August 24

Taxation: how the constitution was supposed to work

There could not be a clearer statement of how taxation should be collected in our Federation than that by Professor Kenneth Wiltshire in The Australian (24/8) “Putting fox in charge of the chicken coop.” In the context of the Henry review of taxation, Professor Wiltshire says the states should give up the GST, along with all the other commonwealth grants with their strings so neatly tied.

“Then states would resume their rightful income-taxing powers to collect sufficient revenue to fulfil their main functions.

“They should set their own tax rates but do not need to recreate separate tax machinery as they can use the Australian Taxation Office to do their collections for them.

“If this means different state tax levels in different states, as was the case for the first 40 years of this nation, that may well be a healthy development.”

He believes that the Prime Minister’s decision to appoint Dr Ken Henry to head the review was a mistake. Dr. Henry has a too Canberra-centric view of the world, wanting  a more centralised and integrated taxation system and uses language such as "empowering the states".

He clearly sees states as "service deliverers" and not genuine policy partners in the federation.Professor Wiltshire thinks the review should also take heed of the tax split in other developed federations; indeed it would be surprising if it did  not. In all other federations the states levy income and other key taxes.

“In the US it is from their own tax bases, in Canada the provinces piggyback on the federal government's tax base, and in Germany they share a number of taxes with the federal government on a fixed percentage that is reviewed at regular intervals.”

He is not worried but rather rejoices that this results in  differing taxation rates and bases. He points out that is exactly what a federation is meant to be all about: diversity, choice and competition.

But Dr. Henry's view from Lake Burley Griffin would see diversity as heresy to be stamped out. He does not like the thought of states "racing to the bottom" in their tax regimes.

Professor Wiltshire believes that if it means they race to compete by lowering taxes and hence forcing themselves to be more efficient, this can only be a gain.

Unfortunately few politicians or political journalists would agree. So we will continue to have dysfunctional state governments and bloated, power-obsessed federal ones. 

The Founding Fathers did not intend the constitution to work this way  


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