Background Paper 1 1997-98
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.
- 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.
- 'GST: Howard's biggest gamble. Election battlelines drawn on tax reform.' The Australian, 14 August 1997.
- David Vos, Coopers & Lybrand, 'Tax Base Pressure Points', a paper presented at ATAX Tax Summit - 'Ten Years On: A New Agenda', September 1995.
- 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
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
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
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.
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.
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
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.
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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