CHAPTER FIVE - OTHER ISSUES

CHAPTER FIVE - OTHER ISSUES

5.1 While a large amount of the evidence received by the Committee fell within the three broad themes of taxation on families, taxation on low income earners, and compliance, evidence on other issues was also received. This chapter will consider evidence in relation to:

  • vertical fiscal imbalance;
  • tax on alcohol; and
  • debit taxes.

Vertical Fiscal Imbalance

5.2 Vertical Fiscal Imbalance (VFI) refers to the situation where there is a systemic imbalance between the revenue-raising capacity and the expenditure responsibilities of different levels of government. In Australia, the Commonwealth government raises significantly more money than it spends, and the State and Territory governments spend significantly more than they raise. As a result, there must be a system enabling Commonwealth revenue to be transferred to the States and Territories to meet their spending needs.

Origins of VFI

5.3 From Federation until 1942, State governments imposed income tax and company tax. From about the time of the First World War, the Commonwealth also imposed taxes in these areas. Taxes from the two levels of government were collected concurrently. During the Second World War, to fund the war effort, the Commonwealth Government determined that income and company taxes must rise. Introducing the Income Tax (War-Time Arrangements) Bill 1942, then Treasurer, the Hon. Joseph Chifley MP stated:

The Government believes that in this emergency it must have available to it the maximum taxable capacity of the nation. The whole of the taxable field is not available to the Commonwealth while State taxes are levied upon incomes at various levels. If a single income tax be imposed to raise revenue for the requirements of both Commonwealth and States, it will be possible to levy that tax on every section of the taxable field, and apply it to the nation as a whole on the basis of equality of sacrifice and equality of citizenship. []

Every honourable member who has occupied the position of Treasurer can testify that the differing rates of Commonwealth and State taxation form a maddening maze of figures which must be studied whenever the preparation of a budget calls for additional Commonwealth revenue. The position has become so serious that strong and definite action must be taken by the Commonwealth to cut this gordian knot, if any simplification of Commonwealth and State taxes is to be achieved in the interests of the war effort.[158]

5.4 The Commonwealth accomplished its purpose by raising income taxes to a high level, and by introducing (in the State Grants (Income Tax Reimbursement) Act 1942) a scheme whereby States which did not impose an income tax would be reimbursed for their lost revenue from the Commonwealth-collected income tax. The Commonwealth could not forbid the states from also collecting income taxes. However, the effect of the State Grants Act meant that no state would be better off by collecting an income tax.

5.5 In addition, as a war measure, the Commonwealth assumed control of all state apparatus (including staff and premises) for collecting income tax.

5.6 South Australia, Victoria, Queensland and Western Australia went to the High Court to test the constitutionality of the uniform tax scheme. The High Court found that the scheme was valid.[159]

5.7 More than a decade after the war ended, Victoria and New South Wales returned to the High Court, seeking a reconsideration of the uniform tax scheme, arguing that the scheme had been a war-time scheme which should have ended following the war. The High Court found that the scheme remained valid, and that 'the whole plan of uniform taxation has become very much a recognised part of the Australian fiscal system.'[160] This remains the case today.

Previous attempts to address VFI

5.8 While uniform taxation may have become a recognised part of the Australian fiscal system, State (and Territory) discontent with VFI has also become a customary feature of it. The process by which the Commonwealth transfers revenue to the states has always been and remains a source of discord. A number of attempts have been made to deal with the ongoing difficulties created by VFI.

Early attempts

5.9 The Commonwealth Grants Commission was established in 1933 to assess claims for tied grants under s.96 of the Constitution. On the commencement of uniform taxation, it was also given responsibility for assessing and advising government on the appropriate distribution of the proceeds from the uniform taxation scheme. It retains that role today, though the rules which guide its assessments have changed several times over that period.[161]

5.10 The initial formula was introduced in 1946, and determined that 'the base amounts in that year for each State shall be increased each your through a series of factors based on a State's total population, its density, schoolchildren and average wages.'[162]

5.11 That formula remained in place until 1959, when Prime Minister Menzies convened a Premiers Conference to consider options for a new funding formula. Victoria, in particular, felt it was at a disadvantage under the 1946 formula. The following exchange, from the Sydney Morning Herald, suggests the flavour of debates on this issue:

Mr Menzies [Prime Minister]: So far as you are concerned the tax reimbursements ought to be on a per capita basis?

Mr Bolte [Premier of Victoria]: Well, far nearer than it is now.

Mr Cahill [Premier of NSW]: You would disregard area in favour of population?

Mr Bolte: Not Entirely.

The South Australian Premier, Sir Thomas Playford, said that while population was an important factor so also was the size of the school population. Victoria had, proportionally, the lowest school population in the Commonwealth. This should be taken into consideration in the formula.[163]

5.12 The first Premiers Conference, in March 1959, failed to resolve the formula issue. Agreement was reached at a second conference in June. The Commonwealth agreed to change the nature of the grants from being 'tax reimbursement grants' and 'supplementary grants' (for smaller states) to a system of 'financial assistance grants' which would be increased as follows:

The financial assistance grants to each State after 1959-60 were to be increased in accordance with (a) annual increases in the State's population, (b) annual increases in the level of average wages of Australia as a whole, and (c) a betterment factor of 10 per cent to be applied to the increases in average wages (so that an increase of 3 per cent in average wages would be increased to 3.3 per cent).[164]

5.13 After a Premiers Conference in 1965, the 'betterment factor' became more generous, increasing to 1.2 per cent and applying to the grant increases as a whole, not just the increases due to wage growth. In 1970, Commonwealth grants to the states increased still further: the betterment factor rose to 1.8 per cent, and the Commonwealth agreed to fund additional capital works, and to fund $1 billion for state debt reduction.

New Federalism

5.14 By the mid 1970s, the States again argued that revenue from the Commonwealth was inadequate. In the 1975 federal election campaign, Prime Minister Fraser campaigned on a policy known as "New Federalism". The key element of New Federalism was a proposal to give each State a specified share of income tax receipts (as opposed to giving them a grant funded from those receipts), then eventually to allow the States to impose an income tax surcharge in their state (effectively a state income tax to be collected above and beyond the Commonwealth income tax). This system was unsuccessful, primarily because the Commonwealth did not lower its own income tax rate to make room for the state surcharges:

Much of the blame for the failure of the Fraser Government's attempts at fiscal reform must, however, rest with its faulty design of the tax sharing system. While this guaranteed the States a fixed share of personal income tax collections it simultaneously, by failing to reduce Commonwealth tax rates and therefore the level of shared tax revenues, permitted the States to avoid any necessity to impose income tax surcharges to make good the reductions in general revenue assistance which that action would have entailed. For their part, if the States had been sincere in their protestations about the need for a restoration of their taxing power, they would have insisted on the Commonwealth making tax room. But they found it politically more attractive to allow the Commonwealth to continue to impose taxation on their behalf and to reserve for themselves the right to argue about shares.[165]

The Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations

5.15 In 1999, as part of the development of the New Tax Package, the Commonwealth, States and Territories concluded an agreement known as the Intergovernmental Agreement on the Reform of Commonwealth-State Financial Relations ('the IGA'). The IGA is still in force.

5.16 The key features of the IGA are:

  • provision of all revenue from the Goods and Services Tax (GST) to the States and Territories;
  • cessation of Financial Assistance Grants;
  • removal of a range of State and Territory taxes, including debit taxes and some stamp duties; and
  • a promise by the Commonwealth to maintain the level of Specific Purpose Payments (SPPs, tied grants made under s.96 of the Constitution) to the States and Territories.

5.17 Clause 8 of the IGA reads:

8. The Commonwealth will distribute GST revenue grants among the States and Territories in accordance with horizontal fiscal equalisation (HFE) principles subject to the transitional arrangements set out below and other relevant provisions of this agreement.[166]

5.18 Horizontal fiscal equalisation was described by Garnaut and FitzGerald as:

Arrangements within a federation to reduce or eliminate difference in the fiscal ability of States to carry out the functions for which they are responsible.[167]

5.19 While the IGA refers to 'horizontal fiscal equalisation principles' it does not actually define those principles. This has been a driver for continued discord among the States and Territories. The New South Wales Government submission to this inquiry, for instance, stated:

New South Wales has long argued for reform of Australias system of horizontal fiscal equalisation. Currently the subsidy from New South Wales to recipient States is about $1.2 billion, compared with an equal per capita distribution of GST revenue grants. This is equivalent to 11 percent of own-source State tax revenue. The NSW Government believes that the subsidies resulting from the current system are too large, are not well justified, and place too high a burden on the donor States. This burden is not expected to ease, with projections made by the South Australian Treasury, on behalf of all States, indicating that the subsidy from donor to recipient States will increase by over 80 percent over the next ten years.[168]

VFI and this inquiry

5.20 New South Wales, Queensland, South Australia, Tasmania and Victoria all made submissions to this inquiry dealing with VFI. The Premier of Victoria, in his submission, outlined a number of concerns which he said are shared by all States and Territories:

  • the impact on public policy development. There is an incentive for States to develop public policy with regard to potential grant share implications, to the detriment of efficient and productive outcomes;
  • the unsustainable and inconsistent level of detail required by the current equalisation system. The current equalisation process requires extraordinary amounts of data. The resources involved in collecting this data are a significant cost to all States, and often detract from efficient and effective delivery of services;
  • the lack of transparency within the current system. The level of detail of the current system and the complexity of its methodology reduce transparency; and
  • the inefficiencies created by specific purpose payments. Specific purpose payments impose considerable administrative costs on both the Commonwealth and the States. They also blur accountability between levels of government and reduce the flexibility of States in providing services.[169]

5.21 The final issue raised by the Premier of Victoria, the current administration of Special Purpose Payments (SPPs), was also a concern for a number of other States. The Treasurer of Tasmania stated:

a consistent theme of recent SPP negotiations is the positioning of the Commonwealth to withdraw funding as GST revenues to the states increase. This has taken the form of tightening the amount of SPP funds available either through overt reductions in funding over time, or through inadequate indexation of the funding base. The systematic reduction of SPP funding across the board calls into question whether the states will in fact be better off financially, notwithstanding the receipt of Commonwealth transfers tied to the expected growth over time in GST revenues.[170]

5.22 The Premier of South Australia made similar comments:

The Commonwealth should commit to ensuring that SPPs are maintained in real terms from year to year. However the commitment needs to go further than that. If the Commonwealth maintains SPPs in real terms but increases the matching requirements associated with these SPPs it is effectively appropriating State revenues for Commonwealth policy purposes. Another danger is that the Commonwealth can effectively shift responsibilities to the States. There are a number of examples where the Commonwealth has encouraged States to set up jointly funded programs but then ceased their funding after 2 or 3 years. The State is then faced with making up the shortfall or cutting back or cancelling the program.[171]

5.23 The Queensland Government stated:

Although the Commonwealth undertakes in the IGA not to reduce SPPs as part of the new tax arrangements, there are from time to time statements made by Commonwealth Ministers that States should use GST revenue to fund areas of expenditure currently funded by the Commonwealth through SPPs to the State. GST revenues will genuinely benefit States if the additional revenues are available for States to improve service delivery to their communities. This will not be possible if the additional revenue is diverted to fund additional expenditure responsibilities transferred from the Commonwealth to the States.[172]

Local Government Issues

5.24 Considerations of VFI usually focus on the Commonwealth, the States and Territories. Local Governments are in an unusual position, as their authority, their responsibilities, and their powers to impose taxes and charges, are all delegated by the States and the Northern Territory.[173] However, in recognition of the role played by local government in Australian communities, the Commonwealth provides Financial Assistance Grants to the States and Territories, in order that the States and Territories can pass them on to local governments. These grants totalled more than $1.5 billion in the 2004 budget.[174]

5.25 The Australian Local Government Association, in its submission to this inquiry, argued that the current arrangements are unsatisfactory. Its submission stated:

There is an urgent need to reform the current tax sharing arrangements between the Commonwealth and local government. The next stage of intergovernmental financial reform must address the relationship between the Commonwealth and local government as a matter of urgency.

A stable, robust tax sharing arrangement linked to a growth tax would enable local government to strengthen itself as an institution, and improve service delivery to communities.

Any new funding methodology must be based around the notion of an entitlement to tax sharing rather than Commonwealth grant provision.[175]

5.26 The Municipal Association of Victoria also sought direct funding from the Commonwealth, but is content with the current administrative arrangements, whereby the funding is in the form of Financial Assistance Grants:

Local government must have access to a tax transfer from the Commonwealth in order to provide adequate services and develop local and regional resources. This tax transfer must take the form of a general purpose payment in recognition of local government's general competence. The current process for enabling this tax transfer, the [Financial Assistance Grants] system, provides an appropriate method of facilitating a tax transfer from the Commonwealth to local government that is sensitive to the state variations in local government roles, responsibilities and asset profiles.[176]

Tax on alcohol

5.27 Taxes have a long history of being used to increase the cost of certain activities which public policy regards as undesirable, or undesirable in excess. This has led, for instance, to relatively high taxes on cigarettes and tobacco products, alcoholic beverages, and gambling. The economic rationale for these taxes is that the taxed activities (drinking, smoking and gambling) create negative externalities, and that it is appropriate to obtain additional revenue to compensate for these externalities.

5.28 In this inquiry, submissions focussed on the tax treatment of alcohol. The Alcohol and other Drugs Council of Australia outlined the social and economic costs of excessive alcohol consumption in their submission, which included the following observations:

  • alcohol misuse cost the Australian community over $7.5 billion in 1998-9. This estimate included costs to the health care system, lost production in the workplace, road accidents, premature death and some aspects of alcohol attributable crime. It did not include the many costs associated with pain, suffering and alcohol-related depression and anxiety;
  • It is estimated that in 1997 alone the misuse of alcohol resulted in 63,164 person-years of life lost (before 70 years), a total of approximately 3290 premature deaths and over 400,000 hospital bed days;
  • The National Drug Strategy Household Survey found in 2001 that 31% of Australians 14 years and over reported being victims of alcohol-related anti-social behaviour in the 12 months preceding the survey. This is twice as many who reported being victims of anti-social behaviour related to all other drugs;
  • A Victorian report in 1988 found that alcohol was definitely or possibly involved in 53% of several thousand reported incidences of family violence; and
  • It is estimated that between 1990 and 1997, 31% of all driver and pedestrian deaths on Australian roads were alcohol related.[177]

5.29 The Winemakers Federation of Australia, on the other hand, pointed out the contribution made by the wine industry to the national economy, including exports in excess of $2.1 billion annually, employment of more than 30,000 people, and nearly $1 billion spent by winery visitors engaging in wine tourism.[178]

5.30 The current system for taxation of alcohol is quite complex, but in general, beverages other than wine are taxed on the basis of their alcohol strength, while wines are taxed on their volume. Additionally, alcoholic beverages attract GST.

Wine equalisation tax

5.31 Wine Equalisation Tax (WET) is a 29 percent value added tax introduced as part of the New Tax Package, to offset the withdrawal of wholesale sales tax. As it is a value added tax, the amount of WET depends on the value of the wine, not its alcohol content. Consequently, premium wines attract a larger amount of WET and cheaper wines (such as cask wines) attract a lesser amount of WET.

5.32 While the Winemakers Federation of Australia did not express concern regarding the operation and level of the WET[179] the Alcohol and other Drugs Council of Australia expressed concern that the relatively low tax on cask wine contributes to alcohol abuse:

As highlighted earlier, Australian studies have clearly shown that consumption of cask wine (and standard beer) is more closely associated with higher levels of violence, injury and illness than other alcoholic beverages.

Excessive cask wine consumption is a major problem in some Aboriginal communities. In the Alice Springs region, a population of less than 35,000 people consumed over 1.2 million litres of cask wine in 1998. That was equivalent to over 5,500 four-litre casks a week. Since most of the population did not drink cask wine, these data indicate harmful consumption by drinkers of cask wine.

The current system allows a male drinker to consume a daily intake that is considered, by the National Health and Medical Research Council, to be high risk for long-term harm for only $2.94 (7 or more standard drinks) and a female drinker to do so for just $1.60 (5 or more standard drinks) if drinking from a 4 litre wine cask.

The current situation also disadvantages small Australian premium wine producers, many of whom concentrate on the innovative and higher quality end of the market, in their ability to compete in the overall wine market. The WET may actually be discouraging innovation and production of premium wines and encouraging mass production of lower quality wines. This in turn encourages over-consumption of cask wine, which currently represents a high proportion of all wine sold.

The introduction of the WET has served no real policy purpose other than to protect the interest of cask wine producers (mostly large multinational companies) at the expense of Australias premium wine producers. It is also at the expense of the health and well being of many disadvantaged communities where the price of cask wine is a primary factor influencing the amount of alcohol consumed. [180]

5.33 The 2004 budget introduced a measure to rebate the first $290,000 of WET for each producer in Australia (that is, the WET on the first $1 million of sales).[181] This may offset some of the advantage the previous WET arrangements gave to cask wine, because most of the WET rebate will be captured by small regional producers, who often produce low-volume premium wines rather than high-volume, low-quality cask wines. However, these budget measures do not increase the price of cask wine, so their impact on consumption of cask wine remains uncertain.

Tax on ready-to-drink mixed spirits

5.34 Currently, low alcohol beer and mid-strength beer are taxed at a concessional rate. According to Australian Associated Brewers, this (combined with improvements in the taste of low alcohol beers) has resulted in an increase in low alcohol beers to the point where 'now a quarter of all beers sold are lower alcohol.'[182]

5.35 The Alcohol and other Drugs Council of Australia proposed a similar scheme for ready-to-drink (RTD) mixed spirits, which have become popular among younger drinkers. In its submission, the Council stated:

From a public health perspective, low and mid strength products can play a significant role in the reduction of alcohol-related harm. However, low alcohol products have had very little market penetration among young drinkers and currently there is no financial incentive for alcohol manufacturers to promote and produce mid and low strength RTDs, which currently represent only 1% of the RTD market [] The excise rate applying to low and mid-strength beer should also apply to [ready-to-drink mixed spirits] and apple ciders with the same alcohol content [183]

5.36 In its October 2002 report on the provisions of the Excise Tariff Amendment Bill (No. 1) 2002 and the provisions of the Customs Tariff Amendment Bill (No. 2) 2002, the Senate Economics Legislation Committee observed:

The Committee also notes the importance of the excise system as a tool to influence drinking habits through price mechanisms. It accepts that excise on alcohol has a place in discouraging the consumption of high alcohol beverages by making low alcohol products more attractive through lower prices to the consumer. A similar excise regime to that of beer would be an incentive for wine and RTD producers to produce low alcohol drinks.

However, it was pointed out that changes in excise rates alone are not enough to control the abuse of alcohol. For example, the increase in the consumption of RTDs can be attributed to a number of factors such as a reduction in price. Additional factors that influence consumption are marketing and the general drinking patterns of specific groups in society. An example is the preference that young women have for spirits.

The Committee is also of the view that future changes to legislation that impacts on the taxation of alcohol should be preceded by a comprehensive inquiry into the taxation of alcohol products.[184]

5.37 The Committee still considers that such a review would have significant merit.

Debit Taxes

5.38 A 'debit tax' is essentially a tax on bank transactions, particularly withdrawals and transfers. The Debit Tax Council describes the debit tax in the following terms:

The Debit Tax formula is simply an added percentage, one third of one percent (0.33%) is suggested, to the amounts withdrawn from all accounts held in trust by banking and financial institutions. This Tax, when cleared is instantly deposited through the Electronic Funds Transfer (EFT) system by way of the banking and financial institutions computers into the National Treasury at the end of each day.[185]

5.39 The Committee received a number of submissions calling for the introduction of a broad debit tax by the Commonwealth.[186]

5.40 Such taxes have been implemented in Australia. An example is the Bank Account Debits Tax, (BAD Tax), which is in the process of being phased out across Australia. However, submissions to this inquiry sought to introduce a debit tax as the single form of Commonwealth taxation. They proposed that all other forms of Commonwealth tax be repealed, and the debit tax asserted in their place.

5.41 Supporters of the debit tax advance the argument that a debit tax, levied at a very small rate would generate immense amounts of revenue. Claims include the following:

  • A 1% debit tax would bring in 3 times the revenue any government needs to get our nation out of trouble ($520 billion per year), enough to run all current Government programs, and also generate many more jobs, pay off our foreign debt and improve our hopsitals. It will also save billions in tax collecting costs.[187]
  • A debit tax of 1% would amount to revenue of $300 billion annually. This compares favourably with the actual figure of $187 billion using all its complexities and compliance costs.[188]
  • it would almost triple government tax revenue.[189]

5.42 Supporters argue that debit taxes would provide a range of advantages over current arrangements. A sample of these are as follows:

  • No tax cheating or tax avoidance necessary or possible.[190]
  • because the tax is payable each time money changes hands, the rash of speculative investment which is rife today would not be profitable. Instead, more investment would be in the real economy which is jobs for everyone![191]
  • multinationals would have to pay their fair share of taxation[192]
  • all employees would immediately have a larger take home pay packet, no income take deducted. More money to spend.[193]

5.43 The Committee does not find merit in proposals for a debit tax. In order to explain the Committee's view, it is useful to consider what the Committee would describe as the two key debit tax myths: the 'myth of increments' and the 'myth of compliance'.

The myth of increments

5.44 One key argument put forward by supporters of debit taxes is that the tax as a percentage would be so small usually a fraction of a percent that it would barely be noticeable, yet over time it would result in the production of massive revenue. This myth is premised on a simple multiplication exercise, as follows.

5.45 Wholesale payments (including high value trading transfers) in the Australian banking system amount to around $135 billion per day, or over $49 trillion per year.[194] If this figure is multiplied by some commonly suggested debit tax rates, the following products result:

Debit tax rate (%)

Product ($b)[195]

0.33

162.6

0.5

246.4

1

492.8

5.46 Total government revenue for the 2004/05 budget was estimated at $193.2 billion.[196] So, even making the unlikely assumption of absolute compliance with the system, a tax rate of approximately 0.392% would be necessary to maintain parity with current revenue.

5.47 Unfortunately, most analysis of the debit tax stops at this point. A tax rate of 0.392% appears to be attractive, especially to taxpayers used to paying income tax rates. There is an assumption that the rate is so tiny, it would barely be noticeable. The Debit Tax Council's literature, for instance, cites as an advantage of the debit tax system the proposition that 'because of the very large amount of withdrawals, only a very small amount is required as debit tax.'[197]

5.48 However, while the debit tax may indeed result in small percentages of tax being paid on individual transactions, an analysis on a 'per transaction' basis does not appear to be particularly useful. Governments, companies, and even individuals are much more likely to assess their tax contribution over the space of a full year, and in each full year they may have thousands of transactions. So, while the per transaction cost may be small, their annual tax bill may be large.

5.49 As noted above, if a 1% debit tax were applied, and full compliance were achieved, the projected revenue (adopting the Debit Tax Council's formula) could hypothetically be $492.8 billion annually. This would amount to nearly two thirds of GDP. Whether the $492.8 billion dollars is collected in tiny increments or one lump sum is entirely irrelevant. The result is still a national tax bill amounting to two thirds of GDP.

5.50 This logic may be extended to companies. Proponents of the debit tax appear to consider that, because the debit tax is so small on a per-transaction basis, companies will not endeavour to avoid it:

[Multinational corporations] (and foreign investors) wil be more than excited about this tax system as there will be no more company tax or income tax imposed on them and their shareholders.[198]

5.51 In reality, however, companies are also likely to consider their tax burdens on an annual basis. If debit taxes were levied directly upon companies, then the amount of tax paid would be reported annually, and would be likely to result in a significant figure (given that debit taxes would constitute the whole field of taxation). When the tax burden is considered annually, the fact that it is paid in tiny increments is irrelevant.

5.52 As debit taxes are collected from within the banking system, the 'tax bill' for companies would likely emerge in the form of increased banking fees, as banks seek to recoup the tax withdrawn from their system. However, whether the tax is paid directly or in the form of fees to banks, it is unlikely to escape notice.

5.53 Finally, it has been demonstrated that, even on a per-transaction basis, the amount of debit tax will often be significant. This is because the debit tax is a cascading tax. Every time money changes hands, another layer of debit tax would be added:

A Cascading Tax, such as the Debit Tax would be, causes the effective tax rate to increase, depending on the number of times a good changes hands before it is purchased. This is largely due to the cost of the Debit Tax being added after the profit margin is added. In the production [of a good as ] simple as pencils it is estimated that at least five withdrawals would be made. With more complex production, even more withdrawals and profit margins would be included. [] In the end, it is not the companies that are most affects, but the consumer.[199]

5.54 In a modern, complex banking system, this cascading effect can add a substantial number of 'layers' of taxation for apparently simple transactions:

To see how these transactions arise consider the following example: I draw a cheque for $10 000 on my ANZ account to buy a car. The car dealer deposits the cheque with his Westpac account. Through the payments system Westpac presents the cheque to the ANZ and draws down its value against the ANZ's balances. That drawing down of funds is a new debit in the system. Now ANZ head office is going to debit the funds standing in the Canberra branch. To cover that the Canberra branch may have to draw down its balances elsewhere in the system. All of a sudden we now have 4 debits recorded. It gets even more complex if the car buyer draws on a Credit union which itself banks with the ANZ.[200]

Conclusion

5.55 The fact that the debit tax on single transactions may be small is irrelevant to an assessment of the overall impact of the tax on the economy and on companies and individuals paying their tax. Simply put, the many small tax payments add up. They add up even more quickly when debit taxes 'cascade' as the transactions involved in the production of goods and the operation of the banking system combine.

The myth of compliance

5.56 Another major advantage proferred by supporters of debit taxes is that they would be impossible to avoid. This is simply not so. The Committee can observe three different methods which could easily be used to get around the debit tax. All three arise from the central principle of taxpayers seeking to reduce the amount of taxable activity they undertake (in this case, reducing their exposure to bank withdrawals and transfers).

The use of cash

5.57 If a debit tax were introduced, one likely outcome would be a substantial increase in the number of cash, in-kind and bartered transactions undertaken. Cash transactions would not avoid debit tax altogether, as the cash would still be taxed as it was withdrawn from the financial institution. However, once it leaves the financial institution, cash inevitably passes through a series of transactions before finding its way back to a bank. These transactions would be untraceable and unenforceable under a debit tax system. A study in 1998 made the following observation:

companies may decide to keep cash on hand to pay employees, or pay through in-kind vouchers. In Woolworths' case, approximately 80,000 people are employed by the supermarket chain. If an employee earns the average wage of $712 per week, an internal contract may be set up so that the employee receives $612 in wages and $100 of in-kind vouchers. If all employees received this, both Woolworths and the employees would save over $1.3 million each year by not actually entering the money flow and encountering a debit tax.[201]

5.58 Small businesses, particularly in the retail and services sectors, with ready access to cash payments, would almost certainly retain this cash instead of banking it. The cash could then be used to pay for business expenses (including wages). It would be effectively untraceable because, even under current circumstances, the Payments System Board acknowledge that 'the number and value of cash payments is very difficult to measure'.[202]

Vertical integration

5.59 Another simple way for large companies to reduce their exposure to the banking system (and therefore to the debit tax) would be to decrease the number of transactions they conduct with outside companies. One excellent way to achieve this would be through vertical integration of their companies. If single corporations own the means of production, distribution and sale for their goods and services as far upstream and as far downstream as possible, then the 'transactions' between those business units can be managed through the company's own accounting and management structures:

Vertical integration would benefit both the companies, the subsidiaries, and the consumers by skirting around the money market using cash, in-kind or internal contracts.[203]

5.60 On the other hand, if companies focus on their 'core' activities and contract with upstream suppliers and downstream customers who are external to the corporation, then every transaction, at every stage of production, will add a cascading layer of debit tax.

5.61 This tax-based pressure to integrate vertically may then reduce the competitiveness of companies, and of the economy generally, as suppliers will no logner need to innovate and compete to attract contracts their customers will be in house, and the tax system will inhibit their customers from looking for other options.

Changes to banking behaviour

5.62 In the modern economy, where capital can flow quickly and easily around the world, one simple way for large corporations to reduce exposure to debit taxes would be to conduct banking offshore. In fact, faced with the massive increases in bank fees likely as a result of debit taxes, the banks themselves may find it attractive to conduct their wholesale operations offshore. This behaviour would not completely avoid debit tax (as debit tax would still apply once funds were repatriated), but it may reduce the number of 'layers' of debit tax which apply as a result of wholesale transactions in the banking system.

Conclusion

5.63 The view that compliance is guaranteed under a debit tax system is unsubstantiated. In fact, tax avoidance under a debit tax system would be a relatively simple matter, with opportunities for avoidance at all levels from the largest companies (through vertical intergration and offshore banking) to the individual (by using cash).

5.64 Low levels of compliance would reduce the amount of revenue obtained under the debit tax. This would leave governments with two options to raise the rate of debit tax, (thereby increasing the incentive for others to avoid paying it) or to introduce other forms of taxation (ending the notion of the debit tax as a universal taxation system).

Conclusion in relation to debit taxes

5.65 Despite being collected incrementally, debit taxes would be noticeable by companies and taxpayers. Debit tax would be simple to avoid, and would therefore generate an uncertain amount of revenue. The 'debit tax concept' has a range of supporters, and has been advanced from time to time for at least a decade. While the Committee expects that debit taxes will retain a certain amount of support, they do not provide a realistic basis for a taxation system.