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A modest proposal

It’s not tax we should be arguing over. It’s spending

It’s not tax we should be arguing over. It’s spending

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economics

Taxes are an issue that makes the blood of every member of the political spectrum boil. Every election cycle begins with a discussion of tax, and every election result is taken as a signal of what sort of tax system society wants now. Economists and accountants find this to be incredible— because in itself, the idea of taxation is relatively benign. In order to inform society that taxation really is boring, I suggest leaving the matter of tax rates up to technocrats—so that the true social debate can focus on the core issue of government spending and redistribution.

I hear you telling me to slow down. You may be telling me that taxation is theft, or potentially that the tax system is how we redistribute. However, it is really the choice of spending decisions that leads to the ‘theft’ or ‘redistribution’ of resources—if government spending was nil then the tax rate a technocrat would set to achieve that income would also be nil.

By having an independent body set a flat rate of tax on income/consumption, in order to balance the books over some period, we gain transparency around the process of government spending. If a party wants to increase spending to meet certain social goals, this independent body can indicate how much tax rates will need to rise.

There are three main reasons people may be fearful of such a policy. They may believe that such a policy will lead to too little redistribution, that it will lead to excessive ‘churn’ in the tax-benefit system, and that a situation where people have full knowledge of the costs of policy will lead to too little government spending.

However, these concerns are overstated. In terms of redistribution, if society wants redistribution, redistributive goals can be pushed (and targeted) through social spending rather than through a progressive tax system.

In this way the level of taxes will be higher, and the level of transfers to those in need will also be higher.

In terms of churn, we have to balance efficiency losses from the fact that tax is paid, and then paid back out, with the fact that we now have a more targeted social assistance system which allows society to help the needy more efficiently. As a result, it is not clear whether the associated churn is a net negative or positive.

And finally, it is a relatively steep call to say that fully informed voters will make worse decisions than voters who are not informed. In reality, we all have a belief that government should be something—bigger, or smaller. But as we are in a democracy, we need to accept the fact that policy should not be set with regards to what we believe is right—but by what the people, on average, desire. Hiding information from people to achieve the outcomes we desire is not democratic, and as a result having a tax system that obfuscates trade-offs is undemocratic.

Taxes are the price we pay for living in a civilised society. Having a flat tax system which is set independently of government ensures that taxes can be viewed solely as a price we pay for residence—and forces policy makers to admit the price of their policies to the electorate at large.

Matt Nolan is an economist at Infometrics and blogs at www.tvhe.co.nz