Tax me if you can

The recent tax white paper issued by the federal government has opened up a debate over the tax system in this country. Many people are looking for ways to both address the deficit and boost economic growth. This balancing act is an extremely difficult task, so we shouldn’t necessarily envy Joe Hockey. But it stands to reason that, when you’re faced with such a challenge,, you should leave as many options on the table as possible.

That’s why it was staggering to hear Mr. Hockey say recently that he is “philosophically opposed to higher taxes.” This strikes me as weird. To me, that roughly translates to “as Treasurer, I am philosophically opposed to using one of the most powerful and effective tools of government economic policy and one which, if wielded wisely, would effectively tackle the main problem I am tasked with solving.”

The use of the word ‘philosophically’ just doesn’t fit. Although a case could be made for treating tax as a moral issue, I would argue it should still be treated as a morally neutral weapon of economic policy that can be used to great positive effect.

Just as a side note, the use of this word is also profoundly annoying to a student of economics such as myself. Economics increasingly tries to align itself with the more robust natural sciences and many students are taught to treat economics as more of a science than a philosophy, hence the relentless focus on mathematics. So to have our premier economic spokesman treat economics as a matter of philosophy, (a discipline that prides itself on the idea that there is no perfect answer to anything) is just confusing.

Another interesting admission, this time in print, is on the first page of the tax report, outlining the government’s main objective, which is to deliver taxes that are ‘lower, simpler and fairer’. This is crucial. There is not much to quarrel with ‘simpler’ and ‘fairer’, but why ‘lower’? Lower doesn’t always necessarily mean simpler and definitely doesn’t always mean fairer. It reminds me of when the Department of Finance and Administration was re-named the Department of Finance and Deregulation between 2007 and 2013. Not only can a deregulatory approach often be ill advised, but it also means that you tie your hands to one particular policy approach, in which any deviation will be noted as hypocritical.

As well as an array of options, we also need to have an enlightening debate, which is only possible in the presence of honest language. Following on from Hockey’s previous statement, he says: “when you raise taxes, you are just collecting someone else’s money.” This is a deceptive use of language. Of course when you increase taxes you are collecting someone else’s money, but the use of the word ‘just’ implies that the process ends there. It doesn’t take an economics student to know that any transaction has two sides and that tax is like any other transaction. The collected tax isn’t lying idle; it is being spent on certain infrastructure and programs that are keeping the economy functioning. When you go to a shop to pay for milk, the shop owner takes your money but he doesn’t stare at you blankly until you walk out. He hands over the milk. This is a notion that one hopes the Treasurer can eventually grasp.

However, despite Hockey’s stern rhetorical opposition to tax increases, he realises he has a job to do to reign in the deficit. The evidence for Hockey realising this objective is basically last year’s budget, which involved extremely unpopular revenue-raising measures such as the GP co-payment and cuts to programs such as pensions. And the evidence for his fear of taxes, at least rhetorically, is held in evidence for all time during the post-budget discussion where he was willing to refer to certain measures as ‘rabbits’ before referring to them as ‘taxes’. Therefore, if there is a way to raise revenue without raising taxes, it’s a win-win.

It seems to me to be extremely difficult to try and develop intelligent tax policy when talk of a tax increase is basically taboo. But if that’s the way the game is going to be played, then let’s play it and see how far we can push it.

Eliminating super tax concessions is one way to do this. The government can raise much needed revenue without having a negative impact on growth and of course, most importantly, not having to refer to the measure as a tax increase. Abolishing negative gearing is another option that is gaining momentum of late. By eliminating the ability of renters to write off losses on property as tax deductions, the government will open itself to another source of revenue, without increasing taxes per se. And hey, what about the carbon tax? Not only is it and was it always the smartest way to tackle carbon emissions, but seeing how it was always a price and never actually a tax, it should go down fine, right? Okay, that’s pushing it. Especially since if they were to do this, it would negate most of the rhetoric that swept them into office in the first place. But you get the picture.

The budget recently handed down by the government was a chance to take or at least consider some of these options. Unfortunately not only did the government avoid all these measures but actually went out of its way to say that it will never make any changes to superannuation. The breathtaking stupidity of ruling out certain economic policy for all of eternity, in what is still a highly uncertain domestic and global economic landscape, is now seemingly becoming a badge of honour for the Coalition.

However, this is bigger than the budget.

We need to absolve ourselves of our terror of a tax increase. Although most of this article has focused on the language of those in power, it’s worth noting that they often speak what we want to hear. And lets be honest, we don’t like tax increases. So if we want to do away with taxes, fine, but it’s economics folks: there are trade-offs and opportunity costs to consider, and government-funded initiatives that drive the economy forward would have to go too as a result. (And pointing to the East-West link debacle does not negate the initiatives that have worked). So until we get over this taxophobia, there can never truly be a proper tax discussion, and many of our problems, not just the deficit, will persist.

 

Image source: https://www.flickr.com/photos/imfphoto/sets/72157643325232674