REINVENTING TAX
A summit organised by the ACCI and ACOSS starting in Canberra tomorrow reopens the debate on tax reform
Giving the States more taxing power, in particular access to broad-based taxes, is the answer to Australia's unbalanced and inefficient system, writes Richard Wood.
How do we get a more efficient, fairer and simpler tax system without getting fleeced by it?
Our tax system is deeply flawed. We rely overly on income tax, and we tax savings and productive activity too heavily. We also need to replace our hotchpotch indirect taxes with a broader-based consumption tax.
But models for better tax design -- proposing simpler, more efficient, more equitable tax -- have without exception assumed that the Commonwealth could be trusted to tax and spend with benevolence and restraint.
Of course, taxpayers know better than this and have wisely decided that it's better to have the decrepit and debilitating tax system that we know, rather than risk being fleeced by a new one.
The question, then, is this: how can we limit a government's ability to fleece us?
The best-known way to harness this is though a well-balanced federal system. People and firms within a federal nation have a choice of jurisdictions in which to live, work and invest. If taxes are too high or spending poorly targeted in one jurisdiction, people and jobs will leave for another.
However, the Australian federal system is seriously unbalanced, with limited competition and choice. Since 1901, the Commonwealth's share of taxing powers has increased from 58 per cent to 75 per cent. Its control over spending powers has expanded even more, from 13 per cent to 54 per cent.
Some centralisation was inevitable, but it has greatly exceeded the level justified by demands of the changing economy and has gone much further in Australia than in other federal nations.
The solution is to focus tax changes on rebalancing the federation by giving the States greater taxing power, in particular access to broad-based taxes.
The Commonwealth's control over taxing powers has arisen from its monopolisation of the two large tax bases available to governments: income taxation and broad-based indirect tax. There is another reason for focusing on the States: they impose the worst taxes.
The States' best and biggest tax is payroll tax (accounting for about half State tax revenue). It is also, perhaps rightly, one of the most hated of all taxes. The Superannuation Guarantee Levy (SGL) -- which is a payroll tax imposed on the wages at a rate expanding over the next few years scope for the States to expand this tax base.
The only other half-decent tax available to the States is land tax, and it is fully exploited.
The worst taxes are without doubt the stamp duties -- imposed on a multitude of capital transactions, including car sales, insurance, cheques, credit cards, sharemarket transactions, land and buildings, and hire purchase arrangements and financial transaction taxes. In a world of instantly mobile capital, and in a nation in dire need of investment and undergoing rapid structural change, it is the height of stupidity to impose taxes on capital movements.
Franchise fees on petroleum and on tobacco and liquor are imposed at exorbitant rates, on top of already rapacious Commonwealth taxes, and they fall predominantly on the poor.
The same can be said for gambling taxes which States have relied on to keep themselves afloat over the past half decade.
Another failing of our tax system is that it has allowed the Commonwealth not only to force its fiscal profligacy onto the States but to force an increasing share of the burden onto the State tax base.
Over the past 10 years the Commonwealth has cut grants in real terms by around $12 billion, or one-third, and used the savings to bolster its own spending. In response, the States have cut expenditure -- to the lowest level in at least three decades -- and increased their share of the total tax take from 20 per cent to 25 per cent.
The States should be allowed the access that their counterparts in the US and Canada have had for decades to both personal income tax and consumption tax. There should be a single federal income tax system with a common base collected by the Commonwealth, where the Commonwealth, by cutting its existing rate, offers the States a choice of topping up that rate or cutting back on spending. This would allow States to vary their tax rates in response to competitive pressure.
The States should be allowed to introduce a broad-based consumption tax -- a GST or a retail sales tax -- preferably with a common base and perhaps central collection, and to use the proceeds to replace most State indirect taxes and the wholesales sales tax. Again it is essential that the States be able to vary their rates.
Of course, reform of State taxes faces huge barriers. The cartel that has been so successful centralising tax power will fight back. Nonetheless, it is really the best -- and perhaps the only -- way to get a more efficient, equitable and simpler tax system without getting fleeced by it.
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