Taxes, till death do us part

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Benjamin Franklin wrote anxiously while corresponding to his dear friend Jean-Baptiste Leroy in Paris during the peak of the French revolution about whether he was in fact still alive or had succumbed to the violence.

Franklin wrote (as translated to English): “Are you still living? Or has the mob of Paris mistaken the head of a monopolizer of knowledge, for a monopolizer of corn, and paraded it about the streets upon a pole.

In the same letter, Franklin was feeling the vulnerabilities of life himself, and having just bedded down the US Constitution, he famously remarked: “Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.”

While not the first to use this term ‘death and taxes’ it is by far the most famous.

The authors of the Re:Think Tax Paper recently released by the Australian Government only wish that tax was in fact as certain as death. The ingenuity of humans whether it be behavioural or technological have managed to highlight the frailties of the current tax system in Australia. It is not longer capable of funding the insatiable needs and wants of government.

While budgets require a tango of expenditure discipline and revenue management,  Australia is struggling like never before to even do the most basic housekeeping on these fronts.

Among the important messages in the Re:think Tax paper, it reminds us that when government tax they change the economy and with that comes the potential to damage economic efficiency if taxes are too high or narrowly based.  Economists call this ‘excess burden’ of taxation, where the benefits of a tax can be overwhelmed by its costs of collection.

Stamp duty on property is identified in the Re:think Tax paper as having a significant excess burden, and I will focus on this because it is a particularly pervasive tax that distorts decision making in business and of individuals. It also has perverse effects like exaggerating the infrastructure deficit.

How does this happen and what are its consequences?

Stamp duty like all taxes has the potential to change economic behaviour. For example, higher income taxes can reduce your incentive to work and stamp duty on conveyances can distort land use, for example by retaining land for relatively unproductive purposes just to avoid stamp duty. The same can be true for individuals when it comes to property ownership and where they choose to live.

In both cases stamp duties for conveyance levied by the states increases significantly transaction costs of buying and selling houses, apartments and commercial land.

Higher transaction costs limit the ability of employers to locate facilities in the most optimal location for access to infrastructure and skilled workers. Equally it directly impacts on people’s willingness to adjust locational preferences for living as their circumstances change over time because of say, a new (another) job, children, health and aging.

With much higher levels of workforce participation, coupled with dramatic reductions in the average tenure of jobs provides some clues as to why traffic congestion is getting worse by the day. Jobs cannot move to people, and people cannot comfortably access jobs is a diabolical mix for our national economic engines. And the solution is, travel more.

Sydney’s major roads such as M5, M1 and M4 all have a daily peak hour exceeding 10 hours per day, and for the more chronically congested in excess of 13 hours. For an equivalent 60km trip in peak hour Sydney,  the average speed is 40 kmh, Melbourne at 44 kmh compared with London at 54 kmh – a city of far greater size and complexity.

Many people may not need to be on the road if they had more choices about where they live, work and play.

A perverse outcome of the tax system I would argue is that it has not only limited work and travel choice, it has exaggerated Australia’s infrastructure deficit. This has caused many commentators to mis-diagnose the cure by supporting even more taxes and debt to invest in better roads and public transport to ease peak hour congestion.

It appears that the new shock absorber to make our cities function smoothly is an over reliance on the transport system which is bearing the burden of an accumulation of tax distortions. Of course, other factors like penalty rates also encourage us to work in the goldilocks eight hour block, exacerbating peak hour traffic as well.

There is an urgent need to better understand the plethora of tax interaction effects with infrastructure and seek to reduce negative consequences.  Taxes and death may share a common inevitability, but our quality of life could be so much better if we managed these negative consequences more thoughtfully.

 

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