Tax is exciting — despite what they say. Last year the Rudd Government set up the Henry Tax Review and, for a while, shovelled all its problems on to Ken Henry. The final report is looming and the Rudd Government will soon be shovelling problems away from Henry. A hard, tough and brutal tax debate is brewing. Good. Tax reform shouldn’t be easy. Yet it is not clear that any reform will actually flow from the Henry Review.
Too many observers have been carried away by the GST exemption. The argument that good tax reform requires a higher GST rate or a wider base is simply lazy. It is all too easy to gouge more money out of Australian consumers by ramping up the GST. That is the genius of the Howard Government’s implementation of the GST — the states get all the benefit, the Commonwealth all the pain from any increase. There is no incentive for Canberra to modify the GST and so any proposal or tax reform predicated on a GST variation is simply a waste of everyone’s time.
Of course, the tax purists are up in arms. Yet tax debates are when the expression “We live in a society, not an economy” especially has merit.
Australians have no interest in living in a theoretically purist tax system. Rather they want to get on with their lives while ensuring that the various governments are appropriately funded. The debate has bogged down with the tax tail wagging the dog.
The best example of this is the notion of taxing the family home.
Newspaper reports have suggested that owner-occupied housing is some sort of tax rort. A Henry Review consultation paper suggested that the Commonwealth foregoes about $25 billion per year. Remember not being taxed to live in your own house is a concession — home owners should be grateful.
People who advocate taxing the family home are invoking a “tax folk theorem”. As Professor Joel Slemrod, of the University of Michigan, has explained: “There is a folk theorem among tax policymakers that goes as follows: all taxes have weaknesses, and the marginal social cost of the weaknesses increase with the tax system’s reliance on any given tax.
“Therefore, revenues should be collected from a variety of taxes rather than a small number.”
This folk theorem can be seen at work when Professor John Freebairn, of Melbourne University, suggested that the tax-free status of the family home lead to an over-investment in housing, and too little saving in bank accounts. Remarkably he didn’t suggest that bank interest be tax free, rather he proposed a tax on owner-occupied housing. The United States does have such a tax and it doesn’t seem to have prevented an over-investment in housing there.
The debate to date seems to be an exercise in how bureaucrats can devise a perfect tax system to raise more money. No bureaucrat ever saw a problem that more money wouldn’t solve. But it is not clear that our existing tax system raises too little revenue, the problem is more likely the vertical imbalances in the system. Tax reform must be about the Commonwealth raising less money and the states raising more.
Unfortunately, all we’re hearing from the Henry Review is increasing taxation and greater centralisation.
Sinclair Davidson is Professor in the School of Economics, Finance and Marketing at RMIT University and a senior fellow at the Institute of Public Affairs.
How can you say that the family home is not taxed? We pay stamp duty on it when we buy it, we pay rates on it every year – I’d say it’s quite comprehensively taxed.
As far as GST goes, I’d be happy enough if it was wider based and higher, to get more money off those that get paid in undeclared cash…
It is true that this debate has been centrally focussed. But that is because the regional and other inputs have to date been so woefully inadequate. The Feds will likely win any serious debate because they are better informed and better prepared. If the states want their inputs to be considered then they need to be prepared with facts and be able and capable of sustaining their arguments. They need to act like a Federation – instead of a loose collection of parochial fiefdoms. The reality is that the state treasuries have a particularly lightweight perspective that is easily countered. It’s starting to look like they are the architects of their own demise.
Australia taxes lightly for an OECD country and for this reason doesn’t invest as much in education, health, social security and public transport as is desirable.
Taxing owner-occupied housing is desirable to maintain horizontal equity with renters. People who rent their accommodation, most of whom are poorer, pay rent which is taxable in the hands of the landlord owner. The landlord is also normally liable to capital gains tax on the premises. But currently people who live in accommodation they own, most of whom are richer, get their accommodation tax free and are exempt from capital gains tax on the accommodation they own.
Sinclair Davidson takes an easy way out advocating the States need to raise more tax. Presently they are down to using traffic cameras to extort desperately sought after funds. Their motor accident insurance is being slammed wiht multi million claims which includes the public hospitals. The plight of the central states NT and SA with their relatively sparse populations but being asked to provide cross-over roads and railways to cater for the east – west traffic needs is not understood in Canberra. In turn they also have to find funding for water and energy needs from a small numbers of users. Of course the States could resort to an income tax or even a “head” tax starting with a$90 annual membership fee from all pensioners. This would be a transparent book entry to transfer Federal funds, in lieu of things like housing rent increases. After that families would pay so much for each adult and then scale down over the number of children. Any increase in State Duties will start to slow down business development.
Gavin, can you please clarify what you mean by:
“desirable to maintain horizontal equity with renters”?
If house prices are going up, yes, the owners would make a profit on selling thier house. But if they wanted to buy another house, presumeably it’s value would have risen as well. they haven’t really made a cent, the money they made is still tied up in thier accomodation.
What if house prices went down? Would they be able to claim the loss back?
I doubt it.
Socialize the profits, privatize the losses. We could call it the Robin Hood policy.