THE CASE FOR KEEPING TAX MORALE HIGH
Stone the crows! Convincing not convictions gets people to pay tax.
Back in the early 1980s Australia was headed down the Athenian road, with tax evasion rife and avoidance endemic. The obvious cause was because a less than efficient tax system made it possible but the underlying reason was people believed they were being unfairly taxed. Between 1955 and 1971 prices rose 56 per cent, wages increased by 116 per cent and income tax collections rocked up by 332 per cent.[i]
We were heading down the Athenian road, which directed Greece to its present crisis. Greeks have so little respect for the state that tax is considered an intrusion to be avoided, or just ignored. The Greek government estimates Greeks have ducked E76bn in tax (last week’s Eurozone bailout was E240bn), and does not expect to recover much of it.[ii]
There are all sorts of reasons why Greeks see tax as an unjust imposition, not least the historic sense born of the long Turkish occupation that it is tribute extracted by oppressors. [iii] But cronyism in politics has also long made it easy for the politically well-connected who can to avoid tax on income, which encourages the PAYE earner who can’t to operate as much as they can in the cash economy. [iv]
This has less to do with greed than Greece never being a strong state, where citizens respect the institutions of government. And people do not willingly pay tax to regimes they do not believe serve all the people.
Even in the 1980s we were nowhere near where Greece is now, in fact the Australian Tax Office lifted its game to such an extent that crackdowns on evasion led to trust in the tax system increasing by the middle 1990s. [v]
But to keep things that way we must keep high tax morale, “the intrinsic motivation to pay tax.” [vi] This, according to an OECD study, is “at the core of every society’s social contract. Citizens pay their taxes in exchange for public services and goods. At the same time, this exchange legitimates the political equilibrium and the state itself.” [vii]
There are three core ways of maintaining tax morale, the first and most common is as ineffective as it is oxymoronic – coercion. The other two are self-fulfilling; a tax system which citizens see is fair and which provides a level of services they could not buy themselves. Conversely, the absence of these two drives evasion, as Molerol and Pujol puts it:
The justification of tax evasion is statistically related with: the presence of grievance in absolute terms, those who feel that taxes are too high; waste of public funds and grievances in relative terms, the suspected level of tax evasion by others, those accepting black economy labour.[viii]
Of the three justifications for ducking tax it seems Australians worry least about the black economy. The welfare lobby always assumes that everybody in the private sector is not paying as much as they should. But overall we worry more about inefficient taxes that allow the Apples and Googles to legally pay not much, rather than outright thievery.[ix] And while no sane citizen ever wants to get into a blue with the Australian Tax Office, at least the agency is independently regulated, demonstrated by calls from the ATO oversight agency last week for a better review process.[x]
Instead, the threats to morale we face is pretty much all on the efficiency side. It is not caused by people wanting to pay less tax while still collecting services but by the majority of taxpayers wanting somebody else to pay more in tax to find benefits for them.
We face a perennial proposal to soak the rich – as if they are not soaked already. The top 10 per cent of icome earners pay close to 50 per cent of income tax, the bottom third 5 per cent. [xi] As for the argument that the Commonwealth gives away money to the rich, notably through superannuation concessions, while there is a case for ending the preferential treatment of this savings stream all Canberra is doing is taking a smaller share of money people earned.
As Judith Sloan puts it, “It is easy to get the impression that the underlying view of Treasury is that 100 per cent of all income should belong to the government and any residual that taxpayers are allowed to keep should be regarded as a concession.” [xii]
In fact, the only major sources of new tax revenue which will not slow economic growth are death duties, especially on family homes, more rigorous assets and means testing for access to the aged pension and related healthcare benefits. As John Daly warns: “Government transfers from younger to older cohorts are now so large that future budgets may not be able to afford them as the population ages.” [xiii]
And cutting negative gearing on investment properties would benefit 85 per cent of taxpayers who do not invest in loss-making rental properties, waiting to make their money on capital gains.[xiv] Good luck. The Crows can’t hear themselves caw for the complaining whenever anybody suggests any of these.
Which leads to the second and most morale sapping argument that undermines the state’s revenue base – the “I paid my taxes argument”. The underlying assumption of such statements is that tax is not a moral obligation we all owe to society, to assist those in need, to keep services functioning. Rather, it is an investment that should pay us a return.
Social services minister Scott Morrison, no less, spelt it out when he said, “The system should be there for people who need it, particularly for the age pension; where people have paid taxes their whole lives, they have earned their retirement.”[xv]
And then there is the third argument – the “magic pudding on the menu” idea that services appear from nowhere. University union chief Jeannie Rea put it well last month when she explained what Christopher Pyne’s plan to allow universities to increase student fees is about. As she put it, “As part of its budget repair agenda the government wants to shift the burden of who pays for higher education away from the government and on to the shoulders of students and their families.” [xvi]
And from where, I wonder does “the government” get its revenue?
The best way to keep tax morale high is to demonstrate to the community the point that Ms Rea misses – we all must pay tax but have a right not to see our morale abused.
For speeches, opeds, policy briefs writing and editing call me 0417469093
[ii] Liz Alderman, “In Greece, bailout may hinge on pursuing tycoons,” New York Times, February 26
[iii] Matthew Karnitschnig and Nektaria Stamouli, “Greece struggles to get citizens to pay their taxes,” Wall Street Journal February 25
[iv] AP “In flagrante: tax evasion in Greece,” The Economist, September 4 2012
[v] Benno Torgler and Kristina Murphy, “Tax morale in Australia: what shapes it and has it changed over time,” Journal of Australian Taxation 7 (2) 2004 298-335
[vi] James Alm and Benno Torgler, “Culture differences and tax morale in the United States and Europe,” Journal of Economic Psychology 27 (2006) 224-246
[ix] Matt Wade, “Cash-in-hand economy is costing public billions,” Sydney Morning Herald, October 21 2012, Antony Ting, “Australia eyes missing billions with very own ‘Google tax,’ “ The Conversation, December 9 2014 @ http://goo.gl/B7Lkso recovered on March 1
[xi] Adam Creighton, “No, the rich don’t pay a ‘fair share’ of tax. They pay all of it,” The Australian, March 1 2014
[xii] Judith Sloan, “Tax breaks a matter of opinion, The Australian, February 12 2013
[xiv] Karen Maley, “ ‘Compelling case’ to end negative gearing, says Saul Eslake, Australian Financial Review, September 30 2014
[xv] Denis Shanahan, “Blitz on welfare,” The Australian, December 24 2014