The etymology of ‘tax’ is interesting. It derives from the Latin taxare, meaning ‘evaluate’ or ‘assess’, but also ‘handle’ because of its relation to tangere, meaning ‘to touch’ (from which we get ‘tangible’, and ‘tangent’ – a line that just touches a curve). *
It has always meant an appraisal or charge imposed by government, and that has created the outgrowth alternative meaning of ‘burden’ – “you tax my patience”, “the marathon taxed her resources”.
Despite dubious sentiments like Oliver Wendell Homes’ “Taxes are what we pay for civilised society” and Franklin D. Roosevelt’s “Taxes, after all, are dues that we pay for the privileges of membership in an organised society”, the mathematical reality is that taxes ARE a burden, in three ways. Firstly, taxes are a cost on something, adding to the price, so ceteris paribus, anything taxed is reduced in quantity. Such is the justification for ‘sin’ taxes on alcohol and cigarettes, for example (although the low elasticity of demand for booze and ciggies plays a part). Secondly, taxes impose a deadweight loss to the overall economy, because the reduction in the quantity sold at the higher, taxed price reduces producer and consumer surplus by more than what is gained by the government. Lastly, taxes need a system to evaluate and collect and distribute the revenue, which takes up resources just to move money around without producing anything.
Estimates of this deadweight loss vary, but it’s reasonable to say it’s approximately 25 cents in the dollar. That is, anything the government does with tax money has to have a return of 25% just to break even.
One can agree or disagree about whether any particular tax is a necessary burden, given the various arguments about the proper role and extent of tax-funded government, but the underlying facts should never be far from people’s minds when having that debate.
Which brings me to the Henry Tax Review, currently seeking input from the public here. Terje at Thoughts On Freedom, the Australian Libertarian Society blog, has put down his thoughts on what should be done, and worthy suggestions they are too.
I applaud the Rudd government for instigating a thorough review of our taxation system, even though they chickened out of including the GST. Which is a pity, because it’s a major part of the system, and shouldn’t be excluded from consideration. For instance, although I haven’t seen detailed figures, doubling the GST would allow Australia to roughly halve corporate tax. Wayne Swan says that they want to create “a modern, simple and fair tax system”. That’s great to hear, but I have my doubts as to how far they are willing to go if they don’t want to talk about the GST.
However, since it’s off the table, there are plenty of other things we can do.
The LDP in the past has argued for a negative income tax of 30% with a tax-free threshold (TFT) of $30,000, a policy called 30/30. It would mean the poor pay no tax, and get a guaranteed no-questions-asked, no-mutual-obligation payment of 30c for every dollar under $30,000, and everyone else pays 30c on every dollar over $30,000. Very simple, very modern, and about as fair as you can get – it’s progressive, and absolutely everyone pays the same marginal tax rate, so there are no distortions anywhere in the income scale. It eliminates deductions that typically accrue to those who can afford accountants and financial chicanery, and replaces all welfare payments with a single guaranteed minimum income. Family payments are replaced with an increase in the TFT of $6,000 per child.
While I can’t see the government ever contemplating such a radical notion, I’m hoping that they consider the submissions of myself and others to immediately raise the TFT from its stupidly low current level of $6,000. It wasn’t as bad when it was introduced, but because inflation has eroded its value, it is high time for a doubling (at the very least) or a tripling. Furthermore, it needs indexing either to CPI or average weekly wages, so that its value doesn’t again diminish with time.
Increasing the TFT is good in every way – it helps most those who earn least, but still helps everybody. It leaves more money in the pockets of those who earnt it and can spend it best, reducing the deadweight loss to society. And it improves the position of those who are under-employed or working part-time relative to full-time workers.
In keeping with a large portion of previous submissions to the Henry Tax Review, I have also suggested that the federal government ditch their extra layer of bureaucracy that will be the Carbon Pollution Reduction Scheme in favour of a CO2 emissions-and-equivalent tax.
The emphasis in the scheme on the ‘cap-and-trade’ of CO2 emissions will be prone to errors in the initial set-up, open to corruption, hampered by domestic political considerations, and provides no guarantee of success.
Instead, the better approach is a revenue-neutral carbon tax. It is more efficient, effective, simple, flexible and transparent. A carbon tax would act as a straightforward negative externality charge for CO2 emissions, placing a cost on environmental impact and thus reducing that impact. Since it would replace other taxes (such as fuel tax or payroll tax, or reduce income tax) the overall tax burden would stay the same but be less distorting of economic behaviour. A carbon tax also makes alternative energy sources more appealing by lowering their relative cost, accelerating the transition to cleaner, greener technology.**
There are a thousands of improvements to be made in Australia’s tax system. I sincerely hope that Rudd and Swan make drastic, sweeping changes for the better, but the cynic in me also believes that some egregious stupidities may go, but the rest will be tinkering at most, and thus another opportunity for comprehensive reform will have passed us by. It took almost 40 years to get this one, I don’t want another 40 to pass before the next.
* There are also connections to ‘task’ (through the connotations of taxare with ‘duty’) and ‘taste’ (harking back to touch again). God, I love language!
** My thanks to John Humphreys for some of this wording.