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.