Taxation: Statist Seduction Sinclair Davidson

The federal budget is Australia’s social compact with itself – as a nation, we raise taxes on companies and workers to spend on subsidies for the young, the old, the sick and the poor. –Chris Richardson in the AFR May 1, 2014 RMIT University © 2014 Economics, Finance and Marketing 2

The federal budget is Australia’s social compact with itself – as a nation, we raise taxes on companies and workers to spend on subsidies for the young, the old, the sick and the poor. –Chris Richardson in the AFR May 1, 2014 Really? –What about public goods? –Is spending on ‘the young, the old, the sick and the poor’ a public good? RMIT University © 2014 Economics, Finance and Marketing 3

Arthur Seldon and Over-government Over-government is a problem for democracy –What politicians maintain as the necessary costs of government are increasingly sensed as unnecessary costs of ‘over-government’. And its taxes, originally seen by William Pitt as income tax, and accepted for a few years as payment for a good bargain, are being subconsciously but finally resented as too high for the quality and relevance of services available at lower cost and higher quality from competing suppliers in the market. –The future of the welfare state – ‘Its future now turns on its readiness to shrink its economic domain, perhaps by as much as a half. If it fails, it faces the even more formidable prospect of waging guerrilla financial war against the people.’ RMIT University © 2014 Economics, Finance and Marketing 4

RMIT University © 2014 Economics, Finance and Marketing 5 Taxation, Public Goods and Coercion

Taxation and Coercion Hayek holds that there is no automatic presumption against government in the disputed area. Mises – ‘As the liberal sees it, the task of the state consists solely and exclusively in guaranteeing the protection of life, health, liberty, and private property against violent attacks. Everything that goes beyond this is an evil.’ James Buchanan – ‘Some extensions of state power are more legitimate than others’. Buchanan – ‘The “wealth of nations” is maximised when persons are “free to choose”.’ That disputed area is becoming very large and constitutes over-government. RMIT University © 2014 Economics, Finance and Marketing 6

How does the state get away with over-government? Fiscal Illusion: The State obfuscates as to the true cost of government. When voters are unsure as to the true cost of government they demand more government than they otherwise would. –Tax complexity –Deficit finance –Hypothecated taxes Tax Folk Theorems: Widely held views about principles of good taxation policy or tax facts that are probably not true. –Sources of Tax Folk Theorems: –Fiscal illusion –Political debate –Economics –High theory –Low theory RMIT University © 2014 Economics, Finance and Marketing 7

Tax Folk Theorems The ‘rich’ don’t pay their ‘fair share’ of tax. RMIT University © 2014 Economics, Finance and Marketing 8

Tax Folk Theorems We should tax all sources of income … … but ignore compliance and nuisance costs. RMIT University © 2014 Economics, Finance and Marketing 9

Tax Folk Theorems Not being taxed is a subsidy. –Tax expenditures are created when the actual tax system deviates from an ideal tax system to the apparent benefit of a narrow group of taxpayers. The difficulty is in establishing the ideal tax system – and, of course, who gets to define that “ideal tax system”. –Housing is tax-advantaged. –Living in your own house is a tax-rort. –Superannuation tax benefits accrue to high income earners. –Negative-gearing is a rort. –Tax expenditures are arbitrary exercises in wishful thinking. –Bureaucrats get to play God and design their own ‘ideal’ tax system without having to worry about democratic constraints. RMIT University © 2014 Economics, Finance and Marketing 10

Tax Folk Theorems Economic incidence means that bad policy choices don’t matter. –Very often the same people who claim it doesn’t matter which side of the market gets taxed complain about the salary sacrifice industry. –People who harp on about economic incidence often ignore transaction costs. –People who harp on about economic incidence always ignore fiscal illusion. –Payroll tax is a tax on jobs. RMIT University © 2014 Economics, Finance and Marketing 11

Tax Folk Theorems Big business doesn’t pay its fair share of tax. RMIT University © 2014 Economics, Finance and Marketing 12

Tax Folk Theorems Land tax is an efficient tax. –Nooooooooooo. –The only perfectly inelastic supply curve you will ever face is the face that you only live once. RMIT University © 2014 Economics, Finance and Marketing 13

Conclusion Don’t believe statements about taxation: –That are commonly held –That are pronounced by experts (especially neo-classical economists). Check the statements yourself. There are very few, if any, sources of untaxed revenue. There are very few, if any, easy policy changes that will generate large amounts of tax revenue. When thinking about tax policy beware of the nirvana fallacies: –Free lunch –People can be different –The grass will be greener When thinking about tax policy remember: –Compliance costs –Audit costs –Behavioural responses RMIT University © 2014 Economics, Finance and Marketing 14