No taxation without contemplation

‘No taxation without representation’ was the war cry that drew the American people from apathy to avid opposition at the onset of the American Revolution. Today, we do not face the same peril of colonial burden experienced by the founding fathers. But we do face taxation peril at the hands of an unresponsive and ill-advised government who continues to pursue dogmatic and ineffective tax policy.

The 2015-2016 Budget, Joe Hockey and Tony Abbott’s misguided attempt to play politics rather than economics, has left superannuation tax concessions, negative gearing and GST off the table, leaving us only with yet another tax discussion paper at a time when a progressive tax system is critical for a progressive economy.

Perhaps a generous motto for this current line of policy is ‘no taxation without conversation’, or more accurately ‘no taxation without procrastination’.

But this is not an article about politics, it’s an article about economics – in this case an article about the economics of taxation, and the ideas that are increasingly being overlooked about why we tax at all, and how that plays into what we should consider a better, fairer tax system.

First and foremost, amidst the political furor it is easy to forget that we tax for a reason. Taxation is the primary source of government revenue that is used to fund public expenditure on what are predominantly public goods: infrastructure, education, public transport, health care etc. Before deciding that lower taxes are better it begs the question – at what cost?

We very well may be prepared to give up many of these government services for the sake of lower taxes but we may be equally prepared to accept higher taxes in exchange for better public services. At any rate, the state of our tax system needs to address our decisions about public expenditure, not the other way around.

Secondly what constitutes a ‘better’ tax system is a super complex issue. Despite Abbott’s derisive comments that seek to condense our tax system along political lines (with Labour falling entirely on the harrowing and godforsaken Planet Tax) in reality ‘better’ taxes blur social and economic lines, not just political ones.

Why? Because the general public and academics hold very different definitions about what the right kind of taxation looks like. The former places large emphasis on the perception of fairness, and the latter (the economists in this case) often shift focus to efficiency.

Both sides have their own merits. From an economics perspective efficiency, in the form of non-distortionary taxation, reduces the effect of government intervention on the economy – provoking Adam Smith’s ‘invisible hand’ array of benefits.

On the other hand the social perspective is much more adept at reflecting the public’s sense of fairness. A taxation system purely designed to reduce economic friction might lose sight of the importance society places on, for example, a minimum standard of living.

Let’s consider a extreme case where only the economic sense of ‘better’ taxation is present. We might do this my applying the Ramsey Rule; a taxation policy that requires taxation of goods in such a way that they’re as non-distortionary as possible. This is achieved by taxing commodities according to their elasticities.

If a commodity were highly inelastic, so purchases didn’t vary much with price changes, it would make sense to tax it more under this system – because people would continue to buy it and thus there would be no distortionary effect.

Under this policy bread would be taxed much more heavily than something like caviar or luxury speed boats.

And thus arises the tension between the social and academic perspective. Because from a social perspective we would undoubtedly seek to acknowledge and ameliorate the issue that such a tax would unfairly impinge on those in lower-income groups since bread is a staple item. So despite its efficiency is the system better at all?

In reality individuals draw conclusions about the fairness of a tax system based on who is doing the paying. But the economic considerations of the effect on the market matter too. And both deserve consideration in the context of our tax debate since efficient taxation boosts economic growth whilst government for the people, by the people, necessarily must incorporate the public perception of fairness.

Does this mean that better taxation is lower? Or that lower taxation is fairer? Or that fairer taxation is lower? The answer to any of these questions are anything but simple and yet trying to have a tax discussion that reduces our situation to a rigid party-line phrase ‘better tax system that delivers taxes that are lower, simpler, fairer’ is unhelpful. Perhaps even worse is assigning any tax discussion to the ominous and frightful realm of ‘Planet Tax’ so that all we get is fear-mongering and derision.

What if, we the people demanded a change – ‘No taxation without contemplation’. Contemplation of the foundations upon which we should base our tax policy, and thus the guidelines to which we might hold our politicians accountable. I can accept that there are hard decisions to be made and that a progressive tax policy is going to have some ideological origins. But the Australian public won’t get the tax system it deserves if public taxation discussion remains void of intellectual examination. So let’s start by acknowledging why we tax and what constitutes good taxation – only then can we have any hope of having a real ‘Re:think’ of tax reform.