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II. Surcharge on Property Income

14.6. There is one respect in which the Australian rate scale in the recent past has, for all its proliferation of steps, tended to be simpler than those applying in the United States and United Kingdom. In those countries, and in others, income from property (or investment income) is subject to heavier tax than income from personal exertion. The United States distinguishes between the two forms of income by limiting the maximum marginal rate of tax on personal exertion income to 50 per cent, even though the nominal rate schedule extends as high as 70 per cent. Property income of persons in the relevant ranges of income is thus subject to higher rates of tax than the maximum rate on personal exertion income. Until 1973 the United Kingdom provided for a deduction of an earned income allowance of two-ninths of personal exertion income up to £4,005 and of 15 per cent of income in excess of that figure. Under the unified income and surtax arrangements now operating, the earned income allowance has been abandoned and a surcharge imposed on investment income. At one stage Canada imposed a special 4 per cent tax on investment income from all sources. In 1961, however, it was withdrawn from investment income from domestic sources.




  ― 186 ―

14.7. For many years a distinction was also drawn in the Australian legislation between personal exertion and property income, both as to rates of tax and as to the level of general exemption from tax. Property income was subject to higher rates of tax until 1953, but the lower level of exemptions was removed in the 1930s. The abolition of the differential rate of tax in 1952 was no doubt influenced by the Spooner Committee which had drawn attention in the previous year to the low revenue yield in relation to the complexity involved and the irksomeness of the differential where taxpayers with personal exertion income also had a small amount of property income. However, the differential was reintroduced in 1974–75 in the manner described in paragraph 14.1.

14.8. A long-standing argument for treating income from personal exertion more kindly is its greater ‘precariousness’, having regard to the fact that such income is confined to the period of a person's working life and its continuity may be interrupted by sickness or unemployment. However, much property income is precarious too: losses on investments are by no means an unusual occurrence. In any case, government assistance by way of age pensions and sickness and unemployment benefits now affords considerable protection to those who depend heavily on personal exertion income.

14.9. It is also sometimes said that acquiring income through personal exertion involves greater effort than acquiring property income. But assertions of this kind overlook the fact that a taxpayer's property income may derive from his own saving out of earlier years’ personal exertion income: it would clearly not be feasible to distinguish between property income according to source of investment funds and to confine any property surcharge to income from inherited wealth. So far as the point is that income from personal exertion involves a greater variety of expenses than income from property and many of these expenses may be inadequately reflected in the tax deductions allowable, this is a matter to be corrected by a liberalisation of deductions.

14.10. A surcharge on property income has been proposed, too, as a way of moderating income inequalities, the assumption being that persons on high incomes derive a greater proportion of their income from property than do persons on low incomes. At best, however, this will be so only in a broad statistical sense. There are, after all, many individuals of quite modest means, especially retired folk, for whom interest, dividends or rents are the chief component of income: the relief proposed for low incomes in the Government's recent surcharge is recognition of this. In any case, such vertical redistribution as a surcharge on property income achieves tends to be at the cost of serious horizontal inequities. It is difficult to see why, where there is no relief from surcharge, a retired couple living off their past savings should be asked to pay more tax than members of the work force earning the equivalent income.

14.11. The case for differential treatment has also been argued in terms of the special advantages property confers on its owner over and above any income it produces, particularly in providing a reserve of spending power. Those advantages, it is sometimes held, should be taxed through an annual levy on wealth. For reasons to be explained in Chapter 26, the Committee rejects a wealth tax, and a surcharge on property income might be thought to be a suitable proxy. But this the Committee would not accept. As pointed out in Chapter 3, the income tax system already contains an in-built bias against saving, reducing the ratio at which future consumption can be substituted for present consumption. And an additional bias against certain forms of property income is introduced by inflation, a feature also referred to earlier.

14.12. The Committee sees a number of problems in imposing a surcharge on investment income. Taxpayers are not divided neatly into two mutually exclusive categories, those receiving income from personal exertion and those receiving income


  ― 187 ―
from property. Most property owners, except perhaps the retired, also receive personal exertion income even though many wage earners may have little if any property income. This raises difficult questions, foreshadowed in paragraph 14.10, when it comes to trying to accommodate a differential rate structure to an overall tax system designed to be fair. Should somebody with investment income of, say, $5,000 and no other income be subject to the same additional tax burden as somebody else with $5,000 investment income and a substantial amount of income from personal exertion? Alternatively, as under the present Australian scheme, should persons with the same total income but different components of personal exertion and investment income be subject to the same rate of surcharge on the investment component of their income? Whichever approach is followed, serious inequities and anomalies are bound to arise.

14.13. The administrative difficulties of levying a special tax on property income or of providing an earned income relief are substantial. When taxpayers are dealing at arm's length with employers, few problems are likely to arise in determining what constitutes salary and wages. But in many situations, especially those involving private companies and small unincorporated businesses, there may be considerable scope for substituting the payment of salary and wages for the payment of investment income. In the case of unincorporated enterprises, such as farms, further awkward problems arise in determining the income from the ownership of, as distinct from the employment in, an unincorporated enterprise. It may be possible to apply distinctions for administering the law, but if such distinctions involve many arbitrary elements, as they inevitably must when it comes to drawing a line between what is a return for labour effort and what is a return on investment, inequities will occur and opportunities are opened up for tax planning. No set of tax reform proposals that takes equity and simplicity seriously can really contemplate these types of arrangements.

14.14. The Committee therefore recommends that the present surcharge on property income be abolished at the earliest opportunity.

TABLE 14.B: PROPORTION OF TAXPAYERS, PROPORTION OF TAXABLE INCOME, MEAN TAXABLE INCOME, AVERAGE TAX RATE AND PROPORTION OF INCOME TAX RECEIPTS, BY INCOME RANGE, 1971–72

                                   
Income range (net income)   Proportion of taxpayers   Proportion of taxable income   Mean taxable income   Average tax rate   Proportion of income tax receipts  
(a)  (b) 
per cent  per cent  per cent  per cent  per cent 
0–999  7.2  1.5  671  0.3  0.3  0.3 
1,000–1,999  14.6  6.0  1,353  6.3  7.0  2.2 
2,000–2,999  18.0  11.9  2,206  9.7  11.0  6.9 
3,000–3,999  18.6  16.5  2,953  11.8  14.0  12.2 
4,000–4,999  15.8  17.3  3,645  13.5  16.6  15.1 
5,000–5,999  10.1  13.3  4,385  15.3  19.0  13.4 
6,000–6,999  5.9  9.1  5,140  16.9  21.2  10.3 
7,000–7,999  3.4  6.1  5,924  18.5  23.2  7.5 
8,000–9,999  3.2  6.9  7,041  20.6  25.8  9.3 
10,000–14,999  2.2  6.3  9,597  25.2  30.9  10.3 
15,000–19,999  0.5  2.3  14,368  32.5  38.4  4.6 
20,000–29,999  0.3  1.7  20.689  40.7  46.5  4.1 
30,000 +  0.1  1.3  40,551  52.8  57.7  3.8 
100.0  100.0  100.0 
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