As someone who sets taxation policy as an Elected Member of the City of Burnside Council I think it only right that you know the principles I use to base my decisions surrounding taxation.
This article is written more for my benefit than yours. It allows me to formalise my views and allows any political adversary to hold me to account/use them against me. It means I need to think carefully about decisions past and decisions future; lest I be called a hypocrite. Nailing your colours to the mast is never a good idea in politics… it means you can’t escape criticism. Perhaps my views will be robust enough to stand up to the cut and thrust of it; if not, they will be improved. Such is the Australian political system. Good ideas stand up to criticism; bad ideas are crushed and discarded.
I will set out the principles upon which I vote to spend that money in another article, I’ll need more time to express that clearly.
Taxation law is bloody important. It impacts every single thing you do. Sitting on a park bench eating fish and chips? Tax law has an impact. Buying a new car? Luxury tax pushes you to buy Holdens not BMWs.
I view taxes as having two primary purposes: to raise revenue or to change behaviour. Taxes should be written for one purpose or another; they shouldn’t overlap. Most of our taxations laws in Australia do overlap and have a dual purpose. It is this dual purpose that in my view results in our stupidly complex taxation system that distorts the market and creates a dead weight loss. Dual purpose tax laws are inefficient in their implementation and ineffective in their objective.
All taxes should be, as far as possible, fair, simple, unavoidable and limit any dead weight loss.
I think it is fair to say that many people do not like our tax system. They know that some people get a better deal than others… I can say this with conviction because I am a tax lawyer. People who come to see me get a better outcome than those who don’t. Tax legislation is massive, complex and inconsistent. It is no wonder people inadvertently trigger CGT or miss out on deductions that they were otherwise entitled to receive. I consider my clients to be hyper compliant, others may consider it as a dodge. People are unhappy with how we levy tax. They are fundamentally uneasy about it regardless of your background, whether you are rich or poor… people feel like it’s a void they could never understand. I don’t think I will ever be able to understand it all… its too massive for one person to absorb. After 4 years of practicing in tax law I am still encountering things I have never heard of before… my principal says it takes 10 years of tax before you get the basis right. In criminal law you might be faced with the same crime (obviously different facts) time and time again. There is a formula to it. Tax law is not like criminal law, transactions are almost always different.
We need to rethink and rewrite our tax system because it rests on a swampy foundation and many parts have sunk below into the muck. I think largely the GST Act sits on dry land whereas fringe benefits tax is at the bottom of the Mariana trench. (that was a laboured analogy wasn’t it… not as clear as Christopher Pyne’s Solar System).
The problem is the Canberra Bubble ruins an efficient system when we get minority governments. Minor and single issue parties get air time virtue signalling one issue or another and the government is forced to capitulate because the Minister often struggles to explain the new tax… The best example is the GST where John Hewson couldn’t communicate how GST applied to a cake. He explained it correctly… but nobody could understand it. (he got set up there didn’t he? if you haven’t seen it YouTube “Cake GST John Hewson Interview”).
We need a set of clear principles that all Australians can agree on. This is what I propose in this text. Once you have an agreed set of principles in Australia then Governments (be they Liberal or Labor) can safely push off virtue signalling attacks from minor parties and deliver good tax policy. The Land Tax disaster in SA is not the fault of the Liberal Party, it is the fault of minority parties who hold balance of power playing with it to get a platform… and what a platform they got. Liberal voters are very unhappy whilst the Labor party is gleefully rubbing its hands at the chaos it enabled the minor parties to bestow upon us in SA.
Revenue Raising Taxes:
Revenue raising taxes should be spread equitably across the population, should be easy to enforce, discern their quantum and should not change someone’s behaviour.
They should also allow someone to act in a manner which they consider to be moral. Revenue raising taxes should not force people to act in a way they would not normally act, tax law should be designed around how people normally act and attempt to gently rest on top.
Our current income tax laws, in my view, fail to recognise how people treat income. It is designed on the principle that individuals keep their own money… selfishness or the idea that every person maximises their own utility… they don’t. They in fact share it with their family, their children, their parents, their communities even… people act as families helping each other. So we shouldn’t tax them as individuals acting alone; we should tax people as families. Take a family, two parents and two children. Currently we tax each parent on a progressive tax rate, each getting a tax free bracket from $0 to $18,200. Why are we not taxing both together on a tax free threshold of $0 to $36,400? The improvement in the efficiency of our tax system by such a simple change would be massive. Change nothing else but allow people to put in joint tax returns and there would be millions fewer companies, trusts and partnerships as a result. There would be millions of fewer tax returns being completed each year, reducing the size of the ATO and cost of collection. People do not want to be taxed as individuals they want to be taxed as a family because that’s how they view themselves: as a member of a family. (I mean give them the option of course, many people do actually want to be taxed as individuals but that’s not helping my argument so let's just ignore that). And so these individuals create complex and costly structures so that they can legally act how they intrinsically want to. I know this because I set up these structures. It is inequitable because not everyone can afford to set up these structures and laws allow some people to do it and not others. Higher income earners are more likely to be able to set up these systems whereas lower income earners do not… But Bill Shorten’s proposal about trust laws completely missed the point, his policy was to increase pressure rather than relax it. Water flows down hill.
A great example of a revenue raising tax is the GST. Well almost… the differential taxation of food took it from a great tax to a good one where it became very difficult to explain how much GST you pay on a cake. So close. I would put GST on everything and reduce other taxes or increase payments to equalise the increased cost of food. Exceptions to rules cause chaos.
Council rates are in my view good taxes. Rates are designed to raise revenue and they do so very efficiently, consistently and simply. However, they are an inequitable tax as 1 person living in 1 house pays as much as 2 people living in 1 house, and those who can pay more are not always those who do pay more. Capital rich and income poor are not differentiated. Those who own their own home or invest in property are taxed at a higher rate than those who rent or invest in shares; this is an inequitable way to tax someone if it wasn’t perhaps for Federal Taxation offering a deduction for rates on rental properties. But… given that only 4% of the amount you pay in tax is to councils, the inequitability of council rates is in my view acceptable.
Note*: inequitability isn’t a word as I just found out being unable to remove the red underline from word.
Behaviour Changing Tax Law:
So you want to change someone’s behaviour. You have three options: 1) Make it illegal, 2) tax the crap out of it, or 3) ask them to stop. The reason why you wouldn’t make something illegal is because it creates a black market. People are going to drink alcohol, they just will; if you make it illegal like they did in 1920 during the prohibition all you do is create a very profitable black market and the result is that people break the law. Positivism is not accepted by modern societies. Tax the crap out of it… and well it's easier to pay the tax than act illegally and as price increases demand goes down. Ask them nicely… works over a very long period of time, you basically need to change the ethics of a community.
Smoking is a good example of all three of these working together. You make some aspects illegal such as marketing or smoking on TV, you tax the crap out of it and three you educate the next generation with a Giraffe named Harold. Next minute you have a generation with the lowest smoking rate ever and its dropping fast. Effective.
What happens when you do both?
Income tax or rates are examples of revenue raising taxes whereas land tax are behaviour changing taxes. Stamp duty is a revenue raising tax that hugely changes behaviour. The idea to keep revenue raising and behaviour changing taxes separate has not been accepted in Australia’s history.
The recent land tax amendments are a product of mixed purposes in tax law. Is it the government’s intention to raise revenue or change behaviour? I honestly have no idea. The purpose of land tax should be to allow every person to acquire their home (as this provides good economic outcomes for the state and the individual) and so land tax is intended to stop people from hoarding land by making it uneconomical for people to hold more than $X worth. What these amendments have actually done is to destroy asset protection vehicles such as discretionary trusts and to encourage land ownership in companies which is in direct contradiction to federal taxation tax objectives… I think problematically land tax in SA has fallen into the trap of tax legislation having the dual purpose of revenue and to influence behaviour. As a result, it accomplishes neither objective. To make it a revenue raising tax… then tax all properties regardless of principle place of residence. To make it a behaviour changing tax, all land must be attributed to a natural person and they are taxed on a progressive rate.
Behaviour changing taxes should not be designed to make revenue they should be to change or limit behaviour in a select group of people. These two objectives are in stark contradiction to each other; they cannot co-exist peacefully.
When a government wants to raise revenue it should determine how much money it needs and then tax at a rate that delivers that return through a few key taxes ie: assets tax (land tax), consumption tax and income tax. If a government wants to change behaviour, then making something illegal is one option, but to avoid creating a black market, a government can tax a behaviour to reduce demand. The government should care not for the revenue it raises and should use this “stick” approach to promote education. A government should try and avoid incentivising the “desired behaviour;” the desired behaviour or the ethics of a community, should be morally intrinsic to the individual. If you reward ethical behaviour, by definition you would be rewarding every individual in the community. You could just tax them less rather than taking money away and then giving it back to them.
Taxation Maxims:
The Revenue/Change distinction is my original thought… but I really can’t do better than Adam Smith when it comes to his equitable maxims, so here they are:
Adam Smith was a moral philosopher and an economist. He wrote a book that you have probably heard about before called “The Wealth of Nations”. In that book he spent a good portion of time setting out the answers to Who should be taxed, how much, to what purpose, and in what manner. He also set out a number of principles or maxims of taxation or principles. I’m not proposing to reinvent the wheel but return to basics.
First Maxim: Those who can pay more, should pay more, within reason
“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.”
Adam Smith looked at society as a joint venture and that taxpayers were like shareholders. Larger shareholders contribute more whilst smaller shareholders contribute less. I think this is fair, again I’ll say it again within reason, because those who have a greater share have more to lose and have benefited more from the society they live in than those with a smaller share.
Second Maxim: Taxation should be clear
“Tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.”
If taxation is not clear, then those taxpayers who can afford to challenge the rules or be hyper compliant can do so, where as those who cannot accept a higher rate of taxation cannot. Fringe benefits is perhaps a good example where a small business would be disadvantaged over a larger one due to the complexity of the legislation. Small businesses do not have the funds to determine the best way to navigate these provisions to their advantage and so miss deductions or pay fringe benefits when they perhaps shouldn’t, larger businesses may have the resources to navigate these rules and secure more deductions or correctly classify expenditure. Complex legislation results in smaller entities adopting a higher burden of tax than larger entities. New balancing legislation then also needs to be introduced to balance this issue, ie small business tax concessions or different rates of taxation between small entities and larger entities.
Third Maxim: Taxation should be easy for the Tax Payer
“Every tax ought to be levied at the time, or in the manner in which it is most likely convenient for the contributor to pay it.”
That is obvious I think. PAYG and GST withholding make it easier on individuals and improves compliance. Imagine if every individual in Australia needed to keep a separate account and withhold their own tax; I think that would be administratively unworkable and compliance would plummet meaning taxes would have to increase to cover the shortfall of those who don’t comply. Withholding makes collection more efficient.
Fourth Maxim: Limit the deadweight loss:
“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.”
Deadweight losses are caused in four ways:
1) Employing tax collectors. The ATO has some 20,000 employees (2016) and has an annual budget of $3.5 billion. It costs money to collect money. The mining tax introduced in 2012 was expected to raise $3 billion, but ended up raising $126 million and cost $110 million to set up – net gain: $10 million… yikes
2) Taxes can discourage business
3) Tax evasion occurs when the rate of taxation is too high
4) Me… I am according to Adam Smith a dead weight loss ☹. Accountants and Lawyers are dead weight losses and contribute nothing to society. I think that is something people intrinsically know to be true so it is a bit rude of him to twist the knife.
That’s what I think about tax policy…
[why do people need conclusions anyway, they said it in the introduction]