Peter Martin noted an interesting speech by the man himself on an important but largely forgotten part of the government’s agenda, the Henry Tax Review.
Henry’s speech lays out a set of “lessons” on tax reforms:
- The case for reform should be compelling. The first of my lessons is that the case we put for tax reform should be compelling.
- Uncertainty and risk impose costs too. The second lesson is not to frighten people by portraying tax reform as the equivalent of a short sharp jab.
- Simplicity often gets left behind. My third lesson is that we mustn’t forget the importance of simplifying the tax system.
- Perceptions of equity matter a lot. My fourth lesson is that equity is a powerful and under-utilised argument for tax reform.
- Governments need effective tools to improve peoples’ lives. My fifth, and last, lesson is that we need tax and transfer reform because we need to give our governments the right tools to cope with the big changes going on in the world.
- A conclusion: The goal is to improve wellbeing
But there’s plenty to ruminate over in there, including some interesting thoughts on road pricing. Thoroughly recommended.
There’s enormous scope for simplifying the tax system and taking out some of the stupid side effects, like the FBT roadtrips each March. Sadly, the first thing that the Tele seem to have jumped at is the road pricing discussions, expect smear and fear over that topic.
Henry genuinely seems to see the taxation system as more than just an instrument for raising revenue, can the country be re-shaped from treasury?
You do realise that a great deal of the complexity in our tax system comes from trying to implement other policies? Indeed, you could simplify the tax system a great deal if you allowed it to focus on its main goal.
I think there’s scope to simplify the system for individuals, while still providing economic incentives and disincentives to business.
I disagree that the “main goal” of Treasury is simply raising income. If this were true, why bother with progressive taxation? There are lots of simple ways you could raise the required level of taxation, but they’d be grossly unfair, grossly inefficient (in that they’d lead to negative externalities), or both. Tollways, for example, raise money inefficiently and unfairly. They’re inefficient as they’re applied in a haphazard way, slow down road transport (e-tolls mitigate this), and provide incentives to duck the location the toll’s applied. They’re unfair for largely the same sets of reasons – why does a resident of Mitcham not pay for the Eastern Freeway, but a resident of Caulfield pays for the South-Eastern?
The goal of Treasury, and economic policy more broadly, should always be about application of social policy. Revenue-raising is a part of that, as you can’t fund what we’ve decided is the requisite level of government spending from Pigovian taxes alone. But that doesn’t mean you should ignore the costs to us all of currently unpaid for externalities when they’re actually pretty easy to address.
That’s a very interesting speech. Buried in the last section, on tax and transfer, is a reference to environmental degradation, as one of the things a government should be concerned with.
He’s obviously been spending way too much time with the hairy-nosed wombats …
Federal Government spending is not funded by taxation (or borrowing). Very common misconception.
“Federal Government spending is not funded by taxation (or borrowing). Very common misconception.”
Please dispel this misconception by explaining?
Income splittign and the 30/30 flat tax system. Hurry up.
splittign is a highly technical term used by tax policy wonks in the place of splitting.
Razor @ 8 – won’t get either from a Labor government!
I thought spittign was the noise you made when your tax assessment comes back saying you owe the ATO some more $ above what got taken out of your paycheck. Feel free to substitute the appropriate situation for business owners, sole traders etc.
@7: In a non-convertible currency economy, the sole issuer of the currency is the Government. In order to give it value, the Government demands that taxes be paid in that currency, i.e. we are taxed in AUD which come only from the Government. For us to pay taxes, the Government must first spend. Additionally, the Government is not revenue constrained when spending in AUD. They can buy whatever they want.
Check out Bill Mitchell’s blog for more info.
Razor @ 8, either of those could only be justified on ideological, rather than economic, grounds.
Also while I hesitate to start a discussion of the 30/30 proposal, my view of it was that it simply didn’t add up then (much less now) – it would make lower income people worse-off, higher income people much better-off and it would have produced a massive budget deficit.
Don’t know about that, Alister. John Humphreys’ 30/30 tax reform proposal (if that is what Razor was referring to) actually has some big economic advantages — not least of which is the flattening of nasty Effective Marginal Tax Rates which create poverty traps.
Andos, I don’t read that in exactly the same way you do. And I think Bill Mitchell’s point holds up until it doesn’t; that is, while it’s true that the Australian government is the only body that issues AUD, that’s not the same as saying that the government determines the value of the AUD. I think there are more coherent arguments as to why this debt isn’t a problem.
With regards reform, I’m hoping – but not expecting – a proper resolution to the welfare trap. Eliminating state taxation would be my preference, combined with a proper demarcation of state vs federal responsibilities, and guaranteed funding sources to the states so that they can decide how they meet their needs.
Alister @ 4.
Sorry – Tax Professional short hand. By the “main goal” of Treasury, I mean rasing revenue in a economicly efficient, equitable and simple way.
These are well established tax design principles, and have been acknowledged (if not always put in practice) by the Australian Government long before the Henry Review.
By “other policies”, I generally mean things that would be better deal with by Government spending (i.e. grants etc), rather than messing up the tax system for the vast bulk of people and business for whom such measures are not intended to benefit (or penalise).
Basicly, the problem with using the tax system for social engineering, is that its not the best tool available – it impacts everyone, when you really want to focus where the actual problems are.
Alister: my point wasn’t about the value of the AUD, merely that taxation is used in order to empower fiat money (i.e. give it value). That is the primary function of taxation (from the Federal Government, at least. State Governments are a different matter).
The idea of raising funds through taxation to finance spending is a ‘gold-standard’ paradigm and hasn’t applied to our economy since Bretton-Woods collapsed in the ’70s (thanks, Nixon!). Unfortunately, gold-standard thinking seems to be the mainstream here despite its complete irrelevance to the way our economy works.
Andos @ 18, I wasn’t considering gold standard thinking. In a world where international trade happens, the value of the AUD is also set by what other people want to pay for it. If you decide to do policy as if there’s a bottomless source of AUD (after all, the Reserve could just inject more high-value money into the economy), its value will drop against other currencies. We import a lot of stuff, and if we devalue our currency as compared to other countries’ currencies, they’ll be less willing to buy our dollars. And so hyperinflation ensues, and suddenly you’re Zimbabwe.
Linking the value of currency to its exchangability for some sort of thing is probably impractical. I think that’s well understood. So again, I don’t see gold-standard thinking here. I think we all know that the value of money is solely due to our willingness to see it as valuable, rather than it having some intrinsic value.
Alister: Easy tiger, you are reading too much into my comments. I’m just talking about the way taxation works, see, because this is a thread about tax reform.
For a more detailed analysis of hyper-inflation in Zimbabwe, check this.
Alister @ 13 – Income splitting makes some sense while many welfare benefits are based on family rather than individual income. And it would eliminate the unfair situations where a family with two full time income earners pay more tax than another family also with two full time income earners getting paid exactly the same, simply because the split of income between the partners within a family is different.
All economics is based on ideology.
Yes Paulus the 30/30 proposal is a good idea.
A quick and easy simplification would be to abolish the low income tax offset (LITO) and replace it with a higher tax free threshold. I’ve blogged on this before:-
http://blog.libertarian.org.au/2008/06/19/lito-2009-09-take-2/
Then we could get to work on SATO, MAWTO, FTB-A, FTB-B, integrating the medicare levy etc.
The medicare levy is a travesty. If it was honestly intended to pay for government funded medical services then based on budget expenditure it would need to be revised to about 8%. At the current level all it does is perpetuate the myth that public health care doesn’t cost us much. It ought to be honest or else it should be abolished as a separate form of income tax.
Payroll tax has got to go. Replace it with just about any alternative form of tax.
This is spooky. This morning I was reading a 1996 NYT article by Paul Krugman called “Taxes and Traffic Jams” where he basically argues that what most people mean by tax reform (flat taxes, what is deductable etc) would have hardly any effect on GDP but that taxing road space (which is a valuable and over-used public resource no different in principle to waterside real estate) would save $40 billion (for the US in 1996). I could not agree more – hell I catch the train. What wouldn’t I?
It is a pity he doesn’t mention charging a proper price for water at the same time but I guess the guy didn’t get where he is by offering himself as an easy target.
I quite like the 30/30 tax system with it’s novel negative income tax system as mentioned above. I had read about that a few years back, and have thought about it it quite a bit. Being more of a left-wing libertarian myself, I have been thinking about a slight modification on this idea being a weekly payment too all citizens of, say, $200, or 10% p.a (or a variable rate that would be a little better then the average long term bank account) of the total amount of income tax that a person has ever paid, paid fortnightly which ever amount is the highest. With this system a steep progressive rate of taxation could be used without affecting incentives too much. It doesn’t punish people who might only earn a very high income for a few boom years ,in fact it may help them, it gives the government/reserve bank a much sharper tool to control inflation and create stimulus, it gets rid of, or at least vastly reduces, the ridiculous amount of government bureaucracy, and would feel as though you only actually pay tax once you die – without the usual nastiness of the death tax auditors.
Tax reform + political reality = yet another shambles.