Smith on Australian State Income Taxation

Julie Smith, Australian National University Research School of Social Sciences, has posted Australian State Income Taxation: A Historical Perspective, Australian Tax Forum 30 (2015): 679-712:

Contrasting with social insurance taxes and the key revenue raising role of VAT for northern European welfare states, Australia’s income tax has funded expansion of Australia’s social security system. The uniform income tax plan of 1942 unified Australia’s system of income taxes, and was central to funding the introduction of Australia’s unique social security system, establishing national child endowment, unemployment benefits and the widows’ pension in 1944.

This article will describe the increasing reliance of Australian states on income taxation during the period 1915 to 1942, and the constraints arising from the increasing mobility of taxpayers and post-Federation economic integration; show how these states’ income tax policies responded to the economic shocks of the Depression which depleted the states’ revenues contemporaneously with increasing demands on governments to provide social protection; and identify how the concepts, design and administration of state income taxes were embedded in Australia’s national tax and social security systems established between 1942 and 1944.

The design of Australia’s unified income tax system was not based on a clean slate, nor was it simply an expedient response to wartime revenue or macroeconomic management needs. In this article, it is shown to be based on an income tax template derived closely from Australian state income taxes during the interwar period, reconfigured by the economic shocks of the Depression years, and glued together by federal/state finance institutions and agreements which redistributed national revenues to less affluent jurisdictions. Income tax unification addressed the key barriers to funding adequate social protection that had confronted states during the Depression.