Sunday, June 28, 2015

Income tax. It's having a birthday

We are about to celebrate a birthday, a 100th anniversary perhaps even more important than the landing at Gallipoli. The Income Tax Assessment Act 1915 grew out of Gallipoli. It was a temporary measure designed to help us through a temporary emergency. It's been helping us ever since. This year's returns will double as birthday cards.

Before 1915 the Commonwealth didn't levy an income tax. It got by with customs duties. The states had such taxes, but they hadn't had them long. The dirt poor states tried them first – Tasmania in 1880 with a tax that applied only to income from dividends, and South Australia in 1884. South Australia's became the template for everything that followed.

These days we regard it as obvious that Australians on high incomes should face a higher tax rate than Australians on low incomes. South Australia did it first, by levying its tax on all income but offering a generous tax-free threshold. It taxed income from property at twice the rate of income from wages, crudely ensuring that the better-off faced higher rates.

And we regard it as obvious that individuals should face tax, not households. South Australia broke new ground in the British Commonwealth by taxing married women as if they were individuals rather than as part of their husband's household. In Britain they were lumped in with their husband's possessions along with "infants, lunatics, idiots and the insane".

The Commonwealth entered the field because it had to. Its spending had blown out from almost nothing to one fifth of Australia's national product. With ships not delivering goods, its revenue from customs duties had evaporated. And the war was going badly, requiring even more spending for an unknowable length of time. In the words of tax expert Julie Smith, who has written what may be the definitive history of Australian taxation, it needed to conscript capital as well as labour.

The Labor government of Andrew Fisher proposed the tax and the opposition led by Joseph Cook agreed, with reservations. "This measure is entirely novel and of far reaching importance," Cook told Parliament. "We are blazing a trail against time."

When introduced, the bill was only 22 pages long. But it wasn't easy to follow. Australian National University tax expert Miranda Stewart says almost no-one, perhaps only the man who designed it, truly understood it.

Instead of applying fixed marginal tax rates at different levels of income, the first Commonwealth income tax continuously varied the rate right up to an upper limit of 60 per cent.

"For personal exertion income it was it was three pence and three eight-hundredths of one penny, increasing uniformly with each increase of one pound sterling of taxable income by three eight-hundredths of one penny," Professor Stewart told a conference this year.

Attorney-General Billy Hughes told Parliament the formula for wages was simple compared to the one for property income.

"There is a difficulty in that formula which I am unable to express other than in terms of higher mathematics," he admitted. "I am credibly informed it has something to do with the perturbations of the curve."

The Commonwealth expanded the income tax in the Depression to fund welfare and took over its administration from the states, borrowing another idea from South Australia. Employment was pretty informal back then. It was hard to track down workers and get their money. So South Australia instead imposed a withholding tax on their wages. Employers were made to hand over money on behalf of groups of their employees. The "group scheme" was Australia's first pay as you go tax. The word survives in what until recently were called "group certificates" issued by employers to employees after the end of each financial year.

During the Second World War the Commonwealth grabbed all of the state income taxes for itself ("temporarily") and expanded their scope to provide welfare for soldiers, unemployment benefits, widows' pensions and child endowment. It labelled the extension a "social security contribution", a term that lingered until the Menzies government killed it off in the 1960s.

These days income tax accounts for more than half of the Commonwealth's revenue, and 40 per cent of the revenue amassed by all Australian governments. It pays for our entire social security system, for Medicare, and for the federal spending on hospitals, universities and schools and public order and safety.

We complain at times (although not when we get our refunds) but we couldn't live without it. It's 100 years young, and it's here to stay.

In The Age and Sydney Morning Herald