Tax and Transfers for Shared Prosperity UNESCAP EEG 6 December 2016 Miranda Stewart Professor and Director Tax and Transfer Policy Institute, ANU miranda.stewart@anu.edu.au
Overview 1. Tax system development and the social state 2. Concepts of tax/transfer equity 3. Tax-transfer: relationship between tax, cash transfers, work 4. Tax, gender equality and prosperity 2
1. Tax system development and the social state taxpolicy.crawford.anu.edu.au 3
Systemic challenges/system potential Challenges Demography: ageing; workforce Inequality: top, bottom? Legitimacy: domestic politics of tax and austerity; fragile states; fairness; evasion Global digital economy: Mobility; enforcement; competition Environmental: resources losing value; transition and distributional costs Potential adaptation Demography: women; older workers; Inequality: Demonstrated effectiveness of tax/transfers, education and health spending Legitimacy: rule of law; domestic politics of tax Global digital economy: New tax handles; technological solutions; harnessing intermediaries; coordination; tax sharing Environmental: taxing bads taxpolicy.crawford.anu.edu.au 4
History of the tax state Adam Smith, Wealth of Nations (1776): Taxes to fund govt That sure, steady, and permanent revenue which can alone give security and dignity to government Schumpeter in 1917 While the tax state has been able to survive rising costs of administration and war, changing attitudes towards property and demands for social expenditures offer a more ominous signal for its future. These may generate a crisis which the tax state cannot survive. Musgrave in the 20 th century: the developed country tax state grew and thrived Empirical literature tells us each country has its own pathway to an equilibrium which may be lower than we would like and which is highly contested. 5
Total tax revenues, OECD countries, 2013 % of GDP 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 6
Tax and the Social State OECD, 2014 or nearest year (% of GDP) Spending on cash benefits Spending on Health and Services Belgium Italy Austria France Portugal Finland Spain Greece Slovenia Hungary Luxembourg Denmark Germany Poland Ireland Japan OECD Netherlands Czech Republic Sweden Norway Slovak Republic Switzerland United Kingdom Estonia New Zealand United States Canada Israel Australia Turkey Iceland Chile Korea Mexico 8.6 0 5 10 15 20 25 Sweden Denmark France Finland Netherlands Germany Belgium United Kingdom New Zealand Japan Norway Australia Iceland United States Austria Italy Spain OECD Luxembourg Switzerland Czech Republic Canada Ireland Hungary Slovenia Slovak Republic Portugal Poland Greece Israel Korea Estonia Chile Mexico Turkey 10.4 0 5 10 15 20 7
Australia: taxes in last 110 years 35 Per cent of GDP Per cent of GDP 35 30 30 25 25 20 State and local governments GST 20 15 15 10 Australian Government 10 5 5 0 0 1902-03 1912-13 1922-23 1932-33 1942-43 1952-53 1962-63 1972-73 1982-83 1992-93 2002-03 2012-13 8
Australian tax-transfer system 1905-1952 25.0 20.0 Cth land tax, estate tax Cth takes over income tax; Cth child endowment funded by payroll tax (1941), widow pensions (1942), unemployment, low income benefits (1945) 15.0 Cth maternity allowance Cth sales tax Uniform national income tax; Wage withholding 10.0 Cth age pensions s (some states t earlier) Cth income tax Cth health and hospital funding 5.0 WWII 0.0 WWI State govt attempts at payroll/unemployment insurance in Depression 1905-06 1906-07 1907-08 1908-099 1909-10 0 1910-111 1911-12 1912-13 1913-14 1914-15 1915-16 1916-17 1917-18 1918-19 1919-20 1920-21 1921-22 1922-23 1923-24 1924-25 1925-26 1926-27 1927-28 1928-29 1929-30 1930-311 1931-32 1932-33 1933-34 1934-35 1935-36 1936-37 1937-38 1938-39 1939-40 1940-41 1941-42 1942-43 1943-444 1944-45 1945-46 1946-47 1947-48 1948-49 1949-50 1950-51 1951-52 1952-53 9
2016-17: Aus Govt Expenditures Cth Budget 2016-17 Debt interest 3.5% General public services 7.2% Defence 6% Education 7.5% All other functions 10.6% Social security and welfare 35.2% Health 15.9% GST to States: Health, Education 14.1% About half of State govt spending on health, education (which is half of their total budgets) taxpolicy.crawford.anu.edu.au 10
Tax mix Personal income tax Company income tax Value added tax ( broad based consumption tax) Excises: specific consumption taxes (fuel, alcohol, tobacco, carbon, sugar?) Land, wealth taxes Other: transaction taxes, tariffs taxpolicy.crawford.anu.edu.au 11
The role of the personal income tax I have always regarded this form of direct taxation as peculiarly appropriate to the circumstances of a moderate community; not only an effective means for raising money for the conduct of government, but serving as an instrument of social reform. Billy Hughes, 1915 A courageous effort of the Australian legislature Sir Josiah Stamp (UK economist) 12
Personal income tax as % of GDP, 2012 (OECD) 14% 12% 10% 8% 6% 4% 2% 0% MS 13
Personal income tax had taken this important place mid-way through the 20 th century in Australia 14
Policy principles for tax-transfer system Fairness and distributive justice The tax-transfer-public goods system as a whole Progressivity of taxes (eg personal income tax) Economic efficiency: optimising the system Tax mix; enhancing capital investment Relationship of tax-transfer system to work participation and entrepreneurship Cost-effective: Low compliance, administrative costs System resilience: Social-fiscal system : sustainable equilibrium; adaptation to external shocks, challenges; feedback Diversity; resistance to planning, arbitrage Legitimate, balanced and sustainable system: the link between taxation and representation (variations of negotiated democracy?) 15
2. Concepts of tax/transfer equity taxpolicy.crawford.anu.edu.au 16
Inequality and Equity Benefit theory of taxation Distributional (ability to pay) theory of tax Equality before the law; equal opportunity Equity Across income distribution, inter-household Rural and urban Intra-household (gender) Lifecycle taxpolicy.crawford.anu.edu.au 17
Smith s principles of taxation 4 principles of taxation: (1) The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities... (2) The tax which the individual is bound to pay ought to be certain and not arbitrary... (3) Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. (4) Every tax ought to be so contrived as to take out of the pockets as little as possible, over and above that which it brings into the public treasury of the state. taxpolicy.crawford.anu.edu.au 18
Smith s theory of equality in taxation The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expence of government to the individuals of a great nation is like the expence of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation. (1776) taxpolicy.crawford.anu.edu.au 19
Taxes could fund public goods and regulate inequality Taxation can become a regulating factor in the distribution of national income and wealth, generally by modifying the distribution brought about by free competition. I stand firmly by this conception against all polemics. I should even go further now and say that this second, regulatory purpose to interference with the uses of individual incomes and wealth leads to an extended, or if preferred, a second conception of taxation. This is a social welfare concept beside the purely financial one. (A. Wagner, 1893) taxpolicy.crawford.anu.edu.au 20
A capabilities approach to equity Sen, Nussbaum, development and human rights literature 1. Focus on the individual: It is individual capabilities that, equally with those of others in society, should be developed and respected (not her/his family/spouse) 2. Examine the individual lifecycle: long term wellbeing 3. Equal distribution of the cost and burden of care 4. Support for specific capabilities relating to material wellbeing of individuals, such as security of shelter, the right to work, and the ability to own and control assets on an equal basis over the lifecycle taxpolicy.crawford.anu.edu.au 21
Direct and indirect taxes as % of income by quintiles of equivalised disposable income, Australia, 2009-10 40 35 30 25 20 15 10 5 0 Income taxes Indirect taxes 9.5 11.3 11.4 25.3 10.8 12.7 15.2 10.5 5.2 1.7 Poorest 2nd 3rd 4th Richest Source: ABS Revenue stats (P Whiteford) 22
Direct and indirect taxes as % of income by age of household reference person, Australia, 2009-10 40.0 35.0 Direct taxes Indirect taxes 30.0 25.0 20.0 13.8 11.8 12.1 12.1 11.7 15.0 10.0 5.0 0.0 21.0 21.4 12.9 19.6 13.4 14.9 10.3 5.2 2.0 15-24 25-34 35-44 45-54 55-64 65-74 75 and over Source: ABS Revenue stats (P Whiteford) 23
3. Tax-transfer system: relationship between tax, cash transfers, work taxpolicy.crawford.anu.edu.au 24
Share of dependent popn as % of total popn (comparative/projections, OECD) 25
Australia: Working age share of population (15-65) 26 40% 45% 50% 55% 60% 65% 70% 75% 80% 1921 1924 1927 1930 1933 1936 1939 1942 1945 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 Historical Projections MS
Core design issues in transfer systems Social insurance-style or contributory Work-related (e.g. employers) Compared to general revenue Universal or means tested (by income, assets?) Individual or joint unit/testing? Categorical e.g. by age; family, children, disability Conditional (eg on behaviour, location) Blurs line between public goods and cash transfers taxpolicy.crawford.anu.edu.au 27
Public spending on income-tested benefits, OECD countries 2012 7 6 5 4 3 2 1 0 29
Australian system of social protection Differs from most other countries In Europe, the United States and Japan, most government benefits are financed by contributions from employers and insured employees, and benefits are often related to past earnings, so that higher income workers receive higher absolute levels of benefits if they become unemployed or incapacitated or when they retire. In contrast, in Australia (and New Zealand), most government benefits are flat-rate entitlements financed from general government revenue, and there are no explicit social security taxes. In addition, in both countries but more so in Australia most benefits are income-tested or asset-tested, so that entitlements reduce as resources increase. Because the Australian system is not contributory, eligibility is based on residence and coverage of the population is broad. Duration of payment receipt is not time limited, with income support payments being paid indefinitely subject to the continued meeting of eligibility criteria. PW 30
Tax-transfer equity and work Informal sector vs formal (cash) sector No jobs? (no tax; income support needed) Workforce age proportion trending down Services transition; structural adjustment Casualisation Self-employment or contracting Uberization ; labor hire firms Labor more mobile; home-working; job offshoring Temporary; episodic; uneven over year Multiple employers/jobs/contracts 31
Designing tax/transfer system for new directions in work Progressive marginal tax rates for income tax are fair and efficient where it can be enforced Transfers: Means-testing and targeting seems appropriate but can generate unintended consequences; flexibility? Basic income? (But revenue cost is high if universal) Conditional universalism might be better Childcare Age pension Individualise income tax and transfers: direct relationship with taxpayer; intermediaries? technology?) 32
Income tax rates Marginal tax rate: rate on next $1 of income Average tax rate: total tax paid as a share of total taxable income Effective marginal tax rate (EMTR): rate on next $1 of income at point in time that results from interaction of income tax rate structure and taper of credits or transfers. Effective Average Tax Rate (EATR): e.g. participation rate to do part time or full time work Defined as 1 minus the financial gain to work as a proportion of gross earnings. weighted average of EMTRs over a range
Taxes on average worker (compulsory payment wedge and average tax wedge, OECD 2014) 34
Marginal, average PIT rates 2014/15 Marginal Tax Rate (headline) Marginal tax rate (including medicare levy and budget repair levy) Average Tax Rate 60 Note HECS Top 1% taxable income $324,586 50 40 Female Median Male Median Top 10% taxable income $122,725 30 20 10 0 Min. Wage 0 7 14 21 28 35 42 49 56 63 70 77 84 91 98 105 112 119 126 133 140 147 154 161 168 175 182 189 196 203 210 217 224 231 238 245 252 259 266 273 280 287 294 301 308 315 322 329 336 343 350 357 364 371 378 385 392 399 Female Av. wage Male Av.wage 35
Personal income tax: marginal rates and tax-free threshold over time 36
Tax and labour supply The tax wedge on paid work reduces the relative price of leisure relative to the price of paid work Or, decreases the consumption possible from doing paid work thereby making leisure relatively more attractive Thereby affecting (reducing) labour supply For some, the decision margin is between work in the household ( unpaid care) economy and work in the paid economy (e.g. mothers) There are other decision margins for individuals choosing to do paid work 37
Tax and labour supply incentives Substitution effect: Disincentive Consequence of marginal tax rate Reduces after-tax return of next $1 from activity Substitute another activity for work Countervailing income effect You work anyway because you need the money How much after-tax income remains? Consequence of average tax rat Empirical question: What is the elasticity of labour supply? A lot of elasticity/incidence studies assume away the income effect 38
Work incentives: which decision margin? Intensive margin Workers (already in work) make decisions on whether to work more or less hours of work E.g. 1 hour of overtime, or some extra casual hours labour supply elasticity Extensive margin Workers (not working) decide whether to participate in the labour market or not E.g. take a job; take a part-time job participation elasticity 39
Top personal income tax rate Evidence about elasticity suggests Work and entrepreneurial effort will not reduce (some may move overseas?) Taxable income elasticity, ie people with advice and income do tax planning Opportunities are key if it s not easy to do, or carries risks, people tend not to do it But in countries in the region/developing countries, tax planning, mobility capacity might be much greater 40
Targeting in transfer system causes high EMTRS Tax (individual unit) but targeting in welfare system: Pensioners: transfer tax-free threshold, effectively joint Transfer system Define and withdraw targeted family benefits tested on joint income of a couple Elements of a joint unit may also result from other features of the tax system that are tested on joint income eg phase out of family tax benefits or childcare payment; or application of tax surcharges (such as Medicare Levy); or allowing the transfer of a benefit such as a pension tax credit from one spouse to another. 41
EMTR; Single person, Newstart Source: DPlunkett 42
What tax/transfer parameters affect EMTRs? Benefit levels, free areas and withdrawal rate Cut out point = free area + benefit/withdrawal rate Tax threshold and marginal rates Tax credits/offsets, eg LITO, Seniors and Pensioners Tax Offset (pushes up the tax-free threshold) Tax surcharges, eg Medicare levy Taxability of payments Conditionality Treatment of different income sources Supplementary payments PW 43
5. Tax, gender equality and prosperity taxpolicy.crawford.anu.edu.au 44
Gender and Work disincentives Breadwinner-homemaker family Homemaker wants to return to work part-time Would be the secondary earner in the couple What is the effective marginal tax rate on the home maker s income? This income is effectively on top of the breadwinner s income because it is aggregated So she faces the breadwinner s marginal rate (or higher) She also faces additional costs of working: childcare etc The higher EMTR is a disincentive to work for the secondary earner Also her overall (average) tax is higher than it should be which is unfair 45
Australia: Male and female paid workforce participation trends 90% 85% 80% Male 75% 70% 65% 60% 55% 50% 45% Female 40% 35% 30% 25% 20% 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 46
Full time/part time women s paid work 70% 60% 50% 40% 30% 20% Full Time 10% 0% 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 47
Participation rate for women in years of raising young children (OECD 2010) 48
Gender labour supply gap (Apps 2015) 49
Formal paid and informal unpaid economy Tax policy affects both formal and informal economies Household economy is not enough studied in Asia-Pacific Care and e.g. food production labour in the household is vital for the production and maintenance of human capabilities relied on by the formal market economy and contributes to the provisioning of community needs and wants This economy is highly gendered in all countries Labour hours in both economies, time scarcity important for policy (Craig and Mullen 2010) Unpaid hours estimated 21.4 billion in Australia in 2009-10, imputed value of $650 billion (Hoenig and Page 2012) From an equity perspective, the effects of policy on intrahousehold and inter-household distribution are important NB With thanks to Associate Professor Siobhan Austen, Curtin University 50
Impact on unpaid/paid economy The fiscal cost of incentives to paid or unpaid work should be considered and the consequences of reducing production in one sector to increase it in another should be assessed. Is there cost shifting or burden shifting from the paid to unpaid sectors? 51
Elasticity of labour supply by gender Evert, De Mooij van Vuuren 2008 meta-study the estimation of the elasticity of labour supply with respect to the real after-tax wage rate is not a straightforward exercise, due to e.g. nonlinear budget constraints, unobserved wages for nonworkers, and various econometric and specification issues. Consistent findings of much smaller elasticities for men than women and much smaller heterogeneity in male elasticities compared to women Mean elasticity for men 0.07; for women, 0.34 (ignoring outliers) Male elasticity distribution of results Female elasticity distribution of results 52
Compensated elasticity of labor Saez Slemrod Giertz (2010) http://eml.berkeley.edu//~saez/saez-slemrod-giertzjel10final.pdf With some notable exceptions, the profession has settled on a value for this elasticity close to zero for prime-age males, although for married women the responsiveness of labor force participation appears to be significant. Overall, though, the compensated elasticity of labor appears to be fairly small. In models with only a labor-leisure choice, this implies that the efficiency cost per dollar raised of taxing labor income to redistribute revenue to others or to provide public goods is low, as well. Although evidence of a substantial compensated labor supply elasticity has been hard to find, evidence that taxpayers respond to tax system changes more generally has decidedly not been hard to find. 53
How elastic is Australian labour supply in response to taxes? P Apps (2010) Table 5: Evidence of elasticity of primary earners consistent with international elasticity studies noted above High earners? The relatively small change in hours as earnings rise steeply from the fourth to the fifth quintile also indicates very low to zero labour supply elasticities towards the top of the wage distribution. higher taxes on top incomes would not have significant disincentive effects on labour supply or the pre-tax earnings of primary earners. 54
Australia: On current settings for mothers with kids: High EMTRs lead to part-time work Withdrawal of family benefits Increasing income tax Means tested childcare assistance with annual cap per child Hit once work exceeds 2-3 days per week Recent report by Productivity Commission (childcare)
EMTR on secondary earner: Primary earner fixed income, couple with 2 children age 2, 3 MS Credit: David Plunkett 56
EMTR on secondary earner: Per day of work; Primary earner fixed income, couple with 2 kids age 2, 3 MS Credit: David Plunkett 57
The Tax and Transfer Policy Institute TTPI, https://taxpolicy.crawford.anu.edu.au/ 21/12/2016 58
Austaxpolicy Blog www.austaxpolicy.com 21/12/2016 59
Thanks Questions, discussion? taxpolicy.crawford.anu.edu.au 60