CRISPIN HULL: Turnbull a barrister when it comes to tax
By Crispin Hull
Published Tuesday 12 April 2016
ON TAX, Malcolm Turnbull has been a barrister, not an architect.
Upon taking office as Prime Minister, he promised tax reform and said everything was on the table. We thought he meant “everything” one word. But it appears he meant “every thing” two words – because that is how it turned out.
Every tax “thing” was on the table. What was not on the table, and should have been, was everything – the whole tax system.
An architect, even basing a project on an existing building, designs with an end in view. An architect sees what is worth keeping, what should be modified and what should be demolished – with an end in sight.
An architect talks to the client (or in our analogy, the electorate) about what they want. And talks to the builder and engineer (the bureaucracy) about what is possible.
All the bits relate to each other in achieving the overall aim.
The aims should have been:
- Getting the best balance between taxes on income, capital and consumption.
- Removing inefficient taxes.
- Overall fairness.
- Working out the best balance between federal and state revenue and spending.
Instead, we had the barrister’s approach. Arguing things case by case to win the argument with no overall aim. Things were put on, and fell off, the table like a two-year-old being fed in a high chair – negative gearing, capital gains, inheritance tax, income-tax cuts, company-tax cuts, superannuation changes. And finally, the possibility of the states raising income tax.
Each time Turnbull ably argued the case in isolation.Perhaps the worst result was the almost instant rejection by the states of having access to income tax. The Premiers should have welcomed it and then demanded to have a big say in the details.Instead, it seemed as if the greatest change to Australia’s tax system in 70 years was nothing more than a trap set by Turnbull into which the Premiers fell.
No sooner had they rejected the idea than Turnbull announced that the Commonwealth would not longer give money to state schools. What an appalling outcome.
Turnbull was at least right in one thing. He said that if the states had to raise the money and carry the political opprobrium for doing so, they would be more careful with the spending of it. If, on the other hand, they just kept putting their hand out to the Commonwealth for money they could always blame the Commonwealth for any shortcomings in the services they supplied.
So how could it change? First to some figures which I will round out substantially to make them more comprehensible.
The Feds raise about $400 billion and give a quarter of it ($100 billion) to the states. Of that, half ($50 billion) is GST money.
The states spend about $200 billion and only raise half of it ($100 billion).
If the GST arrangements stayed in place, all the states would need to do is raise $50 billion a year in income tax to free themselves of federal dependency.
Now the Feds raise about $180 billion in personal income tax. So if the Feds cut their personal income tax revenue by $50 billion, the states could pick that up.
More importantly, each state could then decide whether to raise even more income tax than merely replacing what is on offer from the Feds now. That would be the new alternative to just putting out their collective hands for more money from the Feds, as they do now.
Some states could be very smart and very progressive. They would not have to collect their income tax based on the present federal tax brackets. They could make it more progressive, imposing higher levels at higher incomes.
With that fiscal freedom they could provide much better public education and health systems – so much better that private schooling would become irrelevant educationally and only a matter of religious or philosophic choice.
States this way inclined could with good conscience withdraw all funding from private schools. At present private schools get a little above 10 per cent of their funding from the states.
On the health front, the progressive states could have such good hospitals with no waiting times that private health insurance would be irrelevant. They could even offer to give a refunds of state income tax refund to offset any federal tax penalty they suffered for dropping it.
The whole thing has been a huge missed opportunity. People worry that there would be a race to the bottom with states attempting to be the lowest taxing state. But equally there could be a race to the top – to see which state provided the best education and health systems.
In any event, we have seen no evidence over the past 20 years of states racing to the bottom by reducing stamp duties, for example. To the contrary. So why should there be a race to the bottom on state income tax?
Given that Turnbull seems to have given up on major tax reform, the states should have taken up the cause. They still could. The ACT has made a very tentative move to replace stamp duty with higher rates. The others cannot follow because their local governments raise rates. But they could easily replace stamp duty with an inheritance tax on large estates.
For decades now, people on the left have been more likely to favour the abolition of the states and people on the right have favoured “states’ rights”. People on the left have thought that only a strong federal government could drive progressive forces. But perhaps those views have been misguided.
Perhaps, given the power to raise their own money, at least some of the states could reverse some of the growing inequality we have seen in Australia over recent decades. That divide is more pronounced in education than anywhere else.
Funding for private schools is rising faster than that for public schools. The needs-based Gonski funding model which would help poorer Catholic and public schools deliver equal educational opportunity is dead. The Feds are no longer interested and the states can’t afford it. That’s why they should have leapt at the chance to gain fiscal independence.
