related
Profiles:


Aust
Constitution
& cyberspace

     overview

This guide looks at taxation and tariffs, including internet tax issues.

The government's share of online payment for goods and services is a major question for electronic commerce. Should you pay taxes for purchases and other transactions on the web? Is the internet a GST-free zone? Will a 'byte' tax be introduced? Can you evade tax by beaming your money to the Cayman Islands or using a private digital currency? What is the most appropriate way to tax global enterprises? Does the 'new economy' require new taxes or a need to redesign old ones?

     in this guide

The following pages cover -

• impacts - government, industry and academic studies of what, where and how to tax
• byte tax - taxing data, not the value of transactions, and other mechanisms for extracting revenue from the net
• Australia - Australian legislation, reports and industry studies about online payments, contracts and other matters
• global frameworks - overseas developments
• taxonomies - a discussion of key terms and concepts in taxation regimes
• income - personal income taxation
• corporate - taxation of commercial and other entities in the global economy
• VAT - consumption taxation schemes, including Australia's GST
• production - taxes on production
• compliance - electronic filing, payment and monitoring
• havens - offshore financial centres and other havens
• landmarks - major inflection points in the development of offline and internet taxation regimes

If you want expert tax advice we strongly recommend that you consult accountants and lawyers.

     state, community and revenue

Taxation of income, assets and transactions is an integral feature of contemporary advanced societies. It is predicated on a consensus that the individuals and organisations form part of a community, receive benefits from and in turn owe obligations to a particular nation state.

Privatisation of government business operations over the past 20 years, highlighted elsewhere on this site, has deprived governments of source of funds and - with the salient exception of the US - large-scale borrowing to fund expenditure has become increasingly untenable in an era where currencies float freely. Taxation-based revenue has thus become more important without becoming more popular.

Ubiquitous taxation of income in many countries is little more than a century old. However, since at least the time of Hobbes there has been an expectation that the state will appropriately demand financial contributions from the community as the foundation for public services such as defence and administration of justice. Changing visions of the state - and of the community - have been reflected in differing views of the role of taxation rather than just an expansion of how government revenue is allocated. Government expenditure necessarily embodies a political program and community perceptions of the roles, rights and responsibilities of a range of stakeholders.

Taxation has thus come to be recognised as a mechanism that

• enables pervasive 'social intervention' through the provision of health, education and other services
• aims to stimulate or reduce private consumption and investment
• reflects community values (eg in Australia a bias towards investment in housing rather than in risk capital and commercial innovation)
• minimises market volatility, in line with attempts at macro-economic management
• promotes social equity through redistribution from wealthier to poorer members of the community
• is iterative, with ongoing amendment of legislation (and the appearance and eventual demise of specific taxes) rather than comprehensive reform.

Evolution of the contemporary tax system in Europe, Canada, New Zealand and Australia has been inextricably entwined with the emergence of the modern territorial state, politics and economic development. Expansion of government responsibilities - whether through nation building initiatives such as rail and telecommunication infrastructure or underpinning the social compact - resulted in financial demands that fostered a shift to general direct and indirect taxation, in particular -

• on personal income, often on a progressive basis (ie higher rates for those on higher incomes, a delight to tax officials as inflation floated taxpayers into higher brackets) and using pay-as-you-earn (PAYE) arrangements for wage-earners
• on corporate income and
• value-added or goods-&-services taxation, ie indirect taxation.

VAT - la taxe sur la valeur ajoutée - was introduced in France in 1954, with adoption by the European Union in 1967 and other parts of the globe thereafter. PAYE had been introduced in Australia in 1944.

Although the Civil War resulted in a significant growth of US federal financial powers, a stable constitutional basis for federal income tax dates from as late as 1913. Most federal revenue prior to that time related to excise and asset sales. Despite a rhetoric of antifiscalism, US involvement in the 1914-18 War, 1939-45 War, Cold War and 1930s Depression drove development of a progressive and redistributive tax regime that increasingly converged with that of the major European states.

In Australia - discussed in more detail below - federation was followed by an expansion of federal revenue powers (notably through a monopoly on income tax from the mid-1940s onwards) that enabled the national government to operate with state agreement outside the narrow bounds of the 1901 Constitution.

At an international level efforts to minimise regulatory arbitrage and tp address concerns about double taxation and barriers date from before last century, with for example the 1860s German Zollverein a distant precursor of contemporary developments such as NAFTA and the US-Australia FTA. Initial efforts at a global tax regime were similar to those regarding intellectual property, with a patchwork of bilateral treaties.

In 1921 a report for the League of Nations unsurprisingly concluded that double taxation inhibited "economic intercourse and the free flow of capital", preventing "equitable distribution of burdens among taxpayers". The League's model treaties regarding cross-border transactions and income were reflected in the 1963 OECD Model Income Tax Convention that has underpinned most substantive discussion about global agreements.

     tensions in a globalising economy

Traditional taxation regimes came under pressure from several directions during the final quarter of last century.

One was the neoconservative zeitgeist, marked by privatisation or closure of many state enterprises, deregulation of markets and the 'middle class tax revolt' that saw demands for significant reduction of both tax rates and compliance requirements.

Critics characterised tax policy as a dance of the zombies - clever legal and accounting people exploiting loopholes which are then fixed by tax authorities in a way that results in new areas for interpretation and exploitation, a regime of bewildering complexity in which the bold, skilled or merely lucky had scope to evade social burdens.

That characterisation fuelled calls for nostrums such as a simple flat tax (accompanied by significant reduction of expenditure other than on sacred cows such as national security) or a move away from personal and corporate income tax to consumption tax schemes. However, tax revenue from personal and corporate income taxes rose strongly in most OECD countries during the late 1990s. As of 1997 the OECD average ratio of total tax revenue to GDP was 37.0%. The share in GDP of taxes on specific goods and services (such as taxes on tobacco, alcohol and fuel) fell to an OECD average of 4.1% in 1998, reflecting increased reliance on use of general sales taxes.

A second pressure was ongoing globalisation, with an interaction (and competition) between national tax systems.

Globalisation saw removal of barriers to the flow of goods/services and capital across borders. It also saw acceleration of the movement to multinational markets and enterprises. National revenue regimes for most of last century were predicated on highly regulated capital markets, exchange controls, little large-scale B2C activity across borders and operation of enterprises within a particular jurisdiction (meaning that it was usually possible to identify an enterprise's performance and harvest the corresponding revenue).

As the OECD notes, while corporations globalise amid market liberalisation, tax authorities have largely remained constrained by national frontiers and susceptible to phenomena such as transfer pricing and exploitation of corporate tax havens (particularly by enterprises operating across several jurisdictions).

It has been suggested that governments can respond to globalisation by retreating behind national frontiers (with an 'isolationist' stance on global tax issues), seek harmonisation of the international tax system (at its most ambitious through a US-based tax code administrated by a global tax authority) or instead extend existing cooperation about information sharing.

Global capital flows mean that even the US cannot ignore the international concerns about fiscal reforms. Moves towards harmonisation, as highlighted later in this guide, have been inhibited by disagreements about the shape of a global system and its benefits. Contrary to fashionable chatter about the death of the state, national governments have not acknowledged a need for or indeed ability to surrender tax responsibilities.

Administration of those responsibilities - what one OECD writer articulated as "the right to tax in a way that best suits the political realities, economic needs and social and cultural values within each country" - is indeed one definition of a national government.

International discussions since the 1963 OECD Model Income Tax Convention in 1963 have essentially sought to accommodate two approaches in dealing with cross-border income. Various bilateral agreements embody a 'residence principle' (ie each nation has the right to tax income of entities that reside within its borders) and - more contentiously, given the potential for double taxation and disputes about extraterritoriality - an acceptance that states can tax income arising from sources in that state, irrespective of whether participants in the transaction are residents).

The current global regime is aspirational rather than tightly prescriptive. In principle there is no requirement that states implement OECD guidelines, no global enforcement of state behavior - although major states such as the US have been persuasive in dealing with 'renegades' such as the Cayman Islands - and no global mechanism such as the WTO for resolving international disputes.

The OECD has suggested that states can tax income on a source and residence basis, addressing concerns about double taxation through credits for taxes paid to other governments. It has also suggested that residency may be deemed as that to which the organisation or individual has the strongest "personal and economic links", with nonresidents taxed on the basis of any "permanent establishment" (eg a branch or facility) in the taxing nation.

Perhaps more importantly, the OECD has encouraged information sharing about taxation policies/techniques and about taxpayers.

A third pressure was the emergence of the 'information' economy, with ICT providing mechanisms for both revenue collectors and the tax-averse.

     taxation in the information economy

All tax regimes have grappled with problems of information, in particular the difficulty of identifying tax liabilities and securing payments without inappropriate administrative costs or impacts on society as a whole.

Early tax schemes centred on identification of fixed assets such as land and buildings (eg the English tax on windows, a precursor of contemporary bed or toilet taxes in some Australian states) and a handful of commodities, particularly high value commodities - such as tea or silver - that passed through choke points such as customs posts. Governments lacked the resources - and, as importantly, the legitimacy - to comprehensively track income and consumption in a largely paperless society.

That changed with the adoption of new technologies and business models over the past two hundred years. Participants in the economy were increasingly coopted into collection (and verification) of information about earnings and expenditure as part of processes highlighted by Chandler, Coase and Weber. It is difficult to envisage the contemporary state without tools such as personal bank accounts, insurance policies, a comprehensive government census and corporate reporting to capital markets.

At the global level the current regime is primarily concerned with direct taxation - because of its national importance and cross-border impact - and has largely ignored questions about indirect taxes. That may change.

Roland Paris has suggested that international e-commerce is

a qualitatively new form of commerce that defies many of the assumptions upon which existing tax systems are based, including the notion that transactions can be located in physical space

one that will foster international coordination of tax policy because states will not allow international digital commerce to escape taxation and cannot effectively tax it unless there is close cooperation with other states.

     Australia

Prior to Federation most tax revenue for Australian colonial governments came from customs duties and excises - which accounted for around 75% of all revenue. The colonies imposed a variety of other taxes, including stamp duty, livestock taxes, land taxes (eg Victoria's Land Tax Act 1877, aimed at generating revenue and breaking up large pastoral holdings), taxes on the income of high earners and on the property of deceased persons (first introduced in NSW in 1851).

In 1901, as noted in a supplementary profile, the Constitution gave the new national government a monopoly of customs duties and excises, with the power to levy other taxes concurrently with the states. All states had established income taxation by 1907 (which by 1914 accounted for 78% of Australian tax revenue) and there were recurrent attempts to establish sales taxes, rejected by the High Court as excises.

Demands on the new government saw introduction of new taxes. A federal land tax was introduced in 1910, ostensibly to fund the national old age pension promised at Federation, federal income taxes on individuals and enterprises were introduced in 1915 to offset the decline in customs revenue during the 1914-18 War, the Entertainments Tax Act 1916 dealt with theatres and federal sales taxes appeared in 1930 following the slump in customs revenue during the Great Depression. The Pay-roll Tax Act 1941 was introduced to fund the new federal child endowment scheme.

In 1942 federal legislation envisaged that the states would cease to levy income tax during the war, being compensated with a share of Commonwealth revenue. The High Court ruled that the legislation was valid and the Commonwealth unsurprisingly chose to extend the uniform income tax scheme after 1946. States were free to impose their own income taxes on top of the federal tax but would not receive compensation if they did so.

That was of crucial importance as federal income tax rates inhibited states from raising sufficient offsetting revenue and because the 1927 intergovernmental financial agreement, reflected in amendment of the Constitution and creation of the Australian Loan Council, restricted state borrowing.

As in other advanced economies, income tax proved to be a river of gold, allowing the federal government to abandon Commonwealth land taxes in 1952 and death and gift duties in the 1970s. It retained a number of specific excises. State governments have necessarily relied on Commonwealth general and specific-purpose grants (ie a share of federal revenue), supplemented by taxes specific to each jurisdiction.

Those taxes include stamp duties, payroll taxes, motor vehicle taxes and gambling levies; land taxes and municipal rates remain a primary source of revenue for provision of local government services.

Use of large-scale specific-purpose grants (eg for infrastructure development, health and education programs) has ensured federal involvement in matters for which the states have formally responsibility under the Constitution. Federalism has come to be characterised as a dichotomy: the national government taxes, the states spend (using money provided by Canberra and often allocated within a national framework).

By the mid-1980s the federal government collected over 80% of all tax revenue, with the states accounting for about 15% and local government for 4%. In 2000 the federal government introduced a national Goods & Services tax (GST), a broad consumption tax similar to value added tax (VAT) schemes found overseas and replacing a wholesale sales tax.

The GST - a rate of 10% - was a belated response to recommendations in the 1975 Commonwealth Taxation Review Committee report (Asprey Report) and proposals at the 1985 National Tax Summit.

The GST is in addition to federal income tax collection. The 1999 Intergovernmental Agreement on Principles for the Reform of Commonwealth-State Financial Relations (IGA) provides that each government receives a share of GST revenue based on its population share adjusted by a relativity factor reflecting per capita financial needs.

The IGA requires state governments to end or adjust a range of taxes (eg cease bed taxes, debit taxes, financial institutions duties and stamp duties on marketable securities. The Commonwealth has not attempted to establish taxes that are specific to the internet.

Commonwealth Government taxation revenue in 2000-01 totalled $177,237 million, over 81% of total taxation revenue. Aggregate state/territory and local government taxation revenue totalled $40,002 million, some 18.4% of total tax revenue.

Income taxes continue to be the largest component of federal taxation revenue (accounting for 67.2% of the Commonwealth's total taxation revenue in 2001-02), with around $31,782 million from enterprises and $87,250 million from individuals. Property taxes are the largest component of state/territory and local government taxation revenue, accounting for 48.0% of their total tax take in 2001-02.

State/territory gaming taxes accounted for $3,707 million (compared to $2,836 million on insurance and $4,291 million on vehicles). State stamp duty and other capital transfer taxes amounted to $9,672 million. Federal crude oil & liquid petroleum gas levies amounted to $12,793 million.

     studies

An historical overview is provided by Carolyn Webber & Aaron Wildavsky's A History of Taxation and Expenditure in the Western World (New York: Simon & Schuster 1986). For an introduction to contemporary developments see Public Spending in the 20th Century - A Global Perspective (Cambridge: Cambridge Uni Press 2000) edited by Vito Tanzi & Ludger Schuknecht, The Tax System in Industrialized Countries (Oxford: Oxford Uni Press 1998) edited by Ken Messere and Taxation and democracy: Swedish, British & American approaches to financing the modern state (New Haven: Yale Uni Press 1993) by Sven Steinmo.

For the UK see in particular Martin Daunton's excellent Trusting Leviathan: The Politics of Taxation in Britain, 1799-1914 (Cambridge: Cambridge Uni Press 2001) and Just Taxes: The Politics of Taxation in Britain, 1914-1979 (Cambridge: Cambridge Uni Press 2003) and Richard Whiting's The Labour Party and Taxation: Party Identity and Political Purpose in Twentieth-Century Britain (Cambridge: Cambridge Uni Press 2001). For earlier periods see Braddick's The Nerves of State: Taxation and the Financing of the English State, 1558-1714 (Manchester: Manchester Uni Press 1996) and Basil Sabine's A History of Income Tax (London: Allen & Unwin 1966).

There is a more uneven coverage of the US in The Federal Taxation in America: A Short History (Cambridge: Cambridge Uni Press 1996) and Funding the Modern American State, 1941-1995 (Cambridge: Cambridge Uni Press 1996), both edited by W. Elliot Brownlee, and The Great Tax Wars: From Lincoln to TR to Wilson: How the Income Tax Transformed America (New York: Simon & Schuster 2003) by Steven Weismann. Charles Adams' For Good & Evil: The Impact of Taxes on the Course of Civilization (Totowa: Rowman & Littlefield 2001) offers a brisk but for us decidedly unconvincing libertarian flat-tax perspective.

R. Rudy Higgens-Evenson's The Price of Progress: Public Services, Taxation & the American Corporate State, 1877 to 1929: Reconfiguring American Political History (Baltimore: Johns Hopkins Uni Press 2003), Richard Joseph's Origins of the American Income Tax: The Revenue Act of 1894 and Its Aftermath (Syracuse: Syracuse Uni Press 2004), John Witte's The Politics and Development of the Federal Income Tax (Madison: Uni of Wisconsin Press 1985), Mark Leff's The Limits of Symbolic Reform: The New Deal and Taxation, 1933-1939 (Cambridge: Cambridge Uni Press 1984), Death By A Thousand Cuts: The Fight Over Taxing Inherited Wealth ((Princeton: Princeton Uni Press 2005) by Michael Graetz & Ian Shapiro and James Grant's Money of the Mind: Borrowing & Lending in America from the Civil War to Michael Milken (New York: Farrar Straus Giroux 1992) question some myths.

For Australia see Julie Smith's Taxing Popularity: The Story of Taxation in Australia (Canberra: Federalism Research Centre, ANU 1993), The Long And Winding Road: A Century Of Centralisation In Australian Tax (PDF) by Rodney Fisher & Jacqueline McManus, Australian Taxation & Ethics: Colonisation to Costellorisation (PDF) by Paul Kenny and Marian Sawer's The Ethical State: Social Liberalism In Australia (Carlton South: Melbourne University Press 2004). Specific taxes are discussed in the 2001 History of fuel taxation in Australia paper and Denis James's 1996 paper Beer and Cigs Up!': A Recent History of Excise in Australia.

There is a persuasive study of social spending in Peter Lindert's revisionist Growing Public: Social Spending & Economic Growth Since the 18th Century (Cambridge: Cambridge Uni Press 2004). Layna Mosley's Global Capital & National Governments (Cambridge: Cambridge Uni Press 2003) questions received wisdom about public borrowing, taxation and global capital markets.

Debate about e-commerce and globalisation features in Philipp Genschel's 2001 paper Globalization, Tax Competition, and the Fiscal Viability of the Welfare State and Roland Paris' 2003 The Globalization of Taxation? Electronic Commerce and the Transformation of the State (PDF). Multinationals and Transfer Pricing (London: Croom Helm 1985) edited by Alan Rugman & Lorraine Eden remains of value.

Insights about antecedents of the information economy - or its latest manifestation - are provided by James Beninger's Control Revolution: Technological & Economic Origins of the Information Society (Cambridge: Harvard Uni Press 1989), Alfred Chandler's The Visible Hand: The Managerial Revolution in American Business (Cambridge: Harvard Uni Press 1977), Margaret Levenstein's Accounting for Growth: Information Systems and the Creation of the Large Corporation (Stanford: Stanford Uni Press 1998) and JoAnne Yates' Control Through Communication: The Rise of System In American Management (Baltimore: Johns Hopkins Uni Press 1993).

     who pays

Tax systems in democracies are underpinned by a consensus about equity and efficiency: who should pay and how revenue should be collected.

In April 2004 the US federal General Accounting Office reported that around 123 million people in the US filed tax returns in 1999 and paid an aggregate US$1 trillion. That was roughly half of all federal revenue, with the remainder coming primarily from payroll, corporate and excise taxes.

The GAO's Tax Administration: Comparison of the Reported Tax Liabilities of Foreign & US Controlled Corporations, 1996-2000 report indicates an average of six in ten US corporations reported no tax liabilities on domestic income for the five years from 1996 through 2000. 71% of foreign corporations operating in the US reported no tax liabilities for each of those years.




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