Calculating the Final Incidence of Australian Indirect Taxes

Transcription

1 Calculatng the Fnal Incdence of Australan Indrect Taxes Rosanna Scutella* Melbourne Insttute of Appled Economc and Socal Research The Unversty of Melbourne Melbourne Insttute Workng Paper No. 18/97 August 1997 ISSN ISBN *Ths paper results from work undertaken for the research project Taxaton Reform: Effcency and Equty, a collaboratve research project usng the resources of the Melbourne Insttute, The Brotherhood of St Laurence and the Commttee for Economc Development of Australa, and funded by the Australan Research Councl. I partcularly wsh to thank Rajat Sood for the ntal work n the constructon of ths paper. I would also lke to thank Davd Johnson, John Freebarn and John Creedy for helpful comments. Melbourne Insttute of Appled Economc and Socal Research The Unversty of Melbourne Parkvlle, Vctora 3052 Australa Telephone (03) Fax (03) Emal r.qn@aesr.unmelb.edu.au WWW Address

2 Table of Contents 1. Introducton Measurng fnal ncdence of ndrect taxes Problem wth margn servces Methodology to redstrbute margn servces Fnal ncdence of Australan ndrect taxes n Concludng comment...36 Appendx 1: Summary of equatons and matrx operatons used to calculate fnal ncdence of ndrect taxes...37 Appendx 2: Input output ndustry classfcaton...39 Appendx 3: Calculatng fnal ncdence and effectve tax rates of ndrect taxes...42 Appendx 4: Effectve tax rates on fnal demand broken down by type of tax...56 References...86

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4 1 1. Introducton Many ndrect taxes operate n Australa, each wth ts own legslaton and admnsterng department whch may be at Federal, State or Local level. Indrect taxes are taxes assessed on producers n respect of the producton, sale, purchase or use of goods and servces whch are charged to the expense of producton (ABS, 1995, p.29). The man Australan ndrect taxes are wholesale sales tax, excse, fnancal nsttutons duty, payroll tax, land tax, stamp dutes, muncpal rates and prmary producton tax 1. Table 1.1 presents the tax revenue collected by each level of for the man Australan ndrect taxes n It s evdent from ths table that the Commonwealth and State Governments rase roughly the same amount of revenue from ndrect taxes, however the two taxes rasng most revenue are excse and wholesale sales tax, whch are rased by the Commonwealth Government. Unpublshed data by the Australan Bureau of Statstcs provde a breakdown by ndustry of the statutory ncdence of the major ndrect taxes n Australa (ABS, 1996a). Ths statutory ncdence s the amount of revenue collected from each ndustry for each ndrect tax. In other words t shows who actually wrtes the cheques to the. Ths nformaton does not show who bears the ultmate burden of the tax as each ndustry may pass on ts ntal burden to purchasng ndustres and/or fnal consumers through hgher prces. Thus, the burden of the tax s passed on round by round to ndrect busness purchases and fnal demand untl the total burden of the tax s passed on to fnal demand. The followng example llustrates ths process. Payroll tax s mposed on medum and large szed frms. In medum to large sze frms n the textles ndustry for example, employers are thus lable to pay payroll tax on the wages, salares, frnge benefts and superannuaton pad to ther employees. Suppose that the textles ndustry pays a total of $200 n payroll tax. Ths extra cost s seen as an ncrease n the cost of nputs used n textles. Now magne that a half of textle products are purchased by the transport equpment ndustry, for seats, etc. and the remanng half by the clothng and footwear ndustry. Ths $200 1 Whle the ABS classfes land tax and muncpal rates as ndrect taxes, they are arguably more of an asset or wealth tax. If classfed as an asset tax, the assumpton that statutory ncdence of the taxes are fully passed forward s debatable.

5 2 Table 1.1: Australan ndrect taxes by level of Government, , ($m) Indrect tax Commonwealth State Local Share of all ndrect taxes (%) Wholesale sales tax 9, Payroll tax - 5, Excses and leves 10, Crude ol and LPG Other excses 9, Agrcultural producton taxes Leves on statutory authortes Franchse taxes - 3, Taxes on mmovable property a - 2,056 4, Taxes on fnancal and captal transactons 19 4, Stamp dutes - 3, Fnancal nsttutons transactons 1 1, taxes Government borrowng guarantee leves Taxes on gamblng - 2, Motor vehcle taxes 21 2, Other ndrect taxes 4,933 1, Total ndrect taxes b 24,519 23,124 4, Source: ABS (1994, Tables 5, 6 and 9). Notes: a) Includes land taxes, muncpal rates, metropoltan mprovement rates and property owner contrbutons to fre brgades. b) Does not nclude fees and fnes. tax burden s splt nto an ncreased cost of $100 on each ndustry. Fnally magne that households purchase motor vehcles and clothng drectly from each respectve ndustry. The $200 s passed onto the purchasers of clothng and footwear and transport equpment as $100 prce ncreases on ntal values of the motor vehcles and clothng produced by the two ndustres. By assumng that the ntal ncdence of the tax s passed forward onto drect and ndrect purchasng ndustres and fnal demand, ths payroll tax on the textle ndustry ends up beng ndrectly passed forward as an ncreased prce to the fnal consumer (n ths case as prvate domestc consumpton but n other cases t may be passed on to consumpton and/or exports). Ths paper explans the process nvolved n evaluatng the fnal ncdence of ndrect taxes n Australa. Secton 2 dscusses the method used to calculate the fnal ncdence of ndrect taxes as provded by Chsholm (1993). Secton 3 hghlghts the problems wth ths methodology and a method to correct ths problem by redstrbutng margn servces, whle Secton 4 provdes the

6 3 process nvolved to undertake ths redstrbuton. Applcatons of ths procedure to data are llustrated n Secton 5 wth some of the more detaled results outlned n appendx 2. Concludng comments are made n Secton Measurng fnal ncdence of ndrect taxes The method used to derve fnal ndrect tax ncdence s developed from Chsholm (1993). The major nnovaton s to nclude the use of margn ndustres n the ntal flows of the nput output matrx ensurng that taxes on nputs to margn servces are fully passed forward onto the good or servce that the consumer purchases. Margn ndustres are servce ndustres whch add value to a product on ts way from the producng ndustry to the purchasng ndustry. Margn ndustres nclude all or part of four dfferent classes of transport (ral, road, sea and ar); servces to transport; marne nsurance servces; retal trade; wholesale trade; and accommodaton, cafes and restaurant servces. The methodology s dfferentated by type of tax so t s possble to nvestgate the mpact of any plausble change n ndrect tax on household consumpton and hence on household welfare. Warren (1989), developng on earler work n Warren (1979), attempted to calculate the mpact of both drect and ndrect taxaton n Australa on the household sector n the form of an ntertemporal study of the Australan tax system between and Warren (1991) furthers the study by lookng at the changng ncdence of ndrect taxes between and Ths analyss ncludes the effects of Australan tax on the dstrbuton of household ncome ncorporatng varous tax shftng assumptons rather than full passng forward onto fnal demand. The Fscal Incdence Study (FIS) performed by the ABS also looks at calculatng the fnal ncdence of ndrect taxes n Australa. The method used s outlned n ABS (1996b pp ). In ths the ABS attempts to calculate ndrect tax rates and apples these to each household s average weekly (as recorded n the Household Expendture Survey) on respectve commodtes. Results of the study are reported n ABS Catalogue No

7 4 By calculatng the fnal ncdence of ndrect taxes on fnal consumpton t s possble to evaluate the effect of ndrect taxes on households. Gven the dfferent pattern of purchases of groups of households defned by demographc type or by ncome range, t s possble usng a method derved by Creedy (1997) to evaluate the effect of the changes n the tax mx on household welfare and on the dstrbuton of household ncome. The method nvolves the use of the Household Expendture Survey (HES) collected by the ABS to estmate consumer demand equatons for varous HES commodty groups, for dfferent ncome levels. After these are estmated t s possble to evaluate the lkely change n welfare for each household n the survey thus allowng for dstrbutonal analyses to be carred out. Creedy and Martn (1997) report the ntal stage of estmaton of ths model usng the 1993 HES. Ths model combned wth the results of ths paper make t possble to evaluate the equty effects of a change n the tax structure. Both a long run and short run model may be used to calculate the fnal ncdence wth ths paper reportng the method and results of the long run model. 2.1 Short run model The short run model conssts of the orgnal nput-output absorpton matrx, n the case of the data for 113 ndustres. Prvate and publc enterprse gross fxed captal reman as fnal demand categores, however the ncrease n stocks component s deleted as t s assumed that the captal stock s fxed n the short term. 2.2 Long run model The methods descrbed below apply to the long run model wth ndrect taxes fallng both ntally and subsequently on prvate and publc enterprse gross fxed captal assumed to be passed forward nto hgher prces on goods and servces bought by fnal buyers for consumpton or for export. The process nvolved n buldng ths long run model s smply to sum prvate and publc enterprse gross fxed captal and move the column nto the ntermedate demand component of the nput output matrx. Thus, wth the nput output data, we dentfy 114 ndustres (compared to 113 ndustres n the short run model). To account for captal nputs to ndustres the gross operatng surplus row s moved to the ntermedate flow

8 5 matrx. Thus, we now have an extra column and row n our ndustry by ndustry absorpton matrx. 2.3 Methodology to calculate fnal ncdence of ndrect taxes Ths secton descrbes the method used by Chsholm (1993). The steps nvolved n the methodology, n calculatng fnal ncdence of ndrect taxes are: calculatng statutory ncdence; settng up an exemptons matrx; calculatng the frst round output coeffcents; calculatng frst round ncdence on busness nputs and fnal demand; flowng the tax on busness nputs through to fnal demand; calculatng total fnal ncdence of ndrect taxes by fnal demand category; and calculatng the effectve tax rates on fnal demand Calculate the Statutory Incdence Vector, SI The statutory ncdence of ndrect taxes represents the actual revenue collected from busness by the Government due to statutory tax oblgatons. Statutory ncdence splt by ndustry for the man Australan ndrect taxes are shown n Table 2.1 and Table 2.2. Equaton 1 shows that the statutory ncdence vector of ndrect taxes on ndustry, SI, comprses the sum of the statutory ncdence on ndustry over type of ndrect tax j, SI, where there are m ndustres and s types of ndrect tax. SI = s j= 1 SI for = 1,..., m and j = 1,..., s. (1) SI1 SI 2 : SI= SI : SIm

9 6 Table 2.1: Statutory ncdence of man ndrect taxes, ($m.) Industry Sales tax Excse dutes Busness Franchse FID Stamp Fees a Dutes b Payroll tax Other ndrect taxes b Total ndrect taxes Agrculture; huntng and trappng Forestry and fshng Mnng Meat and Dary Products Other food products Beverages and Tobacco products Textles Clothng and footwear Wood and wood products Paper and paper products; prntng and publshng Petroleum and coal products Chemcals Rubber and plastc products Non-metallc mneral products Basc metals and products Fabrcated metal products Transport equpment Other machnery and equpment Mscellaneous manufacturng Electrcty, gas and water Constructon Wholesale trade Retal trade Repars Accommodaton, cafes and restaurants Transport and storage Communcaton servces Fnance and nsurance Ownershp of dwellngs Property and busness servces Government admnstraton Educaton Health and Communty servces Cultural and recreatonal servces Personal and Other servces Captal Total Source: ABS (1996a, unpublshed data, Commodty taxes and ndrect taxes nvestgaton) Notes: (a) Franchse fees n ths analyss nclude taxes on gamblng (b) Stamp dutes n ths analyss nclude motor vehcle taxes (c) Included n Other are land taxes, prmary producton taxes, muncpal rates, customs duty on exports, frnge benefts taxes, taxes on nsurance and regulatory servce fees.

10 7 Table 2.2: Statutory ncdence of excse dutes and franchse fees on petroleum products, tobacco products and alcohol, , ($m.) Excse Franchse fee Total excse duty and franchse fee Petroleum and coal products 7,200 1,174 8,374 Tobacco products 1,355 1,575 2,930 Alcohol ,592 Source: ABS (1996a, unpublshed data, Commodty taxes and ndrect taxes nvestgaton) Set up Exemptons Matrx, E Ths matrx comprses the full ndustry by ndustry flow matrx but wth flows between exempt ndustres set at zero. Ths s to recognse the fact that some ndustres are exempt from certan types of tax; for example, goods sold to defence forces are exempt from wholesale sales tax therefore the column showng purchases by defence s set to zero. Where there s only a partal exempton for one tem out of a range of tems covered by a partcular ndustry classfcaton, only a partal adjustment s made. Summng across the rows of the exemptons matrx and addng n non-exempt fnal demand, FDX, gves ndustry s total non-exempt supply of commodtes or servces, TSX. Fnal demand categores that are exempt, for nstance consumpton and exports are exempt from sales tax, are also excluded when calculatng total non-exempt supply. Therefore the exemptons matrx for flows between ndustry and ndustry j for m ndustres s: E11 E E 1 j... E1 E E... E... E j 2 : : E= E 1 E E... E : : E 1 E 2 : E : E m m m mj mm m m (2) and total non-exempt supply of commodty s the sum of ntermedate non-exempt demand, that s the exemptons matrx, over j ndustres for commodty plus non-exempt fnal demand for commodty : m TSX = E + FDX for = j = 1,..., m (3) j=1

11 8 For ths study, the sales tax exempton matrx s not needed (although may be calculated) as the Australan Bureau of Statstcs provdes a margn analyss for the wholesale sales tax, already provdng the frst round ncdence on busness nputs and fnal demand. For other taxes, t needs to be determned how exemptons n the relevant legslaton should be modelled n matrx form Calculatng the frst round output coeffcents, OX Ths nvolves dvdng each element of each row n the exemptons matrx by total non-exempt supply for that row or supplyng ndustry. Ths gves a frst round non-exempt output coeffcents matrx, OX. Ths matrx expresses ndustry s ntermedate non-exempt supply of a commodty or servce to purchasng ndustry j as a percentage of total non-exempt supply of that commodty or servce where there are m ndustres. E TSX E TSX... E j TSX... E m TSX E TSX E TSX... E TSX... E TSX j m OX= E 1 TSX E12 TSX... E TSX... E TSX E 1 TSX E 2 TSX... E TSX... E TSX m m m m m mj m mm m (4) Frst round ncdence on busness nputs, TI Increases n costs to varous ndustres due to taxes such as wholesale sales tax are assumed to be fully passed forward to purchasng ndustres or fnal demand. The outcome on purchasng ndustres represents frst round ncdence on busness nputs, TI. Frst round ncdence on busness nputs s obtaned by multplyng the statutory ncdence vector wth the frst round output coeffcents matrx. TI = SI OX (5)

12 9 [ 1 2 m] TI = SI SI... SI... SI SI1 E11 TSX1 + SI2 E21 TSX SI E 1 TSX SI1 E12 TSX1 + SI2 E22 TSX SI E TSX 2 : TI= SI1 E1 TSX1 + SI2 E2 TSX SI E TSX : SI1 E1 TSX1 + SI2 E2 TSX SI E TSX E TSX E TSX... E j TSX... E m TSX E TSX E TSX... E TSX... E TSX j m : : : : E 1 TSX E 2 TSX E TSX 1... E TSX : : : : E 1 TSX E 2 TSX... E TSX... E TSX m m m m m mj m mm m m m m m m m j j m mj m m m m mm m Frst round ncdence on fnal demand Some ndustres that are exposed to ndrect taxes sell products or servces drectly to households, s or foregn consumers. For these the ncdence of the tax s passed forward to fnal demand n the frst round. Frst round ncdence on fnal demand, TA, s obtaned by multplyng the statutory tax pad n each ndustry by non-exempt fnal demand as a percentage of total nonexempt fnal supply for each ndustry. The # and the dvson symbol n equaton 6 refer to element by element multplcaton and dvson and not standard matrx multplcaton and dvson respectvely. 2 Ths notaton s used throughout ths paper. TA = SI#( FDX / TSX ) for = 1,..., m (6) 2 Element by element dvson n matrces may be calculated usng matrx operatons by the followng. Consder m- vectors such that: c = a / b = 1,, m. The symbol ^ dagonalses a vector so that: Then, c = b 1 a b1 0 0 b = b m

13 10 SI SI : TA= SI : SI 1 2 FDX TSX FDX TSX : # FDX TSX : FDX m TSX m SI1 FDX1 TSX1 SI2 FDX TSX 2 2 : = SI FDX TSX : SIm FDX m TSX m m The result s the statutory ncdence for each ndustry multpled by the proporton of fnal nonexempt demand n total non-exempt supply, for each ndustry. In the case of sales tax, the above steps are not necessary thanks to ABS data on margn matrces. For other taxes, when the exempton matrx was created, the non-exempt fnal demand and nonexempt total supply vectors were also computed Fnal ncdence of ndrect taxes Calculatng the fnal ncdence of ndrect taxes requres generatng a matrx whch does not allow for exemptons, because those ndustres whch are exempt from, say, sales tax, only get the beneft of the exempton for taxes on ther drect nputs, not for tax on nputs to ther nputs. Thus rather than usng the exemptons matrx to calculate the output coeffcents the orgnal ndustry by ndustry flow matrx s used wth no exemptons. Each flow n ths matrx s dvded by total supply of that supplyng ndustry to obtan the new output coeffcents matrx, O. Flowng Tax on Busness Inputs through to Fnal Demand Now that we have our new output coeffcents matrx the next step s to see how taxes on busness nputs flow through the output coeffcents matrx to fnd how those taxes fall on fnal demand. However, because a fnal good may use nputs that have been through several stages of producton, t s not possble to shft all of the taxes on busness nputs through to fnal demand n one round. Each round, a porton of an ndustry s output wll be purchased at a fnal demand level and the remander wll be used by other ndustres as an nput to ther producton whch they wll n turn supply to ether fnal purchasers or used as nputs to other ndustres producton processes and so on. Eventually, after many rounds, all of the nputs wll end up n fnal demand and correspondngly all of the tax on busness nputs wll be forwarded to fnal demand.

14 11 In each round, the porton of tax passed on to fnal demand n each ndustry, Z,s gven by dvdng the components of the fnal demand vector by the total supply vector: Z = FD / TS for = 1,...,m (7) In ths case, no exemptons are made from ether vector as tax on nputs s borne by all sectors and fnal demand components. When the amount of nput tax remanng from a prevous round s multpled element by element by Z t gves the amount of tax forwarded on to fnal demand n the current round. The amount of tax remanng on busness nputs s TI I n round 2, TI O 2 n-2 n round 3, TI O n round 4 and TI O n round n. After n+2 rounds, the amount of tax that has been forwarded to fnal demand s gven by the seres: ( TI I) # Z + ( TI O) # Z + ( TI O 2 n ) # Z+ + ( TI O ) # Z Whch smplfes to: 2 n [ TI (I + O + O O )] # Z When n gets very large, the O n term becomes very small. When n s nfnte the expresson n the round brackets s an nfnte geometrc seres and so can be smplfed to: 1 TB = [TI (I O ) ] #Z for = j = 1,..., m (8) gvng TB, the subsequent rounds ncdence on fnal demand. If we let: A = (I - O) -1 Then: TB = [TI A] # Z

15 12 [ 1 2 j m] TB= { TI TI... TI... TI A11 A12... A1 j... A1 A A... A j... A : : : A1 A2... A... A : : : A 1 A 2... A... A m m m mj mm m m }# Z ( TI1 A11 + TI2 A TI j A TIm Am 1) ( FD1 / TS1) ( TI1 A12 + TI2 A TI j A TIm Am2) ( FD2 / TS2) : = ( TI1 A1j + TI2 A2 j TI j A TIm Amj) ( FD / TS) : ( TI1 A1m + TI2 A2m TI j Am TIm Amm) ( FDm / TSm) Total fnal ncdence of tax by fnal demand category, TFI Total fnal ncdence of ndrect taxes, TFI, s the sum of frst round ncdence on fnal demand and subsequent rounds ncdence. Thus, TFI = TA + TB for = 1,...,m (9) Total fnal ncdence represents the dollar amount of tax pad by total fnal demand. To calculate the fnal ncdence on each fnal demand component one needs to take each fnal demand components share of total demand and multply t by both frst round ncdence on fnal demand and subsequent rounds ncdence. For nstance when calculatng total fnal ncdence on prvate consumpton, TFIPC, n the case of the wholesale sales tax frst round ncdence on prvate consumpton s equvalent to frst round ncdence on fnal demand as other fnal demand components are exempt from wholesale sales tax n the frst round. When calculatng subsequent rounds ncdence on households, however, only the proporton of that ncdence attrbutable to prvate consumpton must be taken. Ths s shown formally n equaton 10 where PC refers to prvate fnal consumpton. TFIPC = TB (PC /FD ) + TA for = 1,...,m (10)

16 13 Retanng the wholesale sales tax example, fnal ncdence on exports only conssts of subsequent rounds ncdence on exports. Thus, fnal ncdence on exports, TFIX s represented by equaton 11 where X refers to exports. TFIX = TB (X /FD ) for = 1,...,m (11) In the case of many other ndrect taxes, such as payroll tax, all fnal demand components are effected n the frst round thus equaton 10 and 11 wll thus be replaced by equatons 12 and 13 respectvely where PCX and XX represent non-exempt prvate fnal consumpton and non-exempt exports respectvely. TFIPC = TB (PC /FD ) + TA (PCX /FDX ) for = 1,...,m (12) TFIX = TB (X /FD ) + TA (XX /FDX ) for = 1,...,m (13) Effectve tax rates for each fnal demand component can be calculated by dvdng the fnal ncdence of the tax by the level of each fnal demand component, for example, prvate fnal consumpton. 3. Problem wth margn servces Margn ndustres are servce ndustres whch add value to a product on ts way from the producng ndustry to the purchasng ndustry. They nclude amounts pad to ndustres that are nvolved n the transport and marketng of goods for sale to ntermedate or fnal purchasers. Those ndustres that provde margn servces are Wholesale and Retal Trade (ANZSIC 4501 and 5101 respectvely), Accommodaton, cafes and restaurants (5701), Road Transport (6101), Ral Transport (6201), Water Transport (6301), Ar and Space Transport (6401), Servces to Transport (6601) and Insurance (7401). Chsholm (1993) makes no menton of margns. Hs method uses the basc values table to derve the exemptons and output coeffcents matrx. Usng the Chsholm method, margns are represented by flows from the margn ndustres to the usage ndustres and to fnal demand, as

17 14 the case may be. If margn servces were ncluded when valung flows, margns would flow frst to the supplyng producer whose output, ncludng margn payments, s then absorbed by users. To llustrate ths dstncton, consder the followng llustraton: Gran s used by the bakery products ndustry to create bread. The gran s road transported to the bakery. After the gran has been made nto bread, t s acqured by a supermarket (retal trade) to be sold to fnal prvate consumers. Under basc values, flows are recorded from gran and road transport nto bakeres whle fnshed bread and road transport flow nto fnal prvate consumpton, a total of four flows. Conversely when margns are ncluded wth the basc value transactons the value of road transport would be ncorporated n the flow between gran and the purchasng ndustry, bakeres. The retal sales margn would also be represented as an added value n the flow between bakeres and fnal consumpton demand. In ths method all the transactons are represented by just two flows. In consderng margn flows t s noted that not all of the supples of the tradtonal margn ndustres outlned above are margn servces. For example, road transport ncludes non-margn servces such as passenger bus servces whch s a fnal servce n ts own rght. Chsholm s technque allows for the passng on of taxes on nputs to fnal demand. However, hs method fals to allocate taxes on margn ndustres, or nputs to margn ndustres, to the fnal sales of commodtes that use those margns. To understand the problem, consder a tax on a regular (non-margn) supply commodty lke Other Basc Chemcals (OBC). OBC s an nput for a number of usage ndustry groups, but assume that t s not used by any margn ndustres. A commodty tax on OBC would be passed on to the relevant non-margn ndustres, as well as to fnal demand, through the matrx nverson outlned above n Secton 2. Compare a tax on a commodty that s heavly used by some margn ndustres: petroleum and coal. A tax on petrol would not only affect the prce of ntermedate nputs to the car ndustry, but would ncrease the prce of road transport, wholesale trade and retal trade. These ncreased margns would n turn ncrease the cost of car producton. All ths s accounted for n the matrx nverson carred out above. However, what s not accounted for s the effect that ncreased prces for transport and wholesale trade would have on the fnal purchase prce of motor vehcles for fnal consumers. Chsholm s method pushes taxes on nputs to margns through to the basc values of the fnal sales of margns. But he does not allocate the tax-boosted basc value of margn ndustres at the fnal demand level to those commodtes that use margn servces to get

18 15 goods to fnal purchasers. Lookng at fnal demand, a tax on an nput to, say, road transport, would affect only the basc value fgure. Assume that t ncreases that fgure by $300 mllon. To correctly show how the prces of fnal commodtes that use road transport are affected, one needs to allocate the $300 mllon to motor vehcles, pants, clothng and whatever other commodtes use road transport at the fnal stage of delvery to the consumer. Consder the followng llustraton represented n Fgure 3-1. Fuel and fertlser are two products derved from nputs of prmary factors, say for example labour. Fuel feeds entrely nto transport and fertlser entrely nto gran. Transport feeds nto gran, bakeres and fnal consumpton because t s requred to move fertlser to the land used to grow gran, gran to bakeres and from bakeres to the fnal user as fnshed bread s transported to consumers. Intutvely from ths dagram, as bread s the only good drectly purchased by the fnal consumer, t s expected that a tax fallng on any drect or ndrect nput to bread would ultmately mpact on fnal consumers usage of bread from the bakery. The Chsholm method outlned above, does not ensure ths wll occur. In basc values ths dagram suggests the absorpton matrx presented n Table 3.1. Note that the usage of transport at basc values s represented by drect flows from the transport ndustry to the ndustres (or fnal consumer) purchasng the goods. For nstance the transport ndustry s used to delver fertlser to the gran ndustry. Ths s recorded at basc values as a transacton between the transport ndustry and the gran ndustry. Table 3.1: Absorpton matrx at basc values Industry Fertlser Fuel Gran Transport Bakery Fnal Total Commodty Consumpton Supply Fertlser 0 0 $ $100 Fuel $ $300 Gran $200 0 $200 Transport 0 0 $100 0 $100 $100 $300 Bakery $300 $300 Prmary factors $100 $

19 16 Fgure 3-1: Flow dagram for ndustry by ndustry transactons Prmary factors $100 $300 Fertlser Fuel $100 $100 $300 $200 Gran $100 Transport Bakery $300 $100 Fnal consumer Followng the method outlned n Secton 2 the output coeffcents matrx (also the exemptons matrx n ths case) s: OX = O = Suppose that a 10% tax on fuel s leved.

20 17 SI = [ ] Thus, frst round ncdence on busness nputs s: TI = SI OX =[ ] Frst round ncdence on busness nputs falls, as expected, on transport. As there s no frst round ncdence on fnal demand equaton 8 gves us fnal ncdence thus: TB = { TI } # TB = # 0 = Thus the orgnal $30 tax on fuel ends up on fnal consumpton of transport and fnal consumpton of bakery products n $10 and $20 shares respectvely. But the only fnal good purchased by the consumer s bread. Hence, the $10 of tax makng ts way nto the fnal basc value of transport must be reallocated to the purchaser prce of fnal bakery products. Whlst ths s a trvally smple exercse n the above example, where there are many margn ndustres and many non-margn ndustres that use margns, the allocaton becomes more complcated. To take account of margn servces to push the fnal ncdence of ndrect taxes to fnal consumers an extra step s needed n the methodology. Pror to calculatng any sort of ncdence, the supply of margn servces must be redstrbuted to the commodtes that use them, and nputs to margn servces must be redstrbuted to the ndustres whch rely on margn servces to ncrease the value of ther products. The prevous example wth ths extra step s shown below.

21 18 The new transformed absorpton, fnal demand and total supply matrces are llustrated n Table 3.2. Table 3.2: Absorpton matrx wth margn transactons redstrbuted Industry Fertlser Fuel Gran Bakery Fnal Total Commodty Consumpton Supply Fertlser 0 0 $ $200 Fuel $100 0 $100 $100 0 $300 Gran $300 0 $300 Bakery $400 $400 Prmary factors $100 $ In Table 3.2 the transport ndustry row and column from Table 3.1 have been elmnated due to the redstrbuton of all outputs of, and nputs to, transport. The $100 of transport used by gran to transport fertlser to gran has been redstrbuted n the flow between fertlser to gran. The $100 of transport used to move gran to the bakery has been redstrbuted to the flow between gran and the bakery, and the $100 of transport used to move bread to the fnal consumer has been redstrbuted n the flow whch brngs the good whch the fnal consumer uses, bread (or the bakery) to the consumer. To redstrbute the nputs to transport the $300 of fuel used by transport s splt evenly nto fertlsers usage of fuel, grans usage of fuel and the bakery s usage of fuel, as these three ndustres all rely on transport to get ther products to purchasers thus addng value to ther products. The sum of prmary factors, fnal demand and total supply do not change wth the redstrbuton. The new transformed output coeffcents matrx s: O = If the prevous example of a 10% tax on fuel s mposed, frst round ncdence falls on fertlser, gran and the bakery (as the margn servce transport has been redstrbuted):

22 TI = Fnal ncdence now falls solely on fnal consumers consumpton of bread (bakery) as can be seen below. 0 0 TB = TFI = 0 30 Ths s the requred result and thus the larger task of ncludng these extra steps to the larger absorpton matrx must be appled. Ths s complcated as there are many flows to take account of and margn servces use more than one nput, unlke the above example. Fortunately, detaled data s avalable n ABS (1996a, Tables 25 to 34) on the value of each margn used by each commodty at both the ntermedate level and for the varous fnal demand categores. Ths allows the redstrbuton of the usage of margn servces to smply nvolve addng the margn tables to the ntal nput-output table. When workng out how tax endng up on fnal basc values of margns should be reallocated to non-margn commodtes, one must allow for the non-margn producton of the margn ndustres. It would be erroneous to allocate non-margn basc values of margn ndustres to non-margn ndustres. For example, passenger bus servces (or any ncrease n ther value) should reman a flow between road transport and fnal consumers and not be allocated to other commodtes along wth the margn component of road transport. To calculate the correct proporton of basc value for margn ndustres that should reman wth each margn ndustry, one needs to calculate the margn proporton of ther output. These proportons for are presented n Table 3.3.

23 20 Table 3.3: Proporton of tradtonal margn ndustry output attrbutable to actual margn servces, Margn ndustry Proporton of margn ndustry output that s margn servce ($m.) (per cent) Wholesale Trade [32,469.0/34,002.7) = 95.5 Retal Trade [34,216.5/34,953.7] = Accommodaton and restaurants [4,189.8/16,314.5] = 25.7 Road Transport [10,096.1/14,606.4] = 69.0 Ral, ppelne and other transport [2,944.8/4,992.2) = Water transport [815.2/4,189.8] = 19.5 Ar and space transport [439.6/11,495.7] = 3.8 Servces to transport; storage [441.4/11,050.2] = 4.0 Insurance [68.7/8,352.6] = 0.82 Source: ABS (1996c, Table 1) 3 4. Methodology to redstrbute margn servces As mentoned above the margn matrces are added to the orgnal absorpton matrx to redstrbute the usage of margn servces. After ths, margn servces supply must be deleted from each correspondng margn row. Ths apples to the commodtes wholesale trade (denoted by subscrpts and j = 83); retal trade (, j = 84); accommodaton, cafes and restaurants (, j = 87); road transport (, j = 88); ral, ppelne and other transport (, j = 89); water transport (, j = 90); ar and space transport (, j = 91); servces to transport, storage (, j = 92); and nsurance (, j = 97). Note that only the proportons on actual margn servces are deleted whch were calculated n Table 3.3 above. The operatons needed for the calculatons are as follows: AA = (1-.955)ADDMARG f = 83, = ( )ADDMARG f = 84, = (1-.257)ADDMARG f = 87, = (1-.69)ADDMARG f = 88, = ( )ADDMARG f = 89, (14) 3 The values n ths publcaton correspond to the sum of total supply n each of the margn tables n ABS (1996a).

24 21 = (1-.195)ADDMARG f = 90, = (1-.038)ADDMARG f = 91, = (1-.04)ADDMARG f = 92, = ( )ADDMARG f = 97, and = ADDMARG otherwse. Where the matrx ADDMARG s the orgnal ntermedate ndustry by ndustry flow matrx from the nput output table wth margn matrces added on. Ths also needs to be performed on fnal demand where PCAUG, GGIAUG, STOCAUG and XAUG n equatons 15 to 18 refer to prvate fnal consumpton, general gross fxed captal, ncreases n stocks and exports respectvely wth margn flows added on. The reason why consumpton s not ncluded n the followng calculatons s because there are no margn flows to consumpton reported n ABS (1996a, Tables 25-34). Thus, fnal demand and total supply wth margn flows redstrbuted are; for Prvate fnal consumpton, PCA = (1-.955)PCAUG f = 83, = ( )PCAUG f = 84, = (1-.257)PCAUG f = 87, = (1-.69)PCAUG f = 88, = ( )PCAUG f = 89, (15) = (1-.195)PCAUG f = 90, = (1-.038)PCAUG f = 91, = (1-.04)PCAUG f = 92, = ( )PCAUG f = 97, and = PCAUG otherwse; for Government gross fxed captal, GIA = (1-.955)GGIAUG f = 83, = ( )GGIAUG f = 84, = (1-.257)GGIAUG f = 87, = (1-.69)GGIAUG f = 88, = ( )GGIAUG f = 89, (16)

25 22 = (1-.195)GGIAUG f = 90, = (1-.038)GGIAUG f = 91, = (1-.04)GGIAUG f = 92, = ( )GGIAUG f = 97, and = GGIAUG otherwse; for ncrease n stocks, ISA = (1-.955)STOCAUG f = 83, = ( )STOCAUG f = 84, = (1-.257)STOCAUG f = 87, = (1-.69)STOCAUG f = 88, = ( )STOCAUG f = 89, (17) = (1-.195)STOCAUG f = 90, = (1-.038)STOCAUG f = 91, = (1-.04)STOCAUG f = 92, = ( )STOCAUG f = 97, and = STOCAUG otherwse; and for exports, XA = (1-.955)XAUG f = 83, = ( )XAUG f = 84, = (1-.257)XAUG f = 87, = (1-.69)XAUG f = 88, = ( )XAUG f = 89, (18) = (1-.195)XAUG f = 90, = (1-.038)XAUG f = 91, = (1-.04)XAUG f = 92, = ( )XAUG f = 96, and = XAUG otherwse. Therefore, fnal demand (FDA ) and total supply (TSA ) are equvalent to the followng expressons,

26 23 where GC refers to general consumpton, FDA = PCAUG + GC + GGIAUG + STOCAUG + XAUG (19) and, n TSA = AA + FDA j= 1 (20) Inputs to margn servces (columns) also need to be redstrbuted. In order to do ths we need to determne the ncreases n the total supply of each non-margn commodty due to margn servces. These can be found n the total supply vectors from each margn table. The ral transport margn referred to n the followng dscusson ncludes ppelne margn servces. Once we have these vectors, non-margn nputs to margn servces share of ntermedate nput usage for each margn s calculated. Ths s due to the many nputs whch margn servces use. If, as n the example n Secton 3, margn servces used only one nput each, then each margns share of that nput to ts total ntermedate nput usage would be one. Intermedate nput usage s calculated as the sum of all ntermedate nputs, that s: U = AA, for all j j 114 = 1 (21) The shares are calculated as follows: SWT = AA / U f j = 83 SRT = AA / U f j = 84 SACC = AA / U f j = 87 SRD = 069. AA / U f j = 88 SRL = AA / U f j = 89 SWTR = AA / U f j = 90 SAIR = AA / U f j = 91 SSER = 004. AA / U f j = 92, and SINS 1 j 1 j 1 j 1 j 1 j 1 j 1 j 1 j = AA. U j / 1 f j = 97. (22) Multply the shares by the ncreases n total supply due to the use of margn servce:

27 24 WT = SWT WSTS RT = SRT RSTS ACC = SACC RESTS RD = SRD ROADTS RL = SRL RAILTS WTR = SWTR WATRTS AIR = SAIR AIRTS SER = SSER PORTTS INS = SINS MARITS (23) Now that the nputs to margn servces have been redstrbuted they can be deleted from each respectve margn column n the AA matrx, that s: AB = ( ) AA f j = 83, = ( ) AA f j = 84, = ( ) AA f j = 87, = ( ) AA f j = 88, = ( ) AA f j = 89, = ( ) AA f j = 90, = ( ) AA f j = 91, = ( ) AA f j = 92, = ( ) AA f j = 97, and = AA otherwse. (24) The fnal step s to add the matrces resultng from equatons 18 and 19 to the resultng AB matrx from equaton 24: AC = AB + WT + RT + ACC + RD + RL + WTR + AIR + SER + INS (25) Now we have a new transformed absorpton matrx denoted by AC. Fnal demand categores are FDA (for total demand), PCA (prvate fnal consumpton ), GC ( consumpton ), GIA (general gross fxed captal ), ISA

28 25 (ncrease n stocks), and XA (exports) respectvely. Total supply s TSA. For convenence rename these; A FD PC GC GGI STOC X TS = AC = FDA = PCA = GC = = GIA = ISA XA = TSA 4.1 Redstrbutng statutory ncdence on margn servces Statutory ncdence of taxes on margn servces also need to be redstrbuted. To do ths calculate each non margn servce ndustry s usage of margn servces. If A denotes the orgnal undstrbuted ntermedate flow matrx, then ntermedate usage of margn servces s: IU = A ( ) A ( ) A ( ) A ( ) A 114 j= ( ) A ( ) A ( ) A ( ) A ( ) A for = 83, 84, 87, 88, 89, 90, 91, 92 and 97, and 97 (26) = 114 j= 1 A for any other.

29 26 SIS = ( ) A / IU f j = 83, = ( ) A / IU f j = 84, = ( ) A / IU f j = 87, = ( ) A / IU f j = 88, = ( ) A / IU f j = 89, = ( ) A / IU f j = 90, = ( ) A / IU f j = 91, = ( ) A / IU f j = 92, = ( ) A / IU f j = 97, and = A / IU otherwse for = 83, 84, 87, 88, 89, 90, 91, 92 and 97. (27) The transpose of the share matrx 4 s used n calculatons. Therefore, let: SIS = SIS Once the share matrx has been calculated t s possble to redstrbute the statutory ncdence on margn servces to non-margn commodtes and servces whch use margns n ther producton process. Recall from equaton 1 that the matrx SI s the statutory ncdence on ndustry for ndrect tax j. Thus f we treat the statutory ncdence of each ndrect tax as separate vectors the redstrbuted statutory ncdence vector for each j are: WT = SI SIS 83 j 83 RT = SI SIS 84 j 84 ACC = SI SIS 87 j 87 RD = SI SIS 88 j 88 RL = SI SIS 89 j 89 WTR = SI SIS 90 j 90 AIR = SI SIS 91 j 91 SER = SI SIS 92 j 92 INS = SI SIS 97 j 97 (28) 4 Note that ths matrx may be nterpreted as nne separate vectors rather than one matrx, one for each correspondng margn ndustry.

30 27 The matrces referred to n equaton 28 are calculated separately for each tax (denoted by the subscrpt j). Thus rather than thnkng of SI and say, WT, as matrces thnk of them as groups of j vectors each of whch should be treated separately n the calculaton of each taxes fnal ncdence. Margn servces statutory ncdence must be deleted from the correspondng row n SI for each tax: SI = ( ) SI f = 83, = ( ) SI f = 84, = ( ) SI f = 87, = ( ) SI f = 88, = ( ) SI f = 89, = ( ) SI f = 90, = ( ) SI f = 91, = ( ) SI f = 92, = ( ) SI f = 97, and = SI otherwse. (29) Fnally the results of equatons 28 must be added to the statutory ncdence vectors resultng from equaton 29 for each tax; SI* = SI + WT + RT + ACC + RD + WTR + AIR + SER + INS (30) Agan, j refers to a partcular tax s statutory ncdence. In appendx 1 the SI * vectors are denoted as SIEXC for excse, SIWST for the wholesale sales tax and so forth. These vector names smply replace the j subscrpt n order to smplfy the notaton n the equatons. Gven a new transformed nput-output table and transformed statutory ncdence, the method outlned n Secton 2 can be appled to calculate the fnal ncdence of ndrect taxes. The results of ths wll be presented n the next secton. See appendx 1 for the detal behnd the equatons used to derve the ncdence of varous ndrect taxes n Australa.

31 28 5. Fnal ncdence of Australan ndrect taxes n Ths secton outlnes the major results of combnng the redstrbuton method of Secton 4 wth the methodology to fnd fnal ndrect tax ncdence presented n Secton 2. Table 5.1 shows that over half of Australa s tax ncdence ntally gets passed onto busness nputs n the frst round. Thus, Australa s ndrect tax system s far from beng a consumpton tax system n whch frst round ncdence s largely restrcted to consumpton. Table 5.1: Frst round ncdence of Australan ndrect taxes, , ($m.) Busness nputs Prvate fnal consumpton Exports Total fnal demand Stamp duty Wholesale sales tax Muncpal rates Prmary producton tax Payroll tax Land tax Busness franchse fees Fnancal nsttutons duty Excse dutes Other ndrect taxes Total Passng on ths frst round ncdence on busness nputs through to fnal demand round by round and addng frst round ncdence of fnal demand gves the fnal ncdence of Australan ndrect taxes presented n Table 5.2. Although prvate fnal consumpton bears the majorty of the fnal burden of ndrect taxes, exports and general consumpton and nvestment are also sgnfcantly effected by the Australan ndrect tax system. The table shows that ncdence on exports (n dollars) s relatvely hgh for Australa s tradtonal export ndustres such as prmary produce and wool; mnng; and metal products. Prvate consumers bear the brunt of ndrect taxes through goods such as alcohol and tobacco products, petroleum and coal products and motor vehcles and parts. Servce ndustres lke sport, gamblng and recreatonal servces and accommodaton, cafes and restaurants also have a hgh mpact on prvate consumers.

32 29 Table 5.2: Fnal ncdence of Australan ndrect taxes, , ($m.) Prvate fnal consumpton consumpton gross fxed captal Exports Total fnal demand Sheep Grans Beef cattle Dary cattle Pgs Poultry Other agrculture Servces to agrculture; huntng and trappng Forestry and loggng Commercal fshng Coal; ol and gas Iron ores Non-ferrous metal ores Other mnng Servces to mnng Meat and meat products Dary products Frut and vegetable products Ols and fats Flour mll products and cereal foods Bakery products Confectonery Other food products Soft drnks, cordals and syrups Beer and malt Wne and sprts Tobacco products Wool scourng Textle fbres, yarns and woven fabrcs Textle products Knttng mll products Clothng Footwear Leather and leather products Sawmll products Plywood, veneer and fabrcated wood Other wood products Pulp, paper and paperboard Paperboard contaners; paper bags and sacks Other paper products Prntng and servces to prntng Publshng; recorded meda and publshng Petroleum and coal products Fertlsers Other basc chemcals contnued

33 30 Table 5.2 (cont.): Fnal ncdence of Australan ndrect taxes, , ($m.) Prvate fnal consumpton consumpton gross fxed captal Exports Total fnal demand Pants Medcnal and pharmaceutcal products; pestcdes Soap and other detergents Cosmetcs and toletry preparatons Other chemcal products Rubber products Plastc products Glass and glass products Ceramc products Cement and lme Concrete slurry Plaster and other concrete products Other non-metallc mneral products Iron and steel Basc non-ferrous metal and products Structural metal products Sheet metal products Fabrcated metal products Motor vehcles and parts; other transport equpment Shps and boats Ralway equpment Arcraft Photographc and scentfc equpment Electronc equpment Household applances Other electrcal equpment Agrcultural machnery Mnng and constructon machnery; lftng and materal handlng equpment Other machnery and equpment Prefabrcated buldngs Furnture Other manufacturng Electrcty supply Gas supply Water supply; sewerage and dranage servces Resdental buldng constructon Other constructon Wholesale trade Retal trade Mechancal repars Other repars Accommodaton, cafes and restaurants Road transport Ral, ppelne and other transport Water transport Ar and space transport contnued

34 Table 5.2 (cont.): Fnal ncdence of Australan ndrect taxes, , ($m.) 31 Prvate fnal consumpton consumpton gross fxed captal Exports Total fnal demand Servces to transport; storage Communcaton servces Bankng Non-bank fnance Fnancal asset nvestors Insurance Servces to fnance, nvestment and nsurance Ownershp of dwellngs Other property servces Scentfc research, techncal and computer servces Legal, accountng, marketng and busness management servces Other busness servces Government admnstraton Defence Educaton Health servces Communty servces Moton pcture, rado and televson servces Lbrares, museums and the arts Sport, gamblng and recreatonal servces Personal servces Other servces Total Note: Total fnal demand ncludes ncreases (or decreases) n stocks thus t may be equvalent to the sum of the fnal demand components dsplayed n ths table. Table 5.3 provdes the total effectve tax rates on each fnal demand category by ndustry. For a more detaled breakdown of effectve tax rates on fnal demand by type of tax see Appendx 2. The results n ths table support prevous comments made about the dollar value of fnal ncdence: exports are partcularly hard ht for tradtonal export ndustres, prvate consumers face hgh effectve tax rates for alcohol and tobacco products; petroleum and coal products; motor vehcles and parts; sport, gamblng and recreatonal servces and accommodaton, cafes and restaurants. Interestngly, consumers of tobacco products face a tax mark up of nearly 230 per cent. Also, prvate consumers face hgh effectve tax rates for prntng servces and other chemcals.

35 32 Table 5.3: Effectve tax rates on fnal demand for Australan ndrect taxes, , per cent Prvate fnal consumpton consumpton gross fxed captal Exports Total fnal demand Sheep Grans Beef cattle Dary cattle Pgs Poultry Other agrculture Servces to agrculture; huntng and trappng Forestry and loggng Commercal fshng Coal; ol and gas Iron ores Non-ferrous metal ores Other mnng Servces to mnng Meat and meat products Dary products Frut and vegetable products Ols and fats Flour mll products and cereal foods Bakery products Confectonery Other food products Soft drnks, cordals and syrups Beer and malt Wne and sprts Tobacco products Wool scourng Textle fbres, yarns and woven fabrcs Textle products Knttng mll products Clothng Footwear Leather and leather products Sawmll products Plywood, veneer and fabrcated wood Other wood products Pulp, paper and paperboard Paperboard contaners; paper bags and sacks Other paper products Prntng and servces to prntng Publshng; recorded meda and publshng Petroleum and coal products Fertlsers contnued