PREFACE
The review of taxation in this booklet was completed before the surrender of Japan. As it was drafted on the assumption of an early end to the Japanese war, the main conclusions are little, if at all, affected.
The study comprises a broad survey of future taxation from the standpoint of economic and industrial policy. It does not attempt to cover, or to make recommendations upon, the complex technical problems which arise in the determination of the exact nature and incidence of particular taxes. These are matters requiring the attention of experts in taxation with ready access to all relevant information and with powers to obtain evidence and opinions.
A Summary of this booklet appeared in the Melbourne "Herald" and Adelaide "Advertiser" on August 28, 1995. Since that date the first post-war budget has been brought down. It is desirable therefore to stress that the recommendations and observations in this report are not restricted to the first post-war year, but refer to the several years which may be termed the post-war period.
August, 1995.
ARTICLE I -- POST-WAR TAXATION: GENERAL PRINCIPLES
Taxation is one of the central problems of post-war economic and social policy.
We have come a long way from the days when an income tax of 1/- in the £1 could arouse the most furious political contentions and be attacked by its opponents as outright confiscation and as morally despicable. In the light of later experience one would find it difficult to resist the conclusion that in those distant times taxation held a position in the public mind and in political and economic controversy far in advance of its true significance. Even in 1939, when taxation in Australia on the higher incomes amounted roughly to 5/- in the £, the burden could be borne without radical readjustment of modes of life and without noticeable effects on the productive efforts of the people. Up to the time of the outbreak of war nothing had occurred to suggest that taxation of these proportions had in any way seriously damaged the foundations of the Australian economy. At any rate we entered the war, if not in a state of robust health, at least in one which gave no indication of early demise.
But after four years of wartime taxation at unprecedented levels the whole problem has assumed a new proportion and a tremendously increased national importance. The great majority of Australians now realise with painful acuteness the personal, if not the national, significance of taxation, and cry out for relief. But the prospect, while not one of unrelieved gloom, could hardly be called rosy.
HIGH LEVEL OF POST-WAR TAXATION CERTAIN
To-day not even the most cheerful optimist in his most sanguine moments could envisage a return to taxation of the 1939 proportions. Indeed, many feel that we will be fortunate if we can get the burden of taxation down to double what it was in the pre-war days. While anything approaching the present wartime levels would be unthinkable, we are forced to recognise that the magnitude of taxation in the future will be vastly greater than ever before in our peacetime economic history. So will its spread -- in 1939 only about 300,000 people were paying income tax; to-day taxes are paid by over 1,700,000 people and the number may not be greatly less after the war. Taxation will extend to every corner of the economic structure; it will influence directly every business decision and enterprise; it will enter into practically every economic calculation as a factor of major importance. From being a comparative mouse in the pre-war economy, it will be, if not a giant after the war -- and that is possible -- at least something to be reckoned with at every step. The very size of post-war taxation calls for a new approach and a more intensive examination of its relation to the whole economic problem.
What has brought about this change? Why should we have fought a lengthy and arduous war to end up having to carry a far heavier load of taxation than when we began?
These questions can be briefly answered. We have chosen to allot to the state a position in the national life of much increased importance and extent, and we must pay the price of our decision. This general agreement on the need for the state to undertake new functions is, of course, accompanied by profound disagreements on the nature of those functions and how they should be carried out. Much of what the present Commonwealth administration has recently done, and proposes to do, has been severely, and often justly, criticised. Nevertheless, post-war planners, no matter what their political colour or inclination, and however much they may disagree about the essential character of the kind of Australia they want after war, are at one in calling upon governments to render increased services -- often without counting the cost.
Thus for "full employment" the state must supplement and possibly, to some degree, regulate the activities of private enterprise. To achieve a basic security for all, the state must institute schemes of financial assistance to protect its citizens against economic misfortune and the financial consequences of old age. So that all its members will have adequate medical treatment, be properly educated, clothed, fed and housed, the state must increase its expenditure in the field of social services. To achieve a greater measure of national security against external attack, the state must take upon itself the responsibility of maintaining larger peacetime armies, navies, air-forces and defence industries.
This is not the place to discuss the rights and wrongs of all these new demands on governments. Enough to say that the war has aroused the social conscience and commended the great aim, so well expressed by Sir William Beveridge, of eliminating the giant evils of Want, Disease, Ignorance, Squalor and Idleness, to all right-minded people. It is, however, certain that many planners who have gone gaily ahead placing orders on the national exchequer, have received more than a mild shock when presented with the bill of costs.
PRIMARY FUNCTION OF TAXATION
The obvious function of taxation is to raise revenue to meet the current costs of government. The capital charges of the state can, in general, best be met from loan money or, in certain circumstances, from the expansion of central bank credit -- the latter, if wrongly used, would amount to disguised taxation. But the current operating charges of the state must by and large be met and, in the long run, balanced from the proceeds of taxation. The greater these charges, the higher must be the level of taxation.
TAXABLE CAPACITY
To what heights then can taxation safely be raised without producing ill-effects on the economy, or, in the terms of the economist, what is the taxable capacity of a country? This question, which was chiefly of academic interest under the conditions ruling before the war, is likely to become of very real and practical concern in the future when the weight of taxation will press heavily on the resources and work of the nation. It is a question which admits of no simple and direct answer. When a famous British economist was asked how the taxable capacity of a nation could be ascertained he facetiously replied "Nohow". This reply was probably not far from the truth at the time at which it was made, when taxation, at levels contemplated for Australia after the war, was unheard of, and even un-thought of. It is by no means unlikely, however, that bitter experience in experimenting with very heavy taxation in the post-war years may give us some idea of where the taxable capacity of a democratic community, such as Australia, lies.
In any case from the conception of taxable capacity spring some of the most important problems of taxation policy.
TAXATION AND PRODUCTION
The first thing to note is that the amount of taxation which a community can stand varies with the total amount of wealth produced by its people or, in other words, with the size of its national income. A country such as the United States, with great wealth, resources and productive capabilities, could sustain without feeling any ill-effects a per capita level of taxation which the people of a poor and undeveloped nation such as China would find unbearable, and even those of Australia, oppressive. No consideration of the real burden of taxation is therefore possible without taking into account the size of the national income on which taxes are levied. On this count it is not unreasonable to suppose that Australia will be in a position after the war to sustain a higher level of taxation than it could have done before the war, without incurring any increased strain. But this would depend entirely of course on whether the per capita income of the nation is increased through greater efficiency, high productivity throughout industry, and a more economic application of resources.
It is impossible to emphasise too strongly that all taxation comes out of the total national production, and that the original source of the revenue of the state is the efforts and enterprise of the citizens of the state. But if taxation is raised too high and the individual finds that a large part of his earnings is subtracted, his incentive to work, his inclination to take risks, and his ability to save will suffer, and the national income will fall. Taxation above a certain limit must inevitably tend to dry up the source from which it is drawn. The crucial problem of post-war taxation policy in Australia will be to find this limit, and for economic statesmanship to see that it is not exceeded. Nothing could be more disastrous to the economy of the country and the standards of the people than a diminution of the total national production. With taxation at pre-war levels, the effects on production were possibly negligible; but with taxation at the high mark which is probable after the war, the most rigorous attention will need to be paid to economic incentives and to the financial resources left in the hands of industry for expanding, and for improving the efficiency of, its plant and equipment.
NEW CONCEPTION OF FUNCTIONS OF TAXATION
These considerations have led authorities in other countries, which are also facing a much heavier peacetime burden of taxation, to place first among the objectives of taxation that it should impose the least possible restriction upon an expansion of production and employment. The point is well made in an editorial in the American journal "Fortune".
"A new kind of tax bill must be written. It will be less a bill to raise revenue, than a bill to facilitate production and employment. True, the effect of taxes on business activity is an old story -- it was the ultimate preoccupation of Adam Smith. But aggregate taxes of 4 or 5 billion dollars -- the pre-war federal yields -- are one thing; taxes of 15 billion dollars or more are something else again. Taxes in this volume could be a determining influence for prosperity or depression."
TAXATION AND EMPLOYMENT
We should note here the mention of the word "employment". An entirely new conception of the purposes of taxation lies in the possibility that it can be used as an instrument for assisting to maintain steady employment by ironing out the peaks and valleys of economic activity. In the past conditions of great business prosperity have often led to reductions in taxation. But this is just the time when the community is most able to stand a relatively heavy burden of tax. Conversely when economic activity declines the community is least able to bear taxation. By reducing taxes and leaving more money in the pockets of the people, and in the coffers of business, spending and investment is encouraged and business activity stimulated. Recognition of this new function of taxation finds a place in most discussions of post-war employment policy. For political reasons, however, its practical application will be far more difficult than its theoretical acceptance.
KINDS OF TAXES
Given a certain amount of money to be raised by taxation for the uses of governments, the real burden on the community and the effects, whether for good or ill on the whole economy will depend partly on how the money is raised and partly on how it is spent. In Australia it has been customary for governments to use four main kinds of tax:
- Direct taxation on the incomes of individuals.
- Direct taxation on the profits or incomes of businesses.
- Taxation on capital, such as probate charges and estate duties.
- Indirect taxes of various kinds such as sales taxes and customs and excise duties.
From the standpoint of economic policy all these taxes have both merits and defects. One of the most delicate and important adjustments of post-war finance will be to decide how the state's need of revenue should be allocated between the different types of tax so as to place the smallest possible obstacles in the way of national production and economic progress. For instance, with a given sum of money to be acquired by taxation, is it advisable to maintain a relatively high level of taxation on personal incomes and to reduce sales taxes to negligible proportions? And, within the field of personal income tax would it be advantageous to further widen the divergence between taxation on income from property and income from work? Or again, do the requirements of industrial efficiency dictate that taxes on company profits should be kept to a minimum, and the resultant loss to the treasury recouped from other sources? These and similar questions will be examined in later articles.
GOVERNMENT EXPENDITURE
The burden of taxation on the community cannot be considered apart from the manner in which the revenue is spent after it has been raised. It is possible that adverse effects caused by tax exactions may be more than offset by the benefits conferred on the community through wise expenditure by governments. In fact, the central problem of public finance, and one might almost say of modern economics, resolves itself into balancing the advantages to be gained by increasing the expenditures of the state against those which would accrue if the money were left in private hands. A great deal of course depends on the particular type of spending undertaken by the state. For instance, it would clearly have been to the net benefit of the Australian people in the years before the war if governments had used much more of the community's income to strengthen the defences of the nation. For this purpose an increase in taxation would have been amply justified. On the other hand, one could point to many instances of wasteful government expenditure, and to a number of public projects which had better been never undertaken.
In other words, as a leading authority has stated: "It is not possible to pass a complete judgment upon any operation in public finance without balancing against one another both sides of the operation, the effects of the raising, and the effects of the spending, of public revenue". It does not require much reflection to appreciate that the tendency of a great deal of post-war planning is to disregard the former and to consider only the latter operation. This is probably the reverse of the tendency before the war, and certainly the complete reverse of accepted thought a century or so ago when a contemporary economist could say: "The very best of all plans of finance is to spend little, and the best of all taxes is that which is least in amount."
TWO PROPOSALS
In this article we have given a broad sketch of the purposes and of some of the main problems of taxation policy. It would be premature at this stage to attempt detailed suggestions, but two broad proposals can already be made with assurance.
EXPERT STUDY NECESSARY
First, the new high level of public expenditure in Australia calls for comprehensive "and expert study of taxation in relation to its effects on the entire field of economic policy particularly on problems of production, industrial efficiency, incentives and employment. In other countries this is being done. In the United States several notable taxation plans have already appeared. These have resulted in the main from the efforts of private citizens. Perhaps the one which has aroused the most interest is that of the Committee for Economic Development, an organisation formed by a number of leading industrialists, and playing a significant part in the preparation of the American economy to meet the new problems and demands of the coming peace. In Britain, the Government has given special attention to the taxation of industry with a view to promoting its rapid recovery after the war, and to placing it on a competitive basis with the industries of other nations. Already certain far-reaching measures involving significant tax concessions have been placed before Parliament. In Canada, two important investigations, are, at the time of writing, under way.
The second proposal is that, even if the Commonwealth Government is not yet in the happy position of being able to give precise indications of its post-war tax intentions, at least it should point the direction in which it will move as soon as circumstances allow. Is it possible for us to expect some reduction, and if so, of what general nature and of what rough proportions? Otherwise we will enter the peace, ill-prepared in comparison with other nations, ill-equipped for the giant problems of post-war reconstruction. It is impossible for either business or individuals to plan ahead with assurance, and in a practical and effective manner, while the present uncertainty prevails.
ARTICLE II -- THE BUDGET OF POST-WAR COSTS
The starting point of any realistic discussion of post-war taxation must be some forecast of the expenses of Commonwealth and State Governments which it will be necessary to meet from taxation after the war. It is idle to talk of this or that reduction in taxation unless we have some general idea of the future expenditures to which governments are already largely committed and which will need to be paid for out of the proceeds of taxation. Naturally any estimates of government expenses must be approximate, but on the basis of present knowledge it is possible to get a useful idea of the magnitude of the main items in the post-war budget of government costs.
PRINCIPLE OF PUBLIC FINANCE
It is a commonly accepted and sound principle of public finance that, over the years, receipts from taxation and other sources of current revenue should be at least adequate to cover the current costs of governments.
The two main items in the current expenditures of Australian governments consist, first, of cash payments to individuals, such as unemployment, sickness and repatriation benefits, military pensions, child endowment, invalid and old age pensions and similar social benefits; and, second, of interest and sinking fund payable on the national debt, comprising both the part held in Australia and the part held overseas. Other important charges of a current nature are the administrative costs of the various government departments, including social service costs on account of health and education, and the operating charges of the defence services.
ESTIMATES OF POST-WAR COMMITMENTS
On all these items, and particularly on the first two, the post-war costs of governments are certain to be vastly greater than before the war. For instance, the cost of social payments, which in 1938/9 amounted to about £30 millions, is likely to be somewhere in the region of £100 millions a year in the post-war period. In 1943/4 these payments had risen to £77 millions. This figure will expand over the next four years, because of increases on account of child endowment, military pensions and other benefits, and higher prices.
In 1938/9 interest and sinking fund on the national debt held in Australia and abroad was about £52 millions. In 1943/4 it was approaching £80 millions. Borrowing will remain high while the war with Japan continues, and will probably be fairly high after the war to finance large public works and developmental programmes. Three or four years hence the interest and sinking fund bill may be close to £110 millions.
In 1938/9 £8 millions from current revenue was spent on national defence. After the war £60 millions a year has been suggested as a minimum figure for the total cost of defence. Some of this expenditure, such as the cost of military buildings and naval vessels, would be in the nature of capital investment, but assuming 50% -- which would seem reasonable -- to consist of operating costs, the post-war defence charge to be met from current revenue would be £30 millions compared with £8 millions in 1938/9.
In addition to the claims on the national finances just « mentioned, numerous other items, such as the administrative costs of government departments and subsidies to aid ~ financially distressed industries, must be met out of the f, proceeds of taxation. Among the most important of these sundry items are health and educational services, both of which are certain to expand after the war. In 1938/9 these sundry items of expenditure amounted to £64 millions. In 1943/4 they had risen to £73 millions. It is unlikely that it will be possible to reduce this figure after the war. On the contrary it will almost certainly increase. Decreases in some items, such as wartime costs of administering government departments, can reasonably be expected, but these will probably be more than counter-balanced by increases in other directions -- particularly in health and educational services. On the assumption -- an optimistic one -- of the strictest economy and efficiency in government administration, a reasonable estimate of these sundry items might be of the order of £85 millions.
POST-WAR EXPENSES TO BE MET FROM CURRENT REVENUE
On the basis of this forecast, government expenses to be met from current revenue, after the completion of the main demobilisation of the forces and industry, would be as follows:
| Social Payments | £100 millions |
| Interest and Sinking Fund | £110 millions |
| Defence | £30 millions |
| Sundry Items | £85 millions |
| Total | £325 millions |
This would compare with £155 millions in 1938/9 and £368 millions in 1943/4.
In addition to taxation governments have other sources of current revenue -- for example, business undertakings such as the Post Office, sales of land, legal fines. In 1938/9 net income from business undertakings and other revenue was £28 millions; in 1943/4, £45 millions. Informed quarters have estimated it at between £50 and £60 millions after the war. Assuming £50 millions from these sources, £275 millions would have to be raised annually from taxation to cover a total current expenditure of £325 millions.
CONTRIBUTORY SOCIAL SERVICES
It would be wishful thinking to suppose that any material reduction in the post-war costs indicated above will be possible. We are already committed to a huge bill for social payments, and even if it desired to do so, it would be politically impracticable for any government to reverse the trend, common to all modern democracies, toward increased cash benefits from the public purse. Social payments of the order of £100 millions annually are already an established part of the Australian economic and social pattern of the future. (1) Even should these services be placed on a contributory foundation -- as many people, with complete justification, contend -- instead of being paid for, as at present, almost entirely out of national revenue, it is difficult to see how any great alleviation of the real burden on the community would result. Certainly the weekly or monthly tax deductions from the pay envelope or salary cheque of the individual would be diminished, but this advantage would be, to a considerable degree, offset by compulsory deductions on account of his contribution to the social insurance fund. This does not mean, however, that the burden as between different individuals and income groups would not be changed, or that it would not be more equitably distributed. But social services must be paid for either way. Some lightening of the apparent burden there would certainly be -- and this is of greater importance than may appear on the surface. But the argument in favour of the contributory system, although not without financial and economic justification, is chiefly moral and spiritual.
This is not to say that there cannot -- or should not -- be a review of the entire organisation of social services in this country. One great mistake in recent extensions of the social services is the failure to develop them according to an ordered and logical plan as is being done in Great Britain along the lines of the Beveridge Report. Certainly considerable savings in the costs of administration of cash benefits would be possible if the administration of all social services were placed under a single authority (as a logical scheme would certainly suggest) instead of the haphazard multiple system of organisation with which the taxpayer is encumbered at the moment. But these savings, while significant in themselves, would be little more than a drop in the bucket of £100 millions which the Australian people will be paying for their economic protection after the war.
From interest and sinking fund on the national debt there is no escape. It would be possible in course of time to reduce the size of the capital part of the debt and consequently that of the interest payable, but the whole history of public finance in the democracies indicates that national debts, despite the best intentions, keep on growing irresistibly.
COSTS OF POST-WAR DEFENCE
Defence costs may possibly be above, rather than below, the figure of £60 millions just mentioned. There can be no thought of stinting the post-war budget for defence. Australia's position in the Pacific is far too critical and of far too much strategic importance for that. Also the bitter experience of the inter-war years has shown that there is no prospect of permanent world peace unless the peace-loving nations possess among themselves the military might necessary to enforce it. Defence is one thing in which Australian governments, whilst exercising proper financial control, cannot afford to economise.
FORECAST OF NECESSARY POST-WAR TAX REVENUE
The total of Commonwealth and State taxation raised in 1938/9 was about £125 millions. On the most optimistic stand possible it will be necessary for governments to collect about £275 millions a year from taxation after the war -- more than twice the amount in the last pre-war year.
For the financial year just past, 1944/5, the revenue from taxation was over £350 millions. Assuming the strictest economy in government use of public moneys, and that the social benefits and interest bill will not be increased above the figure indicated at present -- about £210 millions -- it may be possible to cut taxation by some £80 millions below the present high level in the post-war years.
REDUCTION IN TAXATION PROBABLE BEFORE NEXT ELECTIONS
It seems as certain as anything can be that some reduction in taxation will be made before the next twelve months have run their course. Apart from economic or financial factors, it would be political suicide for any government to go to the polls in August next year without promising the public some relief of its present tax burdens. In any case strict financial considerations should justify some lightening of the load.
While the war with Japan continues war expenditure will remain high, but not so high as it has been. Already very large reductions in direct war costs are occurring. For 1944/5 direct war costs at £370 millions are about £100 millions below the previous year and £150 millions below 1942/3. With the probability of an early end to the war with Japan and the announced reduction of the Australian military establishment, a further large decline in war expenditure during the current financial year can be safely anticipated. To some extent this decline will be offset by increasing charges on account of social services, interest payments, deferred pay and other costs incurred in partial demobilisation of the forces. It also needs to be borne in mind that a large proportion of the gigantic sums expended on the war in 1942/3 and 1943/4 was financed through the expansion of central bank credit. With the falling-off in the costs of the war, and to protect the nation against the possibility of disastrous inflation, central bank credit has rightly been the first source of revenue to be reduced. In fact in 1944/5 no revenue was obtained from this source. The scope for a reduction in taxation is, therefore, not so great as a cursory examination of the figures of reduced war expenditure might suggest.
Nevertheless, even with all these considerations taken into account, it should be possible to make some cuts in taxation during the current financial period.
STEP REDUCTIONS
It might well be a desirable policy for the Commonwealth to take as an aim a series of step reductions in taxation over, say, the next three years of the order of £25 to £30 millions a year. A total reduction of this magnitude -- that is about £80 millions -- would seem to be within the ambit of practical policy. At least if some such programme could be tentatively laid down, much of the uncertainty which is at present clouding the financial prospect and hampering post-war industrial preparations would be removed. From facing as they are at the moment an unknown and apparently perilous future, industry and individuals would be able to plan ahead with some degree of confidence and knowledge as to their post-war prospects.
WORK -- THE ULTIMATE SOURCE OF ALL TAXATION
Now taxation of the order of £275 millions a year will impose a colossal burden on the economy of the country.
Without question every right-minded citizen wishes to see the Australian community adequately equipped with social services of all kinds. Cash benefits to supplement the income of the individual in time of economic distress are, from every standpoint, desirable. It is difficult to conceive of too much money being directed toward the education of the nation's youth, the health of its citizens, and its defence against possible aggressors. But it must be thoroughly appreciated that all these things can be achieved only by a nation whose national income is rising, whose people are encouraged to work and to put forward their best efforts, and where vigour, enterprise and inventiveness are stimulated to the utmost. Under any other conditions it may well be found impossible even to maintain, let alone increase, the scale of social services brought about and planned for during the war. The ultimate source of all taxation and of all state sponsored services is personal endeavour. High taxation must inevitably tend to weaken this endeavour and therefore to destroy the source of its own creation. It is impossible for a nation to tax itself into prosperity. It is entirely possible for a nation to tax itself out of prosperity. To the wealthy, vigorous, producing country, all things concerned with the material, and indeed spiritual, welfare of its people are possible. To a poor country, struggling under a load of tax exaction too heavy for it to bear, social welfare must remain at a standstill.
Many may argue that post-war taxation of the proportions indicated in this article will be destructive of enterprise and endeavour, undermine incentives to hard work and destroy the healthy spirit of adventure and risk-taking necessary to any progressive forward-moving economy. There is undoubtedly some justification for these contentions. Countless examples could be quoted -- and many have already been quoted in articles in the press -- of the reluctance existing among people of all income grades to work their hardest, to undertake high responsibilities, to venture on risky enterprises, when so much of the extra income they may hope to earn will go not into their own pockets, but into the treasuries of governments. In many businesses the prospects of expansion and modernisation after the war have been seriously affected by the taxes which their profits have been forced to bear over the last few years. But whilst industrial recovery may have already been damaged the position is by no means beyond hope of repair.
UPPER LIMITS OF EXPENDITURE
If governments will now firmly realise that the upper limits of government expenditure on current services have for the present -- and for some time to come -- been reached, and that any further increases for these purposes will almost certainly react disastrously on the total national production and therefore on the well-being of all the Australian people, much can be done to prepare the ground for healthy industrial recovery after the war.
Already it has been suggested that the uncertainty about the future of taxation which at present confuses the business prospect should be dispelled by a definite statement of government policy. This would represent an important forward step. Other measures will be discussed in succeeding articles.
ARTICLE III -- PRODUCTION AND TAXATION
The previous article pointed to the unavoidable conclusion that the post-war costs of governments to be met from taxation will be exceedingly high -- probably somewhat higher than the level consistent with the most efficient use of our productive resources and the most rapid increase of the national income and standards of life. At the same time it was suggested that the taxation position is not so out of hand -- at least, not yet -- as to preclude all possibility of healthy economic recovery and development after the war. It is important now that the right measures of economic and financial policy be taken to ensure that the huge bill of government costs, to which we are committed, is managed in such a way as to ease, to the greatest possible extent, the burden of whatever load is inescapable.
GREATER PRODUCTION
Although the patient may have been inflicted with a chronic ailment, this does not mean that nothing can be done to maintain him in a condition of reasonable health and vigour. In fact, it is even possible that out of a dark necessity can come glowing virtue. For the most effective way of lightening the burden on the individual of heavy post-war taxation is to increase as rapidly as possible, by every means at our disposal -- including hard work -- the size of the community's total production. A higher total national output means a higher average individual income. An annual tax of £30 is much easier to bear from a yearly income of £400 than from one of £300. A national tax bill of £275 millions or £300 millions is a far lighter burden on a national income of £1,500 millions than on one of £1,000 millions. The burden of taxation is to be measured not by its absolute scale but by the proportion it bears to the income which is forced to carry it.
If this fact can be impressed upon the Australian public then the individual taxpayer may find that not many after the war the taxes he will be called upon to pay, however fearsome they may appear at the moment, can be borne without excessive strain. The sum which would go into his own pocket week by week for his personal needs and comforts should be sufficient to make him feel that his labour is not after all largely devoted to satisfying the demands of governments. This, of course, assumes that governments will recognise the dangers inherent in the new high level of taxes and will put a curb on their tax-raising proclivities. If an increase in the national income is absorbed in higher taxation then the individual is no better off so far as his own pocket is concerned. A higher national income lightens the load on the taxpayer only insofar as it results in a lower rate of tax per £ of income than before the increase was achieved. This lower rate of tax is compatible with the maintenance of government revenue since the taxes are now spread over the larger national income made possible by improved productivity.
CAMPAIGN OF ENLIGHTENMENT
There is a desperate need in Australia for a campaign of enlightenment to bring home to the people the supreme importance of efficient work and increased production. It is a message which cannot be emphasised too strongly or repeated too often. "Increased Production" should be made a national slogan to be rung around the country again and again. In an expanding robust economy the size of post-war taxation, large as it will be, can in a relatively short space of time after the war be reduced to bearable proportions.
AUSTRALIAN STANDARD OF LIFE
Studies from widely different sources indicate that the Australian standard of living is, in comparison with that of other nations, by no means so high as is commonly supposed in this country. Colin Clark in his book, "The Conditions of Economic Progress," published in 1938, places the Australian standard of life below that of five other countries. An estimate used by the Army Educational Service reveals that the real income per head of the working population in Australia in 1935 to be just under £4 Australian a week, whereas in the United States the real income per head was over £5/10/- Australian a week. According to this computation Australia was surpassed by six countries including Argentina and Switzerland. A Canadian, Lewis C. Ord, with experience of industrial production in many countries, in an important book published in 1944 -- entitled "Secrets of Industry" -- places the Australian standard of living last among the English-speaking countries -- below Canada, New Zealand, the United States and Great Britain.
The results disclosed by these different studies are strikingly similar. They suggest that there is ample scope for speedily increasing the productivity of the Australian economy and thus for raising our standard of life.
INDUSTRIAL EFFICIENCY
Australia is well-placed by comparison with many other countries in respect of conditions making for a high level of industrial efficiency. In proportion to our population we have a solid foundation of physical resources -- despite some important exceptions the country is fortunate in the possession of considerable supplies of essential industrial raw materials. With the advantage of a healthy, stimulating climate, the physique, virility and native intelligence of the Australian worker -- descended from good British stock -- are surpassed in few, if any, countries in the world.
In experienced industrial leadership we are at a disadvantage because of our national youthfulness. The importance of efforts now being made to overcome our deficiencies in this regard cannot be overrated. But they are capable of great extension. Production and industrial organisation need to be taught more and more in appropriate institutions from the standpoint of an exact applied science. Much more attention needs to be devoted to means by which our industrial capital equipment can be more rapidly replaced and kept abreast of the most modern standards. Scientific and technical research needs to be more widely applied. Managerial technique in the most effective and scientific use of labour can be greatly improved. Without a greater unity of aim and mind between the participants in industry than exists at the moment we cannot hope to achieve the standards of industrial performance of which we are capable. Too much lip-service and too little practical attention is given to the significance of vigorous competition as an efficiency factor in industry. Methods of distribution need to be tied more closely to the requirements of efficient manufacture; for instance, standardisation of product, type and design can be taken a long way further without seriously affecting the variety and attractiveness of the goods available to the consumer.
OPPORTUNITIES FOR EXPORT
The small Australian home market is admittedly a serious drawback to the achievement of the highest standards of industrial productivity. But it is by no means so serious as many people suppose. In any case great opportunities exist for building up an export trade in manufactured products to supplement the home market, and this would assist in the achievement of a cheaper unit cost of production, and benefit the community by making possible a greater volume and variety of imports. There are altogether insufficient signs of determined and properly organised preparations by governments and private enterprise to grasp these opportunities.
"WHITE PAPER" ON FULL PRODUCTION
Industry could do no better service to the country than to supplement the Commonwealth Government's White Paper on "Full Employment" with a "White Paper" of its own on "Full Production". Certainly it is a job which needs to be done. A great load of taxation must be carried after the war. But it is a load which we should find well within our capacity comfortably to bear provided we are united and determined on the goal of efficient production, and provided governments allow the income earner to benefit directly from this efficiency.
ARTICLE IV -- TAXATION AND PRODUCTION
The previous articles pointed to two main conclusions on the post-war taxation problem. First, that the absolute scale of taxation after the war would, of necessity, be at least double -- and probably considerably more than double -- the pre-war level. Second, that taxation of these proportions would seriously influence both preparations for post-war expansion and the level of economic activity and national production in the years following the war, unless certain action was taken. Two steps were suggested. First, that the Commonwealth Government should state, in reasonably definite and concrete terms, the taxation policy it proposes to pursue until the end of the Japanese war and over the succeeding two or three years until the economy has been restored to some kind of peacetime equilibrium. Second, that given the inevitability of high taxation after the war, the most efficacious means of reducing its burden on the taxpayer was for governments and the community to take as a major post-war aim the achievement of maximum production and highest efficiency throughout industry. As a contribution to this end it was suggested that a campaign of economic education should be launched to impress upon the public the supreme importance of industrial efficiency in the whole context of post-war planning.
But taxation is itself one of those factors which affect the level of production and the degree of efficiency attained in the use of resources. Even though government commitments may make unavoidable the raising of a definite sum of money by taxation, it is still important to ask how the necessary taxes can best be distributed and levied in the light of the goal of high production.
WHITE PAPER ON "FULL EMPLOYMENT"
The Commonwealth Government's White Paper on "Full Employment" took sound ground in adopting the principle that "taxes will be designed to have the least possible restrictive effect both on the readiness to undertake private capital expenditure and on the efficiency with which production is undertaken". This statement, while implying that taxation of the proportions to which we are committed in the post-war years must have some oppressive effect on industrial activity, rightly suggests that that effect can be minimised by a wise discrimination among the different types of tax. This problem, however, opens up a vast and complex field of which very little is yet known. All that can be attempted in these articles is to discuss some of the broad lines along which a wise policy might proceed.
STUDIES OF POST-WAR TAXATION IN THE U.S.A. AND GREAT BRITAIN
During 1943 and 1944 in the United States and Great Britain a number of important studies were made of post-war taxation from the standpoint of production and employment. These investigations are concerned chiefly with the merits and demerits of the three main types of tax customarily used by governments in the democratic nations -- the personal income tax, taxes on company profits, and indirect taxes such as sales tax. The conclusions indicate the weight of opinion to lean in favour of relatively heavy taxes on personal incomes, and correspondingly light taxes on company profits, and on sales of materials and commodities. In other words, the studies in general adopt the view that the first-mentioned tax has less of a repressive influence on production and industrial expansion than the other two types of tax.
TAXES ON COMPANY PROFITS
It is argued in those reports that taxes on company profits take money away from where it is needed most and where it can be put to greatest advantage -- that is away from private enterprise on whose efficiency, and decisions regarding the improvement and expansion of capital equipment, the welfare arid standard of living of the community largely depend. Taxes on company income, by reducing the incentive, and more especially the financial capacity of businesses to undertake new investment, put a brake on economic progress and react adversely on the living standards of the people. High taxes on industry -- one of the reports suggests -- have four main disadvantages. They reduce business reserves and thus the rate of capital development, detract from business incentive and the willingness to undertake risky forms of investment, and tend to hold up prices and to depress wages.
SALES TAXES
On the other hand the studies point out that sales taxes, by raising the prices of the commodities and services on which the community sends its income, affect adversely the other major factor in economic prosperity -- that is the demand for the products of industry. This results from the fact that high prices reduce the purchasing power of the people's incomes. It is conceded, of course, that personal income taxes also tend to reduce consumption and purchasing power. But against this the reports, in general, argue that income taxes possess several significant advantages over sales taxes. First, the incidence of personal income taxes can be directly assessed and, therefore, their economic effects more readily traced. Second, and following upon this, they can be levied with a greater approach to equity than sales taxes, the burden of which falls relatively heavily on those sections of the community who spend the largest proportion of their incomes -- that is the lower income groups. Third, and probably moat important, personal income tax brings home to the taxpayer, more directly and forcibly than the other kinds of tax, the real burden imposed on him by government expenditures, and consequently the importance of economy and efficiency in government administration.
From this analysis these overseas studies conclude that business profits should receive the major benefit when the falling-off in war expenditure makes possible some reduction in taxation, and that taxes on profits should eventually be reduced in a greater proportion than taxes on the incomes of individuals. Personal income tax should also remain high relative to sales taxes, because of the unfair incidence of the latter on the lower incomes and their greater tendency to reduce consumer demand and thus the level of business activity.
The conclusion of these studies in the United States 'would, therefore, lead to a system of taxation imposing heavy taxes on private incomes, with relatively light sales taxes and taxes on business profits.
AUSTRALIAN PROBLEM
In view of the influential body of overseas opinion in favour of a post-war taxation policy broadly along these lines, it might profitably be asked how far the proposals made are applicable to the Australian position. On the surface it would appear that our own problem calls for a different prescription.
REDUCTION IN PERSONAL INCOME TAX
While international comparisons of the burden of taxation in different countries are of dubious reliability, all comparisons which have been attempted would suggest that personal income taxes in Australia are at present the heaviest of all the democratic nations -- certainly much heavier than in the United States. It is difficult to resist the conclusion that, for Australia, the requirements of efficient production demand material reductions in the present scale of personal income tax, and that work, enterprise and risk-taking throughout the whole range of incomes will be dangerously, perhaps fatally, affected unless the individual can be assured of a much higher direct net reward for his efforts than is possible at the moment. In addition, it is too little appreciated that the efficiency of companies largely depends on the efforts of the individuals of which they are constituted. These efforts in turn are determined in great measure by the inducements offering, the main one of which is direct monetary reward. On the face of it, it would appear more dangerous to keep personal income taxes somewhere near their present level and to permit any relief in taxation to accrue mainly to the benefit of the incomes of businesses and to indirect taxation than to follow the reverse policy. In the light of the Australian scene it would seem wise to discriminate in favour of private income as against company income,
This does not mean that no reductions in taxation on public and private companies would be possible, or that there is no need of a more lenient and intelligent treatment of company profits.
INDIRECT TAXATION
Nor does it mean that the present rates and incidence of sales tax would have to be continued without modification or removal of outstanding anomalies and defects. The yearly revenue from excise on such commodities as beer, tobacco, cigarettes is at present some £30 millions higher than before the war. There is a strong case for continuing high wartime rates of excise into peace. If this were done, it would be possible to lower rates of sales tax in certain directions and, at the same time, maintain at its present level total revenue from indirect taxes. With the expansion of imports almost certain to occur in the post-war period, proceeds from customs duties should increase. Also, as government spending falls off and consumer goods become available in ample quantities, the total value of sales on which sales taxes are levied should grow. Both these factors should also make feasible a reduction in rates of sales tax without affecting the total proceeds from indirect taxation.
The manner in which sales taxes can best be levied in the interests of cheap and efficient production is a subject for specialised examination and one beyond the scope of this booklet. One aspect however calls for immediate attention and overhaul. This concerns sales taxes on capital equipment and aids to manufacture -- machinery, machine tools, engineering supplies, design and planning materials. These taxes seriously inflate the capital charges and therefore the cost of production of industry. They must also tend to slow up the rate of development of the nation's productive equipment -- the rapid improvement of which it should be a first object of post-war policy to promote. So far as possible sales tax directly affecting costs of capital plant and equipment should be abolished.
SHOULD INDIRECT TAXES REMAIN HIGH?
There are strong grounds for the view, however, that in Australia governments should continue to draw a good part of their revenue from indirect taxes after the war, and that this course would have a less damaging effect on production and employment than a large reduction of revenue from indirect taxes accompanied by relatively high direct taxes on income. Indirect taxes have the qualities of their defects. The very fact that their incidence is uncertain and hard to assess, and that their effects on the size of the individual's real income are not so readily apparent as in the case of personal income tax, means that they do not affect incentives to produce nearly so markedly.
There is a further argument in favour of maintaining a relatively heavy burden of indirect taxation as against income tax in the post-war years. Statistical investigation reveals the significant fact that whereas in 1938/9 indirect taxation comprised 60%, and direct taxation only 40%, of total government revenue from this source, by 1943/4, these proportions had been just about reversed -- indirect taxation now contributing about 40% and direct taxation 60% of total tax revenue. It is perhaps not necessary that we should attempt to restore the pre-war balance between direct and indirect taxation, but the figures suggest that any concessions might well be adjusted to the advantage of direct taxation.
Why should not governments continue to draw the present revenue of about £130 millions from indirect taxation, and allow any reductions possible -- we have suggested something of the order of £80 millions -- to go to the advantage of direct taxation, particularly to personal income taxes, and to a less extent to taxation on company profits?
Such a policy would have obvious disadvantages -- one being that it might possibly be out of harmony with the basic taxation tenet of ability to pay. But it is highly probable that the defects attaching to it would be less damaging to enterprise and production, and thus to post-war standards of life, than a policy which did not allow of very substantial reductions in income tax, both personal and company.
ARTICLE V -- PERSONAL INCOME TAX
In recent decades the growth of indirect taxation has reduced the relative -- but not the absolute -- significance of income tax in the whole complex of public finance. Nevertheless the latter still remains the classic of all the taxes, and the one around which social and economic controversy will continue to rage most strongly.
Income tax really comprises two taxes -- taxation on private income and taxation on company income. Each requires to be treated as a separate and distinct problem.
In the last year before the war Australian governments, through direct taxation, extracted about £26 millions from the incomes of private individuals. In 1943/4 individual income earners were being relieved of some £140 millions of their earnings. No figures are yet available for 1944/5 but on present indications around £160 millions would probably prove an accurate estimate -- about six times the pre-war sum. This amounts to over £20 per head of the population or, what is more striking, £70 per head of the working population.
PERSONAL INCOME TAX REVENUE POST-WAR
What will be the position after the war? Clearly there is no hope of returning to the happy pre-war situation. Equally clearly, and by universal consent, some relief from the crushing wartime burden must be effected. We have suggested -- in the second article -- that on the assumption of the strictest economy in the use of public moneys, and provided no further large-scale commitments are incurred on behalf of the public purse, it should be possible for yearly government revenue from taxation to be reduced by some £80 millions below the 1944/5 receipts of approximately £355 millions. A later article proposed that the major reductions in taxation might profitably be made in personal income tax and company tax, especially the former. On this line of reasoning it might just be possible to reduce the total government yield from personal income tax by some £60 millions, leaving £20 millions to accrue to the benefit oi industrial enterprises. This would give a post-war government revenue from private income tax of something of the order of £100 millions -- a figure about halfway between the wartime and pre-war yield. This might well be a desirable target -- although admittedly a rough and ready one -- at which to aim. It would admit of very substantial reductions in rates of tax and allow the hard-pressed worker to handle again sufficient of his own earnings to make him feel that, although life was still real and earnest, it was not altogether an empty dream.
The figure of £100 million of course requires to be expertly examined and checked. It has been mentioned, mainly to arouse discussion and interest and to establish a principle -- one already affirmed -- that some kind of target should be set up for post-war taxation to relieve the income earner's mind, and to provide something at which governments can shoot. The fact that they will never hit the bull's eye, or possibly even the target itself, is immaterial beside the fact that the presence of the target would help to restore to public finances a direction and certainty which they at present lack.
BURDEN OF POST-WAR INCOME TAX
The burden of the tax relative to the pre-war or wartime burden would, in all probability, not be so great as the actual figures suggest. This, for at least two reasons. First, the natural growth of the population, the return of service men and women to civil life, and the tendency for an increasing number of women to take their place beside men in industry, mean that the number of income earners on which taxes can be levied will be greater than before the war. Second, whatever misgivings may be held about the post-war efficiency of Australian industry -- and present indications hardly justify optimism -- it is difficult to believe that the productivity per head of the population will not be somewhat higher than before the war. Certainly the economic prospect is black indeed if this cannot be assumed. This factor would also tend to reduce the burden on the individual taxpayer. Indeed, as we already have argued, there is no more effective way open to the Australian community of lightening the load of its post-war taxation, than by concentration on the means by which the greatest possible industrial output can be secured with the least possible expenditure of effort.
OVERSEAS TAX SATES
At the present time there seems little doubt that rates of personal income tax in Australia are higher and more steeply progressive than those of any other of the English-speaking countries. If industrial progress in this country is to keep abreast of the best overseas performance, and our industry made more competitive after the war, then it is certain that our personal income tax will need to be roughly in line with that of other nations. The reduction of this tax to levels comparable with overseas standards should be made a general aim of post-war financial policy. If this is not done, it is more than probable that we will suffer from a gradual, but steady, exodus from the country of some of our more brilliant, enterprising younger men attracted by the broader horizons and greater scope offering abroad for satisfying healthy personal ambition.
AN EXAMPLE
A specific example can be mentioned. A few years ago a leading industrial company in Australia sent one of its most promising executives to the United States for special experience and training. Recently he expressed a desire to remain in the United States, in view of the excellent opportunities open to young men for rapid advancement and for obtaining high salaries, and of the comparatively limited opportunities likely to exist in Australia because of the taxation prospect. The same company has had in mind for some time the institution of a scheme for sending abroad every year a number of its young men to gain knowledge of overseas practices. In the light of the above experience, it feels that little advantage would accrue to the company, and a positive disadvantage to the country might well result, from proceeding with the scheme.
On the reverse side of the picture there is no prospect of attracting high-class men to Australia if the level of our income tax is to be substantially above that of other countries. Already difficulties in planning post-war developments are being experienced by leading Australian industries desiring to obtain the assistance of overseas experts and technicians during the growing pains of their new ventures. A similar problem arises in the case of important companies in the United States or Britain wishing to establish subsidiaries in this country. Naturally enough such companies usually desire to place in control of their new ventures top-ranking men from within their own organisations. It is clearly not possible to persuade men of this type to come to Australia for any length of time if they stand to lose by so doing. Exceptionally high rates of income tax would therefore act as a serious obstacle to the investment of overseas capital in this country.
ABILITY TO PAY
In determining rates of income tax the well-known tenet of "ability to pay" must continue to be an important general criterion. But it is at best a vague indefinite concept capable only of the broadest and most general application. It implies different things to different people. All that it can be taken to mean is that the broadest backs should carry the heaviest loads. In practice it leads to some degree of progressive taxation -- which is now accepted by intelligent opinion -- and to differential treatment according, for example, to whether the income earner is married or unmarried, with children or without. But the principle of "ability to pay" gives little help, if any, in determining the precise nature of the progression. One or two things can, however, be said.
TAXES ON THE LOWEST AND HIGHEST INCOMES
Income tax on the lower bracket of incomes should not be so high as to reduce the income of the taxpayer below the minimum standards of subsistence and life regarded as necessary by modern opinion. On the higher incomes it should not be so heavy as to discourage the adventurous, striving, ambitious individual from attempting great deeds. This type of rare person has been the inspiration of economic progress in the past, and it is certain that no society -- in the foreseeable future -- will be progressive unless he is retained. The man prepared to risk the long, hard, hazardous ascent to the heights must not be deterred from so doing by failure to place glittering prizes at the summit. The state must continue to reward its great men greatly if it is not to deny itself the fruits of exceptional skill and enterprise. The Editors of the American journal, "Fortune" have coined an excellent sentence which should be firmly implanted in the minds of all those striving for social improvement -- "this will be a happier century for the common man if it is also the century of the uncommon individual". An equalitarian society, that is one in which men are rewarded primarily according to their needs, and not according to their skill and efforts and achievements, will be a stagnant, dormant society with death at the heart. The tremendous industrial and scientific gains of the past century will be dwarfed by those of the next so long as we keep the pathways to the satisfaction of high ambition clear and broad.
Here we have two general principles for determining the nature and magnitude of personal tax at the extremes of the income scale. But what of the rate of progression between these extremes?
EXTRA REWARDS FOR EXTRA WORK
At least, we have learned, or should have learned, from our experience during the war that taxation should not rise so steeply as to make the extra rewards obtainable from harder work and the carrying of extra responsibilities seem not worth the candle. The classic example is, of course, the protest of the workers and the trade union movement against existing taxation of overtime earnings. The plain fact is that men are so constituted in the twentieth century that they are reluctant to undertake extra work without the prospect of satisfactory reward.
EXTRA REWARDS FOR SPECIAL SKILL
Income tax rates should also not discriminate harshly against the possessor of acquired qualifications and aptitudes. There should be a fair margin of gain between the net rewards -- after payment of taxes -- of the unskilled and the skilled man. The principle of special margins for skill is an accepted part of the Australian system of wage payments, and these differential rewards should not be largely eliminated by a line of progressive taxation rising too steeply. The same argument applies in the case of those men who acquire specialised professional or technical knowledge in spheres requiring many years of expensive and arduous academic training. Years in which no income is earned, and the prospects of marriage postponed, should be adequately balanced by years of especially high rewards for special work well done.
EQUALITY OF OPPORTUNITY
The equalising of incomes, however much it may appeal to the doctrinaire reformer or moralist, is seen in practice to lead to all sorts of ethical injustices and economic evils. Equality of opportunity, however, is an entirely desirable and legitimate social objective and one which should be in the forefront of future policy. The principle was crystallised by Mr. Churchill in his broadcast on post-war policy in March, 1943 -- "All cannot reach the same level, but all must have their chance. ..."
ARTICLE VI -- COMPANY INCOME TAX
Taxation of company income, while usually combined in government statistical returns with personal income tax under the single title "'income tax" is really of an entirely distinct genus and poses a distinct set of problems.
BETTER LIVING STANDARDS WILL DEPEND ON PRIVATE ENTERPRISE
The pronounced movement to the left of the Australian economy during the war alters in no way the inescapable fact that, in the post-war years, the provision of employment and better living standards will depend fundamentally on the activities of private enterprise. Whether the business man will decide on a high, or a low, level of activity in his particular enterprise will be determined by a complex of factors, of which the magnitude and kind of the taxes the business will be called upon to bear are by no means the least important. Here Australian governments have a clear responsibility. In their capacity as guardians of the public interest, they must endeavour to create conditions which will stimulate the business man to the utmost enterprise and efficiency. In the past governments have paid comparatively little attention to the effects of company taxation on business enterprise. They have looked at it more as a convenient means of amassing revenue to meet their own expenditure. This approach will not be good enough for the future -- more especially in view of the higher peacetime taxes to which company income will almost certainly be subjected.
There is no question that heavy taxation of company income must exercise some restraining influence on business and tend to slow up the rate of economic expansion. This is due less to the loss of incentive because of the smaller prospective profit -- although in the case of the riskier forms of investment this is a material factor -- than to the inroads made on the financial resources of the business, and thus on its capacity to expand and to keep its plant and equipment up to date.
FINANCING OF CAPITAL DEVELOPMENT
Contrary to popular belief, probably the greater part of business development is financed from savings put by from year to year out of profits rather than from new capital raised by the issue of shares or debentures. In many cases the best and simplest method of financing new buildings, plant and equipment is through profits "ploughed back" into the business. The raising of capital externally necessitates, frequently, delay in waiting for a favourable moment in the capital market, or, alternatively, obtaining money by means of bank overdraft. For the financing of fixed assets the latter course has certain drawbacks.
The disadvantages of acquiring capital from sources outside the business are more marked in the case of the private company than in that of the public company, owing to the difficulties associated with control and the lack of liquidity of the investment.
All this adds up to a strong case for the lightest practicable taxation of company income and company reserves "ploughed back" and reinvested in industry. It should be clearly understood, however, that a plea for low taxation of company profits is in no way a plea for leniency towards the rich. On all income which the individual eventually receives, he should pay his proper and fair proportion of tax. But to encourage business to improve and develop rapidly its capital equipment by leaving adequate financial resources in its hands is to pursue the commonsense path of public interest, rather than that of narrow private gain.
POST-WAR REVENUE FROM COMPANY TAX
During the war taxation of companies has been exceedingly heavy. In 1943/4 these taxes produced £52 millions of revenue for governments, compared with £16 millions in the last year before the war -- an increase of £36 millions, or over 220%. Out of every £ of company income about an average of 12/- is now taken by the state as against approximately 4/6 in 1938/9. We have suggested that it might be possible to reduce annual revenue from this source after the war by about £20 millions -- this would mean that governments would collect some £32 millions from company taxes, or about twice as much as before the war.
EFFECT OF WAR ON FINANCES OF INDUSTRY
The effect of wartime taxation on the financial position of industry is interesting. Whilst undoubtedly burdensome, inequitable and capricious in its incidence, it may not be so severe as is sometimes supposed. This statement of course refers to the whole field of industry. Cases abound of individual companies which have suffered seriously, even ruinously, from the load they have been forced to carry during the war. Nevertheless, possibly the big majority of businesses, despite taxation, have been able to maintain a reasonably strong financial position. This, of course, is due to a number of influences peculiar to a war economy, and particularly to the basic fact that the state has become a purchaser, on a huge scale, for the products of industry -- and where the state does not itself purchase, it dictates the kind and quantity of goods which will be available for the private consumer to purchase. The satisfactory financial position maintained by many businesses during the war therefore provides no argument for the continuation of a high level of company taxation into the peace, when the multifarious wants and desires of millions of private individuals will, necessarily and rightly, again become the first concern of industry.
But the fact that the finances of industry may be little less satisfactory than before the war does not answer the question whether they are adequate to enable it to surmount the complex tasks of post-war reconstruction. It should be clearly understood that the post-war needs of business -- either in the short or the long run -- bear very little similarity to its pre-war position.
SHORT-RUN FINANCIAL NEEDS OF INDUSTRY
In the short period of transition private enterprise will need to make special outlays to cope with problems quite out of the normal run. First it will need to convert its plant, used to a large extent over the last five years for making war equipment and supplies, to peacetime purposes. In many cases this may be a costly proceeding. Second, it must repair, modernise and replace a great deal of equipment, which has been run down during the war because of excessive use and inadequate maintenance, or which has been rendered obsolete by the technical developments occurring over the war period. Third, there is the great backlog of postponed business expansion enforced or industry by the war. This will involve a demand for immense capital resources concentrated in a very short space of time. Fourth, there will be the special costs of recapturing and rebuilding peacetime markets involving expensive marketing, research and sales promotion and requiring large sums of working capital. Finally, all these necessary outlays will be magnified by the fact that the post-war price level will probably be something over 30% higher than pre-war prices.
LONG-RUN PICTURE
This, it should be emphasised again, is the short-run picture. But what of the longer perspective? On this one thing can be said with certainty. Pre-war standards of industrial progress will be a treacherous guide for policy in the post-war world. If Australia is to retain its place among the advanced industrial nations, then the improvement of the capital equipment of industry, the achievement of more efficient methods of production, the discovery of new, more effective products must proceed at much faster rate than before the war. This is the significant conclusion to be drawn from recent industrial thought and practice overseas, particularly in the United States of America. But, if such a policy is to be translated into a programme of practical action, then industry will require every £ of capital and the largest possible reserves of finance which the economy can afford. On this line of argument, it cannot be concluded that private enterprise is other than poorly equipped for its immense national responsibilities of the future.
AUSTRALIA'S INDUSTRIAL EQUIPMENT
Much of Australia's industrial equipment is out of date, and some of it archaic, judged by the best modern standards. To vie with industry abroad Australia will have to indulge in some large-scale scrapping and replacement of plant in the years following the war. This will require exceptionally large financial resources. Now the degree of obsolescence of industrial plant is something which figures do not reveal. In fact, a sound financial position as disclosed in a balance sheet may well tend to conceal a dangerous state of technical and scientific backwardness. The whole question of taxation of companies needs to be freshly examined in the light of the industrial and economic policies necessary to cope with the new conditions of the post-war world. Sound intelligent principles need to be firmly established having in view the paramount public need of maximum efficiency and enterprise throughout industry.
DEPRECIATION ALLOWANCES
As an instance the trend of industrial opinion abroad strongly favours more liberal allowances for depreciation of plant and equipment as one means of speeding up the rate of technical progress. In the United States the taxation report of the Committee for Economic Development -- which is advised by economists of national repute -- proposes that, within certain broad limits, businesses should be permitted to use their own judgment in establishing the rates of depreciation of their assets. In Britain "The Economist" has long advocated that existing tax legislation be amended by the raising of depreciation allowances and by the widening of the definition of obsolescence. This general view has been followed by the British Government in its Income Tax Bill introduced in the House of Commons in February of this year. Under the bill industrial buildings, plant and machinery will be written off out of depreciation allowances in shorter time than hitherto allowed -- there are to be initial allowances of 20% on plant and machinery and 10% on the cost of new buildings. Even these provisions have been criticised in informed quarters as insufficiently imaginative to meet the real demands of industry after the war. Of these eminent opinions and of the action taken by the British Government, Australia must take notice. To mention one point, Australia is unique in its failure to permit depreciation on buildings -- apart from exceptional cases -- as a legitimate industrial cost against the profits on which taxation is assessed.
From the standpoint of strict accounting principle, it can be argued, with some force, that the rates of depreciation on industrial machinery permitted under existing taxation laws in Australia, are on the whole fair and reasonable in the light of past experience. But is this the real issue? If future technical advance can be accelerated through the more rapid replacement and modernization of capital plant and equipment brought about by a more liberal depreciation policy, then, regardless of other considerations, is there not the strongest reason why this policy should be followed? The state itself would not lose, in the long run, either in tax revenue or in other ways if this course were pursued. On the contrary it would stand to gain. It would have soundly based, technically efficient, and financially strong industries, and consequently, in the end a greater taxable income on which to levy its taxes.
VALUATION OF STOCKS
Another problem requiring express attention concerns the basis of valuation of stocks before the determination of company income. This affects especially retail and wholesale traders, who have a big proportion of their capital invested in stock, but it is by no means an immaterial factor in the case of the manufacturer and primary producer.
Since the outbreak of war, peacetime stocks have been replaced with stocks purchased at temporarily inflated costs owing to war-risk insurance, higher freight rates, increased production costs and so on. Added to all these, and possibly more important, is the change-over of normal merchandise to wartime substitute merchandise. In these circumstances the basis of valuation is a matter of great importance when the values of stocks held by many businesses may fall precipitously after the war.
It is a recognised and essential practice, from which there should be no departure, that provision be made for losses resulting from falls in value in the year to which they relate. Failure to make provision would result in the levying of taxation on profits represented by unsold stocks which are not "realised profits" and which, in fact, may never be realised. Businesses would have not internal reserves on which to lean any many might be forced into bankruptcy or, at best, their financial stability seriously impaired. In the final outcome taxation is paid on all income actually earned and consequently the revenue does not suffer.
RESEARCH AND DEVELOPMENT
Scientific and technical research and development in Australia should be encouraged to the utmost in the interests of industrial efficiency and rapid progress. Taxation is one means, and an important one, of assisting this desirable objective. The recent Income Tax Bill of the British Government again sets an example which might be followed with advantage. The Bill relieves from taxation all expenditure on research from fundamental work up to the stage of full-scale commercial development of the product. The leadership of the future rests with the scientific nations, and no policy will be misdirected which aims at enlarging the resources devoted to the whole field of industrial invention.
TAXATION OF PROFITS
Provisions regarding allowances for depreciation and obsolescence, research and development and valuation of stocks, concern the determination of the amount of profit on which taxation is assessed. There still remains the larger issue of the taxation of the profit itself. After the payment of company tax the profit remaining falls into two categories -- first, that part paid away as dividends to shareholders, and second, that part set aside as a financial reserve and usually reinvested in the business in one form or another.
SHAREHOLDERS' DIVIDENDS
Shareholders' dividends form part of the problem of personal income tax, the basic principles of which were discussed in the previous article. One or two particular observations might be added -- although they do not strictly fall within the subject matter under consideration.
Taxation law has long made a commendable distinction between income earned as wage or salary or commission by way of personal exertion, and income received as a return on invested capital -- the former being charged at a lower rate of tax than the latter. Insofar as it is practicable, future policy might well aim at widening this gap to the benefit of personal exertion income. It is plainly necessary, however, to allow investors a sufficient margin of return on their investments after payment of tax to attract the savings necessary to economic progress, and to encourage people to place money in the riskier forms of enterprise. It should also be borne in mind that investment income often provides an indispensable source of livelihood for aged and sick people, who have worked hard and saved hard throughout their lives. These worthy people should be protected against the hardship which might result from an over-severe tax policy.
The present method of taxing composite income -- that is, income derived from both personal exertion and investments -- gives rise to many inconsistencies, and in certain cases, to gross injustices. It should be overhauled with the object of introducing a more satisfactory basis of treatment.
The double taxation of the return on capital which occurs under Australian wartime legislation, as a result of company and personal income tax, might be modified. In other English-speaking countries the general rule is to grant a rebate of tax to the shareholder for taxation paid by the company. This was the policy pursued in Australia before the war. If restored after the war it would almost certainly tend to increase the rate of capital expansion and investment to the benefit of the community, as well as assisting those people depending almost wholly on income from savings for their livelihood. Greater encouragement would be provided, too, for overseas investors to invest capital in this country.
RESERVES
We have already drawn attention to the singular importance of savings made out of profits and reinvested in industry. Company tax policy should be so framed that these reserves, taken in conjunction with allowances charged against profit, are sufficient to enable the capital plant and equipment and methods of Australian industry to be kept abreast of advanced modern standards. As a first move the present Super Tax and Wartime Company Tax should be abandoned as soon as possible -- these taxes produce a comparatively small proportion of the total revenue derived from company taxes -- and Undistributed Profits Tax on private companies reviewed with the object of making its incidence more certain of estimation, and more equitable as between individual companies.
ASSISTING NEW VENTURES
Adventure and risk-taking would be encouraged by a taxation policy giving special "compassionate" treatment to income earned by new business enterprises. There is a strong case for assisting new industries to strengthen their financial position in the early years of their existence by the creation of adequate reserves. This objective would be promoted if their undistributed profits were taxed at a special low rate of tax. A new industry might be defined as one which has not been in commercial operation for more than seven years. How far taxation concessions to new ventures would be practicable as a general policy would have to be determined by expert study, but at least it can be affirmed that, in principle, they have many advantages to offer.
The taxation of company income is a large subject on which it is customary for even the best-informed to hold different, and often diametrically opposed, views. In one overriding objective, however, all shades of opinion can find common ground -- that is in the public need for the highest attainable industrial efficiency and for the utmost rapidity of technical advance. It is in the light of this purpose that all detailed proposals for the future should be considered.
ARTICLE VII -- SUMMARY OF MAIN CONCLUSIONS
The level of taxation after the war is certain to be far higher than ever before in our peacetime economic history. Governments are committed to greatly increased expenditures on account of interest and sinking fund on the national debt, social benefits, education and health, defence and general administration. The major part of these costs must be borne from revenue from taxation.
At a considered assessment, governments will need to receive annually from current revenue, after full restoration of a peacetime economy, at least £325 millions to meet their post-war commitments and obligations. This estimate of £325 millions is made up as follows --
Social Benefits
(Unemployment and sickness
benefits, child endowment,
military pensions, etc.) | £100 millions |
Interest and Sinking Fund on the
National Debt | £110 millions |
| Defence | £30 millions |
Other
(Administration, Government
Departments, Health, Education, etc.) | £85 millions |
| Total | £325 millions |
To keep down post-war expenditure from revenue to the level indicated in these figures would be possible only on the basis of the utmost efficiency and economy in the use of public moneys, and only provided no more large avoidable commitments are incurred on behalf of the public purse. A reasonable post-war forecast of net income from business undertakings and of revenue from sources other than taxation would be of the order of £50 millions a year. This would leave about £275 millions annually to be raised from taxation.
In the past taxation policy has been regarded by governments primarily from the standpoint of the most convenient and equitable means of acquiring the necessary money to meet their current costs. Little attention has been paid to the impact of taxation on the wider field of national economic policy. In the future the new heavy burden of taxes will raise vital issues concerned with enterprise, production, employment and standards of living, and the entire problem of taxation therefore needs to be examined from a fresh perspective.
This examination should be carried out by an expert committee appointed by the Commonwealth Government. The committee should investigate the whole field of taxation policy in relation to the post-war economy.
The present uncertainty surrounding the intentions of governments regarding the future of taxation -- particularly its magnitude -- is seriously impeding preparations for post-war reconversion and expansion. This uncertainty should be dispelled immediately by a broad statement of government policy.
A total reduction in taxation revenue of approximately £80 millions below the 1944/5 level of about £355 millions should be within the ambit of practical policy. Assuming that about three years from now will elapse before the economy is restored to a normal peacetime equilibrium -- which seems a reasonable assumption -- governments might well take as their aim a series of step reductions in taxation over this period of the order of £25 to £30 millions a year.
The burden of post-war taxation will be inescapably heavy, but it can be lightened provided intelligent measures of economic and financial policy are adopted.
The most effective way of reducing the burden of taxation, both on the nation and the individual, is unquestionably by concentrating on enlarging, by every means at our disposal, the size of the community's total production. This is a responsibility which falls squarely on the shoulders of employers, trade unions and governments. It can be simplified, however, provided there is an effective basis of public support. To this end a campaign of economic enlightenment should be launched to impress upon the people of Australia the central importance of efficiency in all phases of industry. Employers, because of their key position, might well take a leading part in such a campaign by outlining a national plan and stating the national conditions for full production.
The magnitude and kind of taxes are both factors vitally affecting productivity throughout industry. Of the three main taxes contributing to government revenue -- personal income tax, company income tax and indirect taxes -- it is suggested that the major reductions in taxation might well be made in the personal income tax field. Unless the individual can be assured of much greater extra rewards for his extra work and initiative than are possible under the present scale of income tax, then work, production and enterprise throughout all ranges of income will be dangerously affected. Company taxes should also be reduced to the greatest extent practicable.
The total amount of government revenue from indirect taxation could be maintained at the present level -- this would not rule out the possibility of considerable reductions in rates of sales taxes or of the removal of some of the main defects in the present system of levying sales tax. With the return to peace revenue from customs duties and excise should increase -- provided present rates of excise are maintained -- whilst the total value of sales on which sales taxes are levied will probably expand. In particular, sales tax on capital equipment and on aids to manufacture, because of its snowballing effects on costs of production should, so far as possible, be abolished.
Of the £80 millions suggested as a practicable deduction from the present level of taxes, it is suggested that £60 millions less revenue might be raised from personal income tax and £20 millions less revenue from company income tax. This would mean that governments would draw about £100 millions of revenue from personal income tax, compared with probably about £160 millions in 1944/5, and £26 millions in the last year before the war; and about £32 millions of revenue from company income taxes, compared with an estimated £52 millions for 1944/5 and £16 millions in 1938/9. From indirect taxation governments would continue to receive the present yearly revenue of about £130 millions. The balance of £13 millions -- to make a total tax revenue of £275 millions -- would come from estate duty, probate, land tax, etc.
While the above policy would still involve a very heavy absolute load of personal income tax, the burden relative to the pre-war or wartime burden would, in all probability, not be so great as the actual figures indicate. First, the size of the working population, and therefore the number of taxpayers, after the war will be increased by the natural growth of the total population, the return of service men and women to industry, and the tendency for an increasing proportion of women to enter commercial and industrial life. Second, it would be reasonable to assume that technical progress will result in an increased productivity per head of the working community and that this will reflect itself in higher real incomes. This would mean that the average taxpayer will have a larger gross income with which to pay his taxes.
Taxation policy should aim at reducing personal income tax to levels roughly comparable with those of other English-speaking countries. Otherwise, three results will almost certainly follow --
- The nation will suffer from the loss of some of its most enterprising and ambitious men -- talent, which any, but particularly a small, country can ill afford to lose -- to countries overseas where wider opportunities offer.
- Australian businesses planning new developments will find it difficult to obtain the essential services of overseas experts and technicians.
- The investment of overseas capital in Australia will be restricted, in view of the fact that British or American companies desiring to establish subsidiaries in this country would naturally wish to place in control of such ventures top-ranking men from within their own organisations.
Personal income tax on lower incomes should not be so high as to reduce the income of the taxpayer below that which will provide a decent standard of livelihood. On the highest incomes it should not be so heavy as to discourage the more enterprising and ambitious individual from undertaking great commercial or industrial ventures. It is this type of person on whom we have depended in the past, and must continue largely to depend in the future, for economic and social progress.
Between these two extremes of income personal income tax should not rise so steeply as to make the extra rewards -- after payment of tax -- obtainable from harder work and the carrying of greater responsibilities seem not worth the effort. The extra rewards of high professional qualification or specially acquired skill should not be largely eliminated by a line of progressive taxation rising too sharply.
The simplest and most effective means of financing the improvement and expansion of the capital equipment of industry is through business reserves set aside out of profits. The taxation of company income should be framed with this cardinal fact in mind.
In the post-war period -- both for the short-run tasks of economic reconversion and the longer range necessity of speeding of the rate of growth of the nation's capital equipment -- industry will require greater financial resources than before the war. The possibility that industry as a whole lias not suffered so severely from high wartime taxation, as is sometimes claimed, does not therefore provide any guide for post-war policy. The conclusion is inescapable that industry is at present poorly equipped to meet its national responsibilities of the future. The whole system of company taxation requires expert examination preparatory to its adjustment in the light of the consideration just expressed.
As an instance, there is the strongest of cases, especially in view of American practice and of steps recently taken in Britain, for more liberal depreciation allowances than those permitted under existing legislation in Australia.
In view of the probability of a precipitous decline in some stock values after the war, caused particularly by the changeover from wartime substitute to normal merchandise, there must be no departure from recognised practice of making provision for losses resulting from falls in value in the year to which the losses relate. Failure to make such provision could result in the levying of taxation on profits represented by unsold stocks, which are not "realised" profits, and which in fact may never be realised.
Industrial research would be encouraged if all expenditure on research were allowed as a charge against profits before the assessment of tax.
Super Tax and Wartime Company Tax should be abandoned as soon as possible -- almost certainly before the date of termination provided for in the Act -- and Undistributed Profits Tax on private companies reviewed with the object of making its incidence more certain of estimation and more equitable as between individual businesses. Double taxation of company income should be modified by a return to the pre-war principle whereby a rebate of tax was granted to the shareholder on account of taxation already paid by the company.
Business adventure and risk-taking would be encouraged if income earned on new capital investment or in new enterprises were taxed at a special low rate. This may be found to be impracticable, but it should receive the closest examination.
STATISTICAL APPENDIX
The following tables comprise the main data from which the estimates of post-war government expenditure and revenue used in the text have been constructed. Figures, other than post-war estimates, are based on those published by the Commonwealth Statistician.
TABLE I.
COMMONWEALTH AND STATE EXPENDITURE FROM REVENUE
(excludes expenditure from Public Loans and Credit Expansion)
| 1938/39 | 1943/44 | Post-War
Estimate |
| £m. | £m. | £m. |
| Social Payments | 31 | 77 | 100 |
| Interest on Public Debt | 52 | 77 | 110 |
| War (1939/45) | 8 | 141 | 30 |
| Other Expenditure | 64 | 73 | 85 |
Total (excluding expenditure
in Business Undertakings) | £155 m. | £368 m. | £325 m. |
HOW FINANCED
| 1938/39 | 1943/44 | Post-War
Estimate |
| £m. | £m. | £m. |
| Income Tax | 41 | 185 | 132 |
| Capital Taxes | 10 | 14 | 13 |
| Indirect Taxes | 73 | 126 | 130 |
| 124 | 325 | 275 |
Net Income from Business
Undertakings and Other Revenue | 28 | 45 | 50 |
| Total Revenue | £152 m. | £370 m. | £325 m. |
TABLE II.
DETAILS OF COMMONWEALTH AND STATE EXPENDITURE FROM REVENUE SOCIAL PAYMENTS
| 1938/39 | 1943/44 |
| £m. | £m. |
Commonwealth
War Pensions (1914/18 war)
War Pensions (1939/45 war)
Invalid and Old Age Pensions
Widows' Pensions
National Welfare Fund
Child Endowment
Maternity Allowances
Funeral Benefits
Administrative |
8.2
-
16.0
-
-
-
.4
-
.3 |
9.3
1.7
21.7
2.8
25.5
12.3
2.3
.1
.4 |
State
Unemployment Relief |
5.7 |
.9 |
| £30.6 m. | £77.0 m. |
INTEREST ON PUBLIC DEBTS
Commonwealth
Interest and Sinking Fund (1914/18 war)
Interest and Sinking Fund (1939/45 war)
Sinking Fund on State Debts |
9.6
-
1.5 |
9.2
24.8
1.5 |
State
Public Debt Charges |
40.2 |
42.1 |
| £51.3 m.* | £77.6 m.* |
* Approximate.
WAR, 1939/45
| 1938/39 | 1943/44 |
| £m. | £m. |
| Commonwealth (only) | £8.0 m. | £141.3 m |
OTHER EXPENDITURE
| 1938/39 | 1943/44 |
| £m. | £m. |
Commonwealth
Departments
Territories
New Works
Relief to Primary Producers
Payments for States (n.e.i.) |
8.6
1.1
6.6
2.0
4.6* |
10.8
1.0
4.7
1.9
1.6* |
State
Education, Hospitals, etc.
All other |
22.2
18.7 |
25.2
28.3 |
| £63.8 m. | £73.5 m. |
* Approximate.
TABLE III.
DETAILS OF COMMONWEALTH & STATE REVENUE
TAXATION
| 1938/39 | 1943/44 |
| £m. | £m. |
Income Tax --
Commonwealth
States
|
11.9
29.8
£41.7 m. |
183.8
1.5
£185.3 m. |
Capital Taxes --
Commonwealth Land Duty
Commonwealth Estate Duty
Commonwealth Gift Duty
State Probate Duties
State Land Tax
|
1.5
1.9
-
5.0
1.5
£9.9 m. |
3.8
2.8
.2
6.0
1.3
£14.1 m. |
Indirect Taxation --
Commonwealth Customs
Commonwealth Excise
Commonwealth Sales
Commonwealth Pay-Roll
Commonwealth Flour
Commonwealth Entertainments
Commonwealth Gold
State Motor
State Stamp Duties
State Entertainments
State All Other |
31.2
16.5
9.3
-
1.8
-
-
7.0
3.5
1.9
1.9
£73.1 m. |
20.6
46.7
27.9
10.9
1.9
4.7
.3
5.9
3.0
1.5
2.2
£125.6 m. |
OTHER REVENUE
| 1938/39 | 1943/44 |
| £m. | £m. |
Commonwealth --
Interest, etc
Coinage and Note Issue
All Other Items |
1.1
.8
.9 |
1.2
4.6
3.1 |
States --
Land Sales, etc
All Other |
4.1
7.5 |
5.0
9.2 |
| £14.4 m.* | £23.1 m.* |
GROSS INCOME FROM BUSINESS UNDERTAKINGS
| 1938/39 | 1943/44 |
| £m. | £m. |
| Commonwealth | 17.9 | 30.3 |
| States | 55.7 | 91.9 |
| £73.6 m. | £122.2 m. |
* Approximate.
TABLE IV.
COMMONWEALTH AND STATE TAXATION -- POST-WAR AND PRE-WAR
| 1938/39 | 1943/44 | Post-War
Estimate |
| £m. | £m. | £m. |
| Taxation on Personal Income | 25 | 133* | 100 |
| Taxation on Company Income | 16 | 52* | 32 |
| Capital Taxes | 10 | 14 | 13 |
| Indirect Taxation | 73 | 126 | 130 |
| £124 m. | £325 m. | £275 m. |
* Approximate.
For the year 1944/45 taxation from all sources will approximate £355 m. made up as follows:
| Income Tax | £210 m.* |
| Capital Taxes | £14 m.* |
| Indirect | £131 m.* |
| Total | £355 m.* |
* These figures are estimates only.
ENDNOTES
1. To finance these benefits Australia has adopted the non-contributory method of raising the necessary funds, almost entirely, from taxation. This course disregards well-accepted thought and practice overseas and violates the rulings of finance, economics and equity. Under the contributory system, every income earner is required to make a specified contribution to a social insurance fund out of which he is entitled to draw specified benefits under certain eventualities. The fund is financed, in part only, from taxation proceeds.
