Most economists agree that taxation systems and their reforms should be informed by three basic criteria: efficiency; equity;* and simplicity.
However there are no tax systems in existence anywhere on Earth today which practically meet such standards. Indeed, far too many individuals and business owners confront multiple taxing points which not only violate largely-held equity norms but discourage productive economic behaviours such as working, saving and investing.
So, why is the existing taxation system so at odds with the economic ideal?
In a perhaps largely forgotten, but important, paper, Simon Blount in 2001^ argued within a generic public choice framework that ‘politicians make tax law, not economists. And if politics, rather than economics, determines our taxes, a political analysis should explain our current tax structure better than an economic analysis. … [the current tax] system is completely irrational from an economic point of view. But it makes a lot of sense to politicians.’
Blount argued that if politicians are self‑interested they will lean towards acts of tax‑financing government expenditures which will lose the fewest possible votes. This consideration, in turn, suggests three political (not economic) criteria of taxation:
- elasticity: politicians will prefer taxes which deliver seemingly ‘automatic’ (or non‑discretionary) increases in real revenue, including as a result of economic growth. This criterion resembles the revenue buoyancy criterion previously seen in some of the tax economics literature.
- invisibility: politicians will prefer ‘invisible’ (e.g., indirect) to ‘visible’ (e.g., direct) taxes, and tend to even label tax as a ‘fee,’ ‘price’ or ‘budget saving.’ This criterion resembles an element of the well‑known fiscal illusion hypothesis made famous by Italian public finance scholars and, later, public choice theorist James Buchanan.
- complexity: politicians will prefer complex tax systems as part of their efforts to disguise, as far as possible, the consequences of their decisions to the taxpaying public.
Blount also suggested that, if tax decisions or their effects cannot be concealed easily, they will try to manufacture, or capitalise upon, crises such as wars, economic downturns or political upheavals to raise existing taxes or impose new tax bases. Political representatives will also seek the cover of special interest group approval for potentially unpopular tax decisions.
I happen to think that the politically‑motivated tax criteria of elasticity, complexity and invisibility almost perfectly explains why the Gillard government chose the revenue‑raising measures it did in MYEFO.
To force larger companies to pay corporate income tax on a monthly, rather than quarterly, basis is unquestionably inspired by tax elasticity considerations, as it provides the government with a basis to coercively farm tax revenues from businesses on a more regular basis.
The Treasury estimates that this measure will yield an additional $8.3 billion over four years. This disclosure is a clear case of letting the elasticity cat out of the bag, although it remains to be seen if the obvious cash flow and extra tax compliance problems confronting liable businesses will affect the government’s tax revenue estimates.
The envisaged increase in Visa application charges, commencing in the next calendar year, probably rate highly on tax invisibility grounds, as those liable to the additional charges (e.g., skilled graduates, temporary overseas workers) will be blissfully unaware of the additional tax slug imposed upon them to the tune of $521 million over four years.
And the fiddles to various aspects of the business taxation system, including fringe benefits tax and the tax treatment of self‑managed superannuation funds, do little to reduce the inherent complexities of a tax structure which former Treasury Secretary Ken Henry conceded in 2008 vastly exceeds human scale in terms of comprehension.
My assessment of reactions from the business community, economists and media commentators is that most people found MYEFO to be a tricky document wrapped in fiscal desperation, as the government presents a facade of a steadfast commitment to its 2012‑13 fiscal surplus promise.
Many commentators have duly noted the many sleights of hand hidden in MYEFO, but should we be all that surprised by what the government has presented as an excuse for sound public policy? After all, when it comes to the revenue measures, they satisfy the (economically perverse) political canons of taxation to a tee!
* Economists disagree most when it comes to this non-economic criterion. I am not in favour of progressive rate structures in taxation, which fiscally discriminate between citizens and invite the encouragement of voting coalitions lobbying for greater tax imposts on the minority wealthy population. I tend to favour proportional rate structures.
^ Simon Blount, 2001, ‘The Art of Taxation’, Australian Tax Forum 16: 345‑360.
I should think it perfectly proper that politicians don’t make economists
Rococo Liberal
23 Oct 12 at 4:47 pm
Hi Rococo, I see what you mean! However, it’s a direct quote from the Blount paper so I’ll leave it at that.
Julie Novak
23 Oct 12 at 4:52 pm
I don’t disagree with the general thrust that the business tax decisions are definitely driven by invisibility and perhaps complexity.
But this statement is simply wrong:
The revenue effect has nothing to do with elasticity. There is no change to the final tax take. It is simply an accounting “trick” to bring forward revenue into an earlier financial year (equal to 1/6th of the total company tax receipts for companies affetced by the measure). And a trick that really only helps in the 2014 FY.
SteveC
23 Oct 12 at 5:01 pm
If the trick only helps next FY then why does it raise so much over the forward estimates? Clearly the cashflow effect is quite valuable. But I’d put it in the complexity basket because Swan is hoping the average person sees him picking a $100 note off the footpath.
Pedro
23 Oct 12 at 5:49 pm
It brings $5.5B into the next financial year driving the budget into surplus. That’s 2013-14 and also an election year. The year after it only raises $1.6B and the $1.2B.
Sinclair Davidson
23 Oct 12 at 5:53 pm
Yes, but that is still a fair chunk of extra tax.
Pedro
23 Oct 12 at 5:55 pm
Not really. Treasury expects $8.3B extra over four years in a total corporate incomes tax take of $317B over the same period.
Sinclair Davidson
23 Oct 12 at 5:59 pm
SteveC – yes, Penny Wong explicitly claimed on radio this morning that the change to monthly payments would not increase the tax taken. However because it was paid monthly rather than quarterly a couple of months of tax would be moved forward into the financial year changing the numbers for the budget. She then had to defend why the government was using accounting tricks to balance the budget!
She did later claim that paying monthly was the international norm (no idea if this is true or not), but I’ve little doubt they are only doing this because they need it to tweak the books to get a surplus.
Chris
23 Oct 12 at 6:06 pm
This is why you fail.
.
23 Oct 12 at 7:36 pm
dot, please explain how a one-off bringing forward of two months of payments into an earlier financial year is an example of “elasticity: seemingly ‘automatic’ (or non‑discretionary) increases in real revenue, including as a result of economic growth. This criterion resembles the revenue buoyancy criterion previously seen in some of the tax economics literature.”
SteveC
23 Oct 12 at 8:14 pm
The reason it has an effect for three years is the measure is rolled out gradually over three years based on the company’s revenue. After the 4th year there will be no benefit (unless the govt factors in interest earned by getting the money earlier)
SteveC
23 Oct 12 at 8:16 pm
Your words, chump.
.
23 Oct 12 at 9:02 pm
dot, I have said the revenue effect of the bring forward has nothing to do with the definition of elasticity given by Julie. Given the opportunity to explain how the revenue effect is related to that definition, you simply repeated your first statement. I assume therefore you can’t answer the question.
SteveC
23 Oct 12 at 9:09 pm
What is the additional headcount at the ATO to handle the extra work?
Will there be new standards with regard to increasing automation?
At the current time it sounds like a drag on the economy. More red tape and increased monthly document burden.
You do realise this will suck cashflow from large businesses which will naturally pass the problem on down the food chain by blowing out payment terms to small businesses who do not have the market power to object.
Token
23 Oct 12 at 9:17 pm
Fuckhead
They are taking 14 months of revenue out of 12 months of business.
The desire to operate/start a business in Australia over the next 12 months just died in the arse.
Can you tie your shoes up without ending up in triage?
PS
Revenue is ALWAYS related to elasticity.
.
23 Oct 12 at 9:26 pm
This MYEFO shows that Wayne managed to spend his pay packet well before he got it and how he is caught short!
Even the best and greatest economy in the world ( Australia according to Wayne) cant survive Wayne’s and Julia’s spending. Dont they just love shopping!
Surely if they spend all their money they forfeit their right to govern?
Gowest
23 Oct 12 at 11:07 pm
Ok, I’ll be a bit more specific. The increase of revenue of 5.5 billion in FY2014 has nothing to do with elasticity. This is tax the businesses would have paid anyway. The measure in the first year only applies to businesses with turnover over 1 billion (in the 2014 year). And of cours it’s only on profit.
nonsense. Which billion dollar business will shut down because they have to pay tax on earned profit on average one month eralier?
SteveC
23 Oct 12 at 11:34 pm
Revenue is always related to elasticity.
Using a turnover threshold to tax profit is a bad idea. Banks don’t even have “turnover”. Swan doesn’t know what he is doing.
This will affect private equity. This will make Australian start up firms and distressed firms less attractive. What if QBiotics or FXJ need to be bought out to move on or survive and Swan delays a sale long enough for the foreign source of funding to be crunched?
You are just ignoring that there are sovereign risk issues. Part of the reason for the large increase in living standards from 1983-2007 was how business friendly the centre right and centre left were. Manufacturing (Fisher and Paykel) left in the 1990s because of wage on costs and BHP have abandoned Olympic Dam because of the carbon tax raising energy and transport costs.
A Government that changes tax rules not to reform but to balance the books isn’t trustworthy. Swan has promised a surplus for three and half years and never delivered. The Government is not credible and makes harsh changes to the tax code a matter of avarice.
You don’t understand how the world works if you think there is no sovereign risk issue in Australia.
The greed and stupidity extends to Colin Barnett and Campbell Newman.
.
24 Oct 12 at 10:24 am