ESSAY 9: FEDERATION REFORM # 3.2
REVENUE OPTIONS FOR SMALLER GOVERNMENT
We have split the nuts and bolts of federation reform between consecutive essays. Delivery of services (spending the money) was addressed in Essay 7. This essay is the second in a series (Essays 8 to 10) looking at funding (raising the money). Conclusions on funding appear in Essay 10.
Essay 1 included the following comments on Australia’s Federal system of government:
“Taxes should be transparent and paid by all. Only risk of more tax can temper spending.”
Smaller Government is one of Common Sense for Australia Inc’s eight Core Beliefs. Our reasons include:
“We believe that whatever the tide of government spending in Australia, that it is inarguable that indebtedness incurred by today’s society should not be placed on shoulders of unborn generations.”
Here are three famous generally accepted wisdoms about taxation.
France’s Jean-Baptiste Colbert (1619-1683):
The art of taxation consists in so plucking the goose as to obtain the largest of feathers with the smallest possible amount of hissing.
Scotland’s Adam Smith (1723-1790) in An Inquiry into the Nature and Causes of the Wealth of Nations (1776):
Good taxes meet four major criteria. They are (1) proportionate to incomes or abilities to pay (2) certain rather than arbitrary (3) payable at times and in ways convenient to the taxpayers and (4) cheap to administer and collect.
Australia’s Kerry Packer (1937-2005):
I pay whatever tax I am required to pay under the law, not a penny more, not a penny less….if anybody in this country doesn’t minimize their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.
If Colbert (rightly famous in France, as his era’s most notable statesman) lived today, rather than in the 17th century, he might now have a different view. Smith’s 18th century worldview, like Colbert’s, may have overlooked the possibility of gigantuan public sectors which Kerry Packer later observed.
Australia, along with many democracies, has long applied Colbert’s observation of politics. Principled argument of need to increase tax (commensurate with increased spending commitments or to repay government debt) is rarely heard of. And the loudest protestors against ‘even the concept’ of a potential increase in our taxes are, often equally adamantly opposed, to any increase in our public indebtedness.
It is common sense that in an era of relative electoral indifference to greater public spending and leaving our bills to be paid by future generations, the only ‘democratic stick’ which can temper ‘democratic carrots of government expenditure’ is an ever-present-risk-shadow of ‘more tax’ for the wider voting public.
Here is a less famous wisdom about taxation, bequeathed to us in the century after Adam Smith’s The Wealth of Nations.
England’s John Stuart Mill (1806-1873):
The unpopularity of direct taxation, contrasted with the easy manner in which the public consent to let themselves be fleeced in the prices of commodities, has generated in many friends of improvement a directly opposite mode of thinking to the foregoing. They contend that the very reason which makes direct taxation disagreeable, makes it preferable. Under it, every one knows how much he really pays; and if he votes for a war, or any other expensive national luxury, he does so with his eyes open to what it costs him. If all taxes were direct, taxation would be much more perceived than at present; and there would be a security which now there is not, for economy in the public expenditure.
Arguably, whilst small government advocates rail against any virtue in any possible increase in tax (assuming it only leads to increase spending, not demand for less spending), the likely outcome is continuing ballot box tolerance, of increasing public expenditure and more public debt for our Commonwealth.
Modern Tax Theory for Smaller Government:
Modern public sector economies necessitate a 5th criteria, for what makes a good tax, in addition to the four originals, so famously identified by Adam Smith:
Number 5: Widespread & Transparent Application of the Tax (to as many voters as practical, and in a manner which is as obvious to each of them as possible).
The larger the proportion of voters who are impacted by a tax and/or the more transparent the existence of the tax, the more likely public culture responds to it, in a manner favouring prudence in public sector spending. A tax that goes largely unnoticed by most of the voting public makes no corresponding contribution to public culture (whether due to absence of the tax’s transparency, or to its limited and/or infrequent impost upon voters).
The same relationship applies between (a) the visibility of a tax and its impact upon voters; and (b) voters’ tolerance of public debt.
All levels of government should phase out taxes of ‘less visible’ nature to the wider voting public. This mitigates against:
(a) at State and Territory level, Payroll Taxes (an imposition arguably on the interests of wage earners, which is largely invisible to them) and Stamp Duties (which on a day to day basis, are invisible to almost all of us);
(b) at Federal level, tax-free thresholds, offsets and rebates for Income Tax (which increase the number of voters, who pay negligible amounts of income tax).
Factors identified in (b) immediately above, are arguably one of two biggest contributors to contempory Australia’s relative voter apathy, over the size of our public sector spending and government debt. (The other arguable main contributor being, that an increased number of voters with familiarity with their own high levels of personal debt, are likely to be more relaxed about high levels of government debt).
Proposed changes are not intended ‘in isolation’. They are proposed as part of wider corresponding reforms.
Proposed changes are not intended as ideological. They are proposed as a compact of potential bipartisan political reform.
For and on behalf of Common Sense for Australia Inc
Authorised for publication, 6 January 2022