Australia and its states head for a row on tax policy

The Australian government has enmeshed itself in a thoroughgoing review of taxation policies which seems certain to embroil it in controversy with state governments and international business.

For the past five months -- since the day after the last federal elections -- the federal government has been agonizing over the relative mix of personal income taxes and indirect taxes.

The government has now decided to leave things much as they are in that area. Australians will remain comparatively highly taxed in terms of the amount of income tax they pay compared with other taxes, though the average tax level remains below the taxes paid in most industrial countries.

However, there is a continuing brawl between the two parties which make up the federal government coalition as to how income tax should be calculated. The National Country Party, which is the junior coalition partner, is advocating a flat rate of tax, while the Liberals prefer a progressive tax -- one that has higher tax rates as income increases.

Another element in the tax problem is the extent to which business should be taxed, particularly in the light of the energy boom which is attracting billions of dollars of capital investment in Australia at the moment.

The federal Treasury has been advocating a resources tax, to take a slice off some of the huge profits now being made by resource-based companies. Investment in this area is predicted to be worth over $30 billion in the next 10 years.

The federal treasurer, John Howard, and the federal Cabinet have specifically rejected this type of tax, however.

Nevertheless the federal government is looking for ways of getting its share of resources profits. The latest answer it has produced is to make the state governments in the areas concerned -- particularly Queensland and Western Australia -- tax these companies through high freight charges on state-owned railways and high charges for other infrastructure services. To ensure that the states impose adequate charges, the federal government is considering reducing the share of federal revenue that these states are given. Altering the proportions of federal funds paid to the various states would also ensure that the benefits of these resource taxes would effectively be distributed to all six states.

This proposal has been greeted with horror by the two states concerned.

Queensland's premier, Johannes Bjelke-Petersen, said earlier this month that his state "would certainly not go along with it."

He said he didn't believe the federal government would go through with the proposal to withhold federal tax revenues from resource-rich states. "Let's cross that bridge when we come to it."

The state premiers will be meeting Prime Minister Malcolm Fraser and Treasurer Howard in Canberra next month to discuss the formula by which the states are allocated about 40 percent of federal tax reciepts. But Fraser says the government won't have details of its new proposals for changing the formula to help resource-poor states until June.

Next month's Canberra meeting was sought by the states while the federal government was still debating whether to reduce the revenues it received from income taxes. The states at that stage believed they would be severely disadvantaged if the federal government switched from relying primarily on direct income taxes to raising revenues from sales taxes.

The present government's federalism policy specifically refers to the states receiving a fixed percentage of income tax revenues.

The states get no return from other federal taxes.

The federal government decided not to alter the general incidence of income tax, however, after a painful and semipublic review of teh alternatives. Its initial preference was for a form of value-added tax, then for a general sales tax, and then for a wholesale tax.

But according to Treasurer Howard, imposing any of these indirect taxes to a degree sufficient to allow a worthwhile reduction in personal income tax would have meant a surge in inflation of at least 6 percent.

This, plus the belief that this would flow through into additional wage rises , was the main reason the government decided not to introduce new taxes. This was coupled with a substantial campaign by retailers against new taxes.

In a major policy statement earlier this month, Mr. Howard pointed out that total tax revenue in Australia from all forms of government was low, compared with the rest of the industrialized world.

In 1978, he said, Organization for Economic Cooperation and Development figures showed that total tax revenue was only 28.8 percent of gross domestic product in Australia, compared with 35.8 percent for 22 other industrial cou ntries.

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