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, ?You see how rich England is, it pays a billion!?
(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 ?a little.?
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 ?a little? 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, ?you don’t make friends with taxes!?
* 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.’