Gaps in Tax Reform

As I couldn’t deliver my talk at the CEDA tax reform lunch I thought I’d write about what I was going to say here. You can also download my slides. Almost all of this is ripped off things Andrew Leigh has said in the past. In any case, I argue that there are four gaps to be addressed in tax reform.

  • The knowledge gap: pretty much everything an economist would want to know about our tax system and whether it is efficient we don’t know. We don’t know about the magnitude of deadweigh losses (could be anything from 20 to 60 cents in the dollar), the elasticity of tax revenue with respect to tax income (we need a policy experiment to work that one out) and how much income is unreported (where the only data we have is from a randomised tax audit in the US that showed that the low rather than high income households were more likely to not tell the government about income earned). From this I wanted to talk about our failure to learn even when we have information (such as the continual flawed implementation of the baby bonus) and that we need procedures to address all of this and institutionalise learning into tax policy. Surely, this is job number 1 for Ken Henry and his team.
  • The society gap: we means test benefits based on household income and means test taxes on the basis of individual income. This just doesn’t reflect today’s society and it may be better to let households incorporate for tax purposes and run more like a business with income and deductions for things like child-care.
  • The innovation gap: we are not innovative in using new instruments to make taxes and subsidies more efficient. The most glaring example of our lack of will to innovate is the failure to deploy income-contingent loans beyond education funding.
  • The convenience gap: as Andrew Leigh has suggested, filing an income tax return should be optional whereby by opting not to do so, you can’t claim deductions. This will likely save billions per year in unnecessary tax preparation time and costs.

I guess that last one which pretty much says, fire the accountants, would have gone over interestingly at the lunch that was mostly attended by, you guessed it, accountants.

5 thoughts on “Gaps in Tax Reform”

  1. Sorry to read that you’re unwell.

    I really like the society gap idea and hope you write more about that in future. The interaction of the tax and welfare system is a huge problem and that is a solution well worth exploring.

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  2. “how much income is unreported (where the only data we have is from a randomised tax audit in the US that showed that the low rather than high income households were more likely to not tell the government about income earned)”

    This is most likely a result of public assistance programs building in large benefit reductions as reported income of recipients rises. In fact, the highest effective “marginal tax rates” in the US are paid by lower income folks.

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