• You will recall that after consultation with you the Treasurer asked me to look into a question concerning the proposed adoption of a plan of ‘pay-as-you-go’ taxation. The Treasurer asked whether, having regard to the Commonwealth’s relations with the States under the uniform income tax legislation, any adoption by the Commonwealth of a ‘pay-as-you-go’ plan should be preceded by some consultation and agreement with the States. The particular point which the Treasurer had in mind arose out of the proposal that, in adopting a ‘pay-as-you-go’ plan, the Commonwealth should ‘forgive’ taxpayers some proportion (eg 75%) of the tax assessable upon the income of the year preceding the inauguration of the ‘pay-as-you-go’ plan. The Treasurer asked whether it might not be wise to secure a prior agreement by the States that they would not, on re-entering the income tax field, impose any tax retrospectively upon the income thus released by the Commonwealth.

2. In my opinion, the Commonwealth’s position under the uniform income tax legislation does not in any way impede the adoption of a plan for ‘pay-as-you-go’ taxation. I do not myself think any prior consultation or agreement with the States is necessary, or even desirable. My reasons for this conclusion appear below.
3. So long as the States Grants (Income Tax Reimbursement) Act 1942 is in operation, the States are entitled to fixed grants from the Commonwealth, in lieu of levying their own income tax. The manner in which the Commonwealth requires taxpayers to pay tax is, so far as the States are concerned, immaterial. The Commonwealth is as free to experiment with new methods as it would have been before the uniform tax system came into operation.
4. The States Grants (Income Tax Reimbursement) Act 1942 will continue in operation until the last day of the first financial year to commence after the date on which His Majesty ceases to be engaged in the present war. Presumably this will not be the first financial year commencing after the mere cessation of hostilities. The relevant year will not commence until the present state of war has been brought to an end. This, it may be assumed, will not take place until some kind of permanent settlement has been made. It must, therefore, be assumed that the uniform taxation system will still be in operation for a reasonably substantial period. When the Act does expire, the States will have to levy their own taxes for the ensuing year, unless of course some other arrangement has been made in the meantime. They will be free to adopt either the existing system or to fall into line with the Commonwealth and adopt the ‘pay-as-you-go’ system. If they were to revert to the existing system, while the Commonwealth continued the ‘pay-as-you-go’ system, there would no doubt be some administrative difficulties. These, however, would not by any means be insuperable. At any rate, this possibility does not, in my opinion, require the Commonwealth at the present juncture to secure the consent of the States to the contemplated change. If the Commonwealth finds ‘pay-as-you-go’ taxation practicable, there seems to be little reason why a State should desire to revert to the present system. It would, in fact, gain no more revenue by so doing, unless it so happened that the States reimposed tax in a period during which the national income was falling, and even then the advantage would be only temporary. And the State would get its revenue more promptly by adopting the ‘pay-as-you-go’ system than it would by reverting to the present method.
5. There remains the possibility that the States might not only desire to revert to the existing system, but might also seek to use, as the basis of their first year’s tax, the income of the year 1943/1944, in respect of which the Commonwealth had previously ‘forgiven’ 75% (say) of the taxes due. This seems to be a logical rather than a practical possibility, especially if it is assumed that the situation cannot arise until several years hence–e.g. (at the earliest) 1947/1948. To compel taxpayers, four or five years after, to make a return for the State purposes of the income they derived in the year 1943/1944 would be, to put it mildly, a very formidable undertaking, both politically and administratively.
6. On the view I have taken of the real financial effect of introducing ‘pay-as-you-go’ taxation, and on the assumption that the States resume the collection of income tax and fall in with the ‘pay-as-you-go’ system, the States may claim that they are entitled by way of special grant to some share of the Commonwealth’s collections in respect of the year 1943/1944. There would seem to me to be no merits in such a claim. So long as the uniform tax plan lasts, the States are entitled to, and would have had, their full grant, no matter how the amount is provided. If the Commonwealth were to experience stringency in the transition year, that would make no difference to its obligations to the States. Thus the States will be in the fortunate position of being able to adopt ‘pay-as-you-go’ taxation without any permanent loss to their Treasuries.
7. From the Commonwealth’s point of view, there is much to be said against raising with the States, at the present juncture, any question as to what is to be done when the present uniform tax legislation expires. The Commonwealth could scarcely enter any conference on the subject without entering into some commitment, express or implied, as to the continuance of the system beyond the war period. It seems wiser, in such circumstances, not to raise the question at all unless it is really necessary to do so. For reasons already given, I do not think it is.

[Vol. 36, p. 56]