TA X

FACTS FICTION AND REFORM

Neil Warren

Australian Tax Research Foundation Research Study No 41

The views expressed in this and other publications of the Foundation are not necessarily those of the Foundation or those who sponsor its publications. They are published on the basis that they represent a significant contribution to public understanding of aspects of taxation policy. Tax: Facts Fiction and Reform Neil Warren ISBN 0 949482 80 3 ISSN 0 817 4679
Neil

Warren, 2004

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, without the prior permission of the Foundation. Level 9, 64 Castlereagh Street Sydney 2000 Ph (+61)-02-8223 0000 Fax (+61)-02-8223 0077 Website: www.atrf.com.au

DISCLAIMER
The information herein is believed to be accurate and reliable but no warranty to that effect is given and the author and the Australian Tax Research Foundation accepts no liability for any claim in respect of anything and of the consequences of anything done or omitted to be done by any person acting in reliance, whether wholly or partially, upon the contents of this publication. No person should act on the basis of any information contained herein without considering and if necessary taking appropriate professional advice upon their own particular circumstances.

TABLE OF CONTENTS
Preface Glossary of Terms Executive Summary 1. Know Your Tax Facts 2. Current Australian Taxes in Perspective 13 14 16 30 32

Brief History of Taxation in Australia Current Taxation in the Australian Federation Current Commonwealth Tax Rates State Tax Rates Income Distribution and Taxation
3. Overview of Global and Domestic Tax Trends

32 35 39 42 44
50

OECD Trends in Taxation Tax Trends in Other Federations Whats Troubling the Commonwealth and Forcing Tax Reform Back on the Agenda? Whats Troubling State Governments?
4. Tax Reform Timeline 1998-2003 5. Commonwealth Reform of the Tax Policy Process

50 56 58 59
61 66

Board of Taxation ATO and Tax Consultation One Step Forward, Two Steps Back
6. GST in Perspective

70 71 72
74

History of GST around the World Background to GST in Australia What are the Consumption Tax Alternatives to a GST? Why the Proliferation of VAT? VAT Design in OECD Countries Australian GST and its Base And What About the Taxation of Food? GST Design Controversies and Fiction
7. Excise Duties

74 77 79 80 81 85 92 94
97

International Experience With Taxes on Specific Goods and Services Excise Duty Rates Excise Duty Revenue Contribution

97 99 101

8. Reforming the Personal Income Tax Schedule

105

Bracket Creep EMTR So How Do Other Countries Tax Personal Incomes? Tax rate schedule Tax unit Ready Reckoner for Current Personal Income Tax Schedule Costing the Clawing Back of the Personal Income Tax Threshold So How Do We Afford Substantial Income Tax Cuts?
9. Personal Income Tax Base: Sources and Deductions

105 114 119 119 125 127 129 133

134

Non-Investment Income of Individuals Investment Income of Individuals Capital Gains and CGT Reforms Taxation of Rental Income Deductions and Work Related Expenses
10. Taxation of Superannuation

134 135 139 149 158

163

A Brief Overview of Australias Retirement Income Strategy Social Security Contributions in the OECD Taxing Superannuation Contributions Trends in the SGC Superannuation and Small Business Owners Preservation Rules Superannuation Tax Expenditures The Challenge for Individuals
11. Fringe Benefits Tax

163 165 168 172 173 174 175 180

182

The Issue The FBT Facts

12. Company Income Tax

182 185
188

International Trends in Corporate Taxation Tax base differences Central and sub-central rates Tax abatements Tax administration Trends in Australian Company Tax Rates Growth in Number of Companies Imputation Credits Size and Distribution of Companies Company Tax Reform Debate: Successes and Failures since 1998

188 189 190 192 193 194 195 197 199 201

13. The Taxation of Trusts

204

Growth of Trusts, Partnerships and Companies Income Sources of Trusts

14. Tax Expenditures: Size, Distribution and Nature

204 205
207

Commonwealth Tax Expenditures State Government Tax Expenditures Overview

15. Hypothecated Commonwealth Taxes

207 211 213

214

Superannuation Guarantee Charge Medicare Levy Commonwealth HECS State Levies

16. Tax Collection and Administration Reforms

218 219 221 225

226

PAYG and ABN GST and ABN Registrations Widening the Use of the ABN Cash Economy and ANTS
17. Wealth Stock and Asset Transfer Taxes

226 228 231 232

236

Asset and Asset Transfer Taxes in Australia Private Sector Wealth Distribution of Private Sector Wealth Wealth distribution by deciles Wealth distribution by age Distribution of income from wealth Death and Gift Duty or an Annual Net Worth Tax
18. Payroll Tax Reforms

236 239 244 244 248 251 251

253

Current Payroll Taxes Should the Payroll Tax be Reformed?

19. Funding Income Tax Cuts With a GST Increase: Facts and Fiction

253 254
258

Introduction Typical Arguments for a Tax Mix Change Practical Problems with Implementing a Tax Mix Change Final Observation
Bibliography Appendix

258 259 266 268

269 279

LIST OF TABLES
Table Table Table Table Table Table Table Table Table Table 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 History of Tax Instruments Australian Wholesale Sales Tax Base and Rates Commonwealth, State and Local Tax Revenue: 200102 Taxation by Level of Government: 200102 Recent Personal Income Tax Reforms and Low Income Rebate Corporate Tax Rates Excise Duties: 1 February 2004 State Taxation Equivalised Household Income: 200001 Percentage Share of Equivalised Disposable Household Income for Income Quintiles Distribution of Household Income, Taxes and Benefits by Gross Income Quintile: 199899 Distribution of Household Income, Taxes and Benefits by Gross Income Quintile: 199899 Distribution of Household Income, Taxes and Benefits: 199899 by Gross Income Quintile Growth of Taxes in OECD Countries Taxation in OECD Countries: 2001 (% of GDP) Tax Revenue to Level of Government State Taxes as a % of GDP: 2001 Local Taxes as a % of GDP: 2001 Distribution of Taxes by Tax Type: Australia 196970 to 200102 Tax Reform Timeline VAT Rates in Selected EU Countries Taxes on General Consumption General Consumption Tax Types Adopted Worldwide Rates of VAT/GST in OECD Member Countries Concessions, as of 1 January 2003, Providing Relief From VAT/GST Registration and Collection Based on Total Annual Turnover State Sales Tax Rates: January 1, 2003 Household Final Consumption Expenditure and the GST Base: 200203 ($m) Household Final Consumption Expenditure VAT Rates Applied in the EU Member States: May 2003 (%) 33 35 36 39 40 40 41 42 45 45 46 48 49 53 55 56 57 57 58 62 76 78 79 82 83 84 86 89 92

Table 2.11 Table 2.12 Table 2.13 Table Table Table Table Table Table Table Table Table Table Table Table 3.1 3.2 3.3 3.4 3.5 3.6 4.1 6.1 6.2 6.3 6.4 6.5

Table 6.6 Table 6.7 Table 6.8 Table 6.9

Table Table Table Table Table Table Table Table Table Table

6.10 6.11 6.12 7.1 7.2 7.3 8.1 8.2 8.3 8.4

Table 8.5 Table 8.6

Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table Table

8.7 8.8 8.9 8.10 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 9.10 9.11 9.12 9.13 9.14 9.15 9.16

Table 10.1

Household Income and Expenditure: 199899 Regressivity of Taxing Food and Related Products: 199899 Links to Official GST Websites Taxes on Specific Goods and Services Excise Duty Rates Taxes on Petrol, Tobacco and Alcohol Personal Income Tax Schedule: 197071 to 200304 Indexed Income Tax Free Threshold: 197576 to 200203 Top Marginal Personal Income Tax Rates for Employee (2001) Personal Income Taxes MTG International 2001 Rates Apply at 30th June 2001 for Individuals Social Security Contributions: 2002 Marginal and Average Personal Income Tax and Social Security Contribution Rates on Gross Labour Income (2001) (Ranked on MTR for 133% APW) Personal Income Tax Unit, 2001 Personal Income Tax Schedule 200405 Personal Income Tax Schedules: 200304 Personal Income Tax Schedule Changes (excluding Medicare Levy) Major Non-Investment Income Sources: 200001 Taxable Investment Income: 200001 Summary of CGT Characteristics in Five Countries as at August 1998 Comparison of Capital Gains Tax Rates for Individuals: 1999 Tax Treatment of Capital Gains for Businesses: 1998 Taxation of Capital Gains on Shares, 2000 Resident Taxpayers Individuals Capital Gains:200001 Rental Income and Deductions 200001 Rental Property Profit and Loss by Different Entities ($m) Rental Property Profit and Loss by Different Entities: Number of Claimants (000s) Net Rental Income: Individuals 200001 Rental Income and Deductions 200001 Average Annual Rates of Growth in Deductions: 199394 to 200001 Income Deductions: 200001 Work Related Expenses 200001 Estimated Tax Cost of Work Related and other Personal Income Deductions: 2000-01 ($m) Income Tax Plus Employees and Employers Social Security Contributions: 2002

93 93 96 99 101 103 107 108 120 121 123

124 126 128 131 132 135 137 140 141 142 144 149 150 151 152 153 154 159 160 161 162 166

Table Table Table Table Table Table Table Table

Estimated Income Tax and Social Security Expenditure: 200304 Tax Treatment of Superannuation: 200203 Tax Treatment of Retirement Benefits Superannuation Guarantee Rate Superannuation Preservation Age Age Pension Eligibility Retirement Savings Tax Expenditures Estimated Tax Expenditures Through Superannuation Tax Concessions, 199900 to 200607 Table 10.10 Tax Expenditure Trends: 199900 to 200607 Table 10.11 Tax Revenue from Superannuation Funds Table 11.1 Fringe Benefits and Other Income Sources 200001 Table 11.2 Fringe Benefits Tax by Benefit: 199899 Table 11.3 Fringe Benefits Tax by Industry: 199899 Table 12.1 KPMGs Corporate Tax Rates Survey January 2003 Table 12.2 Corporate Income Tax Rates:2002 Table 12.3 Targeted Corporate Income Tax Rates: 2002 Table 12.4 Corporate Tax Regime in OECD Countries: 2002 Table 12.5 Australian Corporate Tax Rates Table 12.6 Growth in Companies 199091 to 200001 Table 12.7 Individuals by Grade of Income, Dividends and Imputation Credits: 200001 Table 12.8 Imputation Credits Claimed by Individuals: 199394 to 200001 Table 12.9 Imputation Credits claimed by Individuals: ($m) Table 12.10 Company Type by Grade of Net Tax: 200001 Table 13.1 Growth in Companies, Trusts, Partnerships and Employment: 199394 to 200001 Table 13.2 Trusts by Broad Industry: 200001 Table 14.1 Aggregate Tax Expenditures by Function Table 14.2 Aggregate Tax Expenditures by Taxpayer Affected Table 14.3 Income From Dwelling Rent: 200102 Table 14.4 NSW Tax Expenditure by Type of Tax: 198687 Table 14.5 NSW Tax Expenditure and Revenue Table 15.1 US State Dedicated Taxes: 1997 Table 15.2 Commonwealth Agricultural Levies and Other Taxes Table 15.3 Medicare Levy and Surcharge: 2003-04 Table 15.4 Health Expenditure 2002-3 and 2003-04 Forward Estimates, and Medicare Levy Table 15.5 Higher Education Contributions Scheme (HECS)

10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9

167 168 169 172 174 175 176 177 177 178 183 186 187 189 191 192 193 195 196 197 198 199 200 204 206 208 210 210 212 212 216 217 219 220 223

Table Table Table Table Table Table Table Table

HECS Outstanding Debt NSW Non Tax Revenues: 200102 ($m) 1998 Forecasts of Australian Business Number (ABN) Registrations GST Client Registration Profile: 24 Aug 2001 Wholesale Sales Tax: 199899 Business Entities by Size of Estimated Annual Turnover: October 2000 Business Entities by Industry: October 2000 (000s) All Commonwealth, State and Local Taxes on Assets and Asset Transfers (% share of All Tax Revenue) Table 17.2 State and Local Taxes on Assets and Asset Transfers (% share of State tax revenue) Table 17.3 State Assets and Asset Transfers Table 17.4 Real Private Sector Wealth Table 17.5 Wealth, Wealth Tax, Income and Consumption Table 17.6 Distribution of Personal Wealth Table 17.7 Distribution of Income Unit Wealth by Type of Asset and Wealth Decile, Australia, June 1998 Table 17.8 Income and Wealth Distribution by Quintiles: 2000-01 (%) Table 17.9 Wealth by Age and Highest Qualification of Income Unit Reference Person, 1986 and 1998 ($) Table 17.10 Income and Wealth Distribution by Quintiles: 200001 Table 18.1 Effective and Nominal Payroll Tax Rates Table 19.1 Personal Income Tax Schedule after Tax Mix Change Causing 2.5% inflation: 200304

15.6 15.7 16.1 16.2 16.3 16.4 16.5 17.1

224 225 227 228 229 230 231 236 237 238 241 242 244 245 247 249 250 254 262

LIST OF FIGURES
Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure Figure 2.1 2.2 2.3 5.1 5.2 5.3 6.1 7.1 8.1 8.2 8.3 8.4 10.1 15.1 17.1 17.2 Changing Share of Commonwealth Consumption Taxes Contribution to State Tax Revenue by Tax Volatility of Revenue from Stamp Duties on Conveyancing RBT Integrated Approach ATO Integrated Tax Design Wheel Tax Design Process and Possible Consultation Approaches Changing Pattern of Household Final Consumption Expenditure (HFCE): 1960-01 to 200203 Changing Contribution from Customs and Excise Duties Average and Marginal Rates on the Average Australian Worker Distribution of Taxpayers Across the Income Tax Schedule Average Weekly Earnings, the Top Income Tax Threshold and the Top Marginal Tax Rate EMTR and ABR for Selected Single Persons and Married Couples: 2003 Household Savings Ratio The Laffer Curve Distribution of Household Net Wealth: June 2003 Contribution to Growth in Real Private Net Wealth of Different Sources of Wealth: 19612003 Income and Wealth Distribution: Australia 2002 38 43 44 69 72 73 90 102 108 109 112 117 165 214 243 243 248

Figure 17.3

ABOUT THE AUTHOR

Dr Neil Warren is Associate Professor of Economics and Associate Director (Research) at the Australian Taxation Studies Program (ATAX), Faculty of Law, University of New South Wales. He is also the Research Director of the ATRF and an Advisor to the Business Coalition for Tax Reform. He was also a member of the Commonwealth Governments Small Business Consultative Committee from December 1998 to June 2003. His academic interests are in public sector economics with a special focus on taxation policy and distributional issues. He has authored and co-authored many articles in academic journals and conference volumes, as well as having published a number of books, conference volumes, government reports and many discussion and conference papers. He has also consulted widely in the area of taxation policy, preparing numerous reports for political parties, welfare and industry groups as well as being an expert witness in various tax related Court cases. Organisations for whom he has been a consultant include the NSW, Victorian, Queensland and WA State Governments, ABA, EPAC, BCA, CPA Australia, ICAA, IFSA, NFF, TIA, and political parties including the Democrats and the Liberal Party of Australia. In particular, he was a consultant to EPAC in the six months leading up to the 1985 National Tax Summit, a consultant to the Liberal Party on Fightback! between 1990 and 1992, and in 1994 he was the Team Leader of a major review of the Vanuatu tax system. Between 1999 and 2002, he also was Project Director of an institutional strengthening project in the Ministry of Finance in Tonga and in 2002, co-chaired a NSW Government Review of Employers Compliance with Workers Compensation Premiums and Payroll Tax in NSW. Selected publications are cited at <www.atax.unsw.edu.au/ staff/warren.htm> All correspondence should be directed to <n.warren@unsw.edu.au>

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