Completely plucked and hissing loudly

The current federal­-state-­local tax review, chaired by commonwealth treasury secretary Ken Henry, is close to completing a blueprint to reform Australia’s taxation regime. The final report is sure to include recommendations to pluck the existing tax goose more efficiently, and possibly to find new geese to pluck.

For example, there has been speculation that the final report might recommend new capital gains taxes on owner­-occupied housing worth $2 million or more, potentially catching many more Australians in the governmental tax net.

Another idea canvassed is to charge traffic congestion levies. These would effectively impose penalties for road bottlenecks during peak travel hours, even though the congestion is not the product of design on the part of individual drivers.

It is expected that the taxing powers of the states will once again come under assault through the Henry Review process.

Assignment of payroll or land taxes could be given to the commonwealth to enable it to impose a standardised tax base across the breadth of the country. The states would then be permitted to raise their own tax rates within certain limits.

This idea has been greeted with much fanfare by the business community, which is not adverse to the extinction of interstate tax base competition. However, if such a proposal was to proceed then two chief advantages of fiscal federalism - choice and diversity in the tax realm - might come closer to becoming a thing of the past.

The review might also recommend ways to increase Canberra’s taxing powers at the expense of the states. One option canvassed by Henry is to create a new federal resource rent tax to replace current state mining royalties.

If implemented such a proposal would aggravate vertical fiscal imbalance in the Australian federation and extend the powers of a monolithic ATO bureaucracy.

Many of these reported proposals are inspired by optimal taxation theory, developed by economists such as Ramsay and Mirrlees and which infuse most public economics textbooks. According to this theory, tax structures should be designed so as to minimise the incentive effect of taxes on wealth­-enhancing private sector economic decisions such as investing, producing, saving and working.

It is concluded in the optimal taxation literature that the best way to minimise the hissing of taxed agents is to cover the whole economy with a blanket of broad­-based taxes. This system would reduce the deadweight losses associated with taxation.

As discussed by Australian economist Geoffrey Brennan and US economist and Nobel Prize winner James Buchanan the risk is that governments would use the lessons of optimal tax theory to maximise their power to tax beyond what is deemed acceptable by the voting public.

In the Brennan­-Buchanan view of the world, tax base broadening is akin to governments establishing a hatchery to breed as many tax geese as quickly as possible.

A discussion paper released by the Henry Review provided a damning statistic of the implicit tax breeding program implicitly adopted by successive governments. Australians already pay at least 125 different taxes each year, with 99 imposed by the rapacious commonwealth, 25 by bungling states and municipal rates by meddling councils.

The prospect of even more taxes at their disposal would be welcomed by governments of all political stripes, especially by those struggling under the weight of heavy structural budget deficits.

On top of the potential abuse of fiscal power that might come from an extension of the taxman’s net, it is highly likely that the additional revenues generated by virtue of broadening tax bases might be dedicated to wasteful government programs, such as flammable pinkbatts or duplicated school halls.

The bitter experience of history suggests that taxpayers cannot rely on the benevolence of political representatives, or other potential restraints such as the power of the ballot box, to keep taxes low. The question then arises as to what should be done?
Ultimately, the key to securing low taxation for prosperity and economic liberty is to restrict access by governments to the tax goose altogether.

In the first instance, this objective may be achieved by a reform process that eliminates the low-­hanging fruit of miscellaneous taxes and charges. As indicated by the Henry Review discussion paper on Australia’s tax architecture, there exist 115 taxes that contribute only 10 per cent of taxation revenue collected by governments.

To ensure that such a program of tax elimination does not impinge on overall fiscal sustainability, it will be necessary to reduce government expenditures by a comparable amount.

Assuming that the 115 nuisance levies are wiped from the taxation landscape, Australia would be left with ten large taxes that currently collect 90 per cent of tax revenues.

The largest of these big ten - the personal income tax - could then be transferred from the commonwealth to the states, in a return to the fiscal situation that existed prior to World War II.

A key advantage of this devolution of taxing power is that states and territories would not only become more accountable to taxpayers and citizens for the spending they undertake, but that the prospect of continuing capital and labour mobility would force states to reduce income tax burdens to retain these precious economic resources.

Another advantage is that the return of state income taxes would halt, if not reverse, the century-­long damaging trend of increasing powers to the distant and less accountable federal bureaucracy.

To further prevent any abuse by governments of their reducing taxing powers, a regime of tax limitation rules - similar to the Colorado Taxpayer Bill of Rights (TABOR) - could be used to limit revenue increases.

According to TABOR style fiscal rules, if governments acquire revenues in excess of the specified inflation, population or income growth limits, then the extra money must be returned back to taxpayers. Numerous studies have shown that such rules are effective in limiting public sector growth.

The weight of submissions tendered to the Henry Review secretariat, numbering over 1,000, amply illustrates that average Australians are feeling completely plucked and are thus hissing more loudly than ever.

The recommendations of the Henry Review final report will say much as to whether the secretariat has heeded these demands for governments to engage in much less plucking in future.