Never was there a better example to illustrate the chasm between economic theory and the intricacies of taxation law than the humble birthday cake. There they were, the Leader of the Opposition one day and the Prime Minister the next, attempting to proselytise the glories of their economic policies but each coming unstuck as soon as they were questioned on the detail.
Confusion and complexity is not restricted to the GST; it is in the very nature of taxation law. Mr Keating had as much difficulty explaining the present sales tax as Dr Hewson did in explaining his GST. The economic policy is not especially difficult. Dr Hewson wants to shift the burden of taxation from production and exports (wholesale tax) and income (income tax and payroll tax) and put in on consumption.
This does not mean that the burden moves to different üpeople.@ Broadly the same people will pay the bulk of the tax. The difference is that they will pay tax on a different class of economic activity: consumption not production. This, he hopes, will change people’s conduct; they will do more producing and less consuming. And as there is no tax on production for export, they will do more exporting.
All very fine in theory. But how does it work in practice. Well, Parliament has to pass a law imposing taxation at a certain rate on a certain event payable by a certain person or company, just like income tax. The history of income tax law shows that it is not a simple matter, especially when the law provides exceptions. The most notable exception in income-tax law is the deductions allowed for expenditure necessarily incurred in and connected to the earning the income.
If I put my child in child-care so I am free to earn income, is it a deduction. No, it is private spending and not sufficiently connected to income-earning, the legal ass says.
Dr Hewson’s GST will provide exemptions, too: food for home consumption, education and health. What about the stapler my child uses for school work and I use for Vampire Society newsletters? And, of course, what about birthday-cake candles?
The birthday cake initially provided joy for Mr Keating. Dr Hewson stumbled over what parts of it were exempt and in what circumstances. It was not exempt if bought at McDonald’s for consumption there, but it was exempt if you took it home. But if you bought the candles separately they would be taxed and so on. Mr Keating gleefully exploited Dr Hewson’s discomfort as illustration of the GST’s inequity, idiocy, uncertainty and unfairness.
Then the truth came home. Mr Keating visited the baker’s shop in Bomaderry and found it hard to say which articles were subject to sales tax and which were not.
The truth that came home was that every tax policy has a fundamental internal contradiction. Adam Smith’s four general cannons of taxation, though seemingly obvious in the late 18th century when they were written, are contradictory. Smith wrote that tax: 1. Should be based on the individual’s capacity to pay. 2. Should be fixed according to principles which are certain and not arbitrary. 3. Should be levied in a time and manner convenient to the taxpayer. 4. Should give the maximum return in relation to the cost of levying it.
Each principle is obvious. So the principle that you pay heed to a person’s capacity to pay might result in an exemption for basic food. But that immediately results in a lost of convenience, certainty and economy. Storekeepers have to set up expensive accounting systems to levy tax on some goods and exempt others. Certainty is lost. What is “”food”? Is sticky confectionery “food”? Expensive administration has to be set up to determine if tax is properly paid.
The easiest tax to impose is one of a flat rate per head, as was done in ancient Greece. But it is blatantly unfair. The more you fix up the unfairness, the greater the complexity and the more political leaders make fools of themselves in cake shops.
In an historical perspective, as distinct from an economic one, Dr Hewson should not have been surprised at the reaction. It was quite apposite for Mr Keating to use the Marie Anoinette (let-them-eat-cake) analogy in the Bomaderry bakery last week. After all, a major cause of the French and American Revolutions was an inequitable tax system. And our own Rum Rebellion and Eureka Stockade were essentially tax revolts.
Fightback II and the birthday cake have been quite an education for Dr Hewson. Fightback II showed him the political necessity to dilute the economic imperative of efficiency in the name of fairness. The birthday cake showed how difficult that is.
If he wins government, expect to see some more difficult clashes between economic models on one hand and the legal and administrative practicalities on the other.