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.
Showing posts with label fiscal equalisation. Show all posts
Showing posts with label fiscal equalisation. Show all posts
2013-04-19
Reforming GST distribution requires creativity
Comments on David Uren "GST distribution needs a carrot for states", 18/04/2013, http://www.theaustralian.com.au/business/opinion/gst-distribution-needs-a-carrot-for-states/comments-e6frg9qo-1226622975731
The GST distribution in Australia reflects the extreme of Australian fiscal equalisation as currently practiced in the world and should be recognised as already past its used-by date. Unfortunately, the current arrangement for federal financial relations makes it impossible to reform the GST distribution system.
The GST distribution in Australia reflects the extreme of Australian fiscal equalisation as currently practiced in the world and should be recognised as already past its used-by date. Unfortunately, the current arrangement for federal financial relations makes it impossible to reform the GST distribution system.
The federal government is generally uninterested in how the GST is distributed among the states because there is little relations for its own revenue or expenditures, so its attitude has been if all the states agree then it would agree. Because any meaningful reforms to the GST distribution system would undoubtedly result in some so called winner and loser states, how could it possible for them all to agree?
Maybe a practical way to change this impasse is to require the federal to contribute, from its own revenue, 50% of the amount that is required for the redistribution from the current calculation and the other half is from the GST pool. In this way the federal government would have some incentive to make the system more efficient and still keep its fiscal equalisation role.
Another way is to distribution the GST by population shares and let the federal government provide all the equalisation funding, so it would have an interest and say in having the system reformed for the better of the nation. But both political persuasions in Canberra are unlikely to be interested in such nation/federation building project. Maybe a worthwhile trade-off is to ask the states to implement some reforms of their inefficient taxes identified in the Henry Review report as a condition for the increased funding from Canberra. It seems another review would be needed, even though a number of reviews done previously ended in failures.
There are entrenched "interest groups" that would like to maintain the current system devoid of any real reforms. This has been reflected even in the various reviews of the GST distribution, but all have failed as a result of that at least partially because of the divergence in any potential outcomes. It's an unfortunate tragedy for the nation.
The most recent one was commissioned by the PM and Treasurer and conducted by two former state premiers Mr Nick Greiner from NSW and Mr John Brumby from Victoria and a South Australian businessman Mr Bruce Carter, who were hand picked by Canberra. That review was first announced when the PM visited WA at a time there was strong tensions between Canberra and Pirth in terms of funding and hospital reform that the PM was keen to get it done.
The final report of that review was particularly disappointing because it represented a complete failure with virtually no meaningful reforms recommended except some face-saving wording, enormous waste of time and money and a huge retreat from its interim report which raised at least some hopes of reforms to the distribution system.
A potential reason for that failure is likely to be the lack of representation of people from WA and for that matter Queensland in the review panel. It was understandably difficult because any reforms would results in benefits to mining states at the time of mining boom when mining royalties can bring huge amount of revenue to mineral rich states particularly WA with Queensland ranked as the second.
The current GST distribution completely ignores the many changes in the past three and a half decades,such the many economic and tax reforms in Australia.
2012-03-04
An interesting submission to GST distribution review
I found this today, see the one "Name Withheld" http://www.gstdistributionreview.gov.au/content/Content.aspx?doc=submissions.htm
It is a short one, but interesting.
It is a short one, but interesting.
2012-01-09
Swan unreasonable on MRRT and GST link again
Comments on NEWS - Economy "Swan pressures states on GST", 9/01/2012, http://www.businessspectator.com.au/bs.nsf/Article/Swan-pressures-states-on-GST-pd20120109-QBQZS?OpenDocument&src=hp4
The RSPT and MRRT, from their design, is a revenue grab by the Federal ALP government, not as what recommended in the Henry Taxation Review to replace the current mineral Royalties with a more efficient rent type tax on minerals.
As a replacement of state mineral royalties, any new tax on mineral rent should leave that to the states.
Should that be the case, it would address not only efficiency of mineral taxation, but also mitigate the current huge vertical fiscal imbalance between the federal and states levels of government in Australia.
That would be hugely beneficial to not only the current fiscal management but future generations.
Haven't we been told by the federal ALP government that the states will not have enough revenue to provide the predicted level of medical services partially related to population aging in the coming decades, as its excuse to ask the states for part of their GST to be given to the federal government to be counted as its contribution to government funding?
Isn't it a fundamental principle that there should be clear accountability for any government for its expenditures and taxes?
Why the federal Treasurer does not follow basic economic principles in his dealing with the states?
2011-04-06
There are reasons for changing our fiscal system
Comments on Ken Wiltshire “Why change our fiscal system?” 6/04/2011, http://www.theaustralian.com.au/national-affairs/commentary/why-change-our-fiscal-system/story-e6frgd0x-1226034313730
Wiltshire has made a number of good points based on his experience at the Commonwealth Grants Commission.
The question on the inconsistency and contradiction between the Gillard and Swan rush to this review of the GST carve up and their strenuous refusal to include GST in the tax summit or forum late this year is particularly pertinent and significant.
However, as some commentators have said or would say, the current arrangement may be on the side of extreme with a strong equality centric that is in a strange way tentatively why Wiltshire argues that “AUSTRALIA'S approach to our GST carve-up is the envy of the world.”
It appears that there may be some dynamics in federal politics that could have forced Gillard to make some truce with the states and territories or delay some almost irreconcilable issues in federal relations that have a strong bearing on the Gillard government, so the latter won’t be seen as a complete retreat or abandoning its well publicised policies or reforms.
It is good tactics that both Rudd and Gillard governments should have adopted or adopted it earlier, so their focus can be on federal issues, as opposed to being seen as fighting with the states and territories at the same time being subject strong and formidable opposition attacks led by Abbott.
However, a fundamental review on the GST carve up is well and truly overdue. There have been so many reforms in Australian taxation to lower tax rates to provide stronger incentives to income earners. Equally the company tax rate has been reduced substantially. So far, there has been little change in the way of the GST carve up, or “the most comprehensive fiscal equalisation system in the world”, to use Wiltshire articulation.
It is the most comprehensive, virtually by the fact that it includes not only revenue equalisation as some other major industrialised federations (such as Canada and Germany) do, but also expenditure equalisation.
Further it is virtually 100% equalisation, only limited by the ability of CGC in devising assessment methods.
It is comprehensive indeed!
Wiltshire has made a number of good points based on his experience at the Commonwealth Grants Commission.
The question on the inconsistency and contradiction between the Gillard and Swan rush to this review of the GST carve up and their strenuous refusal to include GST in the tax summit or forum late this year is particularly pertinent and significant.
However, as some commentators have said or would say, the current arrangement may be on the side of extreme with a strong equality centric that is in a strange way tentatively why Wiltshire argues that “AUSTRALIA'S approach to our GST carve-up is the envy of the world.”
It appears that there may be some dynamics in federal politics that could have forced Gillard to make some truce with the states and territories or delay some almost irreconcilable issues in federal relations that have a strong bearing on the Gillard government, so the latter won’t be seen as a complete retreat or abandoning its well publicised policies or reforms.
It is good tactics that both Rudd and Gillard governments should have adopted or adopted it earlier, so their focus can be on federal issues, as opposed to being seen as fighting with the states and territories at the same time being subject strong and formidable opposition attacks led by Abbott.
However, a fundamental review on the GST carve up is well and truly overdue. There have been so many reforms in Australian taxation to lower tax rates to provide stronger incentives to income earners. Equally the company tax rate has been reduced substantially. So far, there has been little change in the way of the GST carve up, or “the most comprehensive fiscal equalisation system in the world”, to use Wiltshire articulation.
It is the most comprehensive, virtually by the fact that it includes not only revenue equalisation as some other major industrialised federations (such as Canada and Germany) do, but also expenditure equalisation.
Further it is virtually 100% equalisation, only limited by the ability of CGC in devising assessment methods.
It is comprehensive indeed!
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%.
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%.
2011-03-17
An unintended effect of fiscal equalisation
Comments on Gary Johns “Tasmanian worker is a threatened species”, http://www.theaustralian.com.au/news/opinion/tasmanian-worker-is-a-threatened-species/story-e6frg6zo-1226022768108
It appears that the horizontal fiscal equalisation in Australia by the Commonwealth Grants Commission may have inadvertent effects on artificially increasing the Greens support base in Tasmania.
Tasmania receives GST distribution significantly above its population shares due to fiscal equalisation, so it has the same fiscal capacity to provide government services.
Imagine that it only received its population share, or only got back the GST revenue from Tasmania, would those Greens supporters in Tasmania, faced with poor government services than other States, still support the Greens as they have?
Fiscal equalisation through the distribution of the GST by the Commonwealth Grants Commission has far reaching implications than most people have realised so far, even though very few people in Australia understand it. It affects so many things around us.
That is perhaps another reason to have a fundamental review of federal financial relations and fiscal equalisation in Australia.
It appears that the horizontal fiscal equalisation in Australia by the Commonwealth Grants Commission may have inadvertent effects on artificially increasing the Greens support base in Tasmania.
Tasmania receives GST distribution significantly above its population shares due to fiscal equalisation, so it has the same fiscal capacity to provide government services.
Imagine that it only received its population share, or only got back the GST revenue from Tasmania, would those Greens supporters in Tasmania, faced with poor government services than other States, still support the Greens as they have?
Fiscal equalisation through the distribution of the GST by the Commonwealth Grants Commission has far reaching implications than most people have realised so far, even though very few people in Australia understand it. It affects so many things around us.
That is perhaps another reason to have a fundamental review of federal financial relations and fiscal equalisation in Australia.
2010-12-22
Use the Mining tax to reduce vertical fiscal imbalance
Comments on Dennis Shanahan “Gillard retreats on levy to save hide”, 22/12/2010, http://www.theaustralian.com.au/gillard-retreats-on-levy-to-save-hide/story-fn6nj4ny-1225974698079
While it is obviously a moot point to move the fight from with the miners to with the states, one would hope that is only a face saving tactics.
If the Gillard government really wants to fight with the states on mining royalties, they may well lose that war constitutionally, given that the states are custodians of their land including the mineral wealth embedded in the land. What it means is that the states are entitled to mining royalties and if the mining tax is a form of royalties, then they should belong to the states as opposed to the Commonwealth.
Even leaving the constitution issue aside, the existing vertical fiscal imbalance suggests that it is not wise for the Commonwealth to grab more tax powers from the states. Rather, it should do the opposite, that is, to give more tax powers to the states to strengthen their finance for meeting the future challenges of services provisions.
This is particularly clear in the wake of the national health / public hospitals reform, which used the prospect of the states’ inability to have the necessary revenue in the longer term to meet the needs of public health in the future.
Further centralisation of revenue powers is not necessarily good for the nation. It blurs the already unclear responsibilities and accountability between the two important layers of government in Australia.
The Commonwealth should not act as a big brother and treat the states with contempt. A truly cooperative federation requires the Commonwealth to be wiser and altruism, focusing on what it should do and do them better, as opposed to bully the weaker states.
While it is obviously a moot point to move the fight from with the miners to with the states, one would hope that is only a face saving tactics.
If the Gillard government really wants to fight with the states on mining royalties, they may well lose that war constitutionally, given that the states are custodians of their land including the mineral wealth embedded in the land. What it means is that the states are entitled to mining royalties and if the mining tax is a form of royalties, then they should belong to the states as opposed to the Commonwealth.
Even leaving the constitution issue aside, the existing vertical fiscal imbalance suggests that it is not wise for the Commonwealth to grab more tax powers from the states. Rather, it should do the opposite, that is, to give more tax powers to the states to strengthen their finance for meeting the future challenges of services provisions.
This is particularly clear in the wake of the national health / public hospitals reform, which used the prospect of the states’ inability to have the necessary revenue in the longer term to meet the needs of public health in the future.
Further centralisation of revenue powers is not necessarily good for the nation. It blurs the already unclear responsibilities and accountability between the two important layers of government in Australia.
The Commonwealth should not act as a big brother and treat the states with contempt. A truly cooperative federation requires the Commonwealth to be wiser and altruism, focusing on what it should do and do them better, as opposed to bully the weaker states.
2010-11-18
Urban, CGC and PC
Comments on Peter Urban “Simplified GST sharing formula is simply wrong”, 18/11/2010, http://www.theaustralian.com.au/news/opinion/simplified-gst-sharing-formula-is-simply-wrong/story-e6frg6zo-1225955199371
While I am not in the position to comment on the validity of Urban's arguments on the issues of the CGC assessments, his recommendation of splitting the CGC and having the productivity commission to do the main reviews assumes that the PC is good at everything and is better positioned than the CGC to do those.
Unfortunately, that is a big, critical yet untested assumption.
It is interesting to note but difficult to understand why the PC could be good at everything and better than others that are engaged in their specialties.
It would be a much better approach to specify clearly what the governments want in the terms of reference given to the CGC for its reviews.
While I am not in the position to comment on the validity of Urban's arguments on the issues of the CGC assessments, his recommendation of splitting the CGC and having the productivity commission to do the main reviews assumes that the PC is good at everything and is better positioned than the CGC to do those.
Unfortunately, that is a big, critical yet untested assumption.
It is interesting to note but difficult to understand why the PC could be good at everything and better than others that are engaged in their specialties.
It would be a much better approach to specify clearly what the governments want in the terms of reference given to the CGC for its reviews.
2010-10-31
Barnett's issue with CGC misses the point
Comments on Paul Kelly “The west is digging in against Labor”, 30/10/2010, http://www.theaustralian.com.au/news/opinion/the-west-is-digging-in-against-labor/story-e6frg6zo-1225945329693
While Premier Barnett may have a point in terms of GST distribution on whether there should be a floor for any states, his attacks on the Grants Commission are misplaced.
While the use of black box is convenient to describe the Grants Commission when one has an issue with its recommendation, one should understand that most if not all of the methods are open and transparent, as are the process the Commission came to its methods and recommendation.
Further, the Commission only recommends a set of relativities which are supposed to be used to distribute the GST; the Commission does not have the power to force the relativities to be accepted by the commonwealth. It is the Treasurer who decides the distribution of the GST, albeit in most cases based on the recommendation of the Commission.
Another point is that the Commission reviews and develops its methods and calculates the GST relativities under the terms of reference from the commonwealth in consultation with the states. States could influence the commonwealth on the terms of reference. For example, the terms of reference for the commission's last review, the 2010 review which was completed in February, asked the commission to simplify its methods. So the commission did.
The problem is that it is often difficult for the states to agree on an alternative distribution principle to that adopted by the commission.
While Premier Barnett may have a point in terms of GST distribution on whether there should be a floor for any states, his attacks on the Grants Commission are misplaced.
While the use of black box is convenient to describe the Grants Commission when one has an issue with its recommendation, one should understand that most if not all of the methods are open and transparent, as are the process the Commission came to its methods and recommendation.
Further, the Commission only recommends a set of relativities which are supposed to be used to distribute the GST; the Commission does not have the power to force the relativities to be accepted by the commonwealth. It is the Treasurer who decides the distribution of the GST, albeit in most cases based on the recommendation of the Commission.
Another point is that the Commission reviews and develops its methods and calculates the GST relativities under the terms of reference from the commonwealth in consultation with the states. States could influence the commonwealth on the terms of reference. For example, the terms of reference for the commission's last review, the 2010 review which was completed in February, asked the commission to simplify its methods. So the commission did.
The problem is that it is often difficult for the states to agree on an alternative distribution principle to that adopted by the commission.
2010-04-30
An issue in the allocation of GST revenue in Australia
Comments on Henry Ergas "Europe's Greek tragedy has a lesson for Aussies", 30/04/2010, http://www.theaustralian.com.au/news/opinion/europes-greek-tragedy-has-a-lesson-for-aussies/story-e6frg6zo-1225860365007
While the article relates to wider issues, the allocation of the GST revenue to the States by the formula decided by the Commonwealth Grants Commission (CGC) is one of those.
The article argues an equal per capita allocation is better than the CGC's. Although it has some merits, it over simplified the issue.
The CGC formula does not consider incentives or disincentives and that is both good and bad. There are reasons that the CGC should recommend a non equal per capita allocation of the GST. However, there are also reasons that it should also take incentives into its consideration of the allocation formula, that is to encourage efficiency in cost reduction and provide incentives for revenue retention.
In essence, both Henry Ergas and the CGC are on the extremes. An optimal formula should be somewhere in between.
While the article relates to wider issues, the allocation of the GST revenue to the States by the formula decided by the Commonwealth Grants Commission (CGC) is one of those.
The article argues an equal per capita allocation is better than the CGC's. Although it has some merits, it over simplified the issue.
The CGC formula does not consider incentives or disincentives and that is both good and bad. There are reasons that the CGC should recommend a non equal per capita allocation of the GST. However, there are also reasons that it should also take incentives into its consideration of the allocation formula, that is to encourage efficiency in cost reduction and provide incentives for revenue retention.
In essence, both Henry Ergas and the CGC are on the extremes. An optimal formula should be somewhere in between.
2010-04-09
Reforming Australian fiscal equalisation
This is still work in progress.
Key points:
- establish an equalisation fund: 50% from the GST and 50% from Commonwealth
- the rest of GST distributed EPC among the States
- have representatives from the States seconded to the Commission
- HFE should take account its impact on national resource allocation efficiency, productivity and economic growth
- HFE should encourage innovations in governance and services provision, e.g. governemnts in smaller states may consider outsource some of its functions or services to larger states, as opposed to do them by their own
Benefits:
- more transparent
- incentive for the Commonwealth interested in the process and outcome
- more incentives for low costs or efficient or revenue rich States, but still achieve equalisation
- due to increased transparence, expect CGC to develop better, more robust assessment methodologies
- increased understanding by the States conducive to improved incentive for better data
- inclusive of more States and Commonwealth inputs into the process
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