There’s an interesting piece in today’s Fin (subscription required) from John Roskam of the IPA. Looking at the possibility of big tax cuts from the current government, he bags Howard’s conversion to tax-and-spend social democracy before and during the 2004 campaign. He goes on to say
There is no overwhelming demand from the public to lessen taxes and, indeed, this is the nub of the problem confronting Liberal MPs and anyone else committed to tax reform
On the other hand, there is an overwhelming demand for better public services, and Howard has promised to meet that demand. Supporters of tax reform should seek to convince the public rather than taking advantage of an essentially accidental parliamentary majority to push through policies for which they have no mandate.
John Quiggin 
AUS USA
There are many differences between Australia and America, but certainly one of the largest is the pervading attitudes in both countries to the role of government. Sure, you get a lot of anti-government, anti-bureaucracy sniping in Australia, but people…
How would anyone know if there’s a demand? When was the last time any party in Australia ran on a platform of tax reform?
1999 wasn’t it? Who won that election by the way?
The fact that neither major party is interested in tax reform at the moment doesn’t mean that the people aren’t interested in it. It just means that (as usual) the major parties couldn’t give a toss what the voters actually want.
They just put forward the policies they themselves are interested in, and the voters pick whichever one they find the least worst.
Yobbo – Regrettably, anti-tax feelings are the lowest they have been since the late 1960s. this post of mine and its links have the data.
When there is an obvious public need in areas such as public education and health, it is unsurprising that even many liberal people view tax rate preservation (at the very least) as a necessary evil.
I don’t think the ALP differentiated themselves enough from the government in this area at the last election. They had a great opportunity to stand proudly on the services side of the services / tax cuts divide, and they blew it.
Tim Dunlop has been running the line that Howard is trying to make the Liberal Party a clone of the Republican party for some time. I have consistently argued that Howard is actually quite antagonistic to US political norms. The tax issue is a good test case for our competing hypotheses.
Re Guy’s point about Labor not taking the initiative at the last election, Keating started this trend in the early 90s when he proclaimed Labor to be ‘the low tax party’ (remember ‘L.A.W. Law’?). This public position draws them into a Dutch auction with the conservatives, and makes them vulnerable to charges of deceit/ incompetence when they pledge to provide more services. All they can do is try a Robin Hood approach, as Latham did with the school funding issue at the last election, and then get caned for promoting ‘the politics of envy’.
The lower tax brigade’s use of the term “reform” for their particularly agenda should be noted. Presumably, the many people who favour greater provision of services by government, or more progressive tax scales, would technically also be advocates of tax “reform”.
The problem for people driven more by the ‘economic right’ issues, such as Yob, are that the Libs have not won elections with the help of people who subscribe to chicago school economic theories, but rather conservative working class, former labor voters who at best credit Howard with stable economic management (which doesn’t equal marked reform), and like his elites-and-reffo bashing.
There is never any imagination shown in the tax debate. Has anyone in recent times ever called for a significant cut in tax rates TOGETHER with the virtual disbanding of the ‘deductions’ system?
Most of the rorts and unfairness of the tax system can be found here. The fact that the principle that everything expended to earn taxable income is read down to exclude most of the things ordinary people have to purchase to earn a living- such as transport to work, suits and ties, makeup, etc, is inherently unfair anyway.
No deductions equals a huge drop in tax minimisation, a big injection of fairness, a much smaller and clearer tax act, and extra income that could be used to reduce tax levels in a revenue neutral manner.
There is no money in the piggybank to engage in tax reform.
Tax reform is VERY expensive.
howard did have the opportunity to do it if he believed in it but went ahead and spent like Whitlam.
I actually think tax reform is desirable however apart from saying it is very expensive we don’t know how vey expensive it is because Treasury only knows.
howard has always been a big government man and so is the average voter.
It is ironic but Iron Mark did run a smalller government platform.
however voters thought mistakenly he wanted a larger public sector than Howard.
I think the expenditure tax re Kaldor would be better than income tax for example.
Treasury agree it is less complex than income but argue whether the benefits are very large. reminds me of the GST debate.
Dave Ricardo are you back in town now?
Homer, I’ve been back for a couple of weeks. I’d like to say I missed you, but I’d be telling porkies.
I’m with Martin Pike on this one. The big tax reform that’s missing is on the deductions. They cost billions. I don’t just mean stuff like uniforms and home computers, but big ticket items like the diesel fuel rebate. Fix them up, and there’d be plenty of money to cut income tax rates.
This should satisfy everybody politically. There would still be money for social programs, and the highest tax rate wouldn’t kick in at 1.3 times average earnings, or whatever it is.
…ANd expenditure on tax advisers would go down 40%!!
Dave it is good to see you are with Milton Friedman on this.
He suports a linear tax which to the uniniated is simplay a flat tax with a threshhhold making it progresive.
It has no deductions.
I don’t mind this either
deductions as the tax statistics show is related to income.
Martin: Has anyone in recent times ever called for a significant cut in tax rates TOGETHER with the virtual disbanding of the ‘deductions’ system?
That’s LDP policy. $30,000 tax free threshold. 30% flat tax. Abolish all tax expenditures (except for those necessary to ensure the integrity of the system).
Some facts on the Australian tax system can be found here.
Click to access polsumm0405-5.pdf
Nnnnot quite- I never mentioned the word “Flat”; I believe in a progressive tax system, though if I could find ways to keep it revenue neutral then I’d in theory like to see the top thresholds lowered.
Ah, just one word between me (and Dave Ricardo) and milton friedman; as Bono sang we’re “faraway, so close”.
Martin,two things
1) Milton said a lot of things leftwingers never realised which are particularly good. You would be amazed that he supports a minimum income for example.
2) a flat tax with a threshhhold is a linear tax which depending on the threshhold is a progressive tax.
There are NO deductions in either a flat tax or a linear tax.
I don’t quite follow- but am genuinely interested. Do you mean that there is one rate, for example 30%, and 1 threshold, for example 10,000, so that people on 20,000 effectively pay less (15% of total Y) than those on 30,000 (20% of total Y), but they pay the same rate on everything above a fixed threshold?
…WHICH, I hasten to add, is to say that you are trying to provide an argument for calling a flat tax a progressive tax…
Here’s the policy outline. Basically it’s a flat tax, but the tax-free threshold is much, much higher.
Tax reform, great, how about starting on the immoral lower import duties on SUVs? Every time you are backing out of a car park and can’t see, thanks to some jerk with an inferiority complex compensated for by 6 metres of Japanese/Korean superconsuming junk, think tax reform !!! Imagine your family being wiped out by the SUV owner—3 to 1 probability compared to the SUV risks and think tax reform.
Small area I know, but remember the Pitt St farmers driving down Pitt St get full deductibility on their depreciation schedule for it as well.
I’m going to plug Professor Swales’s ideas once again. I’ve got a fair bit on the area at my publications page. You could try starting here for example (apologies if the lack of a good preview made me get either of those links wrong).
With this approach you can start a transition towards a minimum income without any actual outgoings. That comes from not monetising things until after the transition is settled in. So, no cost since you never have to provide funding. Also no opportunity cost etc., since it’s all budget and revenue neutral.
Another way to reduce the effect of deductions, would be via Payroll Tax, which is, in effect, a tax on income before deductions.
In theory, if you broadened the payroll tax base to apply to all employers (regardless of size), and raise the rate, say to 10%, you could probably raise enough revenue to significantly raise the tax-free threshold/ reduce top marginal rates. You would achieve many of the objectives, without needing to tackle head-on reform of deductions.
Obviously, you would need to compensate the losers. And the States would need to be persuaded…
Its easy to roughly calculate what an increase in the tax free threshold costs. Each $1000 increase saves the great bulk of individual taxpayers $170 ($1000×17 cents in the dollar) each and there are 10.3 million taxpayers. Which works out to $1.75 billion dollars per $1000 increase.
You can do similar calculations on changes in marginal rates and thresholds using the tax stats provided here. By my quick calculation from Table 15A, a $10k threshold and a flat 30% rate reduces revenue by about $52 billion. Note total income tax revenue in that year was only $78 billion.
This is an overstatement (mainly because there’s no behavioural change in it) but it’s somewhere in the ball park. Policy discussions in the absence of some numbers are pretty meaningless.
CHeers Yob. Not entirely unpalatable as a policy platform, it is nice to see some true liberals express themselves- not conservatives squatting on the name. I like their migration policy, having a good debate about this on my blog at the moment.
Although I wouldn’t take it to such extremes, my suggestion was not so far from this. I’d probably be pitching more around a threshold at 15k, with about 3 bands of tax running from around 25% minimum to mid-late 30s maximum.
Derrida- Yes, probably should have tossed in some numbers, but this *is* *just* a blog commentary…
Nonetheless, back of the envelope: Broadening the payroll tax base and raising the rate to about 10% could raise an additional $30-$40bn or so.
The point I was trying to make was that this change to payroll tax would be consistent with reducing the effect of deductions, and could provide the revenue to overhaul other parts of the system.