THE CASE FOR A MARGINAL STATE INCOME TAX

by

BRIAN DIXON

In opening this forum, Mr. Coates, the Director of Finance in Victoria, made mention of the fact “that the corpse was not quite dead”. Although Mr. Coates has an injured right arm and I have an injured left leg, this forum is a means, I hope, of breathing life into the corpse. The corpse, as I see it, is the worthwhileness of allowing States political independence through giving them a flexible tax. This is the point at issue and it is a flexible tax in the hands of State governments which, above all else, will mean that State political power is not to be buried under the weight of public apathy and ignorance, the coffin lid having first been nailed down by Common- wealth financial, and consequently political, power.

But why must the States have this political power? In a nutshell- without it, education, health, roads, police and low-cost housing will continue to be neglected. State political power is, in Australia, the sole means of ensuring that extra notice will be taken of these fields. Otherwise, the Commonwealth will continue to demand much more financial stringency of the States than they do of themselves. The Commonwealth has not got the machinery to understand, nor under our Constitution can political pressure be invoked to make the Com- monwealth understand, the pressing need for development in these fields.

I was most gratified to hear both Professor Mathews and Dr. Henderson assume that it is desirable to give States a flexible tax. Indeed, I was somewhat pleasantly surprised to hear that Professor Mathews regarded his proposals in the field of Commonwealth taxation as primarily designed to give States this increased financial independence. Professor Prest’s exposition warmed the cockles of my heart.

On the other hand, I was dismayed that Mr. Phillips believes that “this inevitable Keynesian process of money being raised at the centre and spent at the perimeter” is the essence of the problem and that to solve it, all we have to do is to invent a newly constituted grants commission to allocate money for expenditure purposes by the States. Apart from the defect of taking the allocation out of the political arena, the problem is essentially one of increasing the total State

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revenues and State responsibility for these revenues rather than one of an allocation of a given amount determined by Treasury officials.

I wish to make it clear at the outset that I propose to establish a case, not for the return of State income tax as it operated prior to the introduction of Uniform Taxation in 1942, but rather a case for a marginal State income tax which should be imposed by the States as an addition to the present Commonwealth personal income tax.

My argument is based on the following two assumptions and one proposition.

First, in the face of rising living standards involving increased urbanization, more children going to school and staying longer, more time spent in recreation needing the benefit of more elaborate recrea- tional facilities, and increased life expectancy, there is a need for a greater proportion of our resources to be allocated to education, health, roads, law, order and public safety, and the provision of low-cost housing, which are all in the State field. If this need is to be met, there must be an equitable reduction in the proportion of expen- diture devoted to personal consumption.

Second, this equitable proportional reduction of personal consump- tion expenditure can be brought about by a marginal increase in income tax, of, for example, the order of 5 per cent of personal income tax, that is, approximately E4Q million.

The proposition is that this increase in income tax should be at the discretion of the governments which shall principally be spending the money; and furthermore, that the present operation of the federal system of government in Australia needs to be modified in such a way as to return greater responsibility to the States for their expenditure. This is in contrast to the way the federal system has moved since its inception, and, more particularly, since the introduction of Uniform Taxation. It should be noted that to establish the latter part of this proposition, there is no need to invoke the two assumptions. All that is needed to be shown is that there are political and economic advantages to be gained by modifying the federal system so as to give more financial power to the States.

What then are the disadvantages of the present federal system, and how should these be removed?

Firstly, let me say what I mean by a federal system. In 1934, Mr. Menzies, as Acting Premier of Victoria, represented this State at a Conference of Commonwealth and State Ministers on constitutional matters. In the course of his address to the Conference, an address which was described by the Premier of Queensland as “an exposition of the constitutional position which laymen throughout the Common- wealth will read and appreciate”, Mr. Menzies said :

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“Federalism does to my mind, definitely connote one element. That element is that the Gover&en+both central and local-should exercise independent and not hierarchial powers, that the Government o f Queensland, Victoria. or any other State should exercise the powers left to it.under the Commonwealth Constitution in no sense as the delegate or permitted rep~esenta~ive of the Commonwealth. If we are to have independent and not hierarchial Govern- ment powers in this Federal system of ours, it seems to me to be clear beyond discussion that there must be attached to each Government, some financial power which is also independent and not hierarchial.”’

Speaking as Leader of the Opposition in the Commonwealth Parliament in 1946, Mr. Menzies repeated the substance of that definition when he said:

“To my mind, the vital matter of principle is this. If we are to have a Federal system, with a central Parliament and Government and with State Parliaments and Governments, and their powers are to be in truth independent powers, and not, as one mi ht say hierarchial powers, then it is essential that their financial power also siould be independent. You cannot have indepen- dent legislative authority with dependent financial power.”

It is clear that in Australia this vital element of federalism is not present. A glance at existing State taxes which are largely indepen- dent will also show that they are inflexible and, at least to some extent, inequitable. The three most important fields used by the States are probate and succession duties, stamp duties and land tax. Of these, stamp duties are the most important. Their recent increase, and the proposed new increase in motor vehicle registration to pay for new freeways, may be a means of convincing the business community that a new flexible State tax is highly desirable.

It may be suggested that land tax could be justifiably increased. However, the consideration of tax equity and ability to pay also plays a part. The base of the property tax consists largely of only one form of wealth-real property. It burdens property owners regardless of their income status, for example, retired home owners with reduced incomes, and leaves untouched those with large amounts of wealth in other forms.

Probate and succession duties could conceivably be increased, but to my mind these are already high enough, although, as with most taxation, there is a need to remove some loopholes. The Common- wealth could, of course, withdraw from this field to the advantage of the States, but nevertheless this is not a tax which is directly related to productivity, turnover or earning capacity and thus does not com- pletely fit the criterion of flexibility.

Thus we have the situation that since the introduction of Uniform Taxation by far the larger part of State revenue has come in the form of a reimbursement from the Commonwealth Government. This has taken place side by side with a greater rate of growth in State taxation than in taxation reimbursements.

From 1951-52 to 1962-63, State taxation as a percentage to

1. Conference of Commonwealth and State Ministers, 16th-18th February, 1934.

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Gross National Product has increased by 52.9 per cent, whereas taxation reimbursements to the States as a percentage of Gross National Product increased by 25.8 per cent. Furthermore, State taxation, as a proportion of total State revenue, was 36 per cent in 1951-52, but 40 per cent in 1962-63, which means State taxation as a proportion of total State revenue has increased by approximately 13 per cent.

States have been forced to increase State taxes which are largely sectional and inequitable, and certainly not flexible, to cover a smaller rate of growth of taxation reimbursements which rely on the flexible and equitable source of income tax. Of course, the assumption here is that these are reimbursements to compensate the States for not using their income taxing powers, and that they are not merely financial assistance grants. The basic problem, as it is seen by the States, was outlined by the Premier of New South Wales, Mr. Renshaw, in his 1964-65 Budget speech. Mr. Renshaw said:

“In this State, the tax reimbursement rant for the current year is some 38% higher than the grant for 1959-60, tge first year of the current six-year arrangement. Over the same. period, however, the State, has found it necessary, in order to finance unavoidable commitments, to lift revenue from State taxation and licences b more than 62%. Figures relating to corresponding taxes and licences in dctoria, with appropriate adjustment for tax increases which operate for only part of 1964-65,. reveal a similar situation. Overall only 6/- in the pound of Commonwealth income tax collections is returned to the States as tax reimbursement grants. Moreover, the per capita grants to New South Wales and Victoria are significantly below, while income tax collections per head of population tend to be substantially above those in other States, and the return to New South Wales and Victoria would there- fore represent an even smaller proportion of income tax collechons. The present position clearly demonstrates the need, after six years’ experience with the tax reimbursement arrangements of 1959, for a complete review of these arrangements.”

This situation, whereby the States have increasingly dependent financial power and correspondingly dependent legislative authority, is not a real federal system. It is more aptly described as a pseudo- federal system, or a pseudo-unitary system, the latter perhaps being the more realistic.

As I see it, the disadvantages of this system are as follows. Firstly, the processes of democracy are impaired. Decisions are not

made by the States in the spheres for which they are allegedly and constitutionally responsible to the people. The Australian people have a unitary system of government without the advantage of know- ing that this is the case. Tmportant decisions have been effectively removed from the political arena.

Secondly, the important State fields of education, transport and health, etc., are subject to the control of more than one government and are ccnsequently neglected. The Premiers’ Conference is at worst a sham, because the Commonwealth alone is the responsible decision-

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making body, and at best a political haggle rather than an economic appraisal of State needs, although this year there was an apparent improvement in the presentation of cases. There is a constant alibi for the Commonwealth in that these fields are not their constitutional responsibility, and for the States, that they have not got the finance to carry out their proposals. The Commonwealth is unwilling to incur the political odium of increased taxation to provide revenue for the States to spend. This is sound enough as a political principle, but again takes no account of economic and social needs in the State fields.

Finally, a considerable bulk of the Commonwealth payments to States are in the nature of tied grants. The recent Martin Report is a good example of the operation of the tied grant. Victoria is to receive a subsidy to enable her technical colleges to grant diplomas in tech- nology and liberal arts. However, Victoria needs the money to enable technical colleges to advance to degree status in courses like engineer- ing, applied chemistry, textiles and mining engineering, together with liberal arts subjects, and further money to develop teachers’ training colleges as autonomous institutions for the granting of liberal arts degrees. While the tied grants may assist those States which have not advanced as far in technical and teacher training as Victoria, their sole application in Victoria would be like turning back the clock. With more adequate and flexible revenue resources, Commonwealth grants would be unnecessary for education. Furthermore, there is a wasteful duplication of administration as the Commonwealth sets up departments to advise on the allocation of tied grants to existing State departments.

In 195 1-52, total general revenue grants were approximately €1 3 1 million, compared to total Commonwealth payments of approxi- mately €165 million, i.e. approximately 79 per cent, whereas the estimate for 1964-65 is €356 million in general revenue grants and total payments of approximately 2500 million, which is only 71 per cent. Thus specific purpose payments are becoming increasingly important and States’ independence is being correspondingly reduced. Over the last six years, general revenue grants have risen by 40 per cent from E235 million to €356 million. Special purpose grants have risen from €71 million to f 143 million-a rise of more than 100 per cent.

Another form of decay has been taking place in State budgets and that is the increasing interest commitment as a result of increased borrowings. These borrowings have been increased while the Com- monwealth Government has been able to pay for large capital works out of revenue. Between 1959 and 1964, the Commonwealth reduced its debt from E1,756 million to 21,586 million. The disparity is greater when one removes the Commonwealth-State Housing Agree- ment debt on which, although it is legally Commonwealth debt, the

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agreement requires the States to pay interest and sinking fund, recovering this from rents. The Commonwealth debt then moves from €1,439 million in 1959 to €1,059 million in 1964. On the other hand, the States increased their debts from €2,494 million to €3,345 million. Because monetary policy has invoked higher interest rates, this has involved the States in a total interest bill of €100 million in 1959 and g148 million in 1964. Of the total interest payable on the National Debt the States in 1959 were responsible for 64 per cent, but in 1964 were responsible for 72 per cent.

Thus State budgets are becoming more inflexible both in terms of revenue and expenditure at a time when flexibility and expansion in both revenue and expenditure are essential.

Mr. E. Whitlam, Deputy Leader of the Federal Parliamentary Labor Party, has put forward one solution to this unhappy state of affairs. In Parliament, he said:

“This uniform taxation system does debase politics. It does debauch the States, and it does lead to the perfectly reasonable theory that those who spend the money should bear the odium of raising it. But the solution lies, not in abandoning the uniform taxation system, buf in faking over those functions of the States which the States at present administer, but for which the Commonwealth foots the bill. We on this side of the House certainly believe that those who spend the money should have the odium of raising it, and the corollary is that those who wish to get the credit for spending money should be those who raise it.

“The uniform taxation system is not something which the Constitution imposes on this Parliament. It is something which the Constitution enables this Parliament to impose on the States if it wishes to do ~ 0 . ” ~

I would reject this solution for the following reasons. 1. It seems most unlikely to me that the people of Australia-

notorious for not changing small sections of the Constitution-would accept a new unitary Constitution. Therefore, the States would con- tinue to be electorally responsible for functions effectively controlled by the Commonwealth with all the attendant undesirable elements which I have previously described.

2. Australia is a country of three million square miles, and its population is increasing rapidly (although the pill seems to be slowing our rate of natural increase). I think it is too big to be effectively governed from the centre.

3. In Canada and the U.S.A., both state and local governments are being encouraged to exercise further their own income tax and other taxing rights. This is in line with the attitude of the American and Canadian Governments and also large companies like General Motors and Ford which are endeavouring to encourage decentralisa- tion of initiative and control. This allows the central government more time to devote to the management of its own affairs and to the

2. Hansard, 14th October, 1954.

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co-ordination of national development, rather than to be involved in all the detail of this development and perhaps fail to provide a plan.

4. I believe that all authority derives first from the individual and his family. For the common good, part of this authority is given in trust to local, state and federal governments. A federal system encourages this delegation while a unitary system or a pseudo-unitary system encourages passive acceptance of authority delegated in the opposite direction. In passing, it is worth stressing that because I believe local government should be encouraged in Australia rather than discouraged, I don’t believe States should make significantly increased use of land tax, rates being the sole source of revenue for local government. Of course, if the States don’t quickly receive a flexible tax, they may be forced to.

5 . Bound up with the idea of the importance of the individual, subject to the rights of others, is the existence of the system of “checks and balances” in federal government. In a unitary govern- ment, these “checks and balances” are removed and all control is vested in the centre. In a pseudo-unitary government, where the process of democracy has been dangerously impaired, bureaucrats increasingly manage the economy. The real power in this current, existing situation is the Commonwealth Treasury. Further tied grants and financial assistance grants only increase this control. Is it right that democratically elected governments should be subservient to Commonwealth Treasury officials on matters which should be the result of political rather than economic decisions? The answer is clearly no, particularly when removing this subservience in the political arena would involve no loss of efficiency as far as economic management is concerned.

6. Finally, in the most important of State fields, education, there is a tremendous need for diversity. Unitary or pseudo-unitary control can only remove such diversity as does now exist. Seven sovereign governments have a better chance of establishing a diversity of approach to education than has one government. Even more impor- tantly to one who believes in the right of each individual to have his or her individual talents developed to their full, the control of educa- tion must be placed where it is not judged solely on the economic considerations of the Federal Government. This is the basic defect of the Martin Report. It must be in the hands of the governments which are constitutionally responsible for it and where the elector can indicate how much he is prepared to pay for his own and his children’s education.

I should add, in passing, that if there were no other means to acquire a marginal State income tax, I should be prepared to ask the people of Victoria if they would subscribe to a State education tax levied on income, even though this would be subject to the disadvan-

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tages of tied grants. However, education is such a wide and growing field that the disadvantages would be considerably lessened.

If you accept these reasons of mine for preferring to modify our existing system of government so that it more clearly resembles a real federal system, then clearly (a ) the States must have a much smaller proportion of tied grants; (b) the formula for general revenue grants itself must be made much more flexible, incorporating growth items such as migrant intake, degree of urbanization, numbers of children to be educated and improved educational quality, and the increasing burden of debt charges (or perhaps made a certain percentage of income tax); and finally (c) the States must have a marginal flexible tax.

The complete restoration of State financial independency may be desirable for a number of political reasons, but it poses many prob- lems in the context of a modern economy. The crucial role of main- taining full employment, growth, equilibrium in the balance of pay- ments and a stable price level can only be carried out effectively by the Commonwealth, and for this reason the Commonwealth Govern- ment must retain primary control over the economy by fiscal and monetary means. It is, however, vital that the States should have financial responsibility and independence over a significant part of their revenues and that this revenue should be so based that it will grow with the growth of the wealth and welfare of the State.

Present State taxation does not do this. Much of the burden is inequitably distributed among special classes of taxpayers, such as land-owners and householders, and to increase revenue to meet the rising demands in the State for better education and transport would mean punitive taxation on these groups. The State must win back the power to tax more flexibly at the margin. The Commonwealth would remain the chief government concerned with income and excise taxation. The scheme of tax reimbursement would continue, but the State must be empowered to raise a greater proportion of its revenue by being allowed access to taxes that are directly related to the incomes or expenditures of all its citizens.

There are three possible fields of taxation which could be used to give responsibility at the margin, namely property, wealth, or capital taxes; sales, purchase, or some form of commodity or con- sumption tax; and income tax.

I have already partly discussed property taxes, saying that they are inequitable and anyway belong to the field of local government. I would add that they are not flexible (i.e. they do not expand as the productive capacity and essential service needs of the com- munity expand), discourage home ownership and sometimes mean industry is located where property taxes are lowest rather than

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for other economic consideration. A net worth tax faces the huge administration problem of valuation and faces the disadvantage of being a completely new tax.

In the past, sales taxes have been legally considered as excise and have thus remained in the exclusive province of the Common- wealth. Professor Mathews, one of the authors of Taxation in Aus- tralia: Agenda for Reform, in his address to the University of Adelaide Summer School of Business Administration in February of this year said, “It should not be beyond the wit of State con- stitutional advisers to frame legislation imposing general sales taxes which would not violate this requirement.” Despite this statement, there is a strong doubt as to whether a purchase tax or an advertis- ing tax could be implemented by the States because of the wide definition of an excise tax. A point-of-sale retail sales tax might be held to be constitutional, but the political future of the first State government to introduce it might be short.

Moreover, Sir Garfield Barwick in a judgement in the High Court on the 17th December, 1964, between five demurrers and the State of Victoria, said:

“It has now, however, in my opinion, received definitive exposition by this Court, and, however much other views might have been possible at an earlier stage, it ought now to be taken as settled that the essence of a duty of excise is that it is a tax upon the taking of a step in a process of bringing goods into existence or to a consumable state, or of passing them down the line which reaches from the earliest stage in production to the point of receipt by the consumer. This, in substance, is the formulation of my brother Kitto which received the endorsement of a court of six justices presided over by +e former Chief Justice in Bolton v. Dadsen 1963 A.L.R. 518 at p.. 522.. With great respect, this formulahon of the result of what has been decided in h s connection commends itself to me and I am prepared to adopt it as the description of the nature of a duty of excise within the meaning of Section 90. I would merely add expressly what I think is implicit in His Honour’s expression, namely that the step which puts the goods into consumption is still in the line, albeit at the end of the line, to which His Honour refers.”

Professor Mathews, in the address already quoted, examines in some detail the possible future developments of company tax in Aus- tralia. It is worth noting that as the States are generally responsible for the incorporation and regulation of companies, the scope for wider company taxation by the State is probably greater than that possible by the Commonwealth. The States could conceivably, to quote Professor Mathews, “impose a new general tax on companies in addition to whatever selective sales or excise taxation the Com- monwealth might continue to levy.” I shall be most glad if Professor Mathews is right. However, this does not prevent the imposition of both a general company tax and a marginal State income tax, although there is some doubt in my mind that the Professor is right in terms of the Constitution and also it is my belief that a marginal State income tax is superior to a general value added or sales tax on companies.

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To support his case on the constitutional validity of a value added company tax, Professor Mathews quoted the example of the Victorian fee which is charged to renew liquor licences. It is calculated at 6 per cent of gross purchases by the licensee from the suppliers of beer and spirits.

The Dennis Hotels claimed before the High Court that the licence fee was, in fact, an excise duty. The High Court, it is true, ruled that this was not an excise. However, the decision was four to three and the Chief Justice, Sir Owen Dixon, was in the minority. The Dennis Hotels then asked the Privy Council to accept an appeal from the High Court’s decision. The Privy Council gave leave for the case, and the question of actually having an appeal, to be heard together. The Privy Council then decided to refuse leave to hear the appeal. Therefore, there was no judgment given by the Privy Council on the actual case itself. Then, of course, we have Sir Gar- field Barwick’s statement to which I have already referred.

Turning from the constitutional angles to the question of which tax is the better, I would strongly argue that an income tax is more equitable and that administratively there are no problems for State income tax provided the Commonwealth collects it. If the Common- wealth will not collect it, it would be only slightly more difficult for the States to collect their own income tax than it would be for them to collect a new company tax. Furthermore, the Commonwealth has in fact been accustomed to using sales tax and company taxes in the management of its economic affairs, and, much more importantly, I do not think that by having a gross company tax the difficulties of determining which companies pay what to each State will be over- come. Also there would (assuming we solved the allocation of com- panies question) be difficulties of different taxable capacities, and, although these would be present with an enlarged State income tax, they would not with a marginal State income tax.

This leaves only income tax. In the three major federations in the Western world, those of the U.S.A., Canada and West Germany, the states or their equivalents all levy taxes on income. The tax would be flexible, increasing automatically as production and income rose, and there are no constitutional difficulties in the States raising their own income taxes. Income tax would tend to reverse the tendency of the overall Australian tax structure to become more indirect. With an increasing reliance by the States upon direct taxation some sec- tional and often unseen other State taxes could possibly be removed. More importantly, the tax would be equitable. This criterion is often overlooked when a marginal State income tax is proposed. In 1963-64, 2,944,622 taxpayers earning less than &1,200, or 66.9 per cent of all personal taxpayers, paid 25.5 per cent of personal income tax, while 25.4 per cent earning between &1,200 and 2,000 paid

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29.7 per cent. The remaining 7.7 per cent of taxpayers earning over E2,OOO paid 44.8 per cent of personal income tax. However, in 1963-64 this type of taxation represented less than one-third of total tax, and indirect taxes accounted for nearly half of all taxation in Australia.

I should, in passing, mention the favourite bogey bedevilling the introduction of a marginal State income tax. That is that economic control will suffer. The editorial writers of The Australian went so far as to say that a regression to State taxes would lead to economic anarchy. Quite apart from a complete failure by these writers to grasp the political significance of making State expenditures simply subject to annual Commonwealth budgetary considerations, I would suggest they have little understanding of overall economic policy and control. Each State would announce the amount of taxation it wished to raise prior to the preparation of the Commonwealth Budget. In addition, the Commonwealth would continue to have the full range of fiscal and monetary policy at its disposal and, of course, States are not economic policy-making bodies, but in contrast must seek to balance revenue and expenditure yearly. I have not spoken to a single academic economist who supports the belief that economic control would be prejudiced by the introduction of a marginal State income tax.

Professor Downing, in a letter to the editor of The Age, came out very much in favour of Mr. Bolte’s proposal. He did, however, provide for three safeguards:

(1) the rates on income should not exceed a prescribed maxi- mum;

(2) the States should accept a uniform assessment act; and ( 3 ) they should leave the Commonwealth Government to act

In 1951, Colin Clark was quoted as saying, “It would probably not be necessary to impose limits against variations in State taxation, because with the Commonwealth having first cut, the amount of taxable capacity left for the State would be relatively small.” I subscribe to this view, but if asked to put a maximum on additional State income tax, I would say 10 per cent. Of course, if the Corn- monwealth were to retire from the personal income tax field to the extent of say 10 per cent (see Appendix 1 ) the maximum would become 20 per cent.

It is certainly desirable that States should accept a uniform assessment act, but, as you all know, the Commonwealth Govern- ment has refused to collect the tax for the State of Victoria. The grounds for this refusal given by the Prime Minister were as follows.

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as tax collector on their behalf.

“Our position is and has been that the Commonwealth could contem late an arrangement involving the abandonment or modification of uniform taxation only if such an arrangement met certain essential condibons-more particularly, that it should be supported by al l States, that it should contain adequate safeguards for the interests of taxpayers and that it should provide a sound basis for future financial relationships between the Commonwealth and each of the States.”

An acceptance of my argument would mean that it is the respon- sibility of the Commonwealth Government-particularly as it is a Liberal government, the platform of which Party states “That the Federal System shall be maintained unimpaired”-to enforce a marginal State income tax because this is in the interests of good State government. Moreover, the Commonwealth makes a unilateral decision at the Premiers’ Conference-a fact which they have success- fully hidden from the general public-and at the Loan Council have two votes and a casting vote and therefore need support from only two States. It is ridiculous to assert that the proposal needs support from all States as the existing arrangements have never had that support, except under duress. This duress could equally be applied, and I would maintain with more justification, to encourage States to levy a marginal income tax. The last two conditions stated by the Prime Minister are to my mind further implemented by my proposal. I have included in Appendix 2 a possible scheme of collection by the Government of Victoria, sent to me by an interested party, which would enable the Victorian Government to go it alone at very little expense.

Finally, there is the question of different taxable capacities in the States. At the end of last year, I prepared a paper to be submitted to the Trade and Economic Affairs Committee of the Liberal Party which borrowed its thinking partly from the idea put forward in the May, 1956, edition of The Economic Record by Binns and Bellis. My paper envisaged a withdrawal by the Commonwealth from 10 per cent of the personal income tax field (see Appendix 1). A State would then be in a position to levy, say, 11 per cent of the personal income tax collected in its borders to make up for a corresponding reduction in the Financial Assistance Grant. By examining the table in Appendix 1 you will find, in the last column, the difference between the revenue derived under the proposed new and the old method. This represents the amount which the different taxable capacities of the States would induce in an 1 1 per cent tax after the Common- wealth has withdrawn by 10 per cent.

It is my opinion that the task of redressing the effects of different taxable capacities-particularly if the marginal State income tax were, say, 5 per cent (my original proposal)+ould easily be added to the responsibility of the Commonwealth Grants Commission. It would involve only E4 or &5 million in the year 1964-65. Under a marginal State income tax scheme, different taxable capacities are not a diffi- cult problem to overcome.

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My reason for deleting a State income tax on companies is the difficulty involved in determining which State is entitled to collect what amount of tax from each company.

It should be remembered that up to 1942 the States collected income tax for the Commonwealth, and provision exists in the present Commonwealth income tax Act for the Commonwealth to act as a collector on behalf of the States. A detailed investigation undertaken in 1952 came to the conclusion that the taxpayer would suffer no inconvenience, and experience in Canada and the U.S.A. reinforces this belief.

In conclusion, I realize that what I have had to say will not satisfy the political purists of either the Unitary or Federal schools of thought. The people who I hope will be satisfied are those who do not wish to see a continuance of a form of government which is con- ducive to ignorance and apathy amongst the electors and inactivity from governments in the tremendously important fields of education, health, transport, the maintenance of law, order and public safety, and the provision of low-cost housing.

APPENDIX 1. A SCHEME FOR STATE INCOME TAX

This explanation is based on figures taken from Commonwealth Budget Papers. The Financial Assistance Grants quoted are the estimates for 1964-65. The figures for collections of income tax on individuals in each State are based on statistics for 1961-62 expanded in proportion to the total estimate for 1964-65.

Total collections of income tax on individuals equal f745 million. Total Financial Assistance Grants equal €340 million. The amount collected from each State and the grant for each State are shown in columns 1 and 4 of the table below. The pro rata portion of the Financial Assistance Grant collected in each State is shown in column 3.

The scheme envisages a withdrawal by the Commonwealth from income tax to the extent of 10 per cent of the total, i.e., in round figures. by €75 million. This leaves collections for Commonwealth purposes and remaining State grants of f670 million. The Financial Assistance Grants are to be reduced by €75 million, the States then. being required to tax to achieve total revenues of at least this amount. The Financial Assistance Grants then total €265 million.

Each State receives a grant of 265/340 of the present grant, and levies income tax to make up the difference. The standard rate would be 11 per cent of the reduced federal tax, but variations above or below this would be possible depending on individual State requirements.

The net result, as shown in the table, is.that New South Wales would be €5 million better off than at present, Victoria €4 mdhon better off, and other States down by the amounts shown in the last column of the table. To redress the balance, two alternative procedures are possible.

(1) Financial Assistance Grants are reduced by these amounts to New South Wales and Victoria and paid to the other States.

(2) Grants remain the same, but the Commonwealth finds the extra €9 million from its own revenue.

Variations on this scheme are possible, ranging between the two extremes of

(1) abolition of Financial Assistance Grants, the States to tax to at least a total of f340 million. States other than New South Wales and Victoria

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would have to levy higher rates than these States or receive grants from the Commonwealth, through the Grants Commission.

(2) the system of Financial Assistance Grants as at present, with State income tax over and above these amounts if required. This is the essence of the scheme put forward by the Victorian Government in the 1964 Budget. The net result would be that States such as Victoria and New South Wales would have combined federal and State income tax higher than in other States. This would combine the principle of redistribution of revenues with State financial responsibility. The Commonwealth Grants Commission could be again used to recommend special grants because of different taxable capacity.

The scheme need involve only one collection agency and one tax form for the taxpayer.

fm Present Less Con- F.A.G. New State Total5 Differ- Tax 10% tribution Grantt Tax ence Col- to

lected F.A.G.*

N.S.W. 303 273 138 115 90 30 120 $5 Vic. 228 205 104 86 67 23 90 $4

86 77 39 50 39 9 48 -2 56 28 39 30 6 36 -3

Ql’d 62 S.A. W.A. 41 42 22 35 27 5 32 -3 Tas. I9 17 9 15 12 2 14 -1 Total 745 670 340 340 265 75 340 $0

* Present tax collected x 340/745. .t Financial Assistance Grant x 265/340. § New grant i- State tax.

APPENDIX 2. A SUGGESTION FOR A N INDEPENDENT STATE INCOME TAX

Print a State income tax form similar to the Commonwealth form but hold it in reserve at the State Income Tax Office.

Print a second form to be available generally at all State offices at the same time as Commonwealth forms. This form, which should be as simple as possible, would offer taxpayers two options.

(a) They could state the total taxable income they have declared to ,the Com- monwealth and agree to be assessed later for State tax on the basis of their tax payment to the Commonwealth. They would agree to verify this payment by submitting their Commonwealth notice of assessment for inspection at the time of payment of State tax.

(b) They could complete a State income tax form and have their taxable income assessed by State tax officers. The form could be made a good deal more complicated than the Commonwealth form, verification of payments could be called for and even an additional charge could be made to cover costs of assessment and checking. This would be done to encourage most people to accept the simpler option (a).

People choosing option (a) would receive a form requiring them to state the Commonwealth tax actually paid and asking them to calculate their own State tax assessment from this on the basis of information and examples supplied on the form. The completed form would then be submitted together with the Common- wealth notice of assessment for verification, and the tax paid.

Persons choosing option (b) would be supplied with a State tax form and have their forms checked by State tax officers.

Tax rolls could be built up from electoral rolls and from directories. Electoral rolls would not cover people under 21 but this group would come of age in time and any omissions of tax payments could be checked. Unnaturalised Australians would be more difficult to cover but checks on directories would help and possibly other checks could be found.

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