April 29, 2013

Horse 1473 - There Needs To Be An Increase In Tax

“We will deliver a surplus in our first year and every year after that,” Mr Hockey said on January 28, almost a month after Mr Swan abandoned the government’s promise of a $1.1 billion surplus in 2012-13.
Since then, the government has steadfastly refused to detail when it expects to return to surplus, saying only that it would balance the books over the economic cycle and place a priority on jobs and growth.
Mr Abbott said: “We are confident that we will, at all times, deliver more prudent and responsible financial management than the current government because it’s in our DNA to deliver surpluses and pay back debt. Just look at what the Howard government did.”
- Australian Financial Review, 20th Apr 2013

It doesn't matter which side of politics you stand on (hooray, boo, hooray, boo - at least Celtic and Rangers' fans go home after they've yelled at each other for 90 minutes), sooner or later there will be a greater call on the public purse and I just don't think that either side of the parliament has anything like the required amount of courage to do anything about it. Ms Gillard and Mr Abbott are both political cowards in this respect.
Quite apart from any extra strings which are being pulled tighter as a result of the NDIS or the Gonski education reforms, the simple fact is that expenditures are going to increase and any promises to bring the government books back into surplus, must be funded by increases in taxation; there is quite literally no other way around this. It doesn't even matter which way you look at it, even if all new programs which have been slated, there would still be corresponding increases relating to pensions which will start to be drawn on in increasing numbers as more Baby Boomers reach retirement age and there will be increasing amounts which will be required to be paid out, merely to keep the health system going - unless someone is prepared to simply abandon them.

Especially over the past 15 years, there has been an increasing tendency for political parties to buy votes at the expense of any planning for the future. The usual method of doing this is through successive cuts in rates of taxation; both through individual and company tax; superannuation rules were relaxed such that once a superannuation fund reaches the pension phase, the income generated is tax free. Obviously at some point, someone is going to have to consider raising taxation rates, or at very least letting bracket creep surreptitiously do the job for them because to actually raise taxation rates would also be seen as incredibly unpopular.

The thing to remember above everything else when it comes to taxation is that fundamentally people are selfish. Not only do they not want to pay any tax at all if they can get away with it, but they'd rather other people pay for it. The GST was Mr Howard's method of making poorer people pay for government services and it works to some degree but the fact remains that income tax and company tax are still the most effective methods of extracting revenue.

You will hear of people often reciting the words of Adam Smith when they say that there is an invisible hand of the market in operation, which is used to justify selfish profit as it in a roundabout way contributes to the overall interests of the nation and society as a whole. What you will almost never hear though are his thoughts on taxation; seemingly as though they never existed:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
II. The tax which each individual is bound to pay ought to be certain, and not arbitrary.
III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. 
IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.
- Adam Smith, Wealth of Nations, Book V, Chapter II, Part II (1776).

These four principles make fairly good sense. The biggest stumbling block though is that people and companies think that they are already being taxed too much. We saw this when the media May of 2011 proudly yelling that families were on "Struggle Street" even though they had earnt more than twice the average more than twice the average wage; people still cried poor... crocodile tears.

I - Quite obviously someone on $150,000 a year is able to contribute more towards the support of the government than someone on $50,000 a year. It's also obvious that they also derive a greater proportion of protection when it comes to the matter of the economy of the state being stable.
II - When Adam Smith wrote this, governments were inclined to impose arbitrary taxes. One of the most famous disputes about taxation occured in Boston, Massachusetts (which was at the time a British colony) just three years earlier.
III - One could hardly argue with the modern system of taxation that we have that ample warning is not given  to people when it comes to matters of taxation. I can tell you for instance that the Third Quarter GST 2026/27 will be payable on 15th May 2027. Adam Smith would positively love to see as definite a system as we currently employ.
IV - The key words here are "little as possible over and above what it brings into the public treasury". Smith is talking about the efficiency in actually collecting the tax. This has also improved immensely with the introduction of electronic payments systems.

I found this to be noteworthy of late:

You don't grow richer by ordering another cheque book from the bank; and no nation every grew more prosperous by taxing its citizens beyond their capacity to pay.
- Margaret Thatcher, Speech to Conservative Party Conference, 14th Oct, 1983

Apart from the fallacy that the " fundamental truth" in question that  "the State has no source of money other than money which people earn themselves" is an outright lie because this assumes that Government is a consumer as opposed to a giant system of collective purchasing arrangements (see Horse 1458), the statement above is nominally true.
This speech is also oft quoted as though it was something special but take particular note of those last few words "taxing its citizens beyond their capacity to pay". In Australia, we now have the lowest taxation take since federation and the lowest marginal rates in taxation since the mid 1940s. Company Tax fell from 36% pre 2000, to 34% for 2000/01 and since 2001/02 has been at 30%. I find it somewhat strange that people talk about the ability to pay when effective rates of taxation are lower now than they have ever been.

What's really strange is that sentiment is starting to appear in serious media. It's as though the obvious is staring people in the face and that they're only just walking up to the fact, like some incredibly horrible nightmare:

Politicians and sections of the media undoubtedly feed such dissonance. The ethos of aspiration is, in many cases, little more than economic narcissism. All Australians, however affluent, come to believe they are genuine battlers entitled to government handouts, be it family tax benefits or subsidised private education for their children. Any effort to maintain the progressive nature of the taxation system, or to redistribute income, is decried as ''class warfare'' - an expression of the new conservative political correctness.
But how long can this unreality be maintained? Hetherington argues that a reckoning must come soon. There is structural gap in Australia's tax revenues, created by years of income tax cuts and a failure to reap the full rewards of the mining boom. If future governments are to support the kind of public services and investment that Australians appear to want, taxes will need to rise.
- Tim Soutphommasane, Sydney Morning Herald, 22 Apr 2013


See the spin? So what's their motive? Probably a combination of the editors' personal ideology, self-interest (I pay too much tax already, don't ask me to pay more) and a belief that tailoring your reporting to fit your readers' prejudices will sell more papers.
But it is not just the media that take such a one-eyed approach to budgeting. Most business lobby groups do, too, plus a lot of economists. Many economists believe the answer to budget deficits is always to cut spending and never to raise tax collections, because of the libertarian political ideology implicit in their dominant ''neoclassical'' model.
- Ross Gittins, 29th Apr 2013

If I was Grand Poobah and Lord High Everything Else, I'd seriously start to look at increasing taxation in ways which offered the least amount of objection.

The first way would be to impose a freeze on current income taxation rates for about the next 15 years. This would allow "bracket creep" to push people into higher tax brackets. This is relatively easy to achieve because it can be done with little more than political apathy.

I'd also consider raising the Company Tax rate to 40%. Now I know that this sounds heinous but a lot of investors would enjoy the fact that they would no longer have to pay as much of an excess on their personal incomes because their own marginal rates were higher than the corporate rate; people on lower incomes would receive a net refund on franking credits.
Accountants and small businesses would merely relook at the positions all over again and still determine what the best net position is based on both personal and marginal rates and whether or not income should be paid as wages or dividends, just like they've always done.
I'd also seriously look at removing all deductions for motor vehicle expenses except for purely commercial vehicles. Deductions for motor vehicle expenses allow wholescale rorting, I think. Such a policy might also encourage a greater use of public transport, which would reduce carbon emissions due to it being more efficient to move greater numbers of people, than to do so individually.
Negative gearing on property also seems like a specific subsidy on property holders, which given the squeeze on rental properties, is clearly irrelevant since the private sector obviously wants to keep the rental market tight and closed.

Whatever happens, the bottom line is that taxes will need to be raised. Unless the option being considered is to make future pensioners suffer; that might be a very real position by default.

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