JOHN Dawkins, a Treasurer and Minister for Education in the Hawke Government, had a problem. How was he to reverse the extravagance of the Whitlam Government’s free tertiary education without causing a middle-class revolt against Labor.
He solved the problem, and the way he did it has lessons for today’s Treasurers.
It has always been difficult for Governments to remove benefits from the undeserving well-off or to impose reasonable and fair taxation upon them. Invariably they include articulate, well-connected people who know how to argue and kick up a fuss where it hurts politically.
On ACT and Victorian Budget days last Tuesday we were reminded of the narrowness of the state and territory tax bases and how they were hemmed in because any impost substantially higher than another state would result in a flight of capital and jobs.
Payroll, gambling, land and other taxes have to fall within a fairly narrow band.
At a federal level, at least, the capital and jobs flight is less of a worry because going off-shore is more difficult than going interstate.
Dawkins’s solution was to make students pay, but at some time in the distant future when they would be earning enough money to do so. It meant the middle-class parents would not have to shell out now (as in before the next election) for their children to go to university.
Pain postponed is pain denied.
The Commonwealth had imposed a new tax without much electoral flak – unlike, say, the GST which almost cost John Howard the prime ministership.
How can today’s Treasurers learn from this? They could reimpose death duties.
Premier Joh Bjelke-Petersen abolished them in Queensland in 1978, quickly followed by the Commonwealth. All other states had followed by 1981.
Bjelke-Petersen thought it was a great stunt. The population of Queensland surged. But no-one asked the critical question: “Were people flocking the Queensland to die in a tax-free environment, or were they going for the sun?”
I strong suspect the latter, considering the flow continued after the tax ended in other states.
What would happen if a state or territory reimposed it? I don’t think people would flee that state. And even if they did, would it matter much? If older people fled a state it might be a fiscal blessing as they often take cost burdens on state services with them.
More likely, people would adopt the same thinking as they did following Dawkins’s HECS imposition – it is a long time off and the kids will be paying in any event.
The political fall-out would be lessened because of the modern tendency for Oppositions not to promise to remove new taxes imposed by their predecessors. The GST was a good example.
Another likelihood is that once one state imposed it the others would follow. This is because the political and legal environment is different from 1978. The Commonwealth Grants Commission and Productivity Commission are now far more vigorous in monitoring the states’ and territories’ effectiveness in revenue raising and adjusting Commonwealth grants to the states in that light.
If one jurisdiction raises a death duty, the grants commission will say the others should on pain of relatively less Commonwealth money.
True, we have a form of death duty in the form of the capital gains tax, but critically the principal residence and large swags of personal chattels escape from its radar.
In Britain the death duty is 40 per cent of all the estate over 312,000 pounds. Bear in mind the average London house sells for 354,000 pounds. The tax raises more than 3.6 billion pounds a year.
The tax cannot be avoided and is relatively recession-proof. People still die in recessions even if their assets may not be worth quite as much. However, there would have to be a gift tax to apply retroactively and proportionately on gifts made seven years before death.
The death duty would have the benefit of reducing the tendency for people to pump vast amounts of wealth into their principal residence. It might force a few sales which would put some downward pressure on prices and improve housing affordability.
Oddly enough, the political backlash might be less than imagined. Those Labor voters who have that sort of wealth and might be affected are probably the sort of Labor voters who do not vote out of self-interest.
Moreover, it does not directly affect the people with the wealth because they would be dead when the tax is levied. As to their children, bear in mind that they will be getting, on the British model at least, the first $700,000 or $800,000 tax free and 60 per cent of the rest. They really can’t complain because they are getting the windfall for nothing.
As to the effect on business, the death duty and capital gains taxes could be aligned so there would be no effect.
Further, in these economic times, voters will understand the need to raise revenue elsewhere when business and income taxes are falling. And this tax would not have the effect of dampening economic activity. Indeed a few property and asset sales might increase it.