6537.0 - Government Benefits, Taxes and Household Income, Australia, 2015-16 Quality Declaration 
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METHODOLOGY FOR ALLOCATING TAXES ON PRODUCTION

INTRODUCTION

This Appendix outlines the methodologies used for the estimation of taxes on production allocated in this study. A more detailed explanation of the methodology used to calculate the final incidence of taxes on production is available in Review of Methodology for Estimating Taxes on Production in the Calculation of Household Final Income (cat. no. 1351.0.55.012)

The methodologies used for estimating social transfers in kind allocated in this study are available in the Household Expenditure Survey and Survey of Income and Housing, User Guide, Australia, 2015-16 (cat. no. 6503.0).

TAXES ON PRODUCTION

The methodology for calculating taxes on production can be summarised as follows:

    • The incidence of taxes on production to households was estimated using Input-Output tables from within the Australian System of National Accounts (ASNA). The Input-Output tables present a comprehensive picture of the supply and use of goods and services in the economy and the income generated from product. It records the flows of products from one industry to another and to final demand for consumption. For this study, the 2015-16 Input-Output tables were used to calculate a tax rate for each of the 115 Input-Output product groups (IOPG).
    • The Household Expenditure Classification (HEC) is used to classify household expenditure in the Household Expenditure Survey (HES). The approximately 700 HEC codes were mapped to the 115 IOPG codes.
    • Household expenditure classified to each HEC code was multiplied by the relevant tax rates to estimate the total final incidence of taxes on production for each household.
Taxes on production are those indirect taxes passed on to households in the prices paid for goods and services. The underlying assumption for allocating taxes on production to households is that industries will pass on the taxes on production they pay to the purchasing industries and/or final consumers through higher prices. The tax will be passed from one industry to another until it is fully passed on to a final demand sector, one of which is the household sector. For example, suppose the textile industry pays a total of $100 in payroll tax. If half of the textile products are purchased by the clothing industry, and the other half by the footwear industry, the $100 payroll tax is assumed to cause a cost increase of $50 to each industry. These $50 amounts will be either passed on again to other purchasing industries, or added to the cost of clothes and shoes purchased by households.

Taxes on production consist of taxes on products and other taxes on production. Total taxes on production are calculated net of any subsidies received from governments.


TAXES ON PRODUCTS

Taxes on products are taxes payable on goods and services when they are produced, delivered, sold, transferred or otherwise disposed of by their producers. They include:

    • goods and services tax (GST)
    • taxes and duties on imports (excluding GST)
    • export taxes (excluding GST)
    • other taxes on products (excluding GST)

OTHER TAXES ON PRODUCTION

Other taxes on production consist of all taxes except taxes on products that enterprises incur as a result of engaging in production. These taxes do not include any taxes on profits or other income received by the enterprise. They are taxes payable on the land, fixed assets or labour employed in the production process or on certain activities or transactions. Other taxes on production include:

    • taxes on payroll or workforce
    • recurrent taxes on land, buildings or other structures
    • business and professional licences
    • taxes on the use of fixed assets or other activities
    • stamp duties
    • taxes on pollution
    • taxes on international transactions

GOVERNMENT SUBSIDIES

Government subsidies are netted out from taxes on production. Subsidies are defined in the System of National Accounts as current unrequited payments that government units, including non-resident government units, make to resident producers or importers on the basis of the levels of their production activities or the quantities or values of the goods or services that they produce, sell or import. Subsidies are equivalent to negative taxes on production in so far as their impact on the operating surplus of producers is in the opposite direction to that of taxes on production. Subsidies consist of subsidies on products and other subsidies on production.

CALCULATING THE INCIDENCE OF TAXES ON PRODUCTION

The incidence of taxes on production to households is the amount of taxes on production a household pays, expressed as a percentage of the household's income. It is assumed that taxes on production are fully passed on to consumers. Using Household Final Consumption Expenditure (HFCE) estimates from the ASNA, the methodology calculates tax incidences for taxes on products and other taxes on production. There are three elements to the methodology for calculating the incidence of taxes on production, namely the:

    • re-allocation of taxes on production incurred at any stage of the production process, rather than only allocating those incurred when the product is purchased by the household
    • re-allocation of taxes on production initially allocated to goods constituting gross fixed capital formation (GFCF)
    • re-allocation of taxes on production levied on the margin industries.

INPUT-OUTPUT TABLES

The estimation of the incidence of taxes on production to households is based on the extensive use of Input-Output tables from the ASNA. The Input-Output tables present a comprehensive picture of the supply and use of goods and services in the economy and the income generated from production. It records the flows of products from one industry to another and to final demand for consumption. Using matrix manipulation techniques utilised in standard Input-Output table analysis, it is possible to track the ultimate final use of all inputs to the production process. It is therefore possible to allocate all taxes that are levied at all stages of the production process to appropriate final use categories.

This study uses 2015–16 Input-Output tables to estimate tax rates for goods and services purchased in 2015–16. It is assumed that the tax rates current during the reference period of the Input-Output tables are applicable at the time of production of the expenditures reported in the HES. The 2015-16 Input-Output tables were compiled for 115 product groups.

The Input-Output tables are published in Australian National Accounts, Input-Output Tables, 2015-16 (cat. no. 5209.0.55.001). The publication includes the supply-use tables with detailed explanatory notes on the data sources, content and construction of the tables.

DERIVATION OF TAX RATES

A tax rate is allocated to each of the 115 Input-Output product groups. These tax rates are used to estimate the total final incidence of taxes on production on household consumption expenditure for each household. A general outline of the elements involved in the methodology, as well the underlying assumptions, is provided below.

GROSS FIXED CAPITAL FORMATION

Taxes on production increase the prices of commodities comprising GFCF since the capital costs of producers are higher than they would otherwise be, and it can be assumed that producers charge correspondingly higher prices for their output. The methodology estimates the proportion of HFCE that can be attributed to the taxes on production embodied in the capital costs of producers. To achieve this, "capital stock" is treated as a dummy industry in the Input-Output tables, and the estimation is done in an analogous way to the estimation of the impact of taxes on production on the supply of intermediate inputs to the producing industries. There are a number of assumptions underlying this approach:

    • that the production taxes allocated to GFCF in the current period also applied for all the periods over which the current capital stock was build up, or that producers make their current output pricing decisions as though this were the case
    • that the level of GFCF in the current period is typical of all periods over which the capital stock has been built up
    • that the incidence of production taxes on GFCF is the same for all industries
    • in the absence of industry specific depreciation data, that the usage of capital across industries is proportionate to gross operating surplus across industries.

TAXES ATTRIBUTED TO THE MARGIN INDUSTRIES

For most analysis using Input-Output tables, it is necessary to value commodities at "basic values". With this approach, industries that distribute goods without transforming them, e.g. industries concerned with the transport of goods, wholesaling and retailing, are treated as margin industries. The commodities that these industries distribute are not shown as the inputs and outputs of the margin industries. Instead, the commodities are shown as flowing directly from the producing industry to the user, and the margin industries are shown as providing separate services to the purchasers of the commodities. For example, the goods that households purchase from retailers are shown as flowing from the food processing industry, the oil refining industry, etc., but with a valuation that excludes the margins incurred in the transporting, wholesaling and retailing of the goods. The margins are shown as separate expenditures by households or other users along the supply chain.

The methodology used in this study involves calculating the incidence of taxes on production for each Input-Output commodity group/industry and then applying those rates to the appropriate HES commodities. However, HES respondents report the values that they paid for goods and services, that is, the HES data are valued at "purchasers' prices", not "basic values". Therefore, the distribution margins separately identified within the Input-Output tables are an integral part of the values of goods and services purchased as reported in the HES, and there are no separate HES commodities that match to the Input-Output margin industries.

Detailed Input-Output table information is used to reallocate the taxes on production initially allocated to the margin industries to the industries whose goods are being distributed. In this way they too can be matched to HES commodity expenditures.

METHODOLOGY FOR ALLOCATING TAXES ON PRODUCTION TO HOUSEHOLDS

The expenditure estimates of individual households have been derived using HES data. Household expenditure is classified in the HES according to the HEC. A correspondence was developed mapping the Input-Output commodities in the Input–Output product groups (IOPG) to the HEC commodities. One or more IOPG codes was mapped to each HEC code. Using the Input-Output approach outlined above, a tax rate was obtained for each of the 115 IOPG commodities. Where more than one IOPG was mapped to one HEC, the expenditure for that HEC was divided equally between each relevant IOPG to obtain the tax rate. This rate was then applied to the corresponding average weekly household expenditures reported in HES for each HEC to derive the total value of taxes on production paid by individual households.

OWNERSHIP OF DWELLINGS
In this study, the methodology used to estimate taxes on production for ownership of dwellings uses the gross imputed rent estimates in the HES and allocates taxes on production on ownership of dwellings as follows:

    • for owner occupiers, the tax rate derived from the ownership of dwellings industry was applied to gross imputed rent for the household
    • for renters, the ownership of dwellings tax rate was applied to actual rent payments
    • the ownership of dwellings tax rate was also applied to the value of any rental subsidies received by private renters because the taxes are paid by the household sector (such as renting from family or friends at less than market rates)
    • a proportion of the GST on rental stock built since 2000 was allocated to private renters.

In 2003–04, other costs related to home ownership, such as taxes on repairs and maintenance costs, were calculated using the method outlined above and allocated to the category 'Other taxes on production'. Due to the new method of imputing taxes on production for home owners introduced in the 2009-10 study, these costs are no longer included in 'Other taxes on production' but instead are in 'ownership of dwellings' as they are covered by the imputed rent.

COMPARISON WITH HOUSEHOLD FINAL CONSUMPTION ESTIMATES IN THE AUSTRALIAN SYSTEM OF NATION ACCOUNTS

As the scope of this study is limited to the household sector, it does not attempt to fully allocate the ASNA total, which also includes taxes paid by non-household final demand sectors e.g. government final consumption and exports. In 2015-16, taxes on production on HFCE in the ASNA was 75% of total taxes on production. Table A1 compares the total taxes on production allocated to the household sector in the ASNA with the taxes allocated in this study. The proportion of taxes on production allocated to households in 2015-16 was 55% of total taxes on production, lower than the proportion allocated in 2009-10 (64%).

The main reason for the difference between total taxes on production and taxes allocated in this study and ASNA estimates is likely to be underreporting by respondents in the HES. In particular, some highly taxes commodities such as alcohol, tobacco and gambling services are known to be underreported by respondents in the HES. In 2015-16, the estimated unallocated amount of tax due to underestimation of expenditure in the HES (as compared to the ASNA HFCE) was about $34 billion. In 2003-04 and 2009-10 it was $20 billion and $26 billion respectively (in 2015-16 dollars).

Table 1. TAXES ON PRODUCTION ALLOCATED


Net total Taxes on Production from ASNA(a) ($m)
Taxes on Production allocated by study ($m)
Percent
(%)

2003-04
98,757
59,342
60
2009-10
128,041
82,185
64
2015-16
171,389
93,467
55

(a) subsidies not included