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2011-03-31

Reforming GST carve-up needed but no need to resort to misinformation

Comments on David Uren “PM warned over state tax reform, GST carve-up”, 31/03/2011, http://www.theaustralian.com.au/national-affairs/commentary/pm-warned-over-state-tax-reform-gst-carve-up/story-e6frgd0x-1226031000584

While a review of the horizontal equalisation system is overdue to make it keep up with other tax and economic forms and changes of time, it is important not to use wrong and misleading information on the current methods and principle of equalisation.

The report says - "If governments, through their policy decisions, wind up raising more tax, or lowering their costs compared with the average, they lose GST revenue."

It appears that this statement is problematic at the best and is incorrect and wrong and misleading at worst.

My understanding of the Commonwealth Grants Commission's principle and methods suggests that the above statement is untrue and false.

The CGC reports indicate that states with an above average effort in raising tax revenue are allowed to keep that part of the revenue from redistribution.

Equally, states operate more efficiently than the average in providing services are allowed to be rewarded for that efficiency gain as opposed to be punished as the report says.

The CGC states it achieves this by assessing each state's revenue 'capacity' and 'costs' of services using the state average tax effort and average efficiency in service provisions irrespective a state's own effort and efficiency.

PS: The CGC principle and methods, however, rely on full equalisation not only on revenue but also on expenditure, that differs and distinguish itself from most other federations' equalisation approaches.
For example, in both Canada and Germany the scope of fiscal equalisation includes only revenue but not expenditures,. Further, neither fully equalise revenue to 100%.

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