tax and transfers for shared prosperity - unescap 4. miranda stewart_0.pdf · tax and transfers for...

Tax and Transfers for Shared Prosperity UNESCAP EEG 6 December 2016

Miranda Stewart Professor and Director Tax and Transfer Policy Institute, ANU [email protected]

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”

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 20th 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

6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Tax and the Social State OECD, 2014 or nearest year (% of GDP) Spending on cash benefits Spending on Health and Services

7

8.6

0 5 10 15 20 25

MexicoKoreaChile

IcelandTurkey

AustraliaIsrael

CanadaUnited StatesNew Zealand

EstoniaUnited Kingdom

SwitzerlandSlovak Republic

NorwaySweden

Czech RepublicNetherlands

OECDJapan

IrelandPoland

GermanyDenmark

LuxembourgHungarySloveniaGreece

SpainFinland

PortugalFranceAustria

ItalyBelgium

10.4

0 5 10 15 20

TurkeyMexico

ChileEstonia

KoreaIsrael

GreecePoland

PortugalSlovak Republic

SloveniaHungary

IrelandCanada

Czech RepublicSwitzerland

LuxembourgOECDSpain

ItalyAustria

United StatesIceland

AustraliaNorway

JapanNew Zealand

United KingdomBelgium

GermanyNetherlands

FinlandFrance

DenmarkSweden

Australia: taxes in last 110 years

8

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

1902-03 1912-13 1922-23 1932-33 1942-43 1952-53 1962-63 1972-73 1982-83 1992-93 2002-03 2012-13

Per cent of GDP Per cent of GDP

Australian Government

State and local governments

GST

Australian tax-transfer system 1905-1952

9

0.0

5.0

10.0

15.0

20.0

25.0

1905

-06

1906

-07

1907

-08

1908

-09

1909

-10

1910

-11

1911

-12

1912

-13

1913

-14

1914

-15

1915

-16

1916

-17

1917

-18

1918

-19

1919

-20

1920

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1921

-22

1922

-23

1923

-24

1924

-25

1925

-26

1926

-27

1927

-28

1928

-29

1929

-30

1930

-31

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

-44

1944

-45

1945

-46

1946

-47

1947

-48

1948

-49

1949

-50

1950

-51

1951

-52

1952

-53

Cth income tax

Uniform national income tax; Wage withholding

6 7

Cth age pensions (some states earlier)

9 0

)

Cth maternity allowance

2 3

Cth land tax, estate tax

1

s tatest t

0

Ca

WWII

WWI

Cth takes over income tax; Cth child endowment funded by payroll tax (1941), widow pensions (1942), unemployment, low income benefits (1945)

2

State govt attempts at payroll/unemployment insurance in Depression

Cth sales tax

1 2vt attnempe in D

Cth health and hospital funding

3 4 5 63

2016-17: Aus Govt Expenditures


Social security and welfare 35.2%

GST to States: Health, Education

14.1%

Health 15.9%

Education 7.5%

Defence 6%

General public services 7.2%

All other functions 10.6%

Debt interest 3.5%

Cth Budget 2016-17

About half of State govt spending on health, education (which is half of their total budgets)

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


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)

13

0%

2%

4%

6%

8%

10%

12%

14%

MS

Personal income tax had taken this important place mid-way through the 20th 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


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


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.”


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)


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)


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


Direct and indirect taxes as % of income by quintiles of equivalised disposable income, Australia, 2009-10

1.7 5.2 10.5

15.2

25.3 12.7

10.8

11.4 11.3

9.5

0

5

10

15

20

25

30

35

40

Poorest 2nd 3rd 4th Richest

Income taxes Indirect taxes

22

Source: ABS Revenue stats (P Whiteford)

Direct and indirect taxes as % of income by age of household reference person, Australia, 2009-10

23

13.4 21.0 21.4 19.6

14.9 5.2 2.0

13.8

11.8 12.1 12.1 11.7

12.9 10.3

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

15-24 25-34 35-44 45-54 55-64 65-74 75 and over

Direct taxes Indirect taxes

Source: ABS Revenue stats (P Whiteford)

3. Tax-transfer system: relationship between tax, cash transfers, work


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


Public spending on income-tested benefits, OECD countries 2012

0

1

2

3

4

5

6

7

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.

30PW

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

0

10

20

30

40

50

60

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

Marginal Tax Rate (headline) Marginal tax rate (including medicare levy and budget repair levy) Average Tax Rate

Min. Wage

Female Median

Male Median

Female Av. wage

Male Av.wage

70 77777 84 91 98 1000555

112

A

Top 10% taxable income $122,725

Top 1% taxable income $324,586

35

Note HECS

Personal income tax: marginal rates and tax-free threshold over time

36

37

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

38

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

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

42 Source: DPlunkett

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

43 PW

5. Tax, gender equality and prosperity


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

46

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Male

Female

Full time/part time women’s paid work

47

0%

10%

20%

30%

40%

50%

60%

70%

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Full Time

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 intra-household and inter-household distribution are important

50 NB – With thanks to Associate Professor Siobhan Austen, Curtin University

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)

52

Male elasticity distribution of results

Female elasticity distribution of results

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)

56 MS Credit: David Plunkett

EMTR on secondary earner: Primary earner fixed income, couple with 2 children age 2, 3

57 MS Credit: David Plunkett

EMTR on secondary earner: Per day of work; Primary earner fixed income, couple with 2 kids age 2, 3

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?


tax and transfers for shared prosperity - unescap 4. miranda stewart_0.pdf · tax and transfers for...

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