The University of Sydney-    Classic Texts in Australian and International Taxation Law

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2. Chapter 2 The Australian Tax System in Perspective

2.1. This report concerns the future of the tax system rather than its past, but it is helpful in considering what lies ahead to have some slight perspective on what has gone before. It is the Australian system being examined and not overseas ones, but a greater awareness of the possibilities of change is provoked if the Australian system is compared with those of other prosperous countries with kindred political and social institutions. This chapter therefore provides short descriptive accounts of these matters, designed merely as background.

I. Historical Perspective

2.2 In 1973–74 the various governments in Australia between them raised over $13,750 million in taxes. The figure had been gradually, though not continuously, climbing to this total ever since Federation, with the increase in population, in money income per head, and in the range of government activities. Some salient statistics, revealing among other things the lasting impact two major wars have had on the level and pattern of taxes and on the Australian Government's share of them, are given in Table 2.A.

TABLE 2.A: TAX REVENUE: SELECTED YEARS SINCE 1901–02 ($ million)

                           

	1901–02	1909–10	1919–20	1928–29	1938–39	1949–50	1959–60	1966–67	1973–74
Income tax—
Australian Government			21	20	24	559	1,339	2,724	7,523
State and local governments	1	3	12	32	60
Total	1	3	33	52	84	559	1,339	2,724	7,523
Other domestic taxes—
Australian Government	3	4	22	34	66	300	1,011	1,493	2,810
State and local governments	9	12	25	64	72	146	523	967	2,830
Total	12	16	47	98	138	446	1,534	2,460	5,640
Tariff revenue	15	19	23	59	62	155	168	275	605
Total taxes	28	38	103	209	284	1,160	3,041	5,459	13,768
Tax per adult ($)	13	15	33	54	62	216	479	758	1,655
									(a)
note note

2.3. These figures can be better understood, and be more readily acceptable to those who pay taxes, if they are related to the growth of the economy as a whole, as reflected in estimates of gross national product, and to a broad classification of the


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multifarious uses made of tax revenue. Statistics for the more distant past are not, however, readily available. In rough terms, the total taxes as a proportion of gross national product have risen from 6 per cent in the initial years of Federation, to 9 per cent in the early 1920s, 16 per cent by the end of the 1930s, and 24 per cent at the height of World War II. More trustworthy estimates are available for less distant years and these, with some figures for the main uses of taxation, have been assembled in Table 2.B. They show that while taxes remained a fairly stable proportion of gross national product during the 1950s—at around 22–23 per cent, the proportion was only a little lower than the wartime peak—they have recently been gaining ground and now correspond to over 27.5 per cent of gross national product. Government spending presents a similar picture.

TABLE 2.B: TAXATION AND ITS USES: ALL LEVELS OF GOVERNMENT SELECTED YEARS SINCE 1949–50

                           

	1949–50	1954–55	1959–60	1964–65	1969–70	1973–74
	$ million
Total taxation	1,160	2,184	3,041	4,622	7,722	13,768
Uses—
Current goods and services	426	941	1,323	2,066	3,677	6,869
Transfer payments(a)	520	811	1,230	1,872	2,900	4,978
Contribution to government investment(b)	214	432	488	684	1,145	1,921
	Percentage
Percentage of gross national product(c)—
Taxation	22.8	22.8	22.2	23.6	25.9	27.7
Government expenditure on goods and services (current and capital)	16.6	18.9	18.5	20.0	21.6	21.5
Total government expenditure (including transfer payments)	26.8	27.4	27.5	29.6	31.4	31.5
Contribution of taxation to government investment as per cent of government investment (d)	51.0	49.6	40.2	36.9	41.6	50.0
note note

2.4. One of the key issues examined in this report concerns the tax mix. Recent trends for the principal taxes levied by the Australian Government are summarised in Table 2.C. Undoubtedly the most striking feature of this table is the mounting importance of personal income tax. In 1973–74 just over half of the Australian Government's tax revenue derived from personal income tax and the figure is expected to be close to 55 per cent in 1974–75, whereas scarcely a dozen years ago personal income tax accounted for little more than a third of revenue.

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TABLE 2.C: AUSTRALIAN GOVERNMENT TAXES: SELECTED YEARS SINCE 1949–50

                                                     

							(a)
	1949–50	1954–55	1959–60	1964–65	1969–70	1973–74	1974–75
		$ million
Income tax—
Persons	392	720	884	1,569	2,855	5,490	7,966
Companies	167	343	455	722	1,187	2,033	2,566
	559	1,063	1,339	2,291	4,042	7,523	10,532
Estate and gift duty	14	22	32	49	80	76	77
Customs duties	155	202	168	268	414	605	770
Excise duties	132	286	504	631	939	1,555	1,765
Sales tax	85	201	328	363	569	969	1,105
Payroll tax(b)	45	83	110	150	230	8	12
Other(c)	24	17	37	67	106	202	258
Total	1,014	1,874	2,518	3,819	6,380	10,938	14,519
	Percentage of total taxes
Income tax—
Persons	38.7	38.4	35.1	41.1	44.7	50.2	54.9
Companies	16.5	18.3	18.1	18.9	18.6	18.6	17.7
	55.1	56.7	53.2	60.0	63.4	68.8	72.5
Estate and gift duty	1.4	1.2	1.3	1.3	1.3	0.7	0.5
Customs duties	15.3	10.8	6.7	7.0	6.5	5.5	5.3
Excise duties	13.0	15.3	20.0	16.5	14.7	14.2	12.2
Sales tax	8.4	10.7	13.0	9.5	8.9	8.9	7.6
Payroll tax(b)	4.4	4.4	4.4	3.9	3.6	0.1	0.1
Other(c)	2.4	0.9	1.5	1.8	1.7	1.8	1.8
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0
note note

2.5. The complexity of the Australian tax system is one of the matters to which the Committee is expected to address itself. The simple facts of the numbers of taxpayers involved with income tax are given in Table 2.D: particularly significant is the very rapid growth in the proportion of adult females subject to income tax and in the numbers of partnerships and private companies. Some other facts are worth noting too. More than 80 amending Acts have altered or been added to the principal Income Tax Assessment Act since it first came into operation in 1936; as a result the 1936–1973 Act now extends to 526 pages, six times its original length. Practitioners' textbooks explaining the operation of the Act are today printed in four or more volumes instead of one. In 1973–74 a total of 54,401 objections were lodged against income tax assessments, 350 cases transmitted to Boards of Review, and 31 taxation appeals (mostly income tax cases) decided by the High Court or State Supreme Courts. The several Acts covering Federal estate and gift duty occupy nearly 60 pages, while the sales tax legislation is covered in 220 pages. Significant changes have been made in sales tax exemptions since 1936, with the result that the publication containing relevant sales tax rulings now runs to over 700 pages. The handbook,


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Commonwealth Sales Tax, has been expanded in length to give rulings and explanations of the application of the sales tax laws to new manufacturing processes. While all this may be necessary, it deserves continuous review.

TABLE 2.D: NUMBERS OF TAXPAYERS, RESIDENT AND NON-RESIDENT, ASSESSED FOR INCOME TAX: SELECTED INCOME YEARS SINCE 1954–55

                               

	1954–55	1964–65	1971–72
Individuals—
Male (million)	2.7	3.2	3.6
per cent of adult males (a)	90	93	91
Female (million)	1.0	1.5	2.1
per cent of adult females (a)	34	43	51
Total (million)	3.7	4.6	5.7
per cent of adults (a)	63	67	71
	’000	’000	’000
Partnerships	155	301	413
Trusts	65	108	113
Companies: (b)—
Private (c)	23	55	87
Public	6	11	10
Total (d)	31	71	105
note note

II. International Perspective

2.6. In almost any field of human endeavour international comparisons are difficult to make and liable to be misleading. The area of taxation is no exception. Fortunately, however, international organisations nowadays have large and expert staffs making such comparisons and over the last few years the Organisation for Economic Co-operation and Development (OECD) has been assembling an impressive range of tax statistics covering all twenty-four member countries. The statistics for Australia, which joined OECD in 1971, have been recast in a form comparable with that of most of the countries with which it is interesting to make comparison. The latest document, Revenue Statistics of OECD Member Countries 1965–71, provides a rich hoard of information some of which is summarised in Table 2.E for the earliest and latest years available. The figures are necessarily a little out of date.

2.7. It will be seen that Australia is lightly taxed by international standards, 26.6 per cent of gross national product being taken in tax in 1971 compared with the OECD average of 31.8 per cent. The picture changes somewhat if social security contributions are excluded from the comparison, as Australia is the only country represented in Table 2.E without a separate social security contribution. But, being compulsory levies and a substitute for higher taxation, such contributions should probably not be excluded, unless that fraction of Australian taxation spent on social security is also excluded. However, social security finance is a complex issue on which more will be said in Chapter 13.

2.8. Whether the comparison is made with or without social security contributions, one thing is apparent: the tendency for taxes to rise as a fraction of gross national product, noted already in relation to Australia, is a world-wide phenomenon. In all the countries shown in the table that might be described as modern welfare states,


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taxes (including social security contributions) now account for a third or more of gross national product.

2.9. Table 2.E illustrates the considerable diversity of tax patterns. It is particularly noticeable that, by international reckoning, Australian income tax (especially on companies) is a heavy impost. So too are the miscellaneous levies grouped under ‘other taxes’, a fact to be explained not by any peculiarity of the Australian Government's own tax system but by the very large measure of reliance by State and local governments on stamp duties, property taxes and (in more recent years) payroll tax. By contrast, taxes on goods and services feature less prominently than they do in many countries and, as mentioned already, social security contributions fail to feature at all. In one major respect—the shift towards personal income tax—Australian experience since 1965 parallels the trend of events overseas. On the other hand, the share of company tax has not been diminishing in this country in the way that it has been elsewhere.

TABLE 2.E: INTERNATIONAL TAX COMPARISONS: OECD COUNTRIES, 1965 AND 1971

                                           

	Percentage of total taxes
	Taxes on goods and services	Income tax: persons	Income tax: companies	Social security contributions	Other taxes (a)	Total taxes as percentage of gross national product
1965—
Australia	34.3	33.9	15.6		16.2	23.9
Average of 22 OECD countries(b)	36.7	24.7	8.5	20.4	9.7	27.7
1971—
Selected OECD
courntries—
Australia	31.6	36.9	16.6		14.9	26.6
Canada	33.0	33.9	10.2	8.2	14.7	32.3
France	35.5	10.1	5.8	41.9	6.7	35.6
Germany	29.7	26.9	4.5	33.8	5.1	34.5
Italy	36.9	11.7	6.9	37.9	6.6	30.9
Japan	22.3	24.0	18.8	20.0	14.9	20.1
Netherlands	26.7	27.2	7.0	35.6	3.5	42.2
Sweden	31.7	43.1	3.6	18.0	3.6	41.8
United Kingdom	28.9	33.2	7.8	14.1	16.0	35.7
United States	20.2	33.7	10.4	20.7	15.0	27.8
Average of 22 OECD
countries(b)	33.9	26.9	7.3	22.7	9.1	31.8
Australia's ranking	15th	4th	2nd	22nd	5th	16th
note note

2.10. Even these very summary figures show the Australian tax system to be somewhat untypical. It is revealed as still more so when one looks behind these broad categories to the exact kinds of taxes they contain. What Table 2.E does not reveal, for example, is that in many countries a broad-based value-added tax is the major domestic levy on goods and services, whereas Australia mainly relies on excise duties and wholesale sales tax which weigh heavily upon only a restricted range of goods and services. Again, unlike Australia, at least nine OECD countries impose an annual wealth tax, and the United Kingdom and Ireland are proposing to do so; on the other


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hand Australia has never levied a wealth tax. Also Australia is somewhat unusual in employing the ‘separate’ or ‘classical’ system of taxing companies and, until now, in not imposing capital gains tax.

2.11. Another feature of overseas experience, naturally not reflected in simple statistical tables, deserves special mention. Tax systems in many overseas countries have been drastically changing in recent years and are still under active debate. In the United States, for example, earned income has been given relief in the form of a reduction in top marginal rates of tax. In Canada, capital gains tax has been introduced, significant changes in company tax have been made and personal income tax rates are now being indexed for inflation. In the United Kingdom, much too has recently happened or is being contemplated in the fields of capital gains and development gains taxes, company tax, taxation of goods and services, taxation of capital transfers, and wealth tax. Among recent developments elsewhere are Sweden's partial abandonment of the family as the taxpaying unit under income tax, a change in the form of company tax in West Germany, New Zealand's property speculation tax, and proposed new capital taxes for Ireland. Thus the tax reformer in Australia does not need to feel deprived of possibilities to explore.