Kuta Beach

Kuta Beach

Monday, 11 June 2012

Using GST to force Victorian tax reform

According to an article in The Age titled State could be big loser in tax plan, the Commonwealth government is thinking of forcing states to get rid of inefficient taxes such as car registration and land transfer duty. It will achieve this by tying GST payments to the states' progress on tax reform. The launch of the GST was supposed to remove inefficient taxes, but what eventually happened was the states simply kept these taxes. By linking GST payments to progress on tax reform, the Commonwealth can effectively force the states to reform their tax systems or suffer the consequences.

Most taxes on transactions are inefficient because they distort economic action. For example, land transfer duty prevents a company from moving its business to better location because of the costs. For an employee who works full time, land transfer duty puts a huge cost on relocation, which means that if he has to travel for two hours everyday to get to work he may choose not to move closer to work due to land transfer duties.

A tax like car registration is completely unfair because you pay approximately $600 regardless of whether you do a lot of driving or do very little driving. The amount you pay should be based on how much damage you do to the road, which is why I think getting rid of car registration and making up for the lost revenue with an increase in fuel tax would be great. The problem is that the states cannot tax fuel, only the Commonwealth can.

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