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Reforming State Taxes: Rationale 
and Options 
John Freebairn 
The University of Melbourne 
3 September 2014
Outline 
• Arguments for reform of state taxes 
• Description and critique of current taxes 
• Some reform options and pac...
State taxes, 2012-13 
(fund about 33% of state expenditure) 
Tax Category $billion 
Payroll 
Land 
Stamp duty: 
conveyance...
Arguments for State Tax Reform 
• Improve productivity and efficiency 
– Remove most inefficient state taxes 
– Broaden ba...
Current Taxes and Critique 
• Describe each in terms of: 
– Tax base or taxable sum, especially exemptions 
– Tax rates 
•...
Current Land Taxes 
• Narrow tax base 
– Exempts owner occupied housing and primary 
production 
– Use asset value (rather...
Proposed Land Tax Reform 
• Design: 
– Comprehensive base of unimproved land value with minimal 
exemptions 
– A single fl...
Current Payroll Tax 
• Narrow base 
– Small businesses exempt, and about 50 % of employees 
– Other special exemptions 
• ...
Payroll Tax Reform 
• Design 
– Comprehensive labour remuneration for all 
– Flat rate. But, right to vary rate for “hard ...
Current Conveyance Duties 
• Base 
– Transfer of property, including value of land, improvements and 
buildings 
• Rate 
–...
Replace Conveyance Duties 
A replacement broader base and higher rate land tax, e.g. 
double local government rates 
• Sig...
Stamp Duties on Insurance 
• Current 
– An extra indirect tax on a specific product 
– Leads to non- and under-insurance, ...
Rationalise Taxes on Motor Vehicles 
• Current. Historical revenue raisers 
– Federal fuel excise 
– State stamp duties, r...
Rethink Taxes on Gambling 
• Current 
– Very different effective rates on different types of gambling 
– Logic is to inter...
State Tax Reform Package 
• Land tax: broader base and flat rate 
• Payroll tax: broader base and flat rate 
• Stamp dutie...
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Reforming State Taxes

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Prof John Freebairn at the 123rd Annual Henry George commemorative dinner.

Publicada em: Economia e finanças
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Reforming State Taxes

  1. 1. Reforming State Taxes: Rationale and Options John Freebairn The University of Melbourne 3 September 2014
  2. 2. Outline • Arguments for reform of state taxes • Description and critique of current taxes • Some reform options and packages • Builds on: – Henry Review (2010) – State tax reviews, including Harvey (2001), IPART (2008), ACT tax Review (2012) – Extensive academic & professional literature
  3. 3. State taxes, 2012-13 (fund about 33% of state expenditure) Tax Category $billion Payroll Land Stamp duty: conveyances insurance motor vehicles Other motor vehicle Gambling Total 20.8 6.2 12.8 4.2 2.5 6.1 5.5 63.5 Plus royalties of $10.6 billion
  4. 4. Arguments for State Tax Reform • Improve productivity and efficiency – Remove most inefficient state taxes – Broaden bases of potentially efficient land and payroll taxes – Rationalise special taxes on motor vehicles and gambling • Provide a “hard budget” constraint for the states • Leave most of redistribution and macroeconomic management tasks to the commonwealth
  5. 5. Current Taxes and Critique • Describe each in terms of: – Tax base or taxable sum, especially exemptions – Tax rates • Assess effects and critique in terms of: – Distortions to decisions and efficiency costs – Long run economic incidence and distribution – Simplicity and operating costs – Potential use as part of “hard budget constraint”
  6. 6. Current Land Taxes • Narrow tax base – Exempts owner occupied housing and primary production – Use asset value (rather than rental income) • Progressive tax rate schedule • Results: – Distorts the efficient allocation of land across different uses – Some of the tax burden passed forward as higher costs for consumers of higher land tax uses
  7. 7. Proposed Land Tax Reform • Design: – Comprehensive base of unimproved land value with minimal exemptions – A single flat rate. But, right for states to vary rate for “hard budget constraint” – Simple to use existing local government base A revenue neutral package, including replace current land tax and conveyance duty, would require a doubling of local government rate • Effects: – Remove distortions to best use of land – All burden on landholders, and any change a one-off windfall change in asset value
  8. 8. Current Payroll Tax • Narrow base – Small businesses exempt, and about 50 % of employees – Other special exemptions • Rate – Flat marginal rate • Effects: – Exemptions distort choice of business structure and organisation – In the long run, most of the tax is born by employees of both taxed and non-taxed businesses as lower wages
  9. 9. Payroll Tax Reform • Design – Comprehensive labour remuneration for all – Flat rate. But, right to vary rate for “hard budget constraint” – Use workers compensation or commonwealth PAYG base – Either: • Lower rate for same revenue – Less business structure distortions – Minimum changes in wage rates • Increase revenue to fund replacement of relatively less efficient state taxes • Effects – Efficiency gains from removal of business structure distortions – Minimal distortions to investment and saving decisions
  10. 10. Current Conveyance Duties • Base – Transfer of property, including value of land, improvements and buildings • Rate – Progressive • Effects – Among the most inefficient of all taxes – An additional indirect tax on a specific product, buildings – Important incidence on a specific business input – Distorts reallocation of property from less valuable to more valuable uses with changing circumstances – Inequitable to frequent property transferees – Most volatile revenue of all state taxes
  11. 11. Replace Conveyance Duties A replacement broader base and higher rate land tax, e.g. double local government rates • Significant efficiency gains • Long run equity effects – Small net increase in burden on landholders – Small fall in burden on the building industry • Short run, political noisy, losers – Infrequent property sellers – Asset rich and income poor May require a long transition process, such as ACT strategy
  12. 12. Stamp Duties on Insurance • Current – An extra indirect tax on a specific product – Leads to non- and under-insurance, and more so among the less well off • High priority to remove for efficiency and equity reasons • Possible replacement options – Larger land tax (as for the fire levy) – Larger payroll tax – Larger GST – Access to commonwealth income tax
  13. 13. Rationalise Taxes on Motor Vehicles • Current. Historical revenue raisers – Federal fuel excise – State stamp duties, registration fees, parking fees, licence fees – Together, they collect a bit more than expenditure on road construction and maintenance • Henry Review and PC propose explicit user pay fees for – Use of roads and damage caused – Congestion by road and by time – Pollution to internalise external cost (first two could be reformed state charges)
  14. 14. Rethink Taxes on Gambling • Current – Very different effective rates on different types of gambling – Logic is to internalise external cost of problem gambling • Henry review assessment – Unclear that current taxes are effective in deterring problem gambling, and distort leisure spending choices – A logical case to tax the economic rent earned on government restricted supply casinos and machines • If, as many argue, demand is not price responsive, an efficient tax. Equity and simplicity says a flat rate for all.
  15. 15. State Tax Reform Package • Land tax: broader base and flat rate • Payroll tax: broader base and flat rate • Stamp duties: replace • Motor vehicles: rationalise as user charges • Gambling taxes: focus on economic rent • Meaningful reform will require federal and state cooperation. Include revised federal-state financial relations. Maybe promised White Papers!

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