Which is the worst tax?
As libertarians, we often hold views that aren’t popular. Privatising universities, legalising drugs, removing industry R&D subsidies, gun law liberalisation, abolishing the minimum wage, lower government health spending and many other policies put us in a minority. But on one issue the libertarian position is very popular: lower taxes. Everybody (well, nearly everybody) hates taxes.
The new question for the ALS poll is which tax is the most objectionable?
I have listed all the main taxes and a few that don’t currently exist – including income, company, GST, cigarette, gambling, alcohol, petrol, carbon, land, death, tariffs, stamp duties, payroll, capital gains and other. And for the trolls I have included the option of “I love all tax”.
The last poll asked for predictions about global warming over the next 10 years. The most popular answer was the IPCC answer of 0.2 degrees warming (23%), closely followed by the slightly more conservative 0.1 degree warming (21%). A total of 49% agreed with the IPCC estimate +/- 0.1 degree. The other main answers were no change (14%) and a 0.1 degree cooling (12%). Nobody took up the challenge of putting money on the line.
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One of the most objectionable is Inheritance Tax, but as i have recently discovered Australia doesn’t seem to have it
In the UK it is a tax of 40% of all assets above a $700,000 threshold.
Some bright guy worked out that it would be a good trick to call the Inheritance tax the “Death tax” because it sounded meaner. It was abolished initially in Qld and then the pressures of competitive federalism resulted in it being removed in other States.
Perhaps I’m just dreaming here, but I think your above list of genuinely unpopular opinions is far to inclusive. I doubt things like legalizing drugs (particularily soft drugs) and removing industry subsidies are really that unpopular — and I’d like to see some survey results before believing that.
I was originally going to vote ‘alcohol tax’, but death tax. Definitely. That’s just mean!
Payroll tax. It’s just rude. “You’ve employed someone, give us money.”
I disagree with the comments about inheritance tax – it’s probably the least objectionable to me. It only applies when you are dead so you don’t care any more, and only affects your beneficiaries, most of whom are undeserving.
Based on the principle of equality of opportunity, it’s the most morally defensible. All the others are imposts on individual effort or choice.
I’m with Mark – payroll tax is obscene. Land tax is not far behind.
Any inheritence from estates will be taxed unless the beneficiary is a dependant of the deceased (ie: child or spouse).
I hate all tax but think income tax is the worst.
conrad — I think most Australians are still against drug legalisation, especially for harder drugs. And while I agree that people will often say they are against corporate welfare, it is much more difficult when you actually start giving examples. But just to make the above stated positions more unpopular I’ve added “R&D” before “subsidies”.
While it’s true that inheritance tax only occurs after you die, it impacts on you before you die because you are aware of the tax. One cheeky argument is that you can’t avoid death so a death tax doesn’t create a behaviour change. But you can change your donation habits and an inheritance tax encourages people to give away their money earlier and in different ways.
Recipients of inheritance are no less deserving than Bill Gates when you buy a Microsoft product. Both result from a voluntary choice by the buyer/giver according to their perseption of their own interests. Desire to help your children is just as legitimate as desire to by MS Office.
I voted for income tax, but I also think alcohol tax is quite objectionable as it is a regressive tax that targets the primary recreation of many people.
I don’t care to evaluate a tax in terms of who ‘deserves’ what or whether it’s ‘regressive’. That’s what lefties do. The only relevant criteria is efficiency.
Inheritance tax is the least objectionable in theory because it will have the least deadweight loss for the reasons noted by David. In practice this is not so clear. As for alcohol and cigarettes, insofar as demand is inelastic for these goods for a substantila majority of its users it’s efficient.
I voted for tariffs even though they no longer exist because openness to international competition is absolutely crucial to forcing States to enact economically rational policies.
I guess I’m a leftie then…
Efficiency is generally determined by the degree to which the tax encourages change of behaviour (more change = bad). Behavioural change is probably lowest with land tax, followed by the sin taxes on petrol, carbon & cigarette.
But I think it is legimitate to think of other issues when it comes to tax. For instance, an income tax discourages work and increases the appeal of welfare dependency, which costs the government & undermines social capital.
Sin taxes fall especially hard on the poor (ie is regressive) and I think a proportional tax system is more equitable.
Regressivity flows into ability to pay and actual welfare levels Jason. Efficiency shouldn’t give up equity. That’s why I think Gerogist land taxes are one of the least worst taxes, along with a true VAT.
John, insofar as income tax discourages work it induces a behaviourial change. Indeed, that’s where the deadweight loss comes from. This doesn’t come under ‘other factors’, it’s already under efficiency.
We all know tariffs and the worst. You shouldn’t include it as it messes with the poll.
Yeah I was thinking the same thing too. I know Terje will go on about how income taxes are taxes on household trade effectively but tariffs are a tax on trade with *everyone else in the world*, plus they create further rent-seeking costs, plus they reduce pressure on goverments to reduce inefficient regulations on domestic industries and give governments an excuse to implement other industry policy and create complacency about reform more generally. They stuff everything up in a systemic manner in addition to just the direct deadweight costs of distorting trade (which may be relatively small compared to other taxes) which has no analogy for other taxes.
If tariffs weren’t on the list, I would have voted for company tax, which are effectively double taxation.
And Mark, I wouldn’t be so sanguine about land taxation if I were you. It is a great idea in theory but I worry about the political consequences. I can see the government certifying certain land valuers and rigging the market. Do you really want the Federal government effectively cooking up some bullshit number and telling you this is what you owe them in taxes? I would prefer to leave such taxes as a local government base.
I’m with Jason re tariffs. Income tax bothers me, on a personal level, more, because I pay a lot more viz a viz tariffs. But at least with income tax most people get the point – you pay a proportion of your income for those things the market could or would not usefully provide (defence, some basic social security, foreign affairs, a parliament etc etc). But tariffs are just evil.
Jason
Your comment re land tax is spot on.. The most egregious example is the ACT. Land prices are high – almost a Sydney levels, despite being surrounded by sheep paddocks in all directions for hundreds of kilometres. All ACT governments have a finely graduated calculus between land tax and release of new land for development, which aims to maximise land tax.
Jason – your comment about tariffs being a tax on trade with everybody else in the world would have more validity if domestic trade was not such a large part of our total trade. Sure there are more foreigners than locals but predominately we trade with locals. And taxes such as income tax are not merely a tariff on trade between Australian households but also a tariff on trade between Australian and foreign households. A flat income tax of 20% would distort vastly more trade than a flat import tax of 20%.
Johns question is however difficult to answer without qualifications. Is he refering to the respective taxes at their current rate or merely just the principle that underlies the tax. I’d prefer a GST over income tax because a GST can’t be made progressive and there will be less support for any increase. However if you abolished income tax and insisted on raising the same amount of revenue via GST with no scope for reduction I’d be more hesitant.
Whilst I agree with Davids sentiments regarding death taxes they are rather destructive of family estates and family businesses that may get busted up or shut down just to pay the tax man. A tax that dismembers productive units is not a good one.
The tax I hate the most is not on the list. It is the inflation tax currently popular in Zimbabwe. I voted for income tax but there are a lot of unstated qualifiers.
I hate the tax where you have to be registered like a dog, and then have the government snooping into every transaction of your private affairs, and then you have to adminster it for them for free, and it’s so complex that even different officers of the ATO can’t give a consistent answer on what the law is.
So my vote is income tax.
#18 – Terje, you’re missing the point. I explicitly noted that the negative effects of tariffs extend well beyond their distortionary impacts on trade. Tariffs are not just there for a revenue purpose and don’t just affect foreign purchases. They set a bad precedent for firms to engage in competition through further lobbying. There is a whole literature related to the costs of rent-seeking. An open economy disciplines firms and governments and has done more for libertarians than libertarians themselves.
I don’t know why you’re so hung up over the income tax and yet think the consumption tax is a wonderful thing. The only difference between the two effectively is that the incidence of an income tax is on both labour and capital income whereas the incidence of a consumption tax is only on labour income.
To elaborate:
economically speaking, a consumption tax is equivalent to an income tax with unlimited deductions for savings
The wiki entry for this is pretty good
http://en.wikipedia.org/wiki/Consumption_tax
One of the first detailed analyses of a consumption tax was developed in 1974 by William Andrews. See William D. Andrews, A Consumption-Type or Cash Flow Personal Income Tax, 87 Harv. L. Rev. 1113 (1974). Under this proposal, people would only be taxed on what they consume, while their savings would be left untouched by taxation. For this reason, the tax can be called a consumption tax, a cash-flow tax, an expenditure tax, or a consumed-income tax, to name a few. Former senior editor of Fortune magazine Al Ehrbar notes that proponents of a consumption tax argue its superiority to the income tax based on an economic principle called “temporal neutrality.” See Al Ehrbar, Consumption Tax, The Concise Encyclopedia of Economics.[1] He observes that a tax is “neutral” if it does not “alter spending habits or behavior patterns and thus does not distort the allocation of resources.” In other words, taxing apples but not oranges will cause apple consumption to decrease and orange consumption to increase. The temporal neutrality of a consumption tax, however, is that consumption itself is taxed, so it is irrelevant what good or service is being consumed in terms of allocation of resources. The only possible effect on neutrality is between consumption and savings. Taxing only consumption should, in theory, cause an increase in savings. William Gale, Co-director of the Urban-Brookings Tax Policy Center, offers a simplified way to understand a consumption tax: Assume that our current tax system remains the same, but remove limitations to contributing to and removing funds from a traditional IRA. Thus, a person would essentially have a bank account where they could place tax-free earnings at any time, but unsaved (or consumed) withdrawals would be subject to taxation. Having an unrestricted IRA under the current system would approximate a consumption tax at the federal level.
Each tax is even worster than the one before it! The principle of taxation is abhorrent! And calling us all Tax-PAYERS is rubbing salt deeply into the wound! Next time you meet a tax-peddler, just say ‘NO! Get away from me you scurge in human form!’, and they might get the message.
Jason,
I understand and accept your broader point about the political dynamic that goes with tariffs. And I agree that reducing tariffs has been a good thing and I would not seek to reinstate them. My main point is that import tariffs are not the only tax that is bad for trade.
My preference for a GST over income tax is likewise based on the political dynamic. A high GST is far more politically improbable than a high income tax. However if we must retain income taxes then I’d happily get rid of the GST because there is little point in having both.
Regards,
Terje.
Jason, I would advocate a flat VAT of 5-10% to fund all Governemnt outlays. We just have some issues about funding different Governemnts with it. Hence why I perhaps entertain the idea of land taxes for states and VAT for the national government.
I say split the revenue of a VAT in thirds and then not worry if local Governemnt becomes more important than before, and the States slightly less so.
Like I said, if they need more revenue than 5-10% VAT, they are spending too much.
I know what this deviousness is all about. You want to justify Carbon taxes on the basis that people think its not the worst of all possible taxes.
We cannot justify carbon tax on that basis since none of us are in the position to cut taxes when we want to. This could only be a last minute sunsetted deal with the treasurer and some miscreants in the Senate and it could only come at a massive bargaining price to those evil bastards who would be holding up some other measures that addressed a problem that was REAL.
Look Humphreys. There is simply no substitute for coming up with some sort of evidence. We cannot base policy on ignorance, superstition and your pathological fears.
Income tax is objectionable in its current progressive form:
- witheld tax allows income tax to slip under people’s “I’m paying how much?” radar
- progressive taxation punishes the most productive individuals
- combined with loss of welfare benefits, creates high effective marginal tax rates for unemployed entering the workforce, a disincentive to work/incentive to work in the cash economy (which has inherently less prospects for income growth over time)
- paperwork associated with tax returns and deductions
- incentives to minimise tax and the deadweight costs of employing tax lawyers/accountants
I could go on, and on, and on…
Think about this guys.
Take a bottle of milk.
How much tax do we pay on it in proportion to gross salaries?
GST inputs.
Payroll and income taxes on labour in production.
Land tax on the land used to produce it.
Fuel excise to transport it.
Subsidies (implicit tariffs) on milk.
Income tax on your own income before you can purchase it.
It really is offensive and shows that not a single tax, but a myriad of inefficient taxes at high rates is what makes the Australian taxation system so destructive.
High income earners are in general high income earners because they have skills that are rare and of high value. In generally it is silly to put high taxes on resources that are rare and of high value. It is not clear that the burden of such taxes falls on the holders of such skills and is not merely passed on as a higher price to those that directly or indirectly rely on the services of such skilled professionals.
To be specific. If we put a high tax on medical specialists will we not pay more for medical specialists. And is this not perverse in health terms in light of the reason why we put high taxes on cigarettes?
“Jason, I would advocate a flat VAT of 5-10% to fund all Governemnt outlays.”
Yes this is a good point. In practise while we are cutting non-defense spending in half every year (net old age pensions) and perhaps every 3-5 years if old-age pensions are taken into account (the eligibility age ought to immediately start rising one day in two)……….
…. In practise we would rightly quickly wind up with Land Tax…….. Goods And Services Tax…….Income Tax still on the books but almost nobody paying it…. And infrastructural charges….. AND NOTHING ELSE.
Now if we just take road congestion and water… These two would be charged through the nose but only on those roads and those times of the day when there was a prospect of cutting down traffic with a seamless tax.
This is how you prepare the system for privatisation.
With water you seperate the individual river and charge nothing to pump water out of it when its average or above average level. But as soon as it falls below average the costs start climbing at a strong exponential rate….
But if we know that rain is coming up-river we drop the charges to zero again… So the pumping starts and by the time its raining the rivers are at their lowest viable level.
Land tax is something that ought to slowly take over maybe over a time period of (lets say) two hundred years… for reasons stated in a prior post.
So it will get down to GST and Land Tax alone… Or it ought to pretty quickly.
Personally I’d replace GST with Pauline Hansons cascading tax. Not at 2% as One Nation wanted it but only at 1%…..or 0.5%
And if it wasn’t enough of a revenue raiser then you might have a 1% total assets tax with an assets threshold for sole traders and individuals.
I really think that GST is an intrusive tax and a big hassle.
Although from a purely economic point of view one supposes its less horridly inefficient $ for $ then a lot of other taxes.
28 “….Land tax on the land used to produce it…..”
Supposing the land tax had come in 20 years prior?
Then I don’t think it ought to be included in that calculation since the business otherwise would have to have paid a higher price for the purchase or rent of that land.
But to be sure, recent additions to land tax could be most hurtful. This is why I say it can be the worst tax, but also the best tax, depending on context.
Its double stealing if its brought in when land values and land rentals aren’t rising because it thieves capital value AND cash flow at the same time.
But its virtually costless when seen from the prism of several decades later.
what is the difference between payroll and income tax? same thing right?
Jason, the extra issue I was refering to with regards to income tax was the flow-through consequences re: welfare.
Tariffs are just a selective sales tax. There is no reason to exclude them from a list of taxes and I doubt they are the least efficient.
Company tax isn’t a double tax. If a company pays company tax before paying dividends then you get imputation credits to offset against your income tax. The end outcome is that you pay only the personal income tax.
TAXING LIBERTARIAN LOGIC
I agree with DavidL and others that inheritance taxes are probably the best taxes, although its hard to say exactly which is the best – so many of them generate large net benefits in particular applications. Pollution taxes can be useful for addressing environmental externalities, for example; and consumption taxes on items particularly amenable to positional externality games can bring society closer to optimal consumption patterns and rates of material progress.
Sin taxes, particularly on cigarettes and gambling, are probably the least good as they have little behavioural effect on the addicted – who, by definition, are relatively price insensitive – and are regressive. In such cases, direct regulation may be preferable.
That said, it should be noted that Jason Soon suggested in post 9 that equity considerations are irrelevant to considering the merits of taxes. Since Jason has previously claimed to have forgotten more economics than I know, I suppose he must be right – although that would then mean that John Humphreys (post 10), as well as most of the economics profession, is wrong.
While we’re correcting Libertarians, John’s claim (also in post 10) that the more behaviourial change a tax causes, the less efficient it is, also requires some qualification at least. While it is true in some cases, it is not in others – specifically where the tax is imposed to correct for an external cost and/or an improperly accounted for internal cost – as in the case of smoking and gambling.
Richard Smart.
Why are internal costs of smoking and gambling incorrectly accounted for? Enjoyment in a persons youth may well be far more preferable to an extended old age, if that is your thing. For how many people is their consumption of tobacco and losses on gambling significant enough to punish everybody for consumption of these things? NPV analysis say to me that if you regulate my enjoyment today, I am not going to get any future benefit out of somebodies elses longer life in the future. My discount rate on enjoyment is pretty severe when it somes to third party benefits.
I’m interested in the concept that progressive income tax is a bad thing because it ‘penalises’ those who earn more money, as if the money people earn is determined totally independently from the tax system. Don’t you think that when people are bargaining over their salary or, if self-employed, setting their prices that they take into account the amount of tax they would likely pay on their income? In the end, it is how much money you end up with in your pocket that matters (ie gross income minus tax), rather than the gross income per se. This would imply that whether or not income tax is progressive may not matter all that much. Just wondering
Backroom Girl – That was partially the point I was trying to make earlier with reference to a medical specialist. However I do think that a progressive wedge matters simply because any trade barrier that limits our access to specialist skills is a bad thing. All taxes act as a trade wedge but progressive income tax is particularily problematic.
The progressive income tax is still a disincentive to being more productive. I totally agree that people do the math before they take the job, and asssess wether it’s worth their while. I have a specialist skill to sell with regards to security software, but to sell it at a rate in line with my day job makes it pretty costly, primarily because I have trouble dodging the tax take with a second job. If it wasn’t for the tax I could/would sell this capability cheaper, and more business could use it to enhance their own productivity, thereby providing more services to the community at lower rates.
As it stands, primarily because of tax, I don’t bother unless a client is desperate and willing to pay good money. Even then, they generally can only afford to solve their problems rather than optimise their situation because they’ve got to pay both me and the government.
INTERNALITIES AND GAMBLING REGULATION
Brendan: As the Productivity Commission pointed out in its 1999 inquiry on gambling, “problem gamblers”, who constitute about 3 per cent of all gamblers, but account for as much as one third of gambling revenue, exhibit significant cognitive limitations, as reflected in DSM-IV psychiatric test results and other screening measures. Discounting future costs is not of itself a cognitive problem, but irrational discounting is. Problem gamblers exhibit other cognitive problems too that mean that they are unable to make decisions to satisfy their own preferences. The resultant internalities constitute a significant social cost.
Incidentally, you asked whether the fact that some gamblers have problems justifies punishing them all. The answer is probably not, but then, I advocated regulation to address such issues; not sin taxes. A regulation that requires gambling dens to close 1 hour in 24 affects very few normal gamblers, since most venues choose an hour like 4-5am when normal gamblers are at home in bed. However, a simple regulation like this stops problem gamblers from spending multiple days in a row on pokies – and some have been known the spend as many as 7 days in a row “in the zone”. So, no or at least low costs to normal gamblers; and big benefits for problem gamblers and their families.
Now, of course, one might argue that one can rationally choose to spend 7 days in a row losing all one’s earnings on the pokies, perhaps even citing Becker to strengthen the case (or, at least, to befuddle the opposition). But if you seriously attempted to maintain such a position, you would probably need your head read!
Richard.
Sin taxes in general are the most offensive, they are the most regressive of all taxes, and are mostly only in place because of irrational religious beliefs. But since this poll splits up sin taxes into the different products being taxed, I went for income tax. Although paroll tax is just as bad.
But lets be honest, Richard. 1 hour in 24 at 3-4am is not the sort of restrictions you support. You believe it would be better to have a lot more regulation than that.
However, a simple regulation like this stops problem gamblers from spending multiple days in a row on pokies – and some have been known the spend as many as 7 days in a row “in the zone”.
I call bullshit on this. Since you think a 1-hour break will solve the problem I assume you mean 7 days without sleep.
No gambling addiction is going to give you superhuman powers.
I’m a compulsive gamer and the most I can play world of warcraft or civilization for without completely crashing is 28-30 hours without sleeping. After that your body just completely shuts down.
Besides that, the problem with regulation is not with opening times, it is with the number of licenses.
Most states in Australia only have 1 licensed gaming venue, which means that 1 venue basically rapes the ass out of every person who walks in there. Burswood Casino offers returns of 30-35%, compared to casinos in Las Vegas (or similar zones where gambling is legal) who give back 48-49%.
Having more casinos isn’t going to make any difference to “problem gamblers” as long as there’s already 1 they can go to.
Yobbo – if your going to play for 30 hours straight beware of deep vein thrombosis. Gamers have died from it after long stretches of sitting still. Admitedly I don’t know how serious the risk is but if it was me I’d want to make sure you take a stretch every few hours.
SMART REGULATION
I do not have the information on the particular case, Yobbo, but as I recall it is a oft-noted one among gambling counsellors. Perhaps those 7 days included periods asleep on a lounge, and/or slumped over a machine – as I have witnessed some patrons in gaming venues. That said, I cannot rule out that the particular case is an urban myth, but certainly the evidence before the PC inquiry was that there are gamblers who effectively binge and gamble “around the clock”, although most problem gambling does not fit that pattern – rather, it is gamblings spending several blocks of time each week, and sometimes each day, in gaming venues.
However (and Michael also take note), the example of the regulation I gave was simply that – an example of a potentially welfare-enhancing gaming regulation. There are plenty of others I could have nominated, and I certainly would not resile from advocating many more regulations to address problem gambling – sacraligous though that might be to people whose outlook is restricted by Libertarian theology.
Regarding the number of licenses, contrary to the thrust of Yobbo’s argument, the evidence showed that proliferation of gaming venues was indeed correlated with the extent of problem gambling. While no doubt some problem gamblers will travel significant distances to get their fix, not all will. That said, that is not to say that the best response to the social costs of problem gambling is to restrict licenses. A consumer protection model, that allows normal (non-problem) gamblers to enjoy the past-time while attempting to minimise the risks of problem gambling, is in broad terms the regulatory model I favour.
Richard Smart
“Tariffs are just a selective sales tax. There is no reason to exclude them from a list of taxes and I doubt they are the least efficient.”
Crikey.
You getting your economics from the utterly useless Quiggin or something?
They are fine taxes when ….
1. You are getting both the goods and the taxes. Which is the case when you first apply them.
2. Not misallocating your ongoing investment. Which will be the case within a few months of you applying them.
3. Not getting a retaliation from your trade partners. Which will be the case when you’ve not left them time to retaliate.
4. Not missing out on international business opportunities that you’ll never know about. Which will be the case up front.
Of course these things all reverse. But if you are into computer models rather then reality like Quiggin and Gruen then this will all sale right over your head.
Humphrey.
You are rich enough.
Head off to Auburn and learn some economics for Christsakes.
This neo-classical Jive thats driving your act is just embarrassing.
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