Economic freedom

A case for restoring the income tax powers of the states

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As the late former Labor Minister Peter Walsh said in 1997, a ‘fundamental principle of responsible government in any system is that each government must raise the money that it spends.’ However, for a long time now, states in Australia, which have the most responsibility for public expenditure, are dependent on the federal government, which have the most powerful tools for levying taxes.

Accounting for approximately 45% of total Commonwealth government revenue, income taxes are the biggest taxation tool at the Commonwealth’s disposal. It is this tax power, which, if returned to the states, would do more than anything else to address the gross imbalances in the Australian federation.

This is why it was so encouraging to see a government backbencher include a proposal for an income tax sharing arrangement between the federal and state governments in this IPA Review article. Liberal MP Dr Peter Hendy’s bold plan would split the $37,000-$80,000 tax bracket between the commonwealth and the state of the taxpayer:

Currently that tax bracket attracts a tax rate of 32.5%. So a change would mean that for taxpayers in that bracket they would actually have a 22.5% federal income tax and a 10% [state] income tax.

Treasury calculated that this 10% state income tax would raise $25 billion. The NCA shows that this would allow the federal government to completely withdraw from all education funding, public housing projects and a large number of National Partnership Agreements.

Dr Hendy’s essay forms a compelling argument for reforming the federation, and a forceful reminder that the problems of the states can be solved without raising the tax burdens of individuals.

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Vague concept of “fairness” clouding tax debate

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John Roskam has an essential article in the Australian Financial Review this morning, dispensing with many of the myths surrounding the current tax reform debate. It begins:

There are so many things wrong about the current tax debate it’s difficult to know where to begin. For a start, Australia is not a law-tax country. Second, the wealthy don’t get any special treatment from the country’s tax system. And third, the suggestion that multinational companies should pay tax, not according to what the law requires but according to the personal interpretation of politicians of what’s “fair”, is ludicrous – and dangerous.

Indeed, asking companies to voluntary pay a “fair” amount, as well as some conduct from recent Senate hearings, undermines the rule of law:

Two of the relevant principles of the rule of law are that laws must be understandable and they must be able to be obeyed. Because everyone’s definition of “fair” is different, it’s impossible for any company executive to ever know whether they have complied with the Labor/Greens specification of “fairness”. If Labor and the Greens want to change the tax laws affecting multinationals, by all means they can try. But in the meantime politicians should not be expecting anyone to obey their personal whims.

The former Labor minister Craig Emerson said in these pages a few days ago that the Senate hearings against multinational companies “involve an element of rough justice, since some of the corporations making invited appearances might have done little or nothing wrong”. What’s happening is worse – it’s a breach of the rule. If we’re now prepared to accept our elected representatives handing out “rough justice” the country is in even more trouble than we’ve realised.

On June 15 we’ll be celebrating the 800th anniversary of the Magna Carta. The achievement of the Magna Carta was that it began the process that replaced the arbitrary rule of kings with the rule of law. The recent behaviour of senators (Sam) Dastyari and (Christine) Milne isn’t very different from the “rough justice” that once upon a time King John handed out.

You can read the whole article here.

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Hockey has the revenue Costello had, and then some

Responding to a Herald‑Sun opinion piece by former Federal Treasurer Peter Costello urging the government to consider reducing, and not increasing, the burden of Australian taxes, current Treasurer Joe Hockey responded in the following way:

Quite frankly, I really wish I had the revenue that Peter Costello had … If I had the same revenue as he had, then Iʼd be getting $25 billion extra each year to spend on things.

The beauty of this statement is that it can be proven, or disproven, by the most recent public sector financial data made available in the Mid‑Year Economic and Fiscal Outlook statement.

And here are the results, adjusted for inflation, comparing the revenue received during the last Costello Budget and the estimated revenue received by Treasurer Hockey this financial year.

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The figures make it plain: Treasurer Hockey has been receiving the same revenue that Treasurer Costello did, and then some. In real terms, an extra $18.6 billion in 2014‑15 compared against 2007‑08, in fact.

The real issue here is that spending has gotten so out of control it needs to be pared back to balance with the (larger) revenue kitty.

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Tobacco smugglers the big winners from excise hikes

laffercurve There is a significant amount of evidence from the United States which shows that increases in tobacco excise has revealed a Laffer curve in the market. As Patrick Gleason explains in the Wall Street Journal this morning:

New York state levies the highest cigarette tax in the nation, $4.35 per pack, and New York City tacks on an additional $1.50 local tax. All told, the cost of one pack there can run to $12 or more.

The result? Most of the cigarettes smoked in New York, 58%, are smuggled in from out of state, according to the nonpartisan Tax Foundation. The higher that revenue-hungry politicians raise tobacco taxes, the more profit smugglers can make.

This is a large part of the reason that revenue from increases in cigarette taxes often falls short of expectations. Washington, D.C., experienced this firsthand after cigarette taxes were raised by 25%, to $2.50 per pack from $2, in October 2009. City leaders claimed the hike would generate a windfall of additional revenue. By February of 2010, D.C.’s chief financial officer reported that projections were off by $15 million. Revenue from the cigarette tax actually fell by $7 million after the hike.

New Jersey should have learned the same lesson. In 2007 the Garden State raised cigarette taxes to $2.575, from $2.40. The new tax generated $52 million less than expected, and revenue from cigarette taxes fell by $22 million. But in 2009 New Jersey raised the tax by another 17.5 cents.

Politicians never learn. Of the 32 state tobacco tax increases that went into effect between 2009 and 2013, only three met or exceeded revenue projections, according to industry data.

Australian politicians should take note. Since mandatory plain packaging of tobacco products (accompanied by excise hikes) came into effect, the illicit tobacco market has increased from 11.8% to 14.7% of the total tobacco consumption market. Any further tobacco tax increases will only accelerate this growth.

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The Senator who doesn’t know how taxes work

Of all people, those who impose tax should have a basic understanding of how taxation works.

This is especially so if you happen to be a Senator on the Economic References Committee, grilling business leaders about ‘corporate tax avoidance’. Consider this exchange between Labor Senator Chris Ketter (Queensland) and Tony King from Apple:

KETTER: Mr King, it has been reported that Apple paid $80 million on income tax on revenue of more than $6 billion… would you describe Apple’s tax planning approach in Australia as being aggressive?

KING: No, I would not… Our tax is paid on our net income, and last year it was paid at an effective tax rate of just over 30 per cent.

KETTER: Have I got those figures wrong?

KING: Our revenue in our most recently reported financial statements was approximately $6 billion—that is correct—and our income tax expense was around $80 million.

KETTER: Can you explain how you get that effective rate of tax on a turnover of $6 billion?

KING: Yes. It is because the tax is paid based on the net profit; it is not based on the revenue.

To see this cringe-worthy exchange in full, Professor Sinclair Davidson has it here at the Catallaxy Files.

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The case against tax reform

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In 2015 discussion of taxation reform fills the policy air.

The Abbott government’s Re:think Tax Discussion Paper is the most recent example of this, canvassing a wide array of changes to the way in which governments taxes Australian businesses and individuals.

But why are ordinary taxpayers so imbibed with a sense of dread about the very prospect of reforming our taxation regime, which on any fair‑minded account is afflicted with numerous structural problems?

Australian taxpayers appear to have an inimitable talent for smelling a policy rat, and they fear that in fact taxation reform will not deliver good outcomes.

But why, then, are their fears well founded?

The Case Against Tax Reform, originally written by prominent Australian economist Geoffrey Brennan in 1987, answers this by making the persuasive case that an old tax is a good tax.

Without an explicit policy objective, upfront, that tax reform aims to reduce the overall size of the public sector, Brennan suggests what tax reform simply gives politicians and bureaucrats an easier capacity to collect revenues, raise spending, and grow government.

The danger is, if tax reformers get their way, we’ll end up, post‑reform, with a heavier GST load, a still heavy personal and corporate income tax, and continuous yet unsustainable increases in government spending.

The great value of Brennan’s forgotten classic warning against big‑government tax reform is that he encourages the reader to ask fundamental questions: In whose interests should tax reform serve? The taxpayer or the government?

The re‑publication of Geoffrey Brennan’s The Case Against Tax Reform by the Institute of Public Affairs is both a forceful and timely reminder of just whose interests tax reform is meant to serve.

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Public Holidays: Why you can’t find anywhere to eat brunch

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Struggling to find somewhere to eat brunch this weekend? Looking for someone to blame? Look no further than the Victorian government.

The Andrews government has designated Easter Sunday and AFL grand final eve as the newest public holidays, increasing the total number in Victoria to 13 (the national average is 11).

An extra few days off work certainly sounds appealing, but the decision to make them mandatory will impose significant costs on Victoria’s already struggling business sector.

This will be particularly painful for the hospitality and tourism industries, which often rely on weekend business to stay afloat. These businesses will be faced with penalty rates of 250% for part time and full time workers, and 275% for casual employees.

Business groups have estimated that these extra wages will cost the industry $105 million, and a recent survey by Tourism Accommodation Australia found that two-thirds of hotel operators plan to close or reduce services over the Easter period.

But these costs won’t only affect businesses; all Victorians will be affected.

This point was raised two weeks ago, when the Victorian Healthcare Association estimated that the additional public holidays will increase hospital costs by 60%, costs which will ultimately be paid by all Victorians, through higher taxes or reduced services. The Age reports:

According to the VHA’s [budget] submission, a large metropolitan hospital with 700 beds will face daily operating costs of $600,000 for each new holiday, while a 200-bed rural health services will face $82,000.

Spending time with family and friends is important, but the decision to take time off work ought to be decided by employers and employees (or their chosen representatives). The decision should not be made by the Victorian government.

Victorians deserve better than this display of mindless electoral populism.

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Why Uber is safer

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The head of the Australian Taxi Industry Association (ATIA) has hit out at Uber and Lyft, calling the popular ride-sharing services “cheap copies” of taxis, and arguing that they should be forced to comply with the same regulations that have stifled innovation in the taxi industry.

ATIA CEO Blair Davies made these comments under the guise of public safety:

“It’s not competition that is the issue here,” Mr Davies said. “It is the safety of the community and working conditions of drivers that we are concerned about.”

Unfortunately for Mr Davies, these “imitation taxi services” are not only cheaper and more convenient than traditional taxis; they also provide increased safety for consumers.

Unlike traditional taxi services, ride-sharing apps facilitate cashless transactions between drivers and passengers. Both the driver’s and passenger’s information is available to the other party before the transaction occurs, and both have the ability to rate the other party afterwards.

This means that if a crime occurs then all the personal information about the perpetrator is available and can be sent directly to the police. Anyone stupid enough to assault an Uber driver, or a driver stupid enough to assault a passenger, will effectively be leaving a copy of their driver’s license and credit card with the victim of the crime.

This is far safer—for both passengers and drivers—than traditional taxi services, which carry large amount of cash and pick anonymous passengers up off the street.

Furthermore, drivers who do not keep sufficiently high ratings are booted off the Uber and Lyft platforms, and customers with a poor rating are unlikely to be able to find a ride.

These safety and quality assurance mechanisms not only highlight the absurdity of Blair Davies safety concerns, they eliminate the need for government regulation altogether.

But regulation of ride-sharing is not only unnecessary, it is also counter-productive.

It took a tech company from San Francisco to create these transportation innovations because taxi industries across the country, and across the world, have long been crippled by complacency.

This complacency was caused by government regulation that increased barriers to entry and protected the taxi industry from competition.

Imposing these arcane regulations on Uber and Lyft would stifle the growth of ride-sharing and reduce public safety as a consequence.

Australia should embrace the sharing economy and remove the regulations that reduced competition and stifled innovation for decades.

For more on the sharing economy, check out the IPA’s paper by Chris Berg and Darcy Allen: The sharing economy: How over-regulation could destroy an economic revolution.

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