Gift to econ textbook writers

If nothing else, the Henry Review, should it be implemented (and let’s face it, that isn’t looking promising) is a gift to economics textbook writers such as myself. Basically, what it does is ask the question “if we want a tax system we can explain, what would it look like?” And what it looks like is the typical textbook chapter on taxation. Taxation has four broad categories depending on the base being consumption, individual income, household income and rents. If you can’t group a tax into these compartments, it likely is a poor tax. And we are done. Easy to explain and so easy to educate about.

I would find that OK but not terribly exciting or bound to significantly change the direction of the Australian economy and peoples’ lives. The last time I thought about all this was two years ago where I identified the gaps that the Henry review ought to close.

  • 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.

Now I don’t know about the knowledge gap. That might have been closed but on a Sunday I wasn’t going to check (although I did fly past a recommendation on the better open provision of government taxation data). But the other three do not appear to have been touched. Individuals will still be the basis for income taxation, we are not leveraging off past innovative reforms and you will still have to fill out your tax return every year although you could opt out of keeping receipts. (By the way, I wonder if that last one will be a boon to tax accountants or their curse? Some theory-based policy would be useful there).

Of course, it is nice to see two new environmental taxes being floated including the congestion tax and the resources rent tax. Is there any political will left for the environment anymore?

Anyhow, one big thanks to Ken Henry for lowering the cost of future revisions to my favourite textbook.