Australia's Future Tax System

Architecture of Australia's tax and transfer system

9.1 Raising revenue for general public expenditure

At federation, the Commonwealth levied excises (taxes) on domestic production and tariffs on imported goods. These were typically commodities with clearly identifiable and easily controlled sources, such as alcohol and tobacco. Many of these commodities were also everyday consumption goods including starch and sugar. Although the administrative costs of collecting excise were quite low, their efficiency costs were likely to be high in many cases. This is because taxing some goods and services and not others changes relative prices. This provides incentives for people to alter consumption from taxed goods to untaxed goods.

Over time, the taxation of goods and services in Australia shifted from selective excise and customs tariffs, to broader‑based taxation of goods. The Scullin Government introduced a sales tax at the wholesale level in 1930 at a single rate. The Asprey Committee (1975) noted that exemptions and reclassifications of goods to lower rates since the Second World War had significantly eroded the sales tax base. By 2000, goods were classified at seven different rates, ranging from 0 to 45 per cent. The provision of services was not directly taxed.

The wholesale sales tax was replaced by the goods and services tax (GST) in 2000. The GST applies at a single rate of 10 per cent to a broad base. By adopting a uniform rate, much of the complexity associated with classifying goods against the multiple‑rates of the sales tax was removed. Moreover, the influence of tax considerations on consumer decisions was reduced through fewer tax induced changes to the relative prices of goods and services.

The GST taxes services, which today make up around 70 per cent of Australia's industry output. Some goods and services are GST free, including basic food, health and medical care, education and charitable goods. GST contributes a little more than half of Australian government revenue from indirect taxes.

The Australian government and the States all levy a range of other taxes on specific goods and services that are mostly consumed by households, and for which there are few substitutes. The demand for these goods and services is generally 'inelastic' (unresponsive to the change in price resulting from the tax). Often, goods subject to specific taxes have only a few, easily monitored, producers. For example, there are fewer than 10 payers of tobacco excise and around 100 payers of fuel excise in Australia. Administration and compliance costs therefore tend to be quite low as a percentage of the revenue collected.

Due to these specific taxes and the exemptions from GST, the share of revenue raised from some goods and services is higher than their share of household consumption expenditure, while for others it is less (Chart 9.1).

Chart 9.1: Household consumption and estimated revenue
from Australian government taxes on goods and services in 2006‑07

Chart 9.1: Household consumption and estimated revenue from Australian government taxes on goods and services in 2006-07

Sources: Consumption shares based on ABS (2007c). GST revenue allocations to consumption categories is estimated from national accounts (not including GST embedded in the price of goods and services that are input taxed), other Australian government tax revenue based on actual 2006‑07 Budget outcomes based on estimates for household use.

Chart 9.1 shows the impact of directly imposed taxes on consumer goods and services. It ignores taxes on business inputs that are passed onto consumers through the prices on the goods and services they produce. These taxes are generally less efficient as they also distort production decisions. However, it is possible to limit these distortions by providing relief from the incidence of these taxes to business, such as is intended with fuel tax credits.