Can Mr Hockey be saved by a big idea?

There’s a very interesting article in The New Daily today, about what our Treasurer Mr Hockey might be up to.

It suggests Mr Hockey’s insistence that Australians spend six months working for the government is a deliberate ploy to turn us against income tax, which will dovetail with an idea from the Commission of Audit:

“providing the States with access to part of the Commonwealth’s personal income tax base.”

The Commission expands on that idea like this:

“A further option to increase State source income is a combined Commonwealth-State personal income tax, which could include providing the States with a designated share of personal income tax raised, or allowing the States to levy a State income tax surcharge (with the Commonwealth ‘making room’ so that overall income tax rate need not rise).”

The article‘s logic linking recent statements to this policy idea may be a tiny bit convoluted, but that doesn’t make it necessarily false, and it is well worth remembering that there is a Federation White Paper lurking, due for completion this year.

The first issues paper of the Federation White Paper was released just prior to Christmas (and I mean just, it came out on the 23rd of December). The amount of coverage it got was slightly less than the NORAD Santa tracking radar. Is the idea that the Abbott government going to reform our whole federation as fictional as the man in the red suit?

Maybe it’s the best idea this government has left.  States spend all the money, but can’t raise enough. This is bad from an accountability perspective, and also because it diverts effort to rent-seeking. States spend time scrapping over the GST shares and the conditions on Specific Purpose Payments.

States don’t appear set to introduce a land tax, which I reckon is the only other solution. So giving them the power to raise their own income taxes is a potentially sensible move. This is a classic small-l liberal solution, allowing each state to set the income tax that best suits its needs, and also encouraging competition between jurisdictions. Vertical Fiscal Imbalance could be over!

(I’ve always thought Vertical Fiscal Imbalance was a terrible bit of terminology and it should be known as something more catchy. I quite like calling it the Federal-State Tax Mismatch.)

This could be the high-minded idea that the Coalition need to administer a shock to the electorate, to make people realise they are actually full of ideas, not just a team of cutters. If done right it could deliver positive media alongside well-liked (probably Labor) state premiers.

The only problem now is that the narrative is all but set. Mr Hockey is seen as a hardline right-wing ideologue, so even a rather sensible plan to optimise subsidiarity will likely be seen through that lens. Will Mr Hockey gamble and introduce this idea – doubtless new to many voters and potentially confused with a tax hike – in these conditions?

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thomasthethinkengine

Thomas the Think Engine is the blog of a trained economist. It comes to you from Melbourne Australia.

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