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.
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.