Reform State Taxes to Increase Productivity

• Published date: 01 December 2020
• Author: John Freebairn
• Date: 01 December 2020
• DOI: http://doi.org/10.1111/1467-8462.12399

The Australian Economic Review, vol. 53, no. 4, pp. 577–585 DOI: 10.1111/0004-9018.12399

Reform State Taxes to Increase Productivity

John Freebairn*

Abstract

A larger and more productive economy would

facilitate the reduction of COVID‐19 govern-

ment deficits and their future repayment.

Reform of state taxes is among the low‐

hanging fruit to include in a broad supply‐side

agenda to increase national productivity.

Approximate aggregate revenue neutral re-

form packages to reduce tax distortions and

improve productivity are discussed for state

taxes on property, payroll and motor vehicles.

1. Introduction

The COVID‐19 pandemic has resulted in

record government budget deficits in 2020

for the three levels of Australian govern-

ments.

1

Automatic stabiliser effects and active

fiscal policy expenditure increases have con-

tributed. Also, active fiscal policy tax reduc-

tions and expenditure increases to offset

reductions in private sector aggregate demand

and to provide equity have contributed. A

more productive and larger future economy

will support the reduction of deficits and

ultimately their refunding. As often argued,

debt is manageable if the economic growth

rate exceeds the debt borrowing rate.

Reform of state taxes should be a high

priority component of a comprehensive multi‐

prong supply‐side reform agenda to reinvigorate

national productivity growth. Government re-

ports, including Henry et al. (2009), Australian

Government (2015), Independent Pricing and

Regulation Tribunal (IPART; 2008) and ACT

Treasury (2012), and an extensive literature,

provide a list of reforms to reduce distortion

costs of taxation and to contribute to national

productivity. For example, replacing the current

stamp duty on the transfer of property with a

comprehensive base and flat rate land tax is

estimated to provide an efficiency dividend of at

least 50 cents per dollar of tax mix change.

This article begins with a discussion of the

benefits and costs of taxation. Key attributes

of current state government taxes

2

are de-

scribed, including their distortions to deci-

sions and efficiency costs. Some of the

options for ‘devil in the details’for reform

* Freebairn: Department of Economics, University of

Melbourne, Victoria, 3010, Australia; email:

<J.freebairn@unimelb.edu.au>. Thanks are due to Ross

Williams for helpful comments.

© 2020 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd