03 April 2016
by 2353NM

Malcolm's Magic Pudding

Around 100 years ago, Norman Lindsay wrote what certainly has to be one of the classic Australian Children’s books ‘The Magic Pudding’. The story revolves around the owners of a pudding that automatically regenerates after a slice is cut being chased by dastardly ‘puddin thieves’ who in the end get their comeuppance. As an aside, it’s well worth a read if you have never done so.

Prime Minister Turnbull’s latest venture into the tax discussion has a similar concept. From what has been publically released, Turnbull is suggesting that if the states and territories receive a proportion of the income tax take, they will be able to fund their hospitals and schools to a level greater than that they are currently receiving in tied grants from the federal government. So that Australian’s are not paying more tax, the federal government will reduce their own share of the pudding, collect the states’ share and pass it on without delay or deduction.

Let’s start with the politics.

Turnbull and Morrison have been faffing around preaching their contribution to the golden future of the Australian nation and all that sail in her will be taxation reform. First of all, everything was on the table, then when someone challenged the proposal for increasing the GST to 15% with a broadened base; that part was quietly taken down the dark alley and strangled. Then income tax was considered, then taken down the dark alley and strangled. Others suggested negative gearing and capital gains should be looked at. Turnbull wasn’t having any of that, and if it was possible, he was less enamoured with a suggestion to look at Company Tax.

The only arrow left in Turnbull’s bow apparently is an idea that for the past 70 years has been classed as unworkable. While that in itself is not a reason to look at it, there is a huge potential for some vague plan such as this to be suggested in the lead up to an election then changed significantly (to make it workable) over the election period. When the plan is eventually converted to a practical policy by the time the election has passed, the government has been re-elected and claim they discussed it prior to the election so they have a ‘mandate’ to implement. The problem with the ‘mandate’ is that the policy bears at best a passing resemblance to the original plan.

Then there is the logic.

If the income tax take in Australia is $100billion, it is $100billion regardless of who gets the cash. Unlike the magic pudding, if the states get 10% of the $100billion pudding, it doesn’t increase the total available for distribution; it just means that the federal government has to live with the remaining $90billion. Sooner or later the state and federal revenue requirements will rise causing income tax rates to go up (potentially by different amounts in different states) causing the flaws of a scheme Bernie Madoff would have been proud of to be realised, despite the concept being ‘withdrawn; at the COAG meeting held on April 1.

Given even government departments charge surcharges for payments by credit cards, how long do you think it would be before some bright spark in Treasury came up with the idea of introducing the inevitable ‘postage and handling fee’?

In addition it is clearly more difficult to operate a health and school network where there are smaller groups of people or they are located a greater distance apart. Coincidentally, the states and territories that face these problems are smaller in population or earn less so if the income tax is distributed according to the ratio of tax received – those states and territories have to provide more with less.

Turnbull claims that the smaller and more decentralised states will be looked after. Does this mean there will be some adjustments made to the ratio used to pay out the states proportion of income tax? If so, other states might again be held hostage by one state using the argument for special distribution of the income tax revenue - in a similar way to that attempted by Western Australia (under threat of leaving the federation) in regard to GST when the mining boom petered out.

It would seem that most of the state Premiers are not as gullible as Turnbull hoped, as they are resisting the concept plan. There is a delicious irony that Turnbull’s Coalition Government is now having to have the difficult conversations caused by Howard and Costello’s penchant for propping up middle class welfare using the proceeds of the mining boom and Abbott’s scrapping of both the Mining Tax and the Carbon Pollution Reduction strategy; both of which were capable of producing income for the federal government.

As for us – we have a choice. Do we vote for the party that increased health funding and introduced the Gonski reforms to educational funding (to create a fairer society with greater equality), or the one that has ripped $80billion from health and education over the next decade and is now proposing not to fund public schooling (but happy to continue to fund schools that charge tens of thousands a year)?