Monday, September 13, 2010

Reform Taxation and Reform the States

I had another article published at Menzies House:

Let’s face it, our state governments are a disgrace. Problems such as lack of public transport, poor roads and failing hospitals are primary the responsibility of the states but they seem incapable of doing much about them. So poor have state governments become at doing their job that there are increasing requests for the Commonwealth government to take over various responsibilities such as hospitals and even calls to abolish the states altogether. 

It was not always so. Not all that long ago we had Premiers like Wran, Bolte and of course, Sir Joh, men who understood they were leaders and were willing to use the economic tools they had to maximize the economic development of their state. Increasingly our Premiers are degenerating into managers who at best do the bidding of the bureaucracy.

One of the reasons for the current state of affairs is that the States are losing control of their finances. The more dependent they become on Commonwealth grants the less responsibility they have and they can always blame Canberra for their woes. Say what you want about the pre-GST state taxes, but at least they were under the direct control of the State governments. The GST on the other hand is dished out accordingly to a formula without their direct control.

Recently there have been suggestions the GST rate be increased in order to cut federal taxes. The big problem with that is that the GST taxes are all allocated to the states. Merging it into a Commonwealth tax as well would just confuse the matter further.

Here's a better idea. The GST raises about $45 billion, income tax about $137 billion. So give the GST completely to the Commonwealth. At the same time transfer a percentage of the income tax base to the States. While we are at it transfer other federal grants the same way. It would be a tax collected by the feds but under the control of the states. The percentage would differ from state to state but that’s OK as the swap would be revenue neutral. However, if they want to cut or increase the tax they could do so. No longer would they need to beg the feds for funds. States would have an incentive to cut taxes to increase economic growth in their states. The Commonwealth government could increase the GST rate to cut other taxes. Premiers would again be in control of their financial destiny and hopefully we would get better government.

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