II. Broad-Based Taxes

27.19. In considering a broad-based consumption tax it is as well to start with a reminder of how personal consumption expenditure is divided between various categories of goods and services. As the figures in Table 27. A show, out of the total in 1970–71 of some $19,500 million, about $7,100 million was spent on services; of the remining $12,400 million, excisable goods together with motor vehicles and their operation accounted for about $3,900 million. If these goods are thought to be sufficiently taxed, there remain various retail categories of which the most important are food ($3,850 million) and clothing ($1,790 million). Broadening the base of the tax compels us to face the problem of including food and clothing.

27.20. As these figures indicate, the exemption of food and clothing would significantly reduce the base, with a consequent loss to revenue. Furthermore, if the tax is to have as wide a coverage as possible, exemptions must be kept to a minimum: once they are allowed, a precedent is set and pressures will develop to apply them on a wider scale. To keep all goods in the base and to apply a uniform rate are aims not to be relinquished.

27.21. While the taxing of food has raised much debate in the past, its acceptability has gradually increased. European countries in the main levy taxes on food and clothing, sometimes at concessional rates but not uncommonly at a standard rate applying to most other goods. The majority of American States tax food uniformly at the retail level. Where, as in Australia, food has not been taxed, problems of classification are unavoidable when items such as nuts and confections, vitamin tablets and dietary foods are being considered. Exemption of food causes difficulty in retail outlets, especially in those providing meals on and off the premises, for the provision of restaurant meals rarely fails to attract tax. Food exemption is also discriminatory in favour of those families who spend a high proportion of their incomes on such foods as are in no sense necessary for a reasonable living standard. The same arguments apply to clothing. The Committee therefore recommends that food and clothing be taxed at the uniform rate.

  ― 516 ―

27.22. Apart from tangible commodities, personal consumption expenditure has a large services component. The composition of this component is shown in Table 27.B. It covers medical and hospital expenses, rent (including an imputed figure for owner-occupiers), gas and electric power, fares, postal services, education, life insurance, entertainment, and other services such as hairdressing, restaurant meals and hotel accommodation. If tangible goods are taxed, services connected with such goods should logically be taxed also. If services are taxed, it would again be desirable that the base be as broad as possible, though some items would undoubtedly need to be excluded.


$ million   Per cent  
Medical, hospital and funeral expenses  810  11.4 
Imputed rent of owner-occupiers  1,810  25.6 
Other rent  734  10.4 
Gas, electricity, fuel  485  6.9 
Rail, tram and bus fares  245  3.5 
Other fares  410  5.8 
Postal and telephone services  203  2.9 
Education  173  2.4 
Life insurance  161  2.3 
Entertainment  310  4.4 
Other services  (a) 1,735  24.5 
Total  7,076  100.0 
note note  

27.23. In considering any individual tax, account must be taken of its place in the tax structure as a whole. If a broad-based tax covering food and clothing introduces an element of regressivity, that element can be counterbalanced by increasing the progressivity of other taxes in the system. The Committee is satisfied that, either by special measures by way of transfer payments or by other more progressive taxes, or by a combination of both, the progressivity of the structure as a whole can be maintained or adjusted to the required degree.

27.24. Given that the tax is to be as broadly based as possible, there are four forms which it might take. These are:

  • (a) turnover tax
  • (b) wholesale sales tax
  • (c) retail sales tax
  • (d) value-added tax.

27.25. The arguments against taxes on turnover throughout the whole range of manufacturing and distribution are strong. A turnover tax is not neutral because it falls differently on different products according to the number of steps in their manufacture. A commodity that has only one stage in its manufacture will bear the tax

  ― 517 ―
once, while another that has two stages will pay tax at both stages: at the second stage tax will be levied on a total value including the tax levied at the earlier stage. The final weight of tax thus varies greatly from commodity to commodity. The tax has been replaced in most countries where it was once levied.

27.26. A new broad-based wholesale sales tax merits serious consideration. Unlike the turnover tax, tax is levied only once in the total production-distribution process, and the tax on tax problem and the associated incentives towards vertical integration are minimal. One primary virtue, which would be shared by a manufacturers sales tax, is that the number of firms legally obliged to collect the tax is smaller than under a retail sales tax, and these firms are in most cases better equipped administratively to handle the tax commitment. It has been argued that Australia has extensive experience of the operation of wholesale sales tax, and good reasons are needed to change it.

27.27. The disadvantages of levying a broad-based tax at the wholesale level are twofold. The more serious is that because a wholesale sales tax explicitly excludes the value added at the retail stage it will both encourage a relocation of activity to the retail level where it will escape tax, and also discriminate between goods according to whether a large or small proportion of their value is added at the retail level. The importance to be placed on this problem depends very much on the rate at which the broad-based tax is imposed. If the tax is to be levied at a rate high enough to permit a significant change eventually in the tax mix towards taxing goods and services, then the issue is important enough to provide a case against the wholesale sales tax.

27.28. A second somewhat related disadvantage is that a number of goods and services do not have a wholesale value in any market sense. This is especially true of services. If services are to be treated in the same way as goods traded at the wholesale level, some wholesale value must be imputed to them. To do this would involve arbitrary judgment and considerable administrative difficulty. A tax on services would have to be levied at the retail stage and the rate should be lower than the wholesale sales tax rate to preserve neutrality between the two.

27.29. A broad-based tax on tangible goods at the wholesale level does not fit comfortably with a tax on services at the retail level and, on the face of it, an improvement might lie in also levying retail sales tax on goods. While it is assumed that any sales tax ultimately comes to rest on the member of the public consuming the taxed good or service, a tax confined to the retail level raises administrative and compliance problems not found when a tax operates only at an earlier stage: the number of taxpayers increases and small traders unused to making returns are required to do so.

27.30. For revenue purposes, a tax at the retail stage is to be preferred to one that stops short of it as retail margins increase the base. Single-stage retail taxes are by no means uncommon and are the most significant source of State tax revenue in the United States. The system is usually based on the registration of all traders selling at retail, together with the licensing of businesses that buy goods for business use or resale so that the retailer has to keep separate records of sales to licensed buyers. The system is open to evasion: the licensed buyer would be able to apply to private consumption goods bought free of tax as though for business use or resale. The temptation to evasion grows as the tax rate increases; and if the broad-based tax is to play an important part in raising revenue, the Committee believes that its collection should start at an earlier stage than the retail.

  ― 518 ―

27.31. To overcome some of the defects described above, value-added tax (VAT) has been adopted by many countries particularly in Europe and South America. Only an outline of the main attributes of the tax can be given here. It is a way of levying an ad valorem tax on final consumer spending. The whole of the sales value of consumption goods and services, less those that are specifically exempt, is taxed by stages as the goods and services pass from one supplier to the next in the chain of production and distribution. Each supplier pays the tax, calculated at the VAT rate, on his sales during a period, claiming as a deduction VAT invoiced to him during the period. The final consumer, not being a supplier, bears the whole tax and can claim no deduction.

27.32. To illustrate the way VAT works, let it be supposed that the VAT rate is 10 per cent in a simple sequence of goods supplied to manufacturer (M), to wholesaler (W), to retailer (R), and to consumer (C). The set of figures below shows that the supplier to M, selling at a basic (i.e. VAT-exclusive) price of $100, is required to pay $10 VAT to the government. The supplier charges M the VAT-inclusive price of $110; and when M comes to sell the goods to W he has a credit of $10 to deduct from the VAT he is liable to pay on the VAT-exclusive price appearing on his invoice. W and R proceed in similar fashion.

VAT— exclusive price   VAT at 10 per cent   VAT payments to government  
M buys goods for  100  plus  10  VAT of 10 already paid by M's supplier =  10 
M sells goods to W for  160  plus  16  M pays VAT of 16 less credit of 10 = 
W sells goods to R for  200  plus  20  W pays VAT of 20 less credit of 16 = 
R sells goods to C for  250  plus  25  R pays VAT of 25 less credit of 20 = 
Total VAT paid  25  25 

The example shows that each supplier pays to the government tax on his output less tax on his input. M's supplier, together with M, W, and R, are known as ‘taxable persons’. They are liable for tax at successive stages, but they are reimbursed for the tax they pay in the price they charge and, in the outcome, the consumer bears the whole of VAT. The taxable person acts as an agent for collecting part of the ultimate tax incurred on the goods sold to consumers.

27.33. Some countries have found it necessary to give special treatment to a limited number of goods and services and to certain traders, through either ‘exemption’ or ‘zero-rating’, to use the British terms. For example, consider again the sequence in the last paragraph. If the retailer had only a small annual turnover (less than £5,000 in the United Kingdom), he would qualify to be exempt from VAT and he would then not have to make a VAT charge of $25 or lodge a return with the VAT authority; but at the same time he would not be able to obtain a refund of prior-paid tax. If the wholesaler had exported the goods, he would not be required to charge $20 VAT, exports being zero-rated, and could claim from the government the $16 VAT component in the price of the goods he had paid to the manufacturer. So he could sell the goods free of VAT for $200 in the export market rather than for $220 on the home market. The concept of zero-rating complies with the rules of the General Agreement on Tariffs and Trade that amounts of identifiable tax may be eliminated from export

  ― 519 ―
prices. This method of dealing with VAT thus increases the competitiveness of exporters.

27.34. Table 27.C indicates how rates of VAT vary in some European countries, the date of introduction, taxes replaced and percentage of total tax revenue and social security contributions raised by VAT in 1971.


Tax rates (a)(b) 
Country   Date of introduction   Taxes replaced   Standard   Lower   Intermediate   Upper   Contribution to total revenue(c) 
Per cent  Per cent  Per cent  Per cent  Per cent 
France  1968  various indirect  20.0f  7.0  17.6  33.3  25 
Germany  1968  turnover  11.0  5.5f  16 
Italy  1973  various indirect  12.0  1.0–6.0f 
Belgium  1971  various indirect  18.0  6.0f  14.0  25.0  22 
Netherlands  1968  turnover  14.0  4.0f  16 
Luxembourg  1970  turnover  10.0  2.0–5.0f  12 
Denmark  1967  purchase tax  15.0f  18 
Norway  1970  retail sales tax  20.0f  23 
Sweden  1969  retail sales tax  17.65f  3.09  9.89  14 
Austria  1973  turnover  16.0  8.0f 
Ireland  1972  sales taxes  19.5  6.75  11.11  36.75 
United Kingdom  1973  purchase tax; SET (d)  8.0  (e) 
note note note note note note  

27.35. Much been published about the operation of VAT which need not be summarised here. The countries of the European Economic Community aim to harmonise tax rates, but there is still considerable diversity. Goods and services that do not bear VAT are however kept to a minimum everywhere, and in most countries food is taxed though usually at a lower rate than the standard one.

27.36. The tax charged on purchases made by a trader must be shown on the invoice supplied to him, and this invoice is evidence for the trader to claim a credit. The invoice is an important instrument in control and enforcement and the prevention of tax evasion.

27.37. VAT is seen to have many advantages over other systems described if widely based at a uniform rate. Its chief disadvantage is that the large number of suppliers to be covered increases the administrative task, which would be modified if small suppliers of goods and/or services, as mentioned above, are exempt from VAT.

27.38. In some countries certain government services are exempt; but where there is competition between these services and private ones subject to VAT, equity can be maintained only if all are liable. Financial institutions are invariably exempt because of the difficulty of applying VAT to them: in its place in some countries a separate profits tax is charged to preserve equity between those who use such institutions and those who do not. Services rendered by schools, doctors, and hospitals are often

  ― 520 ―
exempt, though it could be argued that where charges are made they should bear VAT. Special regulations may be necessary in connection with hire-purchase arrangements, second-hand goods and charitable organisations.

27.39. While the Committee recognises that the introduction of VAT would have to be preceded by further discussion of the exact base and by a lengthy government information campaign, it has concluded that, despite its cost of administration, VAT is the most appropriate type of broad-based tax on goods and services.