Towards a libertarian tax policy Sinclair Davidson

RMIT University © 2011 Economics, Finance and Marketing 2 Why Libertarianism? But anyone who after the twentieth century still thinks that thoroughgoing socialism, nationalism, imperialism, mobilization, central planning, regulation, zoning, price controls, tax policy, labor unions, business cartels, government spending, intrusive policing, adventurism in foreign policy, faith in entangling religion and politics, or most of the thoroughgoing nineteenth-century proposals for government action are still neat, harmless ideas for improving our lives is not paying attention. Deirdre McCloskey

Outline Taxation is necessary – even for libertarians Avoiding Nirvana fallacies Some proposals RMIT University © 2011 Economics, Finance and Marketing 3

Taxation is not theft Alas – it makes a great slogan. Taxation defines the relationship between citizen and state. Twentieth century is the century of big government –Cannot be described as being overly successful –Economic prosperity at an all time high –But correlation is not causation Restricting the power of the state must start with restricting its power to acquire and spend money RMIT University © 2011 Economics, Finance and Marketing 4

Taxation is not theft Loren Lomasky –Taxation is not theft, it is robbery. –‘I would therefore caution libertarians to shelve the “Taxation is theft!” slogan despite its sonorous ring, and if they cannot bring themselves to do that, then at least to cultivate a twinkle in the eye when they haul it forth.’ Taxation is coercive. –Some libertarians argue therefore it’s immoral –But coercion and immorality is not equal –Pre-1865 slavery was legal and post-1865 slavery was illegal. –Coercion didn’t change, but liberty improved. RMIT University © 2011 Economics, Finance and Marketing 5

RMIT University © 2011 Economics, Finance and Marketing 6 Taxation and Coercion Ludwig von Mises –One must be in a position to compel the person who will not respect the lives, health, personal freedom, or private property of others to acquiesce in the rules of life in society. This is the function that the liberal doctrine assigns to the state: the protection of property, liberty, and peace. Friedrich von Hayek (emphasis added) –Outside of the field of taxation, it is probably desirable that we should accept only the prevention of more severe coercion as the justification for the use of coercion by government.

RMIT University © 2011 Economics, Finance and Marketing 7 Taxation and Coercion What is Hayek’s position for coercion in the field of taxation? –Principles of coercion –Known rule –Certain –General –Applied equally –With the exception of progression in the income tax most aspects of taxation meet all those criteria. –There seems to be no limit on coercion to finance itself, rather Hayek would limit what the government can do and how it can do what it does.

RMIT University © 2011 Economics, Finance and Marketing 8 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 © 2011 Economics, Finance and Marketing 9

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 supplier 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 © 2011 Economics, Finance and Marketing 10

Playing God and Tax Policy James Buchanan –Many economists, along with other social scientists and social philosophers, enjoy playing God, by which I mean laying out in detail their own private versions of the “good society” without being required to suggest ways and means of implementing their precepts or even to defend the consistency of these precepts with democratic political processes. –This is true of anyone who imagines they can design the ‘good society’ including some libertarians. RMIT University © 20 Economics, Finance and Marketing 11

Playing God and Tax Policy When playing God and engaging in nirvana policies people make three mistakes –Grass is greener on the other side fallacy –GST should be debated / included in tax reviews & summits –GST should be levied on imported goods < $1,000 –Free lunch fallacy –Taxing rent is a free lunch proposal –People could be different fallacy –Tax debates are conflicts of vision –People are not egalitarian –Taxes do not benefit the ‘poor’, ‘needy’ or ‘disadvantaged’ –Median voter is increasingly a taxeater –Tax churn is becoming a feature and not a bug RMIT University © 2010 Economics, Finance and Marketing 12

Who benefits from government spending? Middle class –Median voter prefers policies that benefit middle class. –Given the tax distribution the middle class is getting a bargain. –Deirdre McCloskey works out that if a one-quarter of government spending was paid to poor Americans that each one would get $30,000 p.a. –I calculate that each ‘poor’ Australian would receive $37,500 each (Assuming a one trillion dollar economy, a thirty percent tax take, and twenty-five percent paid to 2,000,000 ‘poor’ Australians). Who are the middle class? –Government employees, university professors. RMIT University © 2010 Economics, Finance and Marketing 13

What to do? Some low-hanging fruit –Tax Complexity – everybody always complains but never does anything –The Tax Pack is very complex –Why? –Is it to bamboozle people into paying too much? –Rich shouldn’t pay too little, Poor shouldn’t pay too much. –All MPs and staff and ATO staff, and spouses, should be required to submit via the tax pack. –Libertarians may worry about coercion. –Benefit is that tax simplification would occur very rapidly. RMIT University © 2010 Economics, Finance and Marketing 14

What to do? Some low-hanging fruit. –Eliminate fiscal illusion –Have a real Operation Sunlight –Publish government spending registry on the internet –Let the true cost of government programs be visible, including a break-down of actual spending RMIT University © 2010 Economics, Finance and Marketing 15

What to do? Two fundamental challenges Vertical Fiscal Imbalance –Commonwealth government raises more money than it can spend (although the current government has been very bad on this score) –State governments spend much more than they raise. –Potential Solution: Devolve personal income tax powers to States –States would not be keen, they benefit from the Commonwealth tax cartel. –Encourage tax competition –Leave corporate tax at commonwealth level RMIT University © 2010 Economics, Finance and Marketing 16

What to do? Interconnectedness of tax and welfare system –Effective marginal tax rates –Means testing –But not receiving a welfare payment that you’re not entitled to is not a tax –There is a perverse incentive effect –Proposed Solution: John Humphreys 30/30 proposal –But 30 percent tax rate is too high A choice needs to be made about which of these two fundamental problems should be addressed. My preference is for devolution of tax powers. RMIT University © 2010 Economics, Finance and Marketing 17

Other issues 10 taxes raise 90 percent of revenue. Nuisance taxes. Capital gains and negative gearing. International tax base or sourced based tax system. Should ‘tax cheats’ be sent to jail? Tax tail should not be wagging the dog. RMIT University © 2010 Economics, Finance and Marketing 18