Tax Policy Elective 1993 --- "Preface to Review of Western Australian State Taxes" [1994] MurdochUeJlLaw 3; (1994) 1(2) Murdoch University Electronic Journal of Law

Title : Preface to Review of Western Australian State Taxes
Author : Tax Policy Elective 1993
Organisation : School of Law, Murdoch University
Language : English
Keywords : TAXATION, WESTERN AUSTRALIA, EQUITY,
: EFFICIENCY, SIMPLICITY, REFORM.
Abstract : This document and its related chapters also
: in this issue of E Law constitute a review and
: assessment of several taxes levied by the State
: of Western Australia, but which are common in
: many other jurisdictions. They include land
: tax, stamp duty, financial institutions tax and
: debits tax, payroll tax, business franchise
: licence fees (imposed on tobacco, petroleum and
: alcohol) and betting taxes. The review is
: particularly concerned with issues of equity,
: efficiency and simplicity in the imposition of
: the taxes reviewed. Criticisms are made on
: the basis of these characterisitcs of an ideal
: tax. Many recommendations are made for the
: improvement of the method of taxation and
: assessment. Statistics and graphics included
: in the original work are not reproduced here
: due to technological constraints but can be
: obtained from the author.
Contact Name : The Editors, E Law
Contact Address : Murdoch University Law School, PO Box 1014,
: Canning Vale, Western Australia, 6155
Contact Phone : [phone]
Contact Email : [e-mail]
Last verified : 23 April 1994
Last updated : 23 April 1994
Creation Date : December 1993
File Size : 61,498K
File Type : Document
File Format : ASCII
Publication Status: Final
COPYRIGHT POLICY :
Material appearing in E Law is accepted on the basis that the
material is the original, uncopied work of the author or
authors. Authors agree to indemnify E Law for all damages,
fines and costs associated with a finding of copyright
infringement by the author or by E Law in disseminating the
author's material. In almost all cases material appearing in E
Law will attract copyright protection under the Australian
_Copyright Act 1968_ and the laws of countries which are member
states of the _Berne Convention_, _Universal Copyright
Convention_ or have bi-lateral copyright agreements with
Australia. Ownership of such copyright will vest by operation
of law in the authors and/or E Law. E Law and its authors
grant a license to those accessing E Law to call up copyright
materials onto their screens and to print out a single copy for
their own personal non-commercial use subject to proper
attribution of E Law and/or the authors.
ISSN: 1321-8247
URL: gopher://infolib.murdoch.edu.au:70/00/.ftp/pub/subj/law/jnl/
elaw/comment/watax/preface.txt
---------------------------------------------------------------

1 PREFACE

This review of Western Australian State Taxes has been
produced by students enrolled in the course Taxation Policy.
Taxation Policy is an elective subject in the Bachelor of
Laws degree programme offered in the Law School at Murdoch
University.

The authors were broken into six groups, each with primary
responsibility for one of the six main chapters in the
Review.

The Commissioner for State Taxation kindly made officers of
his department available to each of the group. This enabled
us to complete our research more quickly and completely than
might otherwise have been possible. We are grateful for the
assistance lent us. Naturally, the opinions expressed in
this Review remain entirely those of the Taxation Policy
Elective itself.

Each group presented their chapter both in seminar form and
as a draft, allowing for significant feedback from other
members of the Elective throughout the writing-up period.
Each member of the Elective also produced an individual
paper critiquing the various draft chapters and suggesting
directions for the review. My Introduction to the review
draws heavily on those papers, and in particular on a paper
by Grant Gernhoefer - with the delicious opening paragraph
coming from Terry Hall.

On the other hand, readers will detect differences of
approach in the various chapters as alternative approaches
to vexed issues (such as the appropriateness of progressive
tax scales) elicited different responses in different
contexts.

The purpose of the Review is to offer a policy based
critique of the State tax system, with a view to stimulating
further discussion and research into one of the most
important areas of our federal system of government.

The members of the 1993 Taxation Policy Elective were:

Dr Neil McLeod (course co-ordinator and editor)
Jim Borshoff Jeremy Malcolm
Grant Gernhoefer Susan Meaghan
Terry Hall Barry Padman
Nanthakumar Kanagalingam Sarah Tapper
Mark Lane Shannon Turner
Colin Ligman Kate Wholley
Paul McEvedy Jenny Wiggins
Bob McKenzie Jack Wong Hing Man


Neil McLeod
December 1993


CONTENTS OF 1993 REVIEW OF WESTERN AUSTRALIAN
STATE TAXES


1 INTRODUCTION
2 LAND TAX
3 STAMP DUTY
4 FINANCIAL INSTITUTIONS DUTY & DEBITS TAX
5 PAYROLL TAX
6 BUSINESS FRANCHISE LICENCE FEES
7 BETTING TAXES


Implicit in any discussion of state taxation reform is a
search for the 'ideal' or perfect tax. This elusive levy
must: affect most people but offend none; be easy and
inexpensive to collect, and impossible to avoid; it must not
distort investment patterns, but must take from the rich
more than from the poor; it must also satisfy constitutional
prerequisites and take account of Commonwealth/State and
inter-State policy differences; and finally, the 'ideal' tax
must not impact adversely upon the career aspirations of
politicians who sponsor it.

In the more prosaic language of public finance theory, the
ideal tax should be equitable, efficient and simple.

2 EQUITY

The notion of equity brings us straight back to the
political arena. What is fair or just within the philosophy
of one taxpayer may seem otherwise from a different
ideological perspective.

The simplest element of 'equity' is the notion of
horizontal equity. This is the notion that individuals with
identical abilities to pay tax should bear identical tax
burdens.

The narrower the base of a tax, the further the tax is
likely to depart from the ideal of horizontal equity. A tax
on the registration of dogs will be borne only by those who
register dogs. (The horizontal inequity of such a tax may
be mitigated by other taxes which impact more heavily on
non-dog owners, such as a tax on insurance premiums - if we
assume that dog-owners face lower premiums.)

Naturally, many taxpayers in fact have significantly
different capacities to pay tax. The notion of vertical
equity requires a greater tax burden to be borne by those
with a greater capacity to pay.

Of course, a flat rate of tax will usually extract more tax
from the wealthy than from the poor. At least this will be
so where the wealthy enjoy greater access to the relevant
taxed good or taxed receipt. Where that condition is met, a
`rich' person will be taxed more in absolute dollar terms
than a `poor' person.

This `minimalist' concept of vertical equity is not the one
that usually finds favour in modern tax policy literature.
A flat rate of tax may still be considered `regressive' if
it claims from the `rich' person a smaller proportion of
their wealth than it does from the `poor' person.

Modern public finance theorists often consider the
redistribution of wealth to be one of the legitimate
responsibilities of government. It is a societal objective
that a market economy itself is unlikely to deliver
optimally. This leads theorists to argue for progressive
rates of tax. Progressive rates are scaled rates, with the
higher rates applying to those with higher capacities to pay
tax.

Progressive rates bring their own problems, however. They
tend to compromise the criterion that a tax should be simple
to apply and to collect (discussed below). By creating
differentials in tax treatment, they foster schemes to
exploit the existence of the lower tax scales.

Most importantly, for a progressive tax scale to have
legitimacy in terms of vertical equity, it must be shown
that there is a correspondence between those persons
attracting the highest rates of the tax and those persons
having the greatest ability to pay. A flat rate tax on the
receipt by taxpayers of Christmas food hampers from
charitable organisations would be regressive. But a
`progressive' scale under which the rate of tax imposed
increased with the value of the charitable assistance
received would likely be even more regressive in its impact.

By way of illustration, the reader will find (in Chapter 2)
that it is not clear to the members of the Taxation Policy
Elective that there is a sufficient correspondence between
the unimproved value of land held by taxpayers and their
capacity to pay tax. As a consequence, we have recommended
the introduction of a flat rate of land tax.

In order to achieve vertical equity, there needs to be a
correlation between the incidence of the tax itself, or of
the higher rates of the tax, and the ability of the taxpayer
to pay the tax. A tax will be most likely to achieve
horizontal equity if it is broadly based (i.e. if the
incidence of the tax is upon as many tax payers as possible)
and contains as few exemptions as possible.

The difficulty of designing taxes which achieve vertical
equity is obvious, and advances in sophistication in the
design of a particular tax may lead to losses in terms of
simplicity. They may also give rise to opportunities for
sophisticated schemes for avoidance. If there is a
correlation between the capacity to pay tax and the capacity
to pay tax advisers, then those who best avoid the tax may
well be those for whom the complexities were specifically
included.

Western Australian, in common with all the States, is
severely limited by constitutional and political realities
in the design of taxes which achieve horizontal, let alone
vertical, equity. Income tax, which does allow some direct
correlations with the ability to pay, has been effectively
denied to the States by political manoeuvring at the federal
level. Broad based consumption taxes have been denied to
the States through the High Court's interpretation of
section 90 of the Commonwealth Constitution. (See Chapter
6.)

It is arguable that the States will tend to overreach
themselves if they attempt too much in terms of equity,
especially vertical equity. There are other ways in which
income redistribution can be achieved. Firstly, the federal
Government is better placed to levy taxes which attempt to
achieve vertical equity, and has in fact done so. Secondly,
direct assistance in terms of the provision of Government
services aimed at those in society most in need of
Government support is a more direct, and arguably more
effective, method of obtaining economic equity than tax
breaks (or 'tax expenditures').

3 EFFICIENCY

One of the perceived virtues of a market economy is that
the prices obtained for inputs and commodities, and the
rewards available from investments of capital, will offer
clear directions to taxpayers as to the most productive use
of their various resources.

One of the criterion by which taxes are judged is the
extent to which they distort those prices, those rewards,
and those uses of resources. The less distortion a tax
causes, the more efficient (or economically neutral) it is
considered to be.

A particular tax may impinge disproportionately on some
forms of resource use, reducing their relative
attractiveness in comparison with alternative forms. This
may well distort investment away from the more heavily taxed
forms of production into less productive areas which offer
greater `after-tax' returns.

Similarly, if a tax is placed predominantly on a commodity
that offers a high level of utility, it is likely that there
will be some leakage of consumption into its less
satisfactory substitutes.

A tax is most likely to be economically efficient if it is
broadly based and contains as few exemptions as possible.


4 SIMPLICITY

Complex taxes impose costs of collection not only on
Government tax officials but also on the taxpayers
themselves. These costs include the costs of setting up and
operating the mechanisms necessary to calculate the tax,
employing and training staff to perform the necessary
collection functions, the seeking of accountancy advice and
legal advice, and the cost of litigating disputes.

The benefits of any change to a taxation regime must be
measured against the initial costs in terms of altering the
ways taxpayers and Government officials must operate in
order to collect the tax.

Taxes will tend to be `simpler' if they have few exemptions
and relatively few collection points (i.e. if the legal
incidence of the tax rests on relatively few tax payers).

A tax which has relatively few collection points is not
necessarily a narrowly-based taxed when viewed from the
perspective of `horizontal equity' or `efficiency' (though
it may be). The extent to which it does offend the latter
principles of good tax design will depend on the extent to
which the legal incidence of the tax varies from the true
economic incidence.

A tax on the wholesalers of a particular type of commodity
may simply be built into the price of that commodity. (The
extent to which this will be possible will depend on a
number of factors including the elasticity of consumer
demand for that commodity and the availability of close
substitutes not subject to the tax.) If the tax is passed
on in this way it will ultimately be borne by the consumers
of the commodity so that the tax will have a substantially
broader base than it would at first appear.

The `ideal' nature of the criteria by which taxes are
usually judged must always be kept in mind. It is unlikely
that the practical application of any tax would satisfy even
one of the criteria perfectly . As those criteria are
frequently in conflict with each other, even theoretical tax
design becomes a matter of compromise. For example,
progressive rates and tax-free thresholds designed to
achieve vertical equity usually involve costs in terms of
the objective of simplicity.

Nevertheless, the various tax policy criteria suggest that
Governments should favour broad based taxes with as few
exemptions and concessions as possible.

5 REVENUE RAISING

It is important not to lose sight of the fact that the
prime objective of most taxation is the raising of revenue.
It is true that tax breaks and tax levies can be used as
indirect incentives in the pursuit of social and economic
policies - though taxation is arguably too blunt a tool to
be as effective as direct expenditures or penalties.

Changes to tax regimes may produce gains in terms of
equity, efficiency or simplicity. But their net effect will
be a retrograde one if they significantly compromise a tax's
revenue-raising capacity.

Proposals for tax reform are best made in the context of
`revenue neutrality'. It must be shown that any loss of
revenue can be made up by other taxation measures, and that
those additional measures do not in turn undermine the
policy gains which motivated the change in the first place.

Again, a broadly-based tax is likely to be one which holds
up well in terms of revenue yield. Narrowly-based taxes
may, in general terms, be more subject to the idiosyncrasies
of the markets on which they impinge.

In general, the proposals for reform contained in this
Review tend towards broadening the base of the individual
taxes and imposing the taxes at a flat rate or uniform rate.

In line with our discussion above, a broader tax base is
considered to improve the equity and efficiency of those
individual taxes(1) and to improve simplicity where the
broader base results from reducing or removing exemptions
from the taxes.(2)

Adoption of a flat or uniform rate is also justified on the
grounds of equity, efficiency and simplicity.(3)

However, one needs to be cognisant of the constraints upon
reforms in the area of tax policy(4) and any recommendations
need to be assessed with these constraints in mind to
determine if they are realistic or not. Once these
constraints have been identified, means of minimising the
effects of these constraints need to be examined.

6 INTERNAL CONSTRAINTS

Budgeting, political and departmental resource constraints
are internal constraints insofar as they relate to aspects
within the control of Western Australia.

The main budget constraint is the State's need to raise a
certain level of annual income to fund its activities.
Changes to the tax system must ensure that this level of
income is maintained. Revenue neutrality needs to be
attained overall, either by ensuring that any changes made
within a particular tax are revenue neutral or by ensuring
that a decline in revenue from one area of taxation is
compensated by a rise in another area. The changes proposed
for land tax could achieve a revenue neutral result for the
tax itself(5) or, with increases to the rate, achieve revenue
neutrality for the system as a whole by compensating for
changes in the tax mix.(6) Revenue neutrality could be
maintained in most areas of Western Australian taxation,
especially where we have recommended an increase in the
respective tax bases (the exception being stamp duties where
there are proposals for abolishing many areas of duty).

Increases in rates for taxes which are inherently broad-
based (such as Land Tax, FID and, arguably, Payroll Tax(7)),
as well as those which have the potential to become broad-
based (such as Debits Tax and Business Franchise Fees(8)),
could be used to achieve revenue neutrality in the tax
system where there are changes in the tax mix. The broader
the tax base, the less the rate would have to be increased
to realise the extra revenue required to achieve neutrality
for the system. However, the ability to increase rates is
also subject to other constraints, as will be seen below.

The political constraints on tax policy reform include the
reluctance of governments to make changes where there may be
political ramifications such as electoral backlash.

Whereas the abolition of areas of stamp duty may not give
rise to this problem, it would inhibit the abolition of many
of the exemptions to taxes which have been proposed,
especially those relating to primary industries, charitable
and non-profit organisations and the family home.

There are techniques which could be applied in marketing
and implementing the removal of these exemptions which could
improve their public acceptability. However, it may be over-
estimating the political boldness (or naivety) of our
elected representatives to suggest that they would
contemplate implementing these changes.(9) Political
constraints may remain a substantial impediment to
meaningful reform.

While many of the proposals contained in this review may be
considered to be politically impossible when considered in
isolation, it is possible they may be somewhat more
palatable when taken as a package and placed into the
broader political context.

In its own taxation reform platform, the current government
has emphasised a lessening of the pay-roll tax burden on
business as a mechanism for encouraging an expansion in
employment. The abolition of pay-roll tax does not seem
feasible at this stage. But the abolition of certain stamp
duties in favour of more broadly-based financial transaction
taxes may offer some relief to business: and the broadening
of the land tax base certainly would.

It would be hard to overestimate the likely extent of
resistance to the abolition of the major land tax
exemptions. But on the other hand, these are so extensive
that abolishing them would allow for a substantially reduced
rate of land tax. That new lower rate of tax would be
substantially less unpalatable than the current rates. The
public might find more palatable still a compromise under
which a tax-free threshold is applied for those currently in
the exempt categories. While such a measure lessens the
attraction of the reform from a pure policy point of view,
it would still allow substantial improvements in the tax
regime to take place.

Similarly, given the political realities, we have
recommended the retention of the current threshold for pay-
roll tax. It would be difficult for the current government
to broaden the pay-roll tax base. However, if the flat rate
of pay-roll tax that we have recommended were to be adopted
it is likely that many of the arguments against imposing the
tax on smaller businesses would carry less weight: the tax
would be simpler to collect and most of the information
needed to calculate it is already be compiled by such
businesses for other purposes. Again, a broader base would
allow for a lower rate of tax - any added costs to
particular businesses could be seen to be offset by falling
rates of land tax and some reduction in stamp duty costs.

More particularly, if the decision in the Capital
Duplicators Case (see chapter 6) has the effect of rendering
current business franchise licence fees unconstitutional,
then the political environment will be much more suitable
for radical taxation measures.

The resources available to the Taxation Department are also
a constraint on tax reform. There are limited staff and
facilities available to implement and monitor changes to the
tax system. However, because most of the reforms suggested
in these pages contemplate simplifying the tax structure by
removing exemptions and adopting flat rates, resources at
the Taxation Department should in fact be freed up.


7 EXTERNAL CONSTRAINTS

Other constraints to tax policy reform - constitutional,
Commonwealth policy (Grants), mobility of the tax base and
harmonisation - can be considered as external constraints on
reform. They are external in that they are factors largely
outside of the direct control of the State. Obviously,
there is less chance of minimising the effects of these
constraints than of the internal constraints and they are
not matters that we have dealt with in detail in this
review. However, they warrant some examination in the
interests of determining long term or more ambitious reforms
to the tax system.

The constitutional constraint arises from the division of
power between state and federal governments in the
Commonwealth Constitution, particularly the exclusive
jurisdiction of the Commonwealth to make laws with respect
to excise duties.(10) It is not so much the division of power
expressed in s 90 which has restricted state tax powers but
the way s 90 has been interpreted. This is discussed in
chapter 6.

It has been suggested that changes be made to the
Commonwealth Constitution by removing from s 90 the words
"and of excise" to enable the states to broaden their tax
base.(11) Although the chances of this occurring may be
uninspiring, it is a worthwhile long term ambition. In the
meantime the Capital Duplicators case presents itself as
being a chance for the High Court to widen state taxation
power enough to enable a broad-based consumption tax to be
implemented. This outcome would enable the tax mix to be
altered so some of the more inefficient and inequitable
taxes (such as some stamp duties) could be removed.

The constraining effect of Commonwealth Policy arises from
the power of the Commonwealth, under s 96 of the
Constitution, to make grants to the States on such terms as
it thinks fit. The discretionary nature of this power
effectively confers on the Commonwealth a financial control
over the States sufficient to constitute a serious
constraint in the direction in which the States' tax
policies proceed. This is another area which warrants
constitutional reform, or judicial re-interpretation,(12) to
prevent the clandestine use of Commonwealth funding to
effect State taxation policy.

The final two external constraints on tax policy can be
linked. The mobility of the tax base has been indicated as
a constraint on substantially increasing the rates of duty
on financial institutions and it was suggested that in order
to increase the rate there should be uniformity between the
States.(13) It is because there is variation in rates between
the States that taxpayers will attempt to be taxed in one
jurisdiction rather than another. The threat of losing part
of the tax base due to the lack of uniformity between the
States acts as a constraint on the States making changes
which could improve the efficiency and equity of the tax
system.

Mobility of the tax base can be addressed by taxing
activities or objects which can only occur within the State
(land tax is an excellent example) or by imposing taxes
which operate extra-territorially, where liability is based
on some nexus with the State even when the activity occurs
outside the jurisdiction (some stamp duties operate extra-
territorially). One disadvantage of taxes which attempt to
combat loss of the tax base is that they become complex,
inefficient and difficult to administer.

Perhaps a better solution is to promote harmonisation
between the States. Increased co-ordination between the
States in implementing tax policy would allow States to
minimise the extent to which they compete with each other
for the tax base. Better communication between States could
identify areas of common taxation with potential for changes
which could benefit all States if applied uniformly. Apart
from allowing existing taxes to be improved, harmonisation
could allow new taxes or taxes previously lost to
competition between the States, such as inheritance tax,(14)
to be reinstated.

Admittedly the differing political agendas of each State
may make harmonisation in some areas difficult. However, as
States are marginalised more and more by Commonwealth
initiatives they may see the need to unify in order to
maximise their financial independence.

Among the matters considered by the Elective were
suggestions for pollution taxes and a comprehensive service
tax as well as the ramifications of the current land tax for
native title. However, the following chapters concentrate
on a review of existing State tax regime.


8 OVERVIEW OF RECOMMENDATIONS

In the short term changes should be sought to remove as
many exemptions from existing tax bases as possible.
Removal of exemptions offered to charitable and non-profit
organisations could be removed with relatively political
pain. Removal of land tax concessions given to primary
producers and the family home would require a little more
planning and may be medium term objectives.

Proposals for implementing a broad-based sales tax
should be examined in anticipation of a narrowing of the
Commonwealth excise power.

Betting taxes, stamp duties and existing business
franchise licences should be "tidied up". The rates of
betting tax should be standardised and many inefficient and
inequitable stamp duties should be removed. The aspects of
business franchise licences which have been identified as
being possibly unconstitutional should be amended.

Greater harmonisation with other states should be
pursued to allow changes to be made to financial
institutions taxes without incurring loss of tax base in
this area. Harmonisation would enable the standardisation
of payroll tax legislation so as to improve simplicity.

To assist in implementing medium term reforms, more
research needs to be undertaken to examine the likely
economic effects of taxes such as payroll tax and gambling
taxes and the likely effects (and associated benefits) of
removal of exemptions for primary producers, charitable
organisations and the family home. The possibility of
establishing a hardship tribunal to deal with the new areas
of tax should be examined.

For the medium to long term, changes to the basic
federal structure need to be examined. The existing
relationship between the Commonwealth and State governments
creates inefficient and inequitable taxation practices.
Changes could be made to the Commonwealth Constitution, with
the push at the federal level for Australia to become a
Republic perhaps creating a greater willingness to re-
examine some of the more troublesome provisions of that
document.

Notes:

(1) See for example the chapters on: Land Tax pp 26-7; FID &
Debits Tax pp 63-4 and 66-7; Payroll Tax pp 78-9.
(2) See for example: Land Tax pp 22 & 25; Stamp Duties p46.
(3) See for example: Land Tax p 25; Stamp Duties pp 39 & 48;
FID & Debits Tax pp 69-70; Payroll Tax p 80; Betting Taxes
p 167.
(4) As many of the authors of the individual chapters have
been. See for example: Land Tax p 23; Stamp Duties p 48; FID
& Debits Tax p 69; Payroll Tax p 80; Licences p 84.
(5) See Land Tax p 20 at fn 43.
(6) See p 27.
(7) The broadness of the base of payroll tax depends on the
likely economic incidence. This is seen to fall on employees
and consumers: see Payroll Tax p 73, especially fn 144.
(8) Broadening the base of business franchise fees would require
a relaxation of the definition of areas of excise prohibited to
the States, which may or may not occur after the _Capital
Duplicators_ case is decided: see chapter 6 at p.87.
(9) The failure of the Federal Liberal party to gain wide
support for its proposed Goods & Services Tax prior to the last
Federal election in spite of adopting many of these strategies
may indicate how unappealing these kinds of changes may be with
politicians.
(10) Other aspects of constitutional constraints relate to
freedom of interstate trade under s 92, and Commonwealth
immunity from state taxation, which are discussed in the New
South Wales Tax Task Force, *Tax Reform and NSW Economic
Development: Review of the State Tax System*, August 1988,
at pp 371-73.
(11) Id, at pp 370-71.
(12) Cf. the judgement of Dixon DJ in the _Second Uniform
Tax Case (Victoria v the Commonwealth)_ [1957] HCA 54; (1957) 99 CLR 575
at 609.
(13) See the FID & Debits Tax chapter at p 69.
(14) New South Wales Task Force, op cit, p 378.