After last week's antics, it's now clear the grand plan to fix our structural deficit is through higher income taxes. The reason? Wage earners are soft targets, writes Ian Verrender.

"Between 1915 and 1942, income taxes were levied at both the state and federal level, leading to complexity and inequitable taxation of income across states."

Oops. Better change that line quick smart.

For that's the explanation Treasury first lobbed onto the federal government website in its Brief History of Australia's Tax System about a decade ago to explain just why the Commonwealth took full control of income tax during World War II.

Suddenly that's all changed. If Prime Minister Malcolm Turnbull had his way, the states in future would be responsible for raising their own income taxes to fund vital services such as health and education.

While there was no disputing the grand sweep of Turnbull's idea and that it perfectly fit Coalition ideology, there were a whole series of questionable assumptions about the supposed benefits that would flow from this monumental change to our system of federalism. More on that later.

Of more immediate concern is that it is now clear the grand plan to fix Australia's structural deficit is not through tightening middle and upper class welfare or removing distorting tax incentives such as negative gearing.

It is through higher income taxes. That's the only way the states could plug the funding gap for health and education. Otherwise, there'd be no point making the change.

Call it unfortunate timing. But given the upcoming budget is likely to include a cut in corporate tax rates, with the possibility of further corporate tax cuts into the future, wage and salary earners look to have been tasked with the mammoth job of budget repair.

The reason? They are a soft target, as evidenced by the growth in their tax contributions in the past few years.

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According to data released by the Australian Tax Office a fortnight ago, not only are individuals the biggest net contributors to the federal coffers, the growth in tax receipts in the five years to 2014 has far outstripped the growth in tax from companies and superannuation funds.

Wage earners coughed up $166 billion in 2013/14, up from $120 billion in 2009/10. Corporate tax, on the other hand, grew from around $57 billion to $67 billion in the same period.

With the company tax cuts now on offer, and given the recent massive losses clocked up by the likes of Rio Tinto and BHP Billiton in the past few months, the corporate world's contributions are set to substantially fall in the next few years, placing an even greater burden on government revenue.

Those pushing for a cut to company argue that Australia has one of the highest rates in the world.

At 30 per cent, we are well above the OECD average of 24.1 per cent and are among the highest in the OECD. America, incidentally, charges almost 40 per cent.

But Australia is one of the few countries to have a system of dividend imputation, which effectively lowers the rate, particularly if most of a company's shareholders are Australian. Local investors are delivered franking credits, meaning the more tax a company pays, the less the investor pays.

While the Prime Minister's grand vision on the federation has been dismissed by the state premiers, it has been a neat political victory at another level. No one is talking negative gearing, capital gains tax or superannuation rorts any longer.

Even with record low interest rates, Australian taxpayers are claiming more than $4 billion annually in tax deductions from losses on mostly property loans, courtesy of negative gearing.

That represents an enormous hit each year to tax receipts. Then there's the opportunity cost. All that money should have been invested in productive enterprises, not loss making ventures.

The biggest impact, however, is on the cost of land and housing. Every business leader in the country complains about Australia's exorbitant costs. Guess what? A large part of that relates to the cost of real estate, which in turn flows through to rents and wages.

Winding back negative gearing tax breaks and the associated discounts on capital gains would be a vital first step to not simply improving housing affordability, but lowering the long term cost of doing business in this country.

As for the supposed benefits of allowing the states to levy their own income tax, the underlying assumption is that it would make the states more accountable; that if they had to raise their own tax, they'd spend the money more wisely.

Where is the evidence for this? Which state has been squandering its health budget? And if any have, why not fix the problem at the source rather than offer an academic solution with spurious benefits?

The truth is that health costs are rising faster than inflation. Why? Because we have an ageing population, the cost of medical technology is soaring and the Australia US Free Trade Agreement signed a decade ago was a dud that left us at the mercy of US pharmaceutical giants. That, in turned, undermined the efficiency of our Pharmaceutical Benefits Scheme.

In his first budget, then treasurer Joe Hockey highlighted the fact that "during the past decade the Pharmaceutical Benefits Scheme has increased by 80 per cent." He didn't mention anything about profligacy at the state level.

Anyone who has ever worked in or been a patient in our public health system will tell you that work rates, staff dedication and stress levels are high and that wages are low. If you want an easy, well paid career as a front line health worker, good luck with that.

Among the arguments this week was that, if one state wants to offer a Rolls Royce health system and another wants a Trabant, then they should be allowed to do so.

Really? Whatever happened to the principle that all Australians are entitled to the same level of health and schooling?

And while the Prime Minister assured us a "mechanism" would be put in place to ensure the poorer states would not be left worse off, that could only mean one thing; an equalisation fund whereby richer states would subsidise poorer states, thereby undermining the entire idea of state taxation independence.

Still, the academics loved the idea, for it would minimise the VFI, the dreaded Vertical Fiscal Imbalance; the supposed evil where the Commonwealth raises more than 80 per cent of the revenue and the states get to spend most of the money.

Not sure about you, but the last time I looked that's pretty much the way most modern corporations work. Head office is responsible for collecting the revenue while various departments are allocated budgets to which they have to adhere.

There's nothing wrong with trying to improve the efficiency of the health and education systems. But reshuffling the income tax system won't do it. Just ask Treasury.

Ian Verrender is the ABC's business editor and writes a weekly column for The Drum.