Queensland’s halving of stamp duty on shares is likely to be another poisonous apple in the fools’ paradise of competitive federalism.It is similar to the abolition of death duties by the ageing Queensland Premier Joh Bjelke-Petersen in the 1970s. Other states felt forced to follow. But the stamp-duty move is likely to spread more quickly. This is because to take advantage of Queensland’s death-duty abolition, you had to pay the price of dying in Queensland _ which meant, of course, that you had to pay the (perhaps greater) price of living there beforehand.Similarly, when the states compete with each other over who can offer the lowest payroll tax, you have to move your workers to that state to take advantage of it.
However, the stamp duty on share transactions is different. Most shares are held electronically and all are transferred electronically. It is easy enough for stockbrokers to set up an agency in Queensland and do all of the transfers there. At present the market turns over $128 billion a year. At the present tax rate of 0.6 per cent, the total stamp duty would be $768 million, less about $155 million lost to overseas transactions. NSW and Victoria raise about $250 million each. The ACT gets $12 million. Leaving $100 million shared by the rest. Queensland is likely to take a very hefty slice of the NSW and Victoria share. Initially, it may find that by reducing the duty from 0.6 per cent to 0.3 per cent, it will pick up more than enough extra volume of transactions to make up for the loss in percentage taken from each transaction. Unless, the other states fall into line and reduce their tax. If this happens, the usually wealthy shareholders of Australia will gain about $384 million a year at the expense of state revenues which usually go to schools, hospitals and roads.
The promoters of competitive federalism argue that the role of the central government should be reduced and the states would compete with each other to offer the best conditions for business and the best services and therefore the best conditions for their populations. The states would not be able to hide under an equalising federal umbrella.It is a flawed view. Sometimes the best conditions for business result in poorer living standards. Business would love to be free of environmental controls, safety regulations and the like, but they make living conditions better.Further, states that offer better conditions end up being attractive to burdensome populations from elsewhere. The ACT saw this during the recession when its public housing waiting list was lengthened with applicants from interstate.Low taxes are helpful up to a point, but after a time they result in poorer services and poorer infrastructure to the very businesses you are trying to attract. Of far greater import than the absolute level of tax is the question of efficiency of taxation and public-sector service and infra-structure delivery.Up to a point public provision is more efficient _ we don’t have two competing road systems and heart transplants are done in public hospitals. We don’t, yet, have two telephone networks. At a certain level, though, public monopoly and public provision of services become inefficient.
The trick for public administrators is to get that balance right, not to engage in some mindless competition with other states because the consequences of doing that can be distorting or self-defeating.Take death duties for example. They have not really been abolished as Bjelke-Petersen supporters imagine. They have merely been replaced by ever rising stamp duties on the sale of dwellings. But this is a less efficient and distorting. High stamp duties act as a disincentive for people to move into more appropriate housing (whether larger or smaller). They make extension more attractive than moving, thus ever increasing inefficient housing stock.
Perhaps the most foolish act of competitive federalism was the ACT’s attempt to undercut other states’ TAB revenues through the ill-fated Vitab scheme. Kate Carnell learnt from the previous government’s mistake and small wonder she had nothing to do with Stock Exchange’s approach.The tax bases of the states have contracted profoundly because of stunts like the one in Queensland. For example, just seven taxes comprise 90 per cent of the ACT’s tax receipts. When tax is on a narrow base it tends to be high _ and high taxes result in people changing their conduct to avoid them which creates inefficiency in the economy.Overall, taxation in Australia is an inefficient mess. It is the legacy of childish competition by the states and political paralysis in the Federal sphere. The Queensland move can only make it worse.