Friday, July 29, 2011

It's the tax summit you have when...

...the good ideas are off the table

In the gun:

Mining royalties
Insurance taxes
Payroll tax
Company tax
Motor vehicle taxes
Stamp duties

On the horizon:

Congestion taxes
Environmental taxes

Out of contention:

The goods and services tax
Negative gearing

The October tax summit has been set up to fail.

Rule Number 1 set down by the Treasurer in the discussion paper says it will have to recognise “the government’s commitment to fiscal discipline, which means ideas that have a budget cost need to be funded”.

Put bluntly - any taxes that go will have to be replaced by new ones or by boosting what’s raised from the taxes we’ve got.

The paper helpfully identifies the taxes that should go. Top of the list - the taxes that do the most damage from each extra dollar raised - are mining royalties. Every extra dollar raised from royalties cuts economic activity by an extraordinary 70 cents. The government tried to abolish mining royalties in favour of a resources rent tax last year and mostly failed. The mining companies liked things the way they were.

Second on the list are the special state taxes on insurance. Anything on top of the goods and service tax discourages people from taking out insurance and does Australia harm. Treasury says each extra dollar raised from an insurance tax costs society 65 cents... Payroll taxes are little better, costing 40 cents for each extra dollar raised. Also damaging - costing more than 30 cents for each extra dollar raised - are motor vehicle taxes that penalise owning a car rather than driving and stamp duties that tax changing houses rather than living in them.
By comparison a resource rent tax of the kind the government wanted to impose does no damage whatsoever according to the Treasury’s modelling, as would increasing the rate of one other tax Treasury won’t mention.

Administering the goods and services tax imposes substantial costs on businesses. But boosting it to fund cuts in other taxes would impose no extra costs at all. New Zealand has a GST of 15 per cent. Many of our northern neighbours charge 20 per cent.

But you won’t hear that from Mr Swan. “Let me make this absolutely clear” he said launching the summit yesterday, “the government will not be touching the base of or the rate of the GST - end of story”.

Without touching the GST it is hard to know what the summit could do. The paper talks of road congestion charges and environmental taxes, but it isn’t enough. The summit is set to achieve little.

Published in today's SMH and Age

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