29/09/2017 - 10:02

Tax equity no easy fix

29/09/2017 - 10:02

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Western Australians would not be better off under a return to state-based income taxes, according to an award-winning honours paper prepared by a Curtin University graduate who now is part of EY’s infrastructure advisory team.

Tax equity no easy fix
A study has thrown cold water on the idea WA should drastically reshape its place in the federation. Photo: Attila Csaszar

Western Australians would not be better off under a return to state-based income taxes, according to an award-winning honours paper prepared by a Curtin University graduate who now is part of EY’s infrastructure advisory team.

There has been renewed debate about WA’s place in the federation in recent weeks, partly driven by a continuing review by the nation’s Productivity Commission into the economic impact of the current distribution system for GST revenue.

Earlier this month, Business News reported that WA had contributed $91 billion more in taxes to the Commonwealth in the past four years than it received in spending.

One potential solution was floated by Prime Minister Malcolm Turnbull, who last year suggested states should be able to set their own rates of income tax on top of a lower federal base rate, in exchange for lower federal grant allocations.

Despite support from then Premier Colin Barnett, that proposal was almost immediately dropped.

Kristina Primus, whose paper won the Economic Society of Australia WA’s best honours thesis of 2016, analysed the impact of decentralising income tax in the context of states having very different economic endowments.

Surprisingly, she found the current system, which is partially centralised with the federal government collecting taxes and allocating grants to states for spending, works better both for the Commonwealth and for WA.

That was despite the beneficial effect of income tax competition between states.

“If you compare the partially centralised and the decentralised cases to the optimal, you can see that both of those cases have inefficiencies,” Ms Primus said.

“By running (the model), I was able to figure that under certain scenarios, the current system that we have now is preferred from a whole of society welfare perspective.

“In some instances, the decentralised case was preferred.

“What I was changing was the size of the resource difference between states, essentially income differences.

“A decentralised scheme would be preferred in net welfare terms if a given state has less than 2.5 times the resources of any other state in Australia.”

She said WA was a good example of a state with a natural resource endowment at least 2.5 times higher than other jurisdictions, meaning national welfare was greater under a partially centralised system.

Surprisingly, however, the model also found welfare for Western Australians as a group was maximised under a partially centralised system.

“If you include the welfare of both mobile and immobile residents of the relatively high income, resource-rich state, total welfare is higher under the current partially centralised scheme than it is under the decentralised scheme,” Ms Primus said.

That was because partially centralised tax collection would benefit mobile residents.

“If state governments in the high income, resource-rich state make policy decisions based on the immobile residents who make up the majority of the population and choose to maximise (their welfare), as opposed to welfare of the entire state, then they would be better off under a decentralised scheme,” Ms Primus said.

“The welfare of immobile residents living in a high income, relatively resource-rich state is higher under a decentralised scheme than it is under a partially centralised scheme.”

Ms Primus isn’t the first economist to unveil modelling that cautions against moves to change the structure of federation.

Australian National University visiting fellow Chris Murphy reportedly told a recent conference that his modeling showed the existing GST distribution scheme was better for the national economy than a per capita distribution model.

That too was because of mobile residents, with around 250,000 people likely to move to WA under a per capita scheme, he reportedly said.

Mr Murphy did not reply to a request from Business News.

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