Against Tax Reform

Slap bang on the front of today’s AFR is an article about the proposal by the NSW and Victorian governments to reform tax; specifically to transition away from a one off stamp duty on property purchases to an annual land tax.

‘Our worst tax’: opt-in stamp duty in tax overhaul

This change has been a long time cooking and apparently:

Former Telstra boss David Thodey is due to deliver his Federal Financial Relations report to NSW Treasurer Dominic Perrottet this week. The need for tax reform and abolishing stamp duty, which discourages people from moving closer to jobs and is a barrier to home ownership, will be a key theme in the recommendations.

The stamp duty vs land tax debate, like all tax reform debates has its share of silly commentary, including in this case from one of the people involved in the review, John Freebairn one of the members of this Thodey Review, who said:

With stamp duty, someone who moves every five years because of changing jobs contributes a hell of a lot to health and education…

Someone who sits in the same house forever contributes nothing.

Contributes nothing except for GST (which is the biggest source of revenue for States), perhaps income tax, perhaps capital gains tax, perhaps, perhaps, perhaps.

However, putting aside for a moment the issues associated with such a change including the abject lack of rigor in current mass land valuation methodologies and the issues associated with such a transition, TAFKAS vehemently opposes such a change until certain preconditions are met.

There is no doubt that the current system of taxes in Australia is terrible and an economic drag.  Payroll tax, whilst efficient in assessment and collection, is a pretty nasty.   And the stamp duty issues are also broadly evident.

However, underlying this debate is that state budgets are challenged due to state expenditures growing faster than state revenues, and notably ever increasing health and education expenditure.

The fundamental problem with this proposition is that it assumes that the current methods of delivering government services is optimal.  Anyone who has had any recent exposure to the public health and education systems would probably agree that there are much better ways of doing things.

To keep spending more and more money on an inefficient and ineffective method of delivery is like increasing the volume of water going into a bucket with no bottom and being surprised that the bucket never fills.

There cannot and should not be any tax reform until there is spending reform.  Not only can the key services that states deliver be delivered much more efficiently and effectively, there are many areas of government expenditure that are not required at all and should just cease.

All tax reform will do is provide the resources to remove the fiscal constraints on government and allow the same inefficiencies and ineffectiveness to perpetuate.

There is no better demonstration of this than the recent decision of the NSW Government to cancel the redevelopment of ANZ Stadium, the former Olympic Stadium.  This is a perfectly functional stadium less than 25 years old.  And the only reason the Government was prepared to entertain this project was because it had the money to spend, but no longer has.

Look also the 1996-2007 Government of John Howard.

The GST reform which handily for the Howard Government coincided with the resources boom which resulted in waves and waves for money flowing into the Commonwealth Treasury.  Before this, the Howard government was not only fiscally conservative but also generally politically conservative.

After the money started to flow, Mr Howard had the confidence to not only go on all sorts of fiscal adventures (baby bonuses, childcare rebates, health care cards, school flag poles), but it gave him the confidence to go on other policy adventures.  Without the confidence of the cash flows, it is unlikely that the Howard Government would have done Workchoices which as retarded industrial relations reform in this country for a generation.  It also created the conditions to wind back reforms to pre-Keating standards.

Resources are a constraint on government – on all policy levels.  We should not remove those constraints until government is better trained.

Innovation is not about a new device or a new website.  It is about a better way of doing things.  It can be as simple as changing operating hours or changing the composition of the team.

Innovation is generally driven by constraint … if we don’t find a better way to do this we will go out of business.  Business cannot “reform” its pricing model to generate more revenue to meet ever expanding expenses.  Business does not have the luxury of a police force to enforce its prices.  If business does not reform and innovate, it dies.

No tax reform until spending reform.  And throw in some regulatory reform along with that.

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41 Responses to Against Tax Reform

  1. stackja

    Politicians don’t reform only rearrange. Voters need to do more for themselves. But how many need a nanny? Nannies are costly.

  2. Tim Neilson

    When GST was introduced we were told that stamp duty would be phased out, because it was to be replaced by the GST.
    We weren’t told it would be replaced by land tax.

  3. John Bayley

    For anyone who still does not get it, s/he needs to read some Ludwig von Mises.

    He knew some 100 years ago already that it is not possible to have only ‘some’ socialism.

    If you start with any of it, you’ll end up with all of it.

    Not dissimilar to cancer, really.

    As is being evidenced literally every day now.

    We let governments run health & education, so they are both now a bottomless spending pit, producing ever more disappointing outcomes.

    Furthermore, they have been used to brainwash kids into believing that socialism is great, and to punish ‘sinners’ who may wish to enjoy a drink or to ride a bicycle without a helmet.

    We have the RBA conducting ‘monetary policy’ that kills savers and rewards the irresponsible.

    We have the government paying unemployed people more than what they could earn from work.

    Getting the picture yet?

  4. mem

    Adam Creighton in the OZ today talks about proposals to put an increased burden of tax on retirees. Thist assumes retirees are rich but the vast majority are not rich but have set aside enough to keep themselves off the pension. Going after the self funded retirees will backfire big time because all it will do is push more onto government pensions.

  5. Roger

    Why is it that in this country “tax reform” always means more revenue for governments?

    Tax reform in this instance would be governmnets abolishing stamp duty and cutting their cloth to suit their reduced means. And there is ample coth to be cut.

  6. John Bayley

    When GST was introduced we were told that stamp duty would be phased out, because it was to be replaced by the GST.

    When GST was to be introduced, there were plenty of ‘small government’ people arguing that while it was a worthwhile reform in principle, it would over time simply see the overall tax net expanded and the ‘old’ taxes resurrected once more.

    Thanks to Peter Costello, the rate of the GST is not easy to be increased – unlike in EU nations, where it is now mostly at well over 20%.

    However I think ever that (reaching an agreement to increase it) is only a matter of time, because as Paul Keating famously and accurately observed, ‘never stand between a state Premier and a bucketful of money!’

    Of course, abolishing the likes of payroll tax was never going to fly.

    (To be fair, stamp duty on property transactions was not among the taxes to be abolished, as I’m sure Costello knew the states would never agree to that.)

  7. Bruce

    Why does it seem that EVERY “reform” is ALWAYS in the government’s favour, especially when it comes to the creative redistribution of property, money and power?

    As for the cosy links between levels of government, let’s look at land valuations and “rates” / “land taxes”.

    Read the “official property “valuation” on a series of rates notices / bills. The numbers involved are used to calculate your “obligation” to the beast.

    Regardless of the variability of the actual real-estate market, these “valuations” seem to exclusively INCREASE with monotonous regularity. Property owners even get a “nice letter” telling them about such reassessments. This is also despite there also being no expansion of “services supplied” for the increasing “fees” paid.

    Just another unilateral gentleman’s agreement, here in the political cess-pit that was once Australia.

  8. John Bayley

    Adam Creighton in the OZ today talks about proposals to put an increased burden of tax on retirees.

    Adam seems to have a Jekyll & Hyde split personality.

    He will write one brilliant article and then the next one will turn out to be utter cr*p.

    However when it comes to self-funded retirees, he has shown consistent form – he truly hates them and clearly believes they need to be punished for the affront of saving for their own retirement and expecting in return at least some tax relief.

    He seems to be impervious to any argument to the contrary.

    I believe this is also called ‘selective blindness’, so no surprise there.

  9. Struth

    He knew some 100 years ago already that it is not possible to have only ‘some’ socialism.

    If you start with any of it, you’ll end up with all of it.

    Exactly.
    Here we have an article being written about government spending when people are still well imprisoned in their homes by government in Victoria, travel and movement restrictions everywhere, while we are threatened about more imprisonment if we do the wrong thing according to our socialist betters, unable to gather in numbers, pubs attendance (where pubs are open) more like a strategic exercise in human avoidance……time limits, no holidaying, no church, nobody allowed at your funeral unless you are black, and absolutely no way of holding any of them to account, yet the subject of stamp duty versus land tax rates a mention?
    As if government spending reform is an option in this environment.

  10. 2dogs

    No tax reform until spending reform.

    This a bizarre demand. Why should it be upon those who want a better taxation system – if we must be taxed – to also make the case for spending cuts? Those making such a case may share your sentiment that it would better to have lower spending, but you have decided to move the burden of that argument to them.

  11. John Bayley

    If anyone needs a heads up of how ‘well’ (/s) the annual property tax system can work, look up some real estate for sale in the state of Illinois in the USA.

    It is one of the most bankrupt states in the Union and, unsurprisingly, it has some of the highest taxes.

    Checking out depressed, drug-infested semi-ghettos like East St Louis will reveal real ‘steals’ in the property market, with house sale prices around USD 25-40K.

    Then you look at the annual state property tax and it will be between $5-8K.

    Little wonder those places are hard to sell.

    But of course, simple logic and evidence from overseas will never resonate with our politicians.

  12. Pyrmonter

    I’m no fan of the states’ insistence on being both purchaser and provider for large parts of the health and education sectors, but … this is how most Australians have their health and education provided, and the services used by those who opt out of the state system are fairly heavily subisidised by comparison with other parts of the private sector.

    Health and education outlays have been growing fairly consistently everywhere in the western world; if the states are not to fund them, who else is going to, and how?

  13. 2dogs

    The fundamental problem with this proposition is that it assumes that the current methods of delivering government services is optimal.

    It assumes nothing of the kind.

  14. MACK

    We’ve made a bit of an effort to privatise the old age pension through super – we now need to complete that job. I’ve sat on government school councils and on government hospital boards and it’s quite clear that both health and education should be fully privatised. When that’s done, I’ll be ready to consider any other “improvement” in the tax system.

  15. FelixKruell

    Tim:

    When GST was introduced we were told that stamp duty would be phased out, because it was to be replaced by the GST.

    Not on residential property transfers. Pretty much all the other stamp duties bar that one.

  16. FelixKruell

    No tax reform until spending reform. And throw in some regulatory reform along with that.

    Why not all three? In whatever order…

    Tax reform that’s broadly revenue neutral. Doesn’t change the constraints on government. Still worth something to us in terms of efficiency and removing bad incentives.

  17. John Bayley

    Health and education outlays have been growing fairly consistently everywhere in the western world; if the states are not to fund them, who else is going to, and how?

    If ‘everyone’s doing it’, that does not yet mean it’s the best, or even the only way.

    I would, for example, love to be able to totally opt out of Medicare and private health insurance. Over the years, between me and my wife we’ve been forced to spend hundreds of thousands of dollars on those two, despite being healthy – possibly because we mind what we eat and exercise a fair bit.

    I would happily ‘self-insure’ and pay for any required care 100% out of my own pocket.

    I am, however, prevented from doing so. Furthermore, the government forces me to wear a helmet, have a bell on the bike I ride to work and so on and so on, on the presumption that if I injure myself, it will ‘cost them money’.

    Basically as I pointed out above: You get ‘free healthcare’ (socialism) and you then lose freedom to do as you wish.

    Before we had Medicare, did people die in their thousands due to no access to health care?
    Many would justifiably argue that what we had before Whitlam’s ‘reforms’ was better than what we have now.

    Why not try the free market, for a change?

  18. Land tax is such a tasty little nugget for any government, because it’s perpetual and can be increased at any time. Just wait to see how this will affect rental owners (for a start) who will now have to add to rent charges (if they are allowed).

    I can’t remember all the potential negatives that a land tax will bring, but it was discussed some years back and, from memory, would bring more misery than not, as well as not achieving what it was thought to do.

  19. mc

    Health and education outlays have been growing fairly consistently everywhere in the western world

    The outlays have been growing but the outcomes have been decreasing (well at least for education). Maybe the funding is not the issue

  20. Diogenes

    If anyone needs a heads up of how ‘well’ (/s) the annual property tax system can work, look up some real estate for sale in the state of Illinois in the USA.

    OTOH , the way California does it is transparent and you end up with a known (even if ridiculously high by our standards) liability…
    The property tax is set at a percentage of the purchase price, and does not increase over time. Eg if the rate is 1% , and you buy a property for 1million you pay 10k a year while you own it.

    This is better than the voodoo from the VG – we have just had a massive increase in our UCV because as a result of new building works and rennos, sales are no longer like for like & the formula seems to be UCV = (sales prices * %age pulled out of arse) + %age increase pulled out of arse due to infrastructure improvements in your LGA

    Agree though, there needs to be spending reform before taxation reform, and TBH I would prefer the commonwealth to retain GST and lift it to whatever is required to pay for its sect 91 obligations (defence, borders, social security) only, and the states get income tax powers and can no longer ask the Feds for anything (health/education). That way at a glance you can see what each level of govt is costing you (every receipt you see what you are contributing to Fed coffers, every pay packet for states)

  21. Struth

    The socialist bureaucracy in the socialist medical system have us in lockdown .
    How much damage and death will we end up suffering from it?
    How much will it cost?

  22. Tim Neilson

    John and Felix,
    Thanks for the correction.

  23. Roger

    That way at a glance you can see what each level of govt is costing you (every receipt you see what you are contributing to Fed coffers, every pay packet for states)

    Elegantly simple, Diogenes.

    (And as a bonus we wouldn’t need a National Cabinet!)

    The repeal of legislation and the reversal of at least one High Court decision which grants the Commonwealth the right to tax income (until 1942 the domain of the states) stands in the way, however.

    Governments are not known to readily vote down their own powers.

    Unhappily, the rather succinct nature of our Constitution – some might say poorly drafted – and the subsequent filling in of constitutional lacunae by legislation and judicial interpretation leaves us with our absurd “vertical fiscal imbalance” (i.e. the Commonwealth collects taxes, the states spend them) seemingly in perpetuity.

  24. John A

    Pyrmonter #3470210, posted on June 1, 2020 at 9:37 am

    I’m no fan of the states’ insistence on being both purchaser and provider for large parts of the health and education sectors, but … this is how most Australians have their health and education provided, and the services used by those who opt out of the state system are fairly heavily subisidised by comparison with other parts of the private sector.

    Health and education outlays have been growing fairly consistently everywhere in the western world; if the states are not to fund them, who else is going to, and how?

    Since “the states” draw their funding from the people, the first part of that is an easy question to answer: the people. The second part is what the argument is about: how?

    I, for one, believe that most health, education and welfare can be better funded directly by the people via a privatised system, with direct user payments and insurance against high total costs rather than for each item delivered.

    Instead, we have a tax and spend system which inevitably costs more because of the costs of collection, the frictions involved in multiple handling, and the loss of accountability caused by the intervention of the behemoth of government bureaucracy acting as a middleman.

  25. Spurgeon Monkfish III

    Why is it that in this country “tax reform” always means more revenue for governments?

    Yep. More and higher taxes is not “tax reform”.

  26. Terry

    @2dogs
    ‘Why should it be upon those who want a better taxation system – if we must be taxed – to also make the case for spending cuts?’

    …because…without first telling “the taxed” what you intend to spend their money on, and obtain their consent to do so, your (moral) right to tax anything at all is precisely zero.

  27. Rob MW

    Slap bang on the front of today’s AFR is an article about the proposal by the NSW and Victorian governments to reform tax; specifically to transition away from a one off stamp duty on property purchases to an annual land tax.

    Interesting move given that Shire (council) rates are collected as a percentage of unimproved capital value as sorted into categories – urban, industrial, farmland etc. For my business (Farmland) I pay roughly $50k per year for the privilege of paying this tax/fee for absolutely no service, or just the small privilege of parking where there is curbing & guttering when picking up rural & household supplies.

    Looking at s90 of the Constitution together with the potential for double taxation if the State brings in a land tax and leaves the Shire Rates collection as is then surely the Shire Rates would have to classified as an ‘Excise’ putting it into conflict with s90, or alternatively, repeal the Shire Rates provision from their Local Government Act(s) and bring in a draconian Land Tax that not only funds Local Governments but also funds the State in lieu of the repealed Stamp Duty Tax.

  28. Botswana O'Hooligan

    Stamp duty on a 700K owner occupied house is 19.48K in Qld. 27.26K in NSW 38.9K in Victoria 27.1K in Tassie 37.99K in SA 27.73K in WA and 34.93K in the NT. At least Joh did the right thing by Queenslanders.

  29. Terry

    Land tax is a fundamentally bad idea. Effectively turning a private owner into a tenant of the government. (Socialism/Communism – pick your variety of totalitarian jackboot).

    It is totally unacceptable, except to those socialists hoping to appropriate your land (and your labour and your wealth and your life) one little piece at a time until they “own” the whole lot. (The word is Slavery).

    Some taxation is required. It is necessarily downstream of government expenditure. Both should be limited and should affect all citizens equally, minus a (very) modest safety net if that’s what we all get together and choose.

    And when choosing, those “employed” by government should not get a say. No vote while you are on the public teat.

  30. flyingduk

    Health and education outlays have been growing fairly consistently everywhere in the western world; if the states are not to fund them, who else is going to, and how?

    How about treating us like grownups and leaving us to make our own arrangements, eg via savings, insurance, good neighbourlyness etc?

  31. HGS

    What ever the promise, this will mean a state land tax, with a possible withdrawal of stamp duty at sometime next century.

  32. Terry

    ‘this will mean a state land tax’

    In NSW it already exists (eg. Residential Investment Properties). They need only remove the exemption from the family home and reduce the minimum threshold to zero to lay their grubby little hands on yet more ill-gotten gains. The rate will need to be jacked up as well, obviously.

    And with the stolen monies, they can continue to piss it up the wall in ever-increasing and novel self-gratifying ways and in ever-diminishing returns for those from which the monies were “appropriated”.

    Evil Bastards.

  33. Walter Plinge

    I’ve paid stamp duty. How does a land tax work then? Will I get taxed twice or will I be permanently exempt on my residential property?

  34. Walter Plinge

    Land tax: Henry George redux.

  35. Spurgeon Monkfish III

    I’ve paid stamp duty. How does a land tax work then? Will I get taxed twice or will I be permanently exempt on my residential property?

    Exactly. The stamp duty I paid on my current home was an eye wateringly obscene amount.

    If a land tax is introduced on my home, I will simply refuse to pay it.

  36. Squirrel

    “With stamp duty, someone who moves every five years because of changing jobs contributes a hell of a lot to health and education”

    ….and to the over-sized, over-paid State and Territory bureaucracies which are now squawking over the “slap in the face”, “kick in the guts” indignity of being asked to keep getting the same nice pay, for the same safe job for the next year, or so.

    The spruikers for the switch from stamp duty to land tax on the family home say nothing about the other costs of moving (particularly agents’ fees, and all the other ticket clippers who take a cut) or about the other disincentives for moving – partner’s job, changing schools, child care, distance from family and friends etc.

    The most dishonest aspect of this push is the lie that it will make housing – particularly the more desirable stuff aspired to by younger voters – more “affordable”. Unless we get to the point where all our property markets are very much buyers’ markets, the truth is that any cuts to stamp duty will benefit sellers, who will simply get higher bids from buyers who don’t have to factor stamp duty into the buying limit.

  37. BorisG

    Why not try the free market, for a change?

    you may well be right but there is a community expectation that these services will be provided by the government. You need to start with changing community expectations.

  38. BorisG

    If a land tax is introduced on my home, I will simply refuse to pay it.

    Good luck!

  39. FelixKruell

    Walter & Sturgeon:

    One scheme being recommended gives you a choice when you next buy – stamp duty upfront, or land tax forever. Meaning you grandfather existing purchasers like yourselves.

  40. miltonf

    Just another attack on property rights.

  41. Herodotus

    For those who delight in kicking the former Howard/Costello government, may I remind them of two things.
    1. That government was about as good as government gets in this country, so stop complaining.
    2. Before you start praising the Hawke/Keating government, think how much of their success was assisted by having a sensible opposition. They would have looked a lot worse and had a tougher time getting any reforms done if opposed by a Labor-Green rabble such as we see these days in the Senate.

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