This piece in The Australian today is unfortunately behind a pay wall. If you insert the title of Henry Ergas’s piece in a Google search you will get the whole article. Henry Ergas is a professional economist who has some very sensible things to say on other issues but who evidently he doesn’t understand the notion of a neutral tax – if you search through the comments thread at the base of Henry’s piece you will find that economist Judith Sloan doesn’t understand it either. That a tax on profits does not distort incentives because, for a mining project that is a reasonable goer, given tax rate t maximising gross profits PROFITS gives the same production plans as maximising net profits (1-t)PROFITS. Output-linked state royalty payments of course have strong disincentive effects and are vastly inferior. It is a proposition that has been taught to undergraduates for decades so one wonders what happened to Ergas-Sloan. The neutrality argument is the reason Nobel Laureate James Mirrlees – perhaps the world’s leading authority on tax and the co-developer of the “optimal tax” literature – supports such taxes not only on mineral resources but also fixed assets such as land. Ken Henry was exasperated by the fact that the original RSPT was modified so extensively to account for mining interest group concerns by the Gillard Government that it became a nondescript “dogs breakfast”.
Or is it just that the right of Australian politics oppose all taxes as a sign of the sinister encroachment by the “socialist state”. Even congestion taxes and other externality internalising taxes are just “taxes” because they have excessive transaction costs etc etc etc…… I have heard this recently and was astonished at how out-of-touch those advancing such views were with the highly-developed literature. But, yes, think of any tax or any tax reform and the libertarian right can manufacture a concern about it that is so overwhelming that reform makes no sense. The only desirable tax reform is one that cuts a tax because the community does not really want a public education or health system and those claiming unemployment benefits are all a bunch of dole bludgers. Perhaps I am exaggerating but the libertarian lunacy in Australia is increasingly paralleling that of the US Tea Party Republicans.
I was chatting with a liberal-lefty the other evening and bemoaning this stupidity. His response provided a basis for optimism – the lunar right wing crazies from the IPA and their fellow travellers in Australia and the Tea Party crazies in the US are progressively isolating themselves with their foolish views. As they do so a basis for thinking about serious microeconomic reform that involves replacing poor taxes with better ones should shine simply because it faces no economically literate competition. (1741)
An inefficient tax is a good tax. Efficient taxes lead to higher taxes and larger governments
Buchanan and Brennan wrote The Power to Tax: their message was if you don’t always trust governments, beware of efficient taxes.
Efficient taxes make it easier for governments to extract more revenue from the population with less resistance.
When Brennan said at a tax reform conference in Australia 20 years ago or so that efficient taxes are bad because they lead to higher taxes, no one understood him.
Idealists all, the audience assumed they were advising a benevolent government, not a size maximising leviathan – a beast that needs to be staved with constitutional constraints on tax bases and tax instruments.
Fiscal arrangements are analysed by Buchanan and Brennan in terms of the preferences of citizen-taxpayers who are permitted at a constitutional level of choice to select the fiscal institutions they are to be subject over an uncertain future. Those in elected office are assumed to exploit the power assigned to them to the maximum possible extent: government is a revenue-maximizing Leviathan.
Tax reform saved the modern welfare state by raising the same or more revenue with less taxpayer resistance.
Taxes are very efficient in the Nordic countries – high taxes on labour income and consumption, and low taxes on capital income and light regulation.
What total rubbish Jim. Taxing bads like congestion and pollution is a good idea. Taxing work effort and incentives to save or invest is dumb.
so large welfare states such as in the EU are founded on inefficient taxes? the VAT is high but taxes on capital incomes are low in Northern Europe by coincidence?
several theories of the growth of government in the 20th century are based on better access to more efficient taxes.
Roger Congleton told me once in light of his extensive work on Nordic constitutional political economy that the Nordic social democrats did not what to kill the goose that lays the golden egg.
I don’t see why you are complaining about the growth in government in the Northern EU states (some fair chunk of which is simply growth in health). Many of them are extremely nice places to live and fairly productive economically, despite being ridiculously cold, which is why you see very few immigrants from those countries.
Harry,
you seem to have been asleep for a while.
Ergas has been an opposition shill for some time.
he got caught out for fibbing about fiscal consolidation in NZ and here. The IMF reports showed the complete opposite.
He is no different to Sinclair Davidson. Simply look into the figures they use and it is easy to see how they are fibbing. They are not that silly they do not know what they are doing.
Sloan on the other hand writes as one who uses too much peroxide. Stephen Koukoulas caught her out using doctored figures in an article in the Australian concerning fiscal consolidation and she made a complete ass of herself at Troppo when her accusations. against Matt cowgill blew up in her peroxide hair.
She has never been back.
Jim,
We have never had big government here and probably won’t despite the Liberal Party’s best efforts.
I have just Ergas’s article.
he was writing that for his audience.
He couldn’t possibly believe that guff for some of the reasons Harry has stated.
JB Cairns, I agree that australia has a small state sector. is it 1/3 of GDP. NZ is 40-45% of GDP.
why the state sector is so small in Oz is not well explored.
conrad, on the nordics being fairly productive economically, take care not to confuse high labouir productivity with low total factor prodcutivity.
labour productivity is high across muc of the EU because labour is so expensive so machines are hired instead.
Since the mid 1990s, the EU experienced a significant slowdown in productivity growth, at a time when productivity growth in the United States significantly accelerated.
the productivity slowdown in European countries is largely the result of slower multifactor productivity growth in market services, particularly in trade, finance, and business services.
see http://www.indexmeasures.ca/dc2008/papers/vanark_productivity.pdf
Jim,
I’m just pointing out that its a weird argument bringing up the fact that the Northern European countries are big taxing in the negative, when for all intents and purposes, they’ve done fine on most measures for decades and are nice places to live. Germany exports more than the US, for example, there arn’t homeless people all over the streets, they have an excellent training system (unlike the US or OZ) so they might actually be able to compete with other countries in the future, and their cities are safer and don’t have no-go zones. What’s the correlation here?
conrad, Assar Lindbeck has shown time and again that ‘Sweden became a rich country before its highly generous welfare-state arrangements were created’.
See http://www.project-syndicate.org/commentary/the-three-swedish-models
1. Sweden moved toward a welfare state in the 1960s, when its government sector was then about equal to that in the United States in size.
2. Sweden could afford this at the end of the ear Lindbeck labelled ‘the period of decentralization and small government’.
3. Sweden was one of the fastest growing countries between 1870 and 1960.
Swedes had the third-highest OECD per capita income, almost equal to the USA in the late 1960s, but higher levels of income inequality.
By the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP. Swedish marginal income tax rates hit 65-75% for most full-time employees as compared to about 40% in 1960.
Swedish economists encountered a new phenomenon which they named Swedosclerosis:
1. Economic growth slowed to a crawl in the 1970s and 1980s.
2. Sweden dropped from near the top spot in the OECD rankings to 18th by 1998 – a drop from 120% to 90% of the OECD average inside three decades.
3. about 65 per cent of the electorate receive (nearly) all their income from the public sector—either as employees of government agencies (excluding government corporations and public utilities) or live off transfer payments.
4. No net private sector job creation since the 1950s by some estimates!
In 1997, Lindbeck suggested that the Swedish Experiment was unravelling.
Sweden is a classic example of Director’s Law. Once a country becomes rich because of capitalism, politicians look for ways to redistribute more of this new found wealth to the middle class.
Government spending grew in many countries in the 20th century because of demographic shifts, more efficient taxes, more efficient spending, a shift in the political power from those taxed to those subsidized, shifts in political power among taxed groups, and shifts in political power among subsidized groups.
The Swedish economic reforms since 1991 are an example of a political system converging onto more efficient modes of income redistribution as deadweight losses grow.
Jim,
you can go on and on about this, but any sane person can observe the following: There are quite a number of Northern European countries that have big welfare states that are and have been historically great places to live (I noted Germany, for example, and then you replied with Sweden, which is still a good place and a still a high tax country despite the reforms). They also have many advantages over places like the US, as noted. I think what this is shows is that if you have low levels of corruption, this type of government works just fine and hence simply assuming that taxes should be reduced or the countries would have done better with a mid-tax US style model is simple ideological and not born out in reality. Once the US starts exporting 4 times as much as Germany rahter than less than Germany (which would be about equivalent head-for-head), I’ll change my mind.
After fifty years of catching up to the United States level of productivity, since 1995 Europe has been falling behind.
the EU/US ratio of real GDP per capita has languished at close to 70 percent since 1975, while the same ratio for productivity (output per hour) reached 92 percent in 1995 before falling back to 83 percent in 2008.
Robert Gordon showed that even if all the large decline in European hours per capita until 1995 represented a voluntary transfer of working hours to pure leisure, that leisure is not worth much. most of the decline in European hours per capita is higher unemployment, particularly of youth.
For all age groups the average European unemployed person is five times more likely to be unemployed more than one year and only one-quarter as likely to experience an unemployment spell less than three months.
Hours transferred from work in Europe are not spent in leisure activities. Europeans cook more and devote more time to household chores and child-rearing. Americans go out to eat, hire cleaning services, and buy child-care services.
see http://faculty-web.at.northwestern.edu/economics/gordon/8362_011.pdf
Jim’s argument only makes any sort of sense if you assume taxes (and the welfare state they allow) are AXIOMATICALLY bad, not bad for their effects. The argument is the same as those who used to denounce the pill as “encouraging young people to have sex” – which it did, but it also simultaneously removed the main practical objection to them having sex. An efficient and equitable tax removes the main practical objections to taxation.
I have never understood these sort of propertarian views – they seem to view property rights as axiomatically trumping all others, rather than their being an instrument which we either expand or limit according to the empiric consequences. It is one thing to say free markets have the best practical consequences – that’s a testable question to which we can apply evidence. It is quite another to say that they are a God given right – we don’t get to question God on the matter.
derrida derider, I prefer contractarian theories of rights and justice.
In his Theory of Moral Sentiments, Smith said that matters of justice can only be resolved if people distance themselves from their own positions in particular disputes.
competitive markets do not favor one individual over another. They harness individual self-interest to generate massive wealth, widely distributed in society, through voluntary transactions and the discipline of free entry.
Behind a veil of ignorance, rational people would support of strong and transparent markets as their first order of business.
Jim,
picking a single measure is hardly a good way to win an argument (especially given the current disaster the US is in where youth unemployment is also terrible, let alone given the inequality problems which will be caused by it and their shitty education system which will lead to long term problems and even fuller jails, if that’s actually possible). If you still won’t admit that many of the European governments have done and are doing a pretty good job over the last 50 years or so, then it’s not clear what you would admit.
Jim,
picking a single measure is hardly a good way to win an argument (especially given the current disaster the US is in where youth unemployment is also terrible, let alone given the inequality problems which will be caused by it and their relatively poor education system which will lead to long term problems and even fuller jails, if that’s actually possible). If you still won’t admit that many of the European governments have done and are doing a pretty good job over the last 50 years or so, then it’s not clear what you would admit.
conrad, Eurosclerosis is a term coined in the 1970s and the early 1980s to describe the European countries which had high unemployment and slow job creation in spite of overall economic growth.
Eurosclerosis led to the Lisbon Strategy in 2000, also known as the Lisbon Agenda or Lisbon Process.
The Lisbon Strategy intended to deal with the low productivity and stagnation through the formulation of policy initiatives to be taken by all EU member states.
Its aim was to make the EU “the most competitive and dynamic knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion”, by 2010. By 2010, most of its goals were not achieved.
The aim of the Lisbon Strategy was uncontroversial. The EU was lagging behind the US in most technical and scientific fields. As a consequence, the per capita income gap had remained undiminished for a quarter of a century.
The EU states support large bureaucracies that stifle risk-taking, their public sectors are inefficient, and their social policies protect jobs rather than people. countless protectionist measures hinder competition in the services sector which accounts for well over a half of value added
Average per capita income in the EU is about 30% lower than in the US. This gap is almost entirely due to Europeans working less than Americans; output-per-hour worked
is about the same in Europe and the US.
“The EU states support large bureaucracies that stifle risk-taking”
This is obviously why Germany with a population on 80 million exports more than the US. Where is this all going to lead?
“and their social policies protect jobs rather than people”
Have you ever actually been to Northern Europe or the US?
I know where I wouldn’t want to be poor.
“Average per capita income in the EU is about 30% lower than in the US. This gap is almost entirely due to Europeans working less than Americans; output-per-hour worked is about the same in Europe and the US.”
Many people think this is actually a good thing.
people work less in the market but more elsewhere. the fewer market hours worked is not more leisure
higher taxes create an incentive for individuals to do more things for themselves rather than purchase them in the market.
Freeman and Schettkat (2001) studied time allocation data for married couples in Germany and the United States in the 1990s to find that Americans devote more time to market work and less time to home production than do Germans
countries with higher marginal tax rates systematically have lower employment in those market activities for which there are good nonmarket substitutes. Subsidies increase hours in the subsidized sectors that have home substitutes.
Europeans work just as much for 30% less pay, and the young, the old and women are lucky to have a job at all.
This all very well Jim, but you still haven’t yet said whether you think Germany and all those other Northern European countries are great places to live, and have been successful in many ways other countries haven’t (like for example, not having over 1% of their working age population in jail — which, at a guess, could pay for around 7% of their population being unemployed). I’m willing to say they are, even though I’d pay more tax than here. Alteratively, I don’t think the US is really much better than here, even though I’d pay less tax. Of course, this is just personal preference. So are these Northern European countries not great places to live?
Do many people migrate from the USA to Northern Europe?
Don’t those northern European countries have those rather ugly anti-immigration parties spewing bile?
Jim, you are so ideologically blinkered you can’t even admit that places like Germany are, for all intents and purposes, pretty god places. And which countries don’t have anti-immigration parties spewing bile?
Incidentally — unlike you, I’m happy to admit some of the low tax places are great, including ones where I really do have experience after living there — HK, for example, is a super place, and Singapore is super also apart from the dullness of it (which has nothing to do with tax).
I do not like cold places. their anti-immigration parties are in parliament
“Behind a veil of ignorance, rational people would support of strong and transparent markets as their first order of business” – Jim
The welfare state arose as soon as people got the vote, and not before. Your position seems to be that the majority of people in the majority of developed countries have systematically mistaken their real interests – an unlikely view for a proponent of free markets, the efficiency case of which depends fundamentally on people knowing their own interest and being in a position to pursue it. And whatever the ETHICAL merits of the veil of ignorance, as a matter of positive political economy people vote in full knowledge of their likely position in the distribution.
Your position is very reminiscent of the “false consciousness” view that the Trots put forward to explain why the workers haven’t revolted yet, and justifying the need for a revolutionary vanguard that will institute a dictatorship of the proletariat until that consciousness catches up. But at least the Trots aren’t proposing that vanguard institute an economic system that depends on the entire absence of false consciousness.
The welfare state arose in germany under bismark as I recall. In the 1880s, he introduced old age pensions, accident insurance and medical care. was 1880s germany a democracy?
too be more accurate, the growth of government took-off on the emergence of the middle class in the mid-20th century.
Sam Peltzman pointed out that most of modern public spending is supported by the median voter and the expressive voter. Most of this spending is income transfers.
Governments at the start of the 20th century were a post office and a military. At the end of the 20th century, governments were a post office, a military and a large welfare state.
The studies starting from Peltzman showed that government grew in line with the growth in the size and homogeneity of the middle class that was organised and politically articulate enough to implementing Director’s law.
Director’s law is the bulk of public programs are designed primarily to benefit the middle classes but are financed by taxes paid primarily by the upper and lower classes. Based on the size of its population and its aggregate wealth, the middle class will always be the dominant in a democracy.
After the 1970s stagnation, the taxed, regulated and subsidised groups had an increasing incentive to converge on new, lower cost modes of wealth redistribution.
Reforms ensued led by parties on the left and right, with some members of existing political and special interest groupings benefiting from joining new coalitions.
More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less political opposition.
p.s. current public policy is not made behind a veil of ignorance.
Putting aside this citation-mining that Jim is so good at doing, what he seems to be arguing is that on balance, it’s better to have less efficient revenue raising devices because more efficient revenue raising devices make it easier to increase public sector spending. While I can understand the hypothesis I’m not sure I’d put the faith in it that Jim does. It’s basically a high faluting version of the ‘starve the beast’ theory which hasn’t worked in the US.
For his argument to work, the benefit in terms of the slower rate of government spending/transfers which may represent an inefficient use of resources has to somehow exceed the deadweight cost of the supposedly lower level of government spending/transfers of this less efficient at revenue raising state. However if you take the view that ‘starve the beast’ doesn’t work and no matter how much libertarians protest, the size of transfers will always be some minimum percentage of GDP, I’d rather the revenue was raised more efficiently.
jason, efficient taxes lead to higher taxes. the growth in the size of government in the 20th century is linked to the power to tax and constraints on the same.
I really don’t see how inefficient taxes don’t lead to bigger governments also Jim. The alternative is that some governments think “we need these services” and collect as much as they need to get them. That appears to be the mentality in France right now. In this case, inefficient taxes lead to more tax, and additional costs that you would save (e.g., health) compared to things like the sin-taxes.
inefficient taxes provoke more political resistence and raise less revenue than efficient taxes.
“The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” is the french proverb
Jim,
I bet you could find a correlation between expansion of suffrage and income taxation as well. So how do resolve identification problem?
DavidN, there is a small literature on the spread of women’s suffrage and the size of government. Shows sharp increase in spending and changes in voting patterns in congress and state legislatures. no much on different taxes.
The presence or not of a suffragette movement did not matter much to the spread of women’s suffrage across American states and territories from 1869 onwards.
In NZ, the conservative parties pushed for women’s suffrage while the middle of the road liberals was not so keen if I recall the movie I half watched on this. The Labor party was still a twinkle in people’s eye – 25 years away.
The conservative parties thought women would vote against the vices of an 1891 frontier colony such as heavy drinking and gambling, and be more cautious and encourage policies which protected and nurtured families.
Again, how do you resolve the identification problem?
Harry,
Henry is simply writing like Davidson.
there are only two options here.
1) he is ignorant of the topic
2) he is lying
See Ergas, H., Harrison, M. & Pincus, J. (2010). Some economics of mining taxation. Economic Papers, 29 (4), 369-389.
“Abstract
Firstly, the choice between royalties and profit-based taxation involves an efficiency trade-off, between diminished incentives to produce output on one hand, and diminished incentives to minimize costs on the other (as in Laffont and Tirole 1993). So the Brown tax is indeed a tax, and one that reduces the incentive to mine.
Next, the ex post Resource Super Profits Tax (RSPT) falls on quasi-rents as well as on rents, and therefore involves some expropriation.
Third, there may be a case in favour of a retrospective RSPT or the like, but it has yet to be made persuasively.
Fourth, the successor to the RSPT – the Minerals Resource Rent Tax (MRRT) – has many of the inefficiencies of the RSPT but adds some further serious inefficiencies of it is own.
Last, the value of revenues from taxes such as the RSPT and the MRRT is usually over-stated, as those revenues are highly risky. The failure to take account of the risky character of those income streams amounts to fiscal illusion and makes it more likely that unwise spending commitments will be made.”
the MRRT keeps the main inefficiencies of royalties and adds the inefficiencies of a rent tax.
get off the fence Jim,
what is your opnion of the paper
the MRRT keeps the main inefficiencies of royalties and adds the inefficiencies of a rent tax.
the revenues from the MRRT is highly risky. The failure to take account of the risky character of these revenues makes it more likely that unwise spending commitments will be made.
risky taxes leading to volatile taxes to offset the revenue fluctuations, which is contrary to the principle of tax smoothing.