This week’s tax summit — sorry, forum — comes with low expectations, and so far seems to be meeting them. Getting a bunch of experts to reach broad agreement on general principles of tax reform isn’t actually that hard (as Peter Martin points out in this morning’s Age, but getting those principles into a form that’s specific enough to be legislated without frightening the politicians is effectively impossible.

So while Rob Oakeshott, who came up with the idea, wants “a road map for modernising our system”, it’s most likely that all he’ll get is a few new tax breaks for small business and some nice words about further unspecified reform in the distant future.

Queensland treasurer Andrew Fraser compared tax reform to world peace, saying “Everyone agrees with it, but the prospects are actually fairly remote”. But the analogy doesn’t quite work. We all know pretty much what world peace would look like, even if we have no idea how to get there. The tax debate, however, involves different views about the goal, not just the means.

Probably the most obvious example of this is vertical fiscal imbalance.

Clunky name, but simple idea: one level of government (the feds) raises the money, but another level (the states) spends it. The result is a loss of accountability and a general undermining of the whole idea of federalism. In the abstract, most people agree this is a bad thing, but it keeps getting worse.

Last time I wrote about VFI, I said “this isn’t a story of relentless expansion by Canberra met by valiant but futile resistance from the states. On the contrary, state governments have been willing accomplices in their own demise.”

Yesterday just proved the point.

The state treasurers indicated that they would be quite willing to give up some inefficient state taxes, particularly stamp duties, if the Commonwealth would just give them the money instead. Well yes, why wouldn’t they? They get to cut taxes without having to cut spending — someone else wears the political pain.

The federal government said it won’t play along this time. But you can’t blame the states for trying, since this is exactly the trick they’ve been getting away with for so long. Although they sometimes complain about the way Canberra dictates just how its money should be spent (what they really want, of course, is the money with no strings attached), VFI has been a great deal for them.

How to fix it? Ideally, Canberra could just give the states the GST (if we can’t get rid of it entirely), let them set the rates and exemptions and shoulder the political responsibility. But that would be constitutionally dubious; section 90 prohibits the states from “imposing duties of customs or of excise”, and the trend of thinking in the high court makes it pretty clear that the GST would be counted as an excise.

However, that’s the only constitutional restriction. The rest of the field of taxation is open to the states; when they say — as they repeatedly do — that they have “a relatively small capacity to raise revenue”, all they mean is that they’d rather not raise taxes if only someone else would do it for them.

For example, take land tax. Most economists will tell you that land tax is one of the least problematic taxes because it has very low collection costs and, land being immovable, is almost impossible to avoid. As between it and stamp duty there’s no contest — one penalises people for holding onto land they don’t need, the other penalises them for selling it to people who can make better use of it.

Yet the states keep such broad exemptions and high thresholds for land tax that it yields only a fraction of its potential revenue.

Or if you think it’s unfair that land should bear so much of the burden, what about a more broadly based wealth tax? Or what about a bequest tax, ending the absurd situation where the government tells us that buttering up rich elderly relatives is more socially useful than putting in extra overtime at work?

But the states will never consider such options until they absolutely have to, and Canberra won’t force them to by cutting them loose because that would mean giving up federal control of state expenditures in health, education and transport.

And until someone is willing to face up to the issue and make some hard choices, talk of tax “reform” will continue to ring hollow.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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