TABOR for Australia

Taxpayers need more rights codified in law to prevent arbitrary taxation increases by the federal government, writes Terje Petersen.

Every year the cost of government goes up. To demonstrate this fact one need only examine the federal budget over a string of years to see that federal government tax revenues march onward and upward. To be fair on the public sector we might note that population growth and inflation play their part. To calculate an accurate cost of government (the cost we pay to the government for the privilege of being governed) we should divide government revenue by population. And for comparisons between years we should adjust for inflation. However even making these adjustments the trend is still clearly towards an ever more expensive public sector.

Using this real tax revenue per capita as a measure of the cost of government we can see that even under the supposedly small government mantra of successive John Howard governments the price of being told what to do increased by roughly 34% (assuming we allow a favourable case for the government and exclude GST revenue). Some will contest this by claiming tax revenues merely rose in line with GDP growth. But my response would be why should it? This in fact cuts to the heart of the matter. The cost of government does not rise primarily due to politicians campaigning for higher levels of tax and winning the argument, but due to tax laws that guarantee government an automatic share of the economy. If the private sector grows then given our tax code the public sector grows also. And the governed are not consulted before the price rise occurs.

Once again taking the Howard years as an example it is worth pondering what might have been if the cost of government had been kept constant in real per capita terms over that period. For instance even ignoring the dynamic economic benefits we could have come close to entirely eliminating personal income tax. This is without any new taxes and without cutting government spending. Those that claim the tax take had to increase to pay down Keating’s debt conveniently forget that the sale of Telstra paid for most of this debt repayment.  The reality is that the cost of government increased because the government chose to spend increased revenues rather than return it to the people.

A taxpayers bill of rights, or TABOR as it is known, was pioneered in Colorado to overcome this automatic government growth bias. It has over more than a decade delivered reduced tax rates and constrained the growth of government in Colorado.  A form of TABOR has also been proposed in New Zealand by the ACT party. And whilst we may not call it TABOR we have a domestic form of tax capping in the way of state laws in NSW that restrict the level at which local governments can grow their tax revenue. TABOR has precedent and a track record. It is not a theoretical abstraction.  

TABOR delivers small government by relying on a couple of practical realities. Firstly voters are by nature conservative. Nobody wants to pay more for the same set of services, even government services, without a good justification. Secondly courts tend to favour legal rights over political concerns. Thirdly an economy such as Australia’s can be expected to typically grow by a couple of percent per annum such that compounded over a decade or more such growth can deliver sizable reductions in tax rates without reductions in per capita revenue.

Having outlined this background what follows is my attempt at codifying a constitutional TABOR reform for Australia’s federal government. The intent of the reform is to put the power of taxation much more into the hands of the people. As such it is a democratic reform. It does not attempt to take away from government the power to formulate the nature or structure of the tax system. It merely seeks to constrain the overall ability of the government to raise its price without the direct consent of the people.

In drafting this reform there is a tension between finding a form of wording that is specific enough to prevent a later creative legal misinterpretation, simple enough to be communicated during the reform process and generous enough to negate most serious arguments against it.

There are terms and concepts within my codification that could theoretically be fleshed out in more detail but having reflected on this over a long period I think that it is better to keep the terminology as simple as possible and to leave the interpretation to the courts. Some may see risks in this given the history of courts to discover unexpected interpretations, however I don’t think additional detail would guarantee against this risk and I have been careful in crafting the wording to avoid any ambiguity. Furthermore I think additional detail would make communicating and selling such a constitutional reform much more difficult.

I have avoided any reference to inflation to avoid any subsequent legal redefinitions of how inflation is measured or how high inflation is. Instead I have opted for a fixed figure that corresponds to the current upper limit of inflation targeted by the reserve bank.

My codification leaves open the opportunity for taxation to be increased at the state or local level and leaves jurisdictional competition to deal with such eventualities.

Here is my wording as I would seek to have installed in the Australian constitution:-

The total taxation revenue appropriated by the commonwealth government in any given tax year, must be less than the national population multiplied by $20,000. However whilst retaining this formulation an alternate to the $20,000 figure may be substituted through legislation so long as the alternate figure effective in any given tax year meets one of the following two criteria:-

     i) the alternate figure is approved by a majority of the citizens in a plebiscite.

- or –   

     ii) the alternate figure is no more than 3% higher than the figure effective in the preceding tax year

In the event that the otherwise lawful total taxation revenue collected in relation to a given tax year should breach the proscribed limit then each tax payer shall, in proportion to that excess, be entitled to a reduction in their tax liability for that year.

This is an expanded version of an article first published on Thoughts on Freedom, the blog of the Australian Libertarian Society. Terje Petersen is a libertarian blogger and stood as a political candidate for the Liberal Democratic Party in the last two federal elections.

 

Comments

[Davidmrussell]

1.

So, that's what you look like! I've often what 'who you were', so to speak. G'day!

[Angry Conservative]

2.

The byline of this article states the following:

"Taxpayers need more rights codified in law to prevent arbitrary taxation increases by governments, writes Terje Petersen."

then we read the actual article and come across this statement:

"My codification leaves open the opportunity for taxation to be increased at the state or local level"

So the byline was actually wrong according to the article because Terje only wants limits placed on federal government taxation increases. States and local governments can apparently continue to spend recklessly.

Why do you want one tax rule for the Commonwealth government and another for state governments?
This is particularly important given that the states have also been a problem child when it comes to increasing public expenditure:
http://www.theaustralian.com.au/national-affairs/states-debt-binge-to-top-240-billion-as-private-sector-faces-squeeze/story-fn59niix-1225925075615

I also think there would be issues with the second caveat of your criteria. In relation to your alternate figure, if the government can increase it by 3%, what would stop them from simply increasing it by 3% per annum?

[Tim Andrews]

3.

To clarify, the byline was an editorial oversight. Thanks AC - will fix accordingly.

[Billy the Kidder]

4.

I think more importantly, rather than a dollar figure that results from an arbitrary equation, we should look at what services are duplicated, what services are actually required (for instance we do not need the office for the status of women) and which services are run inefficiently and fix it. This gives us a "base load" with respect to the cost of government.

Next we look at capital works and prioritise (and de-pork) what needs to be done. Then we can decide on taxation policy.

What I am saying is that we need minimalist government with less bureaucratic rules and intervention. People talk about the censorship of the 50's-60's (eg Lady Chatterly's Lover) but we had a freer lifestyle with less intrusive jobsworths fouling up our existance.

If taxation were simplified and compliance easier, the ATO could reduce in size and the cost to business and individuals reduced. What's not to like??

[.]

5.

Billy,

Your approach is economically sound and should beapplied to regulation as well. However a TABOR makes that process occur sometime into the future, whilst appealing to democratic principles.

[TerjeP (say taya)]

6.

Angry - I did not write the byline. Also I'm not against amending state constitutions to include TABOR type restrictions, it just isn't the focus of my article. In any case if you restrict federal spending through TABOR the statists will decentralise things for us and jurisdictional competition will be of more significance than at present in our highly centralised funding model.

Billy - TABOR sets the environment in which the government, of either stripe, is compelled to do the things you suggest.

[TerjeP (say taya)]

7.

p.s. To understand TABOR it pays to think like a chess player. Once in place the question is what incentives does this create for voters and for governments. Experience elsewhere suggest that the ability of TABOR to limit government is substantial.

Under my version of TABOR the government could still borrow too much. However those that lend to the government would need to deal with a potential repayment freeze if no tax increase, or spending cut occurs down the track. Lenders will also have different incentives.

[Andy's RANT!]

8.

Two points
That as government expands, liberty contracts &
That centralised funding centralises power.

And that by constitutional amendment, Australians can and should impose permanent controls requiring that only certain appropriate, lawful expenditures may ever be funded by traditional, compulsory taxation.

[TimP]

9.

"I also think there would be issues with the second caveat of your criteria. In relation to your alternate figure, if the government can increase it by 3%, what would stop them from simply increasing it by 3% per annum?"

That's seen as acceptable by this plan I suspect. For instance taking into account a 2.1% per year population increase the difference between 04-05 and 05-06 was about 5.5% and 05-06 and 06-07 was about 4%, so it would have forced the government to take $5.7b and $2.2b less in those two years. The purpose of this clause is to allow the revenue to keep up with inflation, but prevent it from getting out of hand. It could perhaps be changed to "the inflation rate, or 3% whichever is higher".

[TerjeP]

10.

TimP - the 3% is to allow for inflation but I would not put the word inflation in our constitution because it is too easy to manipulate. In practice I suspect that inflation would generally be below 3% and this clause would allow revenue growth slightly above inflation. However in practice this still means that the government will shrink as a proportion of the economy unless the people decide otherwise.

This clause will somewhat ironically give those who favour a bigger state an infective to keep inflation low, and those who favour a smaller state an incentive to keep inflation high.

[ZEG]

11.

GREAT POST TERJE. I JUST READ IT AGAIN AND CAN NOT FAULT THE LOGIC OR YOUR CONVICTION ON THIS MATTER. GLAD YOU ARE A TEA PARTIER MATE.

[TerjeP]

12.

Just saw your comment Zeg. Thanks.

[Duncan Spender]

13.

Hi Terje,
Nice work, but I'm not a fan!

I'd categorise your approach as a macro attempt to restrict the size of government, vis-a-vis the micro approach of arguing against government intervention on a program by program basis.

I feel that the micro approach (which I see you apply insightfully throughout the blogosphere) comes across as principled, responsible, prudent, compassionate etc.

To me, the macro approach could come across as argument-weary/argument-shy, tricky, and/or frustrated table-thumping. It also might have an air of 'damn the consequences'.

An audience hearing this macro proposal could rightly ask 'why not (also) set a floor on the size of government?' The proponent would presumably reply with a micro argument, but would be doing so from a defensive position and would be facing an audience whose sceptical walls would have already be raised. This round-about path to the micro approach is also a waste of scare media time/parliamentary debating time/etc.

Relatedly, and to avoid arguments about irresponsible borrowing, I'd imagine that the proposal should at least be coupled with an expenditure cap. Such a cap seems just as easy to define using constitutional terms (ie 'appropriations')(by the way, I don't think your use of the term 'appropriated' as a revenue concept fits with the constitution). I acknowledge that provisions for a breach of an expenditure cap are messy (ie after-the-fact spending cuts, which I think were stipulated for breaches of the US Budget Enforcement Act 1990).

The proposal gives the appearance of an acceptance of the status quo. As such, it could unnecessarily split small government proponents into optimistic and pessimistic camps, and could lead to inadvertent defence of the status quo.

To me, dealing with the technical and often arbitrary drafting issues would take up a lot of resources for little gain. Some finicky issues include:

1. the distinction between population (which generally includes permanent residents) and the citizenry;

2. the at-times blurry distinction between tax and non-tax revenue ( presumably you're not a great fan of governments generating non-tax revenue either?);

3. the treatment of taxpayers with a negative tax liability in a year when too much tax was collected;

4. the ambiguity as to whether your reference to taxpayers refers to personal income tax payers (in which case, I'm assuming you'd like to include the medicare levy and to attribute FBT to individuals, but not super tax, company tax or resource rent taxes?) or to any payer of federal tax (including sales taxes, excises, customs, agricultural levies etc.);

5. your reference to plebiscites (procedures for which would need to be defined) as opposed to referenda;

6. the treatment of taxpayers using different tax-year periods, and of provisions for averaging income over a number of years (ok, now I'm probably getting way too finicky!).

Cheers.