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Advice for Journalists on Tax Summit

October 3, 2011

Won’t take long. Just some very quick advice, pushing you commentators in a skeptical direction especially with the interest groups and the rent-seekers buzzing around Canberra like flies.

First, imagine yourself in a meeting of the budget committee. State or Federal. The demands are endless. For more services and tax breaks, and the population is ageing. But more important: people want a better quality of public services – air conditioning in classrooms, noise barriers on highways, wheelchair access on buses, touch screen terminals on hospital beds, special education teachers in greater number, lifetime care for disabled, faster and fuller investigation of child abuse, more highly trained staff in child care and fire alarms in every unit of public housing.

By the standard of any previous age, we want a gold plated public service.

Well, folks, you don’t get it without robust tax revenues. If France and Germany have got health systems better than ours – and I’m not altogether sure they do – it may be related to the tax rates they pay. All the above enhancements are damn expensive. They are funded by tax revenues.

William Gladstone, steering it onto the statute books, called income tax “a mighty engine of reform.”

When the interest groups turn up and start pleading for reductions in income tax or stamp duty or payroll tax you are obliged to ask one question : how will you replace the lost revenue? And don’t accept vague references to cutting duplication or government advertising or finding savings – as if nobody from either side of politics has thought of that one.

You only get big licks of savings from reducing transfer payments, that is social security. Wayne Swan has done terrifically well in winding back middle class welfare but even that bought howls of protest from the Opposition and part of the media.

Demonizing payroll tax or stamp duty is easy but mostly it is a knee-jerk dismissal – “tax on jobs”, tax on housing. Tell us the alternatives, please. The real challenge would be to take Treasury’s advice and, yes, lower the rate – but broaden the base. That would mean taxing more businesses on their payroll but at a minimal rate and leveling a tax on all homes on an annual rate but none on the transfer of homes. Easily said. But too difficult to sell. Impossible to sell.

At least be honest.

The role of journalists during the tax summit is to force the advocates of tax relief to answer the old question: where’s the money coming from for the services that nobody – just nobody – is volunteering to go without.

5 Comments
  1. emily's nephew permalink
    October 3, 2011 12:24 pm

    Very good Bob. Hope some journos at least bother to read your post and some to actually heed it too!

  2. October 3, 2011 3:22 pm

    I have to agree on this very valuable and relevant point. You’ve challenged bloggers and journos to ask the question of how do we enjoy the public services that we expect and demand for as our citizenry democratic rights. The fourth estate have the power to articulate this pro-Keynesian message, however, the social media seems to be unfettered, ie, with the ethical codes of practise and professionalism, in that uncontrolled and unbridled social media have become much more salient and a much more robust influence, over the internet, compared to the mainstream regulated media circles.

  3. Richie Gun permalink
    October 4, 2011 9:36 am

    William Gladstone, steering it onto the statute books, called income tax “a mighty engine of reform.” Yet apparently Gladstone went to the election of 1874 on a policy of abolishing income tax. (This from The Lion and the Unicorn, which I am reading on your recommendation. The book is disappointing in its focus on the personalities at the expense of issues: little about what they argued about, and almost nothing on big issues of the 19c like the Irish famine, the Crimean War or the American Civil War.)

    However, I agree with your views.. If taxes are not to go up, surely there must be an end to the Howard-Costello program of middle class welfare and capitulation to grey power at the expense of working famiies.

  4. October 4, 2011 9:38 am

    At the state level, stamp duty is the most inefficient tax, with an excess burden of over 60%. A government using this revenue source needs to get more than 60% rate of return on its spending, or else it destroys value in the economy. Stamp duty also lowers labour mobility, which is important in a time of structural change. Stamp duty on a median Sydney home costs half an average workers annual after-tax wages: you need a very good job to justify moving home.

    In contrast, a well-designed land tax has a zero excess burden. Changing from stamp duty to land tax would raise GDP by 1.2%.

    How do you get there from here? Abolish stamp duty. Create a new land tax such that the present value of land tax on a property is equal to the stamp duty that would otherwise have been paid. Apply the land tax to all properties bought after stamp duty is abolished. (ie granny who hasn’t sold her house doesn’t pay the new land tax; anyone who buys a house does so in the knowledge it is subject to the new land tax).

    A full transition will take many years, but around 50% of people who own homes sell them within 9 years; the rate of expansion of the land tax base will slow after that. During the transition there is state revenue shortfall, which can be covered with increased debt. Repaid over a long time horizon, this transitional debt is readily achievable in the context of a state budget, although assistance from the Commonwealth would ease the process.

  5. old public servant permalink
    October 4, 2011 7:30 pm

    I agree with much of what you say … to a point. You make the point that payroll tax (and I would add land tax) is essentially a ‘good’ tax. Most economists would agree. But the states have progressively (irony intended) taken a good tax – the payroll tax – and made it worse. Was this because they listened to Treasury advice or because they responded to vested interest and political needs? If they acted on Treasury advice it would be a sad commentary on the backbone of the state Treasuries. Tax reform at the state level should encompass an expansion of land tax and payroll tax bases on equity and efficiency grounds. It should encompass greater use of environmental taxes and congestion charges on efficiency grounds (and I think a serious analysis of congestion charges – together with a concurrent increase in public transport fares – would show it increase the overall equity of taxing and spending on transport). These steps would fund better services and a reduction in the many inefficient and inequitable state taxes. All of these points are made in the Henry Review and, before that, the IPART review of NSW taxes.

    Will the states do this? The evidence of past behaviour of state Premiers and Treasurers is that they will not. It is said that taxation is the art of plucking the goose with the least amount of hissing. State Premiers and treasurers have found the goose to be too large and troublesome a bird and have turned to plucking any small – preferably mute bird – they happen upon, no matter the quality of the feathers. On the other hand the Commonwealth Governments of various persuasions have demonstrated the occasional capacity for significant tax reform (capital gains tax, fringe benefits tax, franking, reform of personal tax, resource rent taxes, GST etc). This drives me to one practical suggestion: we should pay whatever price is necessary to get the states out of taxation and let them concentrate on service delivery within a pot of funds determined by the Commonwealth.

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