II. Appraisal of Particular Taxes

3.29. It is convenient next to appraise the main kinds of tax that already exist in or might be introduced into Australia, by reference to these dominant criteria. They are all taxes that will have to be surveyed in more detail later, but a short summary here will help towards a preliminary discussion in the next section of alternative kinds of tax system.

3.30. Personal income tax. If income can be accepted as the primary feature in comparisons between the ability to pay of individuals, it follows that, if the problems of definition and information-collection can be solved, a personal income tax is an admirable vehicle for fairness. An almost limitless range of provisions for horizontal equity can be introduced into it. Any degree of progressivity can be enacted. It is indeed the only tax currently in the tax system that is capable of raising large revenues and into the structure of which a refined set of progressive provisions can be incorporated. To the extent, however, that consumption represents a superior measure of ‘economic well-being’, at least for some income groups, it might still be less fair than a progressive consumption tax, were such a thing practicable. But on the whole personal income tax scores highly in terms of equity.

3.31. By contrast, and again comparing it only with potentially large taxes, it must rank lowest for simplicity. Complexity is introduced when many allowances are believed to be called for by horizontal equity; and more when, with a highly progressive scale, measures have to be taken to prevent or control the transfer of incomes from

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persons in high tax ranges to those lower down. As a main revenue-raiser it must fall on almost every person with income, many of whom have little taste for or skill at form-filling and many of whom, but for income tax, would have no need to keep financial records. The definition of what taxable income is to include is a matter of the greatest difficulty. It is a tax on which the administrators must perpetually compromise between the expense and intrusiveness of a rigorous administration and the losses of revenue suffered when administration is comfortably trustful. It is one too that presents the largest number of citizens with annual temptations to evade and avoid and to suspect misbehaviour in others.

3.32. As regards resource efficiency, personal income can certainly be made the vehicle for deliberate non-neutralities. Considered as a neutral tax, faults can be found with it. Since it must, in large measure, be a tax on the proceeds of work, it is not neutral between work and not working though it shares this defect with almost every tax. Nor, as noted already, is any general tax on income neutral between current consumption and savings. This makes the income tax rather discouraging to growth.

3.33. Company income tax. This is a most difficult tax to appraise, especially with respect to equity, not least because in this area the international aspects of tax are of the highest importance. Equity is essentially a matter of comparative justice between individuals. Any tax on corporations may (or may not) be fair to its owners, its employees or the purchasers of its products; but it cannot be said either to be fair or unfair to the corporation as such. When the tax is held to fall upon the income rights of the proprietors, its fairness will turn upon whether the sum paid is equal to what would be paid were the income in question simply added to the other income of these individual proprietors. Neither in Australia nor elsewhere is this in fact often the case.

3.34. For simplicity it will rate higher than personal income tax. The problem of ascertaining the income of a company is, in principle, no different than in the case of personal income, but the necessary accounting procedures are likely to be, if anything, more readily available, more fully required already for the company's own purposes. Furthermore, though the vast majority of companies are not large, in Australia as elsewhere a comparatively small number among them produce the bulk of the substantial revenue this tax yields.

3.35. The efficiency of company income tax is also hard to judge. It is adaptable to deliberate non-neutralities—almost too conveniently so. But even when neutrality is sought there are ways in which it will probably fail: there is likely to be some discrimination between companies and other types of legal organisation.

3.36. Capital gains taxes. The pros and cons of capital gains taxes are discussed at some length in Chapter 23. The fundamental case for such a tax rests upon equity. It is almost universally agreed that capital gains (when ‘real’ and not simply the result of inflation) are so closely akin to income in its everyday sense that equity requires that they be taxed if income is. By the test of fairness, therefore, a capital gains tax has merit, in principle, as a supplement to personal income tax. On the other hand it must be a tax of great complexity, and efforts to bring it within the bounds of administrative practicability must lead to some evaporation of its equitable advantages. It is a tax not without attractions in terms of resource efficiency. When capital gains are untaxed but income gains are, investments in the kinds of asset on which the returns come (or can be arranged to come) in the form of capital appreciation will be made relatively the more profitable. A misallocation of resources is therefore likely which the tax serves to correct.

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3.37. Estate and gift duties. These taxes may be taken together, since (as will be argued in Chapter 24) they lead into a tangle of inequities and avoidances without even the merit of producing large revenues unless they be integrated and tightly administered. As a supplement to income tax—or even to a consumption tax—an estate duty ranks high for equity. It taxes those assets the income from which could only with difficulty be ‘imputed’ for income tax purposes. It can also bear specifically upon inherited wealth if equity is believed to require a special levy upon it.

3.38. Estates and gift duties, and such variants as inheritance and accession duties, must however be very complex taxes. They cause less continuous trouble to those concerned than annual taxes—and this gains one good mark for simplicity—but their provisions need to be elaborate. However, if it be possible to confine them to large fortunes, they will be simple in the sense of not affecting the majority of the population. They need not be inimical to resources efficiency. They inevitably contain a nonneutrality in terms of their discouragement of accumulation for the benefit of heirs, in the same way as a progressive income tax may contain a more general discouragement to savings. But in both cases the conflict is between distinct ultimate ends and has to be resolved by judgment.

3.39. Wealth taxes. Wealth taxes are discussed in Chapter 26. Here they can be briefly disposed of. They have some of the advantages of estate and gift duties in terms of equity and all their disadvantages in terms of simplicity—and more, since they will be so much more frequently levied.

3.40. Taxes on goods and services. A distinction must be made here between ‘narrow-based’ taxes falling upon only a few consumption goods and services (even though they be ones that absorb quite a significant proportion of total expenditure) and ‘broad-based’ taxes levied on very large ranges of goods and services even if not quite all consumption. The Australian sales and excise taxes are an obvious example of the former category; the British and Continental value-added taxes belong to the latter. They are described in Chapter 27.

3.41. Narrow-based taxes rank badly for equity. They discriminate between persons with the same incomes but different tastes. It may perhaps be desirable to levy a heavier burden on the smoker and the drinker than on other people but if so it will be on the grounds of efficiency rather than equity and even then it has to be remembered that the real sacrifice may well be borne by the families of those on whom it is intended to lay the impost. Nor can such taxes be made in any way effectively progressive in terms either of consumption or income. They are however taxes of extreme simplicity. Exceptionally few enterprises have the legal responsibility for payment; they will have the machinery for calculating their liability as part of their normal activities; generally their assessment can quickly be settled with the official administration. In terms of resource efficiency it is obvious that these are non-neutral taxes. They rank well for efficiency only when they are deliberately tailored to fit some desired non-neutrality, and they can be made fees for particular government services rather than taxes required for general revenue.

3.42. Various forms of broad-based taxes are discussed in Chapter 27. The choice between them chiefly turns on points of technical detail. What is more relevant here are the qualities such taxes have when at high uniform level and when very widely based.

3.43. A broad-based tax serves horizontal equity by not discriminating between savings and consumption; but by itself it cannot be adapted to the varying situations of

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individuals. Nor is it, by itself, suitable for vertical equity. It is essentially a proportionate consumption tax, and actually regressive as a tax on income since the proportion of consumption to income normally falls as income increases. It stands high by the test of simplicity, certainly far higher than personal income tax when both are compared as major revenue-raisers. Whatever its form it would be levied on far fewer persons or enterprises. A much higher proportion of them would have little difficulty with the paper work, much of which would be only a small addition to ordinary commercial recording. This latter advantage would be greatly diminished if the rate were not uniform. Such taxes certainly have problems of definition at their edges, even though uniformity within the boundary avoids them there, and the higher the rate the more acute they will be. However, it seems unlikely that these would ever reach the scale of those encountered in income tax. A broad-based tax at a uniform rate is inherently neutral within its ambit. Were all savings made solely for the purpose of savers’ own future consumption, it would also be neutral between consumption and savings; but to the extent that other motives enter into savings, this would not be so.

3.44. Grants. As noted earlier in this chapter cash grants by the State need to be brought into the overall assessment of taxation systems. As will become clearer in Chapter 12 they provide an alternative to concessional deductions in the personal income tax as a technique for achieving horizontal equity. Most social service grants to the needy may also be quite naturally viewed as instruments of vertical equity at the lower end of the income scale. Whether taxed or not they will, when at a flat rate, somewhat increase the net progressivity of the tax system. Since they will constitute an ever smaller proportion of the incomes of their recipients as one moves up the income scale, they serve to make the distribution of income less unequal. They are also, when free of means test, simple since their eligibility is determined by such tests as age, parenthood, sickness, unemployment. In general too they are neutral. Unless the benefits are very large it is unlikely that child endowment could be much of an incentive to parenthood or that well-administered sickness or unemployment benefits increase the incidence of illness or unemployment to any significant extent.