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Naked truth is better for selling tax

By Geoff Carmody - posted Thursday, 1 July 2010


The holy grail of tax theory is a tax that raises revenue without changing taxpayer behaviour and without shifting the tax away from those legally required to pay it.

The government is selling the resource super-profits tax as a practical example.

It claims rich foreign miners will pay the RSPT and the revenue can be used to fund benefits for (voting) Australians.

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For a capital-importing country such as Australia, the explicit xenophobia used as part of the rhetoric pushing this tax is appalling and irresponsible. The class war overtone also used is wedge politics, ignoring past reforms, including those of the Hawke-Keating governments, that brought people together (for example through superannuation investments).

Worse, the RSPT is a wolf in sheep's clothing. For new mines, it looks like another distorting tax. The government's future cost refund promises on which its non-distorting credentials rest aren't believed by the market. They're worthless. Most Australians will pay through lower investment, jobs and asset prices.

For existing mines, it may be closer to the ideal non-distorting tax. But it gains that accolade by being applied to existing mines as a complete surprise after all the hard work has been done, costs are depreciated away and only the rewards from success are there to be taxed.

As with most real-world “ideal” taxes, the trick is to ambush successful investments after success has been delivered and hope future investors will be too dumb to worry that the same trick may be pulled on them.

This is dishonest and likely to be a one-trick strategy, the costs of which will be a permanent souring of the investment climate and less growth down the track.

So, far from looking after future generations, as its proponents claim, the real risk is that the short-term political opportunism driving the RSPT will detract from their living standards.

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So-called developer levies are also dressed up as an ideal tax. Governments pretend the landowner or the developer pays such levies. If they don't, the tax must be shifted to home buyers and other property investors. If landowners and investors won't pay, and developers can't make a profit by passing the levy on, the land doesn't get developed.

In time, the resulting land banking (including by governments) pushes land and property prices higher as demand grows, until the developer or government owner can pass the levy on to the next buyer in the chain.

Australia's housing affordability problem in some states partly reflects this problem. In the end, consumers - especially first-home buyers - usually end up paying so-called developer levies.

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First published in The Australian on June 24, 2010.



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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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