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Saturday 7 November 2015

The fairness test

It has been a busy week on planet Earth. Russia bombing ISIS and losing planes, chairs being arranged for the upcoming Paris Climate Change extravaganza, new 'draconian' security laws being introduced in the UK, Prime Minister Trudeau with 50% women "because it is 2015" and the steady background drone of migrants crossing borders in Greece, Serbia, Hungary, Austria and Germany.

Despite these distractions on the world stage, Australia has managed to cover topics of greater import; recovering quickly from a bad day at the World Cup with a good day at the Melbourne cup. Against 100:1 odds Prince of Penzance guided to victory by Michelle Payne, a young, pretty (dare I say that), outspoken, female jockey from a large family raised by a single Dad. It was indeed a fairy tale dream for the battler, and could not have been scripted better. The media hit the jackpot and have been milking it since the day.

But I digress. Back at the political coal face our freshly minted PM, Malcolm the optimistic, has launched the tax reform campaign with the much repeated mantra that any tax reform will be fair! (see 'Fairness is absolutely critical': Malcolm Turnbull says tax reform will be more than GST). I guess such an open and early declaration is sensible given the howls of criticism levelled at the previous leader's policies. But of course this won't stop anyone with a vested interest.

You and I, dear reader, are not subject to such earthly vices and can take a more objective look at this question. So despite all the other topics beckoning for some attention, I will focus on this one. What is Fair? By clearly nailing his colours to the fairness mast how high a threshold has our Mr T put on this tax reform? Is it even possible to create a fair set of changes? Indeed what is the Fairness Test?

Lets be clear the tax system is not fair today

At the outset we must recognise that we don't start with a level playing field. The current tax system is not 'fair' in any sense.

Consider Income Tax. The lowest earners pay no tax and receive substantial welfare payments. At the same time the top 10% of income earners pay 50% of the taxes. The following graph shows this distribution.

Table: Who is Paying Income Tax (from Fact Check)

Similarly for Company Tax, many large multi-nationals pay less tax than local companies because they manage to re-locate their profits to lower tax regions. Is this fair?

How about Payroll tax? Again states governments charge different payroll taxes in different states. What is fair about the cost of employing a person being different in one state than another?

Same with GST, it is applied to ice cream but not plain cream, to tampons but not condoms and so on. Is that fair?
Indeed with whatever definition of fairness you may care to dream up, there is nothing fair about the current range of taxes levied on individuals and businesses.

Our tax system seems to be a random concoction of rules resulting from the capitulation of governments to screeching interest groups over the decades. It sort of reminds me of the 1000 monkeys on 1000 typewriters ..

So lets be clear the current tax 'system' is not fair today.

The objective is to make the changes 'fair'

Lets take a charitable interpretation of Mr T's pronouncement, heaven knows there will be many others who wont. Lets take it that the government does not want to redress the inherent unfairness in the current system, but will ensure any changes to the system will be fair. So we need to look at the changes alone and not the sea of problems onto which they are to be applied.

Of course Mr T has not explained this and I have already heard many a call from the vested interests asking for re-dress of existing tax grievances.

What are the 'fairness' criteria?

Even with this more limited definition of fairness introducing change is not easy. Inevitably any changes to taxation rules will have both winners and losers. Any losers will immediately scream "Unfair!", as has been the case so often in the past. This can only be avoided if the 'losers' for one set of changes become winners on another. In other words there are no 'net' losers. This is no easy task when many vested interests see tax changes as a zero sum game, believing that they cannot 'gain' unless someone else 'loses'. Consider the claims by naysayers that the GST is regressive. Despite the already acknowledged low income earner compensation package that would come with any increase in GST, there are already calls for additional imposts on higher income earners through changes in Superannuation.

So this first imperative to ensure that there are no 'net' losers will not be an easy task.

But leaving interest groups 'no worse off' is not enough. Mr T and Scomo have already committed not to add to the overall tax burden. This is far less than the "we have a spending problem” mantra of earlier days. I guess our grandchildren, a demographic whose voice is weak, would be indeed worse off if the tax burden were to increase with borrowed money. Reducing or at least not increasing the overall tax burden is the second imperative.

If it were just these two criteria we could simply leave things as they are. Within our limited definition of fairness it would be 'fair'. No one would be worse off and indeed the tax burden would not have increased. But that would get us nowhere.

So we have the final fairness criterion. There  must be some benefit from implementing changes and the benefits should be greater than any compliance costs. Gains can come in many forms. They could be cost savings through increased efficiencies. eg a higher GST take requires no ongoing increase in compliance costs yet if it were to replace Payroll tax, it would eliminate compliance overheads for businesses as well as State Governments. Other reforms may modify incentives leading to more efficient use of resources, greater investment and growth in the economy. A reduction in company tax can reduce costs for consumers, increase business profits and thereby encourage greater investment. These potential benefits can be far greater than the costs of implementing them and can easily justify such reforms.

The fairness Test

So Mr T and Scomo, your challenge is to come up with a set of changes to our tax system that satisfy the Fairness Test represented by the following 3 requirements.

The Fairness Test
  • All losses by any interest group are offset by gains by that same interest group 
  • There is no increase in the overall tax take 
  • Changes are beneficial to the country through efficiency and growth and exceed any compliance costs.

Mmmm. Good Luck!

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