The Henry Review and the Federation - a Constitutionalist's View

The previous article set out parts of a speech given by Ken Henry, the Secretary to the Australian Treasury and chairman of the Future Tax System Review.

Henry looked at the issue of fiscal federalism through the prism of Australia as a single market, with taxes and allocation of responsibilities ‘assigned’ to the appropriate level of government through the operation of an intergovernmental agreement.

Kenneth Wiltshire from the University of Queensland Business School responded to the contents of the speech in the Australian on 24 August.

He said:

If Australia had a unitary system of government, some of (the observations of Henry) might be appropriate. Even then, a tax review ought to begin with the time-honoured principles of taxation, including that taxes should be fair and equitable, efficient, appropriate, certain, non-distorting, easy to administer and transparent. It would also begin by acknowledging that Australia is generally too dependent on direct taxes, which are often higher than our competitors', and that the tax system has too much vertical imbalance in its federal-financial relations.

But Australia is not unitary; it is a federation and any tax review of this kind should begin from the premise that states are sovereign partners. They do not need to be "empowered"; they already have sovereign powers, including in taxation, and they had them before the commonwealth was created.

He went on to say that the units of a federation can have different tax bases that can give rise to diversity, choice and competition – and also different tax rates in different jurisdictions.

Wiltshire then noted:

Henry is correct about two things: (a) the present state tax bases serve to distort economic behaviour by industry and individuals, and (b) the blame game is all about dollars. But both these features are caused by the commonwealth's intrusion into the states' constitutional powers, and the conditions it attaches to the majority of funding it gives to the states. Henry's proposals would exacerbate this situation. Clearly, asking the head of the federal Treasury to design a fiscal framework for the federation is like putting a fox in charge of the chicken coop.

Wiltshire suggests that the States should surrender their rights to the GST and instead recommence levying income tax, with the role of the Commonwealth Grants Commission of ensuring horizontal fiscal equity between the states ‘to ensure that no state is penalised for financial circumstances over which it has no control’ continuing.

He finally said:

Contrary to Henry's recently stated views, this is meant to be a tax review, not an expenditure review. If there is to be any decision about realignment of government functions in the light of the tax arrangements, that should be done by elected representatives of the states, not by bureaucrats. If he is not careful, he will certainly end the blame game between the commonwealth and the states, because all of them will blame him for the ensuing mess.

This all sets up an economist vs. constitutionalist debate on the structure of the Australian federation. My observations are set out in the next article.