According to standard economic theory, the least distorting of all taxes is a land tax. This point can be pushed too far – for example, most land is improved to some extent, and that may be capitalized into land values. Nevertheless, given the financial difficulties of state governments, their failure to make use of this revenue source is an indictment, especially since they impose much more distortionary taxes on transactions involving land, such as transfer duties. All states exempt owner-occupied homes and primary producers from land tax, while taxing land sales and purchases across the board. The effect is to benefit existing landowners (except owners of rental housing) at the expense of new home-buyers and tenants.

It appears to be beyond the realm of political possibility to change this, but a government facing a supposed financial crisis, and looking for luxury items to cut, could start with land tax exemptions. As you might expect, Queensland has both a high threshold ($600 000) and a low rate (1 per cent increasing gradually).

None of the usual justifications for Queensland’s low tax effort apply here. Land tax exemptions do nothing to attract business to Queensland. They are a straightforward handout to landowners, mostly wealthy households with investment properties.

Unsurprisingly, this handout attracts zero critical attention from the Commission of Audit which states “Queensland has historically maintained a competitive taxation environment compared to other states.” This is entirely wrong as it applies to land tax. Since land is immobile, there is nothing competitive about low rates of land tax.

Among the many cuts introduced by the LNP government (which promised, pre-election to improve services), some of the sharpest are in the area of hospitals. According to this report[1], Royal Brisbane&Womens and Metro North face cuts of $130 million a year between them, with much more to come elsewhere. But, according to the Premier, we are on the verge of the abyss, and everyone must make sacrifices.

Well, not quite everyone. Despite the emergency situation, Campbell Newman has managed to find $110 million to upgrade the racing industry statewide, including more than $30 million for the Gold Coast turf club, to build “a slick new bar and upgraded foyer and lobby entry”. I’m sure that if RBWH had an extra $33 million to spend, they could find a better use for it than a slick new bar and foyer.

(Hat tip @BigBadWolf1950 on Twitter)

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The most important single point in the Queensland Commission of Audit report (not a new one) is that Queensland is attempting to deliver the same services as the other states with a lower “tax effort”. To see what this means, let’s look at payroll tax which is both the biggest and (at least in principle, and with the exception of land tax) the least distorting tax available to state governments. The states were given the right to collect payroll tax back in the 1970s, in the hope that it would provide them with a tax base growing in line with the economy, and free them from dependence on the Commonwealth. It was never going to be enough, but the states made things worse by competing to provide exemptions, higher thresholds and so on, with the result that the tax collects less, and distorts more than it should. Unsurprisingly, Queensland has been the leader in this field. We have a payroll tax threshold of $1.0 million, about twice the level prevailing in other states, and a rate of 4.75 which is the lowest of any state. The LNP has promised a further increase in the threshold to $1.6 million.

The tax currently raises a bit under $4 billion, so raising the rate to 5 per cent would yield around $200 million a year. No one likes paying more tax, and a payroll tax is a tax on jobs[1], so raising the rate isn’t a step that should be taken lightly. Still, it seems clear that any job losses from a higher tax rate would be far less than those now under way. There are currently about 20 000 Queensland firms liable for payroll tax, and the average bill would increase by $10 000 a year. Perhaps some firms might respond by laying off an employee or not filling a vacancy, but surely most would not (and hardly any would lay off more than one. Cutting the threshold to $800 000, still much more generous than other states, would also raise $200 million a year.

If Newman took his hyperbolic rhetoric about a debt crisis seriously, the least he could do is ask his own supporters in medium-sized and big business to share some of the burden of fixing the problem, while still getting a better deal than anywhere else in Australia. Disregarding this rhetoric, we ought to have a serious discussion of whether the benefits of payroll tax concessions are sufficient to justify the lower standard of health, education, police services and so on now being imposed upon us.

fn1. The theory of tax incidence shows that, in equilibrium, a payroll tax is the same as a consumption tax, since both fall, in the end, on labour income. I’ve never been sure how much weight I should place on this result.

I was on Steve Austin’s radio program today, talking about my critique of Campbell Newman’s claim that Queensland was on the verge of the kind of debt crisis we have seen in Greece and Spain. At the end, Steve threw me a question I hadn’t prepared for, about a couple of claims made by Newman in the last day or so. These were

* Job cuts would not be needed if the unions would agree to a wage freeze
* Every 0.1 per cent wage increase implies the loss of 800 jobs.

Newman didn’t spell out his reasoning, but it seems clear that he is assuming a fixed fund available to pay wages. Given this assumption, any increase in wages implies a proportionately equal reduction in employment. So, we can easily check his arithmetic, starting from an estimate supplied by his own office that Queensland currently has just under 200 000 (full-time equivalent) public servants (using the term in the broad sense to cover teachers, firefighters and so on, in addition to administrative workers).

Looking at the second claim first, 0.1 per cent of 200 000 is 200, so Newman appears to be out by a factor of four here, or maybe a little less if part-time employees are taken into account. The first claim is a little harder to assess, but the announced cut of 20000 jobs amounts to 10 per cent of the existing total, so an offsetting wage freeze would need to hold wages constant over a period during which they would otherwise increase by 10 per cent. That would at least 2-3 years, assuming steadily increasing real wages, more like 4 years relative to an outocme that maintained the value of real wages. In practice, it’s very rare to sustain a comprehensive wage freeze for so long. Good staff start leaving and are hard to replace, morale is poor and so on. Then again, the alternative offered by the government isn’t doing much for staff retention or morale.

The big problem, as I said last time, is that long-term problems are being addressed with short-term panic responses. Although he is happily ditching promises made to public sector workers, Newman cites vague language about the ‘cost of living’ to rule out any re-examination of tax poloicy, even though most of QUeenland’s low tax effort reflects concessions to business rather than households.

That’s the title of my latest piece at The National Interest, opening paras below, follow the link for the whole thing:

“Whatever it takes.” Those were the words followers of the euro zone have been waiting to hear ever since Mario Draghi replaced Jean-Claude Trichet as head of the European Central Bank. To spell out the quote in full, Draghi said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Central bankers are famously gnomic in their utterances. This is, however, about as unambiguous as they ever get. Jean-Claude Trichet used exactly the same phrase in reference to his determination to put inflation control ahead of all other objectives, and he demonstrated it with policies that came to the edge of destroying the euro in order to save it from inflation. Draghi’s choice of words therefore amounts to, at the minimum, a sharp change of course.

Of all the actions open to the ECB, there is only one that is sufficiently big, and sufficiently controversial, to justify Draghi’s statement. That is a decision to buy the bonds of EU member states, if necessary printing euros to do so, and accepting the risk of higher inflation.

Here’s my latest from Crikey:

Campbell Newman’s hyperbolic claims that Queensland is on the verge of becoming the “Spain of Australia”, is on a “slide into bankruptcy” and about to execute a “power dive into the abyss” have been rightly derided. Queensland has a strongly growing economy, unemployment rates at near 40-year lows and a budget that is close to balance, and likely to return to surplus, even without drastic cuts.

Credit ratings agencies are overrated, but they are paid to estimate the likelihood that a given bond will go into default as a result of corporate or state bankruptcy. Despite some egregious failures, they are more often right than wrong. The comparison between Queensland’s AA+ ranking (the same as that of US Treasury bonds) and Spain’s BB- speaks for itself.

Unfortunately, Newman’s silliness is an echo of the interim report of the Commission of Audit, headed by Peter Costello, which the Liberal-National Party government commissioned on taking office. The recommendations of the commission are drafted as if Queensland is facing a Spanish-style crisis, and propose austerity measures similar to those adopted in Spain.
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Opening paras of my latest at The National Interest

As the euro zone stumbles towards a seemingly inevitable collapse, it is easy to blame the politicians involved or the whole idea of a common currency. The outcomes of the latest top-level meeting, including a pledge to create a single euro-zone banking supervisor and a relaxation in conditions for lending to Spain, are welcome enough but seem, yet again, to be too little, too late to save the common currency.

In reality, the real problem is not with the euro but with the institution set up to manage it, the European Central Bank. The idea behind its creation—a central bank completely independent from government control—is detached from economic reality.

The ECB’s disconnectedness was evident in the decisions by President Jean-Claude Trichet to raise interest rates twice during the course of 2011, at a time when the danger of complete collapse was already evident. Although these decisions were subsequently reversed, they killed any chance that Europe would grow its way out of the debt crisis.