Co-operative federalism is key to effective tax reform

RULING out a GST increase would be economically unwise.

AS NSW Premier Barry O'Farrell noted yesterday, the scare campaign from the Gillard government about a possible increase in the GST under a Coalition government is predictable and dishonest. Julia Gillard is understandably looking for a straw to clutch, but since all states and territories must agree to any changes, the notion that Tony Abbott could raise the GST by stealth is faintly ridiculous. The Opposition Leader has promised an inquiry and a tax white paper, and that he would seek a mandate for any proposed changes at the 2016 election.

From that point, presuming he was returned for a second term, the negotiations would start in earnest. But as Mr O'Farrell explained, having a state or territory with an election looming would reduce the chance of unanimous agreement. Already other state leaders are on the attack, with South Australian Premier Jay Weatherill claiming simplistically that the Coalition wanted to "put the burden on ordinary mums and dads".

The challenge of increasing the GST and broadening its base to include food, education and health spending, offset by the elimination of a raft of inefficient state and federal taxes and lower marginal rates, should be pursued in the national interest, providing the overall tax take does not increase, and preferably is reduced. Reform is not impossible, as John Howard showed in 1998 when he put his political career on the line over the GST, lost the popular vote but won a small majority of seats. The GST, levied at 10 per cent, which is considerably lower than in most countries, has proved efficient and not as economically damaging as many other taxes. A decade and a half on, many voters understand the need for a flatter, more efficient system with lower compliance costs. And state payroll tax, stamp duty and land tax, as imposts on investment and employment, are impediments to activity and growth.

Unfortunately, Labor's "root and branch" tax review conducted by Ken Henry was hamstrung by the Rudd government's insistence that the GST be left off the table. Even worse, Dr Henry's 138 recommendations provided a comprehensive blueprint for overhauling the tax system but their implementation was stymied by Wayne Swan who cherrypicked one big idea - the mining tax - then bungled it, while largely ignoring the rest. There would be no point in a Coalition government repeating such a hollow exercise. There is much in Dr Henry's report, however, on which it could build. Any useful review would also cut a swath through the tax-welfare churn and the end point should be a lower tax take, offset by significant reductions in the public sector and leaving more money in the pockets of individuals and business.

In his interview on Australian Agenda on Sky News yesterday, Mr O'Farrell also defended his state's interests in accepting the Gillard government's Gonski school funding, a stance that irritated some federal Coalition members. Rather than berating Mr O'Farrell, his pragmatism in leading our largest state should generate useful debate on the Coalition side of politics, opening the way for reform of federal-state relations and the elimination of government overlap and red tape. If a Coalition government is to deliver the reforms the nation needs, mature, sensible economic debate will be essential.