The Art of Taxation


It was Jean-Baptiste Colbert who first uttered the immortal words, "The art of taxation consists in so plucking the goose as to get the most feathers with the least possible amount of hissing". Colbert knew a thing or two about raising taxes: as Louis XIV’s minister of finance, he was responsible for finding the money for such small projects as the Palace of Versailles.

More than 300 years later, little has changed in the arts of government. Tax is still one of the three main things they do, along with the making of laws and a monopoly on violence. Indeed, it’s more necessary than ever before to finance the large outlays and transfers that 21st Century citizens expect from their nation state.

Even so, Treasury secretary Ken Henry’s draft paper on reforming Australia’s tax system, which was released on Wednesday last week, is an ambitious project. While it contains no recommendations, there’s a wealth of information for policy junkies, tax lawyers, social democrats and libertarians alike.

It’s instructive that we needed a massive root-and-branch review whose draft document runs to several hundred pages to even discover all the taxes levied by various arms of Australian governments. "There are at least 125 taxes paid by Australians every year," the report says. At the press conference, Dr Henry made fun of one of the most obscure of these, the Queen Bee levy, and rightly so. But there are numerous other absurd, inconsistent and highly inefficient taxes, levies and payments across the country.

Perhaps the most interesting finding of the paper was that, of those 125 taxes, 90 per cent of the total revenue collected by all levels of government was derived from just ten taxes. The biggies are income tax, company tax and the GST – but also making the top 10 are fuel excise, payroll tax, stamp duty, council rates, superannuation, tobacco excise and land tax. The 115 other taxes include fringe benefits tax, insurance taxes, gambling and alcohol excises, motor vehicle taxes, agricultural levies – and the list goes on.

The paper also looks at money flowing the other way. There are around 40 cash transfers to individuals and organisations from the government, "costing over $70 billion in 2006-07 and representing more than a quarter of Australian government spending". The big ones here are of course the pension and dole, the carers’ allowance, Family Tax Benefit (A and B), and all the other payments that make up the modern Australian welfare state. This is the notorious "churn" that so upsets the right-wingers at the Centre for Independent Studies and Institute for Public Affairs.

But hold your horses, Des Moore. Australia is also apparently a relatively low-tax nation. We’re the eighth-lowest taxing country in the OECD and, believe it or not, the third-lowest spending. You could argue, and some will, that the OECD is a club full of rich European social democrats and that data for Mexico and Turkey is not available. Even so, Australia’s tax revenue-to-GDP ratio of around 35 per cent is only slightly higher than Japan’s or the USA’s, and we actually run a budget in surplus, something the US hasn’t seen for nearly a decade.

There report also gives some invaluable data about Australia’s tax mix. While our percentages of indirect (eg the GST) and direct (eg income tax) taxes are broadly similar to the OECD average, the make-up of that mix differs. Our company tax rate is above average while our GST, at 10 per cent, is lower than typical consumption tax rates of 15 per cent or 17 per cent. Brendan Nelson will no doubt completely ignore the statement that "taxes on fuel are low".

What this means is that Australians are taxed more on their income and investments than other rich-world nations, but less on their consumption, which is partly a quirk of history owing to the relatively late introduction of the GST here. In fact, the report is very supportive of the concept of the GST full stop. Andrew Murray and Meg Lees might find a warm glow of self-justification in the tax that destroyed their party, because it appears to be the only thing that allows the Australian states to pay nurses and build schools and roads.

The report will also surprise many when it says that Australia’s benefits system is progressive, redistributive and tightly targeted. Translation: despite the best efforts of John Howard and Peter Costello, Australia actually has very little so-called "middle-class welfare". The bulk of government payments go to those most in need, particularly the poorest 10 per cent of Australians. It’s probably this system of government redistribution which has held levels of income inequality in Australia in check over the past 15 years. In the US, in contrast, inequality has blown out in the Bush years, spurred by tax cuts for the rich and falling real wages for the poor.

Of course, some vested interests will always seek to advantage themselves, and that’s why Thursday’s Australian Financial Review contained many pages of analysis from industry types complaining about Australia’s relatively high rates of company tax. Australian corporate tax revenue as a percentage of GDP is the fourth highest in the OECD, something which CIS economist Sinclair Davidson has wailed on about at length. This defender of the wealthy and powerful complains that most corporate tax is paid by the biggest companies. It’s unsurprising in a time of high corporate profits and excellent terms of trade that Australian companies would be paying a lot of tax; in return, Australian companies get to operate in one of the least corrupt and most sound macro-economic environments in the world.

Where Davidson does have a point is when he argues, citing US Congressional Budget Office analysis, that the burden of corporate taxes is eventually passed on to investors and workers. In other words, because companies must eventually share their tax burden between workers and owners (like other costs), a tax on companies is a deferred tax on both labour and capital. Davidson’s argument is that because the people who own companies pay income tax on their earnings anyway, we don’t need a company tax. This rather ignores the many foreign owners and shareholders of Australian companies, as Treasury officials James Kelly and Robert Graziani point out in this paper.

There is another aspect of the corporate tax debate which the libertarians tend to ignore. This is the legal identity of corporations. A corporation is actually a "person" in legal terms. This quirky legal status developed so as to allow them to own property, solicit investors, list on the stock market and so on. Given these legal persons can and do own vast amounts of Australia’s wealth, I don’t think it’s such a stretch to ask them to pay taxes like real people.

Anyway, enough about Sinclair Davidson and the rate of tax on capital. Let’s just say I don’t think you’ll find too many Australians who think BHP Billiton should be paying less tax.

Nor will you find many who would think they should be paying more GST – which is why Wayne Swan explicitly left the GST out of Ken Henry’s terms of reference. This is a pity, because, as the draft report makes clear, there is a strong case for raising the rate of GST. Consumption is patently under taxed in Australia compared to labour (and yes, compared to capital), and a higher GST take would help address one of the major structural problems of the Australian Federation: the so-called vertical fiscal imbalance, where the Feds raise most of the tax, but the states spend most of the revenue.

The GST is categorically off the table. But even if this review results in a simpler, less complex tax system, that will still be a win for all Australians. And this reasonable, intelligent and data-rich paper prepared by Dr Henry and his boffins should go a long way to help stimulate a more sensible taxation debate. It could even help put to rest the usual right-wing clamour for flatter, lower taxes as the answer to everything (if you can stomach it, read on here about the Laffer Curve).

Ben Eltham is New Matilda's National Affairs Correspondent.