The trouble with ‘taxeaters’ (aka middle-class welfare recipients)

Treasurer Wayne Swan supervises journalists examining his budget. His tax plans are a “fiscal illusion”. AAP/Andrew Taylor

Thinking about tax policy gives individuals the opportunity to devise their own “great society”. As economics laureate James Buchanan explains “Many economists, along with other social scientists and social philosophers, enjoy playing God, by which I mean laying out in detail their own private versions of the ‘good society’ without being required to suggest ways and means of implementing their precepts or even to defend the consistency of these precepts with democratic political processes.”

UCLA economist Harold Demsetz warns of nirvana policy mistakes when playing God. People engaging in nirvana policies make three mistakes.

First is the belief the grass will be greener on the other side, second a belief in free lunches and third, people could be different. Anyone proposing policy that relies on any of these nirvana views will be disappointed.

Tax debates often revolve around people being different. Can people be different? Probably not.

In tax debates there are all sorts of conflicting visions of humanity. Those who prefer lower levels of taxation are pilloried as being selfish, anti-social, greedy, and the like. While the beneficiaries of taxation are described as the poor, the disadvantaged, the disabled, and so on.

Libertarians have a wonderful term “taxeater” to describe the beneficiaries of taxation.

There is a lot of angst and discussion about the need to cut “middle-class welfare” and the failure of government (any government) to do so. Deirdre McCloskey explains why this is so; the median voter has become a taxeater.

That isn’t what we normally imagine. Most people think that government exists to provide public goods and welfare to the poor and needy. Most government programs are designed to benefit the middle class; economists have formalised this idea as “Director’s law”.

McCloskey demonstrates this with a very simple example. She asks if one-quarter of the US government tax take went to poor Americans how much money would they receive. Some back of the envelope calculations show that each poor American would receive US$30,000 – for a family of four that would be $120,000.

In other words, there would be no poor people if government was really redistributing income to the poor.

Is there an equivalent Australian number? This coming financial year the federal government plans to raise $342 billion and spend $362 billion. Assuming the Smith Family are correct and about 13 percent of Australians live in poverty, the McCloskey calculation for Australia is about $28,500 per person.

Putting that number into context, the federal government spends more than 25% of its budget on welfare.

The biggest beneficiary of taxation is government employees and the middle class – home of the median voter (and, dare I say it, university professors).

The tax churn that Peter Saunders, of the Centre for Independent Studies, so eloquently warned us about is no longer a bug in the tax system; it is a feature of our democracy.

Many voters believe they are getting a bargain from the government (and given the distortions in the tax system, they very often are getting a bargain).

Voters are victims of fiscal illusion - a set of strategies that the state adopts in the hope of altering voters’ fiscal consciousness.

In particular the state hopes to convince voters that the tax burden isn’t nearly as onerous as it is, while the benefits of public spending are greater than they are.

Those who complain about excessive middle-class welfare and the need to cut it out are quite right; it is wasteful and unnecessary.

But they seldom offer coherent strategies, beyond vague references to “leadership” and “the need for tough decisions”, to convince the middle class, and the median voter, that they need to pay more tax or use fewer government services.