Press Statement No. 346
21 October 1974
REPORT OF COMMITTEE APPOINTED BY CABINET ON TAXATION
MATTERS
The Prime Minister, Mr. Whitlam, today released the
report of a committee appointed by Cabinet.
The report is attached.
CANBERRA, A. C. T.
TAXATION MATTERS
REPORT OF COMMITTEE APPOINTED BY CABINET
i. The Committee was asked to report on what may be
done through the taxation system
a. to restrain cost inflation, including the possibility
of excluding wage and salary increases
beyond an established norm from acceptable costs
for the assessment of company income;
b. to encourage saving and investment, including the
possibility of imposing a tax on income for which
a rebate is given for saving;
c. to prepare for a possible balance of payments problem.
2. We took these references to be concerned with particular
modifications of the system of taxation and not with
the structure of rates within the present system or with the
outcome of the Budget as a whole. At the same time, we were
aware that these more general matters were of great relevance
to the Committee's work and accepted that the possibilities
we were asked to examine were to be seen in a Budget context in
which, we understand, the Government was seeking to limit the
growth of its own expenditure.
3. A detailed consideration of proposals to index tax
schedules was outside the Committee's terms of reference, since
such proposals relate more to desirable levels of rates than to
the system of taxation itself. However, since informal
-2-
representations were made to us on this matter, perhaps two
specific comments on tax indexation might be made. First,
such an approach eliminates the stabilising properties of a
progressive tax system in an inflationary situation. Secondly,
as most proposals for tax indexation envisage at most annual
revision of rates, tax brackets and concessions in line with
an approximate formula, whatever decisions need be made could
be made consciously with the Budget, and in the light of the
Government's own judgments, rather than automatically.
4. We were also acutely aware of the limits to the
Committee's considerations set by the time available. It has
therefore been necessary to leave many issues for further
investigation. The Committee met on August 19, 20, 21 and 22.
6. For convenience, our comments appear in a different
order from that set out in paragraph 1 above.
SAVING AND INVESTMENT
Saving
7. From an overall viewpoint, the object of most taxes
is to restrain private spending in general, whether on consumption
or investment, so as to make room for Government claims on
resources and for outlays on social services etc. At the same
time considerations of equity point to placing the heaviest tax
burdens on the relatively " rich", who do most of the private
saving. Given the present income distribution, a tax system
designed to encourage saving would tend to run counter to the
-3-
equity objective ( even though in no particular case is it
certain that a " rich" person, if relieved of tax burdens,
would save more rather than spend more).
8. Against this background, it has been suggested
by some that there would be net advantage in replacing all
income taxation by progressively graduated expenditure
taxation. The Committee considered a less ambitious suggestion
that there should be a special tax or surcharge on income, progressively
graduated, but subject to rebate to the extent that
a taxpayer could show by the net addition made to his assets
( less debts) that he had saved in the course of the year. To
the extent that the introduction of the special tax and rebate
resulted in an increase in savings, it should permit other tax
rates to be reduced below the levels otherwise necessary.
9. The Committee agreed that
the task of determining and policing the rebate
would be a new administrative enterprise of great
complexity; and
( ii) personal incomes, as currently determined for
income tax purposes, inadequately reflect " capacity
to save" to such an extent that the introduction of
a special tax related to saving would be likely to
cause serious anomalies and widespread evasion,
e. g. through intra-family gifts.
The objection under ( ii) would remain even after
the now-contemplated restructuring of tax rates and concessions,
including the provisions to benefit low-income single-income
families.
-4-
11. Finally, it was acknowledged that the suggested
special tax and rebate, although possibly important for
long-run taxation policy, would not make a direct impact on
the cost aspects of the present inflation. The Committee
concluded that such a tax should not be introduced at the
present time.
Investment
12. Measures to encourage private investment in the
aggregate are inherently in conflict with the objective of
restraining private spending and partly inconsistent with the
idea that Government capital-formation should play an increasing
role in the economy. The Committee noted that action against
inflation might discourage private investment and that conventional
accounting in a period of inflation might also work
against investment.
13. If it were desired to mitigate any possible
reduction, provisions such as accelerated depreciation or
investment allowances could be considered but they would
reduce tax revenue and increase company profits without necessarily
increasing investment. For directing investment towards
particular avenues, the taxation system is not an appropriate
instrument. 14. The Committee thought that the worst danger to
investment levels was not in action against inflation, but
in fear of what action the Government might take, and equally
of the consequences if the Government failed to take action.
If business men believed that effective action was
being taken against inflation and were confident also that
demand generally would be sustained at adequate levels,
private investment decisions would be made in the light of
normal long-term considerations of economic advantage. There
should then be little need for special measures to boost private
investment generally.
COST INFLATION
16. The Committee agreed that a tax penalty on wage
and salary increases beyond an established norm could, if
practicable, be a valuable supplement to demand management
in slowing down price increases as the pressure on capacity,
labour, imports and other resources eases.
17. Equally, such a penalty or other like device cannot
work unless that pressure of demand is limited. The penalty
can only stiffen the resistance of employers to excessive wage
claims by increasing the cost of meeting those claims in the
event that the employer is unable to pass on a cost increase
in full. If an employer is confident that he can pass his costs
on, then he could not care less what wages he is asked to pay,
regardless of the tax penalties placed upon him if he pays.
18. In a sellers' market, such as we have had in recent
years and which for the most part we still have, all antiinflationary
efforts will be frustrated. Similarly, the
comfortable expectation that international competition would
be eased by exchange depreciation and/ or controls on imports
when domestic inflation makes that competition uncomfortable
would be a green light for cost increases and would undermine
measures to restrain inflation.
-6-
19. With this background, the Committee considered
a mechanism for excluding wage and salary increases beyond
an established norm from acceptable costs for the assessment
of company income, a possibility to which attention was
directed in our terms of reference.
It would be necessary for the Government to lay
down a norm for permissible wage increases. The Committee
carried on its discussions in terms of a norm which in any
quarter would be the level of the Consumer Price Index in the
preceding quarter related to a fixed base after adjustment
for a predetermined " betterment factor" of, say, 0.5 or 0.6
per cent per quarter. It would also be necessary, but more
difficult, to arrive at a figure for an actual average wage
being paid by an individual employer for comparison with the
norm and so to provide a basis for the determination of tax
penalty. 21. The Australian Bureau of Statistics estimates
each month the Average Weekly Earnings per Employed Male Unit
by States for Australia as a whole, largely on the basis of
Pay-Roll Tax statistics. A similar method is used to establish
Average Wage Earnings for application in the formula for
Reimbursement Grants to the States.
22. Greater difficulties arise in an attempt to produce
a corresponding figure for individual firms which might be used
to determine what are " excessive" wage and salary payments.
The Committee agreed that, despite the difficulties, such a
f igure could be produced for each firm concerned. However, if
this figure were to be used as the basis for a penal tax, there
-7-
would be many anomalies and the Government would be enforcing
penalties which in many instances would clearly be unjust.
23. It would be necessary to rely on an over-simple
formula in considering whether individual firms are paying
" excessive" wages and salaries because it is impossible, from
award determinations or other sources, to determine how changes
in pay rates, occupation by occupation, will affect pay-rolls,
firm by firm, and quarter by quarter. No formula, even if valid
statistically, will accurately represent the situation of any
individual firm with a labour force the relationship of which
to its average in the base period is changing as time goes on.
Even if no wage rate increased, the average might rise because
of a different mix of sexes, skills etc. and because of variation
in overtime, holiday pay etc. Some of these changes could reflect
developments planned earlier but only now Coming into effect. A
firm in which such changes occur could be penalised for an average
pay increase which did not arise from any change in rates to which
it had agreed.
24. Just as bad would be the plight of a firm affected
by large award increases resulting from a meaningfully contested
case before a statutory wage-fixing authority. An example is
the progress of women towards equal pay which could heavily
penalise employers with a large proportion of female staff.
Similar problems would arise for firms which find it
necessary to work an unusual amount of overtime after oil
industry strikes).
-8-
26. Accidental factors such as weather, strikes,
shortages of material, components or power might also impair
the validity of the formula for an individual firm and call
in question the usefulness of the base period.
27. For every firm disadvantaged by such factors
there would probably be another firm receiving a positive
advantage. But this may only increase the protests of the
first set of firms without attracting fan mail from the second.
28. No doubt some of these defects could be set right
in the course of administration but it would be impossible to
hope for more than the roughest of justice. It may be that
rough and ready justice can be tolerated if it is the price of
coping with the inflationary situation. But if the injustices
were sufficiently common and glaring there would be widespread
resentment against the scheme even if it would help keep prices
down. There might also be industrial unrest and unexpected
failures of businesses.
29. Coming closer to home, the Australian Government
must consider how best to deal with remuneration in its own
employment. Much of this employment would not be subject to
company income tax and therefore not subject to penalties in
the course of the scheme. However, a Government which imposed
the scheme and set the norm by which penalties were determined
for other employers would presumably be obliged to conform. The
same considerations apply to State Governments.
We have been advised by the Commissioner of Taxation
that it would be practicable to administer a penalty scheme
along these lines within and through the assessment of companv
-9-
incorte. Further, it is his opinion that, if such a plan is
to be introduced, it would be preferable to give effect to it
through the company income tax system rather than to use the
State Pay-Roll Tax or a revived Australian Government Pay-Roll
Tax. He emphasises that its administration would be costly, in
money and in skilled personnel, even if the firms to be covered
were confined to a few thousand large employers. To achieve
this limitation it would be necessary to exempt a large proportion
of the 80-90,000 firms at present subject to State
Pay-Roll Tax. This would not exempt a corresponding proportion
of employment. It would perhaps lead firms included to seek
exemption by splitting their enterprise into separate smaller
units. 31. Again, these difficulties could perhaps be dealt
with in a rough and ready manner but not without protest..
Furthermore, it seems desirable to repeat that there will be
most serious anomalies and inequities that no tax law, if it is
to retain community respect, should permit. These will exist
as between firms to which the scheme applies and between those
firms and firms outside the scheme. They cannot be eliminated
legislatively and it is to be expected that some affected firms
will try to take matters into their own hands as far as possible
by manipulating pay-rolls and labour to avoid them.
32. We have emphasised the anomalies and injustices
because the Government would wish, in considering whether to
set out on a new path, to do so with its eyes open. If these
anomalies and injustices could be countenanced by the Government
Ait would be Possible to give effect to the measure we have
outlined and if applied as part of a total program it could
help contain cost inflation. It would, however, be impossible
to sustain such a plan for any considerable period of time. If
it is to be employed, it should be seen essentially as a shortterm
measure.
33. The Committee considered various suggestions,
including those put forward by the Institute of Applied Economic
Research and a group of Adelaide economists. These suggestions
have included a tax similar in objective to that referred to in
paragraphs 16 to 28 above and a suggested tax on profit margins
in excess of those in a base period. We saw no reason to prefer
their suggestion for taxes on excess wage and salary payments to
that we have examined in detail. While the proposal for a tax
on excess profit margins is seen by the Adelaide economists as
a desirable complement to a tax on excess wage and salary payments
we found it necessary to reject it both conceptually and because
of acute administrative difficulties.
THE BALANCE OF PAYMENTS
34. Generally the Committee felt that the tax system
was not an appropriate instrument for dealing with general
balance of payments problems whether they exist currently or
are anticipated. There may be a case for encouraging Australian
industries to involve themselves to a greater extent in exports,
for instance, to take advantage of previously unrealised opportunities,
or of possible economies of scale, and to expose the
industries concerned to the competitive and technological stimulus
of international markets. Such encouragement should therefore be
selective outside the tax system, and follow examination of the
circumstances of each case. Desirably, the form and extent
of the encouragement should be subject to Government and
parliamentary scrutiny. Experience with the previous Government's
export incentives schemes suggests that the tax concessions
involved tended to reduce revenue without necessarily achieving
significant results. H. C. Coombs ( Chairman)
F. H. Wheeler
E. T. Cain
T. W. Swan
F. H. Gruen
Brian Brogan
August 22, 1974