Thursday, 17 September 2009

Financial illiteracy

 “Treasurer, is the Budget blowing out again”, asks Peter Gutwein, Shadow Treasurer in a Press Release dated 15th September 2009. “Last year, in the midst of the Global Financial Crisis, the State Government managed to spend $311 million more than it budgeted”.

Quite correct. Mr Gutwein must be reading from page 10 of the Preliminary Outcomes Report released 14th August 2009.

But then Mr Gutwein says “(t)his was despite Tasmania losing nearly $220 million in revenue in 2008-09.”

That is incorrect. Revenue was $103 million higher in 2008/09 than budgeted not $220 million less.

Mr Gutwein then intones“(w)e need financial leadership and vision, not spin and poor management”.

Agreed, but we also need people who can read a simple set of accounts.

The previous day, on 14th September 2009, Mr Gutwein issued a press release on the subject of Land Tax reform in which he says

“The Treasurer’s recent desperate attack on the Liberals’ Land Tax reforms is further evidence of how tired, stale and out of ideas this 11 year old Government has become…….Our plan is do this in an affordable and responsible way, costing $2.5 million a year over the next four years……Our plan is fully costed”.

Mr Gutwein makes it sound like the plan has been subject to rigorous scrutiny. In reality the figure of $2.5 million per year could easily have been obtained in 30 seconds by a remedial Grade 7 maths student by referring to the comprehensive Land Tax Calculation table on page 5.15, Volume 1 of the 2009/10 Budget Papers.

But let’s get the $2.5 million in perspective. Approximately 20% of the State’s revenue or $800 million is raised by State taxes, with the balance coming principally from the Commonwealth. Our 4 main revenue raisers (transaction taxes, payroll tax, land tax and gambling taxes) which together make up 80% of State taxes all suffer from defects, on both equity and economic efficiency grounds.

Land tax will raise approximately 11% of State taxes or $90 million during 2009/10.Land tax will apply to 56,000 properties classified as General, but not 8,000 Primary Production properties or 100,000 Residential properties, so the base is narrow which necessitates a higher rate to raise the same amount of tax.

Any move to raise the threshold will make the tax even more inequitable. Once used to help break up large speculative landholdings it has instead become a distorting tax. Today it encourages principal places of residences rather than other residential and non residential development. The grouping provisions which are essential for anti avoidance reasons when there are varying thresholds and rates, are not nearly as rigorous as for payroll tax purposes. Associated individuals are able to manipulate ownership to minimise the effects of grouping, an option much harder for companies.

But more seriously a reasonable expectation of profit required to satisfy the Primary Production classification has been loosely enforced. The Treasurer was blissfully unaware of this requirement at an Estimates hearing in June 2009. The Treasurer has been remiss in his application of the current law, and many have claimed the Primary Producer exemption when they were not entitled to do so. As a result the remaining narrower base has had to pay higher rates to compensate.  Both Opposition parties have been untroubled by this fact.

And Mr Gutwein aims to narrow the base even further with what he describes as a “responsible, affordable and business and jobs-friendly policy”. He describes the Government as “sad, pathetic and desperate”. Maybe. But narrowing the base of a tax to save $2.5 million is not exactly a gold medal performance.

In any discussion of land tax it must be remembered that a portion of rates represents a tax on land. There are sound arguments for taxes such as rates because the base is immobile. The income tax base can move elsewhere, the GST base can hide in the cash economy but land is immobile. It’s a useful tax base provided the base and the rates are set with economic and social goals and strategies in mind other than merely “to promote a more business-friendly environment” as Mr Gutwein puts it.

Making vacuous comments about tax policy is not the preserve of Mr Gutwein. Mr McKim in the recent Leaders Debate managed to classify taxes into ‘good’ and’ bad’ before declaring that a full Review would be needed to decide which were good and which were bad. He implied payroll tax was bad.

Apart from the narrow base and the high rate, payroll tax is generally regarded by economists as being equitable and efficient, the latter meaning that resource allocation is not distorted. Even though the legal incidence may fall upon an employer, the economic cost is generally borne by the employee, not too dissimilar to PAYG for a wage earner.

Narrowing the land tax base too far may cause problems with the Grants Commission split up of GST receipts but I’m sure Mr Gutwein has considered this point.

If collecting land tax is too difficult for the State Government then perhaps it should be handed over to Local Government. The latter could forgo their top up grants from Governments and would virtually be self supporting with respect to raising enough revenue to cover their expenses. An object lesson in Vertical Fiscal Balance that a State Government could well heed.

A declining State Tax base might eventually bring into question the State’s very existence.

Perhaps that’s Mr Gutwein’s real agenda, as a Fifth Columnist trying to undermine the current 3 tier system of Government.

But in the meantime Mr Gutwein and Mr McKim, can we have a more meaningful exchange of the merits of the various taxes that together make up our fragile inequitable and distorting State tax system?

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