One of the more prominent entries into the public policy debate of late has been the Grattan Institute’s Game Changers report, which is an attempt to prioritise the various reform options that the federal government could pursue, and highlight those policies which would deliver the greatest economic dividend. It’s a worthy report, although I disagree with much of it, partly for the reasons set out by John Quiggin.
In the wake of the report’s release, the CEO of the Grattan Institute has been on a roadshow to promote it, including recent events with Paul Kelly in Sydney and George Megalogenis in Melbourne. I’ve listened to the podcast of the Sydney event, and one of Daley’s arguments in particular rankled with me. Daley repeatedly claimed that equity shouldn’t be a consideration when you’re designing a tax system, and that instead you should leave redistribution purely to the welfare system. In Mr Daley’s own words:
One of the things that Ken Henry articulated really clearly, and I think very well, in his address to the tax forum last year, was to say ‘do not try and engineer regressiveness or progressiveness through the tax system. The purpose of the tax system is to collect tax. The purpose of the welfare system is to deal with regressiveness.’”
I strongly disagree with this and I think it misrepresents Ken Henry’s comments.
At the Tax Forum, Ken Henry suggested that fairness shouldn’t be a consideration for each and every component of the tax system. He did not suggest that equity should be ignored when you’re designing a tax system, and should instead be left to the welfare system.
Here’s a quote from Ken Henry’s speech that John Daley referred to:
…the fairness of a tax and transfer system should be assessed in respect of the incidence of the system as a whole. More importantly, there is a very strong argument for insisting, as the review panel did, that equity objectives should be pursued only through the personal income tax and transfer system obviously taking full account of the incidence of various other components of the tax system but not affecting the design of those other components of the system. [emphasis added]
See that? Dr Henry isn’t suggesting that equity should be left to the transfer system, but that it should be left to the personal income tax and transfer systems. Big difference. He also says that you should design the personal income tax and transfer systems “taking full account of the incidence” of other elements of the tax system. What this means is that if the rest of the tax system were to become more regressive, say by an increasing emphasis on consumption taxes, then you might want to make the personal tax and transfer systems more progressive to offset that.
The tax review that bears Ken Henry’s name doesn’t come close to claiming that progressivity should be left to the welfare system and ignored when it comes to taxes. Instead, equity is the first design principle that the Review identified:
The tax and transfer system should treat individuals with similar economic capacity in the same way, while those with greater capacity should bear a greater net burden, or benefit less in the case of net transfers. This burden should change more than in proportion to the change in capacity. That is, the overall system should be progressive. Considerations about the equity of the system also need to take into account exposure to complexity and the distribution of compliance costs and risk.
Leaving equity solely to the welfare system wouldn’t accord with this principle. Instead, under a system that let welfare do all the redistribution, the tax and transfer systems would only be progressive up to the income level at which individuals ceased to be entitled to transfer payments, beyond which the system would be proportional or regressive. There are reasons to think this would be undesirable even on efficiency grounds, and its effect on equity would be to dramatically increase inequality of disposable incomes.
I hope I’ve misunderstood John Daley’s comments, but the fact that he repeated them a couple of times makes me think that I haven’t.
Except the Henry Tax Review in practice was and is about continuing the shift in wealth to capital from labour. The very few references to equity in the Review are window dressing.
One of the problems with going down the path of using the welfare system to tackle broad tax equity issues is that, as welfare, the scheme becomes the target of those who can only see the welfare system as being about vertical equity.
You only have to look at the commotion around middle-class welfare in the family payments area to see this in action.
Still, a lot of this depends on what you see as an equity issue in the first place. Family payments is interesting in this regard as it operates as a kind of particle accelerator, where opposing viewpoints are circulated, brought together in an unedifying collision wtih new, weird and exotic payments being produced. The matter-antimatter collision that occurs between those who think payments for children are almost evil because children are a consumption choice, versus those who run the children are the continuation-of-society line is wonderful to see.
I guess I’m talking horizontal equity issues here and to me that’s one area where its tax design, rather than welfare payment design, that needs to do the heavy lifting. We’ve gone the other way for some years in Australia, to the extent that horizontal equity has almost disappeared (and is postively unfashionable).
Hi Dave,
What changes would you have in mind to bring about greater horizontal equity?
Well, here’s an aspect of the issue…
It’s apparently okay to preclude person 1 from getting income support (eg, Newstart allowance or Austudy payment) by taking the income of their partner (person 2) into account. However, it seems that it’s not okay to reduce person 2′s tax liability to recognise that the state is requiring person 2 to support person 1.
One could be cynical about this and say that the assumptions underpinning the rules for income support serve to reduce outlays whereas the treatment for tax purposes serves to increase revenue. I would like some consistency here.
It’s a similar issue with children – the tax system no longer recognises the reduced capacity to pay tax of a household with children compared to one on the same income and no children. Now, as I alluded to in my initial reply, whether you think this is a problem depends on where you sit on the children as commodities debate. Seeing as I am more firmly in the community camp, I think it should have that sort of recognition in its design.
I guess that boils down to a tax system that has some recognition of what the welfare system is doing in terms of assumptions of dependency via its income testing regimes.
Yes agreed Matt.
[...] Institute is verballing Dr Ken Henry’s position on equality via the taxation system. Read the article here, it is well thought out and well [...]
Grog asked me to ask you why you aren’t posting blogs more often?
PS
I agree your blogs are always worth reading and there should be more of them Pretty Please
Agreed, easily one of the best political blogs and a desperately needed voice of reason pushing back against the deceptive narratives of the murdoch press/big business.
Thanks – I will start posting more frequently when I get the time. Soon.