Taxing times

Jason Soon has lost no time in taking advantage of the Movable Type extended page facility at Catallaxy’s new home. He’s posted a long-ish rant about the benefits (and to some extent the problems) of a flat tax system. I’m inherently sceptical about flat tax, although I certainly agree that the current top marginal rate cuts in at far too low a level. Moreover, I’m attracted to Jason’s argument that a flat tax system would tend to promote political honesty and accountability for taxing decisions:

When people know that to tax their neighbours is to tax themselves, their appetite for larger government and complex taxes will be reduced. The flat tax constraint does not place, nor should it place, any explicit constraint on overall levels of public expenditure. But it knocks out many of the opportunities to spend political capital for partisan gain. Flat taxes stack up well against the two tests for any legal system: the costs of administration are low, and the incentives for responsible political behaviour are great.

However, this quote also contains the germ of the reason for my suspicion. Although there may not be any “explicit” constraint on overall levels of public expenditure, there is a powerful implicit one, namely the very factor that Jason sees as an unalloyed virtue. In fact it’s a two-edged sword. Governments won’t easily be able to create a public impression that the burden of tax increases is going to fall on someone else (i.e. the wealthy who can afford it), because increases will fall equally on everyone.

However, what that would mostly mean in practice is that new or enhanced areas of service and infrastructure, even if they might more sensibly be regarded as public in nature (in that everyone needs them and they’re essential to creating equality of opportunity), will tend to be provided by the private sector because governments won’t practically be able to fund them through increased taxation without running an unacceptable risk of losing the next election. It’s always easier to run a scare campaign against a new taxation measure than to sell its virtues (just ask John Hewson or Paul Keating).

But because the private sector needs to make a profit and inevitably charges on a “user pays” basis, further moves towards private service and infrastructure delivery will inevitably lead to a regressive system and a more and more unequal society where the poor are priced out of access to basic facilities. It wouldn’t even be practically possible for governments to redress the regressive effects of the private sector model by devices like a voucher system for poorer students to access education: the likely electoral consequences of the tax increases (or spending cuts in other areas) necessary to fund it would make this a ‘courageous’ choice in a Sir Humphrey Appleby sense.

I agree with Jason that we need a system where governments are more directly accountable in a political sense for their taxing and spending decisions. But I think it would be best achieved by sticking with progressive income tax rates but inflation-indexing the marginal rate thresholds, so that at least taxation can’t be increased by stealth/masterful inactivity.

There’s a lot more to say about flat versus progressive income tax systems. Unfortunately I have neither the time nor the expertise to debate the arguments coherently. With a bit of luck someone with greater knowledge in this area, like John Quiggin, Tim Dunlop or Christopher Sheil, will take up the challenge of advocating the virtues of progressive taxation.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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Jacques Chester
Jacques Chester
2024 years ago

I must respectfully disagree with your statement that “user pays” creates a drift towards the exclusion of the less well off from service delivery.

You have perhaps overlooked that there is a strong incentive to deliver services to the less well-off as efficiently as possible, simply because taken together they spend a lot more, and more frequently, than the rich do.

To use the famous example, who became wealthy in the car business? Mr Ford, who sold to the working class American, or Messrs Rolls and Royce, who sold exclusively to the very wealthy? I can assure you that it was Henry Ford who was the “worker’s friend” in this instance, and not any public service model.

This is likewise true of food, without which you would surely die. Today we have an embarassing plenty of the stuff, because we have generally in Australia avoided the idea that it must be somehow ensured that persons X, Y and Z shall have a priority claim on farm production.

To recap: even where services are today too expensive, there is a strong incentive to bring them to the mass market tomorrow. Without private provision of resources we’d be lucky to get time on the government’s expensive mainframes, let alone communicating using cheap, commodity PCs!

John Humphreys
2024 years ago

I used to really hate progressive tax. Not any more. I’ve come to the conclusion that it makes little different. Therefore, due to the administrative and compliance benefits of a flat tax, I still support it – I can’t see why people would want to complicate things for no real benefit.

John Humphreys
2024 years ago

I don’t see why a flat tax would be harder to raise than any other tax. The government regularly increases regressive taxes – and gets away with it easily. The primary reason is that they increase it by such a small amount each time.

Further, you assertion that the free market distribution of wealth is wrong is just that – an assertion. There is an appropriate level of inequality, and little evidence to suggest that the government knows what it is.

Finally – there could be some moral questions about supporting a tax on the basis that it is less transparent. If a public service is sufficiently demanded, then people will accept the necessary tax. If they don’t accept the tax – maybe that means they don’t want the service?