ED. CORP.

Press, 25 July 1989, Page 28

ED. CORP.

Classroom Commerce

A look at Budget tables 2 and 3 shows that the Government gets tax from a variety of different sources. Those sources have changed in a big way since the introduction of the Goods and Services Tax (GST) in September, 1986, and with a host of other reforms introduced since 1984. The Government’s aim is to take a little tax from as wide a range of sources as possible. In the past, heavy reliance was placed on personal rates and company income tax for the bulk of total revenue. These are known as direct taxes. This led to comparatively high tax rates. This led to a lot of tax dodging, and hindered productive investment. Since then, tax rates have dropped substantially, with the top personal and company income tax rates now both set at 33 cents in the dollar. At the same time, however, a consumption tax (GST) has been placed on almost every item that anyone buys. GST is known as an “indirect” tax, and last year accounted for almost 20 per cent of the tax take. The tax is said to be fair because everyone pays it at the same rate, and there are almost no exemptions. It is very difficult to avoid paying.

At the same time as GST was introduced, sales taxes on most items except alcohol, tobacco, and petrol products were removed.

A large number of business tax "loopholes” — which let some businesses exploit the tax system so as to pay less tax — have been closed by new tax laws as a trade-off for a lower over-all company tax rate. But the biggest single source of tax is still individuals who paid $l3 billion in income tax last year, or 57 per cent of the total tax take. Individuals also pay the bulk of GST. Whether tax rates continue to fall from here will be partly a matter of Government philosophy and partly a matter of whether control of spending will allow it.

The rates of GST and company tax were increased earlier this year because of increased pressure on the deficit caused by higher Government spending. This year’s Budget marks the end of an era.

It has been prepared under a system which focuses attention on the resources which the Government puts into its various activities.

From now on, Budgets will be prepared with a view to what comes out of the money which the Government spends. The shift in focus is a basic and important one, and is aimed at improving the quality of spending which any Government undertakes.

It means that Government departments will now have to give a full account of what they are achieving to justify being given money again the next year.

Instead of basing their demands on how much money they got last year, they will have to argue their case anew for each year’s Budget. There will now be one main Budget every July, followed by two smaller "topup” announcements, like mini Budgets, later in the financial year. The Auditor-General has described this reform as “enormous, ambitious, and in large part, unprecedented anywhere in the world.” The changes are in the Public Finance Act, which passed through Parliament this month.