This week's Commission of Audit's recommendation that the states be allowed to raise income tax – as they do in the US – and to effectively re-privatise the health system are spots of crass stupidity in a report that otherwise contains some fundamental truths and some worthwhile remedies.

Health is not like other commodities that respond to price signals in a market to drive efficiency. People should be encouraged, not discouraged, from going to their GP and hospital out-patient clinics which would happen with the imposition of a co-payment. 

GPs are the cheap end of the health system. If people get early intervention, many costs at the expensive end can be avoided – particularly hospitalisation.

Moreover, health, unlike other commodities runs far more efficiently in the public sector. 

US research suggests that every dollar levied in a co-payment for GP visits results in costs later down of about $3.50.

Seeking higher co-payments for pharmaceuticals is equally idiotic. It discourages people from filling their prescriptions and causes them to get sicker and then present for expensive hospitalisation – unless you want those people to die on the street.

Greater privatisation in health makes no sense. Private health insurers have transaction costs of about 12 per cent and another 4 per cent goes in profit – totalling 16 per cent. Medicare, on the other hand, costs about 3 per cent in transaction costs, plus about 1 per cent for the ATO to collect the levy – totalling 4 per cent.

Australia spends about 9 per cent of GDP on health for a far better result than the US spending of about 16 per cent on health. That is entirely due to our fairer and more efficient delivery of health and the US’s profit driven, exploitative and unfair system.

If you want to save money in health, the best way would be to remove the tax concession for private health insurance which costs about $5 billion a year and has not been effective in encouraging private cover. 

The number of people taking out or keeping private cover is driven mainly by the stick of the lifetime health cover scheme which imposes higher premiums on those who do not take out and keep cover from the age of 30 rather than the carrot of the tax rebate. 

With the penalty in place, the removal of the tax concession would not result in any great exodus from the private system.

But, no, the commission of audit and the government are more interested in ideology than rationality.

But if we are to be rational and not ideological we should not reject many of the other recommendations, particularly in areas where price signals work and where private-sector efficiency, innovation and risk-taking yield better results.

The Post Office is a good example. Times have changed. I bet a privatised Post Office would open at the weekend. The case for a universal subsidised letter-delivery system in the wide-brown land is extremely weak in an email-saturated world.

Privatising rail and making road users pay their real cost would also be good ideas. Since some states privatised their rail systems, they are beginning to compete more effectively with road. Government-owned rail systems typically stagnate with under-investment and rigid administration.

The environmental case for these changes is strong and ideological objections to privatisation should not get in the way.

Rail languishes while public money is lavished on roads which get filled with big trucks.

It would make better sense to impose road-user charges through fuel levies and to reduce registration charges. Congestion levies in big cities would also make road users pay the costs of their actions.

The commission is also right to recommend the removal of a lot of inefficient industry subsidies.

On the other hand, its proposal for the states to reimpose income tax runs counter to one of the commission’s central tenets – increasing efficiency by reducing duplication.

If you have a single efficient federal system of tax collection, why set up six state and two territory income-tax bureaucracies.

The inefficiency is wider than that. How would the states assess the tax – based on residence or on where the income was earned? What about people who move during the financial year? 

Would the states mirror the deductibility rules of the federals income tax law? If so wouldn’t it be easier for the feds to administer state income-tax raising using the same tax returns and PAYE system and just adding a percentage on the instruction of each state and territory. 

That would not be very much different from what the feds do now – gather the tax and hand a portion back to the states.

For all their bleating, the states have never pressed the issue since losing a second challenge to the uniform tax scheme in 1957. Obviously, they think it politically easier to just blame Commonwealth short funding for their short-coming in providing health and education.

The upshot has been an undesirable reliance by the states on some unwholesome taxes – payroll tax which puts a burden on employment and gambling taxes which result in states encouraging gambling. 

Also, the governments responsible for spending money are not responsible for raising the money that they spend. So the states are not fully politically accountable for their spending decisions.

But there are better ways to deal with that than state income taxes.

In the 1970s the states voluntarily gave away a very good source of income – death duties.

They could easily reimpose them. Queensland was the first to abolish death duties under National Party Premier Joh Bjelke-Petersen. The idea was that it would attract rich retirees to the state. It was an absurd proposition. 

The Commission of Audit and Treasurer Joe Hockey have made much of the increasing costs caused by an ageing population. So wouldn’t it make sense for a state to reimpose death duties so that all those health-dollar-consuming old fogies clear off to be a burden on another state or even another country?

Finally, if you are going to include expensive family homes in the pension assets test, it would make it fairer to abolish stamp duty on the purchase of smaller houses by people over 65.