The ACTU sought information from Treasury and the EPAC
Secretariat on a number of tax reform options, and
with the agreement of the ACTU that information is made
available to Summit participants.
I
2
Introduction
This paper provides a preliminary analysis of the broad
distributional erfects of a series of taxation options
formulated by the ACTU. The analysis has been
undertaken at the ACTU's request. The options
considered include Approaches B and C of the draft
White Paper Reform of the Australian Tax System,
together with particular proposals' put forward by the
ACTU.
2. Methodology Distributional results have been obtained with the aid
of the STATAX facility developed at the. Office of
EPAC. STATAX is designed to provide a statistic called
" cash gain" for households of a chosen type and within
each of a series of weekly income ranges. The cash
gain is simply the number of dollars per week
households of the chosen type, within the given income
range, would be better off ( or worse off if the cash
gain figure is negative) on average if a particular
proposed package of changes in taxation and benefit
arrangements were to be introduced.
The basic data used by STATAX is the individual
household record file from the full-year 1984 Household
Expenditure Survey ( HES) conducted by the Australian
Bureau of Statistics ( for details see ABS, .1iM
House-hold Expenditure Survey. Australia Preliminary,
6529.0). Although HES was not designed to support an
income-expenditure analysis of the STATAX type, it is
the only official data source available which provides
integrated up-to-date information on the details of the
incomes and expenditures of a broadly representative
sample of Australian households. The heavy reliance of
STATAX on HES brings with it data problems which have
been discussed widely in reports by the Australian
Statistician, in the White Paper ( see Appendix 22-A)
and in the media.
In developing The STATAX methodology the Office of EPAC
has explicitly recognised the deficiencies of the HES
data for these purposes. These have been dealt with by
implementing a set of corrections to the HES data, the
effect of which is to calibrate incomes by major
source, and expenditures by broad commodity group, to
coincide in aggregate with the corresponding National
Accounts aggregates. Full details of the basis for
these corrections are provided in EPAC Papee' 85/ 3.
( Note, however, that the particular correction factors
provided there were preliminary, being based on only 6
month data from HES and earlier National Accounts
information current ones are available on request.)
While it is believed that these corrections have
dramatically reduced the biases implicit in the raw lIES
data, it is important to recognise that all such
adjustments carry with them implicit distributional
assumptions. It must also be recognised that the
chances remain high of significant errors in any
analyses based on HES data which link the income and
expenditure information from the survey as explicitly
as does STATAX.
No data source exists that would permit an entirely
accurate estimation of the detailed distributional
effects of the types of radical tax changes in the
options considered here. At best the results presented
here, and others of their kind, can provide a broad
picture of the distributional effects of changes in
taxation and benefit arrangements. Nevertheless, the
Office is satisfied that the STATAX methodology does
reliably provide such broad distributional information.
STATAX calls on the results of the TAXIO model,
developed by the Treasury, to obtain the effects of
changes in the Wholesale Sales Tax on the prices of
commodities at the factory gate. The TAXIO model is
also used to provide estimates of revenues derived from
consumption taxes applied to commodities and services
outside private final consumption expenditure taxes
on business inputs and on investment goods for
instance. This reflects the fact that STATAX itself is
concerned primarily with private final consumption
expenditure, as reflected in the expenditures of
individual households.
Estimates of the distributional impact of
base-broadening measures have been formed in a manner
consistent with that used in the White Paper ( Sections
22A. 15 to 22A. 32), although the White Paper methodology
has been modified to reflect the household orientation
of the STATAX facility. ( White Paper estimates were
based on individuals.) Consistent with the White Paper,
the methodology used here includes an assumption that,
at higher income levels, some of the incidence of the
tax on fringe benefits will be shifted back to the
employee.
The estimates of revenue yields from the imposition of
a BBCT, of the cost to revenue of modifications to or
elimination of the WST, of the cost to revenue of
compensation measures and of the revenue yield from the
existing personal income tax schedule are consistent
with estimates published in the White Paper and in the
1984-85 Budget Papers.
A separate paper prepared by the Treasury in-response
to the ACTU request provides details of the revenue
yields and CPI effects of a range of options. ( Note
however that the numbering of the * ACTU options in the
Treasury paper does not correspond to that used in this
paper)
Full details of the STATAX methodology are provided in
EPAC Paper 85/ 3, Quantifviniz the Distributional Effects
of Alternative Tax Options A report of Proxress,
March 1985. That paper considers in some detail
limitations of the HES data and of the STATAX
methodology. This paper should be read in conjunction
with that discussion to put the distributional results
in their proper context.
It is important to recognise that the results provided
below from the STATAX facility do not make any
provision for behavioural responses to the proposed tax
changes. Thus the possibility that consumers may
change their expenditure patterns, that work effort may
change or that the balance between consumption and
saving may alter is ignored. Such responses may well
be significant but the objective of the present
analysis ( in keeping with that of the White Paper and
other analyses available to date) is to concentrate on
the immediate impact of the changes.
3. Overview and Interpretation of the Results
Two household types have been chosen for analysis at
this stage. In line with figures presented in the White
Paper, these are households whose principal source of
income is wages and salaries, and households whose
principal source of income is the age or wife pension.
In most cases, a table is provided which presents, for
each of several income ranges, estimates of:
the change in the commodity tax applicable to
expenditures by households in that income range;
the change in the personal income tax payable;
the additional personal income tax payable
resulting from measures intended to broaden the
income tax base;
Examples of base-broadening measures include
taxing non-cash fringe benefits, taxing
capital gains and eliminating negative
gearing of rental property investments. Such
base-broadening measures form the basis for
Approach A of the White Paper-,
the compensation payable as the result of
increased pensions or improvements to other
government benefits;
the cash gain.
Positive entries in the tables indicate an amount by
which households in the given income range would be
better off in cash terms, negative entries an amount by
which they would be worse off. Summing the entries
across a particular row of the table for commodity tax
change ( CT change), personal income tax change arising
from new tax scales ( PIT change), personal income tax
change arising from base-broadening measures ( PIT BB),
compensation payments ( compensation) gives, for
households on average in that income range, the cash
gain arising from the proposed package of changes in
commodity taxation, personal income taxation and
government benefit arrangements. All figures in the
tables are expressed in 1984-85 dollars per week.
Consider the seon row of Table 2 for illustrative
purposes. Table 2 provides results for the impact of
the White Paper Approach C on households whose
principal source of income ( this will not generally be
the only source of income to such households, of
course) is wages and salaries. The second row relates
to such households ; whose 1984-85 incomefell in the
range $ 301 to $ 350 per week. The results show that, on
average, these households will
pay an extra $ 19.86 per week as the result of the
impact of the BBCT included in Approach C on their
expenditures on commodities and services
receive a personal income tax cut of $ 20.60 per
week incur additional income tax of $ 0.07 per week as
the result of the impact of base-broadening
measures included in Approach C on their personal
income tax liability
receive compensation in the form of higher
government benefit payments to the tune of $ 2.67
per week.
The net result of these changes is that the cash gain
for households of this type in the $ 301-$ 350 per we * ek
income range is $ 3.33 per week. That is the estimate
of the amount by which such households would be made
better off by Approach C.
In interpreting the estimates provided in the tables,
it is important to recognise that all the figures
provided are group averages. That is, they provide an
estimate which applies on average within the specified
income range and for households of the specified type.
Such aggregation is necessary in view of quite
significant variation within income classes. Equally,
however, it is important not to lose sight of.. this
underlying variation. In particular, household
structures will impact significantly on the access to
and need for compensation within lower income groups,
while the impact of base-broadening measures will vary
sharply amongst higher income earners reflecting
individual household access to and exploitation of the
underlying income sources and taxation avoidance
measures. In the case of the 3 specific ACTU Options, the precise
details of the compensation packages including income
tax Cuts, have not yet been finalised ( being depenaent
on further analysis Of the runs so far conducted).
These tables do not therefore include figures relating
to changed income tax scales and compensation. The
last column " preliminary net gains' refers only to the
impact of the changes to indirect taxes and base
broadening.
4. Results 4.1 White Paper ApproachC
Tables 1 and 2 provide estimates of the distributional
impact on age-wife pensioner households and wage and
salary earner households respectively of the White
Paper approach C options.
Over4ll, pensioner households are estimated to be $ 4.80
per week better off if Approach C were to be
implemented, while the corresponding cash gain estimate
for all wage and salary earner households is $ 6.25.*
There is relatively little distributional variation for
pensioner households, with those in the $ 121-$ 150 per
week income range experiencing the largest estimated
cash gain ($ 6.37 per week) while the least ($ 2.36 per
week) is experienced by those in the $ 181-$ 210 per week
income range.
The distributional pattern of cash gains over pensioner
households is influenced to a considerable degree by
household composi * tion effects and by the age structure
of households. ( These factors underlie the variation in
expenditure patterns over income ranges.) Since
pensioner households are in receipt of relatively low
levels of taxable income, they do not benefit to any
great degree from the shift to the Approach C income
tax schedule. Similarly, the incomes Of these
households are too low for base-broadening measures to
have any impact upon them as a group. Consequently,
their cash gains are dominated by compensation payments
offsetting the increased Cost Of thei'r expendituros
arising from the imposition of the BBCT.
A more varied distributional pattern is evident for
wage and salary earner households under Apprpoach C.
Cash gains rise steadily from $ 2.43 per week for such
households * in the $ 271-$ 300 per week income range to
$ 12.74 per week-for the $ 741-$ 930 per week range. This
mainly reflects the interaction of the increased
outlays on expenditure with the benefits of the reduced
income tax payments, compensation being relatively
7',
unimportant for all but the lowest income groups
amongst these households. Base-broadening measures
begin to bite significantly above the $ 741-$ 930 per
week income range. The effect is for the estimated
cash gain to fall away rapidly above this level of
income, with wage and salary earner households on
average experiencing a cash loss of $ 314.86 per week in
the over $ 1250 per week income range. As noted
earlier. this reflects the fact that high income
households tend to have the greatest access to income
sources affected by base-broadening measures.
4.2 White Paper Approach 8
Estimates of the distributional impact. of the White
Paper Approach B are shown for age-wife pensioner
households in Table 3. and for wage and salary earner
households in Table, 4. For both household types, the
overall impact of the proposals, as measured by the.
cash gain, is much smaller than for Approach C.
In the case of pensioner households, the variation in
the impact on particular income ranges is similar to
that evident in the case of Approach C. Aside from the
highest income households, however, wage and salary
earner households show much less variation in cash gain
over income range under Approach B than was evident for
Approach C. This occurs because, with a much lower
rate BBCT, after allowing for the removal of the WST,
relatively little revenue is available to provide for
income tax cuts. The benefits of the new income tax
schedule being significantly smaller, the general
effect is to compress the variation in cash gain over
income ranges. For the highest income ranges, the
income tax benefits are not sufficient to offset the
impact of base-broadening measures to a significant
degree. As a result, these groups suffer cash losses,
the magnitude of which ($ 59.90 per week) is quite large
for the top income range.
4j, 3 ACTU Options I to3
The remaining options considered are not as fully
specified as those ' examined above, in that no change to
the personal income tax schedules or in the rates of
government benefits is proposed. Consequently,
estimates are provided only of the impact of proposed
consumption taxes and base-broadening measures. In
each case. the base-broadening measures included are
the same as those of the White Paper approaches.
ACTU Option 1 involves the elimination of ' the-WST, the
imposition of a 5 ' per cent BBCT on the same base as in
the White Paper. together with base-broadening
measures. Estimates of the distributional impact of
this option are shown in Tables .5 and 6 for age-wife
pensioner households and for wage and salary earner
households respectively. The main noteworthy feature
of these results is the extent to which the
distributional pattern which emerges is dominated by
the impact or the base-broadening measures.
ACTU Option 2, results for which are provided in Tables
7 and 8, involves the elimination of the WST, the
imposition of a 7 per cent BBCT on the White Paper
base, the imposition of a 12 per cent UST on selected
(" luxury") items predominantly those currently
subject to WST at 32 per cent, together with motor
vehicles and parts and the base-broadening measures.
ACTU Option 3 involves a restructuring of the WST to a
uniform rate of 5 per cent, with the imposition of a
per cent BBCT on the White Paper base and
base-broadening measures. Results for this option are
provided in Tables 9 and
41.4 Exemptions
Tables 11 and 12 provide estimates of the
distributional impact of two types of exemptions from
the base for the BBCT.-The tables show, for th~ e
specified household type and for each of the income
ranges, the amount per week) by which the cash gain
shown in Tables 1 or 2, as is appropriate, would be
increased by the specified exemption.
In the first case, all food is exempted from the BBCT,
while in the second the exempt commodities are food,
clothing, electricity and gas.
Exempting food from the BBCT base clearly benefits
higher income households more in dollar terms than
lower income households. ( See pages 119-121 of the
White Paper for a discussion of the general issue of
exemptions.) Exempting clothing, electricity and gas in addition to
food provides a similar, though accentua * ted
distributional picture by comparison with the exemption
of food only. However, examination of the ratio of the
columns for the two exemption types reveals the strong
regressive element of the wider set of exemptions
relative to that of food only. For the lowest wage and
salary income range, this ratio is about 1.69. In
general, the ratio rises progressively with income to
2.17 for the highest income range. * The implication is
that the wider set of exemptions confers a cash benefit
which is greater than that for the exemption of food
only by a factor of 1.69 for the lowest income
households. For the highest income households the,
wider set of exemptions confers a benefit 2.117 times
greater than that for food only. In this sense, the
wider set of exemptions confers a benefit that rises
sharply with increasing income..
Concluding Remarks
The paper has provided preliminary estimates Of the
distributional impact of a range of alternative tax
packages put forward for analysis by the ACTU. The
options encompassed by the tested packages are far from
comprehensive but should usefully provide an overall
feel for the distributional Consequences Of tax-benefit
change. The results also serve to illustrate the
capabilities of,, the STATAX facility developed by the
Office of EPAC and may therefore assist the ACTU in
formulating requests to the Office for further work.
Results have been obtained to date only for two main
household types age-wife pensioner and wage and
salary earner households. The STATAX facility has the
capability to provide results for a range of other
household types, some of which may well be of interest.
It must be emphasised that the figures provided here
are estimates and' no more than that. Considerable
uncertainty is attached to them as with any estimates.
No data source is available which will provide a more
reliable assessment of the distributional impact of the
major taxation-changes currently under consideration.
Nevertheless, the estimates presented here should not
be regarded as providing more than a broad picture of
the distributional impact of tax change proposals.
Office of EPAC
June, 1985
TABLE I
Preliminary Analysis of Tax Options
Option C Age-wife Pensioners
By Household Income Class
Income Range $ pw CT change $ pu PIT change $ pw PIT BB $ pw Cornp pu Cash Gain $ pw
0-120 -8.28 0.95 0.00 9.79 2.46
121-150 -9.81 6.21 0.00 9.96 6.37
151-180 -12.55 3.47 0.00 13.56 4.48
181-210 -14.57 0.96 0.00 15.97 2.36
211-210 -15.00 3.99 0.00 16.88 5.87
Total -11.98 3.64 0.00 13.14 4.80
TABLE 2
Preliminary Analysis of Tax Options
Option C for Wage and Salary Earners
By household income class
Income CT PIT PIT Compensation Cash
Range change change BB Gain
Spy pw $ pw $ pw $ pw tpw
271-300 -18.54 16.53 0.00 4.44 2.43
301-350 -19.86 20.60 -0.07 2.67 3.33
351-425 -22.54 24.47 -0.21 3.22 4.95
426-510 -25.34 29.07 -0.43 3.91 7.20
511-615 -28.08 35.00 -0.80 3.30 9.42
616-7.40 -29.54 41 .80 -3.45 3.02 11.83
741-930 -35.91 51.61 -6.14 3.17 12.74
931-1250 -42.44 67.07 -18.76 3.38 9.25
> 1250 -54.38 97.65 -81.77 3.64 -34.86
Total -30.09 40.48 -7.57 3.43 6.25
Option C as in the White Paper.
CT: net commodity taxes ( BBCT, wholesale, and
excise). PIT: Personal income tax on current base.
PIT BB: Personal tax on additional income from base
broadening.
Notes:
Income Range py TABLE 3
Preliminary Analysis of Tax Options
Option B Ago-Wife Pensioners
By household income class
CT PIT PIT Compensation
change change BB
$ pw $ py $ pypy Cah Gain pw
0-120 -2.58 0.93 0.00 2.12 0.417
121-150 -2.90 3.441 0.00 2.14 2.68
151-180 -2.941 1.31 0.00 2.97 1.341
181-210 -41.241 0.418 0.00 3.417 -0.29
211-2410 -41.00 2.87 0.00 3.67 2.541
Total -3.30 2.05 0.00D 2.841 1.59
TABLE 11
Preliminary Analysis of Tax Options
Option B Wage and Salary Earners
By household income class
Income CT PIT PIT Compensation Cash
Range change change BB Gain
spy $ pw * pw Spy Spy Spy
271-300 -11.55 5.50 0.00 1.19 2.141
301-350 -5.07 6.65 -0.08 0.93 2.413
351-1125 -5.51 7.91 -0.22 1.12 3.27
426-510 -6.00 11.00 -0.116 1.25. 5.79
511-615 -6.119 11.15 -0.85 1.10 7.91
616-7110 -5.90 15.82 -3.66 1.01 7.27
7411-930 -7.67 20.15 -6.50 0.99 6.97
931-1250 -8.77 26.72 -19.86 1.05 -0.86
> 1250 -10.86 36.55 -86.58 0.98 -59.90
Total -6.66 15.110 -8.02 1.06 1.78
Notes: Option B as in White Paper
CT: net commodity taxes ( BBCT, wholesale, and
excise). PIT: Personal income tax on current base.
PIT BB: Personal tax on additional income from base
broadening.
TABLE
Preliminary Analysis of Tax Options
ACTU Option 1 for Age-wife Pensioners
Current Income Tax Scale
By household income class
CT' PIT
change BB
$ pw $ pw Preliminary
Net Gain
$ pw
0-120 -1.95 0.00 -1.95
121-150 -1.83 0.00 -1.83
151-180 -1.67 0.00 -1.67
181-210 -2.93 0.00 -2.93
211-240 -2.74 0.00 -2.74
Total -2.. 21 0.00 -2.21
TABLE 6
Preliminary Analysis of Tax Options
ACTU 1 Wage Salary with Current income tax scales
By household income class
CT PIT
change BB
$ pw $ pw Preliminary Net Gain
$ pw
271-300 -0.48 0.00 -0.48
301-350 -0.99 -0.07 -1.06
351-425 -1.20 -0.21 -1.41
426-510 -0.97 -0.43 -1.40
511-615 -1.22 -0.80 -2.02
616-740 0.39 -3.45 -3.06
741-930 -0.57 -6.14 -6.71
931-1250 0.15 -18.76 -18.61
> 1250 -0.99 -8.1.77 -82.76
Total -0.68 0.00 -7.57 0.00 -8.25
Notes: ACTU Option 1 involves no change in the personal
income tax schedule; broadening of the income tax
base ( no impact estimated for pensioners); 5% BBCT;
and no wholesale sales tax.
CT: net commodity taxes ( BBCT, wholesale, and
excise). PIT: Personal income tax on current base.
PIT BB: Personal tax on additional income from base
broadening.
Income Range $ pw
Income Range $ pw
TABLE 7
Preliminary Analysis of Tax Options
ACT, 2 with current Income Tax for Age-wife Pensioners
By Household Income Class
CT PIT
change BB
$ pw $ pw Preliminary
Net Gain
$ pw
0-120 -4.05 0.00 -4.05
121-150 -4.82 0.00 -4.82
151-180 -5.99 0.00 -5.99
181-210 -7.17 0.00 -7.17
211-240 -7.40 0.00 -7.40
Total -5.86 0.00 -5.86
TABLE 8
Preliminary Anal-ysis of Tax Options
ACTU 2 for Wage Salary Earners with Current Tax Scales
CT PIT
change BB
$ pw $ pw
-7.92
-8.68
-9.55
-10.79
-11.75
-12.22
-15.30
-18.27
-22.77 0.00
-0.07
-0.21
-0.43
-0.80
-3.45
-6.14
-18.76
-81.77 Preliminary Net Gain
$ pw
-7.92
-8.75
-9.76
-11.22
-12.55
-15.67
-21.44
-37.03
-104.54
Total -12.76 -7.57 -20.33
ACTU Option 2 involves no change in the personal
income tax schedule; broadening of the income tax
( no impact estimated for pensioners); 7% BBCT; 12%
wholesale sales tax on selected items.
CT: net commodity taxes ( BBCT, wholesale, and
excise). PIT: Personal income tax on current base.
PIT BB: Personal tax on additional income from base
broadening.
Income Range $ pw
Income Range $ pw
271-300
301-350
351-425
426-510
511-615
616-740
741-930
931-1250
> 1250
Notes:
TABLE 9
Preliminary Analysis of Tax Options
ACTU 3 Age-Vito Pensioners with Current income tax scales
CT PIT
change BB
Spw Spw Preliminary Net Gain
$ pw
0-120 -6.25 0.00 -6.25
121-150 -7.51 0.00 -7.51
151-180 -9.53 0.00 -9.53
181-210 -11.26 0.00 -11.26
211-240 -13.06 0.00 -13.06
Total -9.17 0.00 -9.17
TABLE
Preliminary Analysis of Tax Options
ACTU 3 W& S Current income tax scales
Income CT PIT Preliminary
Range change BB Net Gain
$ pw $ pw $ pw # pw
271-300 -11.92 0.00 -11.92
301-350 -14.01 -0.07 -14.08
351-425 -15.96 -0.21 -16.17
426-510 -18.00 -0.43 -18.43
511-615 -20.12 -0.80 -20.92
616-740 -20.49 -3.45 -23.94
741-930 -24.83 -6.14 -30.97
931-1250 -34.50 -18.76 -53.26
> 1250 -30.10 -81.77 -111.87
Total -12.27 -7.57 -19.84
Notes: ACTU 3 involves a 10% BBCT and a 5% wholesale sale
tax CT: net commodity taxes ( BBCT, wholesale, and
excise). PIT: Personal income tax on current base.
PIT BB: Personal tax on additional income from base
broadening.
Income Range $ pw
TABLE. 11
Preliminary Analysis of Tax Options
Effects of Different Exemption Struotures under
Age-Wife Pensioners
Cash Gain by Household Income Class
Gain From.
Food Exemption Gain from
Food/ Clothing/ Utilities
Exemption
0-120 2.61 3.91 1.50
121-150 2.53 3.95 1.56
151-180 3.87 6.415 1.67
181-210 4.53 6.941 1.53
211-2410 1.93 7.741 1.57
Total 3.66 5.76 1.57
TABLE 12
Preliminary Analysis of Tax Options
Effects of Different Exemption Structures under Option C
Wage and Salary Earners
Cash Gain by Household Income Class
Income Gain from Gain from Ratio of
Range Food Exemption Food/ Clothing/ Utilities the two
Exemption Gains
271-300 41.53 7.66 1.69
301-350 41.641 7.61 1.641
351-4125 5.411 8.90 1
1126-510 5.86 10.08 1.72.
511-615 6.30 10.85 1.72
6 16-74o0 6.30 11.13 1.77
7411-930 7.211 141.31 1.85
931-1250 8.19 16.16 1.97
> 1250 9.01 .19.52 2.17
Total 6.410 ' 11.65 1.82
Notes: These figures relate solely to the exemption of the items
specified; as such they would involve significant revenue cost
unless accompanied by other revenue items. Figures are
presented simply to indicate the incidence of the tax on these
items as background to consideration of the possibility of
exempting them from the base.
Income
Range Option C
Ratio of
the two
Gains