CHAPTER ONE - THE INQUIRY

CHAPTER ONE - THE INQUIRY

Referral and terms of reference

1.1 On 12 December 2002, on the motion of Senator Jacinta Collins, the Senate referred the following terms of reference to the Economics References Committee, for inquiry and report by June 2004:

The structure and distributive effects of the Australian taxation system with reference to:

a) the level, extent and distribution of the current tax burden on individuals and businesses;

b) the impact of (a) on taxpayers' families;

c) the use and efficacy of various tax and expenditure incentives to influence social and economic conduct, for instance participation in the workforce;

d) the long term social and economic impact of the current distribution of taxation, government spending and employment including the intergenerational consequences of the tax structure;

e) the respective roles of the Commonwealth and the States in relation to the collection and distribution of taxation revenue; and

f) any other relevant issues which may arise in the course of the inquiry.

1.2 On receiving this reference, the Committee noted that the terms of reference are exceptionally wide, and amount to an invitation to the Committee to conduct a wide-ranging assessment of the Australian taxation system.

Conduct of the inquiry

1.3 The Committee placed a call for submissions in The Australian newspaper and on the Senate's website. Closing date for submisions was 28 July 2003, and 111 submissions were received. A list of the parties who provided submissions is at Appendix 1.

1.4 The Committee held a total of four hearings during 2003. The first two hearings, on 28 and 29 July 2003, focussed on issues of distributional justice with particular reference to the combined effect of the welfare and taxation systems on households in different circumstances. The third hearing, on 12 September 2003, focussed on compliance and the impact of tax reform on the cash economy. The final hearing, on 2 December 2003, was a round table of experts convened to consider further directions of inquiry for the Committee. It is discussed further below. A list of the witnesses who appeared at these hearings is at Appendix 2.

Round Table of Experts

1.5 As noted above, the terms of reference for this inquiry are unusually broad. While the Committee received a substantial number of submissions, it became clear to the Committee that insufficient evidence had been receive to support a thorough and wide-ranging reassessment of the entire taxation system. However the submissions and evidence did point to specific areas of concern within the taxation system.

1.6 In October 2003, the Committee met with officers from the Department of the Parilamentary Library[1] to discuss possible options for dealing with the breadth of the current reference. Following that meeting, the Committee determined that it would report the evidence obtained in this inquiry process, and would endeavour to establish the basis for a subsequent series of more focussed references on particular taxation issues. To that end, the Committee convened a round table of experts on 2 December 2003, to discuss the areas of policy within its current terms of reference that might usefully form the basis for future, more focused references from the Senate to the committee, and to give the Committee some guidance about the priority which might be given to these references.

1.7 The outcome of this round table, together with the Committee's subsequent deliberations, for the basis of Chapter 6 of this report.

Objectives of this report

1.8 As noted above, the Committee has not responded to the current terms of reference by undertaking a sweeping review of all aspects of the current taxation system. This report will not, as a result, recommend substantial changes to the tax system. Instead, this report has the following objectives:

Structure of this report

1.9 The first chapters of this report will set out the evidence received by the Committee in submissions and oral evidence. This evidence has been arranged by issue, and these issues formed the basis of the discussions with the round table of experts.

1.10 Chapter 2 of the report focuses on the taxation of families. It discusses whether the taxation system supports or penalises couples wishing to establish families, and whether the interaction between the taxation system and the welfare system (through both direct payments and tax benefits) proides sufficient support to families.

1.11 Chapter 3 of the report discusses the tax system and low income earners. Consequently, this chapter discusses the impact of 'bracket creep' on low income earners, and the impact of high effective marginal tax rates on low income earners attempting to move from welfare into paid work.

1.12 Chapter 4 of the report discusses issues of taxation compliance and, as a related issue, the impact of the cash economy on the taxation system. This chapter examines the use of trusts as a vehicle for tax avoidance, and the taxation treatment of Pay as You Go (PAYG) taxpayers in comparison with the tax treatment of self-employed taxpayers.

1.13 Chapter 5 of the report discusses other issues raised in evidence, including the issue of vertical fiscal imbalance, the use of taxation to promote social objectives (such as a reduction in gambling and alcohol consumption), and the support in some submissions for a flat tax or a debit tax.

1.14 The final chapter, Chapter 6, sets out the results of the rouble table, and points to a number of areas where the Economics References Committee might usefully undertake future inquiries. These issues are set out in three general categories: