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Governments are 'socialising' tax revenue gains and 'capitalising' tax revenue losses

By Geoff Carmody - posted Wednesday, 21 November 2012

The 2012-13 Mid-Year Economic and Fiscal Outlook revealed a significant reduction ($3.9 billion) in taxation revenue forecasts compared with those released at Budget time.

This reflects heavy reliance on volatile income taxes.

Total income tax receipts, including resource rent taxes (PRRT and gross receipts from MRRT), are down nearly $4 billion, accounting for more than the total tax write-down. Indirect taxes (eg. GST, WET, LCT, and customs and excises) are now expected to be over $90 million higher in 2012-13 than forecast at Budget time (assuming no change in carbon tax revenues).


Within income taxes (down 1.6% in total), the largest reductions are resource rent taxes (down 24.6%), company tax (down 3.1%) and gross 'other individuals' income tax (down 1.4%). Gross PAYG income tax is expected to be a little higher. However, for personal tax overall, increased refunds mean no change in the Budget forecast.

Even after these revisions, in 2012-13 the Government is forecast to raise 73.2% of its tax revenue from income taxes, and 26.8% from consumption and similar taxes.

Income is a more volatile – risky – tax base than consumption. The difference between them – saving – is more volatile than either. Income taxes also double-tax income from saving relative to taxes on consumption, increasing distortions that erode saving.

Other features of our income taxes make them even more distorting. Properly designed income taxes would allow full and immediate offsetting of losses against all other forms of assessable income, and, importantly, allow immediate refunds where losses exceed other income. This is almost never allowed.

Claimable losses are variously delayed, quarantined, limited (via caps or time limits) or denied. This was also true for losses under the ill-fated Resources Super Profits Tax (RSPT). It is true for loss carry-back provisions supposedly linked to revenues from the grotesque MRRT replacement for the RSPT.

Of course, proper treatment of losses would make income taxes even more volatile and risky. At present this would also reduce income tax revenues even more.


For Australian residents, refunds of franking credits under our dividend imputation system could be regarded as an exception. But governments collect company tax revenue first, and have use of the funds before refunds are paid.

Governments want it both ways. They 'socialise' income gains, by claiming their income tax share, and more, as soon as possible. They 'capitalise' many losses, delaying or denying the Government's revenue share of them, contrary to proper income tax design.

Contrary to the assertions made during the debate about the RSPT, governments don't accept their full share of the risk and volatility inherent in heavy reliance on income taxes. This is unfair.

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A version of this article was first published in the Australian Financial Review on November 12, 2012.

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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