To each according to their contribution

Sorry - for a technical IT reason the attachment did not attach to my previous distribution. Please click on this link if you want to read John Fallon's paper:
https://aip.asn.au/wp-content/uploads/2019/10/Horizontal_Fiscal_Equalisation.pdf My apologies. Graham Young

The Australian Institute for Progress rejects the recommendations of the Productivity Commission’s interim report into GST distribution reforms because it gives insufficient weight to the need to make the economy more productive.

Executive Director Graham Young said that any system of distributing GST which attempted to compensate one state more than another was a betrayal of the principles of the Australian Federation and good economics.

“GST money should be distributed to the states either per capita, or in proportion to where it was generated. Any other system is overly complicated and unfair, by design.

“The real problem isn’t the deal Western Australia gets. It is a system which can reward states for having weak revenue bases and penalise states for developing strong ones.

“Victoria is the outstanding example. Despite imposing some of Australia’s highest state taxes, its assessed capacity to raise revenue from its own taxes is below the national average, and it consequently receives more GST per person than the national average.

“Victoria has managed the remarkable feat of taxing heavily while producing a relatively weak tax base, and the GST system then asks other states to help make up the difference.

“Under horizontal fiscal equalisation, bad economic policy comes with an insurance policy: weaken your tax base and the GST system helps make good the loss.

“The point of a federation is that the states compete against each other and out of that competition efficiencies grow, leading to higher productivity and more wealth.

“Some of the wealthiest countries in the world are federations, including the USA, Canada, Switzerland and Germany.”

Mr Young said that Australia runs its federation like it runs the Melbourne Cup: as a handicap.

“States like Western Australia and Queensland which have developed their mineral resources are penalized in favour of states like Victoria and New South Wales that refuse to do so.

“States which develop stronger revenue bases are expected to subsidise those which do not. But it gets worse than that.

“Queensland has been penalised because higher mining royalties increased its assessed revenue-raising capacity. But states can also be penalised for reforms which expand their tax bases, because the GST system then assesses them as having a greater capacity to raise revenue.

“States which depart significantly from the national average, particularly where they dominate a revenue source such as mining, can lose GST as a result.

“This defeats one of the benefits of federation. States should be able to experiment with different tax and development policies and retain the benefits when those policies succeed.”

Mr Young said that the Institute looked at this issue in 2019 via a paper written by economist Dr John Fallon, former Director of Research at the Queensland Competition Authority, which is attached to this email.

“Dr Fallon found that both equal per capita and state-of-origin distributions would largely remove the economic disincentives built into the present system.

“His preferred practical reform was to distribute GST on an equal per capita basis, with separate targeted Commonwealth assistance to smaller states and territories where necessary to allow them to meet their service obligations.

“A state-of-origin system, where GST was returned in proportion to where it was generated, would provide an alternative with similarly strong incentives for economic development.

“Either way, the guiding principle should be simple: stop using the GST system to handicap successful states.”

For further information contact Graham Young 0411 104 801 or graham.young@aip.asn.au