APPENDIX 4 METHODOLOGY FOR ALLOCATING TAXES ON PRODUCTION
INTRODUCTION
This publication summarises the results of a study of the effects of government benefits and taxes on the distribution of income among private households in Australia. The allocation of benefits and taxes to households included in the study is restricted to those benefits and taxes that are relatable to particular types of households and household expenditures.
The study produces estimates of final household income by extending the estimates of household disposable income. For this, estimates of the value of indirect benefits household receive from free or subsidised government services, known as social transfers in kind, are added to household disposable income and estimates of the value of taxes on production assumed to be ultimately paid by the households are deducted. The two components are modelled using aggregate government finance statistics and Input-Output tables.
With the aim of improving the coverage of taxes on production allocated in the study, the ABS has developed a new methodology for the estimation of the incidence of taxes on production to households.
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.
The underlying assumption 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 $200 in payroll tax. If half of the textile products are purchased by the clothing industry, and the other half by the footwear industry, the $200 payroll tax is assumed to cause an increased cost of $100 to each industry. These $100 amounts will be either passed on again to other purchasing industries, or added to the cost of clothes and shoes purchased by households.
The 1998-99 publication of Government Benefits, Taxes and Household Income, Australia (cat. no. 6537.0) refers to taxes on production as indirect taxes.
Following the implementation of the 1993 System of National Accounts (SNA93), the term indirect taxes is no longer used and has been replaced by the term taxes on production and imports (for the purposes of this publication we are using the term taxes on production). Taxes on production consist of taxes on products and other taxes on production.
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 taxes
- taxes on pollution
- taxes on international transactions.
GOVERNMENT SUBSIDIES
Government subsidies are netted out from taxes on production. Subsidies are defined in the SNA93 as 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 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.
PREVIOUS APPROACHES TO CALCULATING TAXES ON PRODUCTION
The methodology used up until 1998-99 for estimating the incidence of taxes on production to households can be regarded as being a relatively limited method. It captured taxes on production levied directly on final goods and services purchased by household and the taxes on production levied on industries carrying out the final stage of production before the goods and services are supplied to households. However, it did not capture taxes on production levied:
- on industries producing the goods and services that are used as inputs to the production of commodities supplied to households
- during the creation of fixed capital utilised in the production of goods and services purchased by households
- on margin industries that are engaged in the transport and distribution of goods that are purchased by households.
The introduction of the GST and other elements of the new tax system from 1 July 2000 substantially altered the structure of the system of taxes on production in Australia. For instance, sales tax and some other taxes are no longer levied on early stages of production and the GST is effectively only applied to Household Final Consumption Expenditure (HFCE), since GST paid on industry inputs, Gross Fixed Capital Formation (GFCF) and exports is normally refunded.
NEW METHODOLOGY FOR CALCULATING THE INCIDENCE OF TAXES ON PRODUCTION
A detailed review of the steps undertaken 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).
Focusing on HFCE, the methodology calculates tax incidences for taxes on products and other taxes on production. There are three new 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 in the last stage of production or as the product is purchased by the household
- re-allocation of taxes on production initially allocated to goods constituting GFCF
- re-allocation of taxes on production levied on the margin industries.
As with the previous methodology, it is assumed that taxes on production are fully passed on to consumers. It is also assumed that the tax rates current during the reference period of the Input-Output tables are applicable at the time of production of the commodities reported in the Household Expenditure Survey (HES). This study uses 2001-02 Input-Output tables to estimate tax rates for goods purchased in 2003-04.
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 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 production. It records the flows of products from one industry to another and to final demand for consumption.
The ABS published the Input-Output tables in Australian National Accounts, Input-Output Tables, 2001-02 (cat. no. 5209.0.55.001). This publication includes the supply-use tables with detailed explanatory notes on the data sources, content and construction of the tables. The 2001-02 Input-Output tables were compiled in terms of 109 product groups.
DERIVATION OF TAX RATES
A tax rate is allocated to each of the 109 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 detailed explanation of the methodology used to calculate the tax rates from the Input-Ouput tables is available in Review of Methodology for Estimating Taxes on Production in the Calculation of Household Final Income (cat. no. 1351.0.55.012). A general outline of the three new elements involved in the revised methodology, as well the assumptions employed, is provided below.
INCORPORATION OF TAXES ON EARLY STAGES OF PRODUCTION:
Taxes on production can be:
- levied on commodities as they are supplied for final use (i.e. for HFCE, government final consumption expenditure, GFCF, change in inventories, or exports)
- levied on industries that supply commodities for final use
- levied on industries that supply commodities as inputs to other industries.
The incidence of taxation for each commodity group derived with the previous methodology only reflected the first two of these categories of taxes on production. The new methodology also incorporates the third category. 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 in the early stages of the production process to appropriate final use categories.
INCORPORATION OF GROSS FIXED CAPITAL FORMATION (GFCF)
In the same way that it is assumed that taxes on production increase the prices paid for commodities purchased as HFCE, it can also be assumed that taxes on production increase the prices of commodities comprising GFCF. The capital costs of producers are therefore higher than they would otherwise be, and it can be assumed that producers charge correspondingly higher prices for their output.
The second new element of 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 built 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.
ALLOCATION OF 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 are treated as margin industries. The principal industries concerned are transport of goods, wholesaling and retailing. 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.
In contrast to the previous methodology, the new methodology uses detailed Input-Output table information 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.
APPLYING TAX RATES TO HOUSEHOLD EXPENDITURES
With the exception of the ownership of dwellings commodity, the obtained tax rate for each of the 109 commodities using the Input-Output approach are applied to their corresponding average weekly household expenditures reported in HES to come up with the value of taxes on production paid by individual households. To do this, a mapping between the Input-Output commodities and the HES expenditures is needed.
MAPPING HEC TO IOCC
Household expenditure is classified in the HES according to the Household Expenditure Classification (HEC). This was translated into expenditure classified by the Input-Output Classification of Commodities (IOCC). The concordance between the HEC and the IOCC used in this study mapped each HEC code to an IOCC code as follows:
- a HEC code is mapped to one of the 109 IOCC codes
- in some cases, a HEC code is mapped to more than one IOCC code.
In the latter cases, the concordance acknowledged the fact that expenditure classified to one HEC code can be represented by more than one IOCC code.
OWNERSHIP OF DWELLINGS
The above methodology could not be used to allocate taxes on ownership of dwellings, because of scope differences between the Input-Output tables and the HES. The Input-Output tables include imputed rent for owner occupiers in household expenditure on ownership of dwellings, whereas HES does not. The alternate methodology adopted was as follows:
- for owner occupiers, taxes on ownership of dwellings were taken to be equal to expenditure on local government rates and land tax
- for private renters, the proportion of rent constituting taxes on production was estimated, based on the amount of rates paid by owner occupiers.
IMPACT OF NEW METHODOLOGY ON THE ALLOCATION OF TAXES ON PRODUCTION
The new methodology has improved the coverage of the total taxes on production allocated to households. The table below shows the National Accounts figures for 1998-99 and 2003-04 taxes on production and what was allocated by this study using both the previous and new methodologies.
A4.1 Taxes on production allocated using 1998-99 and 2003-04 methodologies |
|
 | Net total taxes on
production (published)(a) | Taxes on production
allocated by the study | Percent |
| $m | $m | % |
|
| 1998-99 (previous methodology) | 69 842 | 29 411 | 42 |
| 1998-99 (new methodology) | 69 842 | 45 212 | 65 |
| 2003-04 (new methodology) | 99 116 | 59 342 | 60 |
|
| (a) Subsidies not included. |
For 1998-99, the previous methodology used to allocate taxes on production to households resulted in allocation of 42% of all taxes on production, whereas the new methodology significantly increased this allocation to 65%. As the scope of this study is limited to the household sector, it does not attempt to fully allocate the National Accounts total, which also includes tax of non-household final demand sectors e.g. government final consumption, exports.
The proportion of taxes on production allocated in 2003-04 is 5% lower than the 1998-99 allocation using the new methodology.
The main reason for the decrease in allocation in 2003-04 is that there is a greater degree of difference between expenditures reported in the HES and the estimated level of HFCE in the Input-Output tables. Highly taxed commodities such as tobacco and gambling services are known to be underreported by respondents. In 1998-99 the estimated unallocated amount of tax due to underestimation of expenditure in the HES as compared to ASNA was about $5 billion, whereas it was about $15 billion in 2003-04.
The effect was partially offset by an increase in taxes on production included in HFCE due to the introduction of The New Tax System (TNTS) in 2000 which both widened the base for taxes on production and, through the GST, resulted in taxes on production being more directly attributable to individual household expenditures than was possible with the previous taxation arrangements. In 1998-99 taxes on production on HFCE accounted for 77% of total taxes on production, whereas in 2003-04 this increased to 81%.
The new methodology had relatively little impact on the distribution of the incidence of taxes on production by equivalised private income quintiles for 1998-99.
A4.2 Distribution of total taxes on production, by Equivalised private income quintile
There are only minor changes in the distribution of taxes on production in 2003-04 as compared to 1998-99 using the new methodology. Tax for the highest quintile has decreased, whereas tax for lower four quintiles has slightly increased. The reasons for these minor changes are believed to be:
- the redistribution impact of the GST
- changes in expenditure patterns between 1998-99 and 2003-04
- demographic changes between 1998-99 and 2003-04
- the increased underreporting of taxed expenditure in 2003-04.
In summary, a significant amount of the taxes on production that were not captured in the previous methodology are accounted for in the new approach resulting in an additional $1.6 billion in taxes being allocated in 1998-99. The introduction of the GST resulted in a much larger proportion of taxes on production being levied at the point at which goods and services are provided to final consumers.
The new methodology increases the estimated average amount of taxes on production paid by households. However, increased underreporting of taxed expenditure in 2003-04 significantly offset the benefits derived from using the new methodology. The increased underreporting of taxed expenditure in 2003-04 compared to 1998-99 is estimated to have understated taxes on production by $22 per week per household. Had these expenditures been reported in 2003-04 at the level reported in 1998-99, it would have resulted in the extra taxes on production being allocated to the spending households. It is likely that the allocation would have increased the share of taxation paid in the higher income quintiles.
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