Taxes and the States

I'm not a huge Peter van Onselen fan but there are some interesting points to be made from his most recent column. His whole argument seems in favour of allowing an equal distribution of the GST in return for its increase.

The case for upping the GST is powerful. Growth in the tax has not kept pace with the costs attached to funding a host of state-based services. The squeeze is only going to get worse in the years to come.

The case for upping the GST may be viable on the grounds that it is one of the most efficient taxes because it is not a tax on production (unlike a capital gains or income tax), but the case should not be made on the basis that states are no longer able to afford the services they are providing. We already have a case where more productive states like WA - who get 68c in the dollar - are funding less productive states like Tasmania - who get $1.60 in the dollar.

A few years ago, the cost of providing government welfare (including to the middle class) outstripped revenue from income taxes for the first time in our national history. This, to be sure, is cause for a wider debate about the size of government. But, more urgently, it means we need to plug the funding gap that is fast becoming a gaping hole.

His logic seems to be backwards here. Yes there is a problem with too much welfare provision but the solution shouldn't be to up taxes but to cut spending. Yes there should be more equalisation but supplying the funds to states like NSW that produce less than states like WA will only guarantee that spending will increase even further. Politicians only confront dire fiscal conditions when they are forced to. If states were spending their own tax revenue then perhaps there would be more incentive to economize.

One of the arguments in favour of Tasmania's disproportionate share of the GST is its unique status as an island state. But the high unemployment rate and poor economic performance of Tasmania should be an incentive for people to move to places like WA where there are jobs that can't be filled. As Henry Ergas points out

While the CGC originally sought to ensure financially weaker states could afford public services to a "minimum acceptable standard", by the 80s the goal had changed to that of making the states fully equal from a fiscal point of view.

As that happened, our fiscal redistributions came to greatly exceed, in scope and ambition, those in other federal systems.

Little wonder our economy responds poorly to shifts in the geography of economic opportunity. And it is surely paradoxical that both government and opposition lament WA's reliance on importing short-term migrants while defending fiscal arrangements that discourage domestic labour mobility.

Basically, WA shouldn't be punished for collecting more mining royalties and should be a greater benefactor of more GST income to provide more services and training to attract employees for its productive sectors. If there are little economic activities in Tasmania then people should be encouraged to move where there are opportunities and our overly centralised 'federal' system shouldn't be standing in the way.

But this is John Howard's legacy. Despite being a decent PM he lacked respect for the federation.