A federal government MP has called for his side to abandon "simplistic" hopes of expanding the GST and is advocating giving back to states the power to raise income taxes in return for lower federal taxes.
Peter Hendy, the Liberal MP for the swing seat of Eden-Monaro, has made the call in a 3000 word essay on federalism and tax reform to be published by the free market think-tank, The Institute of Public Affairs.
Liberal MPs including Victorian backbencher Dan Tehan have publicly backed enlarging the GST but Dr Hendy, an economist, says the goods and services tax is "completed reform".
He argues revenue that would be raised by either increasing the rate from 10 per cent or broadening the base would immediately be soaked up in further compensation and welfare payments for the poor.
"Let me be very clear. Most of these advocates are arguing for bigger government, not a more efficient tax system," Dr Hendy says.
Dr Hendy hits out at the business lobby for getting caught up with the "fashionista" calls for expanding the GST and specifically singles out the Business Council of Australia and the Australian Industry Group for criticism.
"Some, like the business groups, should know better, but they have been caught up in the newest fashion … the Business Council of Australia and the Australian Industry Group should shake off their naivety and be very careful about supporting such calls," Dr Hendy writes.
And in a radical alternative, Dr Hendy says the states should be given back powers they gave up during World War II to raise their own income taxes instead of constantly having to run to the federal government with their begging bowls.
That is a win-win proposition," Dr Hendy says.
"The end result would be to address the states' revenue problem, remove the federal government from a very large proportion of expenditure, and do it without increasing total revenues.
"It is an option that would not raise the overall tax burden," Dr Hendy says.
The federal government's Commission of Audit recommended the idea in February last year.
It said while there is no constitutional or legal limitation in the states imposing their own taxes, there would be substantial administrative and compliance costs.
The Commission of Audit says the Commonwealth could lower federal income taxes and reduce the amount in tied grants and allow the states to impose their own surcharges instead.
"Giving the states access to the Commonwealth's personal income tax base would provide them with another growing revenue source, but should not significantly affect compliance costs for Australian taxpayers."
"This 10 percentage point state surcharge would be hypothecated to the states providing them, in this example, with an estimated additional revenue source of around $25 billion per year," the commission said.
Such a scenario could end the deadlock between the states and Western Australia, which is demanding a greater share of the GST given it is suffering a collapse in revenue from the fall in the global iron ore price.
NSW Premier Mike Baird has recently backed the idea, saying it would lead to the states better competing against each other. When contacted about Dr Hendy's article a spokesman for the Premier told Fairfax Media: "NSW will be an active and constructive participant in the Taxation White Paper process."
