Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E1. User charging

E1–3 Charging for club goods can reveal how much people value them

'Club goods' are a special type of non-rivalrous, but excludable good which can often be provided in markets. All you need to make television excludable is a scrambler and coaxial cable. By charging for an inherently non–rivalrous good — one person watching does not reduce the ability of others to watch — such goods can be left to markets. Other goods may be excludable because their spillover effects are geographically limited, so only those who live in the immediate region benefit from the spending. This is one of the arguments for levying council rates on land (see Section G3 Local government). Governments can assist in the provision of club goods by allowing the imposition of compulsory fees on certain groups, with the rate set by the beneficiaries from the spending. In effect, the tax provides a signal for how much of a local public good is demanded. These arrangements are relatively prevalent in agriculture due to the organised nature of producers and limited spillovers between industries.

Agricultural levies

The Australian government imposes a large number of agricultural levies — 66 at December 2008 (see Table E1–1). Most of these taxes are imposed at a particular rate per unit of production. For example, cherry production is taxed at $0.07 per kilo and exported buffalo are taxed at $4.60 per head. Some important goods, however, are taxed at a particular percentage of value, including wheat, vegetables, wool, exported wine, barley, oats and legumes. The levies are administered by the Department of Agriculture, Fisheries and Forestry.

In total, agricultural levies raised $594 million in 2007–08. These levies are typically charged at very low rates, resulting in very low revenue collection — 33 of these taxes collect, in total, less than $1 million per year. The administration costs of collecting the smaller levies can be very high. At the highest end, the collection costs of the Queen Bee Levy amounted to 38 per cent of the revenue collected by it, while the collection cost of a number of levies was less than 1 per cent of the revenue (Levies Revenue Service 2008).

Table E1–1: Agricultural levies

Levy Collections
2007–08 ($m)
Levy
(continued)
Collections
2007–08 ($m)
(continued)
Beef production 9.44 Apple and pear 4.96
Buffalo slaughter 0.02 Avocado 3.37
Cattle transaction 70.29 Cherry 0.50
Deer 0.06 Chestnut 0.05
Goat fibre 0.02 Citrus 1.69
Goat slaughter 0.07 Custard apple 0.08
Goat transaction 0.48 Dried fruits 0.35
Live animal export 4.38 Honey 0.46
Live animal export recovery 0.33 Lychee 0.19
Livestock slaughter 3.40 Macadamia 3.51
Livestock transaction 34.62 Mango 0.85
Pig slaughter 13.36 Mushrooms 2.11
Wool 45.10 Nashi 0.09
Egg promotion 3.40 Nursery products 1.93
Laying chicken 0.90 Onions 0.39
Meat chicken 1.39 Papaya 0.20
Coarse grains 26.18 Passionfruit 0.08
Cotton research 1.99 Persimmons 0.10
Grain legumes 4.73 Potato 1.00
Oilseeds 6.33 Rubus 0.05
Pasture seeds 0.15 Stone fruit 0.96
Rice 0.50 Strawberry 0.49
Sugar cane research 4.82 Table grapes 1.02
Sugar reform 0.01 Turf 0.54
Wheat 41.34 Vegetable 6.34
Wheat export 1.52 AFMA(a) 9.57
Grape research 2.80 AVPMA(b) 1.45
Wine export 2.90 Macropod 0.13
Wine grape 9.64 NRS(c) — game pigs 0.04
All milk 28.34 NRS — horses 0.05
Dairy adjustment(d) 228.10 NRS — ratite slaughter 0.02
Forestry 4.62 Prawn 0.11
Almond 0.46 Queen bee 0.01
Total 594.86
  1. Australian Fisheries Management Authority.
  2. Australian Pesticides and Veterinary Medicines Authority.
  3. National Residue Survey.
  4. This levy ceased to operate in February 2009.

The levies fund industry-specific research and development. Most levies have been established at the request of industry participants. Many agricultural industries comprise a large number of producers, each of which accounts for only a small share of a fairly homogeneous industry output. This makes it difficult for a producer to capture all the benefit from research and development for which it pays individually. First, a small producer may be unable to raise the funding, or bear the risk, associated with a large research project. Second, intellectual property rights may not be robust enough to ensure that a producer gains all the benefit of its research and development; for example, it may not be possible to patent or copyright an idea or technique that is not embodied in a machine or software. By collecting a levy from all producers in an industry, it is possible to ensure that all producers share both the costs and the benefits.

For example, a single cotton grower is unlikely to appropriate all the benefits from private research into better sowing methods — other growers would be able to free ride on its innovation. The Australian government therefore taxes all cotton growers to fund the Cotton Research and Development Corporation which shares the results of its research for the benefit of all growers.

In most cases, the government sets the structure and rates of tax on advice from the relevant industry. For this reason, it is a relatively good way of revealing producers' collective judgement on funding levels, although individual producers may have varying preferences. Since the imposition of these levies involves the exercise of compulsory powers by the government, it is important that they do not disadvantage individual producers or particular classes of producers. For example, in some industries a particular type of research might be irrelevant to small producers, even though they are obliged to pay the levy at the same rate as large producers. However, the relative ease with which levies can be established provides a measure of flexibility. The Queen Bee levy, for example, was introduced when queen bee producers left the Honey Levy in 2003.

In most cases, the Australian government matches the amount collected from the levy, dollar for dollar. Such matching funding is not necessary to overcome the spillover problem and instead appears to constitute industry support.

Principles

For taxing club goods to be feasible, the public good needs to be local and excludable; that is, the beneficiaries need to be identifiable.

The rate of tax for a club good needs to be set by a majority of those directly bearing the legal incidence of the tax.

Any government subsidy associated with club good taxation should be based on any social benefits (beyond the immediate group of taxpayers) that arise from the funded activity.