The front page of The Australian Financial Review last Friday provided some hope that government and opposition might yet provide some good policy. First there was federal shadow treasurer Joe Hockey talking about aligning the company tax rate with the top personal income tax rate. Then just a few columns away new Victorian Premier Ted Baillieu was discussing the virtues of ''competitive federalism'' and how his state could maximise its competitive advantage.
Both are potentially significant developments. It's welcome that Hockey has taken a break from bank-bashing. At last he's doing what a Coalition shadow treasurer should be doing, which is pushing a smaller-government, lower-tax agenda. Instead up until now he has been spending his time trying to outflank the Labor Party from the left.
It's pleasing that Hockey hasn't swallowed the line that the only thing that counts when it comes to Australia's attractiveness as an investment location is the company tax rate. Certainly tax matters, but a stable political and policy regime counts as well. It's ironic that at the same time as the Henry tax review was urging a reduction in the corporate tax rate to ensure Australia's competitiveness, it was advocating the resources super profits tax. The damage done to the country's reputation as a result of the mining tax has more than compensated for any potential benefit that could have been gained by reducing the company tax rate.
The Henry review never seriously considered the relative merits of cutting personal income tax rates compared with the corporate rate. It should have, and part of the reason it didn't is politics. When the top personal income tax rate (including the Medicare levy) is 46.5 per cent and the company tax rate is 30 per cent, the potential for arbitrage and tax minimisation is enormous. Any reduction in the top rate of personal income tax is inevitably portrayed as an unfair benefit to the rich and a threat to the concept of a progressive personal income tax system.
And that's true. Cutting the top rate would provide in nominal terms greater benefits for the wealthy, and make the tax system less progressive. But the reason the wealthier get the biggest tax cuts is because they pay more tax -- a fairly obvious point that few politicians (at least in Australia) have ever been brave enough to make. Karl Marx was a fan of progressive taxation.
As Treasurer Wayne Swan was quick to point out, lowering and flattening personal income tax is expensive, especially if you're not going to increase company tax. But this is not a reason not to have it as an aspirational goal. And it's a welcome alternative to the prevailing wisdom of the Henry review, which is that the only tax the government should ever consider cutting is that imposed on companies.
Another welcome alternative to prevailing wisdom is Baillieu bucking the trend of national centralisation, harmonisation and uniformity. As businesses have rushed to embrace a ''seamless'' national economy, they've forgotten there's no point having uniform regulation across the states if that regulation is bad regulation.
This is not an argument about the merits or otherwise of states' rights, it's simply a matter of commonsense. Uniformity should not come at the expense of quality.
One of the reasons Baillieu won is because he promised to make the trains run on time -- literally. Better service delivery was the core of his election commitment. But simply doing the same things better than Labor isn't going to revitalise the Victorian economy. Victoria has looked good compared with NSW, but on a per capita basis during the last few years Victoria's economy has been shrinking.
If, for example, the Gillard government were to impose a national occupational health and safety standard that had the worst features of the NSW system, Baillieu would be absolutely right to reject it and go it alone.
The workers compensation scheme established by Jeff Kennett and left basically unchanged by the Bracks and Brumby governments provided businesses in Victoria with an important commercial advantage.
A report prepared for state governments a few years ago identified that countries with strong federal structures have more efficient governments and higher rates of economic growth than countries with centralised administrations.
This is something for Liberal premiers Colin Barnett, Ted Baillieu, and (after March next year) Barry O'Farrell to ponder.
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