The GST Debate - A Chronology


Background Paper 1 1997-98

John Harrison
Economics, Commerce and Industrial Relations Group
22 September 1997




Consumption Tax Taxonomy



Taxation reform is now unequivocally on the public policy agenda. The need for such reform has been made more urgent by the recent High Court decision on tobacco charges(1) which has exacerbated the vertical fiscal imbalance in Commonwealth-State financial relations. It is evident from the Government's announcements that a consumption tax will again be a significant element of coming taxation reform debates.(2)

This paper provides a chronology of milestones in the consumption tax debate since 1975 when the Asprey Taxation Review Committee recommended that Australia adopt a broadly based consumption tax. Its recommendations however were not taken up until 1980 when Mr Howard, the then Treasurer in the Fraser Government, proposed to introduce a broadly based indirect tax. Further significant debate surrounded the 1985 Taxation Summit, when the Hawke Government proposed to introduce a Broadly Based Consumption Tax (BBCT). Fightback! was the next major instalment in the consumption tax debate when Opposition Leader Dr Hewson proposed a Goods and Services Tax (GST) as the centrepiece of the Fightback! package. A review of more recent taxation reform policy highlights the GST as being off the political agenda. Since mid 1997 however, there appears to be momentum building for a revival of the GST debate.

It is interesting to note that the Australian situation is quite different to overseas experience where governments have increased their reliance upon consumption taxes as a source of revenue. There are 128 countries which operate a consumption tax known as the Value Added Tax (VAT).(3) Over the last two decades, nearly all of these countries have adopted this more modern form of consumption tax. Australia and the United States are the only OECD countries not to have a VAT.(4) Australia does have a wholesale sales tax on goods imposed at the Federal level while the US has a broad retail based sales tax imposed at the State level. (Refer to Consumption Tax Taxonomy attached which briefly describes the nature of various consumption taxes).

Despite the worldwide trend towards significant reliance on consumption taxes, the Australian experience has been that successive initiatives to introduce a GST have consistently failed on political terms. However, many participants in the tax reform debate believe that the GST option will keep coming back because of inherent problems arising from the existing tax system. The existing taxation laws are seen as complex and the system is costly to administer. It is seen as inequitable and economically inefficient, failing in terms of revenue adequacy and is prone to tax avoidance. The incremental approach to tax reform is considered by many to be no longer tenable and a more rational approach is deemed necessary. The GST is seen by some as an important tool which would help ameliorate some of these problems. For some however, it will only add to these problems. Accordingly, the pros and cons of a GST will be debated in the near future as a key component of taxation reform.

  1. The High Court of Australia brought down a combined decision in the cases of Walter Hammond and Associates v the State of NSW and others and Ha and anor v the State of NSW and others 1997. The decision which dealt with the imposition of franchise fees on tobacco has effectively declared all current State business franchise fees to be constitutionally invalid.
  2. 'GST: Howard's biggest gamble. Election battlelines drawn on tax reform.' The Australian, 14 August 1997.
  3. David Vos, Coopers & Lybrand, 'Tax Base Pressure Points', a paper presented at ATAX Tax Summit - 'Ten Years On: A New Agenda', September 1995.
  4. Consumption Tax Trends, Organisation for Economic Co-operation and Development, Paris, 1995.


Milestones         Details                                                        Source Documents             

1975               In 1972, the McMahon Coalition Government decided to           Preface to Asprey Taxation   
January            institute a public inquiry by a Committee into the operation   Review Committee Report.     
Asprey Taxation    of the taxation system 'which would put the Government in a    AGPS: Canberra, 31 Jan       
Review             position to have an overall look at tax policy.' The           1975.                        
                   Committee provided a comprehensive final report with detailed                               
                   recommendations covering many aspects of the taxation system.                               
                   The Committee reached the general conclusion that the                                       
                   taxation system should place greater reliance on taxes on                                   
                   goods and services by the inclusion of a broad-based tax.                                   

                   The then federal Labor Government stated that the              Australia. Senate. Governor 
                   recommendations of Mr Justice Asprey would be taken into       General's Speech, 9 Jul  
                   account in the 1975 Budget, with urgent consideration of the   1974, p. 7.      
                   restructuring of the taxation system.                                            
                   In the Budget, no reference was made to a broad-based          Australia. House Of  
                   indirect tax. The Labor Government concentrated on changes to  Representatives.          
                   the personal income tax.                                       Appropriation Bill No 1, 19  
                                                                                  Aug 1975, p. 62. 

1975-1980          The newly elected Federal Coalition Government in late 1975                                 
                   expressed a similar lack of interest in goods and services                                  
                   tax reform, a position it maintained for the ensuing five                                   

1980-1981          In November 1980, the then Treasurer, Mr Howard in the Fraser  Australia. House of          
Treasurer          Coalition Government, announced that the Government had        Representatives.             
proposes Broadly   decided to examine certain options for change to the present   Hansard, 12 Mar 1981, p.     
Based Indirect     taxation system-in particular, the option of changing the tax  758.                         
Tax                mix by shifting the burden to indirect consumption taxes                                    
                   thereby reducing the burden of income taxes.                                                

                   In February 1981, the Treasurer made a submission to Cabinet   Australia. House of          
                   proposing a broad-based indirect tax, with a number of         Representatives. Hansard,    
                   options. Cabinet rejected the proposal.                        24 Feb 1981, p. 20.          

1981               In March 1981, the Treasurer, Mr Howard issued a Ministerial   Australia, House of          
March              Statement to provide the House with an opportunity of          Representatives. Hansard,    
Taxation System -  debating the present taxation system, and more specifically,   12 Mar 1981, p. 758.         
Ministerial        detailing reasons for the Government's decision not to                                      
Statement          introduce a broad-based indirect tax. The Treasurer stated                                  
                   that a multi-stage VAT was quickly rejected because it would                                
                   have imposed a considerable administrative burden on both                                   
                   taxpayers and collecting authorities. A retail turnover tax                                 
                   would have involved a very extensive licensing system, and                                  
                   the necessity for a significant increase in the number of                                   
                   taxpaying units. The simplest method would be to extend the                                 
                   existing wholesale sales tax to some goods (then exempt) and                                
                   to impose a tax on selected services.                                                       

                   The Treasurer stated that in deciding whether to broaden the                                
                   wholesale sales tax system, the Government did not want to                                  
                   increase its reliance on indirect taxation unless it could                                  
                   achieve a noticeable offset in personal tax reductions while                                
                   being anxious to minimise the inflationary consequences of                                  
                   collecting additional revenue. Detailed projections revealed                                
                   that these two objectives could not be achieved. Despite the                                
                   advantages of an increasing reliance on indirect taxes, the                                 
                   Government indicated that it was not prepared to squander the                               
                   gains made and maintained in the fight against inflation.                                   

                   The Government would continue its 'uncompromising attack upon                               
                   tax avoidance.'                                                                             

1983               In March 1983, the Hawke Labor Government was elected. The     ALP Policy Speech, Federal   
March              election platform included promises to reduce taxes for        Election Campaign Launch.    
Federal election   almost six million Australians, with the greatest tax cuts     Sydney Opera House Theatre,  
                   benefiting those on the lowest incomes, and to reform the tax  16 Feb 1983.                 
                   system, aiming for greater efficiency and equity. During the                                
                   election campaign and its aftermath, there was considerable                                 
                   public debate and concern about the integrity of the tax                                    
                   system in particular 'Bottom of the Harbour' tax schemes and                                
                   the growing cash economy.                                                                   

1984               In October 1984, the Prime Minister, Mr Hawke, announced the   Australia. Prime Minister    
December           staging of a Taxation Summit via a consensus style debate      (Bob Hawke). 'Government     
Taxation Summit    involving wide ranging representation from government,         Taxation Policy'.            
Announced          unions, business and community groups.                         Statement, 31 Oct 1984.      

                   In November 1984, Mr Hawke announced the Government's nine     Australia. Prime Minister 
                   tax reform principles, including commitments :                 (Bob Hawke), ALP Policy    
                   . to not increase the overall tax burden                       Speech, 13 Nov 1984.      
                   . to provide for personal income tax cuts                                 
                   . to counter tax avoidance and evasion                                                        
                   . to provide a simpler, fairer and more progressive tax system,                               
                     not disadvantaging people on welfare benefits, and                                          
                   . to reduce poverty traps, promoting investment, employment and                               

1985               In preparation for a Taxation Summit, submissions were         'Reform of the Australian    
June               invited and Treasury set about preparing a Draft White Paper.  Tax System'. Draft White     
Draft White Paper  The paper was subsequently released six weeks before the Tax   Paper, Canberra: AGPS, Jun   
                   Summit in July 1985.                                           1985.                        

                   The Draft White Paper considered :                                                          
                   . income tax cuts through reducing marginal income tax rates                                  
                   . introduction of new taxes such as the fringe benefits tax and                               
                     capital gains tax                                                                           
                   . introduction of identity cards which would be used to improve                               
                     the level of voluntary compliance and assist in reducing tax                                
                   . quarantining of negative gearing losses and the restricting                                 
                     of primary production losses                                                                
                   . introducing a tax on gold mining                                                            
                   . abolishing petroleum exploration and primary production                                     
                   . restricting film industry concessions                                                       
                   . tightening soil and water conservation concessions                                          
                   . abolishing concessional rebates on superannuation, life                                     
                     insurance, education, property rates and land tax expenses                                  
                   . replacing the existing medical rebate with a concessional                                   
                     rebate on medical expenses, and                                                             
                   . introducing a foreign tax credit system for the foreign                                     
                     source income Australian residents.                                                         

                   The above amounted to income tax base-broadening measures and                               
                   modest personal income tax cuts-collectively these                                          
                   initiatives were put forward as Option A.                                                   

                   Further, the White Paper argued strongly against a Wholesale                                
                   Sales Tax and for its replacement with a retail sales tax on                                
                   goods and services called a Broad-Based Consumption Tax.                                    
                   Options B & C were extensions of Option A.                                                  

                   Option B involved income tax base-broadening measures, a 5%                                 
                   consumption tax on most goods and services, a 10% wholesale                                 
                   sales tax on cars, wine and those goods in the highest                                      
                   category, and modest personal income tax cuts.                                              

                   Option C involved income tax base-broadening measures, a                                    
                   12.5% consumption tax on all goods and services, and major                                  
                   personal income tax cuts.                                                                   

1985               The Government and Treasury recommended Option C, but it was   Warren, Dr N. GST, the       
July               Option A which gained the ascendancy at the Summit. To many    long, winding road, Sydney,  
Taxation Summit    observers, it seemed that the main reasons Option C failed     Institute of Chartered       
                   were political, rather than economic.                          Accountants, 1996.           

                   The ACTU objected to the consumption tax and questioned                                     
                   whether all the pain was worth income tax cuts amounting to                                 
                   an extra $8 per week for workers. Welfare groups were                                       
                   concerned that the proposed goods and services tax                                          
                   compensation arrangements would not adequately protect social                               
                   welfare recipients. Employer groups did object to the new                                   
                   taxes on the business community but supported the consumption          
                   In the face of strong opposition, the Government was prepared  Grattan, Michelle and  
                   to consider changes to its preferred tax plan. These changes   Robinson, Paul, 'PM close              
                   included varying the rate of the consumption tax (proposed     to food tax deal', The Age,    
                   12.5%), exempting food from the proposed consumption tax or    4 Jul 1985: 2.     
                   providing compensation for the cost of food to low income      Bowers, Peter, 'Hawke had  
                   earners, exempting charities, fuel and building materials.     no choice but to opt for  
                   However, despite negotiations with business leaders and        damage control', The Sydney      
                   unions, no compromises were agreed to. Further difficulties    Morning Herald, 6 Jul 1985,       
                   followed when four key Cabinet Ministers decided that they     p. 1.                             
                   would not support a tax reform package which included a                                     
                   broad-based consumption tax.                                                                

                   In the end no clear consensus could be gained for any one                                   
                   option and so a minimalist approach was ultimately taken,                                   
                   this being Option A.                                                                        

1985               After the Tax Summit, the then Treasurer, Mr Keating           'Reform of the Australian    
September          announced the Government's tax reform proposals which          Taxation System', Statement  
Statement by the   involved some 22 measures to reform the Australian taxation    by the Treasurer, Canberra:  
Treasurer          system. The measures essentially provided income tax cuts and  AGPS, 19 Sep 1985.           
                   were aimed at improving fairness in the income tax system and                               
                   sought to reduce tax avoidance. Two of these important                                      
                   measures were the introduction of the Capital Gains Tax and                                 
                   Fringe Benefits Tax. Minor improvements were to be made to                                  
                   the existing wholesale sales tax, and no provision was made                                 
                   for a broadly based consumption tax.                                                        

Post 1985-1996     This decade of taxation reform was characterised by            Income Tax legislation       
Taxation reform    substantial income tax changes pursuant to the Labor           after 1985.                  
under Labor        Government's taxation reform program where the Income Tax                                   
                   Assessment Act 1936 grew substantially in detail and                                        
                   complexity. The essence of the long standing income tax                                     
                   regime was maintained, but with adjustments made to improve                                 
                   fairness, to reduce tax avoidance, and to increase the size                                 
                   of the tax base by including taxes such as capital gains and                                
                   fringe benefits tax.                                                                        

1990               The 1990 federal election focused on family issues generally,                               
March              taxation being more of a side issue. Following the election,                                
Federal election   the Opposition Leader Mr Peacock resigned and Dr Hewson was                                 
                   elected Leader of Liberal Party in April 1990, and Leader of                                
                   the Opposition.                                                                             

1990               With the Liberal and National Party endorsement for a GST,     Power, Julie, 'Nats Get      
October            Opposition Leader Dr Hewson and Shadow Treasurer Mr Reith and  with It : Support Libs on    
Beginnings of      Access Economics begin work on Fightback!                      Consumption tax'.            
Fightback!                                                                        Australian Financial         
                                                                                  Review, 29 Oct 1990, p. 4.   

1991               Dr Hewson released the Fightback! economic manifesto (some     Fightback! - It's Your       
November           650 pages) which included as its centrepiece, a Goods and      Australia, Canberra,         
                   Services Tax. Fightback! however, was an action plan for the   Liberal and National         
Release of         first year of a Coalition government, and was therefore much   Parties, 21 Nov 1991.        
Fightback!         more than a tax reform plan. The tax essence of the proposal                                
                   was a 15% GST (replacing the Wholesale Sales Tax), a $13                                    
                   billion dollar personal income tax cut, a $10 billion cut in                                
                   government expenditure partially offset by increasing other                                 
                   areas, including $3.6 billion in selected government programs                               
                   on Social Welfare, the abolition of State payroll taxes and                                 
                   substantial cuts in petrol excise duty and proposed schemes                                 
                   for savings. Fightback! also include changes to Medicare, the                               
                   labour market, to public service delivery as well as the sale                               
                   of a number of government-owned business.                                                   

Post November      To many observers, Fightback! was a complicated document and   The Mackay Report - Keynote  
1991               was very difficult to communicate to the community. These      - Why did Labor Win ?        
Fightback!         problems were highlighted in the media where Dr Hewson failed  Mackay Research Pty Ltd.     
discredited        to explain the detail of the tax and it was easy for the       April 1993.                  
                   Government to attack it. The Mackay Report (p.17) stated that                               
                   'Repeatedly, participants in this study referred to the                                     
                   implausibility of the Coalition's attempts to persuade the                                  
                   electorate to adopt a new tax-particularly a tax which seemed                               
                   complex and unpredictable in its effects.'                                                  

1991               Mr Keating succeeded Mr Hawke as Prime Minister.                                            

1992               The One Nation Statement was delivered by Prime Minister Mr    One Nation Statement by the  
February           Keating which promised that a re-elected Labor Government      Prime Minister. Canberra:    
One Nation -       could deliver the same personal income tax cuts as the         AGPS, 26 Feb 1992.           
response to        Coalition's Fightback! proposal to middle class voters but                                  
Fightback!         without the need for a GST. This gave voters a stark choice                                 
                   between a reduced income tax with no GST and a reduced income                               
                   tax with a GST.                                                                             

1992               Dr Hewson reconsidered Fightback! and relaunched it to make    Fightback! Fairness and      
December           the GST more acceptable to the community. The major            Jobs, Canberra, Liberal and  
Fightback!         provisions were to remove the goods and services tax on food   National Parties, 18 Dec     
Mark II            and child care through zero rating and provision for a         1992.                        
                   Rebuild Australia fund for new public works. Changes to                                     
                   Medicare, the $10 billion dollar cut in government                                          
                   expenditure and Jobsback package of labour market reforms                                   
                   remained unchanged.                                                                         

1993               Prime Minister Keating undertook a high profile media          Transcript, 'Losing the      
March              campaign against Fightback! focussing on the electorate's      unlosable: How the Liberal   
Federal Election   perceived fear of the GST, its permanence and its broader      Party lost the election',    
                   implications for the national lifestyle. Labor defeated the    Four Corners, 5 Apr 1993.    
                   Coalition in what some observers described as the 'unlosable                                
                   election' by discrediting the GST to the electorate. In        Bruer, Mark, 'Food for       
                   analysing reasons for the election outcome, observers noted    political thought', The      
                   that groups such as unions, business, social welfare,          Age, 6 Mar 1993, p. 23.      
                   students, pensioners, and public servants were all affected                                 
                   by Fightback! and were uncertain about its effect.                                          

1993               Dr Hewson speaking at a business breakfast in Kalgoorlie       Davis, Ian, 'Hewson digs in  
July               before the opening of the West Australian Liberal Party        on Fightback'.               
Fightback! demise  Conference, recommitted the Liberals to the central            Canberra Times, 25 Jul       
                   principles of Fightback!. This statement was attacked by Mr    1993, p. 1.                  
                   Aldred, then Liberal member for Deakin, Victoria, considered                                
                   a prominent rebel in the Party. Mr Aldred said 'I think we                                  
                   should dispense with the title Fightback! and with the notion  Millet, Michael, 'Fightback  
                   that we have to have a tightly integrated policy.'             Dead and Buried, says        
                   Fightback! was also rejected by former Shadow Treasurer, Mr    Reith', Sydney Morning       
                   Peter Reith who had retired to the backbench after the         Herald, 31 Jul 1993, p. 1.   
                   election. In a speech to a group of disenchanted Liberal                                    
                   supporters in Melbourne, Mr Reith stated that Fightback!                                    
                   should be consigned to the political graveyard.                                             

1993               Dr Hewson remains committed to the general principles of       Transcript, 'Leader of the   
November           Fightback! but states that Fightback!, minus the GST, will     Opposition surveys the       
Fightback!         form the basis for future policy.                              year'. Lateline, ABC         
without the GST                                                                   Television, 30 Nov 1993.     

1994               The Shadow Treasurer, Mr Downer says the large spending cuts   Kitney, Geoff, 'Big          
April              as outlined in Fightback! will be scrapped.                    spending cuts dumped by      
Fightback!                                                                        Opposition', Sydney Morning  
scrapped                                                                          Herald, 12 Apr 1994, p. 1.   
                   Dr Hewson declares the Fightback! policy is 'Dead and          Tingle, Laura and Stewart,   
                   Buried'.                                                       Cameron, 'Hewson pronounces  
                                                                                  Fightback! manifesto dead    
                                                                                  and buried', The             
                                                                                  Australian, 16 Apr 1994, p.3. 

1994               Mr Downer succeeded Dr Hewson as Leader of the Opposition.                                  

1995               Mr Howard succeeded Mr Downer as Leader of the Opposition.                                  

1995               Mr Howard, Leader of the Opposition, stated that a GST or      'Howard bans GST forever',   
May                anything resembling it was no longer Coalition policy… nor     The Age, 3 May 1995, p. 5.   
GST completely     will it be policy at any time in the future… it is completely                               
off the political  off the political agenda in Australia.                                                      

1995               A decade after the Hawke Government's Tax Summit, the          ATAX Tax Summit - 10 years   
September          University of New South Wales organised a conference in        On - A new Agenda,           
ATAX Tax Summit    Canberra. The conference-Tax Summit, 10 Years On, A New        Canberra, Old Parliament     
                   Agenda-reviewed tax reform over the last decade and examined   House, 18-20 Sep 1985.       
                   current issues.                                                                             

                   Only one paper examined the issue of whether the indirect tax  Phillip Anderson, 'Has       
                   base extension was off the political agenda. Mr Anderson, a    Indirect tax Base Extension  
                   partner of Arthur Andersen, provided a paper which questioned  Got A Future?', Paper        
                   whether the indirect tax base could be extended in the         presented to the ATAX Tax    
                   future. He saw that the sales tax was a much maligned tax in   Summit. Canberra, 19 Sep     
                   Australia and acknowledged that although it had deficiencies   1985.                        
                   it was low in its administrative and compliance costs. A GST                                
                   which would likely collect more revenue would also increase                                 
                   administrative and compliance costs. Mr Anderson thought that                               
                   further expansion of traditional indirect tax bases would                                   
                   only exacerbate problems which were already evident                                         
                   throughout the sales tax, excise and State indirect tax                                     
                   bases. A new services tax was possible, but would not come                                  
                   without similar problems. A possible area of expansion lay                                  
                   with business franchise fees although there was uncertainty                                 
                   about their Constitutional validity, which would likely be                                  
                   challenged particularly if such fees were broadened. Overall,                               
                   the future for indirect tax base extension was not bright.                                  
                   Anderson considered that an extension of the indirect tax                                   
                   base would have adverse consequences for business as                                        
                   governments would continue to concentrate the tax base                                      
                   expansion on business inputs rather than on consumer goods                                  
                   resulting in further problems and reduced competitiveness                                   
                   through higher business input costs.                                                        

1996               The GST was not an election issue. The Howard-Fischer          Australia. Shadow Treasurer  
March              Coalition came into government with an election platform       (Peter Costello), 'Meeting   
Federal election   promising no new taxes or increased taxes.                     our Commitments' Press       
                                                                                  Release, 15 Feb 1996,
                                                                                  Liberal Policy Launch
                                                                                  Statement, 18 Feb 1996.
                   For more than a year the Coalition Government dismissed tax    Henderson, Ian, 'Howard        
                   reform as being on the political agenda, emphasising in        resists GST pressure',        
                   particular, that there would be no GST in its first term of    Australian, 11 Nov 1996, p.4.      

Ongoing since      Extensive media comment calling for taxation reform by State   Various newspaper reports    
1996               Premiers and business and social welfare peak bodies,          including Field, Nina and    
May                including calls for a taxation summit and an inquiry similar   Grattan, Michelle 'Pressure  
Community calls    to the Australian Financial System Inquiry (Wallis inquiry).   mounts for tax reform',      
for taxation                                                                      Australian Financial         
reform                                                                            Review, 11 Nov 1996, p. 1.   
                   In July 1996, the Victorian Premier, Mr Kennett urged the      'Two Years for tax reform,
                   Prime Minister, Mr Howard to embrace a debate on tax, warning  says Kennett', Canberra       
                   Australia had only a two-year time frame for reform.           Times, 20 Jul 1996, p. 2.   

1996               Professor Officer, National Commission of Audit Chairman       Davis, Ian, 'Audit           
July               urged a review of the taxation system when speaking at an      Commission chief urges tax   
Audit Commission   Australian Society of Certified Practising Accountants         system reform', Canberra     
Chairman           luncheon on the Commission of Audit report.                    Times, 25 Jul 1996, p. 2.    
recommends tax                                                                                                 

1996               The Productivity Commission's first report Stocktake of        Stocktake of Progress in     
July               Progress in Micro-economic Reform supported the introductions  Micro-economic Reform,       
Productivity       of a broad-based consumption tax and radical reform of         Industry Commission,         
Commission reform  Federal-State finances.                                        Canberra, AGPS, July 1996.   
                                                                                  Ellis, Stephen, 'Radical     
                                                                                  Reform Program', Australian  
                                                                                  Financial Review, 19 Jul     
                                                                                  1996, p. 1.                  

1996               This joint conference of business and social welfare involved  Harrison, John, The          
October            over 200 peak body representatives from diverse sectors of     National Tax Reform Summit:  
ACCI/ACOSS         the community; Parliamentarians and public servants were not   a Summary of Outcomes,       
National Tax       invited. The Summit was convened to encourage broad community  Research Note No. 10         
Reform Summit,     discussion and increase awareness of the need for fundamental  1996-97, Canberra,           
Correcting the     tax reform in Australia.                                       Parliamentary Library.       
Balance            The Summit acknowledged that broad based reform was essential                               
                   to address serious deficiencies in the structure of the                                     
                   current tax system, and that such reform must have wide                                     
                   ranging community support and must be designed to ensure the                                
                   long term integrity of the tax system. Seven criteria for tax                               
                   reform were agreed-equity, economic efficiency, revenue                                     
                   adequacy, simplicity, transparency, cost and tax avoidance.                                 
                   It was a common view that reform of indirect taxes and income                               
                   and asset taxes should be approached simultaneously.                                        
                   The Summit strongly supported the rationalisation of the                                    
                   indirect tax structure-either through a broadening of the                                   
                   existing indirect tax base with exemptions for business                                     
                   inputs, or preferably, through a more uniform, broadly based                                
                   consumption tax applying to all goods and services, to                                      
                   replace both the wholesale sales tax and many of the existing                               
                   inevitable and distorting State taxes (such as Financial                                    
                   Institutions Duty, Debits Tax, Payroll Tax, Franchise Taxes).                               
                   In this context the Summit expressed strong support for the                                 
                   removal of indirect taxes from exports because they hindered                                
                   Australia's international competitiveness. There was no                                     
                   detailed discussion of a particular tax rate, but there was                                 
                   concern that a tax rate of 15% would pose too many problems                                 
                   for adequate compensation of the needy and those on social                                  
                   security. Throughout the conference, emphasis was placed on                                 
                   the need to protect those on social security and those on low                               
                   wages from any adverse changes.                                                             
                   The principle of reformed Commonwealth-State tax sharing                                    
                   arrangements allow the revenue base of States and local                                     
                   authorities to better match their spending responsibilities                                 
                   was strongly supported. This should be achieved by a fixed                                  
                   and well understood methodology for the sharing of taxes                                    
                   collected by the Commonwealth.                                                              

1996               The Small Business Deregulation Taskforce report recommended   Field, Nina, 'Time for       
November           that the number of wholesale sales tax rates be reduced at     business', Small Business    
Small business     the same time as some exempt goods have sales tax applied to   Deregulation Taskforce       
deregulation       them, thereby satisfying the 'revenue neutral' criteria.       Report, Canberra, AGPS, Nov  
taskforce                                                                         1996.                        
recommends fewer                                                                                               
tax rates in the                                                                  'Call for radical tax        
wholesale sales                                                                   surgery in small business    
tax system                                                                        report', Australian          
                                                                                  Financial Review, 1 Nov      
                                                                                  1996, p. 2.                  

1996               In December 1996, the Wallis inquiry into financial services   Australian Financial System  
December           conceded that recommendations on tax reform were out of        Inquiry, Final Report,       
Wallis inquiry     bounds for the inquiry although it had received submissions    (Wallis Report) Canberra,    
                   calling for such reforms. However, the issue of taxation       AGPS, March 1997.            
                   reform was noted by the inquiry to be of significant concern                                
                   in improving Australia's competitiveness.                      Kirby, James and Kerin,      
                                                                                  John, 'Wallis backs away     
                                                                                  from tax reforms',           
                                                                                  Australian, 13 Dec 1996, p.23.

1997               In November 1993, the Joint Statutory Committee of Public      JCPA Report No. 348, 'An     
March              Accounts in the Commonwealth Parliament published a report     Advisory Report on the Tax   
JCPA Report No     recommending the setting up of a broadly based Task Force to   Law Improvement Bill 1996',  
348 - Tax Law      rewrite the income tax law. In the following month, the        Canberra: AGPS, Mar 1997.    
Improvement        Government announced the Tax Law Improvement Project (TLIP).                                
Project terms of   The purpose of the project was to restructure, renumber and                                 
reference too      rewrite the income tax law. The terms of reference allow the                                
narrow             Project team to consider rewriting the existing tax law, but                                
                   not major policy changes. There have been ongoing criticisms                                
                   of the TLIP's terms of reference being too narrow, raised in                                
                   particular to the Joint Committee of Public Accounts. JCPA                                  
                   Report Nos 343 & 345 supported the project's terms of                                       
                   reference. However, in JCPA Report No 348, tabled in March                                  
                   1997, it was considered that the Tax Law Improvement Project                                
                   review did not go far enough and it called upon the                                         
                   Government to give TLIP a wider mandate. Given that the                                     
                   project's brief was to review income tax, there has been no                                 
                   consideration of a consumption tax                                                          

1997               At a Liberal Party function in Sydney, the Prime Minister, Mr  Dwyer, Michael, 'PM's tax    
May                Howard took steps to address the growing momentum of the tax   reform rules', Australian    
Prime Minister     reform debate. He stated that any taxation reform proposal     Financial Review, 26 May     
put taxation       would have to pass three tests :                               1997, p. 1.                  
reform back on     . it must generate more employment                                                            
the political      . it must help boost exports, and                                                             
agenda             . it must generate higher living standards, encourage                                         
                     risk-taking and provide greater economic incentives.                                        

                   In June 1997, the Prime Minister received endorsement for      Peake, Ross, 'PM gets                             
                   taxation reform from a national meeting of the Liberal Party,  endorsement for tax        
                   Parliament House, Canberra.                                    reform', Canberra Times, 18          
                                                                                  Jun 1997, p. 3.  

1997               A GST was given a higher profile in the taxation reform        'GST the answer to tax       
June               debate. The Treasurer, Mr Costello, blamed the taxation        dodgers', Australian         
GST raised         system for costing jobs and suggested that the introduction    Financial Review, 4 Jun      
profile in         of a broadly-based indirect tax would make tax avoidance       1997, p. 3.                  
taxation reform    harder.                                                        Transcript, 'Treasurer       
debate                                                                            explains his arguments for   
                                                                                  tax reform', AM, ABC Radio   
                                                                                  Program, 17 Jun 1997.        
                                                                                  Short, John and Henderson,   
                                                                                  Ian, 'Costello links jobs    
                                                                                  to tax reform', Australian,  
                                                                                  17 Jun 1997, p. 2. 
                   The Opposition indicated its position as being anti-GST in     Leader of the Opposition,    
                   that the tax does nothing to create jobs nor help family       Transcript of Doorstop       
                   incomes.                                                       Interview, Parliament House  
                                                                                  Canberra, 17 Jun 1997.       
                                                                                  Chamberlin, Paul and Das,    
                                                                                  Sushila, 'Labor, Coalition   
                                                                                  remain at odds on tax', The  
                                                                                  Age, 18 June 1997,  p. 4.    

1997               A series of High Court decisions have defined excise duties    James, Denis, Federalism up  
August             to be any levy imposed upon goods at any point in the          in Smoke? The High Court     
High court         production and distribution chain. Given that section 90 of    Decision on State Tobacco    
decision on        the Constitution vests exclusive power to the Commonwealth to  Tax, Current Issues Brief    
business           impose duties of customs and excise, this interpretation has   No. 1 1997-98, Dept of the   
franchise fees.    effectively prevented the States form imposing a tax on        Parliamentary Library,       
pressure for GST   goods. The States have attempted to find ways of levying       Canberra.                    
                   consumption taxes which were structured in such a way as to    Walter Hammond and           
                   circumvent the High Court's definition of an excise. By        Asscoiates Vs. the State of  
                   1995-96, business franchise fees were raising $4.9 billion,    NSW and Ha and anor Vs. the  
                   representing just over 16 per cent of total State and          State of NSW and others      
                   Territory taxation revenue. The constitutional validity of                                  
                   business franchise fees on tobacco was challenged through the                               
                   High Court. The decision has effectively declared all current                               
                   State business franchise fees to be constitutionally invalid.                               
                   As a stop gap measure, the Commonwealth has agreed to impose                                
                   its own tax on petrol, alcohol and tobacco, the proceeds of                                 
                   which will be paid back to the States. The invalidation of                                  
                   this substantial source of State revenue is another pressure                                
                   for further review of both Federal-State financial relations                                
                   and the structure of taxation.                                                              

1997               Cabinet decides that a taskforce of Government officials will  Australia. Prime Minister    
August             be set up to develop tax reform options and will report to     (John Howard), 'Taxation     
Cabinet agrees to  the Prime Minister in 3 months. The Prime Minister, Mr         Reform'. Press release, 13   
pursue tax reform  Howard's thinking is in terms of a tax reform package that     Aug 1997                     
                   reduces personal income tax, and a broad-based indirect tax                                 
                   that replaces some or all of the existing indirect taxes.                                   
                   The Prime Minister has also flagged the prospect of a major    Short, John, 'GST :     
                   overhaul of Commonwealth-State financial relations that could  Howard's biggest gamble,  
                   significantly alter the States' revenue sources, as well as    Election battlelines drawn   
                   shift responsibility for significant spending programs         on tax reform', Australian,           
                   between the two tiers of government. The Prime Minister has    14 Aug 1997, p. 1.   
                   called a special meeting of all Premiers to discuss                                         
                   Commonwealth-State financial relations and has refused to                                   
                   rule out any options States could put to his government. 

Consumption Tax Taxonomy

There are two main types of consumption tax. Consumption may be taxed in the hands of the income earner or during the production or sale of a good or service.

  • Where consumption is taxed in the hands of the income earner, the tax is generally referred to as a direct expenditure tax although it is also sometimes referred to as a Meade tax (since this sort of tax was proposed by James Meade, a recent English economist). An expenditure tax is very much like an income tax, but instead of paying tax based on full taxable income, taxpayers are permitted to deduct from their annual income the amount of money they have saved that year. The 'income tax' rates thus fall only upon that portion of income which has been used for consumption. The objective of this form of tax is to promote saving and prevent the double taxation of savings (i.e. taxed once when received as income and then again when it returns interest income). (For further information refer to Research Note Number 27, February 1997, What is a Direct Expenditure Tax?)
  • The most common form of a consumption tax, however, is a tax imposed on the production or sale of goods and services which is an indirect expenditure tax. This is a tax on one's spending-the tax is therefore indirectly levied. It is common to refer to general and specific taxes on goods and services. A specific tax is one which is imposed specifically upon a particular type of product. Excises and customs duties on such commodities as petroleum products, alcohol and tobacco are examples of specific taxes. A general sales tax is one which is applied at a reasonably uniform rate (or with a small number of different rates) to a fairly broad range of goods and/or services.
    • An excise is a specific tax imposed upon domestically produced goods. It is generally imposed on producers and paid at the point of production (e.g. by the petrol refiner, the tobacco manufacturer and the brewer). Excises can be applied at a specific rate (e.g. cents per litre) or at an ad valorem rate (i.e. a percentage of value). In Australia, all excises are currently applied at specific rates.
    • A customs duty is a tax, analogous to an excise but applied to goods which are imported. The duty is applied at the point of entry of the goods into the country.
  • General sales taxes can also take a number of different forms. These taxes can be once-off taxes or they can be applied at a number of different points in the production and distribution chain.
  • There are two types of once-off taxes. The first type is a wholesale sales tax (WST), as currently applies in Australia, while the second type is a retail sales tax (RST).
    • A wholesale sales tax is applied at the point where a good is sold by the wholesaler to the retailer. In general terms, a retailer who purchases goods pays sales tax on those goods to the wholesaler. The wholesaler is responsible for collection of the tax and passes it on to the Australian Taxation Office (ATO). The consumer indirectly pays for cost of the sales tax which the retailer has factored in to the retail price. Wholesale sales tax is a federal tax imposed on goods imported into Australia and goods which are manufactured and go into consumption in Australia. This tax was introduced in the 1930s and represents 13% of tax collected by the ATO. WST is a single stage tax imposed on the value of the last wholesale sale of goods that have not previously been used in Australia. Usually the sales tax is expressed as a percentage of the wholesale value of the good. It is possible to have a number of rate structures eg. in Australia, the general rate for most goods is taxed at 22%, some goods are exempt, others are taxed at rates varying from 12% to 45%. The wholesale sales tax has the advantage that only a small number of wholesalers have to file tax returns. It has the major disadvantage that the tax can only fall on goods, not services. (It is impossible to wholesale a service.)
    • A retail sales tax is applied at the point where a good or service is sold by the retailer to the consumer. Usually the sales tax is expressed as a percentage of the retail value of the good or service. The retail sales tax has the advantage that it can be applied to both goods and services. However, a large number of retailers have to file tax returns. The Broad-Based Consumption Tax proposed by the Hawke Government was a single-stage sales tax on consumer goods and services, levied on the retail value of the product at the point of sale to the final consumer.
  • There are two main types of multiply applied taxes. The first is a turnover tax while the other is a value-added tax.
    • A turnover tax is a tax applied at every stage in the production and distribution chain. The nature of a turnover tax is in effect, a general and uniform sales tax applying to all sales by businesses. The taxing of sales turnover is not a new concept. Indeed, the turnover tax system was the basis from which the value added tax (VAT) system grew-known in Australia as a Goods and Services Tax (GST). If a farmer grows wheat, sells it to a miller who sells flour to the baker who sells bread to the consumer, tax would be paid every time a transaction occurs. A turnover tax is thus a cascading tax, so called because each time a product changes hands, the gross sales proceeds are taxed, leading to a cascade or tax-on-tax effect. One disadvantage of a turnover tax is that it affects different commodities unevenly. The more stages a product goes through, the more tax is paid. A turnover tax encourages businesses to become 'vertically integrated', i.e. to undertake as many stages of production as possible in-house. For example, the wheat to bread process would normally result in turnover tax being imposed a number of times, as the farmer sells his wheat to the miller, as the miller sells his flour to the baker, as the baker sells his bread to the retailer, and as the retailer sells the bread to the consumer. Under vertical integration, a business which specialised in milling flour may acquire farms to grow wheat, bakeries to bake bread and retail outlets to sell the bread, thus avoiding the three of the four transactions on which turnover tax would apply. This runs against laws of economics by shutting out specialist firms and causes business decisions to be taken that would not otherwise be contemplated. The turnover tax can also increase the ultimate cost of exports and put exporters at a competitive disadvantage. A turnover tax was initially introduced in Germany, Italy, France and Belgium to ease the financial crises caused by the First World War. It was introduced in Great Britain in 1940 and Switzerland and Sweden in 1941. Eventually, however, the turnover tax was found to have economically inefficient consequences and was replaced with the value-added tax (VAT) from the 1950's onwards.
    • The value-added tax (VAT) is essentially a turnover tax system with allowance made for taxes previously paid. It is designed to overcome the cascading and uneven taxation effect of the turnover tax and the bias towards vertical integration. It is levied on the amount of value added (the excess of a firm's sales over its purchases of inputs) at each stage in the production and distribution of the process. Even though a VAT is paid at every stage of production and distribution, it ultimately only falls upon final domestic consumption. Using the farmer-miller-baker example, the tax works as follows:
The farmer includes the specified percentage of tax in the cost of his wheat. If some wheat is sold to consumers, they pay this tax. When the miller buys wheat he also pays tax. When the miller sells flour, he too collects tax but gets a credit for the tax he has already paid on the wheat. If consumers buy flour, they end up paying the tax charged by the miller. But if the baker buys flour, he gets a credit for the tax he has paid on the flour. He then includes tax on the bread he sells to final consumers.

Thus, even though the tax is applied at multiple points, the tax only falls on the value of additional production undertaken by each producer in the chain, ie. on 'value-added'. Since each producer gets a rebate of tax paid, the ultimate tax is only borne by final consumers. Each trader is able to claim the tax he pays on his inputs as a credit against the tax payable on his output. The sum of the values added at successive stages is equal to the final price of the product, so that the sum of the tax paid at the different stages would equal the tax payable under a retail sales tax, assuming equivalent rates. Note, too, that all tax paid on a good is generally reimbursed to exporters. This ensures that the tax is only borne by domestic consumers and enables the exporter to compete on world markets at tax-free prices.

One disadvantage of the VAT is that it involves a lot of paperwork, so compliance costs may be high. This was not such a disadvantage in those countries which already had a turnover tax before switching to a VAT. However, it is often argued that the 'double accounting' nature of a VAT significantly reduces tax evasion.

  • The goods and services tax (GST) was a tax proposed in Mr Hewson's Fightback! package. It was a form of a value added tax intended to replace the WST. It was a tax levied at the point of sale on virtually everything bought for personal use, rather than for use in business. Fightback! was designed to introduce significant cuts in marginal income tax rates and cut government spending sharply. Under the GST regime, virtually every item or service consumed would have a flat 15 per cent tax added to it. The provider of the goods or service would be responsible for collecting the 15 per cent tax. Accordingly the amount of GST paid by the consumer to the retailer is equal to the sum of the amounts of GST paid to the ATO by the players along the production and distribution chain.

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