Business put its hand up for big tax cuts this week.
The Australian Chamber of Commerce and Industry’s blueprint for reform contains some principles and objectives of taxation policy. They were not much different from those laid out by Adam Smith in the Wealth of Nations 230 years ago.
Smith said citizens should contribute towards the support of the government in proportion to their ability to pay. Tax ought to be certain, and the time, manner and quantity ought to be clear and plain. Tax ought to be levied at the time and manner in which it is most likely to be convenient for the contributor to pay it.
Most importantly, he wrote, “Every tax ought to be so contrived as both to take out and 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.” In other words, no costly tax bureaucracies.
The ACCI principles call for similar things: fairness, efficiency, clarity and simplicity.
The ideals are obvious, but their achievement seems impossible. There are several major difficulties.
First, the ideals are contradictory. If you want fairness, you have to eliminate tax avoidance and evasion. To eliminate avoidance and evasion requires complex legislation, so the ideals of simplicity and clarity go out the window. Business is first to scream about complexity and compliance costs. Give us a simple system, it asks. But business is the first to exploit any loophole not covered by complex legislation. They use trusts, companies and imaginative deductions.
If you want efficiency, the Taxation Commissioner has to have almost arbitrary powers of assessment. So fairness is compromised.
Secondly, different people have different views of fairness. What a welfare organisation might call fair would be regarded by a business group as confiscatory. What business calls fair would be regarded by a welfare group as rampant, selfish capitalism.
The ACCI, for example, wants the top marginal rate cut to 30 per cent and to apply only on income above $100,000. It also wants capital-gains tax to be cut with a tapering scale which reduces to zero if an asset is held more than 10 years.
It also wants only two income-tax brackets. Again, the ideal of each person contributing according to ability is compromised by the desire for simplicity. Business might well argue that there is no need for a progressive system with higher rates at higher levels of income because even with a flat rate people who earn more pay more tax. But low-income earners would not see it that way.
But the biggest obstacle is political.
The ACCI quite rightly called for indexation of the income tax rates. The income levels at which each higher rate cut in would be indexed for inflation. As it is now, we cop an automatic tax rise every year as inflation effectively lowers the real level of income at which the higher rates apply.
A fairer, more transparent system would be indexed so that if the politicians wanted to raise more tax they would have to legislate for it openly and not rely on inflation to silently do the job for them.
But neither side of politics would support indexation. They are happy for inflation to increase taxes in the early part of the electoral cycle so they can generously provide “tax cuts” in the year before the election.
It gets worse. Before the mid-1980s the Australian tax system had an efficient method to help parents. Children were tax deductions. Now we have means-tested family benefits usually paid directly to the mother. The theory was that it would be better for the children if mothers got fortnightly payments through the year rather than the usually higher-income-earning father getting it in the annual tax return or through lower PAYE deductions through the year.
But two unintended consequences flowed. First, the effective marginal tax rate on additional income earned by mothers going into the workforce (plus childcare costs) has made it hardly worthwhile for women with under-school-age children from working at all. Secondly, both sides of politics are now addicted to sending parents cheques in the mail, especially in the lead up to an election.
The Government has tinkered a bit with the system and promises some more tinkering, but the whole set-up is flawed. The Government hands out about $25 billion a year to families with children, nearly all of whom are paying tax. It is hopelessly inefficient. Two hundred and thirty years after Adam Smith stated the obvious, the Australian Government breaches the principle that tax should be contrived efficiently. We have the government taking money in tax and then handing it back in family benefits, with all the complexities and expense of determining liability to pay and eligibility to receive.
A quarter of Australia’s income tax of $100 billion is put through this costly churn. And much of the time it is mucked up so parents are left with a debt to the Government at the end of the year. The Government should not take the money from these people in tax in the first place.
The ACCI has got the wrong end of the stick. It is pushing for cuts at the top end of the income scale. It should look at the bottom end first. It mentioned the welfare-to-work question, but not the inefficiency of churning $25 billion through the tax and family-benefits systems.
It is patently absurd that someone on just $8000 a year should pay any tax at all. It is more absurd that someone with a child on $20,000 should pay tax and then get a family benefit.
The tax-free threshold should be lifted to, say, $25,000 with a further lifting of several thousand dollars for each child being supported.
But the pollies will not do that because they would have the electoral advantage of being seen to be handing out money.
Any efficient, fair system of tax would not tax people whose income is so low that they qualify for welfare, nor would it give welfare to people who are on an income high enough to attract tax.
The efficiencies and extra productivity gained by encouraging more mothers into the workforce would most likely be as great as those obtained through the incentive of a lower top marginal rate.