Frederick
on direct taxation, 47
hotel tax
Victoria, 71, 89
household production (unpaid), 109 note, 111 note,
194
Howard government
and business tax reforms, 149, 160–4
and charities, 176
and fuel taxes, 145–6
and GST, 149, 152, 199; see also GST
tax policy, 148
see also A New Tax System (ANTS)
Hughes, W. M. (Billy), 53
see also Hughes government
Hughes government
and income tax, 52
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IND EX 253
Hume, David
on taxation, 12, 116
Hunter, John (Governor)
and taxation, 9
hypothecation
of tax revenue, 193
of gambling tax revenue, 127, 128–9
of tobacco tax revenue, 139
see also benefit taxes; earmarking
imports
taxes on, 10, 11, 13; see also customs duties
imports tariffs see tariffs on imports
income-splitting, 105 note, 107, 118
income tax, 11 note, 24, 33, 34, 36–44, 56–9, 63–7,
78, 89, 96, 102–8, 180, 187 note, 192–4
1896–97, 43
1901–02, 47
1915, 24, 52–3, 122
1918–19, 54
1928–29, 59
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
avoidance of see under tax avoidance
concessional deductions, 104
cuts see under tax cuts
damaging effects of, 103
Draft White Paper and, 121–2
in England, 22
exemptions from see under exemptions
and inflation, 103, 105
and Keynesian demand management, 74
and land tax, 32, 33, 37, 43, 83
and morality, 40, 103
New South Wales 1875, 14
objections to, 40
rebates, 77, 78, 104 note
revenue from see under revenue
the states and, 57, 59, 64, 74, 75, 79, 80
surcharge, 78
surtax, 60
and tax sharing under 'new federalism', 95
uniform, 58–9, 64–5, 75–6, 79
Victoria, 92
and wages, 113
Income Tax Assessment Act 1915 (Commonwealth),
24
indirect taxation, 11 note, 12, 14, 22, 23, 46 note,
60, 114–16, 200
Depression (1929–30s) and, 60
reform of, 147–8, 154–60; see also A New Tax
System (ANTS)
and tax incidence, 70
see also broad-based consumption taxes; consumption taxes; customs duties; excise duties;
GST; sales tax
individual taxation
and joint taxation, 109 note, 111 note
Industry Commission
and tax privileges of charities, 173–4
inflation
and estate and gift duties, 86
and income tax, 103, 105
and land taxes, 82–3
and taxation, 73, 77, 108–14, 204
inheritance taxes, 25
international tax arrangements
Australia and, 201–2
new, 189–91
review of, 164
threats to, 181–9
see also cyberspace; e-commerce; foreign-source
income; globalisation; multinational companies; tax havens
international tax treaty system, 182 note, 183, 184–
5
internet gambling, 132
investment allowance, 105, 114, 124
investment income, international
taxation of, 181, 182, 184, 194
Joint Committee on Public Accounts (JCPA)
and tax compliance costs, 178
joint taxation
and individual taxation, 109 note, 111 note
a just tax, 7, 22
Keating government
and L-A-W income tax cuts, 148, 168 note
and superannuation guarantee charge, 168
and taxation alcoholic fruit-based drinks, 142
Keynes, John Maynard
and macroeconomic management, 73
Keynesian demand management
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T AXIN G P O P U LARIT Y
taxation and, 74
King, Philip Gidley (Governor)
and taxation, 9, 10
Knibbs, Sir George
and taxation, 49 note, 52
L-A-W income tax cuts, 148, 168 note
La Trobe, Charles (Governor)
and gold licence fee, 15
labour movement
and land taxes, 32, 34
and protectionism, 18
and social reform, 21
see also Australian Labor Party; socialism
land
accumulation of by pastoralists, 28–9, 35
disaggregation of, 29, 84
sales, 19
valuation, 84 note
land taxes, 22–3, 28, 29–36, 82–5, 89
1896–97, 43
1901–02, 47
1910 see Commonwealth land tax (1910)
1918–19, 54
1928–29, 59
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
administration of, 84
Bruce-Page government and, 51 note, 52 note
cut in, 62
Draft White Paper and, 122–3
in England, 22
exemptions from see under exemptions
and income tax, 32, 33, 37, 43, 83
New South Wales 1875, 14
revenue from, 83
and wealth taxes, 83, 84, 85
see also single tax and single taxers; 'unearned
increment' in value of land
Landed Estates Tax Act 1877 (Vic.), 33
Latham, Sir John
on excise duty, 71
legacy duties, 25 note, 27 note
legislation
and taxation
in colonial Australia, 8–9
licence fees, 13, 15
Ligertwood Committee
and tax avoidance, 106–7, 108
limited partnerships
taxation of, 161, 162, 163
liquor franchise fees, 150
liquor taxes, 81, 115, 126, 139–44
rates of, 140–1
see also alcohol; wine
Local Government Act 1906 (NSW), 35
low- and middle-income earners
tax burden on, 67, 104, 105 note, 194
see also wage and salary earners
luxuries
taxation of, 12, 13, 115
macroeconomic management
taxation and, 73–8
marginal tax rates
income tax, 52, 111, 194
inflation and, 109
marital property, 86
rights, 26 note
marriage
death taxes and, 25
married women
under British law, 38
death taxes and, 25
property rights of, 25, 26 note, 38
Mathews Committee
and inflation and taxation, 110, 112–13, 114
matrimonial property see marital property
McMahon government
and review of taxation, 110
Medicare Levy surcharge, 171 note
Menzies government
and company tax, 77
and income tax, 89
and land tax, 82
and National Welfare Fund, 63, 67
and sales tax, 77, 78
and tax avoidance, 106–7
taxation reform, 104
and uniform taxation, 75
migration
and taxation, 14–15
Mill, J.S.
on taxation, 23, 25, 30, 38, 41, 70, 82, 126
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IND EX 255
mineral rents
taxation of, 98
mineral taxes see mining taxes
minerals
rights to, 97, 98–9
mining industry
mineral levies and, 98
and tax concessions, 99
mining royalties, 96, 98
mining taxes, 96–101
money laundering, 188
morality
income tax and, 40, 103
protectionist tariffs and, 18
see also 'sin' taxes
motor taxes, 81, 90–2, 115
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
2002–03, 159
multilateral fiscal body
proposal for, 186–8
multinational companies
and taxation, 182, 187 note
National Commission of Audit
and tax expenditures, 148, 166, 167
National Taxation Summit, 121–5, 160
National Welfare Fund, 63–7
net worth tax, 107
'new (cooperative) federalism', 95, 199
'new federalism', 95
New South Wales
company tax, 44 note
customs and excise duties, 19
customs duties, 34
death duties, 25–6
financial services taxes, 94
and free trade, 19
gambling taxes, 90 note
and gold licence fees, 15–16
income tax, 34, 39–40, 44 note
land taxes, 32–3, 34–5
motor taxes, 91
petroleum franchise fees, 94
taxation, 17
taxation 1875, 14
taxation 1896–97, 43
unemployment relief and social service taxes, 59
New Tax System, A see A New Tax System (ANTS)
New Zealand
GST and income tax cuts in, 155 note
not-for-profit organisations
GST and, 174–5
taxation and, 171, 172
oil see crude oil levy
old-age pension, 67
financing of, 48–9
Option C
in Draft White Paper, 121, 122, 123–4
Organisation for Economic Cooperation and Development (OECD)
and international tax treaty system, 184–7
and taxation of e-commerce, 183, 188–9
on wealth taxes, 198
Orphan Fund, 10, 11
outlays
taxes on, 71
Page, Dr Earle, 53
and per capita grants system, 55, 57
and taxation, 57
see also Bruce–Page government
partial imputation, 111
passive smoking, 137–8
pastoral leases
and Commonwealth land tax, 50
pastoralists
and accumulation of land, 28–9
and direct taxation, 17–18, 23–4
and land taxes, 36
see also propertied classes
pay-as-you-earn (PAYE) tax withholding system, 60,
61 note, 65–6
see also wages taxes
Pay As You Go (PAYG), 179 note
payroll tax, 81, 93
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
2002–03, 159
exemptions from see under exemptions
and National Welfare Fund, 63
the people
Smith RS43 ATRF Page 256 Thursday, November 11, 2004 3:00 PM
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T AXIN G P O P U LARIT Y
and taxation, 7
per capita grants system, 49 note, 55
persuasion
and taxation, 9, 201
Petrol Case (1926)
and excise, 68
and sales tax, 69, 70
petrol tax, 91
see also fuel taxes
petroleum franchise fees, 94
petroleum products
customs and excise duties on see fuel taxes
petroleum substitutes
tax concessions for, 144, 145
see also ethanol
Petty, Sir William
on taxation, 12
Phillip, Arthur (Governor)
and taxation, 8, 9
piped gas franchise fee, 94
‘Pitt Street farming', 105
poll taxes, 42
population
and taxation, 17–18
Premiers' Conferences
1916
and uniform taxation, 55
1919
and direct taxation, 55–6
Premiers' Plan
and taxation, 61
prescribed payments tax, 120
Prices and Incomes Accord
and taxation, 120
private health insurance rebate, 170–1
privatisation of public utilities and enterprises, 147
Probate and Succession Duties Act 1876 (SA), 27
probate duties and fees, 13, 24, 25–6
1896–97, 43
1901–02, 47
New South Wales 1875, 14
Queensland, 86
Productivity Commission (PC)
inquiry into gambling industry, 131, 132
progressive taxation, 13, 22, 23, 81, 197
and economic stabililisation, 73
income tax, 40–1, 52–3, 65, 103
inflation and, 109
land taxes, 32, 49–50
propertied classes
and death taxes, 87
and direct taxation, 13–14, 23–4
and income taxes, 23–4, 37
and land taxes, 23–4, 34, 35, 36, 37, 50
and taxation, 10, 11
see also commercial interests; pastoralists
protectionism, 17–18
protectionist tariff, 18
provisional tax, 65 note
public benevolent institutions (PBIs), 172, 173
and taxation, 171 note
Queensland
company tax, 42 note, 44 note, 53 note
death taxes, 27, 85, 86
income tax, 39, 41–2
land taxes, 35–6, 98 note
probate and succession duties, 86
resource rents, 98 note
taxation, 17
taxation 1896–97, 43
withholding tax on dividends, 42 note, 44 note
Quick, Sir John
on excise duties, 68, 69
Ralph Review
and business taxation, 160–4
and tax avoidance, 160, 161–2
Real and Personal Estate Duties Act 1880 (Tas.), 33
rebates, 65 note
income tax, 77, 78, 104 note, 111
see also concessional rebates; dependent child
rebate; dependent spouse rebate
rebellion/revolution
and taxation, 7–8, 11, 12
receipts duty on wages and salaries, 92–3
reform see taxation reform
regressive taxation
consumption taxes, 81, 115
customs and excise taxation, 17
gambling taxes, 129 note
indirect taxes, 14, 23
'sin' taxes, 81, 126
tobacco taxes, 138–9
Reid, Sir George
and land and income taxation, 34
resource rents, 97 note
resource taxation, 97
see also mining taxes
resources rent tax (RRT), 42 note, 100
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retail sales tax, 115
retrospective taxation
in colonial Australia, 9
on income-splitting, 118
revenue
from Commonwealth land tax, 51
from company tax, 106, 122
cost to from donations to charity, 171
cost to from tax concessions, 165, 167
from customs and excise duties, 46, 48, 51, 57
from death taxes, 85
from fuel taxes, 144
from gambling taxes, 127–8, 129 note, 132, 133
from goods and services, 115
from GST, 151
from income tax, 37, 60, 83–4, 103, 104, 121–2
from inflation, 108–9
from land sales, 19
from land taxes, 83
from liquor taxes, 139–40
lost from tax avoidance/evasion, 121 note
from mineral taxes, 98, 99
from receipts duties, 93
from 'sin' taxes, 81, 126–7
from stamp duties, 93
from taxation, 13, 17, 22, 29
taxation and, 9, 200
from tobacco taxes, 133–4, 135, 136
revenue replacement payments, 150
road funding
fuel taxes and, 144
Royal Commission on Activities of the Federated
Ship Painters and Dockers Union (1980–85,
Commonwealth)
and tax avoidance schemes, 118
Royal Commission on Taxation (1920–24, Commonwealth), 56, 98 note
Royal Commission on Taxation (1932–37, Commonwealth), 58, 110
Royal Commission on the Constitution (1927–29,
Commonwealth)
and excise, 71
sales tax, 61, 77, 78
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
Draft White Paper and, 122
exemptions from see under exemptions
High Court and, 68, 69–70
and Keynesian demand management, 74
the states and, 68, 69, 80
see also wholesale sales tax
second world war
and direct taxation, 59
and income tax, 64, 74, 75, 79
and sales tax, 74
selection, 19
self-assessment
of income tax, 178
of land values, 50 note
services
GST and, 156
taxes on, 70–1, 93; see also GST
'sin' taxes, 80, 81, 89–90, 126–46
High Court and, 128 note
see also fuel taxes; gambling taxes; liquor taxes;
tobacco taxes
single tax and single taxers, 23, 30–1, 32, 34, 49, 83,
84
Smith, Adam
and tobacco taxation, 134
smoking
health costs of, 134, 136, 137
passive, 137–8
prevention of children taking up, 137
public campaigns against, 134–5
reduction of and taxes, 135, 136, 139
regulation of in public, 136, 137
social costs of, 137
social reform
land taxes and, 29
Option C and, 122
taxation and, 19–20, 21, 47, 51, 63–7, 111 note
see also equity; National Welfare Fund; old-age
pension; Prices and Incomes Accord; wealth
redistribution
Social Services contribution, 66
social tax expenditures, 165
socialism
and land taxes, 32, 35–6
see also labour movement
South Australia
company tax, 44 note
death taxes, 27
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T AXIN G P O P U LARIT Y
income tax, 34, 37, 38–9, 44 note
land taxes, 32–3, 34
motor taxes, 91
pay-as-you-earn (PAYE) tax withholding system,
65
petroleum franchise fees, 94
piped gas franchise fee, 94
sales tax see Petrol Case (1926)
taxation, 18
taxation 1896–97, 43
Stamp, Sir Josiah
on 1915 income tax, 52
stamp duties, 13, 26, 92, 94
1896–97, 43
1901–02, 47
1918–19, 54
1928–29, 59
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
New South Wales 1875, 14
the states and, 70, 81
Stamp Duties Act 1865 (NSW), 26
the states
competition between see competition between
states
and financial autonomy/subordination, 55, 79,
80, 102 note, 151, 154
see also Commonwealth–state relations; grants
system; uniform taxation
see also under each individual state
stock taxes, 13
Stone, John
on estate duty, 197
on GST as state tax, 152
Succession Duties Act 1886 (Qld), 27
succession taxes, 25, 26, 27
Queensland, 86
sumptuary taxes see 'sin' taxes
superannuation
compulsory, 169–70
tax concessions for, 124, 166, 167–70, 195
tax incentives for, 167
superannuation co-contribution, 169
superannuation guarantee charge (SGC), 168, 170
superannuation surcharge, 169
Surplus Revenue Act 1908 (Commonwealth), 48
tariffs on imports, 10 note, 11, 13, 45, 46, 46 note
Federation and, 45
and taxation, 17–18
see also ad valorem tariffs
Tasmania
company tax, 44 note
death taxes, 26–7
gambling taxes, 90 note
income tax, 33, 37, 41, 59
land taxes, 32, 33
taxation 1896–97, 43
tobacco consumption tax, 93–4
withholding tax on dividends, 37, 41, 44 note
tax avoidance
under ANTS, 179–80
company tax, 125, 160, 161, 162–3
courts and, 105
death duties, 25, 86–7
income tax, 103, 105–8, 116–19, 122
Ralph Review and, 160, 161–2
revenue lost because of, 121 note
tobacco taxes, 136–7
see also tax shirking
tax competition
in Australia, 46, 54–9, 74–6, 81, 85–6, 98, 99,
200
international, 182, 184, 185
tax compliance, 180–1, 201
and complexity, 177, 181
tax compliance costs, 178, 180
GST, 179
tax concessions, 165–6, 195
business tax, 166–7
and competition between states, 81, 98
death taxes, 85
income tax, 103, 105
industry, 124
mining industry, 99
for petroleum substitutes, 144, 145
superannuation, 124, 166, 167–70
and tax avoidance, 117
see also tax expenditures; tax subsidies
tax cuts
company tax, 160, 161, 162, 194
income tax, 124, 148, 155, 157, 158, 160, 193–
4
tax deductions, 65 note
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IND EX 259
and concessional rebates, 111
tax evasion
income tax, 103
revenue lost because of, 121 note
tax expenditures, 165–7
see also business tax expenditures; social tax
expenditures; tax concessions
tax havens, 117, 125, 182, 185, 186, 188
tax imputation, 162, 194
see also full tax imputation; partial imputation
tax incentives, 165, 167, 195
tax incidence
and direct and indirect taxes, 70
tax indexation, 112, 113–14
fuel taxes, 144, 145, 146, 154
tax integrity measures, 161
Tax Law Improvement Project (TLIP), 178
tax multiplier, 73, 74, 77
tax rebates see rebates
tax shirking, 147, 148 note, 150, 179, 184, 204
see also tax avoidance
Tax Simplification Task Force, 178
tax stabiliser, 73
tax subsidies for private provision of services, 167
tax treaties, international see international tax treaty
system
tax value method (TVM), 160, 161, 164
taxable capacity, 9
taxation
1849–2003, as percentage of GDP, 205
1896–97, 43
1901–02, 47
1918–19, 54
1928–29, 59
1938–39, 62, 67
1948–49, 77
1958–59, 90
1975–76, 116
1984–85, 118
1990–91, 125
1999–2000, 159
2002–03, 159
in colonial Australia, 8–20
and colonisation of Australia, 7–8
compulsion and, 10, 201
of consumption see under consumption
direct see direct taxation
and economic stabilisation, 73–8, 200
and equity, 22, 200
of imports see under imports
indirect see indirect taxation
the people and, 7
as percentage of GDP, 152
as percentage of GDP 1849–2003, 205
persuasion and, 9, 201
policy in postwar period, 102
and rebellion/revolution, 7–8, 11, 12
and revenue see under revenue
see also a just tax
Taxation Act 1884 (SA), 38
taxation reform, 192–204
business tax, 149, 153–4, 160–4
and Commonwealth–state relations, 198
consumption taxes, 115, 124, 196–7; see also A
New Tax System (ANTS)
Downing Inquiry and, 107–8, 110, 121
Fraser government, 111–12, 113–14
Hawke government, 119–25; see also Option C
Howard government see A New Tax System
(ANTS)
indirect taxes, 147–8, 154–60; see also A New
Tax System (ANTS)
liquor taxes, 143
Menzies government, 104
Whitlam government, 110–11
taxation system
and economic growth and development, 199–
200
future of, 201–4
intent and reality of, 199–201
obstacle to improvement of, 204
see also complexity of taxation system
terrorist approach to tax compliance, 177, 180
tobacco franchise fees, 150
tobacco industry
government role in, 134–5
and tobacco tax revolt, 136
see also smoking
tobacco taxes, 93–4, 115, 126, 133–9
avoidance of see under tax avoidance
rates of, 134, 135
regulatory fees on wholesalers and retailers, 135
and social costs of smoking, 135
and wholesale price, 135–6
transfer pricing, 117
trusts
taxation of, 161, 162–3
see also discretionary trusts
Turner, Sir George
on income tax, 41
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T AXIN G P O P U LARIT Y
'unearned increment' in mining
taxation of, 97, 98, 99, 100
'unearned increment' in value of land
taxation of, 29 note, 30, 31 notes, 32, 34, 42
note, 50, 82, 83, 97
unemployment benefits, 67
National Welfare Fund and, 66
unemployment relief taxes, 59, 60, 62, 63
uniform taxation, 74–6, 198
income tax, 58–9, 64–5, 75–6, 79
Premiers' Conference (1916) and, 55
Royal Commission on Taxation 1920–24 and,
56
Royal Commission on Taxation 1932–37 and,
58
unit royalties
mining, 98
United States of America (US)
and OECD and tax havens, 185–6
urban property market
land taxes and, 83
user pays
and alcohol taxation, 140, 141
and gambling taxation, 129–30
and tobacco taxation, 137–8
value-added tax (VAT), 110
see also broad-based consumption taxes
Victoria
company tax, 44 note
death taxes, 27
financial services taxes, 94
gambling taxes, 129 note
and gold licence fees, 15–16
hotel tax, 71, 89
income tax, 40–1, 44 note, 92
land taxes, 33
protectionist tariffs, 18–19
stamp duty, 92
taxation 1896–97, 43
voluntary subscriptions
and revenue, 9
Vos Committee
and GST-free activities, 174
wage and salary earners
and income tax, 63–4, 106, 109
see also low- and middle-income earners
wages
Accord and, 120
income tax and, 113
wages policy
taxation and, 63
wages taxes, 60, 63
see also pay-as-you-earn (PAYE) tax withholding
system
wartime profits tax, 54
wealth redistribution
broad-based consumption taxes and and, 197
note
death taxes and, 25, 88
income tax and, 52, 103, 200–1
land taxes and, 29, 32, 50–1
Option C and, 122
wealth taxes and, 197, 201
wealth taxes, 11 note, 22, 23 note, 80, 107–8, 122,
123, 197–8, 201
and death duties, 24
and land taxes, 83, 84, 85
Western Australia
company tax, 44 note, 53 note
death taxes, 27, 85
Financial Emergency Tax, 59
income tax, 43
land taxes, 33, 35
special tariff, 35 note
stamp duty, 92
taxation, 17
taxation 1896–97, 43
withholding tax on dividends, 44 note
Whitlam government
and death taxes, 88
and mining industry tax concessions, 99
and tax increases, 109
and tax on export of coal, 99
and tax reform, 110–11
wholesale sales tax (WST), 96 note, 115, 121, 141,
148
exemptions from see under exemptions
wholesalers
and sales tax, 61
widows' pensions, 67, 76
National Welfare Fund and, 66
wine
taxation of, 141
wine equalisation tax (WET), 141–3
withholding tax on dividends, 37, 41, 42 note, 44
women see married women
working class
and taxation, 12, 13–14, 18, 23
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World Bank
and passive smoking, 137–8
and tobacco taxation, 134, 136, 138–9
World Tax Organisation
proposal for, 186–8
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