Taxing Times in Australia (and Elsewhere)

Following the surprise victory of the increasingly conservative Liberal-National coalition at the 2019 Australian federal election, one of their first orders of business was to implement their promised income tax reforms. This seemed a little odd as the LNP's tax policy provided excessive benefits that it would provide for the very well off. But the great joy of democracy is people get the government that they voted for, whether by informed, uninformed, or a misinformed public vote. At least the income tax cuts were one the few transparent policies, even if they were promised in the budget prior to the actual campaign. As a piece of electioneering, it was clever; little for the poor, larger tax cuts for the middle, and little for the rich in stage one, but by stage three the wealthiest ($180K per annum) would receive $8640 per annum extra, whilst the poorest (under $30K per annum) would receive a paltry $255 per annum.

Immediately after the election however, there was a snag. Either due to a stunning level of incompetence or a cunning level of plausible deniability, it was announced that they would not be implemented in the current financial year. When the tax package reached parliament, the opposition Labor Party was unable to get any amendments in the House of Representatives considered by the government, who has a majority. Rather than face the unpalatable prospect of having to be seen voting down middle-income tax-cuts, Labor opted to pass the package in full in the HoR to seek amendments in the Senate, where the government doesn't have a majority. That aspect was tactically reasonable at least, although it didn't work - the government was able to pass the package with the support the Centre Alliance and independent Lambie. The support of the Centre Alliance is unsurprising, being milquetoast centrists, who only occupy that position due to a complete lack of coherent ideology. Lambie's support was primarily due to a lack of intelligence; effectively bribed with the offer of $150m in relief for public housing debts, the loss in Commonwealth public revenue is five hundred times greater for the Stage Three proposals.

If any good is to come of this at least the next Federal election can be fought with the issue on whether or not those earning $180K per annum really need an additional tax cut of over $8.5K each and every year in preference to public services (every cost is an opportunity cost). Whilst many did condemn Labor at the time for not voting against the tax cuts in the House of Representatives, in a sense, they were left with little option due to the stringent procedures of the parliamentary system which is, of course, vastly different to the variety of positions that one can take outside of such an arena. For their part, of course, The Greens were in a position to vote against the package, knowing full well that they would not lose any votes over it.

It is also an opportunity to consider what is the optimal tax system in Australia (and by extension elsewhere). Fortunately the Australian government did conduct an extensive review on the subject almost ten years ago, "The Henry Review". Most of the recommendations of that review have not been implemented, which is quite unfortunate as the review did engage in an objective analysis of Australia's tax system with a particular emphasis on ensuring sufficient retirement incomes. Being objective, it also provided a great deal of information that could also be used by other countries who are less prone to partisan politics and the curse of self-interested and short-sighted electorates who are happy to vote to provide themselves a larger slice of a smaller pie. Even then, however, the Review had the unfortunate limitation give recommendations on one of Australia's more controversial taxes, the Goods and Services Tax, although the general principles of any sales tax still applies; the price of the good is increased, demand is reduced (depending on elasticity of demand), and there's a deadweight loss to consumers and suppliers due to a loss of trades, all in addition to the costs of administration.

In fact, this general principle applies to all produced goods, which have a relatively elastic supply, and in contrast to natural goods which have a relatively fixed supply. Taking into account these relative levels of supply elasticity, and demand elasticity, and the cost of collecting taxes versus the revenue raised, allows one to calculate the "welfare loss" of a particular type of tax. When the Henry Review conducted its analysis it noted that there were ten taxes in Australia which contributed about 90% of public revenue and approximately 115 other taxes that generated the other 10%. From a perspective of administrative efficiency alone, there is a strong argument for reducing the sheer quantity of specialist taxes. When considering the welfare loss of major taxes, the worst by far was Australia's archiac state-based mineral royalty system which lost almost 70c in every dollar raised, which will vary dramatically as it is volume-based. State-based taxes fared particularly badly, in addition to the welfare loss in the royalties system, there were also notable inefficiencies in the insurance taxes, payroll taxes (effectively a tax on employing people), motor vehicle taxes, and conveyancing stamp duties. Among the more efficient taxes were the Petroleum Resource Rent tax, municipal rates, state land tax, and the GST. In most of these cases they are actually a variant of one and the same - they targetted private acquisition of economic rents which is universally agreed by economists to be damaging. It is not without reason that one of the key recommendations of the Review was the abolition of state-based stamp duties, and the establishment of a Federal land tax.

The Henry Review also set the set for the debate in Australia about what to about its vast mineral wealth which, at the time, was booming. The government at the time was keen to have a market-based price, which became the Mineral Resource Rent Tax, a replacement to the original Resource Super Profit Tax (RSPT). The RSPT was furiously opposed by the Minerals Council of Australia who, with an advertising war-chest that even the government could not compete with, ensured that they retained their monopolistic profits through their paid agents in the Liberal and National Party, who eventually repealed the MRRT. Subsequent analysis has showed how costly that decision was; according to Juan Carlos Boué of the Oxford University Institute for Energy Studies, Australia had lost a "staggering" $90 billion by rejecting the RSPT. As Australia gas exports are roughly equivalent to that of Qatar, it gains some $600 million from this - the Qatar government receives $26.6 billion. Comparisons between Australia's failure, and Norway's success (which does have such a resource tax), have not gone unnoticed.

Following the general principle across the board, there should always a general move towards deriving public income from the use of natural resources to avoid speculative monopolistic practises which increase inequality, for economic efficiency, and, to encourage minimal use. An example of the latter was the carbon pricing scheme, Australia, being one of the less rational jurisdictions in this regard, engages in the reverse behaviour, providing negative gearing and capital gains subsidies to property owners, a policy which makes housing increasingly concentrated and expensive, leading to major boom-and-bust cycles, all issues that have been reviewed in some depth. As another bizarre example, Australia is the only country world that allows fully-refundable franking credits. Whilst many have adopted the policy of dividend imputation to "double taxation", nobody else allows taxation be reduced to negative levels, i.e., the recipient received a tax refund, even though they paid no income tax. This becomes additionally enticing because superannuation income is not counted as taxable income, leading to a situation where many wealthy people on very high incomes, are receiving an income tax refund despite not having paid income tax. It also effectively, in many cases, reduces company tax to zero. The cost of such a policy, approaching some $8bn per annum, is arguably the the worst economic decision of any Australian government this century.

One wonders whether Australia has the worst taxation and subsidy policy of any advanced economy in the world. Certainly from an immediate review it would be difficult to imagine a country who engages in policies that actively encourages rent-seeking, the monopolisation of natural resources, and the effective public subsidy of environmentally destructive behaviour. In the other side of the story, with the single exception of raising the tax-free threshold, the tax and subsidy system is increasingly designed to punish lower and middle-income wage earners, and with ever-increasing attempts to remove aspects of the social wage; such as attempts to abolish Medicare, the decades-long refusual to increase unemployment benefits, or attempts to reduce the effectiveness of union-influenced non-profit industry superannuation funds, which consistently out-perform their for-profit rivals.

It would be inappropriate to simply describe the problems without offering an alternative, and such an alternative should be designed around the optimum result and the transition second. Ideally, public revenue is derived from fixed-supply natural resources, which implies an all-of-Commonwealth land-tax system, with Pigouvian-style taxes for various pollutants, and various competitive rental licenses for other forms of economic land (e.g., radio spectrum bands), all of which equates with an optimal level of public expenditure. It also suggests a continuous increase of the tax-free threshold of wage-income and the equalisation of wage-income and interest-income grades. On the subsidy level there should be a removal of the excesses of fully-franked dividends in favour of a partial dividend system, an end to negative-gearing except for new constructions (and this would increase housing stock), and for capital gains benefits to be tied to real CPI levels. The prospect of such changes of occurring, however, are slim, despite the - literally - hundreds of billions of dollars in benefits that it would bring to the Australian economy. Sometimes those who benefit from having a poor situation will do whatever they can to prevent loss of that privilege, even if the alternative would make all better off.