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Tax Forum

I have been attending the Tax Forum in Canberra for the past two days. I made a submission to this Forum on congestion pricing on roads and I made a presentation based on this submission in the Environmental and Social Taxes session. To be honest this was the only session at the Forum where I had expertise. I must say too I was disappointed with the session. Many wrong views (particularly from the ACTU/AWU) were presented and, because there were many participants who wished to talk, these erroneous views were left unrefuted and the discussion was relatively diffuse. Paul Howes, National Secretary of the AWU, thought that a binding case against congestion taxes was that they were regressive. Of course, so too are taxes on cigarettes, booze, carbon, gambling, fat etc etc. The standard counterargument is that one should not evaluate the equity implications of particular environmental or social taxes but at the impact of the overall tax/transfer mix. This is a crucial – and well-recognised point – because these individual taxes have revenue implications.  Indeed all redistributive objectives can be carried out by means of the income tax.

Generally I found the trade union representatives at this meeting were among the least interesting of the various groups who attended. I couldn’t work out if they were intrinsically stupid or just outlining a preconceived union viewpoint in bad faith -certainly they were not engaging with those who showed their views were wrong. A number of other attendees of various political persuasions made the same observation.  I recalled with sadness the reasons I abandoned Labor in the mid- 1970s. These unionists embodied a kind of  bullying stupidity that must constrain the Labor Party and Australian politics.

The other sessions on corporate taxes, state taxes,  personal taxes and tax administration were much more interesting to me because they introduced me to broader areas where I had less expertise. Again the union representatives did not distinguish themselves either in terms of intelligence or good faith.  They are a bunch of reactionaries. On corporate taxes these representatives did not seem to understand the idea of effective tax incidence. Almost everyone in public finance agree that in an open economy with freely mobile capital that the corporate income tax falls primarily on labour creating a case – from the viewpoint of labour – for cutting corporate taxes to levels comparable to those of our major trading partners to increase investment and drive up labour productivities and hence wages. The ACTU dinosaurs saw arguments for cutting the corporate tax rate as a move that disadvantaged labour by giving a greater fraction of income to profits.  They refused to even engage with the alternative consensus scientific view. These unionistss  act in ways that disadvantage Australia and their own members.

The discussions on state taxes covered the standard disasterously inefficient state taxes such as stamp duties, taxes on insurance charges and mining royalties. The questionable status of payroll taxes  –  are they in the main analogous to income or consumption taxes? – was also raised.  Good session.

My negative comments on the unions are part of a general issue of the role of uninformed public discussion in complex debates on public policy.  Of course some weight must be given to public discussions for strategic reasons but perhaps there is the need to provide information to the various groups before discussion occurs.

Did I waste two days on a talk-fest? No, not at all. I know from long-term experience that arguing for efficiency-based economic reforms is a long-term project. But at this meeting I got the impression that efficiency-based reforms also have to be formulated in a way that cannot be demonised by deadheads and ideologues. I also think that the deadheads themselves need to understand a little bit about public policy issues before they spin their homespun views. Finally I got some good publicity in the press and on TV on the case for congestion charging. It helps to keep an important issue on the agenda.

20 comments to Tax Forum

  • davidp

    Was interested to read your comments (and had been wondering how it went). It sounds like it was interesting (despite the mixed crowd…)

  • Harry, you’re going to ruin your reputation at Catallaxy for having gone barking mad Green/Left because of your support for carbon pricing and a mining tax.

  • KB Keynes

    The Trade Unions have a preconceived view which bears no resemblance to reality.
    similar to Catallaxy actually.

    A congestion tax is going to be regressive. Yeah I can see all those blue collar workers driving into the CBD?

  • David

    Good work Harry.

  • MikeM

    KBK

    You’ve no idea how congested the traffic gets in Sydney around Sussex Street.

  • KB Keynes

    no blue collar boyos in Sussex st only pretenders.

    The congestion is far worse in George St.

    States could abolish all those small revenue taxes and simply get rid of all exemptions and thresholds in payroll tax and wella you have a de facto consumption tax. Do the same with lad tax and you have enough revenue.

  • Isn’t your disappointment about the unions because they took a class perspective rather than pretend this was a technical, ideology-free exercise in public policy discussion? It is one of the blights of the current era that questions of class interest are removed from such discussions in order to give regressive measures a technocratic sheen.

    That kind of technocratic elitism is pretty explicit when you write, “My negative comments on the unions are part of a general issue of the role of uninformed public discussion in complex debates on public policy.”

    On congestion taxes, I’d have to say that the London experience was more positive than expected because Ken Livingstone really did use it to boost public transport provision — but I see no hope that this would happen in Sydney under Barry O’Farrell (or his ALP predecessors), especially not with GFC2 rolling our way.

  • derrida derider

    Fair enough commentary about the unions’ dogmatism, Harry, but they weren’t Bob Crusoe. Some of the other lobbies looked pretty ugly to me too.

    But like others I’m quite surprised at the claim that congestion taxes are regressive (though as you note even if true that’s no reason to dismiss them out of hand). I’d have thought that people who can afford to drive their BMWs into or through the CBD are hardly battlers. Even the indirect costs (eg levies on retailer’s supply trucks) would seem progressive at first glance – people buying in the city aint usually poor.

    Indeed IIRC Red Ken originally got support for London’s congestion tax up by asserting it would soak the rich in the City. Was that just politician’s bullshit? I’d genuinely like comment (and evidence if available) on this issue from an expert like you.

    On company tax, yes to the extent that markets (including financial markets) are competitive, and hence none of the taxable profit represents a rent, then the final incidence is wholly on labour. But that’s a strong assumption to make, especially in the Australian economy where in fact rents are, for a variety of reasons, pretty pervasive.

    BTW, this last is a point that has made me more sceptical of lots of strict neoclassical approaches in recent years as I’ve realised that information problems make local monopoly and monopsony the rule rather than the exception, and that in many markets this really matters. Getting down to tin tacks, the “new labour economics” posits many wages are set by bargaining games to distribute the rents from the job match, as distinct from reflecting each worker’s marginal product (note this is a different set of arguments from “efficiency wage” type ones about imperfect measurement of marginal product). This makes it clear that worker cartels (ie unions) can be welfare-, and in some plausible circumstances even employment-, enhancing. Whether that theoretic “can be welfare-enhancing” translates to an empiric actually-existing unions “ARE welfare-enhancing” is a different question of course, though people like Alan Manning have done empiric studies that suggest they are, at least in the UK and the continent.

  • So the unions challenged the general consensus at the neoliberal talk fest. If only they had bowed down with the rest of you before the later of capital it would have been OK. Obviously cutting company tax rates produces a miracle economy.How can those silly ‘reactionaries’ not see that. Ireland is the standout example.

  • altar. Bloody spell check.

  • Robert Wiblin

    John P, perhaps you would like to outline your model of the effective incidence of corporate tax in an open economy. I’m sure we would all love to hear about your research breakthrough which allows it to fall on the mobile factor of production.

    Best wishes,

  • Robert, maybe you should come along to the conference I am organising called Tax Reform Results and Prospects at the University of Canberra on 5 December. Speakers include Rob Heferen, Executive Director, Revenue Group, Treasury, Jeff Lawrence, Secretary ACTU, Robert Jeremenko, Tax Institute, Andrew Leigh MP and Professors Freebairn, Ergas, Walpole and Evans.

    http://www.canberra.edu.au/taxreformconference

    And I have a little cameo on the political economy of tax reform.

    So do tell me about Ireland then. Other factors no doubt.

  • That looks like a terrific initiative, John.

  • Robert Wiblin

    Unfortunately I will be overseas on the 5th of December otherwise it sounds like it would be a lot of fun. Is there any way you can describe your theory of tax incidence in writing though? Or a paper?

    A lot of things happened in Ireland. It seems unlikely that a financial crisis in a single country would say anything much about the incidence of corporate tax rates in an open economy. In any case even after the GFC their GDP is much higher than it was 10 years ago (don’t have median income on hand):

    http://www.google.com.au/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false&nselm=h&met_y=ny_gdp_pcap_cd&scale_y=lin&ind_y=false&rdim=country&idim=country:IRL&ifdim=country&tstart=-291466800000&tend=1286370000000&hl=en&dl=en&iconSize=0.5&icfg&uniSize=0.035

  • Robert Wiblin

    I wrote this for an email so may as well post it here:

    “You don’t need fancy arguments about further investment or productivity growth to see why the tax can’t much fall on investors.

    Imagine a firm is hit with a new corporate tax of $X and is considering who is going to pay for it: investors, employees and customers. They think about asking (debt) investors to pay. The investors can simply reply “if you make us pay this tax (through a lower interest payment on our investment), we will stop loaning you money and instead give it to another firm or country offering the original global return on business investment”. The firm, and Australia in general, is a price taker in the market for capital investment. They cannot pass a new tax on to investors for the same reason that you cannot choose what price you pay for oil. The firm can however pass the tax on to its employees as they cannot so easily change jobs or move to another country. Often they can force consumers to pay too as you can’t easily import e.g. haircuts from overseas.

    The picture gets a bit fuzzier if Australia is absorbing a significant share of global business investment, or investments are lumpy, made through equity rather than debt, or past investments can’t be taken out quickly. But the basic story isn’t going to change.

    If we want to tax capital we have to have a tax on capital returns to Australian owners of capital that applies regardless of where the investment is made. That they cannot easily escape. The corporate tax is not that.”

  • hc

    Dr_Tad, It’s not technological elitism. How can you have a sensible debate with someone who doesn’t understand the difference between the nominal and effective incidence of a tax?

    Derrida and John, Capital is very mobile and labour isn’t. Hence it will fall on labour.

  • Chris Grealy

    Oh, those nasty nasty unions. How dare they look after the best interests of their members by opposing your pet project.

  • Gowest

    Having seen very big employing companies go under due to unions, it is somehow comforting to see that nothing has changed now the ALP is back in charge – we do need the country to suffer often so the next generation learns. Another two years of jobs losses and higher taxes will do lots of good for the union cause.
    Given the fact that unions are a tax deduction it is not surprising that they are experts on the taxes others should pay.
    The govt on the other hand is really stupid because they are forcing the cash economy to be the only growth area in the economy and that will do wonders for their tax collection. The AFR projection shows that PAYE taxpayers will be paying 75% of the govt tax revenue by 2015, so just what services are us TAXPAYERS getting for the 75% ownership of the government. Not even a table at the tax forum it seems.

  • derrida derider

    Capital is mobile, rents are usually not. They arise from such things as resource location (including the resource of unimproved land), natural monopoly (scale economies making these more prevalent in a small economy – eg the old saying that Oz can support “two and a half” domestic airline networks) and local market power due to limited consumer choice. Where super-normal returns persist capital will flow to it, and the company tax will act to lower those returns without affecting that persistence (ie the final incidence will be on shareholders).

    None of this denies that a big slab of company tax incidence must be on labour (WHICH labour is an interesting question, though). But ’tis a distortion to say it is ALL on labour, and indicates a failure to think about the effects of the real-life limits to competition (most, as I note, due to information costs).

  • hc,

    I think the nature of the discussion is “technocratic elitism” not because there is a level of technical knowledge and understanding needed, but that there is the use of technical concepts to cover (elite) class interests in the debate.

    I am not a tax expert, but in my field (health) we get lots of health economics and performance talk that requires knowledge of a great deal of technical managerial language, but beneath which lies the drive to increase work intensity and attack conditions.

    The tax debate is even more rarified, but even looking at some of the comments here from people who obviously identify on the Left, the concepts are treated as if they are technical problems divorced from underlying social interests.

    My favourite example is when tax reform advocates talk of “efficiency”. The question is efficiency for who?