What is a classic? Leaving aside the restrictive meaning that it must come out of ancient Greece and Rome, a classic is something of enduring relevance.
So much written in the past goes into what Mao referred to as “”the garbage can of history”, including his Little Red Book, it seems. But some works have enduring quality.
Oddly enough, several of them are in the field of economics, that mercurial subject in which professors can ask the same question every year by employing the expedient of merely changing the answer.
Nonetheless, some works of economics have enduring qualities.
Two years before Governor Phillip and the First Fleet sailed into Sydney harbour, Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations.
In it he synthesises some general principles from the experience of nations at the time. One of his subjects, inevitably, is taxation. It is worth re-visiting 222 years later as the GST debate continues. There are lessons for both governments and voters.
Smith lays down four maxims. They are simple and elegant, but seem obvious, now. That is the nature of a classic.
The first maxim is as follows:
“”The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate.”
This is a very different proposition to that put by, for example, Kerry Packer to the Senate committee hearings he attended while Labor was in power.
He said he paid his tax according to his legal liability, not a penny less, not a penny more. And anyone who paid more was a mug.
Smith urges governments to ensure taxes fall fairly and says citizens ought to pay their fair share.
This part of the tax debate has been given lip-service to by Prime Minister John Howard and Treasurer Peter Costello. Catching tax avoiders through a broad-based GST is a lower-order reason for having a GST. They rather highlight economic efficiency and, of course, ignore the possibility that a GST might make tax less fair.
They would do well to take up Smith’s first maxim and explain how a GST might fall within it and make sure that their version of a GST does in fact fall within it. If they do not, a GST will fail and the economic benefits it might bring (and should be distributed fairly among “”the tenants of the estate”) will be lost.
The fourth maxim is:
“”Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state. [The trouble is] the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax [and] it may obstruct the industry the people, and discourage them from applying to certain branches of business. . . . While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.”
This explains why tax reform is necessary. Narrow-based and high-rated state taxes like residential stamp duty and payroll taxes are discouraging more efficient housing uses and discouraging employment. The states need access to more and broader-based taxes.
Wholesale sales tax is rated differently for different categories of goods so is more complex to administer. These taxes also discourage exports, which are still taxed before export, whereas as GST is taxed only at the point of consumption and does not apply to exports which leave the country before consumption at the wholesale stage.
Smith’s third maxim is:
“”Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. Taxes upon such consumable goods are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty, too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconvenience from such taxes.”
That view is harsh if you are talking about people on low incomes having to buy taxed necessities. It shows that Howard and Costello must ensure that either the necessities are not taxed or there is proper compensation for people on low income.
Other than that the maxim is an excellent argument for a GST. It is convenient, not easily avoidable and progressive in that the more you spend the more you pay. Spending is discouraged. Savings improve.
Lastly, the second maxim says:
“”The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain.”
At present our tax law is not plain. Its complexity has arisen after years of interplay between avoiders and legislators patching loopholes. It could be rewritten or avoidable income taxes should be cut and unavoidable consumption taxes be put in their place.
What prescience Smith had in 1776.