It’s widely expected that the Federal government today will announce a temporary increase in the Medicare levy to pay for the flood damage that has occured in Queensland and other parts of the country. Early reports suggest that people affected by flooding will be exempt while those not affected will have to pay. I’m not sure how that’s actually going to work – in some places people living over the road from each other may or may not be liable for a Commonwealth tax based simply on an accident of geography. (I suspect constitutional lawyers will want to keep an eye of that issue.) Then there is the issue of defining ‘flood damage’ if it is associated with a lower tax rate. There is more than a little moral hazard associated with this proposal.
What concerns me, however, is that policy makers have been somewhat limited in their thinking about financing the rebuild effort. Levy or spending cuts? Given that choice I reckon spending cuts should, at least, be the dominant source of financing. (Cuts could and should finance the entire rebuild, but that is a choice they obviously have already considered and rejected).
So what to rebuild? Should all the pre-existing infrastructure simply be replaced? or upgraded? A lot of careful thinking should go into that decision. Who gets to make the decision? The Commonwealth who is levying the tax, the taxpayers of other states who pay for it, or the people who are the direct beneficiaries of the spending?
What about other sources of finance? A lot of infrastructure is being rebuilt from scratch – this is an opportunity to introduce a whole lot of user-pay principles to public infrastructure. Rebuilt roads and bridges, for example, could be tolled; taxpayer-citizens loathe tolls being introduced on existing infrastructure – quite rightly, they have already paid for it through their taxes – but a lot of this will be new. It could then be financed on a commercial basis.
By providing private financing choices it sharpens the mind as to what will be rebuilt and where and how and so on. Rather than have an open cheque from the Commonwealth (and all the strings, not to mention wastage, that comes with) the rebuilding effort will be focussed, effective and somewhat more efficient.
Update: Graingrower left this is the comments, but I think it is well-worth highlighting
Defining flood damage is of great interest to me personally and no doubt to the majority of cropping farmers. We estimate the 125mm of rain we received in 2 days will cost us 60% of our projected pre-rain income this year.
However the actual flooding, if it is defined as water sitting around where it shouldn’t be or damage to fences etc. is a much, much smaller area and amount. While nobody likes paying an additional tax, it appears we will get the double whammy of major income damage and a new tax. I doubt the Federal Government has any clue about this or if they do that they care, after all I and my neighbours are still making a taxable income. Even if it is much reduced and is the first one in some years.
is there not a saying that a temporary tax will live to see its hundredth birthday?
john malpas
27 Jan 11 at 8:46 am
I don’t want to pay. I don’t like Queensland. They should be encouraged to secede.
TerjeP
27 Jan 11 at 8:47 am
Of course the bright side if we did succeed would be that la gillardine would no longer be our PM. It would be Wally.
I can’t see how you can effectively apply s flood tax to some and not others too easily.
A flood claim from an insurance company?
A claim on the $1000 Centrelink payments?
Located in one of the cat C NDRRA shires?
Any of the above would be a road to grief.
Entropy
27 Jan 11 at 8:54 am
Let me see if I have got this right. The people who built their houses in flood prone areas don’t have to pay, but the people who didn’t build their houses in flood prone areas do have to pay. And this government claims to believe in fairness! Go figure.
At least she has used this as an excuse to dump her clunker policy. Not all bad.
And if the Opposition can effectively fight against it, it might spook her into not inflicting an unnecessary ‘carbon’ tax on us. Another good outcome.
johno
27 Jan 11 at 9:13 am
It will achieve precisely as much as the gun “buyback” levy ie fuck all. And I was among those who “sold” stuff.
DavidLeyonhjelm
27 Jan 11 at 9:20 am
How on earth is any of this constitutional, if reported correctly?
.
27 Jan 11 at 9:25 am
It’s concerning that some respectable commentators are coming out and saying that the deficit should be extended to pay for the rebuilding, Warwick McKibbon (and, less interestingly, Alan Kohler) amongst them. Yet the RBA increased official interest rates beyond neutral in November, suggesting that the economy is already growing pretty fast. Apart from cancelling the remaining BER spending, the best option might be to delay the NBN by 5 years, by which time we will have more information about whether it is likely to be a worthwhile project and at which time it is likely to be a more worthwhile project. This would save about $5 billion costs in present value terms.
Sleetmute
27 Jan 11 at 9:26 am
…my suggestion would be to extend the across the board cuts, and not levy the tax.
.
27 Jan 11 at 9:27 am
Cuts could and should finance the entire rebuild, but that is a choice they obviously have already considered and rejected
how could cuts finance the rebuild?
daddy dave
27 Jan 11 at 11:13 am
a gov’t user pay principle for roads and the like does not reduce the size or fiscal burden of govt decisions on tax-payers. it simply provides govt the disincentive to eliminate waste because it no longer has the same need to prioritise spending, and because gov’t do not do price competition (cutting fees).
the principle would only work if all the roads were privately run. for instance, with all the road tolls around sydney taking traffic away from govt’ run roads, i’m still waiting for a cut in registration and the fuel tax to flow through to my bank account. the road tolls just become an indirect gov’t tax.
Adrian
27 Jan 11 at 11:18 am
Maybe we should give them the boot if they do that?
User fees are better. Money hungry Governments are not a reason to avoid them. Money hungry Governments are a good reason to vote for an alternative.
.
27 Jan 11 at 11:20 am
dd – spending cuts elsewhere in the budget.
Sinclair Davidson
27 Jan 11 at 11:21 am
Defining flood damage is of great interest to me personally and no doubt to the majority of cropping farmers. We estimate the 125mm of rain we received in 2 days will cost us 60% of our projected pre-rain income this year.
However the actual flooding, if it is defined as water sitting around where it shouldn’t be or damage to fences etc. is a much, much smaller area and amount. While nobody likes paying an additional tax, it appears we will get the double whammy of major income damage and a new tax. I doubt the Federal Government has any clue about this or if they do that they care, after all I and my neighbours are still making a taxable income. Even if it is much reduced and is the first one in some years.
grain grower
27 Jan 11 at 11:36 am
Or to put it another way the 5 billion dollar rebuilding of flood affected areas is a little less than 1/3 of the disaster “building the education revolution” was at 16 billion….
Or about 1/4 of the disaster the NBN will be…
thefrollickingmole
27 Jan 11 at 12:07 pm
WTF?
You build a house in an old river bed because the land was cheap, don’t take out proper flood insurance because it’s a few 100 bucks more. Not only don’t you have to pay the levy but you also get some mullah from the government.
The person who built higher up does pay.
Are these fucking clowns for real?
This is a scam by this scumbag of a government to rebuild a constituency in Queensland while also hoping there’s money left over cover up some of the deficit.
If people in the rest of the states and those living on higher ground accept this scam without comment we all deserve this government for the next generation.
JC.
27 Jan 11 at 12:08 pm
First they give us XXXX. Then they give us Rudd and Swan. Now they give us a levy.
Queenslanders are the worst people on earth. To hell with all of ‘em.
Infidel Tiger
27 Jan 11 at 12:34 pm
The efficient formula for financing public infrastructure (e.g. roads and bridges) is not “user pays” (e.g. tolls) but “beneficiary pays“. The beneficiaries of a new road or bridge include not only the users of it, but also the owners of land in locations serviced by the new facility, or by alternative routes on which congestion is reduced by the new facility. That land rises in value (cf. the front-page story in Australian Property Investor, Feb.2010).
If one tries to impose the entire cost of the new facility on the actual users, the use of it will be sub-optimal — often so much so that user charges fail to cover the cost. To make the project viable, it is usually necessary to claw back a substantial fraction the resulting uplifts in land values. Private financiers, of course, can’t do this — which is why PFIs/PPPs so often go belly-up, requiring government takeovers/bailouts, which defeat the purpose of private finance, but only after the consultants have taken their fees and run.
But if the government, using the taxation power, claws back a certain percentage of every uplift in the value of land, wheresoever and howsoever caused, then every infrastructure project whose uplift/cost ratio is at least equal to that fraction will be self-financing from the government’s point of view. There is no need for the tax measure to take any explicit account of location, hence no risk of violating s.51(ii) or s.99 of the Constitution.
Libertarians apparently consider it outrageous that a land owner can be required to pay back a fraction of the increase in the value of his land caused by a project about which he was not consulted. But at least he is getting a benefit in return for the payment (which is therefore properly called a charge rather than a tax). The same cannot be said for the various ways in which the government spends his income tax or other taxes buried in the prices that he pays. And he wasn’t consulted about that spending either! In those circumstances, if you complain about a partial clawback of unearned windfalls in the land market, your indignation is grotesquely selective.
Gavin R. Putland
27 Jan 11 at 1:28 pm
Gavin:
Most libertarians that I know here or elsewhere have never expressed the disgust towards property taxes you self righteously claim they do.
Next up you’re mixing up all sorts of principles and positions in a dishonest way.
JC.
27 Jan 11 at 1:32 pm
No Gavin.
The concern about Georgist taxes is that if they are not rated very lowly, then they become wildly distortive. A 20% LVT would wreck the economy. Not as much as doing an equivalent revenue raiser of doubling all taxes though…
If we have private infrastructure, you’re saying we should tax positive externalities? Usually orthodox theory says we should subsidise positive externalities.
There are plenty of successful private toll roads. The M5 and M7 for example. The M7 got good advice. The Lane Cove Tunnel ignored the advice.
The role of business managers shouldn’t be confused with a generality.
.
27 Jan 11 at 1:37 pm
I wouldn’t say that JC. He’s almost libertarian in some of his views. Georgists often are. They’re good guys.
The Georgist movement however has a chip on its shoulder from the Gandhi/Ayn Rand wings of the US libertarians. They’re 100% against the tax. Americans also have a propensity to label it “communism”, despite what the manifesto says about income taxes…
.
27 Jan 11 at 1:47 pm
Missing preposition: My “substantial fraction the resulting uplifts” should of course be “substantial fraction ofthe resulting uplifts”.
Gavin R. Putland
27 Jan 11 at 2:02 pm
(From missing preposition to missing space…)
JC and “.”: I’ll take your word for it – maybe the “libertarians” who bite me are unrepresentative. Of course we Georgists don’t consider ourselves “almost” libertarian; we consider ourselves the real libertarians.
Re “Usually orthodox theory says we should subsidise positive externalities”: More precisely, we should subsidise the cause of positive externalities. Which raises the question: how is one to finance the subsidy of the cause, if not by clawing back some of the effect?
Gavin R. Putland
27 Jan 11 at 2:44 pm
Why are the Queensland government assets not insured?
Andy
27 Jan 11 at 5:39 pm
Yea I know they’re good guys. However they have an annoying habit of attacking regular libertarians. They ought to stop it as we’re not their enemies, the statists are.
JC.
27 Jan 11 at 6:18 pm
“They ought to stop it as we’re not their enemies, the statists are.” Nah, it’s the People’s Front of Judea he needs to be targetting.
If you want to really puke then read this:
http://www.couriermail.com.au/news/opinion/politics-must-not-muddy-levy-plan/story-e6frerg6-1225993700197
pedro
27 Jan 11 at 6:30 pm
The Johnstown flood tax was enacted in 1936; it’s still going strong…
Tim Andrews
27 Jan 11 at 7:03 pm
What a moron he is, Pedro.
So “helping other people” isn’t a new tax, it’s just “helping other people”.
In any event Abbott isn’t to his own discredit isn’t walking away from the Queensland spendathon. All he’s saying is cut other spending to finance this thing.
JC.
27 Jan 11 at 7:08 pm
Let’s not forget that NSW, and Tas flooded and Vic is still under flood and SA will get it as well.
The other states need to ensure Duck Bum and SwanDive need to be held accountable … Unlike the last ( forgotten how many ) times they messed up the spending of our piggy bank for a rainy day
Aussieute
27 Jan 11 at 7:39 pm
JC
Well Abbott has never even hinted he’s any type of liberal, let alone libertarian!
Peter Patton
28 Jan 11 at 10:28 am