Access Economics’ David Chessel has a dry sense of humour, even for a dry economist.
We are indebted to him for reminding us this week of the quote from Louis XIV’s Finance Minister Jean Baptiste Colbert. Chessel likened ACT Treasurer Ted Quinlan to Colbert who said that the art of taxation was to pick the maximum amount of feathers from the goose for the least amount of hissing.
Chessel thought that Quinlan’s new revenue measures would create little hissing – the bushfire levy (temporary) and the extra water and gambling imposts on gambling and water (environmentally and socially responsible) and so gave Quinlan a mark of 77 per cent.
Maybe that is true in the short term. But in the longer term this week’s Budget has some contradictions and flaws. Most are not of Quinlan’s making. As he has plucked the goose’s feathers, he was probably pushed too much by the forces of Commonwealth-State (and Territory) financial relations and demands from his colleagues for goose down to feather their portfolio nests.
Trouble is, pluck the goose too much and it will fail to lay golden eggs.
It is a theme of Australian politics that Labor overspends on the right things and the Coalition controls spending with the wrong priorities.
But back to the ACT Budget.
Let’s look at the contradictions.
The socially responsible extra gambling taxes are supposed to discourage gambling. But gambling expenditure for the addicted is not discretionary. The extra tax will merely reduce the time in which the addicted gambler becomes penniless. On the other hand, the extra environmentally sensitive water charge will responsibly reduce water consumption. A portion of water consumption is discretionary and can be controlled (as we have seen in the past few months).
The lesson is that taxation will affect discretionary behaviour, but not necessary or compulsive behaviour. People will continue to earn income even though it is taxed. People will continue to consume even though it is taxed. These broad-based taxes work. Alas, these juicy, broad-based taxes are constitutionally in the hands of the Commonwealth.
The new taxes and tax increases in Labor’s past two Budgets tax what to some extent is discretionary conduct – increases in stamp duty on people who buy dwellings, increases in rates on those who move to new dwellings, increases in stamp duty on unlisted share transfers, a new tax on commercial mortgages. These new taxes and tax increases will affect behaviour. Fewer people will move dwellings and fewer businesses will headquarter in the ACT. The historic lower-tax advantage of headquartering a medium or large business in the ACT has now evaporated.
The increases in these taxes might result in fewer transactions to tax – the killing (or at least starving) of the goose and fewer golden eggs.
A good example is the old booze tax. If you tax spirits at $10 a bottle you might raise $10 million a year. If you tax it at $20 you will not raise $20 million because people will turn to beer and wine or drink less. Indeed, a $20-a-bottle tax might raise less than a $10-a-bottle tax.
Business taxes might cause businesses to move or to employ less, which results in less tax overall.
Quinlan argues with some justification that his hands were tied with the new business mortgage stamp duty and the increase in existing share-transfer stamp duty. He says the Commonwealth Grants Commission looks at the ACT’s taxes in relation to other states and territories. If the ACT is failing to keep up with the revenue measures of other states it cannot put its hand out for federal money to make up the difference.
Incidentally, would the Grants Commission to any new tax a state might raise in an attempt to broaden its tax base – such as reintroducing death duties? Once state started would the commission say other states must follow to get a tick in the box marked Effort in Revenue Raising?
It would reverse the trend set by Queensland in the 1970s with the abolition death duties. Other state governments foolishly followed Queensland’s lead. Queensland thought that by abolishing death duties it would attract wealthy population. Wrong. They went to Queensland for the sun. Further, these days the selfish baby boomers have a different attitude. They are members of SKINS – Spend Your Kids Inheritance Now.
This tax passes the Jean Baptiste Colbert test. If the goose is dead, it does not hiss when its feathers are plucked. Moreover, it is one tax that cannot be avoided by changing behaviour.
The narrow tax base is a difficulty with this Budget. In recent years, the housing-property boom has brought the states and territories big increases in revenue. In some years, some of these taxes have yielded increases of between 10 and 20 per cent.
Come the inevitable bust, however, the revenue will drop just as dramatically. This is the danger in Quinlan’s Budget. He has budgeted for a deficit (albeit a small one) at the height of the boom and at the height of the general economic cycle. He has left it for subsequent years (which may be down-turn years) to come back into surplus. That is not good economics. It not even good politics in the long term when spending has to be trimmed to avoid Cain-Kirner-Bannon-Burke-style blow-outs.
A better solution is to control spending. Do not promise what cannot be funded. Build up a surplus BEFORE you spend a deficit. This Labor Government is going the other way. It got a surplus last year on the back of the fiscal rectitude of the previous government and some lucky land-sale and other windfalls. But in its first full financial year in office it goes straight into the red.
Chessel says that warrants a mark of 77 per cent. I don’t, because ultimately Labor’s laudable priorities for things like health and education will go down the gurgler if they are not soundly financed. Quinlan’s difficult task as Treasurer is to impress that fact more firmly upon his colleagues.
After all, the extravagance of Louis XIV and his descendants ultimately ended at the guillotine.