States and taxes

Well, this potential tax reform is interesting because of the way it attracts both supporters and detractors from both sides of the political spectrum.

Andrew Bolt is against it, as are all of his cohort who now comment at Catallaxy, but it's hard to say how much of that is due simply to it being Turnbull's idea.  Turnbull hatred is a powerful force amongst the del cons . 

But amongst economics commentators, I see that both Peter Martin and Adam Creighton support it, even though they are not that often on the same page when it comes to economics analysis.

Creighton's column this morning is interesting because it raises one issue that Martin ignores:  how competitive tax regimes can lead to a race to the bottom.  (Not that Creighton wants to call it that.)

Of course small government types love the idea of competition tax regimes, because that suits their basic goal of seeing that government is strangled of ability to provide services.  But they don't like acknowledging that competition can lead to a race to the bottom.

It seems to me that it clearly can - with the best example being Kansas in America.  It's in serious fiscal trouble because of Laffernomics which Art promises will help them, eventually.  Maybe in 10 years?   Meanwhile, its universities lose funding.   So sorry, universities: Art says it'll all come good, one day.

Creighton notes a couple of things that happened under State competition in Australia:

But Egan sounds a note of warning. “I hope [this reform] wouldn’t mean states would compete their income tax rights away as they did with payroll tax,” he says.
Indeed, then prime minister William McMahon ceded states payroll tax in the early 1970s, to help restore their financial independence. But this was undone by an explosion of tied grants under the Whitlam government. Payroll taxes are theoretically efficient — broadly similarly to a consumption tax, in fact — but states progressively increased the turnover threshold to win votes from small businesses. This meant rate increased on a dwindling base — the very opposite of good tax policy. The same can be said for inheritance tax — a relatively efficient (and some would say fair) tax that Queensland premier Joh Bjelke Peterson effectively killed off in the 1980s. This prompted other states to follow suit.
In fact, states have access to the most efficient tax of all — land tax. They could in theory spurn all Canberra’s money and levy a flat rate percentage rate of tax on all land: business and residential.

Well, that land tax reform is unrealistically ambitious and isn't going to happen, but economists like to fantasize about efficiency.

But I will give credit to Creighton for noting these "race to the bottom" examples - even if he reluctant to name them as such.