The current federal-state-local tax review, chaired by commonwealth treasury secretary Ken Henry, is close to completing a blueprint to reform Australia’s taxation regime. The final report is sure to include recommendations to pluck the existing tax goose more efficiently, and possibly to find new geese to pluck.
For example, there has been speculation that the final report might recommend new capital gains taxes on owner-occupied housing worth $2 million or more, potentially catching many more Australians in the governmental tax net.
Another idea canvassed is to charge traffic congestion levies. These would effectively impose penalties for road bottlenecks during peak travel hours, even though the congestion is not the product of design on the part of individual drivers.
It is expected that the taxing powers of the states will once again come under assault through the Henry Review process.
Assignment of payroll or land taxes could be given to the commonwealth to enable it to impose a standardised tax base across the breadth of the country. The states would then be permitted to raise their own tax rates within certain limits.
This idea has been greeted with much fanfare by the business community, which is not adverse to the extinction of interstate tax base competition. However, if such a proposal was to proceed then two chief advantages of fiscal federalism - choice and diversity in the tax realm - might come closer to becoming a thing of the past.
The review might also recommend ways to increase Canberra’s taxing powers at the expense of the states. One option canvassed by Henry is to create a new federal resource rent tax to replace current state mining royalties.
If implemented such a proposal would aggravate vertical fiscal imbalance in the Australian federation and extend the powers of a monolithic ATO bureaucracy.
Many of these reported proposals are inspired by optimal taxation theory, developed by economists such as Ramsay and Mirrlees and which infuse most public economics textbooks. According to this theory, tax structures should be designed so as to minimise the incentive effect of taxes on wealth-enhancing private sector economic decisions such as investing, producing, saving and working.
It is concluded in the optimal taxation literature that the best way to minimise the hissing of taxed agents is to cover the whole economy with a blanket of broad-based taxes. This system would reduce the deadweight losses associated with taxation.
As discussed by Australian economist Geoffrey Brennan and US economist and Nobel Prize winner James Buchanan the risk is that governments would use the lessons of optimal tax theory to maximise their power to tax beyond what is deemed acceptable by the voting public.
In the Brennan-Buchanan view of the world, tax base broadening is akin to governments establishing a hatchery to breed as many tax geese as quickly as possible.
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