Taxing our way to impoverishment

In yesterday’s edition of The Australian newspaper the chairman of business consultancy IBISWorld, Phil Ruthven, argued that governments should raise the tax burden imposed on Australians. Key messages from the piece are as follows:

It may come as a surprise to taxpayers, be they personal or business, that Australia today is the lowest-taxed nation in the developed world.

At 28 per cent of gross domestic product in 2013, it is nine percentage points below the OECD average of 37 per cent, and exactly half the world’s highest-taxed nation (Denmark) at 56 per cent of GDP. Our taxes are also three percentage points below where they were in 2007, then 31 per cent of GDP, and the last time we actually ran a surplus budget.

Only developing economies, without the economic capacity to have higher taxes, sit below Australia’s rate.

the key messages on taxation are: we are very lowly taxed; we can and should raise them a little, preferably via the GST, and balance the budget in the process; and, yes, we should simplify and streamline the tax collecting regime.

Ruthven is the latest to attach himself to the conga line of people who believe that Australia can, and should, raise taxes, increasing the relative size of government in the process, and in so doing rendering little or no economic harm.

The high‑taxing fan club conga line includes the likes of Ken Henry, Alan Kohler, Ross Gittins, staffers of the Grattan Institute, and a few others, chanting much the same line that Australia can tax its way to greater prosperity.

Citations of similar erroneous statements are not new, and nor are refutations of this basic mistake in economic thinking. In an 1825 letter to his best friend at the time, Frederic Bastiat had this to say about the extensive tariff regime in England:

It is not enough for two facts to exist at the same time to conclude that one is the cause and the other the effect. In England, trade restrictions and prosperity certainly relate to each other through coexistence and contiguity, but not through causation. England has prospered not because of, but in spite of, countless taxes. This is the reason I find the language of ministers so ridiculous when they say to us each year, ʻYou see how rich England is, it pays a billion!ʼ

(Source: Jacques de Guenin, ed., 2011, The Man and The Statesman: The Correspondence and Articles on Politics, The Collected Works of Frederic Bastiat, Liberty Fund, Indianapolis, p. 21)

Economic fallacies have a quality akin to that of cockroaches in a nuclear holocaust, but, in our time, the exhortation to increase the tax burdens remains no less an economically risky proposition.

One would think that any self‑respecting person with business knowledge, like Ruthven, must be aware that raising tax rates, or extending the base which taxes apply, distorts economic decision making and discourages the productive efforts which we rely upon to boost our living standards.

The British‑Australian economist Colin Clark once argued that a tax burden exceeding 25 per cent of national income would harm the economy, a view supported by none other than John Maynard Keynes.

Even though our relative tax burden is lower than that found in low‑growth, high‑unemployment European countries, Australian taxation still exceeds even the very generous Clark‑Keynes threshold. *

And policymakers in Australia should be very mindful of the ceaseless tax competition for mobile investment and skilled workers vigorously pursued by our Asian neighbours, and further afield.

Australians should also be sceptical about arguments for raising distortionary, and often regressive, taxes on businesses and individuals, whilst exempting government spending from critical scrutiny.

After all, the heavy tax load is also paying for wasteful items of government expenditure, such as unnecessary corporate subsidies and exorbitant middle class welfare.

The implicit argument by conservative defenders of the spending status quo, including ACOSS, the ACTU and the like, fails to concede the most obvious point that expenditure programs are not created equal. In reality, there are a heap of inefficient and ineffectual spending commitments, with some of these being more inefficient, and greatly so, than others.

In fairness, Ruthven does indicate that he believes that the overall tax burden should increase ʻa little.ʼ

The most straightforward cautionary statement opposing this view is that if one gives leviathan an inch in policy terms, it will invariably take a mile. And even ʻa littleʼ increase in taxation can cause significant economic harm to those affected by greater tax imposts.

Whilst I recognise that there are some contrary empirical studies in the field investigating the relationship between taxation and economic activity, a fair and reasonable reading of the literature gives weight to the conclusion that higher taxes are detrimental to the performance of an economy (a recent short survey here; a lengthy survey here).

Even to those doubting the veracity of the weight of empirical evidence that higher taxes are detrimental to economic activities, I defy anyone to assert that lifting the Australian tax burden from 28 per cent to GDP to 37 per cent or above, even in a gradual fashion, would not bear harmful effects to private entrepreneurship, savings and capital accumulation, and labour supply.

To sum up, perhaps the only way one could respond to members of the high‑tax conga line is to sing out, ʻyou don’t make friends with taxes!ʼ

 

* Taxation burdens accounting for 25 per cent of national income are far too high, particularly when the amount of expenditure for defence, public order and safety is less than five per cent of GDP (which much of the remaining spending unlikely to add economic value). Therefore, I subscribe to J‑B Say’s dictum that ‘the best tax is always the lightest.’

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50 Responses to Taxing our way to impoverishment

  1. Rabz

    It may come as a surprise to taxpayers, be they personal or business, that Australia today is the lowest-taxed nation in the developed world.

    This statement is a blatant untruth, as I have demonstrated on this blog on numerous occasions.

    FFS, give it rest.

  2. Andrew

    If the conga-line genuinely believed that we can’t afford new social initiatives within our current tax structure, and we were ALREADY in stupendous deficit as a result of the KFC* then why the flying fuck were they campaigning for new social initiatives?? And why were their pronouncements NOT accompanied by this fairly fundamental caveat?

    The NDIS reportedly got a big endorsement from the low information public. Had it been phrased the “GST increase, elimination of your childcare rebate, healthcare rebate, Family Tax Benefit, school bonuses, taxing your super and new NDIS package” the sheeple might have seen it slightly differently.

    *Krudd Financial Crisis ™

  3. Alfonso

    Yep, that NZ Land Tax and CGT are doozies.

  4. Stan

    “And even ʻa littleʼ increase in taxation can cause significant economic harm to those affected by greater tax imposts.”

    Exactly. Even if a little increase in tax only causes a little extra unemployment (eg, 10,000), I wouldn’t want to be one of those 10,000.

  5. blogstrop

    For your common or garden employee and PAYE taxpayer, it has long seemed punitive and counter-productive to impose a tax on savings.

  6. blogstrop

    that is, “interest earned on savings”

  7. john constantine

    my family’s university politics/law student has been taught that the most noble use of the taxation system is to stop people ‘exploiting’ other people,and produce a system where every normal person is content to work for the government,casting the tory freaks back into the outer darkness

  8. Dianeh

    I have never understood how anyone can think that removing money from the market economy in the form of taxes, and using it to increase the size of the wasteful, inefficient public sector, would have no negative economic effect.

    Also, what are they planning to do with the bigger govt, write even more regulations to stifle business and the economy? The smaller the better when it comes to Govt.

  9. Fred Lenin

    Business produces,governments consume,the recpie for an improved standard of living ,less government consumption,equals more production for the economy.A simple Fact thatshould be obvious even to self absorbed ,arrogant Idiot politicians!

  10. Max

    I think we could easily cut that 29% down to 15% without seeing people starving in the streets or dying in the corridors of hospitals and schools.

    On the contrary, the prosperity and growth generated by a 10 – 15 % government tax stack in GDP would lift everyone up.

  11. twostix

    The post could have been shortened to: “Millionaire technocrat thinks you should pay more tax and be more European.”.

    Why is it at all desirable to be more like the basket cases of Europe rather than less like them?

  12. Up The Workers!

    Winston Churchill expressed it best when he said:

    “We contend that for a nation to tax itself into prosperity, is like a man standing in a bucket and trying to lift himself up by the handle.”

  13. Demosthenes

    Excellent post as always, Dr Novak. I can only disagree about “much of the remaining spending unlikely to add economic value”, since much of the remaining spending is the oil to keep the gears moving. Or your grease-based metaphor of choice. Its necessity is the key reason it’s so easily abused.

  14. Art Vandelay

    If ACOSS, the ACTU, Grattan Institute etc think we should pay more tax, perhaps they should set an example for the rest of us and give up their tax-exempt status?

  15. H B Bear

    Until all governments start spending money as well and as efficiently as private citizens there is never an argument for increased taxation. Roughly $10bn of desalination plants and a few hundred million dollars of windmills says this is never going to be the case.

    Economic comparisons with the sclerotic basket case that is the OECD and Western Europe can safely be ignored in perpetuity.

  16. Infidel Tiger

    Does Australia have the stupidest business lobbyists in the world?

  17. .

    Yep, taxes are so low that 46% of the cost of a new home is tax…

    Like rabz said, these are egregious lies. Those offering this advice merely have a racket to follow and don’t give a damn about the economic vandalism they are encouraging.

  18. stackja

    Liberty Quotes
    Higher taxes discourage the “animal spirits” of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation.
    — W. Kurt Hauser

  19. Cool Head

    What I always find interesting is that everyone knows that lower taxation creates wealth. Witness the countries and US states that have, and aggressively advertise, tax free zones and 10 year tax holidays for new business that either start up or move to these tax free zones. Then these clowns write that we need to pay more tax, i.e. destroy wealth. Classic contradiction.
    http://startup.ny.gov/
    NEW YORK
    IS TAKING CARE OF BUSINESS
    There’s a new advantage to doing business in New York. A big one. START-UP NY, Governor Cuomo’s groundbreaking initiative, is transforming communities across the state into tax-free sites for new and expanding businesses. Now, businesses can operate 100% tax-free for 10 years. No income tax, business, corporate, state or local taxes, sales and property taxes, or franchise fees.

  20. Max

    Does Australia have the stupidest business lobbyists in the world?

    If you look at the first 6 months of the Abbott “Regime” it seems that every single week a company or lobbist has come out with a crisis that has completely dominated the news cycle:

    Holden
    Toyota
    SPC
    Qantas
    Productivity commission and Howes (kicking nanna out of the family home)
    Ken Henry with the budget crisis
    etc
    etc
    etc

    Its almost as if ALP Apparatchiks are embedded in many of the large corporates in Australia.

  21. twostix

    Its almost as if ALP Apparatchiks are embedded in many of the large corporates in Australia.

    If they’re not luvvies themselves, they’re terrified of Labor and Labor’s militant arm.

    The Liberals present no such concern to them. Some soft cock MBA who grew up in the leafy suburbs isn’t equiped to deal with the violent vitriol that relentlessly pours out at him personally from the union thugs and Labor if he stands up.

    Look at how the Federal Government treated Gina Rhinehart, Joyce et al. Personal vilification from the most powerful seat in the country, death threats, etc all condoned by a large swathe of the power structure. What modern executive sees that and didn’t figure out who it is best to kowtow to.

  22. Roger

    I’m no economist, but I’d be interested if it were possible for an economics student write a program that would give us a fair idea of the impact on the economy of a flat rate of income tax of say, 15% (once the program is developed different figures could be tried) plus a removal of the taxation on personal savings and superannuation (i.e. investments that in the long run save the government money)? People would immediately raise the question of the survival of the welfare state, but under a new tax regime the welfare bill could conceivably be reduced to a humane minimum and most of those in employment could use their increased income to purchase their own unemployment and disability insurance, save for their children’s university education and retirement, etc, not to mention the extra capital that would be available via investment in government bonds, savings accounts, etc.. The new regime could be introduced incrementally so people can adjust and prepare. Of course, you’ll say “tell him he’s dreaming”…but what do the non-statist inclined economists say?

  23. Bertie_Wooster

    Reminds me of the classic lines from YM:

    “The Treasury does not work out what it needs and then think how to raise the money. It pitches for as much as it can get away with and then thinks how to spend it.”

    I’m not sure what the presupposed *need* for these increases are, but there you go.

  24. motherhubbard'sdog

    I could have sworn Singapore was part of the developed world.

  25. Max

    but I’d be interested if it were possible for an economics student write a program that would give us a fair idea of the impact on the economy of a flat rate of income tax of say, 15% (

    Roger => the closest Historical Analogue that I can think of was when Reagan cut person tax rates in the USA by 25% across the board.

    It got the US out of a deep recession and started the 80′s boom years.

  26. Roger

    Very interesting Max.
    One would assume a goodly portion of those tax cuts went into consumption, thus stimulating the economy. I believe the US has states based consumption taxes but generally set lower than our GST, so the impact on state coffers must have also been positive, allowing increased investment in public services.
    But my next question, then, has to be what went wrong?
    It was also in the Reagan years that US public debt started increasing massively, was it not?
    There must be lessons to be learned there.

  27. .

    Yes, they won the Cold War, and the Democrat Congress refused to cut non defence spending with their majorities.

  28. Roger

    So, the real problem then was that the American people elected too many Democrat congressmen (no sarc intended). Politics, it seems, always gets in the way of good economics! The only answer is better education of the electorate in the fundamentals of sound economics. Since most households have to manage a budget and control outgoings as well as try to lay something aside for a rainy day, that shouldn’t be impossible though.

  29. Roger

    Or is what I just wrote impossibly naive?
    Is de Tocqueville being proved right – mass democracy inevitably leads to a tyranny of the majority which inevitably runs to vulgar materialism? The result is voting itself ever more largesse from the public purse. The only solution then would be a return to limited franchise based on property rights or, perhaps more justifiably in a fluid economy, the paying of income tax. Dangerous ideas!

  30. .

    French wisdom:

    Capitalism allows you to be as vulgar as you can afford.

    In a democracy, you get the Government you deserve.

    Basically the public can want to be Paul, wanting everyone else to rob Peter..

    If the US Federal Government ran a TABOR like Colorado, many problems would be averted, but the statists would frame the solutions as problems.

    Ergo, you are correct about education.

  31. Jim Rose

    Efficient taxes lead to higher taxes

  32. Combine Dave

    South Korea, Taiwan and Singapore; all developed countries from our region, who trade and compete with us and have lower taxation rates than Australia.

    So Phil Ruthven is wrong.

    Why the sudden desire to follow Europe into their hole of declining prosperity?

  33. Watching It Unfold

    I want taxes to fall – I would be happy to pay the current level of tax if I believed the Feds were spending the money wisely and prudently. I don’t believe that we are getting value for money. I’ve had to earn my money the most difficult way, that is trade for every dollar I make – in the market place. Its seems no one gives a crap about my welfare as long as I hand over a portion of my funds to unworthy enterprises . We need a better system of accounting for our tax expenditure, I need to see policy makers & politicians ‘get in trouble’ for wasting money from people who take considerable risk and effort to earn it before returning it in taxes. Let me see – $500,000,000.00 given to the Pacific Rim to develop Leaders in Climate Change Policy.

  34. Greg James

    Frankly, I think the biblical tithe of 10% [on everyone] is about right.

    Beyond that it is theft.

  35. Notafan

    Europe is nuts , Italy has a GST of 22%, one small business owner I spoke to said the tax take now approachs 70%. They want to emigrate to Australia. Cash is king and no-one has ‘metal money’

  36. Yohan

    Fantastic to see you quoting Bastiat and Say Julie!!

  37. Yohan

    All economic illiterates, such as the Labor left and progressive greens, constantly point to bankrupt European welfare states as a reason why we should not worry.

    Government debt too high? Its low by European standards. GST too high? Its low compared to the EU. Government tax as a % of GDP? Its low compared to the EU

    and on and on

  38. Rococo Liberal

    This chap iss is so stupid he doesn’t even know that the method for calculating GDP was changed in 2008 so that it makes our tax take look lower when it was actually much higher. If he can’t get this fact right why should we listen to him at all. He’s a lightweight.

  39. michael

    Like forlike analysis requires adding bback 9 percent compulsory super, which is very like a tax, once compared to the other countries systems…..

    And then there is never the thoughr, “hey maybe low taxes are the reason for 20 try of economic growth….”₩

  40. Yohan

    Another thing to point out, when the comparison is made between Australia’s tax take and other countries, they often do not include our state government and local government taxes. In many European countries they do not have state level governments.

    So you can find conflicting tax charts which show Australia as the 3rd/4th highest taxed country in the developed world.

  41. Squirrel

    Raising the GST and “simplifying” and “streamlining” the tax collection regime is one of the more popular prescriptions put forward, but without looking hard at spending, and the overall tax burden, it’s just shuffling the deckchairs in a short-sighted game.

    The Bastiat quote was most interesting, and reminded me of:

    http://en.wikipedia.org/wiki/Morton's_fork

  42. Andrew of Randwick

    Up The Workers! #1229730, posted on March 18, 2014 at 1:26 pm

    Winston Churchill expressed it best when he said: “We contend that for a nation to tax itself into prosperity, is like a man standing in a bucket and trying to lift himself up by the handle.”

    So UTW has got me into Winston mode…..
    .
    The problem with all this Tax Talk – is all youse economists get a few big things wrong:
    .
    MEASUREMENT:
    I remember reading somewhere that the Tax/GDP figures, across countries, have to be analysed in depth to get the right numbers. If I recall, the EU people pay for their pensions through tax (giving higher fed govt spending & tax, and personal tax higher rates) but then in Australia people don’t take into account that compulsory super as a pension tax. Also, the little state and local government taxes also can be significant, e.g.US state based sales taxes.
    Just dividing Federal Govt tax collections by national GP is not good enough.
    .
    FALLACY OF AVERAGES:
    “we don’t pay enough tax”. Who is ‘we’ kimo sabe?
    The tax/transfer merry-go-round system has been written about (good graphs: ADAM CREIGHTON THE AUSTRALIAN MARCH 27, 2013). The top quintile of income earners (and to a lesser extent the next 20%) are the ones paying for everybody else.
    So how does the tax take (or effective rate) for Top Quintile compare across countries?
    .
    GOVERNMENT AS MAFIA BOSS:
    I remember Swanny talking obscene language that if we don’t take 100% of your wages then be thankful., e.g. for every 1% we let you keep that is a “revenue loss”, and when we taken another 1% that is a “budget save”.
    .

    Winston said: “Some Socialists see private enterprise as a tiger – a predatory target to be shot. Others see it as an old cow to be milked. But we Conservatives see it as the sturdy horse that pulls along our economy.”

    It’s our money first, bruvver. Please justify why you want another cent. And don’t tell me its to pay for Gonski, NDIS and NBN, because the cost-benefit analysis of those three programs is unproven – and the first two are state thingies.
    .
    SOME AUSSIES WANT A SOCIALIST UTOPIA
    And to see for how far we have gone wrong, I was just listening to Trevor Chappell on ABC radio (this insomnia is killing me) and many of his callers wanted “the government” to support innovation (by spending money), or wanted “the government” to do this, and do that.
    Winston also said: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries”
    I think we need at least 13 years of ‘new education’ starting now in Kindergarten with some fundamentals, you are on your own in this life, whether as a worker or a business owner. Yes the “government” might help you if you are desperate, but the level of desperation is so great for you to qualify that you never want to go there.
    .
    WHY ANY WELFARE STATE AT ALL? THAT WOULD CAUSE BRAIN EXPLOSIONS
    Remember listening to a RN broadcast where a bloke/lecturer/prof explained how the “welfare state” worked in the early 1900′s in Australia when Tax/GDP was 10% or so. There was none. Charity was provided only by Churches and Good People.
    And there was a very strong feeling that a working man, who gave up his freedom (to go fishing, to be with his family, to undertake leisure, etc) for 8 hours a day, should not have to give to someone else, unless that other person did a community activity of equal length of time, i.e. 8 hours per day, each and every day. Then the worker was happy to help them out, either through increased taxes, or more giving to the Church.

  43. Combine Dave

    If the feds don’t have enough money for their schemes….

    Sell off some assets and sack a few thousand APS govies. Problem solved.
    - No further taxation needed.

  44. rickw

    Why shouldn’t the tax required to provide a constant level of basic services actually be dropping?

    Each year industry is able to deliver more for less thanks to improvements in technology and investments in plant and equipment. eg. look at the ever reducing cost of cars and houses (not the land) as compared to the average wage. It either costs less or you get a lot more for the same money.

    As industry delivers a substantial part of the basic services that taxes pay for, should there not have been a corresponding drop? In addition, the same technology that has made industry more efficient should also have made the delivery of basic services that Government still manages more efficient.

    Why is there any argument for increasing taxes when there would seem to be a very strong argument for flat to down to deliver a constant level of service in an environment of improving efficiency?

  45. .

    Andrew

    Run for Parliament. FFS. Stop dithering on this blog.

  46. Combine Dave

    Why shouldn’t the tax required to provide a constant level of basic services actually be dropping?

    Each year industry is able to deliver more for less thanks to improvements in technology and investments in plant and equipment. eg. look at the ever reducing cost of cars and houses (not the land) as compared to the average wage. It either costs less or you get a lot more for the same money.

    I once saw some propaganda from the PS promoting the fact that the size of most govie depts hadn’t grown in accordance with historical norms was evidence that we needed more public servants…

    Of course it should be pointed out that once the days of typing pools, manual file keeping and the transmission of data (aka letters, memos, briefing notes) by hand were over, why would the number of public servants continue to grow, and the fact that it hasn’t fallen, should be an indication that the government has A LOT of padding?

    Cutting out this fat would negate the need for more taxes and possibly result in the opportunity for some tax back :D

  47. Squirrel

    “Combine Dave

    #1230709, posted on March 19, 2014 at 9:48 am

    Why shouldn’t the tax required to provide a constant level of basic services actually be dropping?

    Each year industry is able to deliver more for less thanks to improvements in technology and investments in plant and equipment. eg. look at the ever reducing cost of cars and houses (not the land) as compared to the average wage. It either costs less or you get a lot more for the same money.

    I once saw some propaganda from the PS promoting the fact that the size of most govie depts hadn’t grown in accordance with historical norms was evidence that we needed more public servants…

    Of course it should be pointed out that once the days of typing pools, manual file keeping and the transmission of data (aka letters, memos, briefing notes) by hand were over, why would the number of public servants continue to grow, and the fact that it hasn’t fallen, should be an indication that the government has A LOT of padding?

    Cutting out this fat would negate the need for more taxes and possibly result in the opportunity for some tax back ”

    And not to forget the zillions “invested” (spent) on IT which, from the earliest days, was justified as a net savings measure because the costs would be more than offset by reduced staffing needs. In so many areas of Commonwealth government activity (i.e. where there is little or no public contact) the argument that staffing should grow with national population is just self-serving piffle.

  48. Empire Strikes Back

    It may come as a surprise to taxpayers, be they personal or business, that Australia today is the lowest-taxed nation in the developed world.

    Liar untruthful articulator.

    Phabulous Phil has displayed Keynesian tendencies:

    Australians have been spooked. “They are scared by world events, and they are not convinced by the Federal Government to go out and spend, so they are not spending.”

    He says the Federal Government needs to do more to talk up confidence.

    Still, he said this:

    You might think you know what causes recessions. I’m here to tell you it’s not the consumer.

    Definitely an optimist:

    We’ve all been scared to death. But 2011 will be a bloody ripper with over 4% growth. There has never been a recovery from a recession that has not been spectacular.”

    But he does advocate a market approach (albeit demand side) to lifting the lot of the lowest:

    On weekends in particular I resort to sloth. Sloth is a very underrated virtue. Sloth does so much good because what you’re doing with sloth is outsourcing to people who haven’t got a job and that makes you feel very virtuous by the fact that you’ve now reduced unemployment. So I think sloth is a very underrated virtue.

    My personal favourite:

    The reason we could stop them [recessions] in the future is that there’s not enough women on the boards at the present time. There’s only 11% of the boards of directors that have got a woman on them. I think we should have at least 40% of the boards of directors being women and I truly mean that because they are less nervous than blokes. They would stabilise the investment program of corporations and we might then never have a recession for the rest of our lives.

    Phabulous Phil has solved the riddle of capital misallocation. Insufficient vagina in the board room. Who knew it was so simple? Phil did.

    Next time my wife goes white knuckle in the motor, I’ll be laughing at you Phil.

  49. Combine Dave

    And not to forget the zillions “invested” (spent) on IT which, from the earliest days, was justified as a net savings measure because the costs would be more than offset by reduced staffing needs. In so many areas of Commonwealth government activity (i.e. where there is little or no public contact) the argument that staffing should grow with national population is just self-serving piffle.

    IT in gov is an excuse for huge projects with mega projects = more jobs for the boys :D

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