Our member, Associate Professor María Racionero (ANU), participated in a Q&A event at ANU College of Business and Economics. In this event she answered to a wide variety of tax concerns, ranging from subsidies to childcare services and reintroducing carbon tax. ANU College of Business and Economics has published some excerpts in their website.
In the lead up to the Australian general elections, the average voter has been overloaded with facts and stats related to tax. In a Q&A with CBE students, Associate Professor Maria Racionero responds to a wide variety of tax concerns, ranging from subsidies to childcare services and reintroducing carbon tax. Following are the excerpts.
Q. How do you assess the Australian political attitudes towards a high tax welfare system like the Nordic countries?
(Sabbina Kang, Second Year, Economics)
Australia’s tax-to-GDP ratio, currently around 28%, is well below the average tax-to-GDP ratio in the Nordic countries, around 45%. Australia ranks, and has historically ranked, within the bottom third of Organisation for Economic Co-operation and Development (OECD) countries.
In this context the obsession of some Australian politicians with tax cuts seems unjustified. From an economics perspective, what really matters is how efficiently and fairly the tax revenue is raised and, also importantly, how that tax revenue is effectively used to finance crucial public expenditure programs. In both respects, the Nordic countries are recognised to be well ahead.
It would be arguably challenging for Australia to replicate the Nordic model. Yet the success of the Norwegian sovereign wealth fund is worth highlighting. This initiative represents an example of bipartisan long-term commitment that is hard to imagine in the current Australian context, where in stark contrast there seems to be a tendency to turn temporary gains into permanent erosions of the revenue base.
Q. How significant will tax cuts prove to be in the coming elections?
(Ruby Ground, Master of Economic Policy)
Tax cuts may prove less significant in the coming election than the Coalition may have wished. The Labor party supports the part of the tax cuts package that aims to provide tax relief to low and middle-income individuals while it opposes the most expensive part, namely the second and third stages of the Coalition $300 billion tax cuts aimed at higher income individuals.
The claim that lower tax rates on top incomes generates efficiency gains from reduced disincentive effects is largely unfounded since labour supply elasticities estimates tend to be relatively small. Modern research focuses instead on the elasticity of taxable income, which captures income shifting, tax avoidance and tax evasion alongside labour supply responses.
According to the taxable income elasticities estimates in the literature, a more efficient way to increase taxable income is to minimize tax avoidance strategies (e.g., to broaden the tax base with fewer deductions or exclusions). Labor plans to reduce the concessional treatment of negative gearing and capital gains, unused franking credits and family trusts.
Childcare costs are a concern for Australian families…addressing this problem should be a top priority for our politicians.
Q. Considering we already have a lack of childcare services and not enough workers in childcare, can politicians subsidise a service, which is already unable to meet the needs of Australians with children?
(Sasha Personeni, First Year, Politics, Philosophy and Economics)
Childcare availability and costs are effectively a concern for Australian families with children. But the real problem is that they exacerbate existing disincentives to work due to the interaction of the current Australian tax and transfer systems. The loss that results from the combination of income tax paid and benefits withdrawn for each additional dollar of income earned is typically measured by Effective Marginal Tax Rate (EMTR). EMTRs have been shown to be relatively large in Australia, particularly on partnered working mothers.
A recent KPMG report proposes an alternative Workforce Disincentive Rate (WDR) measure, which explicitly accounts for increased out-of-pocket childcare costs in addition to income tax paid and loss of family payments. The study finds that WDRs between 75% and 120% are common for mothers seeking to increase their days of work beyond three days per week.
Addressing this problem should be a top priority for our politicians. Excessive focus has been put on tax cuts for high-income earners, without compelling evidence, where the real, and amply documented, problem is the large disincentives to work that second earners face. The available empirical evidencesuggests that spending on childcare can have significant positive impacts on female labour participation.
Q. Why isn’t inheritance tax an issue?
(Geneviev Mukkati, Third Year, Politics, Philosophy and Economics)
Inheritance taxes are controversial, both in the public debate and among economists. The apparent lack of consensus, even in theory, stems from the fact that the optimal tax treatment of bequests depends crucially on the reasons why bequests exist in the first place. It has been argued that unintended bequests should be taxed heavily. In contrast, it may be desirable to subsidise intended bequests, especially among the poor.
Recent research suggests that the optimal inheritance tax rate should be positive and quantitatively large if the elasticity of bequests to the tax rate is low, bequest concentration is high, and society cares mostly about those receiving little inheritance. Using micro-data for France and the US, Piketty and Saez find that, for realistic parameters, the optimal inheritance tax rate might be as large as 50%–60%, or even higher for top bequests.
Q. Given how environmentally conscious most Australians are, how could politicians rebrand and reintroduce carbon tax?
(Rebecca Ryan, Final Year, International Relations and Economics)
The carbon tax has been unfortunately demonised in recent years. Most economists agree that, in order to achieve a given emissions reduction target, market-based mechanisms, such as emissions fees or emissions trading mechanisms, are markedly superior to alternative policies. Inefficient policies, such as subsidies to polluters, are however often put in place, instead of the more efficient ones, because those who stand to benefit from the inefficient policies are in a better position to lobby for them.
The polluters are few and each has a relatively large stake, when compared with the large number of taxpayers who are made worse off. I do not personally know how the carbon tax could be rebranded and reintroduced, but I believe that an education campaign, based on solid evidence, would need to be part of the package to cut across the great deal of negative spin that has been put around the carbon tax.