Sea change

July 27th, 2015

Maybe it’s my chronic over-optimism, but it seems to me as if there has been a sudden change in the long-sputtering debate about taxation in Australia. Until a few weeks ago, “tax reform” was, as it had long been, code a “tax mix switch” which in turn was code for “tax food and use the proceeds to cut the company tax rate or the top marginal rate of taxation”. Joe Hockey was still pushing the second part of this package only a week ago.

But the reports coming out of the recent COAG summit seemed to convey a general acceptance that more tax revenue is needed to fund health expenditure in particular. The two top options were an increase in the rate of GST or an increase in the Medicare levy, with little mention of “base broadening” (more code for taxing food).

Meanwhile, Labor has been talking about a Buffett tax, that is, a minimum rate of tax levied on gross incomes, regardless of deductions. And, while the LNP still assumes that it can win by running against a “carbon tax”, that belief seems to have come unmoored from any general theoretical viewpoint. How can Abbott run against a “great big new tax on everything”, if he is happy to discuss a 50 per cent increase in our existing “great big tax on everything”, the GST?

I’m not clear what has happened to bring this about, or whether I’m misreading the signals. But it certainly looks to me as if the great political taboo against even mentioning higher taxes has been broken.

  1. David Irving (no relation)
    July 27th, 2015 at 16:48 | #1

    I hope you’re right, Prof Q. Certainly, the premiers (although not the federal government) are making encouraging noises.

  2. Peter Chapman
    July 27th, 2015 at 16:49 | #2

    Your mistrust is justified, by many precedents and long historical experience. However the politics are interesting: Abbott being upstaged by Baird, with (in the view of some commentators) the latter showing the way in conservative leadership; the shifting electoral prospects of the WA government; the increasing pressure from almost all the rest of the world on climate policy… etc., etc.. However there remains much room for mischief, particularly when it comes to Abbott and Hockey insisting the GST is a “state’s tax” and the potential for cost-shifting on health funding. But Abbott appears to remain fixed in his view that states must sell assets before they will qualify for new infrastructure funding; not everything has changed.

  3. David Allen
    July 27th, 2015 at 16:54 | #3

    Seems like there’s plenty of uncollected tax out there already without changing anything except compliance. A whole industry of tax avoidance. Prepare for a CPA waambulance if a buffet tax is considered.

  4. Mr T
    July 27th, 2015 at 16:59 | #4

    I have never understood how Abbott and Hockey have gotten away with the massive gaps in logic about tax.

    Their rhetoric has been constantly that about the deficit, and how this is going to be end of civilization as we know it. Yet their first action when gaining government was to eliminate 2 forms of taxation: the price on carbon which is a well constructed tax; and the mining tax (not so well constructed).

    I have also thought that if you have to have a tax (and it appears that we need more tax to fund a growing expenditure on health), taxing a “bad” was a good economic management. Things that I think fall into that category are pollution including carbon emissions, speeding, tobacco, and alcohol.

    So even if you accept that what they abolished was a tax on carbon emissions rather than a price on carbon emissions (an argument about labels), it is a tax that is better for the economy than either income tax (which is what the increase in medicare levy would be) or a tax on consumption (which is what an increase in GST would be)

  5. Chris O’Neill
    July 27th, 2015 at 17:35 | #5

    a 50 per cent increase in our existing “great big tax on everything”, the GST

    Well spotted.

  6. Uncle Milton
    July 27th, 2015 at 18:31 | #6

    How can Abbott run against a “great big new tax on everything”, if he is happy to discuss a 50 per cent increase in our existing “great big tax on everything”, the GST?

    Watch and learn.

  7. Uncle Milton
    July 27th, 2015 at 18:37 | #7

    a Buffett tax, that is, a minimum rate of tax levied on gross incomes, regardless of deductions.

    Talk of a Buffett tax shows the dangers of importing foreign ideas without local context. In Australia, high earners don’t avoid tax by having lots of deductions from their gross incomes. They avoid it by shifting their incomes to super and trusts. I guarantee that every equity partner of every major law firm, who would all have incomes of around $1 million, or more, would have gross incomes of around $250K, tops.

  8. Megan
    July 27th, 2015 at 18:58 | #8

    Peter Chapman,

    Speaking of Baird upstaging Abbott – and some people not being so sure – Clarke & Dawe touched on that last week.

  9. Donald Oats
    July 27th, 2015 at 19:57 | #9

    I’ve been busy pointing out the disconnect b/n PM Tony Abbott yelling no carbon tax and no mining tax, then being happy for a 50% increase in the GST to be discussed, including on imports, as if there is no impact upon us mugs. What surprised me is how meh people go at the 50% increase of the GST, and I think it is because a tax of 10% going to 15% in absolute terms sounds not too bad, even though in relative terms it is a 50% increase of a tax which is very broad in its base. Say to someone that they’ll save $550 by getting rid of the carbon tax and yay, happy voter: say to them oh, we’ll increase GST from 10% to 15%, and the voter just switches to watching netflix for a bit, not making the connection…and, it is worth pointing out that non-core promise section 7, item 3(a), was “There will be no change to the GST.”

    How Australians can put up with this two-faced behaviour is a constant surprise.

    Personally, I am truly ambivalent about this discussion of our taxes: on the one hand, I’ve been wondering how long it would take before something sensible was on the table; on the other hand, after Tones was so relentlessly negative on new taxes, or on any change to existing tax (unless a tax cut), pounding the ALP into the dust on this very issue, I feel aggrieved to see Tones actually benefit from the current discussion. I know that is petulant, but it still rankles me.

  10. Pete Moran
    July 27th, 2015 at 21:12 | #10

    The Australian level of political maturity has rapidly eroded thanks to the efforts of this tea-party inspired Coalition. It won’t be long before Labor hear the siren song of populist immature tax negativity however.

    Only the Greens have been consistently bold on taxation questions.

  11. David
    July 27th, 2015 at 21:16 | #11

    John,

    My suggestion would be to “out source” the tax department. If tax assessors were paid a percentage of taxes collected, there would be an efficiency dividend. Assessors would have an incentive to ensure that the current tax act was adhered to thoroughly. A 5% increase in tax receipts would equate to $20 billion annually.

    Tax resources would be directed towards assessing the returns of people and firms who currently avoid tax, illegally. And because the tax department would be self funded issues around chronic under funding of the Tax Dept could be resolved.

    Do you know of literature that has explored this idea?

  12. Megan
    July 27th, 2015 at 21:59 | #12

    @David

    You could google something like: tax collectors + privatized

    Sanborn expanded his operations, the Treasury accepted his list with little or no evaluations. Private collectors were required, by law, to furnish details about each collection, such as, nature of the debt and the evidence used to support accusations. Traditionally, the government would hire contractors to assist its officials in collecting taxes. Sanborn viciously turned the system, and assured full-time government employees would work for him.

    BIR officials were required to give the contractor all the help and assistance necessary, BIR employees would assist Sanborn to analyze several railroad companies. About this time Congress had delivered the contractor another 150 delinquent accounts. In July 1873, Sanborn extended the contract by 150 companies. Meanwhile, he convinced Congress to allow him take over all of the railroad companies within the United States. Sanborn was trying to collect taxes that BIR employees were also pursuing, causing great disturbance among the employees. Also the commissioners had lodged a formal complaint with the Treasury, which was ignored by the same.

    On January 10, 1874, Sanborn and two others were indicted for revenue fraud. Sanborn’s defense was that he was under contract from the government due to a rider in an 1872 appropriations bill created by congressman William H. Kelsey. This bill allowed the Secretary of the Treasury to hire three persons to “discover and collect” unknown taxes to the United States government. If they collected they would receive 50% commission. What Sanborn did instead was to take already existing tax cases, and put them on his contract, so when they came in, he would collect 50%. When the charges came, and congress investigated the documents. In the following testimony, Richardson said he didn’t read the contracts, he resigned few months later. Sanborn was acquitted of the charges because he was under contract to collect those taxes, but a scandal still rocked the country from January to May 1874.

    I’ve always thought that a better idea would be to pay well above market rates for taxes paid early or even “on account”.

    If you are struggling and behind on your taxes the government charges interest in double figures (something like 17%). But rich people can only “earn” about 4% on relatively secure terms.

    If the rich could get, say, 8% and the struggling could pay 8% with the government both the collector and guarantor – all with the appropriate judicial and other oversight mechanisms – everyone in the equation would be better off.

  13. Megan
    July 27th, 2015 at 23:12 | #13

    PS: The other main part to that idea is a very, very big stick for the rich who avoid tax. So much so that they would find it a much better prospect to simply pay taxes early than to be belted for avoiding them. The smaller taxpayers should be given a lot more lee-way and the bigger a lot less.

  14. rog
    July 28th, 2015 at 08:42 | #14

    How can Abbott run against a “great big new tax on everything”, if he is happy to discuss a 50 per cent increase in our existing “great big tax on everything”, the GST?

    Easy, he shifted some spending burden onto the States then said that if the GST was to be raised its entirely up to the States to make that move.

    Turnbull has muddied the waters by saying that Govt spending on emissions control was tantamount to a tax.

  15. David
    July 28th, 2015 at 08:58 | #15

    @Megan Thanks Megan, I will look into this. This paper is on my bucket list

  16. Aardvark
    July 28th, 2015 at 09:06 | #16

    The LNP has been quite politically astutue to make it very clear the GST is a state tax and will only be changed by the willingness of the state. The current mix of LNP and ALP premiers makes it possible to change the GST rate as it can be argued that it has bi partisan support. This could substantially limit the fallout to the relection prospects of the incumbents. The states get to raise more revenue to continue their inefficient profligacy in provision of Health services and champion that they have spent more on health and education than any previous government.

  17. Hal9000
    July 28th, 2015 at 11:13 | #17

    @David

    Do you know of literature that has explored this idea?

    The Bible. Romans did it. Not popular with the taxpayers. Paul gave the career up in order to pursue the safer job of proselyte for the new religion, threat of crucifixion notwithstanding.

  18. David
    July 28th, 2015 at 11:20 | #18

    @Hal9000
    Interesting. They built a lot of roads, though. 🙂

  19. totaram
    July 28th, 2015 at 19:34 | #19

    @David
    There was no rail.

  20. totaram
    July 28th, 2015 at 19:38 | #20

    @Mr T
    “I have never understood how Abbott and Hockey have gotten away with the massive gaps in logic about tax.”

    Quite simple really, if you have the the MSM on side. Can you point to even one article or piece anywhere in the MSM which has a decent discussion (analysis) about taxes?

  21. Andrae
    July 29th, 2015 at 09:28 | #21

    @David

    The wikipedia entry for this practice is: https://en.wikipedia.org/w/index.php?title=Tax_farming

    Historically it has always been a recipe for corruption and oligarchical tyranny—of course, surely this time would be different…

  22. David Irving (no relation)
    July 29th, 2015 at 11:56 | #22

    @David
    I think the Romans tried that. It generally ends in tears.

  23. derrida derider
    July 29th, 2015 at 17:30 | #23

    @Mr T
    Thirty years ago when AGW was still genuinely uncertain some tax economists were touting a carbon tax as a “no regrets” option – that is, even if AGW turned out to be false a carbon tax was more efficient and equitable than the taxes it would replace so we should do it anyway. After all, it would still be taxing the known LOCAL human and environmental damage from digging up and burning coal. Plus Abbott was right – a carbon tax is “a great big new tax on everything” – and it is a fundamental proposition in indirect tax policy that you should try to lightly tax everything so you don’t have to heavily tax anything.

    There’s an old saying in tax – “the only good tax is an old tax”. The point being that a thoroughly nasty tax will be easily accepted if it’s been around a while, because everyone has made their arrangements around it. But try replacing it with something that upsets current arrangements, even if people come out of it far better in the end, and you will quickly find out how loudly the goose can squawk (to borrow Colbert’s metaphor).

  24. derrida derider
    July 29th, 2015 at 17:39 | #24

    @Hal9000
    Until well into the C19 it was the norm everywhere in Europe. In fact it has been the norm since the dawn of civilisation (remembering, of course, that we consider civilisation to have arisen when taxes arose. For most people over most of human history “civilisation” just meant “armed thugs arrived and stole my stuff in the name of their boss”).

  25. Hal9000
    July 30th, 2015 at 10:35 | #25

    @derrida derider
    Indeed, dd. It was one of the nastier features of the Thirty Years War that several competing bands of thugs roamed the German countryside, all of them coercing payment from the starving populace. It took the Germans centuries to recover.

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