III. Level of Vat and Transitional Problems

27.40. To achieve simplification of the tax system by the development of VAT would take some time. It would be possible to make the first moves in this direction by widening the wholesale sales tax and gradually making uniform the present varying rates, a retail sales tax restricted to services being brought in at the same time. But it would be preferable to introduce VAT as soon as possible, the simultaneous steps being to:

  • (a) cancel wholesale sales tax and introduce VAT on a wide base at a comparitively low level;
  • (b) adjust duty on excisable goods so that when VAT is levied on them at prices embodying excise the combined effect of excise duty and VAT on the prices of the goods in question is equal to that of current excise duty; and
  • (c) impose an excise tax on motor vehicles so that when VAT is imposed on vehicles which have already paid excise duty, the total levy is equal to current wholesale sales tax.

27.41. The aim of these steps would be to obtain from excise duty and VAT at least as much revenue in toto as excise duty and sales tax together raise at present, and not to increase the total revenue from currently excisable goods. After the change to VAT, the price of excisable goods would remain unaltered, the prices of some goods such as those as in the electric and hardware categories would be reduced, and the prices of others, particularly food and clothing, would increase. A possible exception to the unchanged price of excisable goods might be made in the case of beer, which may be thought now to carry an unjustifiably high amount of excise duty.

27.42. If all tangible goods and all other personal consumption expenditure except rents and certain financial services were to be taxed, the base would be equivalent in 1970–71 to about $16,000 million at retail level, excise duty and wholesale sales tax included. If VAT were to be levied at a uniform rate of 5 per cent, very approximate estimates indicate that, on the basis of the steps in paragraph 27.40, $2,000 million would be raised from it and excise duties—an increase of $250 million over the revenue raised from wholesale sales tax and excise duties in 1970–71.

27.43. The above estimates are based on the assumption that the supply of goods and services in different categories would not be affected. As the change will increase personal consumption expenditure—$19,500 million in 1970–71—by less than 2 per cent overall, any inaccuracy in the assumption may be ignored for this discussion.

27.44. VAT on goods and services puts those on low incomes at a disadvantage and some countervailing measures would have to be taken. Purely by way of illustration, let it be assumed that a family consisting of husband, wholly dependent wife and two children spends its entire after-tax income of $100 a week, plus child endowment of

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$1.50 a week, on goods and services that rise in price by 5 per cent when VAT at that rate is imposed. To maintain the family's consumption level, expenditure on an annual basis will need to rise from $5,278 to $5,542, an increase of $264. One way of ensuring that the family is not made worse off would be for the husband to receive an extra $407 a year in pre-tax income, assuming 1974–75 income tax rates apply. A second way would be to reduce the amount of income tax the family has to pay from $604 to $340 by adjusting the income tax scale. Alternatively, the same income tax relief might be given by lifting the dependant allowance for wife and children from $832 to $1,494. Another possibility is to increase child endowment for two children from $78 a year to about $340, for example by raising the weekly rate for the first child from 50 cents to $3.00 and for the second from $1.00 to $3.50. (Were child endowment to be made taxable in the father's hands, the amount of endowment for two children would have to be increased still further.) The choice of compensating measures is obviously wide.

27.45. VAT has some common ground with payroll tax and with company income tax. When VAT was introduced in Britain in 1973, it replaced purchase tax, which was a wholesale sales tax, and selective employment tax, a type of payroll tax based on the wages of certain categories of employees and paid by employers. In Australia payroll tax was handed over to the States in 1971; at the current rate of 5 per cent on all payrolls, it could raise as much as $1,000 million in 1974–75. The introduction of VAT might need to be accompanied by discussions between the Australian Government and the States about the future of payroll tax. A VAT running alongside such a tax would involve an element of tax on tax that would be difficult to avoid.

27.46. The effect of VAT on company profits will depend on the extent to which VAT can be regarded as an addition to wage costs and be shifted forward in the price of goods and services. In some VAT systems, it is mandatory for VAT to be shown as the stipulated percentage of the selling price. Any absorption of the tax, leading to a lower selling price and to less revenue for the government, would necessitate reduced profits or reduced payments to suppliers. VAT can be beneficial to exporting firms: as noted earlier, VAT is an identifiable tax which the General Agreement on Tariffs and Trade allows suppliers to deduct when goods for export reach the border.

27.47. Under the aegis of a prices and incomes policy a government introducing a VAT, with or without other tax changes affecting suppliers, can estimate justifiable price changes and control them. The control should be seen to work in both directions for some prices might be capable of reduction in circumstances of other tax decreases. In the absence of a prices and incomes policy, a government can advertise prominently how the prices of certain categories of goods should be affected by the measures being taken. In much the same way, a government can state to the arbitration authorities and to the public in general how it expects wages to be adjusted in the presence of any alleviative measures taken at the same time. As VAT is meant to be a tax on private consumption expenditure, prices of goods and services are expected to increase; but in that the contribution of VAT to revenue may be balanced by a reduction of other imposts, the effect of the whole restructuring of the system need not be inflationary. Should the government require increased revenue in otherwise stable conditions and the imposition of VAT is the only measure taken, adjustments to prices and social service grants would be unavoidable.

27.48. In the preceding paragraphs the discussion has centred on the problems of the initial introduction of VAT, and a very low rate of tax has been used in the illustration. But the whole trend of the Committee's argument presupposes that, thereafter, it

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should be steadily raised with concomitant upward adjustments to social service payments and downward adjustments to the income tax. The Committee sees VAT as doing much more than helping to remedy the defects of the existing taxes on goods and services: its prime role lies in allowing, in turn, a major switch from existing direct taxation and a large-scale simplification of the whole taxation system. It believes that once Australian taxpayers become used to a VAT, and once its teething troubles are over, they will see its advantages and be willing to encourage its extension.

27.49. As and when a broad-based consumption tax was raised from its initial low rate, it would of course continue to be imperative, for the preservation of vertical equity, to adjust social service grants and personal income tax rates in a compensating way. But it would become increasingly difficult to achieve greater simplification of the fiscal system—the prime objective of the increase—through these means as personal income tax virtually ceased to be levied on persons earning up to little more than minimum wages. Further progress in this direction might only become possible if the regressive effect of an increasing VAT were recognised as justifying specially favourable treatment to low-income earners in the wage awards handed down by the Arbitration Commission and in other wage negotiations. There may be sound reasons why, in such negotiations, questions of tax should usually play only a minor role. But if the government were engaged upon a deliberate and explicit restructuring of the taxation system for widely accepted and welcomed ends of simplicity and efficiency, it would not, in the Committee's view, be in any way inappropriate for employers, unions and the Commission to assist by eliminating obstacles arising from considerations of equity. This seems to the Committee one of the areas in which objectives of tax reform call for the co-operation and understanding of non-government agencies.

27.50. The introduction of any major new tax such as VAT is a major task for government, and the Committee is under no illusions that its proposals in this chapter are administratively easy. The opinions of those who have written submissions on the subject of sales taxes in general have been divided and no clear view emerges. The somewhat extreme opinion that a VAT cannot be administered in Australia has, however, to be rejected.

27.51. The unavoidable difficulties accompanying the introduction of VAT will be reduced if the Government makes its intentions clear well in advance. Once an official decision has been made, staff has to be recruited and trained and a widespread education programme will be necessary to prepare the public and the business community. It is to be hoped that in the preparatory period much ill-informed criticism would be quelled and the ancillary benefits of VAT become increasingly appreciated. There is much evidence of overseas experience to show that, after initial troubles, VAT can become a readily accepted tax and be allowed to play an increasing part in revenue-raising.