Government has to rely on inefficient taxes to fix budget – GST reform needed

Among other 2013-14 Queensland Budget decisions, Treasurer Tim Nicholls today announced that the Government would be:

  • Increasing the insurance duty on general insurance products from 7 to 9 per cent to assist the state in funding the NDIS (Disability Care Australia). On a policy for a $300,000 home with $75,000 contents the increase will be $25 per year.
  • Deferring for two years the planned increases in the payroll tax threshold.  This will save the government $235 million.

While these measures may be necessary, given our State’s fiscal challenges, they are rather undesirable measures because both insurance duty and payroll tax are inefficient taxes in that they discourage much more economic activity per dollar raised than more efficient taxes such as the GST (see my previous post Inefficient State taxes which reproduces a nice KPMG-Econtech chart ranking different taxes by their economic costs).

Higher insurance duty is undesirable because it may discourage some people from taking out house and contents insurance, denying them the benefits of an insurance policy. The economic cost of payroll tax is a bit trickier to understand; it is not really a tax on jobs as often claimed. Instead, payroll tax affects the economy in two ways, which were nicely explained in a 1996 NSW Treasury paper by Matt Crowe:

  • To the extent that payroll tax can be passed forward to consumers through higher output prices, the net effect of the tax is comparable to a consumption tax.
  • To the extent that payroll tax can be passed backwards to employees as lower wages, decreasing disposable income, the impact of the tax is similar to personal income tax.

Given the complexity of its impacts, it’s unsurprising that payroll tax is a bad tax, and much less desirable than raising an equivalent amount of money through the GST alone.

Unfortunately, State Governments will keep using inefficient tax measures in the future because they really don’t have much choice. Instead, taking a broader federal perspective, it may be desirable to raise more money through the GST, which would reduce the need for relying on less efficient taxes such as insurance duties and payroll tax, as discussed in a post of mine last week:

GST changes should be considered as part of wide-ranging tax and expenditure review

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2 Responses to Government has to rely on inefficient taxes to fix budget – GST reform needed

  1. J Odwyer says:

    I probably don’t have an issue with raising the GST however lets not do what we did last time and give the states the ability not to withdraw these inefficient taxes at the same time. It is my memory that most states kept some state based taxes as well as introducing the GST. While a tax review is needed it can not look at the GST as the Henry review did. I am a punter when it comes to taxes and where they hide and how they work in many respects but at the end of the day it all needs to be considered on the basis that a tax review will result in more taxes to pay for the ever increasing quest to have the best social support system, education system and health systems in OECD countries from where I can se this government policy platform is pushing us.

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