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Taxation: Statist Seduction
Sinclair Davidson
• The federal budget is Australia’s social compact with itself – as
a nation, we raise taxes on companies and workers to spend
on subsidies for the young, the old, the sick and the poor.
–Chris Richardson in the AFR May 1, 2014
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• The federal budget is Australia’s social compact with itself – as
a nation, we raise taxes on companies and workers to spend
on subsidies for the young, the old, the sick and the poor.
–Chris Richardson in the AFR May 1, 2014
• Really?
–What about public goods?
–Is spending on ‘the young, the old, the sick and the poor’ a
public good?
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Arthur Seldon and Over-government
• Over-government is a problem for democracy
–What politicians maintain as the necessary costs of
government are increasingly sensed as unnecessary costs
of ‘over-government’. And its taxes, originally seen by
William Pitt as income tax, and accepted for a few years as
payment for a good bargain, are being subconsciously but
finally resented as too high for the quality and relevance of
services available at lower cost and higher quality from
competing suppliers in the market.
–The future of the welfare state – ‘Its future now turns on its
readiness to shrink its economic domain, perhaps by as
much as a half. If it fails, it faces the even more formidable
prospect of waging guerrilla financial war against the people.’
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Taxation, Public Goods and Coercion
Public Good

No
Disputed Territory

Free Rider Problem

Private Economy
No
Coercion
Yes

Yes
Pay Tax
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Taxation and Coercion
• Hayek holds that there is no automatic presumption against
government in the disputed area.
• Mises – ‘As the liberal sees it, the task of the state consists
solely and exclusively in guaranteeing the protection of life,
health, liberty, and private property against violent attacks.
Everything that goes beyond this is an evil.’
• James Buchanan – ‘Some extensions of state power are more
legitimate than others’.
• Buchanan – ‘The “wealth of nations” is maximised when
persons are “free to choose”.’
• That disputed area is becoming very large and constitutes
over-government.
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How does the state get away with over-government?
• Fiscal Illusion: The State obfuscates as to the true cost of government. When
voters are unsure as to the true cost of government they demand more
government than they otherwise would.
– Tax complexity
– Deficit finance
– Hypothecated taxes
• Tax Folk Theorems: Widely held views about principles of good taxation
policy or tax facts that are probably not true.
– Sources of Tax Folk Theorems:
– Fiscal illusion
– Political debate
– Economics
– High theory
– Low theory
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Tax Folk Theorems
• The ‘rich’ don’t pay their ‘fair share’ of tax.
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Tax Folk Theorems
• We should tax all sources of income …
• … but ignore compliance and nuisance costs.
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Tax Folk Theorems
• Not being taxed is a subsidy.
– Tax expenditures are created when the actual tax system deviates from an
ideal tax system to the apparent benefit of a narrow group of taxpayers.
The difficulty is in establishing the ideal tax system – and, of course, who
gets to define that “ideal tax system”.
– Housing is tax-advantaged.
– Living in your own house is a tax-rort.
– Superannuation tax benefits accrue to high income earners.
– Negative-gearing is a rort.
– Tax expenditures are arbitrary exercises in wishful thinking.
– Bureaucrats get to play God and design their own ‘ideal’ tax system
without having to worry about democratic constraints.
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Tax Folk Theorems
• Economic incidence means that bad policy choices don’t matter.
– Very often the same people who claim it doesn’t matter which side of the
market gets taxed complain about the salary sacrifice industry.
– People who harp on about economic incidence often ignore transaction
costs.
– People who harp on about economic incidence always ignore fiscal
illusion.
– Payroll tax is a tax on jobs.
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Tax Folk Theorems
• Big business doesn’t pay its fair share of tax.
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Tax Folk Theorems
• Land tax is an efficient tax.
– Nooooooooooo.
– The only perfectly inelastic supply curve you will ever face is the face
that you only live once.
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Conclusion
• Don’t believe statements about taxation:
– That are commonly held
– That are pronounced by experts (especially neo-classical economists).
• Check the statements yourself.
• There are very few, if any, sources of untaxed revenue.
• There are very few, if any, easy policy changes that will generate large
amounts of tax revenue.
• When thinking about tax policy beware of the nirvana fallacies:
– Free lunch
– People can be different
– The grass will be greener
• When thinking about tax policy remember:
– Compliance costs
– Audit costs
– Behavioural responses
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