All things being equal, Barr's tax reforms are hitting low-income households

That a shift in revenue-raising effort from inefficient taxes, namely commercial and residential property transactions and insurance policies, to a more efficient tax base, namely land, would have economic benefits is universally accepted. Indeed, this was the basis on which the Quinlan review recommended the reforms. The COPS' analysis seeks to quantify the economic benefits and the changes in economic decision-making resulting from, all else being equal, a "dollar-for-dollar" transfer of revenue from inefficient to efficient bases. In other words, a key assumption in the COPS analysis is that the ACT tax reform program is in fact "revenue-neutral".

The CMTEDD analysis purports to demonstrate revenue neutrality by comparing the increases in general rates revenue with a "counterfactual" for revenues relating to duties on conveyances and insurance policies over 20 years - the inefficient sources that were to be abolished over 20 and five years respectively. In doing so, however, it inexplicably excluded increases over the same period in the Fire and Emergency Services Levy (FESL) and the introduction of a new tax on insurance.

In 2012-13, the government collected $29 million from the FESL, which increased to $84.1 million in 2018-19, and is forecast to yield $87.4 million in 2019-20. The threefold increase in the FESL was largely driven by an increase from $104.8 per dwelling in 2012-13 to $344 in 2019-20. Land tax - albeit a tax on land, but due to its discriminatory nature and economic incidence one which is considered to be inefficient, hence the Quinlan Review recommendation that it be abolished - increased from $71 million in 2012-13 to $137 million in 2018-19.

The increase in land tax is more stark, because land tax payable on commercial properties has been incorporated into commercial rates. Taxes on insurance, which were to be abolished within five years, were forecast to raise $55.3 million in 2012-13. Having abolished the tax, and incorporated the foregone revenue into general rates, the government introduced a new tax on insurance. In the 2019-20 budget, taxes on insurance were forecast to raise $47.9 million.

In short, land as a revenue base has been loaded considerably more than is recognised in the revenue neutrality analysis, which in addition completely ignores the reloading of inefficient tax bases - notably the land tax on rental properties and insurance. In the CMTEDD's analysis, "revenue neutrality" clearly means, in the words of Humpty Dumpty, no more and no less than is necessary to prove that tax reform has been revenue-neutral.

An economic or financial model's representation of reality critically depends on its construction, inputs, and assumptions. If the exclusion from the model of a new tax on insurance and double-dipping on land tax were not enough to cast doubt over the CMTEDD analysis, assumptions on the counterfactual - what would the revenues be in the absence of tax reform, which must now be recovered through general rates? - make it completely irrelevant to the questions being asked and answered. The CMTEDD paper identifies four possible approaches to defining a counterfactual, and following a laborious discussion adopts the following definition:

"For simplicity of analysis, it is first assumed that tax reform has not had a significant effect on economic activity. This means that all variables are held constant at their yearly observed values except rates for stamp duty, general rates, commercial land tax and insurance duty. Some examples of the variables held constant are: the number of rateable properties and their average unimproved values (AUV), WPI, property growth, property turnover and property prices."

So, in the conceptual house of cards constructed by the government, on one hand the economic analysis concludes that there has been a change in economic activity due to the tax reform assuming there is a dollar-for-dollar transfer of taxation from inefficient to efficient taxes. On the other hand, the financial analysis assumes that there has been no change in economic activity due to tax reform, and concludes therefore that the tax reform has been revenue-neutral.

Ceteris paribus - that is, assuming all else being equal - is a standard approach in economic analysis. The COPS's conclusions of economic benefits under this assumption are in fact unremarkable, as noted earlier. The trouble is that "all else" has not been equal. A model that is based on assumptions or is of a scope that excludes and/or ignores what has occurred on the ground will inevitably result in conclusions removed from reality.

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By assuming that 2011-12 policy settings have remained constant, the analysis has conveniently but inappropriately ignored the decision by the ACT government to increase land tax on rented - and unrented - residential properties, and to reload the insurance tax base. To assume there has been no change in economic behaviour is not just inconsistent with well established economic analysis, but more significantly it creates an opportunity to "double dip" by claiming that the increase in transactions after the tax reform would have occurred in any event, and hence should also be loaded onto general rates.

The reality is that the weight of taxation on land (general rates and land tax) has increased significantly more than the decrease in the weight of taxation on inefficient tax bases (transactions on property and insurance). The weight of taxation on the economy generally has also grown at a far faster rate than growth in the economy. In the years prior to the commencement of the taxation reform program, taxation growth in the ACT was commensurate with economic growth as measured by State Final Demand (SFD) at 5.2 per cent and 5.4 per cent a year respectively. Over the six years from 2012-13 to 2018-19, taxation revenue in the ACT grew by 56 per cent, while the real economy grew by a mere 11 per cent (average annual growth rates of 6.8 per cent and 1.8 per cent respectively). Surely, if the taxation reform program was even "broadly" revenue-neutral, such a large and disproportionate increase in taxation revenue over time and relative to the economy respectively would not have occurred.

In 2011-12 the ratio of taxation to SFD was 2.6 per cent. This increased to 3.8 per cent in 2018-19. The government would have collected $254 million less in 2018-19 if taxation growth had been maintained at pre-reform levels, and $566 million less if the weight of taxation on the economy was maintained at those levels. A challenging question for economic analysts is to what extent the increased taxation burden which has been imposed on the ACT under the cloak of tax reform has contributed to its stunted economic growth over this period.

The distributional impacts of the proposed taxation reform were at the forefront of considerations of the ACT's Taxation Review Panel. The chief executive of ACTCOSS, Dr Emma Campbell, is reported to have said that the burden of tax reform in the ACT has been borne by low-income households. We are in complete agreement with this conclusion.