How to tax should be a matter for citizens but not politicians to decide

Comments on Janet Albrechtsen “A nation of paupers”, 10/06/2009, http://blogs.theaustralian.news.com.au/janetalbrechtsen/index.php/theaustralian/comments/a_nation_of_paupers/

As long as taxes and redistribution of income as concerned, it is inevitable that there will be some value judgement involved, the so called normative as opposed to positive issues in economics. Implicitly, people have the concept of fairness, although that concept varies from country to country and from people to people, and even from person to person, and of course from time to time. In that sense, the moral issue of taxation can’t be completely ruled out from consideration, although most people may not talk in that term.

There are a number of main issues here. The first one is the fairness of taxation at the time of consideration. This is the collective standard of the whole nation as a whole. It should not be left to just politicians or parties to decide. It should be dealt with by the nation and by voters. So any significant changes to the taxation system should be put to the voters before an election as a referendum item and let the voter to decide.

The second point is that there is always the issue of the inevitable trade-off between equality in distribution and efficiency / incentives. So the nation and voters should be made clear about that point. If you choose to tax the higher income earners more heavily, it is likely to reduce the total output of the nation for given resources, especially human resources (even these can be variable due to people’s migration from one place to another and from one country to another) . As a result, the total value available for distribution among the nation is smaller.

Thirdly, there is the issue of potential tax evasion or minimisation issue involved. Human beings are intelligent and will react to the environment and the changed environment. If the tax is too heavy for higher income earners, they can employ resources to minimise their tax liabilities, legally and / or possibly illegally. They would lose that income any way due to higher tax, why don’t they spend some of that to attempt to reduce the total tax bill? They have the resources / income to do it.

Fourthly, there is both short term and long term government tax maximisation issues. The government might be able in theory to design the taxes in such a way to maximise its income and redistribute it to the low income people or provide services to benefit the poor more. The shorter run has some implications for the longer run.

Fifthly, there is also a higher order issue of welfare maximisation issue, that is more important to at least some people than the government tax maximisation. Of course, welfare maximisation will be heavily influenced by the society’s norm or standard for fairness. Bear in mind that even the society’s norm and standard will change over time and across countries.

So taxation is both a simple and complex issue. It is important to make this point clear and to leave the power of deciding on which tax to adopt in a nation to the citizens of that nation and not in the hands of a few politicians.