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| Canberra: Enlighten Festival, 2014 - Image thrown onto walls of the National Library |
This duplication results
from a single accident of history - the Australian taxation treatment of income
tax.
Denis James succinctly backgrounded this change in a 1997 paper:
Denis James succinctly backgrounded this change in a 1997 paper:
Perhaps
the greatest source of the current vertical fiscal imbalance was the takeover
of personal income tax by the Commonwealth during World War 2. A number of the
States had been levying small amounts of income tax even before Federation,
although the main source of taxation revenue available to them at that time
were duties of customs and excise. When the power to levy customs and excise
became the exclusive preserve of the Commonwealth upon Federation, the States
began to develop their income tax base. Even so, the Commonwealth began to
compete for this base by commencing to levy income tax in 1915. Nevertheless,
prior to World War 2, the States and the Commonwealth shared the income tax
base in such a way that the States were reasonably fiscally self sufficient.
However,
in 1942, the Treasurer appointed a Committee to consider the question of the
Commonwealth becoming the sole income taxing authority for the duration of the
War, and for reimbursement payments to be made, using section 96 powers, to the
States upon their retirement from the income taxing field. At the time, the
various States imposed their income taxes at very different levels. The
Commonwealth wished to raise income taxes to finance the War, but found itself
in a quandary. If it set its income tax at a uniformly high level, this would
impose a serious burden on those inhabitants in States with high income tax.
Imposing low Commonwealth tax would not yield sufficient revenue. The solution
was for the Commonwealth to impose a uniform, high rate of tax and reimburse
the States for the income tax that they would have forgone.
The
Committee presented its report and recommended that, for the duration of the
War and one year afterwards, the Commonwealth government should be the sole
authority to impose taxes on income and that the States should be duly
compensated. In May 1942, legislation was introduced in the Federal Parliament
to give effect to this recommendation and a uniform income tax scheme came into
operation on 1 July 1942.
At
a Premiers' Conference in January 1946, the States were informed that the
Commonwealth proposed to continue uniform taxation indefinitely. A formula
approach was adopted to the distribution of tax reimbursement grants which
continued to be provided on condition that the States made no attempt to
re-enter the income taxing field. This left the States with little alternative
other than to devise new forms of taxation.
The central
collection of income tax is not a feature of most other federal systems. In the US, states and federal governments
impose separate income taxes.
The
centralisation of income tax practice raises a couple of interesting policy
issues.
That the
centralised income tax system is superior to the US system is adopted as an
article of faith in Australia. In fact, the US experience suggests
that separate taxation assessment is no less effective than a centralised system (in part because state based income tax can be better integrated into property based taxation systems). However,
the mere imposition of different rates by states and commonwealth does not mean
that a centralised system of collection could not be maintained, if this was
seen as desirable. Of course, the
imposition of different rates would inevitably invite questions about which
taxation rate you or your company was exposed to, and taxation avoidance. Other federal states seem to have devised
mechanisms to minimise these issues.
Under a return to
pre-1942 arrangements, the Commonwealth would only impose income tax for
federal purposes (eg, defence, international relations and federal regulatory
schemes). The States would set rates for income taxes for their own state
responsibilities (eg, schools, roads and health). Under such arrangements, it
is unclear what purpose a Commonwealth Departments (such as Health) and associated Commonwealth Ministers might serve. The removal
of central organising functions would probably necessitate the emergence of
state-managed inter-state co-ordination capacity – as in other federal systems.
The clear advantage
of such an arrangement is that it removes present confusion about which level
of government is responsible for imposing and spending tax. Local political choices have immediately
recognisable taxation consequences. While collapsing the existing
arrangements would result in significant savings at Commonwealth level, a
degree of interstate coordination capacity would need to be rebuilt.
Peter Quinton
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