To save money Labor’s killing a money saver

Hidden among the Labor Party’s election promises was a plan to scrap the office of the Inspector-General of Taxation (IGT) for a saving of $6 million. Government spending certainly needs to fall substantially from its current high level, but axing the IGT could prove to be a false economy.

The Howard government established the office in 2003, fulfilling a 2001 election promise. The Inspector-General of Taxation has the brief to review, and make recommendations to improve, tax administration. Rather than abolishing it, the Rudd government ought to be strengthening the position and expanding its powers.

The new federal government has promised greater transparency in tax matters and the budget process—a welcome development. Yet without strong and independent mechanisms to maintain that transparency, this government will quickly develop the bad habits of all its predecessors where tax is concerned.

Louis XIV’s finance minister, Jean-Baptiste Colbert, famously said that ‘The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the least possible amount of hissing.’ That cynical observation—that taxation aims to strip people of as much money as possible with the least possible resistance—is as true today as it was then. The Inspector-General of Taxation was introduced specifically in response to criticisms of tax administration, because the ‘hissing’ had begun to threaten the longevity of the government.

The art of successful goose-plucking is known as ‘fiscal illusion.’ This is where government creates the impression that taxes are not as onerous as they appear. By making high taxation appear low, big government can convince voters to accept more taxation, and can raise more revenue than it otherwise could.

The most obvious way to confuse taxpayers about how much tax is costing them is to make the tax system complex. The complexity of the Australian system is such that, while the top 25% of income earners pay 64.3% of net personal income tax, and 0.38% of firms pay 72.59% of net corporate income tax, only 43% percent of Australians understand that our graduated progressive tax system makes high earners pay the greatest proportion of their income in tax.

Opportunistic taxes, which are introduced to take advantage of community attitudes to current events, are another form of fiscal illusion, increasing the tax burden but seeming like good value. The Howard government levied a range of such taxes: the Ansett levy, the sugar levy, the milk levy, the super surcharge levy, and the gun buy-back levy. The Timor levy was quickly abandoned when it turned out that community attitudes did not support it. Such levies are often introduced very quickly, on a narrow base and with a specific objective. Yet, they can remain in place for long periods of time, and after their purpose has been served.

The Howard government also acted to dampen expectations of serious tax reform. Former Treasurer Peter Costello often argued that tax reform could only occur after services had been funded, debts paid off, investment undertaken, and budgets balanced. Yet Treasury has consistently underestimated revenue, leading to larger surpluses than have been budgeted. From 1996 to 2005 the cumulative underestimate was over $75 billion. This cannot be a simple mistake: it is dishonesty.

The Charter of Budget Honesty requires the Treasurer to produce an economic and fiscal outlook report at each budget. But startlingly, there is no requirement that the information contained within those reports be honest. It is quite clear that Australians have been unfairly denied the possibility of $75 billon of tax cuts in the past eleven years because Treasury has misled us about the revenue it expects. The Treasury revenue forecasting process needs to be audited.

At present, there is no mechanism for anyone to undertake such an audit, and there is no mechanism to reduce the level of fiscal illusion in the economy. An expanded and empowered Inspector-General of Taxation would have been the perfect office to take on these roles, but the Rudd government is going to abolish it. We can look forward to Australians being as confused about the tax they pay under this government as they were under the last.

Professor Sinclair Davidson is a professor at RMIT University. This article is based a paper released by the Centre for Independent Studies ‘Fiscal Illusion: How Big Government Makes Tax Look Small’.