John Humphreys, a Queensland based economist whose home was destroyed in the flooding, responds to those who say the levy is too small to make a difference, and demonstrations the negative impact it will have:
The primary way that taxes hurt the economy is by changing people's incentives at the margin. Each small change in taxes may not seem like a big deal to any one person, and for many people it won't change their behaviour, but it is possible to measure the change in behaviour and assess the economic consequences through statistical analysis. The economic cost caused by changed behaviour from taxes is called the "deadweight loss" and has been estimated at anywhere between 20% and 40% (depending on the study and depending on the tax). That means that for every $100 in tax raised, the economy shrinks by $20 to $40. So for a levy of $1.8 billion the deadweight loss costs are likely to be in the order of $0.4 to $0.8 billion.
In addition to this, there are the administrative and compliance costs, but these are likely to only be in the millions and so are less costly that the deadweight loss described above. A third way that tax can negatively impact the economy is if the government is more wasteful in their spending. Generally, people spend their own money more carefully, and there are good reasons from public choice theory (and plenty of evidence) to suggest that the government can be wasteful in their spending of taxpayer money.
These are the broad economic costs. Of course, there will also be some pain to families who will pay an extra few hundred dollars a year. For many, that extra impost will be easy to pay. For some, it will be more difficult as they juggle their household budget. You need to remember that while each tax increase may seem small, the sum of many small increases eventually creates a substantial cost. Seventy years ago there was no federal income tax, and next financial year it is expected to raise $156,050,000,000.
But for me, one of the biggest reasons to be opposed to this tax is that it is another small knife in the back of voluntary community and a vibrant civil society. Humans are social animals, and we get a lot of value out of the social interactions we have through social and community groups. These are the places where we learn how to be decent people, and were we learn the value of tolerance, compassion, love, belonging, self-esteem, and forgiveness. Civil society groups promote independence, strength of character, consideration for others and a sense of moral responsibility to get active and make the world a better place.
There is clear evidence that big government crowds out civil society, and I think we have seen some of the consequences of that in long-term dependence, sometimes leading to low self-esteem, xenophobia, and anti-social behaviour. Children in dependent households have worse health, worse educational outcomes, lower life expectancy, and are more likely to end up in jail. These are innocent victims of a system that has prized the bureaucrat over real community.
It may not be easy to fix this, and I don't pretend to have all the answers. But the first thing to do is to stop going in the wrong direction. Stop increasing taxes and stop increasing the size of government.
John Humphreys is an editor of Menzies House and the President of the Human Capital Project (a non-profit operating in Cambodia). His personal blog can be found at http://johnhumphreys.com.au/. This was initially posted in the comments section of a facebook hate page dedicated to attacking Stop The Levy. Menzies House, and our administrators.
Another day, another whinge on Menzies House about the flood levy - this from a side of politics who brought in the biggest tax ever realised on the Australian population - The GST.
Pot. Kettle. Black, kids, Pot. Kettle. Black.
Posted by: PK | February 4, 2011 at 12:55 PM
This site would probably argue against the GST but there you go
Posted by: Dan Nolan | February 4, 2011 at 01:09 PM
No it wouldnt.
Infact, the site would probably advocate the removal of personal income tax and just have a national sales tax.
Posted by: Vikas Nayak | February 4, 2011 at 01:14 PM
The income tax is bigger than the GST. And while I'm not defender of the GST, it is worth noting that the GST reforms were revenue neutral (in that there were offsetting tax cuts elsewhere).
Posted by: John Humphreys | February 4, 2011 at 01:15 PM
John: Not knowing the full details, but I would suggest that the GST was not revenue neutral in the sense that it increased the vertical fiscal imbalance between the commonwealth government and the states.
Posted by: Clinton Mead | February 4, 2011 at 02:25 PM
Vikas: I'm not sure about that.
The GST is still an income tax effectively. Its a tax on sales, and since the wages of workers generally come from them producing goods or services which are sold, they effectively bare this 10% tax.
There's no free lunch.
I would imagine people at this site would advocate the abolition of both the national personal income tax and national sales taxes and prefer these to be collected at the state and local levels (in a competitive environment so they stay low).
The Commonwealth government could rely on revenues from offshore drilling to fund defense.
Posted by: Clinton Mead | February 4, 2011 at 02:35 PM
Problem with that clinton, is that offshore drilling taxes would have to be low to compete with countries that dont tax it. Also such taxes on specific behavior goes against the broadbase tax stabilisation mechanism. What you're proposing would destabilise the federal government completely, and leave it vulnerable to oil interests.
A national sales tax (which is what the US fair tax system is) provides a stable broadbase level of income that is kept in check by the population.
Posted by: Vikas Nayak | February 4, 2011 at 02:42 PM
Clinton -- by revenue neutral I was referring to the amount of revenue that was raised, not who raised it.
Posted by: John Humphreys | February 4, 2011 at 02:56 PM
Good point John. Economic decisions are made at the margin.
Numerous left wing commentators think that this is irrelevant, and an endless stream of revenue can be harvested if we simply farm output with an increasing number of new and small, inefficient taxes.
Not only is this nonsense, it shows a dire ignorance of the tax system in Australia. New home construction has a 26-31% tax on it, paid out of after tax income - which has income tax levied against it. Out of that, we must buy essentials - fuel has an excise on it which to also the GST applies. Even if basic foods are exempt, they are subject to tariffs and their distribution is subject to payroll and fringe benefits taxes.
The idea that we don't pay enough tax or can pay more without significant losses in output, income and employment and increases in prices is simply foolish nonsense. Decisions are made at the margin, and under our usurious, labyrinthine, compounding tax system, small increases can destroy a lot of output, jobs etc with ultimately higher prices.
Posted by: . | February 4, 2011 at 04:21 PM
Vikas: As far as I'm concerned, mining/drilling companies should not be specially charged, as long as they put back in the ground whatever they take out.
However, unless you're a communist, you'd have to agree if you take someones property, even from a state, and don't return it, you should have to pay for it.
And unless you believe in socialism, governments should get the best price they can for the minerals they own, instead of artificially subsidising mining companies.
Posted by: Clinton Mead | February 4, 2011 at 05:52 PM
Thats all well and good, but thats a different point than replacing a broadbase tax like a National Sales Tax and replace it with a off shore trilling tax only.
This is the same problem with progressive taxation, as soon as you narrow the tax base, it becomes easy for government to legitimise tax increases in the name of "democracy" and that works to the detriment of creating growth. I agree with the principle of mining/drilling companies paying a levy or royalty on the minerals they are taking out, but such a tax ought to not replace a broadbased tax scheme.
Posted by: Vikas Nayak | February 4, 2011 at 05:59 PM
The problem isn't just the levy. It's the whole concept of governments borrowing to live beyond its means.
If you want to see where all this ends, may I recommend the following video:
http://www.stansberryresearch.com/pro/1011PSISBBVD/LPSIM220/PR
This is not a short program, but one that spells out clearly and factually the fallacy of thinking we can continue down this path indefinitely.
It is all about the American example, but there are lessons here for Australia too.
Posted by: Hugh | February 5, 2011 at 11:20 AM
Great comment Hugh. I have read the whole of the website you suggested and feel that everyone should read it. There are certainly lessons here for Australia to learn - and learn quickly. Australians should not put their heads in the sand but challenge the principles of this Labor Government which is going down the same path. I think if anyone wishes to do so the Book of Revelation will reveal all. One example is the printing of money to cover debts clearly forecast in The Book of Revelation.
Posted by: Georgina | February 5, 2011 at 05:26 PM
I hope you find some suitable accommodation John.
Posted by: Ben | February 6, 2011 at 07:47 PM