Doing government well

I’d be surprised if any of the recommendations in Henry generate a higher internal rate of return, greater efficiency gains per unit of effort than the recommendation to simplify tax returns for five odd million Australians, something that can be done simply by offering tax cuts in the form of a uniform entitlement to an increasingly large deduction for business expenses.  As that entitlement grows it means that fewer and fewer Australians need to pay tax accountants to chase greater refunds a practice that gobbles up resources for next to no return.

This chart from the Henry Review shows the proportion of the population using tax agents.  The only worse example than Australia is Italy. One thing jumps out. The countries most notorious for ‘big government’ – particularly the Scandinavian countries tend to have the lowest proportion of their populace engaged in the waste of the yearly tax-refund paper chase.

Several observations suggest themselves.

  1. Many countries with large governments, and particularly the Scandinavians do government pretty well and this generates other paradoxes of big government.  Scandinavian countries twigged years ago to the fact that capital was mobile and thus that it made sense to lower company tax – which they have done within generalised mechanisms to tax capital income at rates well below the top marginal rate of tax for income from personal exertion.  Contrast this with the US, the home of small government which has a substantially higher company tax rate than the Scandinavian countries – though you could argue that its higher rate is justified by its size – which reduces the mobility of its capital base. Still those ‘big government’ Scandinavians typically tax companies less heavily than another small government country – ours!
  2. Having a higher level of taxation enables universal entitlements (or to put the causation the other way round, universal entitlements require higher levels of taxation).  And universal entitlements simplify tax systems.  Australia’s tax system can and should be massively simplified in its practical operations for most taxpayers.  But while much of the intensive targeting of welfare in Australia could be automated by the ATO using data matching, it hasn’t been and can be quite tricky.

Of course none of these arguments themselves are very strong arguments for or against big or small government, but they do underline something that is indubitably true. Whether governments are big or bigger (for there are no small governments except in failed states), doing government well yields richer gains than the usual haggles over whether you’re for or against bigger or smaller government.

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13 years ago

Love a good graph – this one makes a pretty good case for the fact that our tax system is in dire need of simplification.

13 years ago

You might at some stage venture a comment yourself on how the goal of simpler automatic tax refunds is at the moment impeded by the fact that the government is still allowing charitable deductions – the simple system is available only to people who have none. Alternatively or in addition, you could imagine what’ll happen when the government bites the bullet on this and imposes the virtual abolition of the charitable donation deduction (under some set sum- $100?).

13 years ago

More generally, the issue is that complications in the tax system come about because the government is attempting to achieve some (theoretically) socially desirable goal, and every simplification will make many of these tools unavailable.

Gavin R. Putland
13 years ago

“Still those ‘big government’ Scandinavians typically tax companies less heavily than another small government country – ours!”

The comparison is meaningless unless the “Scandinavians” have dividend imputation. In 2001, Norway did, Sweden didn’t, and Denmark had “partial” imputation.