Australia's Future Tax System

Consultation Paper Summary

3. The revenue mix

Overview

The revenue mix can be considered at several levels: the balance between the underlying sources of government revenue; the balance between taxes faced by individuals; and the balance of approaches taken to raising revenue.

The short-term balance between government revenue from the three tax bases — labour, capital and consumption — is sensitive to economic conditions and government policy decisions. There has been a marked change in the balance of taxes from labour to capital since 2000‑01. It is unclear how this balance will be influenced over the long‑term by pressures such as the ageing of the population. However, it is possible that there will be a continuation of existing pressures on capital and labour taxes as a revenue source, suggesting an increased reliance on consumption taxes.

The relative taxation of the returns to work compared with the returns to saving can affect individuals' choices about working, saving and consuming. These choices can have important implications for the efficiency and equity of the tax‑transfer system. There are strong and conflicting views about the relative reliance on these bases.

Alternative arrangements, such as user charges, have the potential to play an important role in improving efficiency through the pricing of public resources and to provide an alternative source of revenue to more conventional taxes.

Consultation questions

Q3.1 What problems, if any, are generated by the overall mix of taxes in Australia on business and labour income, consumption, transactions and assets, and what changes, if any, should be made?

Q3.2 Does Australia's tax system penalise (or favour) the returns to savings relative to other activities and should this lead to changes in the structure of taxes and means tests?

Q3.3 Does Australia's tax‑transfer system appropriately deal with property and wealth, or should new approaches be introduced? What, if any, implications would any changes have for the taxation (or means testing) of capital income flowing from property and wealth?

Q3.4 Assuming no increase in the rate or base of the GST, what principles should guide the future development of other consumption taxes in Australia, and is there a need to change the role and structure of such taxes?

Q3.5 Could greater application of user charges, rather than general taxes, in the funding of government services or infrastructure bring social, environmental or economic benefits?

Key messages in submissions

Australia's relatively heavy reliance on revenue from corporate taxes is seen as an important issue, with concerns expressed about capital mobility and Australia's international competitiveness. Many business submissions, and others, call for a reduction in taxes on capital income, particularly corporate taxes.

A number of submissions from individuals, business groups, and business advisory organisations, argue in favour of reduced tax on the returns to saving more generally. Some of these argue that taxing savings disadvantages people who save relative to people who do not.

On the other hand, many individuals and organisations, especially welfare groups, are concerned about the equity implications of the current concessional treatment of some forms of capital income, noting that this tends to favour high income taxpayers. While most of these submissions suggest equal taxation of the return to work and saving, some suggest taxing returns to saving more heavily than returns to work.

Treatment of inflation is also identified as an issue. Some call for the exclusion of an inflation component from the taxation of interest income, while others call for an inflation exclusion for all income from savings.

Some submissions support consideration of a direct, recurrent tax on household net wealth, generally with a low rate and a broad base. Another feature often suggested is a threshold high enough to ensure that only high wealth individuals have a liability. A wealth tax is seen as supplementing, rather than replacing, taxes on capital income. Some submissions also canvass the possibility of wealth transfer taxes, again with a threshold to ensure that only large estates, or inheritances or gifts are affected.

A number of submissions argue for a reduction in taxes on income and an increase in taxes on consumption, although they generally acknowledge that the increasing base and rate of the GST are outside the terms of reference. However, some strongly oppose a shift towards taxes on consumption, or advocate reducing existing taxes on consumption, citing equity concerns.

Submissions raise a range of issues with secondary taxes on consumption (such as alcohol and tobacco). Some submissions support these taxes, on grounds such as public health. Others suggest that these taxes are overly complex.

Some argue that existing taxes on transactions, such as land transfers, are inefficient and should be reduced. Others argue in favour of more extensive use of taxes on transactions, for example by replacing all other taxes with a broad‑based financial transactions tax.

There are different views about the equity, efficiency and simplicity of user charges and beneficiary taxation. Some argue that user charges are difficult to set appropriately, and administer efficiently. Submissions are divided on whether beneficiary taxes are efficient and equitable compared to raising general tax revenue. Infrastructure charges are a particular concern for housing developers who argue that the costs of infrastructure should be borne by the community as a whole.