Fiscal Illusion: How Big Government Makes Tax Look Small

Fiscal Illusion: How Big Government Makes Tax Look Small

Fiscal illusion is the political art of crafting tax and expenditure policies to make taxpayers think that taxes are not as onerous as they appear.

In a paper being released by the Centre for Independent Studies on Wednesday, Fiscal Illusion: How Big Government Makes Tax Look Small, Professor Sinclair Davidson argues that Big Government distorts its citizens’ fiscal consciousness to allow it to raise more tax revenue and spend more than it otherwise could.

In Australia, forms of fiscal illusion include:
* Complexity in the tax system.  The Australian tax code has more than doubled in size since 1996, totalling an estimated 8,800 pages by 2005
* Taxing winners on inheritances, transfers, and gifts
* Fees and charges on pleasant events and activities such as wedding, pet and fishing licences
* Opportunistic taxation, which can be imposed to take advantage of a specific attitude in the community such as the Ansett levy or gun buy-back levy
* ‘Dread consequence’ taxes such as the Medicare levy, without which the consequences for social life would seem to be disastrous
* Underestimation of government revenue

‘A strong example of fiscal illusion during the Howard years was the persistent underestimation of government revenue by Treasury, leading to larger surpluses than had been budgeted for. Instead of reducing taxes as much as it could have, the Howard Government “parked” surpluses in the Future Fund and the Higher Education Endowment Fund to subsidise future government spending.’

Davidson calls for more transparency and honesty in the tax system, budget forecasting and government spending.  ‘We should all be aware of how much tax we pay and how much tax others pay’ and yet ‘the majority of Australians do not understand how the graduated progressive income tax works.’ 
Davidson’s paper is the fifteenth Policy Monograph in the CIS series Perspectives on Tax Reform.
Sinclair Davidson is a Professor of institutional economics at RMIT University in Melbourne.

Embargoed copies of the report are available online at https://www.cis.org.au/policy_monographs/pm81.pdf media enquiries:
Leonie Phillips
Ph: 02 9438 4377
Mob: 0403 063 852
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