March 31, 2016

Horse 2093 - A Brief, Incomplete and Mostly Wrong, History and Future of Income Tax In Australia

Before we begin, here is a brief history lesson on Income Tax in relation to Australia.
In 1770, Captain James Cook sailed around the world, looking at the transit of Venus across the sun, and stealing countries through the cunning use of flags. Terra Australis, the great southern land, was declared empty even though there were people obviously living in it but because they didn't have a flag, the "Rule Britannia" was invoked where "Britannia rules the waves" and "no flag, no country, you can't have one" were enforced.

In 1773, the Americans decided that they'd had enough of British rule and despite paying less than 2% in levies for goods like tea and corn, they had a war with Britain to throw off their colonial masters. Fast forward six years and Britain realised that it had nowhere to dump its knaves, rogues and ne'r-do-wells and decided to dump them all in Australia; which was out of sight and pretty well much out of mind.
In 1779, Britain found itself embroiled in a war with France and so imposed it's first income tax. This remained in place until 1812, was reintroduced in 1813 and ended again after it had ended its war with Napoleonic France.

The first "modem" Income Tax was imposed in 1842 under the premiership of Sir Robert Peel, from whom we get two nicknames for policemen "Bobbies" and "Peelers", when government and society generally was asked to do things in the name of "improvement". Innovations such as postage, actual proper sewerage, and public institutions such as the fire brigade and the police, began to be provided by the government. Peel's government needed a way to pay for it all and the income tax which was first imposed in 1842 was levied at 7d./£ for incomes over £150 (which is less than 3%).
From the 1850s onwards and after the discovery of payable gold in New South Wales, the six colonies in Australia were each granted responsible government of their own and they each imposed their own Income Tax. People in Australia were subject to both the Income Tax from Britain as well as their own colonial Income Tax and this remained in place until just after federation. The British Government charged the six states for residual services until the end of the tax year ending 5th April 1902.

The Australian Federal Government found that it had to fight every year to collect it's income from the states, from 1901 until 1936 when it passed the Income Tax Assessment Act, and for a brief period of time, citizens of Australia were again subject to two sets of Income taxes but from 1942, during the height of the Second World War, the states agreed to let the Federal Government be the only collector of Income Tax in Australia and that arrangement has been in place ever since.
Since 1942, there has been an annual bunfght at the Council of Australian Governments meeting (COAG), where the state governments have whinge that some states get more from the Commonwealth in services than their citizens pay and get gypped because of it.

This week, Treasurer Scott Morrison has put forward the totally unoriginal idea that the states should be allowed to again impose and collect their own Income Tax. This would have  the net effect of removing costs from the Federal budget; which fits in nicely with the Liberal/National Party's narrative of reducing the size of government.
The problem in principle with this is that the only people who would actually like this idea are the Federal Government, the State Government, businesses which cross borders and who would be able to find arbitrage and other opportunities to spin a profit because of differences in state Income Tax and people like accountants, auditors and financial advisors, planners, knaves, rogues and ne'r-do-wells. The vast majority of people for whom lodging tax returns of any sort is already about as much fun as haemorrhoids, would hate the idea of having to lodge a second Income Tax Return because the state governments are both crying poor and can't work together.

I personally think that the underlying driver behind Mr Morrison's hint that the states should impose their own Income Tax is ultimately about lowering tax rates and eroding government services.
Income Tax and in particular a progressive income tax is hated by business and the rich generally because they increasingly find the idea that government should fund things that they don't immediately benefit from, an anathema. Lower class people tend to derive most of  their income from wages but as you move upwards in Income, more income is derived from rent, dividends, interest and wages which come from financial and managerial employment; so as less to do with producing actual real work. Progressive Income Tax mostly has the effect on taxing income which has come from other people's work. The resentment arises mainly because of transfer payments to poorer people who they deem as not worthy recipients. The biggest item in the 2015 Federal Budget was Social Security and Welfare at $154bn and most of those payments were direct transfer payments; mainly to old people.

Actually, when it comes to general assistance to the States and Territories in terms of revenues paid to them, it only amounts to $57.7bn or just 13.2% of all Commonwealth outlays. This figure is almost identical to the revenues collected by the Commonwealth through GST receipts; so really if the states want to get together and have a giant collective whinge, they may find themselves being asked to take care of a few things that the Federal Government does, in return for their ability to take in their own Income Taxes.

Ultimately I think that the meal served up by Treasurer Scott Morrison to the states is unpalatable and I would be surprised if if wasn't spat out almost immediately. It seems like a bitter thing for the states to swallow as none of them are particularly well equipped to handle the administration required to collect such a thing. If the idea survives beyond the end of budget season, I will be well surprised.

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