The state may provide infrastructure by raising taxes. There are several different approaches to raising taxes:
• An increase in direct or indirect taxation levels with economy-wide effect
• The raising of a tax or levy with state or regional application
• The imposition of a user-charge.
In its 2009 budget, the Queensland Government anticipated revenue of $37 billion derived from the following sources:
• Grants from the Commonwealth $18.7 billion (50.4%)
• State taxes $9.3 billion (25.0%)
• Sale of goods and services $3.7 billion (9.8%)
• Other revenue $2.4 billion (6.3%)
• Interest income $2.0 billion (5.4%)
• Dividends and tax equivalence payments $1.2 billion (3.1%)
Taxation accounts for around 25% of state government revenue although this increases to around 35% in the case of local governments. Government transfers account for around half of state government revenue.53
The effectiveness of taxation and alternative methods of financing urban infrastructure was examined by Allen Consulting for the Property Council of Australia in 2003. The comparative research is based on GCE methodology which examined the net economic impacts (including output and employment) for five financing methods - taxation, user charges, producer levies, state debt and privately sourced capital. The study found that the highest net returns were state debt and privately financed projects (218% and 182% respectively) which nearly doubled the state taxation benchmark of 100%.54
Taxation is a source of revenue for government, however, it also carries with it adverse economic impacts and deadweight costs.
Deadweight Cost of Taxation
The deadweight cost of taxation includes direct costs such as taxation administration, compliance and enforcement and induced effects whereby taxpayers have less disposable income to invest or change their behaviour to activities of lower utility which attract a lower incidence of tax. These effects represent the disincentive or deadweight cost of taxation.55 Thomas examined the deadweight cost of income taxation in New Zealand and found that tax cuts introduced in 1986 reduced deadweight costs by 27% or 23% of the tax revenue raised.56 In contrast, tax increases in 2000 raised deadweight costs to 15% of tax revenue collected. The welfare cost of taxation was estimated at $1.01 for every extra dollar of tax revenue raised. A study of Australian taxation suggests the deadweight cost is closer to 1.2 to 1.3 times the revenue raised.57
Taxation is also a problematical issue when private debt is substituted for public debt. Unlike a government agency or business enterprise, a private company pays tax on its taxable income albeit after the deduction of depreciation and interest expense from its assessable income. A trust may also claim these deductions and qualify for tax transparency which shifts the burden of taxation to investors. This can affect the incidence of tax and the timing of its collection. For example, an investment structured as an unincorporated association may derive advantage from tax benefit transfer during the early years' operation of the project. Implicit in tax-based bond financing is a transfer payment from the Australian Government to private investors. Private or public expenditure involving a transfer of benefits from the state to private investors is an additional deadweight cost.
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53 Productivity Commission 2009, p. 57f.
54 Allen Consulting Group 2003.
55 Diewert and Lawrence 1998.
56 Thomas 2007.
57 Robson 2005.