Sunday, January 22, 2012

The principles of tax reform

Greg Mankiw has a great op-ed column in the Sunday NY Times on four basic principles for tax reform. While this relates to the USA it is universally relevant. 

1) Broaden the base and lower rates
2) Tax consumption rather than income
3) Tax bads rather than goods
4) Keep it simple stupid

Mankiw is a Professor at Harvard and author of some of the most widely used economic textbooks. He is very big on 'pigovian taxes' which is the basis of 'tax bads rather than goods' and this also makes him an advocate of a carbon tax. He was also chief economic adviser to Dubya Bush and generally associated with the Republican Party which always makes him interesting as a debating reference to confuse the ideologically blinkered among the right. Note: see previously posted Einsten quote.

Mankiw also touches on property taxes in context of broadening the tax base:

"Subsidies to homeowners are, in effect, penalties on renters — after all, someone has to pick up the tab. But there is nothing wrong with renting."
Australia also has too many anomalies here and this was also addressed in the Henry tax review. In my view among the most perverse, amoral, and rarely discussed of these has been local councils giving rates preference to owner occupied properties. This is a tax on renters with no justification. To our credit while pervasive elsewhere this is something Cairns has avoided but who knows for how long it can be politically resisted?

This is also a part of our cultural bias in Australia to home ownership. A fews years back when a participant in council submissions on rates increases it was a cry from home owners that strata units were owned by investors who got tax breaks, so they should have their own rates breaks to compensate.

The most vocal hypocrit on this was a man sitting on a $million tax free capital gain on the Kewarra beachfront while requesting his rates be capped and unit owners be slugged by council to compensate for investors ability to claim depreciation!

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