I heart tax reform.

A big review whets people’s appetite for change. If taking a super-sized bite out of mining company profits with a resource rent tax is suddenly regarded as “underwhelming”, “safe” or “pragmatic”, it is only because the media have seen some of the fancier items on the Henry tax review menu.

Swapping metaphors now…

Policy making is like war – long periods of extreme boredom, interspersed with brief periods of extreme panic.  A review opens a ‘policy window’ – a period where people expect and are open to change – that sends good policy makers over the trenches. A policy window is a bad thing to waste. While to some extent the lack of gusto to reform is a result of the GFC, to some extent it is due to the Government’s Fear and Cowardice…

The Henry review itself says not everything should be implemented at once.  But once a review gets a few years old, the ideas in it (like lifting the tax-free threshold to $25,000) stop looking fresh.  After an electoral cycle, you’d need to convene a review to review the review.  The chance of something being plucked from the dusty pages and implemented seven years from now is remote.

To lock in change, someone needed to make up an implementation schedule.  It could have been in the Government’s response, if not in the review itself.

All that said, I like the Norway model of socialising (and saving) resource profits.  It embodies intergenerational equity – our grandchildren can benefit as much as we do from what will be dug up. But I want to focus attention on something that has flown under the radar, but, happily, didn’t get onto the Government’s NOT TO DO list.

Road tax.

If a good is communally owned and underpriced, it will not be efficiently allocated.  Punt Road is no different from the crusty, sawdust-infused ХЛЗБ (bread) of my faintly-remembered youth.*

To combat this, you need proper pricing.

And, in one of the most theoretical parts of the review, Henry proposes a comprehensive road tax.   This is exciting.  It says:

Faced with an imbalance between demand for road space and its supply, one option is to increase the supply of roads. While this may have worked in the past, it is likely that for most major Australian cities the cheapest supply-side options have already been taken.

i.e. We’re done building roads, we just need to make sure they’re not used by every last bozo with a faint desire to go across town.

Most people’s understanding of economics doesn’t centre on ‘allocative efficiency’ – the idea that scarce goods should only go to those who value them most. But that’s the effect that prices have. The people who most want something have to vote with their wallets to get it. If a business values the flow of benefits (in their case, revenue) more than the cost, they should have it. If a private citizen values the benefits (in their case, derived happiness) more than the cost, they should have it.

The problem with the market for roads is a lack of allocative efficiency. Most roads can be used by anyone, for free. In fact, congested roads are used by people who have the most time to kill. These are not people who value the road.

The road use charge replaces the more complex system of fuel tax and fuel tax rebates. Fuel tax is a ‘blunt instrument’. It’s not a carbon tax, not a particulate-pollution tax. It over-charges non-damaging driving, such as on non-congested roads, where there are no alternatives; and it does too little to discourage driving in congested areas where better options might exist.

The plan also proposes charging trucks for the road damage they do. Road damage rises exponentially with weight. This (combined with some fancy competitive neutrality charges) could do wonders for the rail freight trade.

Sensible road charging largely failed to make the media response to the Henry review at all. The Government has left the door open to include some more measures from the tax review in next week’s Budget. Let’s hope road user charging is among them!

* There are no such memories.  Your author was born to a comfortable home in Melbourne’s eastern suburbs.