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I. Reasons for a Review

1.1. There are a number of distinguishable, though overlapping, reasons why a broad review of the Australian tax system is timely.

1.2. There has been nothing approaching such a review since two Royal Commissions on Taxation, the Warren Kerr Commission (1921–23) and the Ferguson Commission (1932–34), reported. Several Commonwealth Committees on Taxation were set up in the 1950s—the Spooner Committee (1950–54), the Hulme Committee (1954–55) and the Ligertwood Committee (1959–61)—but each was restricted by its terms of reference to aspects of income tax. Even if, as is not the case, the Australian system were generally agreed to be as satisfactory as any tax system is ever admitted to be, a periodic thorough inspection would be as wise a precaution in this area of affairs as in any other.

1.3. Many of the key features of the present tax system were introduced in the 1930s and 1940s for good short-term reasons connected with the Depression and World War II, without much thought to their longer-run implications. This is true, for instance, of the adoption of sales tax in 1930, of the discontinuance in 1940 of company tax rebate on dividends to individuals, and of the introduction in 1941 of payroll tax (now under the control of the States) and Federal gift duty. Three decades or more later it is reasonable to examine the permanent consequences of these changes as well as to take stock of the piecemeal accumulation of minor changes that have since occurred. The present Australian fiscal legislation is best viewed more as an historical growth than as a system in the sense of a deliberately conceived and integrated structure in which every part has a defined role to play. The Anglo-Saxon tradition is to adapt slowly; but a periodical re-examination of the logic of what has grown up remains appropriate.

1.4. The wide range of tax structures to be found in countries with economic, social and political systems not unlike Australia's, to which reference is again made in Chapter 2, points to a variety of experiences from which much can obviously be learned, whether as precept or warning. If one wishes to choose between foreign models there are indeed many from which to make a selection. Stimulating too, though somewhat intimidating, is the long row of reports and studies produced overseas in the last few years, notably the six volumes and thirty accompanying studies of the Canadian Royal Commission on Taxation (Carter Commission, 1966), the report of New Zealand's Taxation Review Committee (Ross Committee, 1967), the several reports of the Commission of Enquiry into Fiscal and Monetary Policy in South Africa (Franzsen Commission, 1969–70), a series of Green and White Papers and Select Committee reports on various tax changes under consideration in the United Kingdom, and the many volumes of evidence submitted to the 1969 and 1973 Congressional hearings on tax reform in the United States.

1.5. Of more immediately pressing significance is the increasing discontent with the existing system. A decade ago four economists from Australian universities published a book entitled Taxation in Australia: Agenda for Reform, under the auspices of the Social Science Research Council. Their study, though traversing much that the present report has to cover, attracted little public attention. The 600 or so submissions


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received by the Committee reveal a less ready acceptance of the existing system. While few of these submissions discuss taxation in the broad, and many deal with quite small points of detail, collectively they reveal widespread and lively criticism. No doubt the impact of a rapid rate of inflation and the upward trend in government spending with its accompanying increases in the overall level of taxation partly account for this shift in public attitudes, but there is certainly revealed also the existence of a number of anomalies and inequities, many very real, in the tax system we now have.

1.6. The two factors just mentioned—inflation and the rising trend of government expenditure—provide further reasons for the urgency of a radical discussion of tax reform. The Australian tax structure was not designed for, and is still not adapted to, an economy in the throes of inflation. The implications of inflation warrant separate detailed examination and discussion is postponed to Chapter 6. Present comment is directed to the other factor—the increase in government spending.

1.7. A great part of the sharply rising totals of government expenditure, referred to again in Chapter 2 where statistics are given, can be explained by the rising unit costs of normal government expenditure of all kinds and the increase in population. But not of course all, since expenditure has also been increasing as a proportion of gross national product. The existence of this trend, and its likely future, are an important factor in tax policy.

1.8. The Committee's terms of reference instruct it to have regard to ‘the need to ensure a flow of revenue sufficient to meet the revenue requirements of the Commonwealth’. This may be taken to exclude from this report any substantial discussion of the relative place of taxation and borrowing in the overall public finances of Australia. But it may be noted that in some countries government capital expenditure is financed almost exclusively from borrowing, leaving taxes to cope with current needs. In Australia, however, a sizeable fraction of government investment is met from taxation. Were this fraction to be lowered and the fraction represented by borrowing correspondingly raised, the pressure for increasing taxation would be that much relieved. However, whether such a further lowering would be practicable over the years ahead is not something the Committee is competent to judge, involving as it does issues of economic policy and monetary management that go beyond its terms of reference. But the point deserves to be noted.

1.9. Even if rather more borrowing is resorted to, it is virtually certain that government spending will continue to increase as a percentage of gross national product. This has recently been happening in Europe and appears to be nearly universal: the varying political complexions of governments, it would seem, do no more than cause some dispersion in the speed of the growth.

1.10. In Australia, as summary figures in Chapter 2 serve to remind us, both the main overall categories of public expenditure—on goods and services involving a shift in real resources from the private to the government sector, and on transfer payments chiefly in the form of cash social service grants—have been gradually, if not quite steadily, rising as a proportion of gross national product for many years. They will do so again in the current financial year, and it is reasonable to assume that the upward trend will continue over the next few years. The Committee is aware that a number of commissions and inquiries are at work or have recently made recommendations in such fields as the relief of poverty, national superannuation, compensation for injury, illness or disability, and resource matters, all of whose findings are likely to invite consideration of measures that will make very large demands upon public revenue. It is


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conscious that it has to recommend a structure of taxation capable of meeting present and future revenue needs.

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