Two op-eds on the Bank Levy

In the last week I have published two op-eds on tax policy and the bank levy in particular. The first in The Spectator Australia and the second in the Australian Financial Review.

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The relationship between taxpayers and government should be symbiotic – to the mutual benefit of each party. This is certainly what Adam Smith had in mind when he wrote that everyone should contribute to the support of government in proportion to the revenue they enjoy under the protection of the state. He also wrote that paying tax was a badge of freedom and not the mark of a slave. How times have changed.

A lack of fiscal discipline has seen ten years of budget deficits translate into over half a trillion dollars worth of debt. That is over five hundred thousand million dollars. You’d think that the government would have stopped spending money, cut staff, and salaries. Delayed, or even cancelled, big ticket spending items that are unaffordable? Well, no.

The government have turned a symbiotic relationship into a parasitic relationship. The past week has seen two disgraceful tax incidents.

At the last budget, the government announced a bank levy – a tax on tier-two bank capital. As if taxing capital was ever a good idea. This is a tax that strikes at the very heart of the banking system. Banking, as a business, involves lending borrowed money. Lending out your own money is venture capitalism. Expect to see some capital rationing and higher lending rates in the next few years as banks pass this levy onto their customers.

To make matters worse, the government contrived to apply this levy to only five banks. One of those banks has threatened to move their operations offshore. It takes a special kind of stupid to so obviously destroy Australian economic activity and local initiative. It seems, however, that our friends in Canberra are up to the challenge. Mind you – have they ever stopped to think why investment, wages, and economic growth have been so sluggish of late? Probably not.

Not to be outdone, South Australia has just announced they will be copying the federal bank levy. This is precisely the sort of state-based nuisance tax that the GST was brought in to eliminate. It is very disappointing that politicians are reneging on the tax deal that the Howard government negotiated with the Australian people when the GST was introduced a mere 17 years ago. Of course, it is very difficult for the federal government to hold the South Australian government to account when they themselves are trashing the Howard legacy.

Then there is the GST on low-value imported goods fiasco. The government has a tax law that will come into effect on July 1, 2018 but has asked the Productivity Commission to advise them how to actually make it work. Clearly, it can’t operate on the same basis as goods above the $1000 threshold. That isn’t economically viable – the government would be borrowing money to collect less tax than it cost to collect the revenue. Even our current crop of politicians realised that wasn’t too smart.

Plan B was to require online business platforms to collect the tax from their own clients and then pass it on to the Australian government. This required foreigners to voluntarily comply with Australian tax laws when Australian citizens have to be coerced into compliance. This would almost certainly have resulted in Australians being geo-blocked on many platforms. On the positive side, nobody would have to worry about the slow NBN speeds if Australians were excluded from online activity.

All this sounds like some low-budget slapstick comedy, but this is what tax policy has become. Canberra needs to get serious – stop trying to grow the tax take and focus on growing the economy.

Sinclair Davidson is a professor in the School of Economics, Finance and Marketing at RMIT University, a senior research fellow at the Institute of Public Affairs, and an academic fellow at the Australian Taxpayers’ Alliance.

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Policy elites take the view that former prime minister John Howard did a deal with Meg Lees and the Democrats to introduce the GST. In a trivial procedural sense that is accurate. More importantly, however, Howard did a deal with the Australian people that in return for repealing a huge bunch of nuisance taxes, the Commonwealth could levy a broad-based goods and services consumption tax.

The electorate has held politicians to that deal – tampering with the GST has very quickly become a no-go zone. Politicians who try to vary the rate, or base, fast find themselves on the receiving end of voter dissatisfaction.

Australia has done very well out of the GST settlement – many inefficient taxes have been repealed and massive revenue flows have been directed to the states and territories. While there is some dissatisfaction with the distribution of GST to Western Australia, the tax quickly became a widely accepted and understood part of the fiscal landscape.

Howard’s genius in devising the GST was to ensure that the Commonwealth that collected the tax had no incentive to vary the arrangement while ensuring that it bore all the political cost of doing so. After 17 years, the political class has found a loophole.

An unprincipled Coalition government is trashing the Howard settlement. First, we saw the attempt to apply the GST to low-value imported goods bought online for under $1000. That piece of silliness is at the Productivity Commission to work out how it can be done – mind you, the start date for this yet-to-be-designed tax is July next year. But it is the bank levy that looks to be the most egregious violation of the GST settlement.

The levy announced at the last budget is a nuisance tax – exactly the sort of tax the GST was meant to eliminate. All sorts of propaganda has been proposed to justify the tax, but the bottom line is that there is a hole in the budget due to excessive spending and the government needed a plug. Who better to whack than those ungrateful banks – who, apparently, have plenty of money and can afford it anyway.

Contrast the bank levy with the ill-fated mining tax. Taxing rent is the economic equivalent of a perpetual motion machine and was always a bad idea. Nonetheless, the government hoped to substitute a tax on rent for royalties – in theory, at least, an economic improvement. Contrast the bank levy with the carbon tax. There the government had the notion that a less carbon-reliant economy would lead to improved living standards sometime in the future. That view seems to be bipartisan policy.

No noble notions

The bank levy has no such noble notions – rather, it is a mechanism to raise revenue from people who have annoyed the government.

That South Australia would copy the bank levy seems to have caught everyone off guard. In an audacious move, the South Australians have not just wedged the federal government, they have skewered them. How does it argue that the state-based bank levy is a violation of the GST agreement but the identical federal-based levy is not?

Of course, we should all have seen this coming. After all, when the federal government introduced the mining tax Mark II they promised to refund all royalties and the states responded promptly by raising their royalty rates.

One way of thinking about federal-state fiscal arrangements is as a cartel. The various tax bases are carved up and shared out with a dominant player and a series of smaller players. At the last budget, we saw the dominant player create a new tax base and provide political cover for the smaller players to increase their share.

It gets worse.

Compelled to follow suit

If South Australia manages to “get away” with its bank levy, all the other states will almost certainly be compelled to follow suit. The GST distribution mechanism penalises states that do not fully exploit their existing tax bases. Not only will not having a bank levy result in lower tax revenue, it could also result in lower GST revenue from the Commonwealth.

Howard’s GST settlement requires the Commonwealth to jealously maintain integrity of the system. But when the Commonwealth itself breaks the deal, it could be impossible to stop the states from defecting as well.

Sinclair Davidson is a professor in the school of economics, finance and marketing at RMIT University, a senior research fellow at the Institute of Public Affairs, and an academic fellow at the Australian Taxpayers’ Alliance.

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24 Responses to Two op-eds on the Bank Levy

  1. max

    The Bible is clear: When the central government collects as much in taxes as God demands in the form of a tithe — 10% — the nation has moved into tyranny.

    In today’s world, to get back to the tyranny of Egypt — 20% of income — the various levels of civil government would have to cut taxes by at least half.

    Egypt was a veritable flat-tax paradise compared to modern America. Yet Christians and Jews vote for more of the same.

    https://www.lewrockwell.com/2008/04/gary-north/i-miss-pharaoh/

  2. max

    tyrannical governments prefer to tax income.

    Biblical principle of taxation: Every higher level of civil government must tax only the next lower level. No tax should be paid directly by residents to any level of civil government above the city or county, whichever local voters have chosen as the originating tax jurisdiction under which they live. All higher levels must tax only the next lower level. The Federal government taxes the states; the states tax the counties; the counties tax cities or county residents.
    Implementation: A flat rate income tax at this level is not prohibited biblically, just so long as it does not reach the 10% level (I Sam. 8:14, 17). However, it is unlikely politically to remain biblically restrained. Voters will seek to tax higher-income residents at a higher rate: a denial of the rule of law (Ex. 12:49). A sales tax is much better for both personal privacy and judicial equity: an inherently flat tax. Everyone pays the same. A sales tax also does not tax capital and profits, which in turn spurs investment and economic growth.
    https://www.garynorth.com/public/2315.cfm

  3. Rob MW

    Then there is the GST on low-value imported goods fiasco. The government has a tax law that will come into effect on July 1, 2018 but has asked the Productivity Commission to advise them how to actually make it work. Clearly, it can’t operate on the same basis as goods above the $1000 threshold. That isn’t economically viable – the government would be borrowing money to collect less tax than it cost to collect the revenue. Even our current crop of politicians realised that wasn’t too smart.

    Plan B was to require online business platforms to collect the tax from their own clients and then pass it on to the Australian government. This required foreigners to voluntarily comply with Australian tax laws when Australian citizens have to be coerced into compliance. This would almost certainly have resulted in Australians being geo-blocked on many platforms. On the positive side, nobody would have to worry about the slow NBN speeds if Australians were excluded from online activity.

    All this sounds like some low-budget slapstick comedy, but this is what tax policy has become. Canberra needs to get serious – stop trying to grow the tax take and focus on growing the economy.

    Lol. Simply gold.

    It’s going to be difficult for the numbatistas that came up with this clever economic theory to argue against any individual or political party that have similar, or even divergent, economic theories, I mean, shit someone left the top paddock gate open and the ferals escaped.

  4. Chris

    Nice work Sinc.

    One of the worst features of modern journalism is that there is no explanation of the broad situation, just transcribing the bastards press releases and quotes.

    Your pieces are clear and I think easy to understand.

  5. Norman Church

    “While there is some dissatisfaction with the distribution of GST to Western Australia …”

    Hilarious!

    Boiling, white hot anger and resentment would be a more accurate description.

    Of course, this ‘dissatisfaction’ with the distribution of GST to Western Australia is really only held in Western Australia. Everybody else is perfectly happy with the outcome. So, nothing is going to change – other than the loss of a swag of Liberal seats in WA.

  6. max

    The Bible is clear: When the central government collects as much in taxes as God demands in the form of a tithe — 10% — the nation has moved into tyranny.

    In today’s world, to get back to the tyranny of Egypt — 20% of income — the various levels of civil government would have to cut taxes by at least half.

    Egypt was a veritable flat-tax paradise compared to modern America.

  7. Myrddin Seren

    One way of thinking about federal-state fiscal arrangements is as a cartel. The various tax bases are carved up and shared out with a dominant player and a series of smaller players. At the last budget, we saw the dominant player create a new tax base and provide political cover for the smaller players to increase their share.

    How about a group of organised crime syndicates that meet regularly to carve up the territory and the spoils ?

    #Underbelly: ATO

  8. H B Bear

    So, nothing is going to change – other than the loss of a swag of Liberal seats in WA.

    Yep. Whhhhhhhhhhhhiiiiiiiiiiiiiipppeeee out – including golden child, PM in waiting Christian Porter who will be down at the political equivalent of Centrelink, the WA Lieboral Party HQ looking for a safe seat for next time. He will be lucky as the Performing Stick Insect will be booted from Curtin, after devouring 3 or 4 parliamentary leaders. Talk about failing upwards.

  9. H B Bear

    Good stuff Snic.

    The Federation is now a major impediment to any worthwhile economic reform in this country. It is not Robinson Crusoe though, joining the Senate and compulsory preferential voting as active impediments to allowing the government of the day to implement what limited mandate any political party obtains in general election.

    Australia has now had over a decade of stasis and woeful governance. I have never been less optimistic about this place.

  10. val majkus

    All this sounds like some low-budget slapstick comedy, but this is what tax policy has become. Canberra needs to get serious – stop trying to grow the tax take and focus on growing the economy.

    AND minimise wasteful spending! who needs the HRC for a start? Cut the ABC spend! … just to name a couple

  11. thefrolickingmole

    I hadnt considered the GST implications of the bank tax, much like the old death duties in reverse, once one state does it they will all be in on it.

    I wonder how far away we are now from a new death tax for “equalidees” sake?

  12. Rabz

    nothing is going to change – other than the loss of a swag of Liberal seats in WA

    Good times. Here’s hoping Mohammad al-Porter and the stick insect are filmed by ACA shortly after their ignominious turfing rifling through some garbage bins.

    Now that would be a televisual feast.

  13. Rabz

    I wonder how far away we are now from a new death tax for “equalidees” sake?

    As far away as the inevitable election of the Tits Peanuthead/Greenfilth goat rodeo.

  14. RobK

    Well done Sinc. I think the reference to Adam Smith and “the badge of honour” can be closely aligned with above references to the bible. In so many natural systems a measured amount of something works but more of it doesn’t mean a better result. In fact most things in excess are toxic. Taxes are no exception.

  15. RobK

    Higher taxes leads to more welfare.

  16. Neil

    You’d think that the government would have stopped spending money, cut staff, and salaries. Delayed, or even cancelled, big ticket spending items that are unaffordable? Well, no.

    Well they tried in May 2014 but were blocked by the Senate and then it looks like the Coalition gave up. This is what it took to get the budget back into surplus in 1996

  17. .

    Well they tried in May 2014 but were blocked by the Senate

    Really?

  18. Tim Neilson

    South Australia should get a vicious kick in the bollocks at the next Grants Commission meeting. Forget about trying to justify an attack on their bank levy. The politics is simple for the Coalition. Just announce that in a display of the utmost generosity by other States, South Australia will be getting $1.01 for every $1 of GST it puts into the pot. Let Weatherill explain how, after so many years of ALP State government, it needs more OPM. Give most of the savings to WA, but give token amounts to other States to buy votes there. Sure you’d probably lose SA seats (including Pyne, so what’s really not to like), but you’d go some way towards placating WA and maybe get some points elsewhere.
    But they won’t. And I don’t really want them to because I want to see the Termite wing of the duopolistic cartel humiliated at the next election.

  19. Dr Fred Lenin

    I know a timber miller who is ready to supply the wood for the oars on pynes sub,well noats ,all stamped with “unionmade ” , when thefirst is ready they will say ,”submarie? Under water ? No one mentioned underwater Well what do you expect for 5o billionbucks these days ?

  20. Dr Fred Lenin

    Sorry “noats” , a boat tgsts not a boat ,soshalism at wurk .

  21. Neil

    Really?

    Do you have something to contribute?

    Spending cuts were blocked by the ALP in 2014. And then it looks like the Coalition gave up. I think it shows how great Howard/Costello were that they turned a massive Labor deficit into a surplus within 12 months and then kept running surplus budgets.

    If you think you could do better perhaps you should enter Parliament

  22. Tator

    Tim Neilson,
    The state Libs are making big noises to block the bank levy in the State Parliament. Having seen the states books and considering that Whiney Weatherill is spending at the same rate as the GFC stimulus years yet at the same time has been cutting budgets to services like police, health and pathology, one thinks his CFMEU masters are getting the big spend on projects they can leech taxpayers funds from.
    Also, the revenue breakdown shows that they are spending more Federal Government money than they are of their own revenue(GST defined as fed money) They have been the highest taxing government in Australia for years yet still cannot balance their books without asset sales to prop up recurrent expenditure yet bitch about the Libs selling off ETSA to pay down debt generated by the ALP’s incompetence.

  23. Tim Neilson

    Tator
    #2426772, posted on June 29, 2017 at 3:57 pm

    Thanks Tator.

    The state Libs are making big noises to block the bank levy in the State Parliament.

    That’s something I suppose. Though to be honest a better use of scarce resources of vertebrae would be to do something about energy policy.

    one thinks his CFMEU masters are getting the big spend on projects they can leech taxpayers funds from.

    With a State ALP government that’s a safer bet than the Tiges finding a way to self-immolate late in the AFL season.

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