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Vertical and horizontal fiscal imbalance and the PM policy process bubble

Comments on Richard Eccleston "Modelling shows why premiers are wary of Turnbull’s tax proposal", 3/04/2016

The PM's proposal for the States and Territories to levy their own income taxes, unsurprisingly, hit snags of State and Territory leaders, not just because of many of its potential faults, but more importantly also because of the poor processes the PM has got into.

How could such a significant change to Australian taxation and federation financial relations labelled by the PM as a reform to the Australian federation in generations be announced by the PM only one day before the COAG meeting, with no prior consultations at all?

It reflected either unprecedented creative genius, or perhaps sheer stupidity!

Certainly it was not the way national policies should be made at the top of the Australian government.

Having said that, virtually all the issues raised in this post could potentially resolved without too much difficulty. That is to say, the States and Territories could be allowed to have the capacity to raise their own income taxes in whatever rates they each deem as suitable and desirable, then the federal government only provides enough fund for horizontal fiscal equalisation.

Giving the States and Territories the capacity to levy their own income tax would resolve vertical fiscal imbalance. Horizontal fiscal equalisation, in a way similar to what Canada does, would achieve horizontal fiscal imbalance.

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