TAX REFORM IN BRITAIN AND AUSTRALIA
SPEECH TO QUEENSLAND AUSTRALIAN BRITAIN CHAMBER OF COMMERCE LUNCH
Brisbane, 18 June 1999
I'm delighted to be asked to speak today about the British experience of VAT. I started my public service career working in Customs on the administration of VAT, soon after it had been introduced. As befits a raw new-entrant, the first dossier that was dumped on me was the issue of VAT liability of prostitutes and professional safe-breakers!
But I want to start the wider issues of tax reform. The press here often concentrates almost wholly on GST, but it is important to remember that the tax reform agenda goes much wider than that--as Nick Minchin [Federal Industry Minister] will no doubt point out when he speaks a little later.
There are in fact many similarities between the British and Australian Government’s approaches, despite the obvious difference in political complexion of the two Governments. The new Labour Government in Britain, and the Chancellor Gordon Brown in particular, is determined to use the tax system to carry forward its reform agenda.
First, the two Governments share a common belief in lower rates of income tax. This year’s budget in the UK introduced a bottom rate of 10% and cut the basic rate of tax to 22% (the lowest for 70 years). The top rate of tax remains at 40%, applying to incomes of over $80,000 a year.
Second, both Governments are determined to make a real effort to help families with children, and to simplify the interaction between the tax system and social security benefits. The British Government has introduced a new Working Families Tax Credit, payable through the tax system. It provides a minimum income guarantee of $25,000 a year for every family with a full-time earner, and means a no family will pay income tax on earnings of less than $30,000 a year. And the tax credit tapers off more slowly than the social security benefits it replaced.
This is similar to the Australian Government’s introduction of its Family Tax Initiative and the lower taper it is proposing for Family Allowance.
Third, both Governments are targeting extra help at older and retired people. In the UK, thanks to the changes introduced by Gordon Brown, everyone aged 65 or more will be able to have an income of at least $14,000 before they have to pay any income tax.
Fourth, the Governments share a common desire to see lower rates of company taxation. In Australia, this is something being addressed by the Ralph Review, which has been charged with seeing what would be needed to secure a 30% company tax rate in a revenue-neutral way. In the UK, we’ve already been able to get our main rate of corporation tax down to 30%, and the rates for the smallest companies (those with profits of up to $25,000) were cut to 10% in the last budget.
The UK Government has also been introducing reforms to CGT, though not in quite the same way as envisaged in Australia. The UK is moving to abolish indexation, and at the same time to cut the rates of CGT on assets held for a long period—from 40% on assets held for less than a year to 10% on business assets that have been held for 10 years or more. There is also an exemption for the first $17,000 of gains in any year.
There is one area where we are taking a notably different approach to Australia, and that is in the use of the tax system to encourage energy efficiency and to help meet our Kyoto targets for reducing carbon dioxide emissions. Echoing "Yes Minster" I might be described as "courageous" for raising this at a gathering of businessmen in Queensland. But it an area where the British Government is determined to take effective action. We will be introducing a specific climate change levy on business use of energy, to raise over $4 billion a year. But the Government is determined to protect the competitiveness of British industry, so the revenues will be recycled to business by cutting employers’ national insurance contributions. We are also, in contrast to Australia, raising substantially the taxes on petrol and diesel.
One of the aspects of the new Australian tax system that I find particularly interesting is the way it is linked to a reform of Federal/State financial relationships, with all the income from the GST going to the States, in substitution for the existing system of grants. I don’t think we’ve yet found a long-term solution for the funding of either the new devolved administrations in Scotland, Wales and Northern Ireland, or indeed of the local authorities in England. They still rely overwhelmingly on grants from the central government, so I think the Australian reform is an interesting development.
But let me turn to VAT. We introduced in 1972 when we joined the European Community. Before that we had Purchase Tax, which was very similar to the existing Australian Wholesale Sales Tax.
I would say the VAT/GST is definitely a better tax system. It can be broader-based, covering a much wider range of goods and services, and can remove many of the distortions that are inherent in a wholesale system. In particular, it has the advantage of relieving exporters from any indirect tax burden.
In the UK, VAT was introduced with a wide range of zero rates, covering most food, books and newspapers, domestic fuel, public transport and some others. And when the bill was going through Parliament, backbench pressure forced the Government to add zero-ratings for children’s clothing and shoes.
It would not be right for me to get involved in the Australian debate about what zero-rates there should be here. There is obviously a balance to be struck between the simplicity of a universal tax, and the distributional consequences--taking account of both the direct and indirect tax changes.
But let me say a word about the way VAT has developed in the UK. There have been quite a number of changes to the rates, though relatively few changes to the list of VAT-free goods and services.
As I said, there have been few changes to the zero rates:
I worked on the introduction of higher rates in 1974, and that illustrated some of the difficulties in multiple rates. We thought it would be a good idea to ask the Treasury model for a list of luxuries--goods with a high income elasticity of demand in economists' jargon. Rather like "Deep Thought" in "The Hitch-Hiker's Guide To The Galaxy", the Treasury computer thought for a long time and then spewed out a list that about as useful as the answer "42". I remember that top of the list was men's underpants!
In a similar vein, one notorious case on food involved how to resolve the dilemma that one tax inspector had ruled that square Jaffa Cakes were biscuits while another had ruled that round Jaffa Cakes were cakes. We had to consult the Government chemist, who after much muttering about inter-cellular air-space came up with the rather clever point that when biscuits go stale they go soft, whereas when cakes go stake they go hard! And the current furore about hot and cold cooked chickens is very familiar in the UK. Indeed you might like to hear the definition in our legislation:
"Hot food means food which, or any part of which, (1) has been heated for the purposes of enabling it to be consumed above the ambient air temperature and (2) is at the time of supply above the ambient air temperature"
This is all good knock-about stuff. But it shouldn't be allowed to obscure all the other benefits of tax reform. In particular the full scope of the package, including all the changes to income tax and other taxes. There will be teething troubles with the GST. It will take time to settle down. And the 3-year electoral cycle in Australia allows precious little time between the introduction of the GST in July 2000 and the next Federal election not much more than a year later. The Government's planned public education campaign will be crucial, and will need to address the issues we found difficult initially in the UK, such as why businesses have to charge GST on supplies to other businesses who then claim it back. But if those issues can be overcome successfully, the UK experience shows that tax reform can produce a better tax system.
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