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Taxation Reform


Taxation Reform: Equity and Efficiency

Broad, bold and believable .....
The first of four reports to be issued under the Taxation Reform: Equity and Efficiency project was recently launched in Melbourne at a high profile seminar and press conference. The Prime Minister's subsequent announcement of a taxation reform taskforce highlights the timeliness and importance of this major CEDA project.

The report, titled A Stocktake of Taxation in Australia, outlines the deficiencies of the current taxation system and argues for radical reform. Problems with the present system identified in the report include: revenue insecurity; inefficiency; inequity; and undue complexity.

Revenue insecurity
Australia has a declining tax base - in both direct and indirect taxation. Reasons for the decline in the direct tax base (personal income and company taxation) include:
Artificial income splitting and income minimisation, reflected in the recent rapid growth of trusts, partnerships and private companies. Over the ten years to 1994-95, the number of individual taxpayers with net partnership and trust income increased by 20 per cent.
Different ways of taxing different investment options, providing arbitrage opportunities for schemes to reduce tax payable.
The large difference between the top personal tax rate (48.7 per cent) and the corporate tax rate (36 per cent), providing an incentive for high-income people to channel income through a company to take advantage of the lower tax rate. In the ten years to 1995, participation in the PAYE system grew by 19 per cent - while the number of individuals with net business income grew by 63 per cent.
Increasing use of exemptions and deductions, which has almost doubled over the last decade.


Technological advancement and international integration also impact on the direct tax base. Deregulation of financial markets and greater capital mobility have increased the pressure on government to engage in 'tax competition', placing downward pressure on revenue from income taxes on labour and capital. And the growth of electronic commerce will add new challenges to the taxation of capital income and the security of the income tax base.

Within the indirect taxation system the wholesale sales and excise taxes are based on high and variable tax rates levied on goods with no taxation of services. Yet the services sector is the fastest growing sector of the economy. Growth over time of indirect tax revenue from these taxes is considerably less than would be possible under a broad-based consumption tax falling on most if not all goods and services.

The revenue generating capacity of another form of indirect taxation - state payroll taxes - is limited by exemptions, such as the exclusion of small business. As a result, less than 60 per cent of employees are subject to the tax. The growth of small business relative to large business over the last ten years further limits the revenue potential of payroll taxes.

Finally, financial innovations and deregulation have reduced the effective coverage of financial taxes such as the FID, BAD and some of the stamp duties.

Inefficiency
A second major criticism of the tax system is that it is non-neutral, resulting in distortions to the pattern of economic activity and losses in efficiency. There are higher taxes on savings and future consumption than on current consumption; and major disparities exist between effective tax rates on various savings and investment options making some savings vehicles (such as negatively geared rental property and owner-occupied housing) more attractive than others (see Table 1). These differences distort investment decisions and generate dead-weight losses.



Effective Tax Ratea on Major Asset Classes for Individual Savers with
Different Statutory Tax rates, 1992

Statutory personal tax rate

Asset category
39 per cent
48.25 per cent

Interest bearing deposit
62.4
77.2

Owner-occupied home
11.4
19.8

Negatively geared rental property
-0.8
-0.8

Unincorporated enterprise
23.0
33.5

Local company
36.6
53.1

Investment abroad
62.9
70.4


Source: Johnson, D. et al (1997), A Stocktake of Taxation in Australia, Melbourne Institute of Applied Economic and Social Research.
Note: aEffective tax rate is measured as tax paid divided by the real income return, expressed as a percentage. In all cases inflation of 3 per cent is assumed.


Other distortions include a lower tax rate for unincorporated businesses compared to companies (which distorts the choice of business form); a high proportion of indirect taxes imposed on selected business inputs (distorting choice of production method and investment decisions); and alternative tax structures on various forms of financial transactions (creating further distortions in firm decision-making). As well there are widely varying effective indirect tax rates on goods and services purchased by households.

A further area of inefficiency is the fiscal imbalance between levels of government. The Commonwealth raises 77 per cent of Australian taxes, the states raise 20 per cent while local government raises 4 per cent. However, the Commonwealth spends about 80 per cent of the taxes it collects while the states spend nearly double their tax collections and local government nearly three times its collection.

In addition, Australia's complex and complicated tax structure results in high compliance and administration costs. Australia appears to have significantly higher compliance costs than other OECD countries.

Another aspect of inefficiency is the effect of the interaction of the taxation and social security systems. For example, as an individual on unemployment benefits takes up employment, increased personal income tax and reduced social security benefits can generate relatively high effective marginal tax rates. In some cases low-income earners face effective tax rates of more than 80 per cent. This may significantly reduce the incentive to work.

Inequity
A number of factors limit the progressiveness of the direct tax system. Some high-income recipients have very low effective tax rates - due to the greater use of tax minimisation vehicles; exploitation of tax concessions more readily available to the better-off; differing effective tax rates on classes of assets (Table 1); the absence of wealth taxes and inheritance taxes; and salary packaging.

Lower income people also face a higher indirect taxation burden and indirect taxes represent some 40 per cent of the total taxes collected. The bottom 20 per cent of income earners pay about 19 per cent of their disposable income as indirect taxes, whereas the richest 20 per cent are paying only 8 per cent. This is an important issue when considering reducing income tax by introducing a consumption tax.

The present tax system fails notions of horizontal equity. Wage earners subject to the PAYE system pay more tax than most non-PAYE people on similar income levels. And those who spend a higher share of their income on goods, such as cars and electronic gadgets, pay more indirect tax than those who prefer to spend on services, such as aerobics classes and holidays.

Reasons for reform
Urgent reform of the taxation system is needed to arrest the decline in the tax base; promote a more efficient allocation of resources by reducing distortions in business and household decisions; enable a fairer distribution of the aggregate tax burden between high- and low-income earners and between PAYE and non-PAYE taxpayers, and to reduce the compliance costs associated with undue complexity.

Over the next 18 months the CEDA-Melbourne Institute-Brotherhood of St Laurence taxation research project will examine a range of tax reforms designed to overcome these problems. This will include reforms to both the indirect and direct tax systems with examination of the implications of alternative reforms for equity and efficiency.




Taxation Reform: Equity and Efficiency



A joint CEDA-Melbourne Institute-Brotherhood of St Laurence research project aiming to assess
the impact on both efficiency and equity of various taxation reform options, funded in part by the
Australian Research Council


A unique feature of this project is the co-operative partnership of all stake holders in the reform process. Business, welfare and academia have come together to develop an agreed methodology for evaluating the impact of different taxation reform options.

The findings of the project will facilitate public policy formulation based on rigorous research and sound analysis of the options and impact of taxation reform for all Australians.

The first report of the project, A Stocktake of Taxation in Australia, was launched at a CEDA seminar in August. Participants in the seminar included: Mark Leibler, Senior Partner, Arnold Bloch Leibler (Chair); Mark Paterson, Chief Executive, Australian Chamber of Commerce and Industry; Robert Fitzgerald, President, ACOSS; Professors John Freebairn and John Creedy and Dr David Johnson, University of Melbourne; and Alison McClelland, Director, Social Action and Research, Brotherhood of St Laurence.

A Stocktake of Taxation in Australia, by David Johnson, John Freebairn, John Creedy, Rosanna Scutella and Sally Cowling.







Published in the CEDA Bulletin, October 1997, p.4-7


Contact: Margaret Mead
Phone: +61 3 9662 3544 fax: +61 3 9663 7271 or email: Email: [email]info@ceda.com.au[/email]
Category: CEDA Bulletin, release date: 13/11/97 last modified on: 03/11/99.

The Politics of Taxation Reform
Gary Johns, The Age, 28 July 1998


I remember asking Lionel Bowen in the lead up to the 1980 election what the key issues would be during the campaign. 'Tax my boy, same as the last election, same as every election!' Lionel was exaggerating somewhat but tax or tax reform usually feature prominently at election time. And so they will at the forthcoming election. Tax reform is a dangerous beast, the Capital Gains Tax scare certainly played a part in Fraser's survival in 1980, and the GST scare a large part in Keating's in 1993. Will it lead to John Howard's demise in 1998?

Major tax reform is a rare thing. The trouble with it is that the economy doesn't vote. What could otherwise be a search for the most efficient form of tax becomes a game of buying acceptance.

All governments have from time to time given tax cuts which amounted to no more than reimbursement of the ravages of inflation, but that is not tax reform.

Why should John Howard attempt tax reform if it is such a risk? The truth is he has to. He was elected in 1996 with a platform so thin that it was exhausted in his first year. Governments are not rewarded for doing nothing. So he had to create an agenda, and that agenda was always going to include tax reform, the last great intellectual task that the Liberal party undertook with Hewson and the one great reform that Labor could not tackle (outside the waterfront labour monopoly) after Keating's 1985 Option C died.

Both 1980 and 1993 were instances where an Opposition had proposed a new tax at election time, and both were subject to the most terrible vilification by the government of the day. What happens when a government does the proposing? In this instance the electorate are being challenged to toss out a government on the basis of tax reform, not fail to elect an Opposition. There is a difference, so the Howard government which is otherwise not in a terminal state, has an advantage in the contest.

The current system is unduly focussed on business inputs and income, and applies differently to different parts of the economy. The Howard government can opt either to retain the main features of the personal (income, FBT), corporate (company, payroll, licenses) and indirect (WST, petrol, excise) tax mix, or replace as far as possible, personal and corporate income taxes with a consumption tax.

The Howard government has to map out a strategy for reform that, step by step, leads towards the second option, seeking a mandate for every change along the way. For example, step one is a simple tax swap, the Wholesale Sales Tax for a GST. Step two might be to change the mix of taxes, say raise more in indirect taxes but less in direct taxes. Step three might be to relieve the states of their reliance on some of their sillier taxes like gambling and betting.

The best way through this is to be conservative and opt for the indirect tax replacement of one tax, the WST so as to keep the debate confined, as far as possible, to industry groups. Where at present only a small number of wholesalers have to file tax returns, in the future all retailers would have to do so. A WST can only fall on goods (you cannot wholesale a service) so a whole new sector of the economy has to become involved. The only tax mix change would be at the fringes. For example, where there cannot be a clean replacement of the revenue forgone with the abolition of the old tax, and where any compensation is due to any group because of a differential impact on incomes.

But just to make sure everyone is happy you must offer a very large apparent tax cut. Apparent because the money will have to come (in the absence of swingeing cuts to outlays) from taxes. This must be done not by raising new or existing taxes, but by taking them from future Budget surpluses. Of course, those surpluses need not be available in the first place at least not for the purposes of providing a cut. Nevertheless, that is the strategy for cleaning up the indirect tax system. Income tax relief, which may or may not be economically warranted is politically essential.

Opponents will argue that the new tax will rise in the future. But why is that different to any other tax, and besides a government running a surplus at a lower level of total tax take has some basis for being believed that the rate will remain steady. More important, in time the tax should be used to buy out other taxes. To the question, will the GST rise, Howard can truthfully answer, no, if he means not in its own right.

Modest tax reform is one step in major tax reform. The Labor government took the first steps, the Coalition has to take the next.

I recall when interest rates hit 18% in 1990--91. Facing enormous political pressure Prime Minister Bob Hawke let it be known that he was considering easing rates. The moment he made his announcement the nervous-nellies on the backbench started ringing around seeking to meet and demonstrate against the Treasurer. Paul Keating told them to hold the line. The government did, and survived. If Keating had shown weakness the government would have been doomed because the electorate would have asked, and quite rightly, 'why did we have to go through all this in the first place?' The electorate do not like change but they will accept it if they are convinced that it is essential and enduring.

Taxation Reform: Your School and Your P&C Association
September 1998
Since the release of the Federal Coalition Government’s taxation reform agenda, many affiliates have requested information about the impact of the proposed changes on parent organisation activities and on schooling generally. Because parent organisations exist in the context of schools it is worthwhile to summarise the impact of the proposed changes on schools before detailing the implications for P&C associations.
The Goods and Services Tax (GST) and Government Schools
At present, school activities are not taxed in Australia. All government schools are exempt from wholesale sales tax. P&C associations are also eligible for wholesale sales tax exemption.  This means all computer equipment, photocopiers and other resources purchased by schools are tax free. There is no wholesale sales tax on books and computer software. Services used by schools, such as garbage collection services, buses to take students to sport and entry to venues such as museums or theatres are not currently taxed. In addition, fundraising activities conducted by schools or by parent organisations, including the proceeds of school or parent organisation operated canteens, are not taxed. Under the Commonwealth’s proposed taxation reforms, all this will change.
School Fees
Under the Coalition Government’s taxation proposals, tuition at a pre-school, school, college, TAFE or university and boarding school accommodation are to be GST free. The effect of this measure is largely meaningless for government schools because, according to relevant legislation in all states, tuition at government schools is already free. It was proposed because “applying the GST to education would discriminate against private providers” (Costello, P Tax Reform: not a new tax a new tax system p.94).
Books, Materials and Excursion Charges
The proposed arrangements mean that the school will be treated like a business for the purposes of the GST. Goods which are supplied to students free of charge will be GST free. This means the school can claim back the GST it paid on items it then gives to students. However, all goods which are sold or leased to students will be subject to GST. The school will be able to claim back the GST (or Input Tax Credits) it paid for the goods ? if it adds GST to prices it charges students. GST will be payable on the following and similar items:
• uniforms;
• books;
• musical instruments;
• some sporting activities;
• camps and recreational excursions; and
• school bus services.
All of the Government’s information about the educational impact of the taxation reforms lacks detail. Following the release of the Government’s tax package, the Commonwealth Minister for Schools and Vocational Education, Senator Ellison, issued a media release in which he asserted GST will apply to “non-compulsory activities that are not assessed or do not contribute to a student’s marks or graduation requirements… sporting, craft activities and holiday camps that are not part of curricular assessment will have a GST applied” (Senator C Ellison: Media Release August 25, 1998).
On August 26, Senator Ellison told the South Australian House of Assembly the “Commonwealth Treasury advised that a materials and services fee is considered potentially to be subject to a GST, but a definitive position will depend on the recommendation of the Taxation Consultative Committee which will meet after the election.” (quoted in: Australian Council of State School Organisations Media Release August 27, 1998).
P&C Association Activities
One of the key elements of the taxation reforms is to treat the “commercial activities” of all religious, not-for-profit and charitable organisations as if they were businesses conducted for profit and apply GST to those activities.
Under the proposed arrangements, only non-commercial activities conducted by organisations eligible for income tax deductibility will be GST free. Because donations to P&C associations are not tax deductible, they are not considered to be charitable organisations and they will all be affected by aspects of the taxation reforms. The precise scope of these non-commercial activities will be decided after the election by the Tax Consultative Committee.
GST Threshold
Under the Coalition Government’s proposals, all parent organisations will be treated as if they were businesses. If a parent organisation’s monetary turnover exceeds $100,000 per annum it will be obliged to register with the Australian Taxation Office as a business. As such all its “taxable activities” will be subject to GST. Taxable activity is defined as “any supply of goods or services for a payment whether in cash or kind” except wages. (Costello, P Tax Reform: not a new tax a new tax system p.90). P&C Federation understands many affiliates will meet this criterion. Every association which receipts an average of $2500 per school week or more from its combined operations (such as uniform shop, canteen, OOSH service and fund-raisers) will have to collect and remit GST to the Commonwealth.
These larger associations will have to add GST to the prices charged for all the goods and services they sell or provide in return for money. In return, they will be able to claim Input Tax Credits on the materials and stock they purchase. Every three months the association will subtract the amount of GST it paid on its purchases from the amount of GST collected over the counter of the school canteen, at the school fete, the uniform shop and other activities at which funds were raised and remit the remainder to the Australian Taxation Office.
Smaller associations, where gross monetary turnover is less than $100,000, will not have to charge GST in return for the goods and services they provide. Unfortunately they will not be able to claim Input Tax Credits either and will have to pay GST on all their purchases. Small associations will be able to claim Input Tax Credits only if they register with the Taxation Office as a business, add GST to the prices of all goods and services they provide and subsequently remit GST to the Taxation Office every quarter.
Impact on Fund-raising
Smaller affiliates whose gross monetary turnover is less than $100,000 will not have to register or remit GST to the Taxation Office. Affiliates associated with larger schools whose turnover exceeds the threshold will have to calculate the amount of GST owed from every fundraising activity.
For example, it will not be necessary to add GST to every item sold at a school fete. But registered associations holding such a fund-raiser will have to retain a GST liability equal to one eleventh of the gross amount received at the event.
Affiliation with P&C Federation
P&C Federation will be treated in the same way as any other large non-profit organisation. All services provided to affiliates in return for money will be taxable. GST will be payable on the following services provided by P&C Federation and the cost of these services will need to be increased accordingly:
•affiliation fees;
•all insurance products;
•all books and other printed resources sold by P&C Federation; and
•information days.
Other services such as representation, guest speakers for associations, telephone advice and employees’ wages and conditions advice will remain tax free.
Conclusion
The Coalition Government’s taxation proposals will have a great impact on schools and on the activities of school-based parent organisations. P&C Federation believes that such a tax will do great damage to the invaluable volunteer effort exemplified by parent body affiliates around New South Wales.
The Government’s proposals seek, not only to tax staple foods, books, educational aids and services (aside from tuition), housing, many medicines and other essential products, but also to tax for the first time a raft of community services including much the work of charitable organisations such as the Salvation Army and St Vincent de Paul.
The work of voluntary organisations, such as parent bodies and charities, is the glue that holds many communities together in these difficult times. These organisations, through the freely given efforts of their members, seek nothing more than to make their communities better and more caring places in which to live.
The Commonwealth’s vision for taxation reform disregards these vital aspects of civic life. Instead it sees only businesses, families and individuals. It is intent on taxing the efforts of groups of citizens who are willing to rely on their own strengths in order to help themselves and their neighbours. Governments of all persuasions have, in the past, exempted charitable and community organisations from all forms of taxation for good reason — they provide services that governments cannot or will not provide. They maintain the identities and safety of neighbourhoods and provide important social bonds in what is fast becoming an impersonal, utilitarian society.
Australians are all trying to come to terms with the Federal government’s planned taxation reforms. Many are weighing up whether the proposed personal tax breaks will compensate for the effects of a GST and whether, perhaps, they will be better off under the envisaged system. P&C Federation believes all parents need to weigh all these complicated issues carefully. Hopefully, the decisions we all make will benefit us, our families and the communities in which we all live.

TAXATION REFORM

I am delighted to announce that an agreement has been concluded between the Government and the Australian Democrats which will secure passage of the coalition’s historic proposals to reform Australia’s taxation system.

This agreement follows lengthy discussions between myself, the Treasurer, Senator Meg Lees, the Leader of the Australian Democrats, and Senator Andrew Murray, Democrat spokesman on economic matters.

My colleagues, Senator Robert Hill and the Hon John Anderson, have also been involved in discussions at critical phases.

All major elements of the original plan have been kept.

The principal changes are the exclusion of basic food from the GST and restructuring of proposals concerning diesel fuel in response to the strongly put views of the Australian Democrats on environmental issues.

The full measure of the income tax cuts for middle Australia have been preserved. This means that from 1 July 2000, 80 per cent of Australian taxpayers will be on a top marginal rate of no more than 30 cents in the dollar. There has been some paring of the original proposals for income portions above $50,000 a year.

The family benefits have been maintained in full.

The special savings bonus for self-funded retirees will now be available from age 55.

Compensation arrangements have been strengthened.

Generational reform of Commonwealth/State financial relations remains. The States will, as promised, receive the full proceeds of the GST. There has been some rescheduling/deferral of the abolition of certain State taxes.

Benefits for rural and regional Australia have been preserved. In one area, they have been enhanced.

When, on 13 August 1997, I announced that the government planned to reform and modernise the Australian taxation system in readiness for the 21st century, I announced five broad principles which were to govern the reform process. Those five principles have been met.

My thanks are extended to Senator Lees for the manner in which she led the negotiations on behalf of the Australian Democrats. At all times she was direct, constructive and willing to explore issues in an endeavour to resolve differences. She and her colleagues have approached taxation reform with a strong concern for the national interest.

The Democrats’ approach has been in stark contrast to that of the Labor Party, which by its vituperative negativity towards taxation reform confirmed its enduring irrelevance to serious policy debate in Australia.

Like every other person who has held high political office in our nation in the last two decades, Mr Beazley knows that Australia needs fundamental taxation reform. Yet he has lacked the political courage to put the national interest ahead of short term, partisan political advantage.

I particularly record my appreciation to the Treasurer. At all stages during the reform process, he has displayed a skilled and comprehensive understanding of the many complex issues involved in what has been by far the most detailed and extensive economic reform embraced in Australia for many decades.

It has been agreed between the Government and the Australian Democrats that we will work to secure passage of the government’s legislation, with appropriate amendments, by 30 June 1999.

When that occurs, Australia will have a new tax system for a new century.

28 May 1999

   thank you very much ：）

A Public Health Perspective on
Alcohol Excise and Taxation





A Submission to the
Senate Economics Legislation Committee

Excise Tariff Amendment Bill (No.1) 2002
Customs Tariff Amendment Bill (No.2) 2002

September 2002


Submitted by:

David Crosbie
CEO of Odyssey House Victoria
Member of the Prime Minister’s Australian National Council on Drugs,
Member of the National Expert Advisory Committee on Alcohol,
Executive Board Director of the Alcohol Education and Rehabilitation Foundation,
Editor of the Drug and Alcohol Review,
Member of a number of other national and state expert committees.



NB.  This paper has drawn on a range of reputable studies relating to alcohol policy, pricing and taxation (see references), as well as the work of fellow alcohol taxation and health advocates including Prof Tim Stockwell (National Drug Research Institute) and Dr Alex Wodak (Director, St Vincents Hospital, Alcohol and Drug Services).



CONTENTS



Introduction  1


Executive Summary1


Background - Key Issues in Alcohol Policy
Alcohol is a major public concern2
Alcohol causes significant problems in the community2
Alcohol misuse has a significant economic impact on Australia3
Alcohol is a legitimate and accepted source of tax revenue3
Alcohol pricing impacts on consumption4
Alcohol taxes can improve public health and safety4
Redirected alcohol and excise can have a beneficial impact5


Background – Current Alcohol Taxation Issues  
The current alcohol excise and taxation system is, at best, inconsistent6
The Wine Equalisation Tax is a replacement alcohol sales tax6
Price based alcohol taxes are unhealthy6
Recent positive changes to alcohol taxation6
Current taxation favours products associated with high levels of harm 7
Increased pre mixed spirit sales may not be harmful7


Recommendations 8


References 9





INTRODUCTION
This brief submission has been prepared for the Senate Economics Legislation Committee to highlight a number of key issues relating to alcohol excise, taxation and public health in Australia.
It is important to note that while the author supports the proposed Excise Amendment Bill (No.1) 2002, and the Customs Tariff Amendment Bill (No.2) 2002, the broader issues associated with alcohol excise and taxation are seen as fundamental to public health interests in Australia.

EXECUTIVE SUMMARY
1.Low alcohol beer excise and taxation arrangements in Australia have been subject to ad hoc changes in response to other taxation and legislative changes over the last ten years.  They have become inconsistent, difficult to administer, and led to increases in alcohol concentrations as a tax avoidance strategy.
2.Streamlining the state low alcohol subsidy taxation and excise arrangements into new excise rates that are applied consistently throughout Australia has real benefits.  The proposed new excise rates are an efficient approximation of current rates and result in minimal fluctuations in price while providing national consistency, and maintaining a price differential between low alcohol beer and full strength beer.  
3.From a public health perspective, broader reform of alcohol taxation and excise in Australia offers a significant opportunity to reduce the annual toll of more than 3,200 alcohol related deaths, 400,000 hospital bed-days and an estimated $4.5 billion associated with addressing alcohol related harm.  
4.From a public health perspective, excise and taxation on alcohol should be based on alcoholic content and strength of drinks rather than cost of manufacture or the method used to produce the alcohol.  Price based taxes, that apply to wine and other products have created incentives for higher consumption of cheap high strength products (e.g. cask wine).
5.From a public health perspective, alcohol taxation and excise need to be collected at a level that at least maintains the real price of alcohol relative to cost of living and income levels.  Achieving this goal requires all alcohol taxation and excise to be indexed.
6.Redirecting excise and taxation collected on alcohol products into public health initiatives to address alcohol related harm is a strategy that has been shown to reduce the level of alcohol related harm.

BACKGROUND - KEY ISSUES IN ALCOHOL POLICY
Alcohol is a major public concern
In a survey conducted for the National Symposium on Alcohol and Violence in 1995, most members of the general public selected alcohol from a list of 14 drugs as their major drug of concern (National Symposium on Alcohol and Violence, Commonwealth of Australia, 1995).
In the last ten years, high profile drink driving campaigns, public recognition that alcohol kills more people than illicit drugs, and growing community concern about violence and public safety have all contributed to awareness of alcohol-related harm across the community.
While recent media and political attention on illicit drugs may have slightly diminished the relative importance of alcohol as a drug of concern, the reality is that most people are much more likely to suffer injury or other harms as a consequence of excessive drinking than they are as a consequence of illicit drug taking.
Alcohol causes significant problems in the community
Internationally acclaimed studies have quantified some of the social and health costs of alcohol misuse in Australia.  These studies clearly show that alcohol misuse has a major impact on crime, violence, accidents, family function, and productivity, not to mention the loss of human life and human potential.  
•A report commissioned by the Commonwealth Department of Health and Family Services found that alcohol is associated with: 44% of fire injuries, 34% of falls and drowning, 30% of car accidents, 50% of assaults, 16% of child abuse, 12% of suicides, and 10% of machine accidents (English et al, 1995).  
•A later study commissioned by the Commonwealth Department of Health and Aged Care reported that in 1997 alone, the misuse of alcohol resulted in 63,164 person-years of life lost (before 70 years), a total of approximately 3,290 premature deaths and over 400,000 hospital bed days (Chikritzhs et al, 1999a).
•A study conducted for the National Drug Strategy (1999) found that over 50% of adult Australians report that they have been the victims of alcohol-related anti-social behaviour in the last 12 months.
•In a series of extensive consultations conducted as part of a youth alcohol campaign, young women identified unwanted and unsafe sex as one of the problems they experience when drinking.  Young men identify increased violence and accidents (Australian Drug Foundation, 1992.; Elliot and Shanahan, Research Report for the National Youth Alcohol Campaign, Department of Health and Family Services, 1999).

Alcohol misuse has a significant economic impact on Australia
A study by Collins and Lapsley (1996) found that alcohol misuse cost the Australian community $4.5 billion in 1992.  This estimate allows for the revenue generated from alcohol, and primarily comprises a range of drug-related harms including premature death, lost productivity, increased hospital and other health costs, road accidents, increased law enforcement costs, etc.  It does not include the many costs associated with crime, violence and other anti-social behaviour that takes place as a consequence of alcohol misuse.
Alcohol is a legitimate and accepted source of tax revenue
Since Australia’s early settlers first celebrated the arrival of rum shipments, alcohol taxation has been a legitimate avenue for the collection of revenue.  In the late 1800’s, 30% of government income was generated from alcohol taxation (rum tax).  In the early 1900’s alcohol taxation still raised over 10% of government revenue.  Currently alcohol taxes contribute only about 2% of all government revenue (including Commonwealth and State revenue).
Studies into consumer spending also consistently indicate that alcohol taxes are progressive in that higher income groups spend more on alcohol and therefore contribute more to taxation revenue (Ashton et al, 1989).
In almost every other country in the world, alcohol taxation is an accepted form of raising government revenue.
Formal studies of public opinion in Australia regarding increased taxation on alcohol have found substantial support for this, providing the proceeds are directed towards treatment, prevention and research on alcohol-related harm (Lang et al, 1995).  There is a long tradition of linking alcohol taxation arrangements with concerns over public health and safety issues.  In Australia this concern has been notably expressed in a number of ways, including:
•The creation of tax advantages for low alcohol beers in both Federal and State tax arrangements.  There is now empirical evidence to support the common-sense view that this has lead to a dramatic increase in the consumption of lower strength beers and contributed to the decline in road crashes in the 1990s (Gruenewald et al, 1999).
•The creation of the Living With Alcohol levy by the Northern Territory government in April 1992 on all alcoholic drinks with an alcohol content in excess of 3% by volume. The proceeds of about $5 million per year were used to fund treatment and prevention programs.
•The recommendation of the National Inquiry into the Wine Industry (1995) that an additional tax be created based on absolute alcohol content to compensate for the “external costs” associated with wine consumption.  This recommendation was supported, if in different forms, by both the chairman and the industry representatives on the committee of inquiry.

Alcohol pricing impacts on consumption
It is a well-documented general economic principle that as the price of an item rises, consumption of that item falls.  The degree to which price has to increase to reduce consumption is expressed in terms of price elasticity.  Although there is some discussion about the precise degree of price elasticity exhibited by alcohol products, it is universally agreed that in the lower price ranges, product preferences are significantly influenced by price.  As a consequence, most experts in the health field are opposed to any move that would see a real reduction in the price, particularly in the lower price brackets, because of the established connection between price of alcohol and consumption patterns.
Studies of consumption patterns in Australia, New Zealand, Canada, Finland, Ireland, Norway, Sweden, the United Kingdom, and the United States have consistently shown that when other factors remain unchanged, a rise in alcohol prices has generally led to a drop in the consumption of alcohol (Collins and Lapsley, 1996; Osterberg, 1992).  There is clear evidence that this basic economic theory of price influencing demand is applicable to the demand for alcohol beverages, despite their dependence-inducing capability (Chaloupka, 1993).
A major review of the international evidence on the price sensitivity of alcohol consumption was conducted under the auspices of the World Health Organisation as part of a wider review of alcohol control policies (Edwards et al, 1994).  The review panel comprised 17 leading scientists drawn from 13 countries.  They identified 53 adequate studies spanning 17 countries which examined data spanning the years of 1870 to 1991.  All of these studies found a negative correlation between consumption and price for wine, all but one did so for spirits and all but three for beer.
Some critics have suggested that price does not impact on heavy drinkers.  However, it has been demonstrated that increasing the price significantly will lead to a decrease in consumption of those who drink excessively (Hawks, 1993).  One classic study found that during an economic recession, it was the ‘heavier’ drinkers who reduced their consumption of alcohol the most (Kendell et al, 1983).
Alcohol taxes can improve public health and safety
In 1992, the Northern Territory introduced a harm reduction levy on all drinks with a strength in excess of 3% alcohol by volume which raised an additional $4 million to $5 million per year for alcohol prevention and treatment. The Northern Territory has the highest proportion of Aboriginal residents of any Australian jurisdiction and has had a per capita alcohol consumption ranging from 22 litres per person to 15 over the past two decades.  A recent evaluation of the impact of this levy identified a 22% reduction in per capita consumption in the first four years, reductions in hazardous drinking patterns and significant reductions in alcohol related morbidity and mortality (Chikritzhs et al, 1999b).


The Northern Territory government also introduced a special levy on cask wine in April 1995 in recognition of its association with high risk drinking and in order to raise funds for prevention and law enforcement initiatives. An evaluation of levels of consumption of cask wine in the Territory demonstrated significant reductions during the brief period of its implementation (Gray et al, 1999). A survey of retail prices conducted by the NT Health Department (O’Reilly, 1998) confirmed that once the levy was lifted, retail prices of cask wine declined by over $2 per cask – and that the price differential between low and full strength beers decreased.
International experience in Sweden where new alcohol taxation arrangements were introduced in 1992 indicates that when alcohol is taxed more consistently through a volumetric tax, the mean price of alcohol falls, while taxation revenue remains the same (Poniki et al, 1997).  The narrowing of the range of prices, with cheaper products becoming more expensive and more expensive products become cheaper, leads to a decline in the consumption of the cheaper products and an increase in the consumption of more expensive products.  Sweden does not have super cheap products like cask wine, but if the same pattern could be translated into Australia, the decline in cask wine consumption and increase in premium wine consumption would have real health benefits.
Redirected alcohol and excise can have a beneficial impact
Along with the Northern Territory Living With Alcohol Program outlined above, the recent creation of the Alcohol Education and Rehabilitation Foundation is a model that offers some scope to improve health outcomes.  While rigorous evaluation of the outcomes achieved by the Alcohol Education and Rehabilitation Foundation are not yet available, there is no doubt that some communities are already benefiting through better access to the support they desire in addressing alcohol related harms.  
Although the research indicates that reductions in the price of alcohol products is likely to lead to increased harm, it is important to acknowledge that reductions in the price of low alcohol products (under 3.5%) or of products that are relatively expensive (e.g. premium wine) will clearly create less problems than if products that are already relatively inexpensive are further reduced in price (e.g. cask wine, some fortified wines, full strength beer, etc.).
Where reductions in price occur as a result of excise or taxation changes, it is desirable that the alcohol producer benefiting from such a reduction make a substantial allocation to addressing any likely externalities through contributions to bodies such as the Alcohol Education and Rehabilitation Foundation.


BACKGROUND – CURRENT ALCOHOL TAXATION ISSUES
The current alcohol excise and taxation system is, at best, inconsistent
There are many thousands of varieties of alcoholic drinks available in Australia today.  Unlike the situation with tobacco, the level of taxation varies enormously across different varieties of alcohol.  Expressed as tax levied per standard drink, present arrangements result in the following unfortunate anomalies in packaged alcohol products: 6 cents for a standard drink of $9 cask wine versus 26 cents for a standard drink from a $9 bottle of wine, 28 cents for a standard drink of 2.7% low alcohol beer versus 24 cents for a standard drink of 4.8% regular strength beer.  A male drinker can attain the maximum daily level of alcohol intake recommended by the National Health and Medical Research Council for only $1.40 and a female drinker can do so for just 70 cents if drinking from a 4 litre wine cask.  Neither of these amounts represents enough to purchase one standard drink of low alcohol beer.
The Wine Equalisation Tax is a replacement alcohol sales tax
The recent introduction of the Wine Equalisation Tax (WET) to replace a price based Wholesale Sales Tax has served no real policy purpose other than to protect the interests of cask wine producers (mostly large multinational companies) at the expense of Australia’s premium wine producers.  It is also at the expense of the health and well being of many disadvantaged communities where the price of cask wine is a primary factor influencing the amount of alcohol consumed.
Price based alcohol taxes are unhealthy
Sales taxes like WET favour cheap products that are more likely to be misused.  Under current arrangements, there is a continuing failure to tax the alcohol content of drinks or to provide incentives for drinkers to choose low alcohol varieties.  There are also no disincentives for heavy drinkers to choose products like cheap high strength cask wine that attract minimal taxation.  
Recent positive changes to alcohol taxation
From a health perspective, the most positive change in recent decisions relating to alcohol excise and taxation has been the decision to bring into line the excise rates on alcoholic beverages with an alcohol content of less than 10% by volume.  No longer are ‘designer drinks’ and alcoholic sodas greatly advantaged over other drinks of exactly the same strength, particularly pre-mixed spirits and expensive beers.  The only exception to this consistent approach is the provision of the 1.15% tax free threshold currently provided to all beer products, but not other ready to drink products, and the fact that apple cider is treated the same as wine although it is clearly in the same category as other ready to drink products.

Current taxation favours products associated with high levels of harm
If alcohol is taxed higher than other products in recognition of the likely costs of externalities resulting from alcohol related harm, those products associated with the highest level of harm should attract higher taxes.
Data from Western Australia (Stockwell et al, 1998) has shown that local rates of per capita consumption of cask wine and high strength beer are most highly associated with local rates of violent incidents and alcohol-related hospital admissions.  This was a comprehensive study of all liquor sales, violent incidents and alcohol-related hospital admissions for the whole state over one year.  By comparison, rates of consumption of bottled wine and low strength beer are weakly or not at all related to local rates of alcohol related violence and hospital admissions.  
In practice, the current alcohol taxation system clearly favours cask wine and full strength beer over competitors that are less likely to be associated with alcohol related harm.
Increased pre mixed spirit sales may not be harmful
Some interest groups (including competing alcohol producers) have argued that recent changes in excise and taxation in the ready to drink segment of the market has reduced prices of pre mixed spirits resulting in more consumption of pre mixed spirits.  Their argument suggests that the increased consumption of pre mix spirits is by young inexperienced drinkers seeking intoxication.  Although this argument may sound appealing, there has been no real evidence presented that these shifts in consumption patterns represent anything more than a slight decrease in the consumption of full strength beer (around 2%) and an equivalent uptake in pre mixed spirit sales by a similar consumer group.  There is no evidence that overall per capita alcohol consumption has increased, and no indication that there has been a significant increase in per capita consumption among particular age or sex groups (e.g. young women).


RECOMMENDATIONS

1.The changes to alcohol excise under the proposed Excise Amendment Bill (No.1) 2002, and the Customs Tariff Amendment Bill (No.2) 2002 should be passed by the Senate.
2.Indexation of alcohol excise and taxation to the Consumer Price Index should be retained and expanded to all alcohol products.
3.Further consideration should be given to offering a low alcohol exemption to all alcohol products under 10% provided that:
·any reduction in alcohol taxation income is offset by increases in other alcohol taxes (revenue neutral),
·the price differential between products above and below 3.5% does not result in the marketing of products that are significantly cheaper than low strength beer and other competitors (maintain existing minimum price),
·any windfall to particular producers is significantly offset by a levy that would be redirected to the Alcohol Education and Rehabilitation Foundation (as occurred with excess beer excise).
4.The current Wine Equalisation Tax should be phased out over a period of time and replaced by an excise based on alcohol content with incentives for lower alcohol wine products.
5.Further consideration should be given to developing a comprehensive alcohol taxation reform strategy that is based on treating all alcohol products as alcohol products and taxing them volumetrically rather than the current system of individual products of similar strength being subject to separate taxation arrangements.  Such a system would provide clearer incentives for consumers to choose lower alcohol content products.  It would also promote the production of better low alcohol products, raise the price of cheap bulk products, continue to raise high levels of government revenue, save government expenditure on alcohol related problems, and would be administratively simple to apply.
6.Further consideration should be given to a small increase in overall alcohol taxation.  Such a move would be strongly supported by the community if it were shown that the extra revenue was to be spent on prevention and treatment services.  An extra cent levied for each standard drink (10g of alcohol) would raise approximately $100 million per year.  A levy of 5 cents per drink was introduced in the early 1990s in the Northern Territory and was estimated to have saved 129 lives, prevented over 2000 hospital admissions and saved $124 million in health care costs and lost productivity.




REFERENCES

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Australian Drug Foundation. (1992) Youth Alcohol and Communities Project Report, Melbourne, Australian Drug Foundation.

Chaloupka, FJ. (1993) Effects of price on alcohol-related problems. Alcohol Health and Research World, 17(1),46-53.

Chikritzhs, T., Jonas, H., Heale, P., Dietze, P., Hanlin, K. and Stockwell, T. (1999a) Alcohol-caused deaths and hospitalisations in Australia. National Alcohol Indicators Project, Bulletin No. 1. National Drug Research Institute, Curtin University of Technology, Perth, WA.

Chikritzhs, T., Stockwell, T., Hendrie, D., Fordham, R., Phillips, M., Ying, F. & Cronin, J. (1999b) The public health, safety and economic benefits of the Northern Territory’s Living With Alcohol Program, 1992/3 to 1995/6. National Drug Research Institute, Curtin University of Technology & The Lewin-Fordham Group, Perth, Western Australia.

Chikritzhs, T., Stockwell, T.R., Heale, P., Dietz, P. and Webb, M. (2000) Trends in alcohol-related road injury in Australia, 1990-1997. National Alcohol Indicators Project, Bulletin No. 2. National Drug Research Institute, Curtin University of Technology, Perth, WA.

Collins, DJ.  & Lapsley, HM. (1996) The social costs of drug abuse in Australia in 1988 and 1992, National Drug Strategy Monograph, Canberra, AGPS.

Commonwealth Department of Health and Family Services (1996) National Drug Strategy: National Household Survey. Canberra:AGPS.

Commonwealth Treasury. (1994) Submission to the Inquiry into the wine grape and wine industry.  Canberra.

Crosbie D., Quinlan F. & Rodigues A. (1997) Drugs Money and Governments, Canberra, Alcohol and other Drugs Council of Australia.

Edwards, G., Anderson, P., Babor, T.F.  et al.  (1994) Alcohol Policy and the Public Good, Oxford, Oxford University Press.


English, D. R., Holman, C.D.J., Milne, E., Winter, M.G., Hulse, G.K., Codde, J.P., Bower C.I., Corti, B., de Klerk, N., Knuiman, M.W., Kurinczuk, J.J., Lewin, G.F. & Ryan, G.A.  (1995) The quantification of drug caused morbidity and mortality in Australia, 1995 edition.  Canberra, Commonwealth Department of Human Services and Health, Canberra.

Gladstones, J. (1997) Health, Tax and the Future of the Western Australian and Australian Wine Industries.  Perth, Wine Industry Association of Western Australia

Gray, D., Saggers, S., Sputore, B. and Bourbon, D. (in press) What works?: A review of evaluated alcohol misuse interventions among Aboriginal Australians. Addiction.

Gruenewald, P., Stockwell, T., Dyskin, E.  & Beel, A. (1999) Beverage sales and drinking and driving: The role of on-premise drinking places.  Journal of Studies on Alcohol, 60, 1, 47-53.

Hawks, D.  (1993) Raising the price of alcohol to reduce consumption: being right is not always popular.  Health Promotion Journal of Australia, 3(2) 18-20.

Jones, R.  (1993) Drug Use and Exposure in the Australian Community.  Canberra: Department of Health, Housing, Local Government and Community Services.

Kendall, R., de Roumanie, M.  & Ritson, B.  (1983) Effect of economic changes on Scottish drinking habits 1978-82.  British Journal of Addiction, 78 (4), 365-379.

Lang, E., Stockwell, T.  & White, M.  (1995) The acceptability of reforms of liquor licensing laws to the general public and to key stakeholders, in: Alcohol Misuse and Violence 5, An Examination of the Appropriateness and Efficacy of Liquor Licensing Laws Across Australia, pp 271-185.  Canberra, Australian Government Publishing Service.

Makkai, T. (1993) The 1993 National Household Survey Report Series Volume 3, Drugs, anti-social behaviour and policy choices, Canberra, Looking Glass Press.

Oddy, W.  and Stockwell, T.  (1995) How much alcohol in Western Australia is consumed in a hazardous or harmful way? Australian Journal of Public Health, 19 (4), 434.

O’Reilly, B. (1998) Liquor outlet alcohol prices survey 1998. Living With Alcohol program, Northern Territory Health Services.


Osterberg, E.  (1992) Effects of alcohol control measures on alcohol consumption.  The International Journal of the Addictions, 27(2)209-225.

Ponicki, W., Holder, H., Gruenewald, P. & Romelsjo, A. (1997) Altering alcohol price by ethanol content: results from a Swedish tax policy in 1992.  Addiction, 92, 7, 859-870.

Stockwell T, Midford R, Masters L, Gahegan M, Phillips M, Daly A, Philp A. (1998) Consumption of different alcoholic beverages as predictors of night-time assault and acute alcohol-related morbidity. Australian and New Zealand Journal of Public Health, 22(2): 237-242.

Wetter, H., Zhang, J., Berg, R. & Casswell, S. (1993) the Effect of prices on alcohol consumption in New Zealand 1983-1981.  Drug and Alcohol Review, 12(2)151-158.

Winegrape and Wine Industry in Australia (1995) A report by the Committee of Inquiry into the Winegrape and Wine Industry.  Draft report, Canberra, March 1995.

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