Prime Minister Malcolm Turnbull has produced so many thought bubbles on tax reform he makes fresh beer look flat. His latest effervescence is for the states to levy their own income tax on top of the Commonwealth take.
He needs to be warned: Be careful what you wish for.
Should Australia proceed down this path, the states would be under no obligation to follow the federal lead. They could set their own income tax schedules and take more from high income earners and undo the poisonous legacy of the five Howard-Costello income tax cuts that shrank the progressiveness of income taxes by cutting the top rates and divided Australia into rich and poor.
While income taxes are progressive, they impose very high deadweight costs as payers desperately organise their affairs to avoid it – this is the base motive of the 1.3 million negatively geared property speculators trying (and failing) to arbitrage income tax for concessional transaction-based capital gains tax.
And speaking of arbitrage, there is an army of individuals praying for the states to impose different income tax rates so they can base themselves for tax purposes in the lowest-tax state and save a dollar. They will trumpet half-baked nonsense about ‘competitive federalism’ and trouser the savings.
This opportunity will be denied to modest citizens who work and live in one state and will carry even more of the cost of government.
There is a common theme to all Mr Turnbull’s tax reform latherings: they simply cost-shift from the wealthy to workers. Do not doubt the agenda of the Tories playing infantile class-warfare everyone thought we had outgrown a century ago.
We know the worst taxes are levied by the states and that is where change is needed. Stamp Duty and Payroll Tax in particular distort behavior and cause great harm. Meanwhile, the single best tax available to government anywhere remains dormant, riddled with exemptions and wheezes: State Land Tax.
Mr Turnbull may well invite the states to his income tax champagne party. The smart ones already have a better offer – as their Treasury officials keep saying.
Mr Turnbull can cut income taxes and transfer payments to the states and territories, but they are under no obligation to follow his lead and cut education and hospital services. They are sovereign governments who can undertake their own reforms.
Any state that refuses to increase income taxes and instead uses land tax will be inundated by eager capital chasing glorious opportunity and by citizens seeking the independence cheap land provides.
The Liberal/National Coalition are blind to the distinction between innovative capital and rent-seeking monopoly. The practised amorality of neo-liberalism that ranks all investment as equal ignores the distortions our bad taxes impose. The states can teach the Commonwealth a lesson – by reforming themselves.
Economic activity is the agenda, and land tax provides it by the beer truck.