In the most recent federal government budget, yes the one that’s got everybody talking about negative gearing, CGT & trusts, there was one glaring issue that nobody seems to have noticed.
$207.8 billion making up just shy of a quarter (24.9% to be exact) of the federal government’s budgeted spending for FY 2027 is not actually going to be spent by the federal government on anything to do with the federal government’s obligations.
It will be instead given to state and local governments as grants so they can spend it on fulfilling their obligations.
But why is this the case?
It is because our tax system is so thoroughly lopsided by the fact that 100% of all income tax levied on individuals & companies is collected by the federal government and none of it is levied by the States or Local governments
We are paying too much tax at the federal level, and not enough tax at the state and local level:
- The federal government levies 99 different taxes
- State governments levy 25 different taxes
- Local governments only have 1 solitary tax (council rates)
Where do we sit globally?
When you compare Australia with the other Anglophone countries we are in a similar predicament to the other 2 highly centralised countries: NZ & the UK but are the polar opposite of the other 2 highly decentralised countries: Canada & the USA.
In Canada their top federal tax rate is only 33% but when you factor in the state income taxes it increases to 44.5% in the lowest state and 58.75% for the highest taxed state, of which we sit right in the middle at 47% (45% plus 2% medicare levy)
In the USA their top federal tax rate is 39% but when you factor in the state income taxes it increases to 39% in the lowest state and 53.23% for the highest taxed state, of which we again sit right in the middle at 47% (45% plus 2% medicare levy)
What should we do about it?
So while you may have thought that my initial point was that we should reduce the top marginal tax rate, i am not so much advocating to do this in as much as i am advocating for the revenue being taxed by the government that has the obligation to spend it on the services it needs to provide
As a Chartered Accountant with 15 years of experience in preparing tax returns for a myriad of Australian taxpayers my suggestion would be:
- Remove the top tax bracket entirely
- Reduce the second top bracket to be 33% from its current 37% rate
- Then have the states tax all incomes above $190,000 at a rate of 12%
- You still only lodge a single tax return, and this return gets submitted to both governments (State & Federal) creating no additional admin burden for taxpayers
This will mean that initially as a taxpayer, state or federal government alike, there is a barely noticeable difference to you in how much tax you pay or receive, so it can be a smooth transition.
The $200 Billion dollars would go directly to the states where the income earners are living to spend on services and infrastructure where it is needed. Not to the federal government to then be given to the states as grants if and when it suits their political pork barrelling
What is the long term goal?
Over time, some states like WA, would realise after this transition they have more tax revenue than they need, and they can lower their income tax rate to attract talent to move there from the east coast. On the opposite side of the spectrum, states like VIC who are currently broke, can raise their state income tax rate to pay for all the debt they’ve accumulated.
This will make the Australian tax system a lot more dynamic, fairer and will allow our governments to better serve the needs of their people
It will lessen the feeling of resentment from WA taxpayers that they are subsidising through their federal taxes what they view as wasteful spending by the VIC government, but it will also give the VIC government the ability to say that they are spending their own money (not federal money contributed by WA residents) on providing more services to VIC residents that the WA government is not providing their own residents
