Generating a social surplus

Over the fold, a piece that appeared in The Drum (ABC) on one part of the Budget.

Generating a Social Surplus

Too often when evaluating the budget, we tend to focus on the accounts. To be sure, making sure the government has enough revenue to pay the bills is central to the process. But at its core, it is about economic policy-making. So on that level, we need to think broadly about economic benefits and costs.

This Budget includes a measure that is long over-due: taxpayers will no longer have to file tax returns. New Zealand has had this system since 1999. As a result, only about a third of New Zealanders file tax returns.

A 2000 estimate by researchers at the University of NSW put the time cost of tax filing at any average of $346 per person (roughly 8.5 hours times the average hourly pay; adjusted to closer to the present day). That comes to a total cost of $3.7 billion per annum to the economy according to Andrew Leigh (click here for the paper).

Of course, there is a catch – if you choose this option you will have to accept a standardised deduction ($500 rising to $1000 in a few years). So this is likely to attract lower income households; so the pure financial saving will be less. Then again that is 8 more hours to spend with your family. So it is reasonable to suppose that eliminating this mandatory bureaucratic requirement will generate a large social surplus into the future well above any cost of implementing the system.

Already, there are claims that this will harm smaller tax agents. If they were existing because of an inefficient government regulation, they are part of the problem. However, it is not obvious that smaller agents will lose out. They were not competing hard for the trivial form requirements that the larger companies were.

Finally, it is worth noting that this move is a big shout-out to “evidence-based” policy making. Andrew Leigh, now a Labor candidate for the seat of Fraser, gathered the evidence a few years ago and I was surprised that it was not an explicit Henry Review recommendation. It is good news for the future of policy-making in Australia that the Government has chosen to pay attention to the fine academic studies that laid a path to this day. That there is likely to be an insider to translate and feed them such evidence improves our social surplus prospects markedly.

Joshua Gans is an economics professor at Melbourne Business School.