John Menadue. State income taxes – another political diversion?

Mar 31, 2016

Malcolm Turnbull’s suggestion of states entering the income tax field may please ‘state rightists’ in the Liberal party, but it will damage our national aspirations and our national society and economy.

In the repost below, Michael Keating, almost two years ago emphasised the importance of the commonwealth government’s domination of income taxes since 1942. This commonwealth government supremacy has been a key factor in building our successful national economy and society. Or as Paul Keating has said, the commonwealth’s income tax monopoly ‘is the glue that holds us together’.

We federated to overcome the confusion of six different state tariff regimes. Do we now want eight different incomes tax regimes?

The commonwealth’s supremacy in income tax is critical for economic management across the country. Do we want to weaken that national leadership and responsibility?

We have national markets in every field and with a very mobile workforce. Do we now want to put up state barriers to this?

Malcolm Turnbull’s proposal would put pressure on the states to reduce their own tax rates. Perhaps this is what his ‘state rightist’ supporters would like. We saw that in the 1970s when Queensland reduced state taxes and abolished death duties. All other states followed and we are now much worse off as a result. If states decided to introduce their own income taxes, we could see another race to the bottom.

What Malcolm Turnbull is trying to do was tried forty years ago by Malcolm Fraser. The details may be different, but the Fraser proposal went nowhere.

The Turnbull government has become very agile in diversionary tactics. The Abbott government spoke of a debt and deficit disaster but the Turnbull government wants to divert attention elsewhere. A GST was deliberately floated but then our attention was directed elsewhere. One critical issue above all else is budget repair. The Committee for Economic Development in Australia (CEDA) and others have suggested options for overcoming our persistent budget deficit, including increases in revenue. But the government doesn’t want to hear about that, so our attention is diverted to state income tax.

I believe that strong national economic and social leadership is essential for the commonwealth government in the 21st Century, particularly in the global world economy in which we live. That globalisation will continue to grow. Why should we handicap ourselves in meeting such a challenge?

I have always believed that ‘cooperative federalism’ although less sexy and requiring hard work, is the much better way to proceed. In the health field where states spend up to 30%of their budgets, I have proposed for many years a joint commonwealth-state health commission in any state that will agree. Perhaps a joint commonwealth-state health purchasing agency in regions would be a more practical way to start. I will be writing more about cooperative federalism in the health field.

Tony Abbott has left us with many unfortunate legacies. He abolished the COAG Reform Council which had been trying to lead an informed debate on ways that the commonwealth, state and territory governments could cooperate to harmonise their responsibilities. One task of that Reform Council was to build a ‘seamless national economy’.

Malcolm Turnbull seems to want to pull the seams apart.

Michael Keating will be writing further on this subject.

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