tag:theconversation.com,2011:/us/topics/tax-reform-4496/articlesTax reform – The Conversation2024-03-26T12:40:26Ztag:theconversation.com,2011:article/2205742024-03-26T12:40:26Z2024-03-26T12:40:26ZTrump-era tax cuts contributed to a decline in higher ed giving, with fewer Americans donating to colleges and universities<figure><img src="https://images.theconversation.com/files/580516/original/file-20240307-22-jtbky3.jpg?ixlib=rb-1.1.0&rect=165%2C141%2C7710%2C4498&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">How many college grads will frequently donate to their alma mater?</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/los-angeles-ca-ucla-holds-a-commencement-ceremony-in-pauley-news-photo/1499075648?adppopup=true">Sarah Reingewirtz/MediaNews Group/Los Angeles Daily News via Getty Images</a></span></figcaption></figure><p>Policy changes brought on by the <a href="https://www.irs.gov/tax-reform">Tax Cuts and Jobs Act</a>, which former President Donald Trump signed into law at the end of 2017, appear to have led many small-dollar donors to give less money to colleges and universities – or to stop giving altogether.</p>
<p>Individual donations, whether from graduates or people who didn’t attend those colleges and universities, declined by 4% from US$44.3 billion in the 2017-2018 academic year to $42.6 billion two years later. That’s what <a href="https://scholar.google.com/citations?user=KWFRsxEAAAAJ&hl=en">my colleague</a>, Sungsil Lee, <a href="https://scholar.google.com/citations?user=_iTiG64AAAAJ&hl=en">and I</a> found when <a href="https://doi.org/10.1080/1360080X.2023.2288735">we examined a decade of data</a> regarding charitable contributions to 660 colleges and universities and adjusted the totals for inflation. </p>
<p>We also found that the Trump-era tax reforms led to a 7% decline in the number of individual donors, after controlling for other factors such as enrollment size and tuition. </p>
<p>To estimate the impact of the tax changes, we analyzed data that the Council for Advancement and Support of Education, a nonprofit, collected in its annual <a href="https://www.case.org/research/surveys/case-insights-voluntary-support-education">Voluntary Support of Education Survey</a>.</p>
<p>We analyzed data from 660 public and private colleges and universities from the 2010-2011 to the 2019-2020 academic years – 12-month periods that run from July 1 of a given year through June 30 of the next.</p>
<p>Because we reviewed complete records for the number of donors and the total amount of donations over the decade, we could observe what changes the tax policy reform may have spurred.</p>
<h2>Why it matters</h2>
<p>Many states have essentially <a href="https://www.cbpp.org/research/state-budget-and-tax/unkept-promises-state-cuts-to-higher-education-threaten-access-and">frozen their spending on higher education since 2008</a>, while the cost of running colleges and universities has increased. As a result, public institutions <a href="https://sheeo.org/wp-content/uploads/2019/04/SHEEO_SHEF_FY18_Report.pdf">rely more heavily on the money they get from tuition</a> <a href="https://www.clevelandfed.org/publications/economic-commentary/2017/ec-201705-trends-in-revenues-at-us-colleges-and-universities-1987-2013">and donors</a> than they used to. The declines in both the amount donated by individuals and the number of donors, however, fell more sharply for private institutions than for public ones.</p>
<p>Gifts from individuals, rather than organizations or companies, accounted for <a href="https://www.case.org/resources/voluntary-support-education-key-findings-2020-21">more than 40% of all the money donated</a> in the 2020 academic year – with much of that money coming from very wealthy people. Most of the $21 billion from individuals donations came in very large sums.</p>
<p><a href="https://www.irs.gov/newsroom/heres-a-quick-overview-of-tax-reform-changes-and-where-taxpayers-can-find-more-info">The Trump tax reforms</a>, by sharply increasing the standard deduction, led millions of taxpayers to stop itemizing their tax returns. That means far fewer Americans are deducting charitable donations from their taxable income today.</p>
<p>While more than 43% of all taxpayers with an adjusted gross income between $50,000 and $100,000 <a href="https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-complete-report-publication-1304">filed itemized tax returns for their 2017 earnings</a>, less than 14% itemized in 2018, according to the IRS.</p>
<p>Those who no longer itemize <a href="https://doi.org/10.1086/708172">have lost a tax break</a>, and for them, every dollar they give to higher ed or any charity has become more expensive.</p>
<p>Although <a href="https://www.case.org/system/files/media/inline/VSE%202022%20Key%20Findings.pdf">approximately 60% of donations to colleges</a> came from foundations and other philanthropic organizations, <a href="https://doi.org/10.2979/phileduc.1.1.02">these donations are highly concentrated</a> and primarily benefit a few dozen prominent universities. The decline of individual donations can be a particularly big problem for small colleges, we found. </p>
<p>To be sure, other factors, such as <a href="https://doi.org/10.1177/0899764018800791">economic trends</a> and <a href="https://doi.org/10.1007/s10734-020-00543-0">the stock market’s performance</a>, can influence giving too. </p>
<h2>What’s next</h2>
<p>We are now researching how colleges and universities are responding to the tax changes and whether their fundraising initiatives and promotional efforts are persuading more individual donors to give – even if they no longer can take advantage of the charitable tax deduction.</p>
<p><em>The <a href="https://theconversation.com/us/topics/research-brief-83231">Research Brief</a> is a short take about interesting academic work.</em></p><img src="https://counter.theconversation.com/content/220574/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jin Lee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Researchers who analyzed a decade of data detected a reduction in giving after millions of Americans stopped getting a tax break tied to charitable giving.Jin Lee, Associate Professor of Educational Foundations and Leadership, University of Louisiana at LafayetteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2231412024-02-20T13:17:39Z2024-02-20T13:17:39ZHow Lula’s big-tent pragmatism won over Brazil again – with a little help from a backlash to Bolsonaro<figure><img src="https://images.theconversation.com/files/576290/original/file-20240217-26-3ec1u6.jpg?ixlib=rb-1.1.0&rect=0%2C58%2C5473%2C2740&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Brazilian President Lula greets journalists, in Brasilia, one year after rioters stormed the presidential palace, Congress and Supreme Court buildings.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/APTOPIXBrazilRiotsOneYear/ba4ead6af3f84bd587b23503bf8dd425/photo?Query=lula&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=7372&currentItemNo=41">AP Photo/Eraldo Peres</a></span></figcaption></figure><p>A year is a long time in Brazilian politics.</p>
<p>When Luiz Inácio Lula da Silva <a href="https://www.npr.org/2023/01/01/1146518711/leftist-lula-brazil-sworn-in-president">assumed office in Brazil for a third time</a> in January 2023, many <a href="https://www.bloomberg.com/news/articles/2022-11-02/lula-faces-challenges-in-brazil-after-win-over-bolsonaro?sref=Hjm5biAW">observers were pessimistic</a> about the returning president’s <a href="https://www.theguardian.com/commentisfree/2022/oct/31/luiz-inacio-lula-da-silva-presidential-victory-brazil-sweet-govern">chances of governing successfully</a>. </p>
<p>The president, now 78 years old, had recently defeated <a href="https://www.nytimes.com/2023/01/08/world/americas/jair-bolsonaro-brazil.html">Jair Bolsonaro</a>, the hard-right former president, by a narrow margin – <a href="https://www.reuters.com/world/americas/brazil-votes-heated-bolsonaro-vs-lula-presidential-runoff-2022-10-30/">50.9% to 49.1%</a>. But despite that victory, <a href="https://apnews.com/article/jair-bolsonaro-politics-brazil-government-florida-state-south-america-8d7e202b93b6cba7196c4baba32b6452">many Brazilian state governments</a>, <a href="https://www.reuters.com/world/americas/right-wing-wins-brazils-congress-show-staying-power-bolsonarismo-2022-10-03/">as well as the country’s Congress</a>, remained dominated by followers of Bolsonaro.</p>
<p>Following his electoral loss in 2022, Bolsonaro <a href="https://www.pbs.org/newshour/world/brazil-president-jair-bolsonaro-declines-to-concede-defeat">refused at first to acknowledge defeat</a>. He <a href="https://www.reuters.com/world/americas/brazils-bolsonaro-says-no-justification-attempted-terrorist-act-capital-2022-12-30/">declined to take part</a> in the traditional passing of the presidential sash during Lula’s Jan. 1, 2023, inauguration ceremony.</p>
<p>Then a week later, on Jan. 8, thousands of Bolsonaro supporters <a href="https://theconversation.com/democracy-under-attack-in-brazil-5-questions-about-the-storming-of-congress-and-the-role-of-the-military-197396">invaded and vandalized</a> Brazil’s presidential palace, Congress and Supreme Court buildings in Brasília, the capital, in an <a href="https://www.npr.org/2024/02/09/1230337023/a-former-president-in-brazil-is-accused-of-trying-to-overturn-his-election-defea">alleged attempt to trigger a state of siege and annul</a> Lula’s win.</p>
<p>The attempted insurrection failed but nonetheless left a lingering gloom about the state of politics in Brazil.</p>
<p><a href="https://apnews.com/article/brazil-bolsonaro-riots-anniversary-one-year-b49854a5bc0c3ee82aefca6b719c51b1">A year later</a>, the pessimism seems to have been unwarranted.</p>
<h2>Political unity</h2>
<p>In a recent <a href="https://www.atlasintel.org/polls/general-release-polls">Atlas Intel poll</a>, 52% of Brazilians said they <a href="https://www.bloomberg.com/news/articles/2024-02-06/brazil-s-lula-starts-second-year-with-popularity-on-the-rise?sref=Hjm5biAW">approve of Lula’s performance</a>, while 58% responded that they see the government’s performance as “very good,” “good” or “OK.” In contrast, 39% described it as “bad” or “very bad.”</p>
<p>How has Lula’s administration managed, at least so far, to beat expectations?</p>
<p>As a <a href="https://scholar.google.com/citations?user=TY-ajWEAAAAJ&hl=en&oi=ao">scholar of Brazilian politics</a>, I believe his popularity has a lot to do with what happened on Jan. 8, 2023. The attack in Brasilia has apparently <a href="https://www.bloomberg.com/news/articles/2024-01-08/a-year-after-brazil-capital-riots-bolsonaro-s-right-wing-movement-seeks-rebrand?sref=Hjm5biAW">defused the right-wing threat</a> to Lula’s hold on power. With a police investigation in February 2024 <a href="https://www.nytimes.com/2024/02/08/world/americas/brazil-police-raid-bolsonaro-attempted-coup-investigation.html">zeroing in on Bolsonaro and his inner circle</a>, the former president appears to be in no position to mount a challenge.</p>
<p>At the same time, Lula has kept his <a href="https://time.com/6226269/how-lula-won-brazil-election/">broad coalition</a> largely intact by working with pragmatic members of Congress who don’t belong to his leftist political party to build and maintain a legislative majority.</p>
<p>The Jan. 8 attack was followed by a <a href="https://www.motherjones.com/politics/2024/01/in-brazil-another-way-to-remember-an-attempted-coup/">show of political unity</a> in Brazil. Most politicians, including many who supported Bolsonaro’s reelection, condemned the assault on democracy. </p>
<p>Similarly, a <a href="https://www.cnn.com/2023/01/12/americas/brazil-riots-condemned-polling-intl/index.html">large majority</a> of Brazilians condemned the attack and approved of measures to investigate and prosecute those behind the attempted coup.</p>
<p>Here, too, Lula appears to have played his hand well. Rather than use the opportunity to purge Bolsonaro supporters from key positions in the government, he refrained from installing his own loyalists.</p>
<p>For example, when the governor of the Federal District, Ibaneis Rocha, was suspended over his handling of the unrest, his vice governor – a <a href="https://opopular.com.br/politica/conheca-celina-le-o-bolsonarista-goiana-que-assume-o-governo-do-df-no-lugar-de-ibaneis-rocha-1.2592425">Bolsonaro supporter – was allowed to replace him</a>.</p>
<h2>Bolsonaro’s convictions</h2>
<p>Meanwhile, the investigation and prosecution of Bolsonaro and his inner circle have <a href="https://www.japantimes.co.jp/news/2024/02/13/world/politics/bolsonaro-coup-probe-brazil-opposition/">weakened the political right</a>.</p>
<p>Bolsonaro was <a href="https://www.cnn.com/2023/06/30/americas/bolsonaro-court-abuse-of-power-ruling-intl-latam/index.html">convicted of abusing political power and misusing public media</a> in June 2023. That case dealt with a meeting before the 2022 elections in which he told foreign ambassadors that Brazil’s electronic voting system was subject to fraud and that the Supreme Court was prepared to favor Lula.</p>
<p>Due to that conviction, Bolsonaro, who is now 68 years old, cannot run for office for the next eight years.</p>
<p>In October 2023, Brazil’s Superior Electoral Court <a href="https://en.mercopress.com/2023/11/02/bolsonaro-and-braga-netto-guilty-of-politically-using-independence-day-celebrations">convicted Bolsonaro again</a>, this time for abusing political power during an independence day celebration.</p>
<p>As of February 2024, Brazil’s Federal Police are investigating the Bolsonaro administration’s <a href="https://apnews.com/article/brazil-ramagem-bolsonaro-police-spying-18d039c5e111e18341afe8ee2fb4428d">alleged use of an intelligence agency to spy on its political enemies</a> and the alleged attempt of <a href="https://apnews.com/article/brazil-police-bolsonaro-allies-search-coup-a060e6570a03f9b094ebdcfa2847736d">some Bolsonaro insiders to subvert</a> the results of the 2022 elections. </p>
<p>While such investigations could be perceived as political, Lula’s government has been somewhat insulated from such criticism because Brazil’s government can influence, but not control, its judiciary.</p>
<p>Moreover Lula has stressed the <a href="https://www.aljazeera.com/news/2022/12/22/brazils-incoming-president-lula-unveils-more-cabinet-picks">collaborative nature of his administration</a>, presenting it as a <a href="https://internationalviewpoint.org/spip.php?article8106">coalition government that is not ruled exclusively by his party</a>.</p>
<h2>Broad coalition</h2>
<p>The <a href="https://valorinternational.globo.com/politics/news/2022/10/30/with-small-governing-coalition-lula-will-have-to-negotiate-with-opposition.ghtml">center-left coalition of 10 parties</a> that backed Lula’s presidential bid has grown since he took office. Two cabinet positions even went to <a href="https://www.dw.com/en/brazil-lula-adds-bolsonaro-supporters-to-cabinet/a-66741324">politicians who had supported Bolsonaro in the past</a>.</p>
<p>Lula’s party, the Partido dos Trabalhadores, or Workers’ Party, holds only six of the 31 cabinet positions. And the president has had to exert his influence over his own party to keep dissenting voices within it at bay.</p>
<p>Lula’s willingness to work with Congress and his big tent approach to consensus-building starkly contrast with <a href="https://www.washingtonpost.com/world/2023/03/25/bolsonaro-return-brazil/">Bolsonaro’s political polarization</a>.</p>
<p>On Feb. 1, 2023, <a href="https://apnews.com/article/politics-brazil-government-caribbean-democracy-02535a22bdeaf2b24e04bb1a20638597">Rodrigo Pacheco, the Senate’s president, and Arthur Lira</a>, who is president of Brazil’s lower house of Congress, were reelected. Lula chose to support their candidacies despite both men being allied with Bolsonaro in the 2022 election campaign.</p>
<p>Once the congressional term began, Lula was able to use his experience and personal relationships with lawmakers to build the majorities that now support his agenda.</p>
<p>Lula has <a href="https://www.worldbank.org/en/news/press-release/2023/12/05/world-bank-to-support-new-phase-of-brazil-s-bolsa-familia-program">revived his signature Bolsa Familia program</a>, which provides 21 million families – more than a quarter of the population – with an average of R$670 reais (US$136) per month. Brazil has <a href="https://wageindicator.org/salary/minimum-wage/minimum-wages-news/2024/general-minimum-wage-revised-in-brazil-from-01-january-2024-january-08-2024">increased the minimum wage</a> in real terms and is <a href="https://apnews.com/article/brazil-economy-lula-tax-congress-522843f46c3b904ed33cf8940785fe46">streamlining and simplifying its tax system</a> in ways that will help individual taxpayers and businesses. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A short man in a suit salutes while surrounded by other men in suits, clasping a tall one's hand." src="https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/576291/original/file-20240217-20-hmntpk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Lula waves while shaking hands with Senate President Rodrigo Pacheco in November 2022.</span>
<span class="attribution"><a class="source" href="https://apnews.com/article/politics-brazil-government-caribbean-democracy-02535a22bdeaf2b24e04bb1a20638597">AP Photo/Eraldo Peres</a></span>
</figcaption>
</figure>
<h2>Stability is a big plus</h2>
<p>What makes the popularity and repositioning of Lula as a unity leader all the more remarkable is that the left-wing politican was himself seen as a divisive figure not too long ago. But Bolsonaro’s presidency changed the tenor of Brazilian politics.</p>
<p>Most Brazilians today appear to want to overcome the divisions Bolsonaro promoted and favor stability and predictable policies over seeing their own side dominate the government.</p>
<p>Lula’s popularity has also benefited from <a href="https://www.bloomberg.com/news/articles/2023-12-05/brazil-economy-grows-slightly-in-third-quarter-as-slowdown-looms?sref=Hjm5biAW">Brazil’s economy, which performed far better in 2023</a> than many economists had expected.</p>
<p><a href="https://www.barrons.com/news/brazil-inflation-ends-2023-in-target-range-286aa1aa">Inflation fell to 4.6%</a> at the end of 2023, less than half the <a href="https://tradingeconomics.com/brazil/core-inflation-rate">pace it was running a year earlier</a>. Gross domestic product <a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=BR">grew 3% last year, about the same rate as in 2022</a>. And <a href="https://agenciadenoticias.ibge.gov.br/en/agencia-press-room/2185-news-agency/releases-en/39208-quarterly-continuous-pnad-unemployment-retreats-in-two-fus-in-q4-2023">unemployment fell to 7.4%</a>, the <a href="https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?locations=BR">lowest level since 2014</a>. </p>
<p>The strong economy has helped boost Lula’s popularity because he has been able to assure centrists that he’s governing responsibly.</p>
<p>In politics, as with investing, past performance does not guarantee future returns. But for now, Lula’s pragmatic coalition-building and his careful negotiations with Congress are paying off.</p><img src="https://counter.theconversation.com/content/223141/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anthony Pereira has received funding from the Inter-American Foundation and the Organization of American States.</span></em></p>The third-term president has used his experience and personal relationships with lawmakers to build the majorities that now support his agenda.Anthony Pereira, Director of the Kimberly Green Latin American and Caribbean Center, Florida International UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2235472024-02-18T19:51:38Z2024-02-18T19:51:38ZLabor’s Stage 3 changes aren’t genuine tax reform – here’s what would be<p>Another year, another round of tax cuts. Australian governments have made an art of announcing new income tax cuts as elections draw near. But while such cuts are always popular with the public, they should not be confused with tax reform.</p>
<p>Labor’s redesign of the Coalition’s Stage 3 offers larger tax cuts for low and middle earners, and smaller (but still substantial) cuts for higher earners.</p>
<p>The real loser <a href="https://theconversation.com/middle-australia-wins-from-the-governments-tax-plan-but-the-budget-is-the-biggest-loser-222383">will be the budget</a>. Both the original Stage 3 and the redesign will return more than A$20 billion a year in accumulated bracket creep to taxpayers without doing anything much to boost economic growth.</p>
<p>The cost to the budget means these tax cuts will make it harder for this government – and for future governments – to raise the money they will need to meet demands for more spending in areas such as healthcare, aged care, disability care and defence.</p>
<p>While high commodity prices are boosting the budget at the moment, the deficit we would have if it weren’t for that good fortune (the so-called <a href="https://theconversation.com/budget-explainer-what-is-a-structural-deficit-and-why-does-australia-have-one-40089">structural deficit</a>) is close to 2% of GDP, which is about $50 billion a year in today’s dollars. </p>
<p>We can try to close that deficit by making budget cuts, but <a href="https://grattan.edu.au/report/back-in-black-a-menu-of-measures-to-repair-the-budget/">spending cuts</a> alone are unlikely to be enough.</p>
<p>Economic growth would help, but it’s been sluggish for more than a decade.</p>
<h2>So what would genuine reform look like?</h2>
<p>Genuine tax reform requires a “tax mix switch” – moving from taxes that do a lot of economic damage to taxes that are more efficient.</p>
<p>Such a switch would allow the government to raise as much or more money, while delivering an economic dividend at the same time.</p>
<p>Part of the switch would be a move away from income taxes towards taxes that would encourage us to use resources more efficiently, including taxes on wealth, land and the exploitation of natural resources.</p>
<p>And income taxes should be broadened by abolishing the labyrinth of concessions, deductions and deferral options available to the well-advised.</p>
<h2>Super tax breaks cost $45 billion</h2>
<p>Superannuation tax breaks are the biggest hole in the income tax base. </p>
<p>They cost the budget <a href="https://grattan.edu.au/report/super-savings-practical-policies-for-fairer-superannuation-and-a-stronger-budget/">$45 billion a year</a> – about 2% of GDP – and will soon cost more than the age pension. </p>
<p>They are also poorly targeted: half the super tax benefits flow to the wealthiest one-fifth of households – the ones who already have enough to fund their retirement.</p>
<p>Tighter limits on annual pre-tax contributions and lifetime post-tax contributions, and raising the tax rate on some pre-tax contributions, would reduce the use of super as a tax-minimisation tool. </p>
<p>And taxing super earnings in retirement (they are currently untaxed for people with superannuation balances below $1.9 million) would get comfortably off older Australians to make the same sort of contribution to the cost of government services as the rest of us.</p>
<p>Those changes could save the budget more than <a href="https://grattan.edu.au/report/super-savings-practical-policies-for-fairer-superannuation-and-a-stronger-budget/">$10 billion</a> a year.</p>
<h2>Capital gains tax breaks encourage speculation</h2>
<p>Similarly, the 50% <a href="https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount">capital gains tax discount</a> means income from capital gains is taxed at a much lower rate than income from working. </p>
<p>When paired with negative gearing, the 50% discount encourages speculation on property in place of other more useful uses of funds.</p>
<p>Halving the capital gains tax discount – as Labor promised to do in <a href="https://webarchive.nla.gov.au/awa/20160627043846/http://pandora.nla.gov.au/pan/158841/20160627-1111/www.100positivepolicies.org.au/positive_plan_on_housing_affordability_capital_gains_tax_reform.html">2016</a> and again in <a href="https://webarchive.nla.gov.au/awa/20190513154843/http://pandora.nla.gov.au/pan/175559/20190514-0131/www.alp.org.au/policies/reforming-negative-gearing-and-capital-gains-tax-arrangements/index.html">2019</a> – would save the federal budget about <a href="https://grattan.edu.au/report/back-in-black-a-menu-of-measures-to-repair-the-budget/">$5 billion</a> a year. </p>
<p>If combined with curbs to negative gearing, it’d save a further <a href="https://grattan.edu.au/report/back-in-black-a-menu-of-measures-to-repair-the-budget/">$2 billion</a> a year at least.</p>
<p>Some of these savings could be used to reduce overall income tax rates. The rest could be used to repair the budget’s structural deficit.</p>
<p>Other ways of funding lower income tax rates and boosting government revenue include winding back fuel tax credits (<a href="https://grattan.edu.au/wp-content/uploads/2023/04/Grattan-Back-in-Black-1.pdf">$4 billion</a> per year), boosting the taxes paid by companies that make their profits from exploiting Australia’s natural resources (at least <a href="https://grattan.edu.au/wp-content/uploads/2023/04/Grattan-Back-in-Black-1.pdf">$4 billion</a> per year), and setting a minimum tax on trust distributions (<a href="https://grattan.edu.au/wp-content/uploads/2023/04/Grattan-Back-in-Black-1.pdf">$2.3 billion</a> per year).</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/chalmers-has-a-70-billion-a-year-budget-hole-here-are-13-ways-to-fill-it-203331">Chalmers has a $70 billion a year budget hole: here are 13 ways to fill it</a>
</strong>
</em>
</p>
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<h2>The goods and services tax is getting weaker</h2>
<p>A bold government would revamp the goods and services tax (GST) too, either by increasing the rate or by reducing exemptions. As each year goes by we are spending more and more of our income on exempt services, including health and education.</p>
<p><a href="https://grattan.edu.au/wp-content/uploads/2023/04/Grattan-Back-in-Black-1.pdf">A 15 per cent GST could raise about $12 billion a year</a> after accounting for the cost of cushioning the impact on the poorest 40 per cent of households.</p>
<p>Federal and state governments would each be $6 billion a year better off if they shared that remaining revenue 50:50. </p>
<p>We would not expect any government to pursue all of these major changes at once. Tax reform is a marathon rather than a sprint.</p>
<p>But tax cuts without reform leave less money to buy genuine tax reform, reducing the government’s room to respond to future economic shocks, and pushing the cost of today’s spending onto future generations.</p>
<p>Real tax reform isn’t easy, but neither is good government.</p><img src="https://counter.theconversation.com/content/223547/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Brendan Coates does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Genuine reform should include tackling tax concessions on superannuation, capital gains and trusts and redesigning the GST.Brendan Coates, Program Director, Economic Policy, Grattan InstituteKate Griffiths, Deputy Program Director, Budgets and Government, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2227392024-02-06T19:09:37Z2024-02-06T19:09:37ZHow Albanese could tweak negative gearing to build more new homes<p>There are two things the prime minister needs to get into his head about tax. One is that saying he won’t make any further changes <a href="https://theconversation.com/grattan-on-friday-albaneses-stage-3-rework-invites-a-wider-tax-debate-the-government-doesnt-want-to-have-222493">no longer works</a>. The other is that negative gearing doesn’t do much to get people into homes.</p>
<p>Anthony Albanese seemed to have taken the first point on board when he spoke to <a href="https://www.pm.gov.au/media/television-interview-abc-insiders-1">The Insiders</a> on Sunday. </p>
<p>Rather than promising flat-out not to change the rules around negative gearing, he merely said he was</p>
<blockquote>
<p>supportive of the current rules, we have not considered changes to them</p>
</blockquote>
<p>But he was less careful when it came to the virtues of negative gearing. He said there was</p>
<blockquote>
<p>a whole lot of analysis that says they encourage investment in housing, the key when it comes to housing is housing supply.</p>
</blockquote>
<p>His official advisers in the treasury don’t think negative gearing does much to increase the supply of housing – or, if they do, they omitted it from the six-page briefing note headed “<a href="https://treasury.gov.au/sites/default/files/2023-11/foi-3456.pdf">negative gearing</a>”, prepared to help the treasurer answer questions about it in parliament.</p>
<h2>Our rules reward bad management</h2>
<p>Negative gearing is a particularly Australian tax benefit, which – unlike in other countries – benefits dud landlords: those who can’t make money by renting out properties.</p>
<p>If they lose money (by paying out more in interest, maintenance and other expenses than they are receiving in rent) we let them offset that loss, not only against income from other investments, but also against income from their wage or salary.</p>
<p>It means they can cut their wage for tax purposes, cutting the tax they pay on it. And at the same time, they can hang on to a property they can later sell for a profit, which will be taxed at only half the normal rate, thanks to Australia’s 50% discount on <a href="https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/calculating-your-cgt">capital gains</a>.</p>
<p>It isn’t allowed in the <a href="https://www.taxrebateservices.co.uk/tax-faqs/uk-landlord-faqs/offset-rental-losses-against-other-income">United Kingdom</a> or the <a href="https://www.thebalancemoney.com/passive-activity-loss-rules-5197833">United States</a>. There, if you are a landlord who can’t make money, you can offset your losses against profits from other investments – but not against your wage.</p>
<p>In <a href="https://www.thomsonreuters.ca/en/dtprofessionalsuite/blog/losses-and-the-reasonable-expectation-of-profits.html">Canada</a> you <em>can</em> offset rental losses against wages, but there must have been an “an intention to make a profit”. That would probably rule out most Australian negative gearers.</p>
<h2>Most gearers don’t build homes</h2>
<p>In Australia, an astounding <a href="https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/taxation-statistics/taxation-statistics-2020-21/statistics/individuals-statistics#Table8Individuals">one million</a> of us negatively gear – more than one in nine taxpayers. In 2020-21 they claimed losses amounting to $8.7 billion – 3.5% of the income tax collected – meaning if they didn’t do it (if they didn’t claim for what seem to be deliberate losses) the rest of us could pay less tax.</p>
<p>What Albanese said on the weekend was half right. Negative gearing encourages investment. Most months, more than <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/dec-2023">one in three</a> new home loans is for an investment property.</p>
<p>But most of those loans don’t increase supply – the thing Albanese says matters.</p>
<p>That’s because the overwhelming bulk of investor home loans go to “investors” planning to buy existing homes – to bid against and likely beat would-be owner-occupiers.</p>
<p>In December 2023, only 23% of the loans to investors was used to build a home or buy a newly-built home. In November only 19%.</p>
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<p>As a means of getting more homes built, negative gearing leaks like a sieve. As a means of ensuring Australians continue to rent, rather than buy, it’s effective.</p>
<p>In the 20 or so years since the headline rate of capital gains tax was halved, supercharging negative gearing, the proportion of Australian households renting has climbed from <a href="https://www.abs.gov.au/census/find-census-data/quickstats/2001/0">26%</a> to <a href="https://www.abs.gov.au/census/find-census-data/quickstats/2021/AUS">30%</a>. If those extra renters become owners, an extra 400,000 Australians would be in homes they could call their own.</p>
<h2>How to get better value from gearing</h2>
<p>The really bizarre thing is that Albanese has it in his power to ensure negative gearing does exactly what he said it did – supercharge the building of houses.</p>
<p>All he would need to do is what Labor promised to do in <a href="https://webarchive.nla.gov.au/awa/20160627043846/http://pandora.nla.gov.au/pan/158841/20160627-1111/www.100positivepolicies.org.au/positive_plan_on_housing_affordability_capital_gains_tax_reform.html">2016</a> and again in <a href="https://webarchive.nla.gov.au/awa/20190513154843/http://pandora.nla.gov.au/pan/175559/20190514-0131/www.alp.org.au/policies/reforming-negative-gearing-and-capital-gains-tax-arrangements/index.html">2019</a>. In those elections, Bill Shorten went to voters promising to limit the use of negative gearing to newly-built homes.</p>
<p>As Shorten put it, <a href="https://webarchive.nla.gov.au/awa/20160228235600/http://www.alp.org.au/negativegearing">taxpayers would</a> </p>
<blockquote>
<p>continue to be able to deduct net rental losses against their wage income, providing the losses come from newly constructed housing.</p>
</blockquote>
<p>The sieve would no longer leak. Every dollar of tax lost to a negative gearer would help build a home.</p>
<p>What would have happened if Shorten had got his way: if Australia both focused the use of negative gearing and cut the capital gains discount as he had proposed?</p>
<p>Modelling just published in <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/1467-8454.12335">Australian Economic Papers</a> finds the share of households who own their home rather than renting it would have climbed 4.7%.</p>
<p>That’s security worth having, especially if it is accompanied by more homes.</p>
<h2>An idea whose time is coming?</h2>
<p>Australia’s Treasury has begun publishing estimates of the cost of the present unfocused system of negative gearing. Its latest, released last week, puts the cost at <a href="https://treasury.gov.au/publication/p2024-489823">$2.7 billion</a> per year, to which should probably be added a chunk of the $19 billion per year lost as a result of the capital gains concession.</p>
<p>The estimates are new. Until <a href="https://cdn.theconversation.com/static_files/files/3035/FOI_3388_document_for_release-redacted.pdf">Jim Chalmers</a> became treasurer, his department didn’t publish estimates of the cost of rental deductions. </p>
<p>Chalmers is far from the first treasurer to be curious about what the concession does. Scott Morrison expressed concern about the “<a href="https://www.news.com.au/national/politics/tax-reform-treasurer-scott-morrison-investigates-negative-gearing-distribution/news-story/4c0ae584e9c15cc2f4db24f456831f12">excesses</a>” of negative gearing. </p>
<p>And Morrison’s predecessor, <a href="https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=chamber/hansardr/b15942d6-e86a-4a01-8094-d46337096349/&sid=0035">Joe Hockey</a>, said on leaving parliament that negative gearing should be skewed towards new housing, so “there is an incentive to add to the housing stock rather than an incentive to speculate on existing property”.</p>
<p>Albanese is normally cautious. But as he is showing us right with his rejigged Stage 3 tax cuts, there are times when he is not. </p>
<p>If he really wants to throw everything he has got at building more homes, he knows what to do.</p><img src="https://counter.theconversation.com/content/222739/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin is Economics Editor of The Conversation. </span></em></p>An astounding one in nine taxpayers negatively gear, costing Australia more than $2.7 billion a year. Here’s how we could get better value for that money – and supercharge investment in new housing.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2189112024-02-01T19:05:15Z2024-02-01T19:05:15ZBuying a renovated home? You could be up for an extra 10% GST, but it’s a grey area. Here’s a way to end the uncertainty<figure><img src="https://images.theconversation.com/files/567017/original/file-20231221-27-8ftn73.jpg?ixlib=rb-1.1.0&rect=0%2C9%2C6218%2C4123&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/construction-new-part-old-house-before-535324108">CapturePB/Shutterstock</a></span></figcaption></figure><p>A home buyer usually does not pay goods and services tax (GST) on a home except if they buy a new home that has not been sold before as residential property. However, when a home that has been “<a href="https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/antsasta1999402/s40.75.html">substantially renovated</a>” is <a href="https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/antsasta1999402/s40.65.html">sold</a>, the buyer may have to pay GST. This can add 10% to the price of the home for the buyer. </p>
<p>The problem home buyers face is that what qualifies as a “substantial renovation” is uncertain. The Australian Taxation Office does provide some guidance on this in a <a href="https://www.ato.gov.au/law/view/document?docid=GST/GSTR20033/NAT/ATO/00001">ruling</a>. However, the <a href="https://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/antsasta1999402/s195.1.html">definition</a> is subject to interpretation.</p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4605598">My research</a> has looked at the approaches to answering this question in Australia, Europe and Canada. Whether a renovation has transformed an existing home into a “new home” for GST purposes has been the subject of litigation in almost all countries where such a distinction is made. The experience of other countries may provide a guide to reforms that could be made in Australia to provide home buyers and sellers with more certainty.</p>
<p>If tax law applied a test based on the renovation cost as a percentage of the post-renovation resale value of the home to determine if there is a substantial renovation, that would give buyers greater certainty.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-much-can-i-spend-on-my-home-renovation-a-personal-finance-expert-explains-160696">How much can I spend on my home renovation? A personal finance expert explains</a>
</strong>
</em>
</p>
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<h2>Renovation boom has added to uncertainties</h2>
<p><a href="https://theconversation.com/more-rented-more-mortgaged-less-owned-what-the-census-tells-us-about-housing-185893">Two-thirds of Australians</a> live in homes they own (outright or with a mortgage). Home renovations appear to have <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release">become increasingly popular</a>. </p>
<p>Housing is becoming less affordable, the latest <a href="https://www.corelogic.com.au/news-research/reports/housing-affordability">ANZ CoreLogic Housing Affordability Report</a> shows. Housing prices and rents have increased, along with the cost of debt. It is taking longer to save for a home deposit. There is a housing supply shortage. </p>
<p>Fewer home owners can afford to move. Many are renovating instead. Landlords, too, are often renovating to take advantage of higher rents. </p>
<p>Not all renovations are publicly reported, but <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release">Australian Bureau of Statistics data</a> show both owner-occupiers and investors have been taking out more loans for alterations, additions and repairs since the start of COVID-19. </p>
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<h2>Why renovations can make buyers liable for GST</h2>
<p>Most existing home purchases are not subject to GST. GST is payable when buying a newly built home and potentially when buying a “substantially renovated” home. </p>
<p>GST taxes the value of consumption of many goods and services. The value of consumption is assumed to be the market value. </p>
<p>GST is charged when a “new home” is first bought. For the sake of simplicity, it is assumed the purchase price of a new home when it is first bought is equal to the present value of all future consumption of the home. This means future buyers of the home generally don’t have to pay GST.</p>
<p>However, where a home is substantially renovated it is assumed most of the original value of the home that was subject to GST the first time it was sold has been consumed. The value added by a substantial renovation means the home is regarded as new. A buyer of a substantially renovated home may be required to pay 10% GST. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/building-costs-have-soared-is-it-time-to-abandon-my-home-renovation-plans-188298">Building costs have soared. Is it time to abandon my home renovation plans?</a>
</strong>
</em>
</p>
<hr>
<h2>But what is a ‘substantial renovation’?</h2>
<p>A minor repair will clearly not lead to substantial value being added to a home. On the other hand, if a home is demolished and replaced by a new one, the buyer of the new home may have to pay GST. It’s less clear what the GST treatment should be when a renovation falls somewhere in between these two extremes. </p>
<p>Canadian cases provide helpful examples of renovations falling along the spectrum. This issue is often litigated in Canada partly because home owners may be eligible for GST rebates where they live in a substantially renovated home. The outcomes of these legal cases have been inconsistent. </p>
<p>In <a href="https://www.canlii.org/en/ca/tcc/doc/2003/2003tcc929/2003tcc929.html?autocompleteStr=Lair%20v%20The%20Queen&autocompletePos=1">one case</a>, a basement was added, one floor of the house was gutted and renovated, the electrical system, plumbing, flooring, roof and windows were replaced, and a kitchen was extended. The court decided this was a substantial renovation. </p>
<p>In <a href="https://canlii.ca/t/fznbj">another case</a>, a new hallway was added, part of the roof and the ceilings were raised, the house was re-insulated, and a porch was added. A garage was demolished and replaced with a two-storey addition and basement. The addition included living space, a bedroom and bathroom. The court decided this was not a substantial renovation, despite significant value being added.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/nzs-housing-market-drives-inequality-why-not-just-tax-houses-like-any-other-income-208003">NZ’s housing market drives inequality – why not just tax houses like any other income?</a>
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</em>
</p>
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<h2>So how can we settle the issue?</h2>
<p>A test could be adopted in law to provide certainty about what is a substantial renovation. </p>
<p>A logical test could deem a home renovation to be substantial if its cost is 50% or more of the post-renovation resale value of the home. The cost of the renovation could be verified with receipts.</p>
<p>This means minor changes that do not add significant value to a home would not lead to a future buyer having to pay GST. GST would be potentially payable only when most of the value of the home being bought has been added by a renovation.</p><img src="https://counter.theconversation.com/content/218911/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christine Peacock does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A buyer could have to pay GST on a ‘substantially renovated’ home, but there’s often uncertainty about whether a renovation counts as substantial or not. A simple test could resolve the issue.Christine Peacock, Lecturer in Law, Federation University AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2123562023-09-04T01:26:30Z2023-09-04T01:26:30ZAs NZ struggles to resolve its long-running housing crisis, investors should be taxed for keeping homes empty<p>The property market is <a href="https://www.stuff.co.nz/business/125858062/property-new-zealands-largest-industry-report-says">New Zealand’s largest industry</a>, adding NZ$41.2 billion a year to gross domestic product. But there is a debate over how we tax houses – particularly those sitting empty despite the <a href="https://www.theguardian.com/world/2023/jul/08/new-zealand-housing-crisis-couch-surfing">ongoing housing crisis</a>. </p>
<p>Housing affordability is a concern for both renters and home owners. Last year, one in four rental households <a href="https://www.stats.govt.nz/news/housing-affordability-more-challenging-for-renters-than-homeowners/">spent more than 40% of their disposable income on housing costs</a>, compared with one in five households that were paying a mortgage. </p>
<p>A comprehensive capital gains tax has <a href="https://thespinoff.co.nz/live-updates/12-07-2023/not-the-time-hipkins-rules-out-future-wealth-or-capital-gains-tax">been ruled out</a> by both major political parties. </p>
<p>While the <a href="https://www.ird.govt.nz/property/buying-and-selling-residential-property/the-brightline-property-rule">bright-line rule</a> means home owners have to pay income tax on profits from properties sold less than 10 years after purchase, this still only applies to house sales. What about those investment properties <a href="https://www.stuff.co.nz/business/129998755/10-of-ghost-home-owners-intentionally-keeping-them-empty">sitting empty for investment reasons</a>?</p>
<p>My forthcoming research looks at the feasibility of taxing empty homes and what I found was a potential source of substantial revenue for the government. </p>
<h2>Empty homes during a housing shortage</h2>
<p>Around 5% of New Zealand’s housing stock – 95,000 dwellings – were considered empty during the 2018 census. </p>
<p>According to the <a href="https://www.emptyhomes.co.nz/Content/report/10161%20EH%20Report%20March%202022.pdf">Empty Homes report</a>, roughly 10% of the empty homes surveyed were intentionally being kept empty, while 35% were empty because they were holiday homes. A further 8% were kept empty for personal use (often as a second home), 23% were empty for renovations and repairs and about 17% were vacant rentals, sometimes due to non-compliance with Healthy Homes Standards. The remaining 6% were empty for “other reasons”, which often meant they were awaiting sale.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/taxing-empty-homes-a-step-towards-affordable-housing-but-much-more-can-be-done-80742">Taxing empty homes: a step towards affordable housing, but much more can be done</a>
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</em>
</p>
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<p>It was not clear how much of New Zealand’s housing stock remains in the hands of overseas-based investors after rules changed in 2018 to <a href="https://www.lexology.com/library/detail.aspx?g=a95d1bee-8313-49f9-abfb-eb5b9cb48bc9">restrict foreign ownership</a>. </p>
<p>But the National Party has promised to <a href="https://www.stuff.co.nz/business/132844161/50000-homes-open-for-purchase-by-foreign-home-buyers-under-nationals-plan">allow foreign buyers back into the property market</a>. Under National’s plan, foreign buyers will be limited to properties over $2 million and will need to pay a 15% tax on the sale price.</p>
<h2>Introducing an empty homes tax</h2>
<p>My research examines the under-utilisation of property taxes by the New Zealand government. </p>
<p>In the financial year 2021-22, the <a href="https://www.treasury.govt.nz/sites/default/files/2022-10/fsgnz-2022_2.pdf">central government earned 4.7% of its total tax revenue</a> from property taxes, <a href="https://www.oecd.org/tax/tax-policy/revenue-statistics-highlights-brochure.pdf">below the OECD average of 5.7%</a>. </p>
<p>But New Zealand is fertile ground for an empty house tax, which would directly impact property investors and those who have the means to own multiple properties. </p>
<p>An empty house tax targets home owners who let a property sit empty for a certain length of time. </p>
<p>New Zealand would not be breaking new ground with an empty house tax. This type of tax already exists in a <a href="https://vancouver.ca/files/cov/vancouver-2022-empty-homes-tax-annual-report.pdf">number of countries</a>. </p>
<p>What’s more, New Zealand has the infrastructural prerequisites needed to implement an empty house tax. </p>
<p>New Zealand has an existing land registry which records essential information regarding all parcels of land, bypassing the need to establish this data or to rely on self-reporting form home owners.</p>
<h2>A potential boon for government</h2>
<p>Some sort of empty house tax could be a source of revenue for the government, as illustrated by cities and countries overseas. </p>
<p>Empty properties in Paris, France, incur an annual surcharge of 160% of the standard property rates. In Vancouver, Canada, vacant homes are <a href="https://vancouver.ca/home-property-development/empty-homes-enforcement-penalties.aspx">taxed at 3% of the property’s taxable value</a> and failure to pay can result in fines.</p>
<p>In Ireland, the empty house tax is three times the property’s existing base local property tax. And in Melbourne and Sydney, house buyers who leave a property unused for six months face an annual charge of at least A$5,500 (NZ$5,978). </p>
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Read more:
<a href="https://theconversation.com/airbnb-and-empty-houses-whos-responsible-for-managing-the-impacts-on-our-cities-83959">Airbnb and empty houses: who's responsible for managing the impacts on our cities?</a>
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<p>These countries’ responses to vacant properties suggest that high rates and tax penalties steer investors toward more productive areas of the economy - a reason cited by <a href="https://www.reuters.com/article/us-canada-housing-tax-idUSKCN11K2HL">policy makers in Vancouver and elsewhere</a> for introducing the tax. </p>
<p>Following the Vancouver model, <a href="https://crux.org.nz/crux-news/would-taxing-empty-homes-work-in-queenstown-lakes/">an empty homes tax on property in Queenstown</a> could generate $255 million a year. </p>
<h2>Time for serious consideration</h2>
<p>New Zealand could take one of two paths when introducing an empty home tax. </p>
<p>The first option is to charge a tax of between 200% and 300% of rates, similar to Ireland. Alternatively, we could introduce a tax of 3-5% of land value, like Vancouver. </p>
<p>This tax could be tailored to cities and regions, with empty homes in cities like Queenstown and Auckland incurring higher charges than other areas.</p>
<p>The rules could exempt residential and rental properties, with an exception for holiday homes unless they are normally used for Airbnb. People forced to relocate from their residential homes for extended periods due to work requirements could also be exempted from paying the empty home tax. </p>
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Read more:
<a href="https://theconversation.com/proving-the-wealthiest-new-zealanders-pay-low-tax-rates-is-a-good-start-now-comes-the-hard-part-204532">Proving the wealthiest New Zealanders pay low tax rates is a good start – now comes the hard part</a>
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<p>To ensure the success of the empty house tax, we need to include credible measures to monitor compliance. </p>
<p>The revenue from an empty house tax could then be funnelled into building new homes. </p>
<p>Property investors benefit from New Zealand’s lack of an empty house tax. An empty house is still <a href="https://www.stuff.co.nz/business/property/300935247/hsbc-house-prices-will-rise-5-over-2024">an asset accruing value</a>, even without rent. </p>
<p>On the flip side, introducing an empty house tax will penalise land holdings for speculation, encourage property owners to enter the rental market – which could in turn increase rental affordability.</p><img src="https://counter.theconversation.com/content/212356/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ranjana Gupta does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand needs to follow international precedent and make it expensive for investors to keep properties empty.Ranjana Gupta, Senior Lecturer Taxation, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2098932023-08-09T13:08:23Z2023-08-09T13:08:23ZKenya is going digital to boost tax revenue – there are lessons to learn from other African countries<figure><img src="https://images.theconversation.com/files/540735/original/file-20230802-15-2g1n8k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Billy Mutai/SOPA Images/LightRocket via Getty Imagess</span></span></figcaption></figure><p>Many African tax authorities have weak capacity to raise revenue. From 1990 to 2020, sub-Saharan African countries <a href="https://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf#page=3">on average collected</a> only about 12%-15% of GDP as taxes, a much lower share than the 33.5% in <a href="https://www.oecd.org/about/">OECD economies</a>. </p>
<p>For countries that have limited information about taxpayers, constrained resources and informal economies, it can be difficult to collect revenue. What’s more, African tax administrations tend to rely on manual filing and payment of taxes. In-person interactions between taxpayers and tax officials are common, creating opportunities for collusion when paying taxes. African taxpayers also experience <a href="https://www.afrobarometer.org/wp-content/uploads/2022/02/ab_r5_policypaperno7.pdf">higher compliance costs</a> than similar regions when navigating opaque tax systems.</p>
<p>Kenya has faced many of these challenges. To streamline processes and make them more transparent, the country has in the last decade begun to digitise public services like tax collection. Digitisation also aims to enhance taxpayer identification and monitoring capacity, and lower the costs of compliance for taxpayers.</p>
<p>In the latest policy reforms, the country plans to <a href="https://citizen.digital/news/govt-to-roll-out-unique-personal-identifiers-in-september-n320243">introduce digital identity documents</a> for all Kenyans by February 2024. A digital ID system, e-ID, uses digital technology across the entire ID lifecycle: capturing, validating, storing and transferring data. </p>
<p>In Kenya, each citizen will receive a unique personal identifier. It will be crucial throughout a child’s journey in school. From the age of 18, the identifier will become an official national identity number for access to the full range of public services. </p>
<p>At the same time, Kenya is on course to eliminate cash transactions for all government services. These services include business registration, passport services, and land and property services in 2023. </p>
<p>Combining mandatory electronic tax payment and e-IDs could greatly improve revenue collection and efficiency, and cut taxpayers’ compliance costs. </p>
<p>Electronic filing of taxes has been mandatory since 2016 to collect taxes on employment, business and rental incomes. The <a href="https://www.kenyanews.go.ke/kra-optimizes-itax-ahead-of-june-30-annual-returns-filing-deadline/">system</a> supports a wide range of tasks, from registrations to refunds. Taxpayers can still pay taxes using cash, however, by visiting authorised banks or Kenya Revenue Authority service centres. Universal e-payment of taxes is expected to change all that.</p>
<p>We have between us years of research in governance, public finance and taxation conducted in African countries. Our view is that a number of challenges and constraints need to be considered to unlock the benefits of a fully digitised tax administration, not just in Kenya but elsewhere.</p>
<h2>Technology and taxation</h2>
<p>Technology can strengthen tax administration in <a href="https://www.ictd.ac/publication/promise-limitations-information-technology-tax-mobilisation/">at least three ways</a>:</p>
<p><strong>1. Identifying the tax base:</strong> using third-party information, technology can create comprehensive databases of taxable subjects, making it easier to determine what tax is payable. Kenya’s digital ID would improve the way government databases work together and the revenue collector’s “view” of taxpayers.</p>
<p><strong>2. Enforcing compliance:</strong> technology can automatically check what a taxpayer reports against other data sources. Efficient e-filing platforms can automatically identify missed or late declarations. The unique identifiers provided by an ID scheme make this work.</p>
<p><strong>3. Facilitating compliance:</strong> tax e-filing and e-payment can help <a href="https://www.ictd.ac/blog/tax-compliance-costs-digitalisation/">reduce compliance costs</a>. They improve record-keeping and eliminate travel, queuing and capricious manual practices from tax officials. And the biographic information in the digital ID database helps with tax registration.</p>
<p>But <a href="https://www.ictd.ac/publication/ict-and-tax-administration-in-sub-saharan-africa-adopting-itas-in-uganda-and-sierra-leone/">evidence</a> suggests that important preconditions must be met for IT-based tax reforms to succeed. </p>
<p>In the case of Kenya, accessibility and taxpayer costs should be policy priorities when mandating e-payment. <a href="https://www.academia.edu/57351106/Digitalising_Tax_The_Kenyan_Way_The_Travels_and_Translations_of_ITax_in_Kenya">A recent study on tax e-filing</a>, for instance, revealed that not everyone had access to devices necessary for e-filing, and there were language barriers. These practical challenges typically pushed taxpayers to use intermediaries: they went back to a manual, in-person experience. </p>
<p>These shortcomings increase the risk of errors, misuse of personal data and bribery. Less tech-savvy taxpayers might be vulnerable. As <a href="https://www.ictd.ac/publication/wrong-african-tax-administration/">filing levels are already poor</a>, e-payment solutions should make it easier, not harder, to comply. </p>
<h2>Lessons from other countries</h2>
<p>E-services help improve filing accuracy and timeliness, but one lesson from <a href="https://www.ictd.ac/publication/mandating-digital-tax-tools-response-covid-evidence-eswatini/">our research</a> is that this does not always translate into higher tax revenue. </p>
<p>Positive impacts can be short-lived, as adoption of <a href="https://www.ictd.ac/publication/digital-merchant-payments-as-a-medium-of-tax-compliance/">digital merchant payments in Rwanda</a> indicates. Here, taxpayers quickly reverted to pre-adoption compliance levels. Similarly, in Ethiopia, the <a href="https://www.ictd.ac/publication/icts-tax-compliance-evidence-taxpayer-responses-technological-innovation-ethiopia/">adoption of point-of-sale electronic tax devices increased revenues</a>, but gains were offset by taxpayers inflating other, less verifiable margins.</p>
<p>Making digital systems compulsory, as in <a href="https://www.ictd.ac/publication/technology-tax-rwanda/">Rwanda</a> and <a href="https://www.ictd.ac/publication/mandating-digital-tax-tools-response-covid-evidence-eswatini/">Eswatini</a>, does not necessarily lead to people using them. Digital divides emerge between adopters and non-adopters. The less equipped, more marginalised and less tech-savvy taxpayers <a href="https://www.ictd.ac/publication/the-vat-in-practice-equity-enforcement-and-complexity/">fail to take up the tools</a>. </p>
<p>Our research also shows that <a href="https://www.ictd.ac/blog/identity-issues-four-challenges-digital-ids-africa-tax-systems/">digital ID schemes must meet several conditions for tax administrations to benefit meaningfully</a>. Digital IDs must be universally adopted. Identification data should be accurate and up to date. Strong cooperation across government entities is necessary to allow data sharing, as we’ve seen in our ongoing work in Uganda and Ghana.</p>
<h2>Which way for Kenya?</h2>
<p>The government and tax administration must be cautious about digital IDs. Poor-quality and outdated data from e-ID could be damaging to the Kenya Revenue Authority’s functions. The institutions involved should promote a culture of information updating in the population. They should encourage citizens to share valid information with the government.</p>
<p>It’s vital to establish a robust data protection framework and digital trust, especially after the <a href="https://fpf.org/blog/how-the-kenyan-high-court-temporarily-struck-down-the-national-digital-id-card-context-and-analysis/">failure</a> of the country’s National Integrated Identity Management System. Citizens need clarity on data usage and how the new project differs from the previous one if they are to trust the digital ID system. </p>
<p>Similarly, the government and revenue authority must support citizens to move towards fully digitised tax payments. They can do this by creating systems that are simple and secure, and by providing assistance and training. </p>
<p>The development of e-government must happen along with a framework for data protection and cyber-security response infrastructure. Besides threatening citizens’ data privacy and security, <a href="https://www.bbc.co.uk/news/world-africa-66337573/">system failures</a> – like the one that recently disrupted access to multiple services on the e-Citizen portal – have extremely serious repercussions on citizens’ trust in government and technology.</p>
<p><em>Nimmo Elmi (PhD) contributed to some of the research on which this article is based.</em></p><img src="https://counter.theconversation.com/content/209893/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Fabrizio Santoro receives funding from the Bill and Melinda Gates Foundation. </span></em></p><p class="fine-print"><em><span>Celeste Scarpini does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Digital tax filing can improve accuracy and timeliness but it doesn’t always translate into higher tax revenue.Celeste Scarpini, Researcher, Institute of Development StudiesFabrizio Santoro, Postdoctoral Fellow, International Centre for Tax and Development, Institute of Development StudiesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2067452023-05-31T20:05:48Z2023-05-31T20:05:48ZMaking NZ’s tax system fairer is a good idea – but this proposed new law isn’t the answer<figure><img src="https://images.theconversation.com/files/529220/original/file-20230531-27-ruatts.jpg?ixlib=rb-1.1.0&rect=30%2C100%2C6679%2C4365&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>It’s no secret that Revenue Minister David Parker has <a href="https://www.newshub.co.nz/home/politics/2023/03/david-parker-pushing-ahead-with-new-tax-principles-legislation-plan.html">long been interested in tax reform</a> in New Zealand. In 2022, he announced plans for legislation requiring future tax policy changes to be measured against a set of tax principles, notably fairness. </p>
<p>The <a href="https://www.parliament.nz/en/pb/sc/make-a-submission/document/53SCFE_SCF_691E5C66-AA17-43F0-208D-08DB57320DB1/taxation-principles-reporting-bill">Taxation Principles Reporting Bill</a>, just released for public submissions, is the result of Parker’s ambition. But while it is reasonable to support a tax system that is fairer than the current system, I believe the bill is confusing, unnecessary and pointless. </p>
<p>Unlike the <a href="https://taxworkinggroup.govt.nz/">Tax Working Group</a>, which clearly and adequately stated tax principles that most people could understand, the bill introduces highly technical ideas that could exclude ordinary people from the debate.</p>
<p>The bill also attempts to tie the hands of future governments by legislating principles that are not accepted across the political spectrum. </p>
<p>My main concern, then, is that the bill appears to close down democratic debate about taxation by claiming certain viewpoints are universally accepted. Secondly, the tax principles, as they are stated, are vague and poorly explained. </p>
<h2>Horizontal equity</h2>
<p>The bill introduces the concept of “horizontal equity” and defines this as meaning “people with similar levels of income should pay similar amounts of tax”. </p>
<p>But a more accurate way to explain horizontal equity would be to say “people who are in similar situations should be treated similarly”. </p>
<p>For instance, tax systems often view people with young children as being in a different situation from people with adult or no children. The <a href="https://www.ird.govt.nz/working-for-families">Working for Families</a> (WFF) programme is an example of such a distinction based on a political value judgment. </p>
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Read more:
<a href="https://theconversation.com/new-zealands-tax-system-is-under-the-spotlight-again-what-needs-to-change-to-make-it-fair-198492">New Zealand's tax system is under the spotlight (again). What needs to change to make it fair?</a>
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<p>The principle of horizontal equity as outlined in the bill is incompatible with the Income Tax Act because people with similar levels of income won’t pay similar levels of tax due to programmes like WFF. </p>
<p>If the principle of horizontal equity needs to be stated, it should be that “taxpayers in similar circumstances should pay a similar amount of tax”. </p>
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<img alt="" src="https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&rect=64%2C8%2C5327%2C3581&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/529214/original/file-20230531-23-mupx7.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Revenue Minister David Parker has long been interested in making changes to the New Zealand tax system.</span>
<span class="attribution"><span class="source">Hagen Hopkin/Getty Images</span></span>
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<h2>Time and money</h2>
<p>There is also no concept of income that everyone accepts. A standard tax textbook distinguishes between legal, accounting and economic conceptions of income.</p>
<p>According to the bill, “the time value of money matters when considering horizontal equity”. I presume the authors of the bill mean that some will get a tax benefit by deferring their tax liability when others with a similar income can’t. </p>
<p>But the phrasing in the bill makes it difficult to understand. A set of principles that affect everyone should be understandable by as many people as possible. </p>
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Read more:
<a href="https://theconversation.com/why-a-proposed-capital-gains-tax-could-mean-tax-cuts-for-most-new-zealanders-112852">Why a proposed capital gains tax could mean tax cuts for most New Zealanders</a>
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<p>The bill also introduces the phrase “economic income”, but again a clear definition isn’t included. </p>
<p>The bill’s authors then appear to endorse a particular conception of comprehensive income – that is, the increase in economic capacity during the tax assessment period. </p>
<p>Understood broadly, this conception of income not only includes increases in wealth that a taxpayer hasn’t received (unrealised gains), but also capital gains and capital transfers. But New Zealand doesn’t currently tax capital gains or capital transfers.</p>
<p>This means there would be a significant gap between the ideas set down in the principles and how most people think of income. </p>
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<h2>Vertical equity</h2>
<p>The bill also states: “The tax system should be progressive. Tax is progressive if people with higher levels of economic income pay a higher proportion of that income in tax.” This is in line with the principle of “vertical equity”, which requires people in different circumstances to be treated differently. </p>
<p>It is not uncommon for countries to lock in the ability to pay tax, which traditionally includes both horizontal and vertical equity, within their constitutions. But the bill is not a constitutional document and represents the opinion of one government – and perhaps just one minister – at a particular point in time.</p>
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Read more:
<a href="https://theconversation.com/forget-a-capital-gains-tax-what-new-zealand-needs-is-a-tax-on-inherited-wealth-143604">Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth</a>
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<p>Using the word “economic” in the explanation of vertical equity is unnecessary. The <a href="https://www.oecd.org/ctp/glossaryoftaxterms.htm">OECD</a> defines progression as meaning “an increasing proportion of income must be paid in tax as the income increases”. </p>
<p>The inclusion of “economic” in this context could be seen as an attempt to neutralise debate about a particular theory of income that isn’t universally accepted.</p>
<h2>The bill doesn’t solve our tax problems</h2>
<p>The bill then states: “A progressive tax system does not mean that every tax should be progressive (e.g. GST is regressive) but the overall system ought to be.” </p>
<p>This is a reasonable and pragmatic approach to including GST in the tax mix. But the following sentence is problematic: “In practice, wealthy people should at the very least pay no lower a rate of tax on their economic income than middle-income New Zealanders already do.” </p>
<p>Why “in practice” and not in principle? The income of so-called “middle-income New Zealanders” is most likely fully taxed under the current provisions of the Income Tax Act. </p>
<p>Certainly, some wealthy people may engage in arrangements to reduce their income tax liabilities. But most don’t pay “enough” tax because successive governments have lacked the courage to tax capital gains, wealth, and gifts and inheritances. </p>
<p>The Tax Principles Reporting Bill does nothing to remedy this.</p><img src="https://counter.theconversation.com/content/206745/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Barrett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>New Zealand’s tax system might be in need of updating, but Revenue Minister David Parker’s new tax legislation is unnecessarily complicated at a time when we most need clarity.Jonathan Barrett, Associate Professor in Commercial Law and Taxation, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2029542023-03-30T09:08:34Z2023-03-30T09:08:34ZGrattan on Friday: We need more tax revenue, but don’t ask the major parties how we’ll get it<p>Teal candidates again fell short in the NSW election. Only one who was so labelled was successful, and she rejects the terminology. This followed the Victorian state election in which no teal won. </p>
<p>Inevitably, the two state polls raise the question of whether the teal phenomenon, which saw six win federally last May, was such a product of special circumstances that the balloon might now have burst. </p>
<p>The story is likely to be more complicated. </p>
<p>The federal teals’ campaigns were awash with money – different laws at state level limited resources available to them, even though Climate 200 continued to help. In NSW, optional preferential voting also worked against them. </p>
<p>The specific issues driving the federal teals’ wins (climate change, integrity, women’s equality) were particularly intense in 2022, and the anti-Morrison factor was huge. </p>
<p>When the federal teals seek re-election, there will be no Morrison factor.
But the benefits of incumbency will work for them, as will the general and continued disillusionment with the major parties, which means many voters are looking favourably on independent alternatives. </p>
<p>While the changed electoral scene in 2025 (compared to 2022) could make it harder for new teal candidates to win, so might an overhaul of the electoral funding regime. </p>
<p>If, for example, Labor decided to cap candidates’ spending, which would be desirable to stop the financial arms race we now see in elections, that would harm teal candidates struggling for name recognition. On the other hand, given the teal movement, directed at Liberal seats, has benefited Labor, the federal government might keep its changes modest. </p>
<p>The federal teals, although they liaise and collaborate, are not one bloc, and their parliamentary votes have shown they are ideologically diverse. Labor’s lower house majority has meant they do not, to their disappointment, hold the balance of power there. </p>
<p>But they are proving adept at using the forums provided by parliament, making a contrast with many backbenchers from the major parties who, although they might do admirable work in their electorates and sometimes on committees, give the impression of being just numbers in their respective parties. Serious policy discussions in the Labor caucus or the Coalition party room are rare.</p>
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Read more:
<a href="https://theconversation.com/former-treasury-head-ken-henry-says-we-need-big-bang-tax-reform-rather-than-incremental-change-201962">Former treasury head Ken Henry says we need 'big bang' tax reform rather than incremental change</a>
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<p>The backbenchers in the government and opposition are at their worst in the House of Representatives question time, which continues to be as uninformative as ever. </p>
<p>This government (like its predecessor) uses question time to parade what it is doing, with endless so-called Dorothy Dixers, which must be embarrassing to ask. Apart from questions on the Voice, the opposition asks variations on a common range of questions about cost of living, energy prices and the like, often with a slogan attached – “why do Australian families always pay more under Labor?” </p>
<p>The Coalition questions are predictable and repetitive so the prime minister and practised senior ministers have little trouble batting them away. In the last parliament, question time was frequently painful for the Morrison government; in this parliament, it is seldom difficult for the Albanese government.</p>
<p>Rarely does the opposition produce anything from its own independent research with which to surprise a potentially vulnerable minister. Nor does it effectively use question time to extract information. </p>
<p>Crossbenchers (not just teals) do seriously probe for information and sometimes test ministers. </p>
<p>Question time is frustrating, when you think what it could be. But a much more important fault in current federal politics is this: despite the general recognition that big economic reforms are needed, neither government nor opposition dares go there. </p>
<p>Taxation is the standout example. Over the coming years, total tax will have to increase if we continue to want the services from government we are demanding.</p>
<p>Some 59 leading economists were asked, in a <a href="https://theconversation.com/inheritance-taxes-resource-taxes-and-an-attack-on-negative-gearing-how-top-economists-would-raise-20-billion-per-year-202630">survey</a> by the Economic Society of Australia and The Conversation, for ways to find an extra $20 billion a year. They nominated new or increased land taxes, increased resources tax, winding back negative gearing, and broadening the GST as their top four options. </p>
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Read more:
<a href="https://theconversation.com/grattan-on-friday-trimming-the-tail-of-the-superannuation-tax-tiger-is-no-easy-task-200996">Grattan on Friday: Trimming the tail of the superannuation tax tiger is no easy task</a>
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<p>The Albanese government is hamstrung by its election promise to not increase taxes (apart from cracking down on multi-nationals’ tax avoidance). That’s for this term, but its narrow majority is likely to make Labor wary at the next election of bold tax reform promises. </p>
<p>One way of tackling the issue would be to have a comprehensive inquiry into the tax system, but treasurer Jim Chalmers has made it clear he doesn’t want one. Chalmers was a staffer to then treasurer Wayne Swan when the Henry tax inquiry was held and is seared by the experience – the aftermath didn’t go well for Labor. </p>
<p>Nor can we expect the opposition to lead the way on tax. The risks of being a big target are obvious. John Howard, having lived through the disaster of the Coalition under John Hewson offering major reform with its “Fightback” program at the 1993 election, pledged before the 1996 election “never ever” to introduce a GST, only to reverse that after he won government (and nearly lost the subsequent election). </p>
<p>Small target is today’s fashion, the road to power for Anthony Albanese and Chris Minns.</p>
<p>Teal crossbencher Allegra Spender is free of responsibility for a party, although she does have an eye on what the constituents in her Sydney electorate of Wentworth want her to do. She judges them open to a policy discussion about tax. </p>
<p>Spender on Friday hosts a roundtable on the tax system, to which she has attracted a who’s who of experts, including former treasury secretary Ken Henry (of THAT review) and Grattan Institute executive director Danielle Wood. </p>
<p>In her speech to the roundtable, Wood will say: “Australia’s tax system is failing us as a nation. It fails us because it cannot deliver the revenue we need to fund the services we expect. Australia has a revenue problem. Without policy change, we only have two solutions: let budget deficits grow ever larger, or continue to push up taxes on labour income.</p>
<p>"This is uncharted territory for tax reform: we need changes to the system that both boost revenue and improve the efficiency of tax collections. There is simply no opportunity to ‘buy reform’ through overly generous compensation packages – we need to raise more and we need to raise it smarter.”</p>
<p>At least roundtables like Spender’s provide an airing for initiatives that we should be considering. It’s just unfortunate the leading politicians in the major parties are not the ones giving them ventilation, let alone support.</p><img src="https://counter.theconversation.com/content/202954/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The government is hamstrung by its election promise to not raise taxes or bring in new ones. That’s for this term, but its narrow majority is likely to make Labor wary at the next election of bold tax reform promises.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1911742022-09-22T10:23:33Z2022-09-22T10:23:33ZGrattan on Friday: Can Jim Chalmers become a reforming treasurer?<p>Jim Chalmers’ long term ambition is similar to that of most treasurers. He wants to be prime minister. More immediately, he aspires to be a reformer, which has become harder in today’s electorate, with its low tolerance for pain. </p>
<p>Chalmers likes to talk about having “conversations” on economic matters with the public. On Tuesday – when he was playing down some good news about the $50 billion windfall in the budget outcome for 2021-22 – he spoke of the need for a “national conversation” about how we pay for all the expensive programs people want. </p>
<p>He’d been asked about Reserve Bank Governor Phil Lowe who last week said our fiscal problems demanded higher taxation, spending cuts or economic reforms to grow the economy, or all three. Desirably with a start this parliamentary term, said Lowe. </p>
<p>The governor, who’s in the gun for holding out the prospect of low interest rates continuing until 2024, is not elected and anyway, is not expected to be in his post beyond the expiry of his term in September next year. </p>
<p>Lowe has nothing to lose by being blunt. As a senior minister Chalmers has to be more careful. But he was pleased with Lowe’s words, as he was with similar public sentiments from treasury secretary Steven Kennedy recently. </p>
<p>“I do think we need to have a national discussion about the structural position of the budget, and how we fund the expectations that Australians legitimately have,” Chalmers said.</p>
<p>The cynic might say, talk’s cheap, action could cost votes.</p>
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Read more:
<a href="https://theconversation.com/government-announces-inquiry-into-childcare-costs-while-chalmers-promises-conversation-about-budget-challenges-190990">Government announces inquiry into childcare costs, while Chalmers promises 'conversation' about budget challenges</a>
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<p>Chalmers highlighted that five big spending areas – health, the National Disability Insurance Scheme, aged care, defence, and servicing the large public debt – were creating “substantial structural concerns”. The spending represented “a combination of the unavoidable and the desirable”. </p>
<p>Chalmers knows there must be a reckoning. But when, and in what form? </p>
<p>The government is squeezed by the promises it made (to remain a small target in order to get elected), the risks in breaking its word, and a volatile electorate. </p>
<p>We hear endless commentary about the (protected) Stage 3 tax cuts, but they are only one constraint. Apart from a crackdown on multinational tax avoidance, Labor pledged there would be no discretionary increases in tax this term.</p>
<p>In theory it has got greater flexibility on spending cuts and we can expect to see quite a few in the October budget, targeting the former government’s programs. This is not just a matter of removing “rorts” but also replacing that government’s priorities with its own. </p>
<p>Chalmers says this will be a “bread and butter” budget, suggesting the more fundamental attempts at reform will come later. </p>
<p>After this “standard” budget “there are multiple opportunities in multiple budgets over the course of the next three years or so, for us to properly engage the people in a proper national conversation about the services that we provide, and how we fund them,” Chalmers said.</p>
<p>Even so, making major changes this term will be difficult; equally challenging would be putting at the 2025 election a program for structural reform of the budget. </p>
<p>In 2019 Labor took to the election a big spending-big taxing policy; in 2022, it went for minimalism. Nevertheless, the election commitments involve extra spending, notably the generous child care policy, and improvements to aged care, including funding the (uncosted) wage rise for workers that will be handed down by the Fair Work Commission. </p>
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Read more:
<a href="https://theconversation.com/word-from-the-hill-treasurer-chalmers-warns-against-getting-too-excited-by-50-billion-improvement-in-budget-bottom-line-190989">Word from The Hill: Treasurer Chalmers warns against getting too excited by $50 billion improvement in budget bottom line</a>
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<p>The government is also under pressure to do more on various fronts, for example, to extend paid parental leave. </p>
<p>Any “conversation” about what services people want from government can quickly get into tricky issues. </p>
<p>These include the sustainability of what’s being offered (think the ballooning NDIS, costing about $28.6 billion in 2021-22 rising to an estimated $34 billion in 2022-23), and the extent to which users should pay more for some services (think aged care). </p>
<p>Serious attempts to put spending on a better basis in the big areas would be met with loud protests from those losing out.</p>
<p>Then there’s the “conversation” about revenue. Leaving aside the Stage 3 tax cuts, many economists see the tax system as unfit for purpose. Certainly over the long term we need more revenue to finance programs. </p>
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Read more:
<a href="https://theconversation.com/from-curry-nights-to-coal-kills-dresses-how-social-media-drives-politicians-to-behave-like-influencers-190246">From curry nights to ‘coal kills’ dresses: how social media drives politicians to behave like influencers</a>
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<p>But major tax reform takes political backbone, and efforts don’t necessarily come off. John Howard and Peter Costello introduced the goods and services tax, but the Coalition nearly lost the election at which it sought a mandate for it. Years before, when treasurer, Howard failed to get support in the Fraser government for a broad-based indirect tax.</p>
<p>And who can forget treasurer Wayne Swan’s attempt at a mining tax? Certainly not Chalmers, who worked for Swan at the time. </p>
<p>There was treasurer Scott Morrison’s spruiking of GST reform in Malcolm Turnbull’s government, which ended with him being slapped down by his prime minister. </p>
<p>Robert Breunig, Director of the Tax and Transfer Policy Institute at the Australian National University’s Crawford School says, “We’re really stuck on tax”. </p>
<p>“The Scandinavian countries are able to reform tax in anticipation of problems. Anglo-Saxon countries generally get into big trouble and are then forced into reform,” he says.</p>
<p>Breunig argues we have too much reliance on personal income tax and company tax, reducing economic incentives. He advocates targeting wealth, through changing tax arrangements on superannuation and imposing a national land tax, which would replace state stamp duties. </p>
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Read more:
<a href="https://theconversation.com/child-poverty-fell-to-a-record-low-5-2-in-2021-heres-how-it-could-have-been-even-lower-187334">Child poverty fell to a record-low 5.2% in 2021 – here's how it could have been even lower</a>
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<p>While reducing the tax breaks for superannuation might be obvious, the backlash when the Coalition undertook modest change some years ago was sharp. And a land tax-stamp duty trade off would involve getting the states on board. </p>
<p>What about changes to the GST? They would have been easier, Breunig says, in the days when the budget had multi-billion surpluses and losers could have been paid off. </p>
<p>Of course if Chalmers was really brave, he could push the idea of an inquiry into federal-state revenue arrangements, or even propose a tax summit as in 1985 (guarding against treasurer Paul Keating’s experience of his PM leaving him high and dry).</p>
<p>The reforming ambitions of a treasurer affect the dynamics of their relationship with the prime minister. </p>
<p>Bob Hawke, himself committed to economic reform, was supportive of Keating’s zeal, including on tax. But he also reined him in, when the politics came to the fore or there was insufficient stakeholder support for Keating’s goal.</p>
<p>Keating – whom Chalmers often speaks with and greatly admires – chafed under such restrictions. </p>
<p>So far Anthony Albanese has shown himself a cautious leader, in opposition and now in government. The exception is in a non-economic area – his commitment to a referendum on the Voice to Parliament. </p>
<p>Albanese and Chalmers appear to have a good relationship. It remains to be seen whether they will continue to march to the same beat on policy, or whether Chalmers will push for more and faster change, and how Albanese and other ministers react if that happens. </p>
<p>For a treasurer a “conversation” with the Australian people about economic reform must involve a whole other set of “conversations”, with the prime minister and colleagues. And those can test the mettle of all of them.</p><img src="https://counter.theconversation.com/content/191174/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Chalmers knows there must be a reckoning. But when, and in what form?Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1852232022-07-10T20:27:18Z2022-07-10T20:27:18ZDo Australians pay too much income tax? 6 charts on how we rank against the rest of the world<figure><img src="https://images.theconversation.com/files/473155/original/file-20220708-25-p8k8y8.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C3968%2C1954&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australians pay too much income tax – or so some argue. </p>
<p>The Australian Financial Review’s economics editor, John Kehoe, for example, <a href="https://www.afr.com/policy/tax-and-super/personal-tax-take-second-highest-in-oecd-20211206-p59f3y">has noted</a>:</p>
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<p>Australians are paying more personal income tax as a share of government revenue than any other advanced economy, except for the high-taxing Scandinavian welfare state of Denmark.</p>
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<p>And the day after the federal election, the AFR <a href="https://www.afr.com/policy/economy/australia-must-switch-to-the-right-tax-mix-20220516-p5altk">editorialised</a>:</p>
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<p>Too heavy reliance on taxing productive workers and business earnings blunts incentives to work, save and invest. </p>
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<p>Perhaps even more stinging is that the AFR considers New Zealand to have a better income-tax system. New Zealanders pay <a href="https://www.newzealandnow.govt.nz/live-in-new-zealand/money-tax/taxes">10.5%</a> on their first NZ$14,000 (then 17.5% up to NZ$48,000), while Australians enjoy a tax-free threshold <a href="https://www.ato.gov.au/rates/individual-income-tax-rates/">up to A$18,200</a>. The AFR <a href="https://www.afr.com/policy/economy/australia-must-switch-to-the-right-tax-mix-20220516-p5altk">says</a> this:</p>
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<p>creates tax-penalty work disincentives that partly explain New Zealand’s approximately 5% higher rate of workforce participation than Australia.</p>
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<p>Are these issues really a problem? If there is a case for tax reform, what sort of reform?</p>
<h2>High individual income tax</h2>
<p>In 2019, the most recent year for which the OECD has <a href="https://www.oecd.org/tax/revenue-statistics-australia.pdf">complete statistics</a>, Australia ranked second among OECD members on personal income tax as a share of total taxes.</p>
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<p>In fact, it has ranked second or third in 36 of the past 40 years, and fourth in the other four years, swapping places with New Zealand and the United States.</p>
<h2>But that’s just part of the picture</h2>
<p>Overall, Australia’s level of taxation, measured as a proportion of GDP, is relatively low – 27.7% to the OECD average of 33.4%. </p>
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<p>That makes Australia the 29th lowest-taxing nation of the OECD’s 38 members. </p>
<h2>Other nations have social security taxes</h2>
<p>The main reason Australia ranks so highly on individual income tax levels is because Australians don’t pay separate social security taxes.</p>
<p>Australia, New Zealand and Denmark fund social security from general government revenue. The other 35 OECD nations levy specific taxes on employers and employees to fund social security systems (unemployment support, age and disability pensions etc)</p>
<p>These account for an average 25.9% of total tax revenue, or close to 9% of GDP, across the OECD. </p>
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<p>Employee social security contributions are <a href="https://www.jstor.org/stable/pdf/1910545.pdf">very similar to income taxes</a>. They are generally collected the same way, and counted as direct taxes on households or individuals in income surveys.</p>
<p>Though employers also pay social security taxes, <a href="https://voxeu.org/article/who-really-pays-social-security-contributions-and-labour-taxes">evidence suggests</a> about two-thirds of these are effectively paid by employees through lower wages.</p>
<p>In fact, if we add together personal income taxes and social security contributions, then Australia, rather than having the second-highest share of income taxes in the OECD, has the eighth-lowest.</p>
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<h2>What about superannuation?</h2>
<p>Some say Australia’s compulsory superannuation scheme, in which employers pay 10.5% of an employee’s wage as super, should be counted in these tax measures, because it is similar to social security contributions in other countries.</p>
<p>12 other OECD countries have mandatory employer-paid private pension schemes. </p>
<p>Employers pay this money directly into private accounts, not to the government, so it doesn’t meet the <a href="https://treasury.gov.au/sites/default/files/2019-03/c2015-rethink-dp-TWP_combined-online.pdf">definition of a tax</a>. </p>
<p>But for argument’s sake we can factor in super payments using “<a href="https://data.oecd.org/tax/tax-wedge.htm">tax wedge</a>” data. </p>
<h2>Combining mandatory payments</h2>
<p>A tax wedge is the ratio between the amount of taxes paid by an average worker (assumed to be single without dependents) and the corresponding total labour cost for the employer.</p>
<p>The important point here is that wedge data include both what employers pay as mandatory private payments and as mandatory payments into government social security.</p>
<p>On this measure, Australia’s direct tax burden is the 11th lowest in the OECD.</p>
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<p>So claims we have very high shares of personal income taxes are only part of the picture. Superannuation does not change the story significantly.</p>
<h2>So what about New Zealand?</h2>
<p>New Zealand does collect more revenue through consumption taxes – <a href="https://data.oecd.org/tax/tax-on-goods-and-services.htm#indicator-chart">12.5% of GDP</a> in 2019, compared to 7.3% for Australia.</p>
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<p>But it still collects more in income taxes – <a href="https://data.oecd.org/tax/tax-on-personal-income.htm#indicator-chart">12.4% of GDP compared to 11.6%</a>. Its total level of taxation is <a href="https://data.oecd.org/tax/tax-revenue.htm#indicator-chart">33.4% of GDP</a>, compared to 27.7% for Australia.</p>
<h2>The case for tax reform</h2>
<p>Even so, there are things to learn from New Zealand. </p>
<p>Australia’s system could be structured better. As Louis XIV’s finance minister, <a href="https://www.economist.com/special-report/2014/02/20/plucking-the-geese">Jean-Baptiste Colbert</a> (1619-1683), said, the art of taxation is about “plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.</p>
<p>Income taxes are highly visible. This may make us more ready to believe we are highly taxed. There is a case for considering tax reforms that deliver adequate revenue more fairly.</p>
<p>New Zealand is in the process of this change, with its proposed <a href="https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/FlagPost/2021/November/NZ-Social-Unemployment-Insurance">Social Unemployment Insurance scheme</a> being funded by a 1.39% levy on employers and workers.</p>
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Read more:
<a href="https://theconversation.com/beyond-gdp-chalmers-historic-moment-to-build-wellbeing-184318">Beyond GDP: Chalmers' historic moment to build wellbeing</a>
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<p>Last month the Australian Treasury’s secretary, Steven Kennedy, said <a href="https://treasury.gov.au/speech/address-australian-business-economists-0">in a speech</a> it was possible for the government to spend more on things “that improve lives”, such as higher-quality aged care and disability services, “while reducing pressures arising from poorly designed policies”:</p>
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<p>We will need a tax system fit for purpose to pay for these services, that appropriately balances fairness and efficiency. This is achievable.“</p>
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<p>Given the inevitable challenges of an ageing population, climate change and international uncertainty, anything that moves the national conversation on from misleading comparisons with other nations can only help.</p><img src="https://counter.theconversation.com/content/185223/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Whiteford receives funding from the Australian Research Council. He is a Fellow of the Centre for Policy Development.</span></em></p>Compared with other OECD nations, Australians pay much less tax than some headline statistics suggest.Peter Whiteford, Professor, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1809482022-04-10T00:30:27Z2022-04-10T00:30:27ZOne issue matters more to top economists than any other this election: climate change<figure><img src="https://images.theconversation.com/files/457071/original/file-20220408-28400-m1myzc.png?ixlib=rb-1.1.0&rect=473%2C0%2C3520%2C1994&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Offered a menu of issues to choose from as the most important in the May 21 election, Australia’s top economists have overwhelmingly zeroed in on one.</p>
<p>Three quarters of the 50 top economists surveyed by The Conversation and the <a href="https://esaact.org.au/content/369/national-economic-panel">Economic Society of Australia</a> have nominated “climate and the environment” as the most important issue for the incoming government and the most important in the election.</p>
<p>The 74% who nominated climate and the environment is more than twice the proportion that nominated the four substantial runners up: housing availability and affordability, health, tax reform, and education. </p>
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<p>None of the 50 surveyed nominated “lower taxes” as important for the election or the incoming government, and only 8% nominated support for business.</p>
<p>The economists chosen for the survey are recognised as leaders in fields including economic modelling and public policy. Among them are former IMF, Treasury and OECD officials, and a former member of the Reserve Bank board.</p>
<p>Many noted that their priorities were at odds with those of both major parties.</p>
<p>Guyonne Kalb of The University of Melbourne observed that Australia was especially vulnerable to climate disasters, and that the population seemed to recognise this more than the government. Being the last nation to use outdated technologies was “never wise if it can be avoided”.</p>
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Read more:
<a href="https://theconversation.com/below-the-line-introducing-the-conversations-new-election-podcast-hosted-by-jon-faine-180565">Below the Line: Introducing The Conversation's new election podcast, hosted by Jon Faine</a>
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<p>Young Economist of the Year <a href="http://esacentral.org.au/365/images/2021citationYEASchurerforupload.pdf">Stefanie Schurer</a> said Australia had fallen so far behind the richer countries on measures to reach net zero it ranked “<a href="https://www.climatecouncil.org.au/resources/australia-ranks-dead-last-climate/">dead last</a>” according to the Climate Council. It was not only embarrassing, but “incredibly shortsighted” given Australia’s exposure to extreme weather events.</p>
<p>Flavio Menezes of The University of Queensland said the needed transition was massive. To achieve net-zero by 2050 (a target accepted by both sides of politics) Australia would need an 800% increase in large-scale wind, solar and hydro generation, as well as a corresponding increase in the transmission capacity. </p>
<p>The current government’s motto of <a href="https://www.pm.gov.au/media/australias-plan-reach-our-net-zero-target-2050">technology not taxes</a> was “an empty slogan”. Much of the needed spending would have to be funded by taxes.</p>
<h2>A carbon tax would help</h2>
<p>The University of Queensland’s John Quiggin described the campaign as the most depressing he had seen in more than 50 years of paying attention. Neither major party was offering anything substantive. </p>
<p>Several participants noted that a carbon price (<a href="https://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/2F467985129CAEE6CA257A4800137831/%24File/5257055001_jul%202012.pdf">or tax</a>) of the kind Australia had between <a href="https://www.theguardian.com/environment/2014/jul/17/australia-kills-off-carbon-tax">2012 and 2014</a> would provide a permanent incentive for every sector of the economy to find new ways to cut emissions, but was “not on the table”.</p>
<p>Consulting economist Rana Roy said Australia actually had <a href="https://theconversation.com/whos-the-unsung-architect-behind-labors-climate-plans-a-retiring-coalition-minister-173313">several</a> types of carbon price in place, but their rates varied widely, with emissions in some sectors untaxed, while emissions in other sectors (such as petrol) were overtaxed.</p>
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Read more:
<a href="https://theconversation.com/economists-back-carbon-price-say-benefits-of-net-zero-outweigh-costs-169939">Economists back carbon price, say benefits of net-zero outweigh costs</a>
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<p>The third of the economists surveyed who nominated tax reform as an important issue said it would be needed to deal with the other issues identified as important: housing affordability, health, and education.</p>
<p>Saul Eslake said in an ideal world both sides of politics should be having an intelligent conversation about the least damaging ways of raising the extra one to two percentage points of GDP in tax revenue that will be needed to fund priorities including aged care and the national disability insurance scheme.</p>
<h2>Tax reform would help</h2>
<p>The University of Melbourne’s Kevin Davis said next year’s planned <a href="https://www.abc.net.au/news/2021-07-26/labor-keep-stage-three-tax-cuts/100323164">stage three</a> tax cuts directed at higher earners (and costed by the Parliamentary Budget Office at <a href="https://cdn.theconversation.com/static_files/files/2072/Distributional_analysis_of_the_stage_3_tax_cuts_PDF.pdf">$76.2 billion</a> over four years) should be scrapped on equity grounds alone. </p>
<p>Superannuation tax should also be reformed, and capital gains tax concessions reduced or axed. The “massive” tax concessions offered to home buyers and buyers of investment properties were among the chief reasons for high prices.</p>
<p>Curtin University’s Rachel Ong ViforJ said changes that moved tax away rewarding the ownership of non-productive assets toward rewarding work would be needed to address the intergenerational transmission of debt.</p>
<h2>Higher roductivity would help</h2>
<p>The University of Sydney’s Nigel Stapledon said neither side of politics seemed focused on the emerging risk of 1970s and 1980s-style inflation.</p>
<p>The idea that the government could drive real wages growth without productivity improvements and not feed inflation was dodgy economics and risky policy.</p>
<p>Melbourne University’s John Freebairn said productivity growth had been below world’s best practice for a decade, making it hard to lift incomes and collect tax. </p>
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Read more:
<a href="https://theconversation.com/cut-emissions-not-petrol-tax-what-economists-want-from-the-budget-179837">Cut emissions, not petrol tax. What economists want from the budget</a>
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<p>Tax reform itself could raise more tax by boosting productivity and cutting inequality, as could better regulations and less wasteful government spending.</p>
<p>Former OECD official Adrian Blundell-Wignall said Australia didn’t have a plan that offered less dependence on digging holes. Research and development and a highly educated population were the keys to driving sustainable growth.</p>
<h2>But there’s little optimism</h2>
<p>None of the 50 members of the panel was optimistic about either side of politics offering what was needed, at least during the campaign.</p>
<p>Eslake (a Tasmanian) said he was more likely to “tread in thylacine-poo on my front lawn of a morning” than to see the intelligent conversations that were needed between now and voting day.</p>
<hr>
<p><em>Individual responses:</em></p>
<p><iframe id="tc-infographic-677" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/677/bbb2ab89c6d01b381856e640b7a6c1850f2fd4bd/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p><img src="https://counter.theconversation.com/content/180948/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>More than twice as many economists in the Economic Society of Australia poll picked “climate and the environment” as the most important election issue as picked housing, health, tax, or education.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1473422020-10-28T12:22:33Z2020-10-28T12:22:33ZTrump’s ultra-low tax bills are what happens when government tries to make policy through the tax code<figure><img src="https://images.theconversation.com/files/365632/original/file-20201026-21-jv1ly0.jpg?ixlib=rb-1.1.0&rect=65%2C32%2C3576%2C2014&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The tax code can feel like a labyrinth.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/hedge-maze-in-barcelona-royalty-free-image/463203147">Marcel Germain/Moment via Getty Images</a></span></figcaption></figure><p>People tend to have one of two reactions to the revelation that President Donald Trump has paid little to no taxes in recent years: He’s either an <a href="https://www.nytimes.com/2020/10/10/opinion/sunday/trump-taxes.html">amoral tax cheat</a> or <a href="https://www.cnbc.com/2016/09/26/trump-brags-about-not-paying-taxes-that-makes-me-smart.html">he’s smart</a>.</p>
<p>To me, it reveals just how much is wrong with the U.S. tax code, which Congress treats as a sort of <a href="https://www.amazon.com/Fine-Mess-Global-Simpler-Efficient/dp/0143111140/ref=sr_1_1?dchild=1&keywords=tr+reid+a+fine+mess&qid=1601908367&sr=8-1">policy Swiss Army knife</a> to deal with innumerable desired social and economic policy goals, from <a href="https://www.nerdwallet.com/blog/mortgages/how-to-get-the-most-out-of-real-estate-tax-deductions/">homeownership</a> to protecting the <a href="https://legislature.maine.gov/statutes/36/title36sec4303.html">Maine blueberry industry</a>. </p>
<p><a href="https://scholar.google.com/citations?user=rmtYVssAAAAJ&hl=en&oi=ao">I teach</a> a course on “the politics of taxes,” in which we examine how politics shapes tax policy in the United States and other countries – as well as how taxation affects politics. My students are consistently struck by the extent to which Congress uses taxes as its <a href="https://www.routledge.com/Tax-Politics-and-Policy/Thom/p/book/9781138183391">default go-to policy lever</a>. </p>
<p>It wasn’t supposed to be this way.</p>
<h2>The tax code takes over</h2>
<p>In principle, the main function of taxation is to fund the government. But in practice, Congress also uses it to tackle challenges in virtually every policy area, from promoting conservation and charitable giving to encouraging entrepreneurship and ensuring steady business revenue. </p>
<p>All of these policies, however sound they made be individually, make the income tax system <a href="https://www.pewresearch.org/politics/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share">more complicated for ordinary taxpayers</a> and creates a vast array of means by which some wealthy people <a href="https://www.jct.gov/CMSPages/GetFile.aspx?guid=fe7080a8-5a54-48e6-8cc0-ee243fc03236">can reduce their tax payments</a> to levels that feel unfair to many voters. They also, ultimately, aren’t a very good way to reach achieve the policy’s explicit goals. </p>
<p>This convoluted system <a href="https://review.chicagobooth.edu/public-policy/2018/article/why-it-s-so-hard-simplify-tax-code">was thus not created in a big bang of malfeasance</a> or ineptitude but mostly through piecemeal changes that increasingly complicated the tax code. Legislative reforms meant to simplify the tax code, such as those passed in 1986 and <a href="https://www.brookings.edu/blog/up-front/2019/09/25/a-fixable-mistake-the-tax-cuts-and-jobs-act">2017</a>, have accomplished little. </p>
<p>“The result of this process is a set of very complex provisions that appear to have no overall logic if the tax law were being designed from scratch,” as the <a href="https://www.taxpolicycenter.org/briefing-book/why-are-taxes-so-complicated">nonpartisan Tax Policy Center put it</a>. </p>
<p>This complexity has a range of negative impacts. </p>
<p>For example, estimates vary but most suggest <a href="https://bipartisanpolicy.org/wp-content/uploads/2019/04/Tax-Administration-Compliance-Complexity-Capacity.pdf">taxpayers likely pay well over US$100 billion</a> a year in time and money filing their taxes each year – known as <a href="https://onlinebusiness.northeastern.edu/blog/what-is-tax-compliance/">tax compliance</a>. The <a href="https://www.americanactionforum.org/research/tax-day-2019-little-impact-on-compliance-costs-from-tcja-so-far">2017 Tax Cuts and Jobs Act</a> does not appear to have reduced compliance costs despite its emphasis on simplifying the 1040 tax form. </p>
<p>And it’s a lot worse than in other rich countries.</p>
<p>The average American <a href="https://www.jct.gov/CMSPages/GetFile.aspx?guid=fe7080a8-5a54-48e6-8cc0-ee243fc03236">spends about 13 hours</a> filing their taxes each year, according to the Joint Committee on Taxation, <a href="https://www.theatlantic.com/ideas/archive/2019/04/american-tax-returns-dont-need-be-painful/586369/">compared with under an hour</a> in the Netherlands, Japan and Estonia. In Sweden, the government fills in the tax forms automatically, and <a href="https://www.washingtonpost.com/news/monkey-cage/wp/2018/04/12/why-the-u-s-tax-system-is-so-complicated-but-americans-are-proud-to-pay-taxes-anyway/">citizens can simply view and approve them</a> – or make changes – on their cellphone. </p>
<p>Another result is that social welfare programs in the U.S. can be needlessly complicated. </p>
<p>For example, Canada <a href="https://www.pri.org/stories/2019-02-05/what-we-can-learn-canada-s-universal-child-care-model">provides its citizens</a> with cheap child care simply by subsidizing it so that it costs $6 a day. Instead of offering subsidies, the U.S. supports lower- and middle-income parents mainly through the <a href="https://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens">tax code with credits</a> like the earned income tax credit and the child tax credit. But both are very complicated, poorly understood and <a href="https://www.eitc.irs.gov/partner-toolkit/basic-marketing-communication-materials/eitc-fast-facts/eitc-fast-facts">often do not reach those who need it</a>. </p>
<figure class="align-center ">
<img alt="President Donald Trump listens during a White House meeting with Hispanic leaders on July 9 in Washington." src="https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=379&fit=crop&dpr=1 600w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=379&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=379&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=476&fit=crop&dpr=1 754w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=476&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/366176/original/file-20201028-15-eb5fon.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=476&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trump has refused to release his tax returns since the 2016 election.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TrumpTaxes/7544c40ad3424449aeee05c552e21280/photo?Query=trump%20AND%20tax&mediaType=photo,video,graphic,audio&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2654&currentItemNo=58">AP Photo/Evan Vucci</a></span>
</figcaption>
</figure>
<h2>How Trump takes advantage</h2>
<p>Complexity also means that <a href="https://wwnorton.com/books/9781324002727">the tax code is littered with opportunities for wealthier taxpayers</a> like Trump to reduce their tax bill quite substantially. The perception that there are loopholes that only the rich can use <a href="https://www.pewresearch.org/politics/2017/04/14/top-frustrations-with-tax-system-sense-that-corporations-wealthy-dont-pay-fair-share">leads many taxpayers to view the system as unfair</a>. </p>
<p>Three of the strategies The Times reported that Trump has used to avoid taxes demonstrate this quite well. </p>
<p>In 2006, lawmakers wanted to promote conservation while helping farmers and ranchers, so <a href="https://www.propublica.org/article/conservation-easements-the-billion-dollar-loophole">they expanded conservation easements</a>, in which property holders agree to not develop land in exchange for a tax deduction. Trump used this <a href="https://www.irs.gov/charities-non-profits/conservation-easements">frequently abused</a> provision to claim a <a href="https://www.washingtonpost.com/politics/trump-got-a-21-million-tax-break-for-saving-the-forest-outside-his-ny-mansion-now-the-deal-is-under-investigation/2020/10/07/de84c1ba-ff6b-11ea-830c-a160b331ca62_story.html">$21.1 million deduction</a> in 2015 for not developing land near his Seven Springs estate that his family wanted to use as a private retreat anyway. </p>
<p>Another example is <a href="https://www.taxlawforchb.com/2017/07/abandonment-of-a-partnership-interest-or-when-a-taxpayer-rejects-its-tax-return-position/">how U.S. tax policy allows individuals to walk away</a> from an investment and, if they receive nothing, declare any losses that haven’t yet been taken on their current tax return, reducing income by that amount. The policy aim here is to encourage entrepreneurship by not making business failure too onerous.</p>
<p>Trump <a href="https://www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html">used this abandonment rule</a> in 2009 to declare more than $700 million in losses when he walked away from his Atlantic City casinos. Yet it appears he got something in exchange for walking way – stock in a new company – which means he may have technically violated the rules of that tax break. </p>
<p>And in 2009, Congress <a href="https://www.paulhastings.com/docs/default-source/PDFs/1444.pdf">wanted to help businesses recover</a> from the financial crisis so it made it easier to use the large losses that many companies were experiencing to offset income earned in prior years, which resulted in refunds for taxes already paid. <a href="https://www.nytimes.com/interactive/2020/09/27/us/donald-trump-taxes.html">This allowed Trump</a> to claim a refund of $56.9 million he had paid in taxes in 2005 and 2006. </p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p>
<p>The government has ways other than tax code to implement a policy with a social or economic aim, such as via regulations or spending on a new or existing government program. Lawmakers have often preferred to use the tax code because it can seem easier and avoids the political costs associated with <a href="http://www.artsrn.ualberta.ca/econweb/landon/CJE1997.pdf">higher taxes</a>. </p>
<p>Ultimately, however, <a href="https://fas.org/sgp/crs/misc/R44530.pdf">research shows</a> using tax code is not the best way to achieve a policy’s ends.</p><img src="https://counter.theconversation.com/content/147342/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gary Winslett does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Congress tends to use the tax code to implement policy, which increases complexity and creates loopholes wealthy taxpayers like Trump can exploit.Gary Winslett, Assistant Professor, MiddleburyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1434212020-08-13T00:42:01Z2020-08-13T00:42:01ZWe need super, but we’re taxing it the wrong way round<figure><img src="https://images.theconversation.com/files/352430/original/file-20200812-14-14cy6yi.jpg?ixlib=rb-1.1.0&rect=352%2C186%2C2387%2C1108&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Proxima Studio/Shutterstock</span></span></figcaption></figure><p>Many economists think that earnings in super funds should be taxed at a relatively low rate, compared to labour earnings and other types of earnings such as interest and dividends.</p>
<p>This is reflected in tax policy around the world. Among members of the Organisation for Economic Co-operation and Development, private pension plans (what we call super) have among the lowest tax rates of any savings instrument.</p>
<p>The Australian tax treatment of super aligns with this trend. But the Australian system is much more generous than other countries and very expensive.</p>
<p>In the past financial year the tax concessions on super fund earnings cost the government an estimated <a href="https://treasury.gov.au/publication/p2020-51153">A$17.8 billion</a>. The tax concession on employer super contributions cost $19.6 billion.</p>
<p>Do the benefits of these generous tax concessions justify their costs? </p>
<p>Our recent <a href="https://theconversation.com/progressive-in-theory-regressive-in-practice-thats-how-we-tax-income-from-savings-142823">report on savings taxes</a> suggests that they don’t, in large measure because they are poorly aimed at their intended objectives.</p>
<p>In order to understand just how poorly they are aimed, it is necessary to identify the arguments typically used to justify their existence.</p>
<h2>Justification 1. The impact of tax compounds over time</h2>
<p>The first (and by far most convincing) justification is that superannuation is typically held for a long period of time. Since income from superannuation is taxed annually, the impact of the tax compounds over time, similar to compound interest.</p>
<p>Lower tax rates can offset the increase in effective tax rates over time.</p>
<p>But in practice they are applied poorly because they apply equally, irrespective of whether the asset is held for a short or a long time.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/progressive-in-theory-regressive-in-practice-thats-how-we-tax-income-from-savings-142823">Progressive in theory, regressive in practice: that's how we tax income from savings</a>
</strong>
</em>
</p>
<hr>
<p>Ideally the concession would be the greatest for workers at the start of their careers. </p>
<p>They are the ones who hold super for the longest time, but the system actually awards the highest concessions to the high earners, who tend to be the oldest and closest to retirement.</p>
<h2>Justification 2. Super tax concessions encourage saving</h2>
<p>A second rationale for superannuation tax concessions is that they help ensure people save enough money for retirement.</p>
<p>This argument is less convincing, because there is relatively strong evidence suggesting that it is the compulsory nature of superannuation, rather than how it is taxed, that drives retirement savings.</p>
<p>In other words, if people are not saving enough for retirement, superannuation concessions are the wrong tool – increasing the compulsory percentage would be better.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/early-access-to-super-doesnt-justify-higher-compulsory-contributions-143087">Early access to super doesn’t justify higher compulsory contributions</a>
</strong>
</em>
</p>
<hr>
<p>Moreover, if increasing retirement savings is a goal of tax policy, it would be best achieved by charging the least to the people most likely to respond to tax rates.</p>
<p>Existing research suggests that low income people are among those most likely to respond to tax concessions. Yet at the moment the concessions are directed to high earners.</p>
<h2>Justification 3. Super concessions take weight off the pension</h2>
<p>A third argument is that super tax concessions reduce dependence on the age pension.</p>
<p>But super tax concessions only improve the government’s financial position if savings on the age pension are greater than the cost of the concessions. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/352427/original/file-20200812-16-a65i56.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Superannuation has only a modest impact on the likelihood a retiree will claim the pension.</span>
<span class="attribution"><a class="source" href="https://unsplash.com/@adamsky1973">Adam Nieścioruk/Unsplash.</a></span>
</figcaption>
</figure>
<p>It is a <a href="https://theconversation.com/myth-busted-boosting-super-would-cost-the-budget-more-than-it-saved-on-age-pensions-119002">far from decided</a> question.</p>
<p>There is a good deal of evidence suggesting that the amount placed in super has only a <a href="https://www.pc.gov.au/research/completed/ageing-australia">modest impact</a> on the likelihood that the superannuant will claim a pension, and a relatively modest impact on the amount claimed.</p>
<p>Increased savings of almost any form will reduce dependence on the age pension to some extent because most savings, other than owner-occupied housing, are counted in the means test. </p>
<p>If the government wanted a stronger effect it could tighten the means test.</p>
<p>Alternatively, it could direct concessions toward those Australians most likely to receive an age pension.</p>
<p>At the moment the biggest concessions are directed to the Australians wealthy enough to be unlikely to receive the pension.</p>
<h2>So how should we tax super?</h2>
<p>In the long-run there’s a case for taxing the earnings from all types of savings <a href="https://theconversation.com/progressive-in-theory-regressive-in-practice-thats-how-we-tax-income-from-savings-142823">at the same rate</a>.</p>
<p>Short-run, super tax could be reformed by</p>
<ul>
<li><p>making all superannuation contributions out of post-tax income (potentially with an upfront subsidy, but a smaller one than currently exists)</p></li>
<li><p>taxing earnings in the retirement phase in addition to the pre-retirement phase and using the resulting revenue to reduce the tax rate on all super earnings </p></li>
<li><p>taxing super earnings at a lower annual rate for younger Australians to account for the fact that they hold super assets for a longer</p></li>
<li><p>Removing “catch-up provisions” that allow older Australians to put in more at lower tax rates and lowering the annual concessional contributions cap</p></li>
</ul>
<p>The savings made could help fund a reduction in personal income tax rates, greater government support payments, or a combination of both.</p>
<p>The government’s <a href="https://treasury.gov.au/consultation/c2019-36292">retirement income review</a> has examined some of these questions. It was delivered to the treasurer <a href="https://www.news.com.au/finance/work/coronavirus-australia-workers-could-face-years-of-lower-wages/news-story/3117f234b6690c868b862ed2761c3806">late last month</a>.</p><img src="https://counter.theconversation.com/content/143421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kristen Sobeck works for the Tax and Transfer Policy Institute which is an independent policy institute established in 2013 with an endowment from the federal government. It is supported by the Crawford School of Public Policy of the Australian National University.</span></em></p><p class="fine-print"><em><span>Robert Breunig works for the Tax and Transfer Policy Institute which is an independent policy institute established in 2013 with an endowment from the federal government. It is supported by the Crawford School of Public Policy of the Australian National University.</span></em></p><p class="fine-print"><em><span>Peter Varela does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We give the biggest concessions to those least likely to need persuasion to save well.Peter Varela, Research Fellow, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityKristen Sobeck, Senior Research Officer, Crawford School of Public Policy, Australian National UniversityRobert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1418932020-07-05T19:50:06Z2020-07-05T19:50:06ZMemo to Australia’s states: try renovating your tax system before asking for a new one<figure><img src="https://images.theconversation.com/files/345456/original/file-20200703-29-1ns9ko0.jpg?ixlib=rb-1.1.0&rect=957%2C202%2C3009%2C1498&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>A <a href="https://www.treasury.nsw.gov.au/federal-financial-relations-review">major report</a> commissioned by the NSW government has proposed lifting and expanding the goods and services tax and replacing stamp duty with a broad-based land tax.</p>
<p>Launched at the <a href="https://iview.abc.net.au/show/national-press-club-address/series/0/video/NC2011C023S00">National Press Club</a> on July 1 by NSW Treasurer Dominic Perrottet, panel chair David Thodey and panel member Jane Halton, the report said what has been said before – that these particular big bold changes will set Australia up for the future.</p>
<p>But they’ve fallen flat in the past.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/345433/original/file-20200703-33918-57q0bj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Former Telstra chief David Thodey launching the Federal Financial Relations Review on July 1.</span>
<span class="attribution"><span class="source">MICK TSIKAS/AAP</span></span>
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<p>Big bold proposals have losers as well as winners. When the losers are identified, it is hard to get traction, even if the winners want them.</p>
<p>NSW residential stamp duty is roughly equivalent to a tax on property of one and a half to twice the current municipal rates. Transitioning from one to the other might take <a href="https://www.ahuri.edu.au/__data/assets/pdf_file/0020/15338/Pathways-to-state-tax-reform-Executive-Summary.pdf">10 to 20 years</a>. </p>
<p>The losers (people paying higher rates) are more numerous and likely to be more vocal than the winners (people finding it cheaper to move home).</p>
<p>And proposals involving the goods and services tax lead to finger pointing – towards the Commonwealth for waiting for the states, and towards the states for waiting for each other. </p>
<p>Proposing the Commonwealth fix state problems is attractive to everyone but the Commonwealth.</p>
<p>Thodey’s <a href="https://www.treasury.nsw.gov.au/sites/default/files/2020-06/FFR%20Review%20Draft%20Report%20.pdf">report</a> is an improvement on many past reports, but it too has shot for the big headlines. The states do have genuine problems with tax design and the current federal arrangements, but a more worthy strategy might be to focus on renovating the system they’ve got.</p>
<h2>Renovation is slow, but effective</h2>
<p>Repairing what states already have is simpler, less contentious and almost certainly just as effective as big bold programs, albeit less exciting.</p>
<p>A recent review I took part in, commissioned by the Australian Housing
and Urban Research Institute, found it was best to start <a href="https://www.ahuri.edu.au/research/final-reports/291">small</a>, build each case, and move incrementally. </p>
<p>First, state governments should wind back the current array of <a href="https://www.budget.nsw.gov.au/sites/default/files/budget-2019-06/Appendices-A5-BP1-Budget_201920.pdf">tax concessions</a>. Doing so in NSW could increase land tax collections by 27%, payroll tax collections by 19% and conveyancing stamp duty by 9%.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/cutting-out-the-insurance-free-rider-when-it-comes-to-funding-fire-services-15852">Cutting out the insurance "free rider" when it comes to funding fire services </a>
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<p>Second, in NSW there would be value in revisiting the failed 2017 proposal to replace insurance stamp duties with a property-based fire and emergency services levy applying to all homes needing fire protection, not just those that are insured, a proposal the new NSW review <a href="https://www.treasury.nsw.gov.au/sites/default/files/2020-06/FFR%20Review%20Draft%20Report%20.pdf">supports</a>.</p>
<p>Most states have already done it. The levy would lay the foundations for property making a greater contribution to state revenue and build the architecture needed for a land tax for stamp duty swap.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/post-coronavirus-well-need-a-working-tax-system-not-more-taxes-and-not-higher-rates-137232">Post-coronavirus, we'll need a working tax system, not more taxes and not higher rates</a>
</strong>
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</p>
<hr>
<p>Third, and very unexciting, states should renovate their tax administration. One initiative would be a national harmonised payroll tax administered by the Australian Tax Office.</p>
<p>Another would be publishing <a href="https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Tax-gap/Australian-tax-gaps-overview/">tax gap</a> estimates. The tax office has found publishing estimates of what is not being collected compared to what could be collected is <a href="https://www.ato.gov.au/Media-centre/Speeches/Other/Future-of-tax-administration/">fundamental</a> to identifying what is not working.</p>
<p>None of these ideas make for big headlines. But on the track record of ideas that attract big headlines so far, they are likely to achieve more than those that do.</p><img src="https://counter.theconversation.com/content/141893/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Neil Warren has received funding in the past from the Australian Housing and Urban Research Institute.</span></em></p>Boosting the GST and swapping land tax for stamp duty get headlines, but they never seem to happen.Neil Warren, Emeritus Professor of Taxation, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1418732020-07-02T02:48:47Z2020-07-02T02:48:47ZPolitics with Michelle Grattan: two leading economists on Australia’s post-COVID economy<p>With three months before JobSeeker is due to end and calls for <a href="https://theconversation.com/cutting-unemployment-will-require-an-extra-70-to-90-billion-in-stimulus-heres-why-141376">billions of dollars in extra spending</a>, there is a growing debate about how Australia’s post-coronavirus economy will actually look.</p>
<p>While Scott Morrison has said Australia will need to lift economic growth by “more than one percentage point above trend” through to 2025, a <a href="https://theconversation.com/no-big-bounce-2020-21-economic-survey-points-to-a-weak-recovery-getting-weaker-amid-declining-living-standards-141184">22-economist panel </a> hosted by The Conversation forecast a bleaker result. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/no-big-bounce-2020-21-economic-survey-points-to-a-weak-recovery-getting-weaker-amid-declining-living-standards-141184">No big bounce: 2020-21 economic survey points to a weak recovery getting weaker, amid declining living standards</a>
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<hr>
<p>Growth one percentage point above trend would average almost 4% per year.</p>
<p>The Conversation’s economic panel forecast an annual growth averaging 2.4% over the next four years, much less than the long-term trend.</p>
<p>In this podcast, Michelle Grattan discusses the economic pathway ahead with two economists featured on the panel: Professor of Economics at the UNSW Business School Richard Holden, and Professor of Economics and Public Policy at the Australian National University Warwick McKibbin.</p>
<p>McKibbin argues for a major change to the national cabinet. “I think it would be very useful if the leader of the opposition was on that cabinet, and perhaps even a couple of the key ministerial portfolios from the opposition side, so that you truly have… both sides of the political spectrum represented.”</p>
<p>Making the body more inclusive, McKibbin says, would assist a bipartisan approach. “If you are going to go for the big bipartisan approach, which I think is fundamental to most of the problems we face, you have to do something like the national cabinet,” he said.</p>
<p>“It worked very effectively during the worst parts of the virus, it is breaking down now it appears, because Australians seem to think things are okay now. But I think you’ll see it re-emerge very shortly.”</p>
<p>Richard Holden warns an increase in taxation should not be contemplated to pay for some of the large spend the COVID crisis is requiring. </p>
<p>“I don’t think there will be an increase in taxation under this government, and I definitely don’t think there should be under any government,” he says. </p>
<p>“The coalition has made the debt and deficits mantra part of their political brand, and I understand that from a political perspective. And there’s nothing wrong with aspiring to balancing the budget over the economic cycle.”</p>
<p>“But when you’re in one of the largest economic crises in a hundred years, it is not the time to be penny-pinching and focusing on economic management credentials as measured by the budget bottom line in the short term.”</p>
<p><a href="https://itunes.apple.com/au/podcast/politics-with-michelle-grattan/id703425900?mt=2"><img src="https://images.theconversation.com/files/233721/original/file-20180827-75984-1gfuvlr.png" alt="Listen on Apple Podcasts" width="268" height="68"></a> <a href="https://www.google.com/podcasts?feed=aHR0cHM6Ly90aGVjb252ZXJzYXRpb24uY29tL2F1L3BvZGNhc3RzL3BvbGl0aWNzLXdpdGgtbWljaGVsbGUtZ3JhdHRhbi5yc3M"><img src="https://images.theconversation.com/files/233720/original/file-20180827-75978-3mdxcf.png" alt="" width="268" height="68"></a></p>
<p><a href="https://www.stitcher.com/podcast/the-conversation-4/politics-with-michelle-grattan"><img src="https://images.theconversation.com/files/233716/original/file-20180827-75981-pdp50i.png" alt="Stitcher" width="300" height="88"></a> <a href="https://tunein.com/podcasts/News--Politics-Podcasts/Politics-with-Michelle-Grattan-p227852/"><img src="https://images.theconversation.com/files/233723/original/file-20180827-75984-f0y2gb.png" alt="Listen on TuneIn" width="318" height="125"></a></p>
<p><a href="https://radiopublic.com/politics-with-michelle-grattan-WRElBZ"><img class="alignnone size-medium wp-image-152" src="https://images.theconversation.com/files/233717/original/file-20180827-75990-86y5tg.png?ixlib=rb-1.1.0&q=45&auto=format&w=268&fit=clip" alt="Listen on RadioPublic" width="268" height="87"></a> <a href="https://open.spotify.com/show/5NkaSQoUERalaLBQAqUOcC"><img src="https://images.theconversation.com/files/237984/original/file-20180925-149976-1ks72uy.png?ixlib=rb-1.1.0&q=45&auto=format&w=268&fit=clip" width="268" height="82"></a> </p>
<h2>Additional audio</h2>
<p><a href="http://freemusicarchive.org/music/Lee_Rosevere/The_Big_Loop_-_FML_original_podcast_score/Lee_Rosevere_-_The_Big_Loop_-_FML_original_podcast_score_-_10_A_List_of_Ways_to_Die">A List of Ways to Die</a>, Lee Rosevere, from Free Music Archive.</p><img src="https://counter.theconversation.com/content/141873/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Michelle Grattan discusses the economic future of Australia post-COVID with economists Richard Holden and Warwick McKibbinMichelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1382472020-05-22T12:18:39Z2020-05-22T12:18:39ZA $300 charitable deduction, explained<figure><img src="https://images.theconversation.com/files/335023/original/file-20200514-77263-o3obok.jpg?ixlib=rb-1.1.0&rect=317%2C308%2C1679%2C679&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The demand for services nonprofits offer is surging.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/volunteers-hand-out-boxes-of-food-during-a-drive-thru-news-photo/1220786235">Paul Bersebach/MediaNews Group/Orange County Register via Getty Images</a></span></figcaption></figure><figure class="align-left ">
<img alt="" src="https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=227&fit=crop&dpr=1 600w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=227&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=227&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=285&fit=crop&dpr=1 754w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=285&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/333221/original/file-20200506-49538-1t9ca7k.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=285&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p><em><a href="https://theconversation.com/us/search?utf8=%E2%9C%93&q=significant+figures">Significant Figures</a> is a series from The Conversation in which scholars explain an important number in the news.</em></p>
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<a href="https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/335164/original/file-20200514-77276-1kdkb7m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<p>The COVID-19 pandemic has been hard on everyone, including <a href="https://www.marketwatch.com/story/why-coronavirus-could-devastate-charities-even-more-than-the-great-recession-did-2020-04-07">nonprofits</a>. With <a href="https://www.politico.com/news/2020/04/23/coronavirus-unemployment-claims-numbers-203455">millions of jobs lost</a>, long <a href="https://www.motherjones.com/food/2020/04/these-photos-show-the-staggering-food-bank-lines-across-america/">lines are forming outside food pantries</a>. Demands for <a href="https://www.reuters.com/article/us-health-coronavirus-philanthropy-insig/covid-19-crisis-strains-needy-and-groups-that-help-them-idUSKCN21Y1XS">a wide array of services charities provide</a> are rising fast at a time when many <a href="https://theconversation.com/what-happens-to-charitable-giving-when-the-economy-falters-133903">Americans feel unable to give away</a> as much money as they used to. </p>
<p>You may have missed it, but Congress tried to solve this problem.</p>
<p>In March, lawmakers approved a new tax break designed to encourage more charitable giving. The measure, tucked into the US$2 trillion economic relief package known as the <a href="https://aboutbtax.com/PQ6">Coronavirus Aid, Relief and Economic Security</a> (CARES) Act, will let some Americans <a href="https://www.philanthropy.com/article/How-the-New-300/248523">deduct up to $300 in charitable donations</a> from their <a href="https://www.investopedia.com/terms/t/taxableincome.asp">taxable income</a>, when they file their 2020 tax returns in 2021.</p>
<p>This small tax break <a href="https://www.philanthropy.com/article/How-the-New-300/248523">apparently applies only in 2020</a> although that could change should any of the several <a href="https://walker.house.gov/media-center/press-releases/walker-introduces-legislation-incentivize-charitable-giving-amid">related measures</a> now pending become law. The IRS hasn’t yet made clear whether couples filing jointly who don’t itemize may deduct a total of $600.</p>
<p>Currently only Americans who itemize deductions on their federal tax returns get a tax benefit from donating to charity. Less than 15% of people filing returns itemize and the <a href="https://taxfoundation.org/standard-deduction-itemized-deductions-current-law-2019/">majority of them are well-off</a>. But <a href="https://theconversation.com/fewer-americans-are-giving-money-to-charity-but-total-donations-are-at-record-levels-anyway-98291">more than half of Americans donate money each year</a>, and most of them get no tax benefit from it.</p>
<p>Like most <a href="https://scholar.google.com/citations?user=jWArVX0AAAAJ&hl=en&oi=ao">economists who study philanthropy and taxes</a>, I support <a href="https://www.taxpolicycenter.org/publications/tax-incentives-charitable-contributions/full">letting more people take advantage of a charitable deduction</a>. However, I believe it’s unlikely that this $300 deduction will do much to <a href="https://budgetmodel.wharton.upenn.edu/issues/2020/3/27/charitable-deduction-the-cares-act">boost donations to nonprofits</a>.</p>
<p>Only people who don’t itemize can use this charitable deduction, and only money given to <a href="https://www.investopedia.com/ask/answers/08/nonprofit-tax.asp">tax-exempt nonprofits</a> counts toward the $300 limit. Donated stock, furniture, clothes and canned goods don’t. Neither does giving to <a href="https://theconversation.com/donor-advised-funds-charities-with-benefits-74516">donor-advised funds</a> or foundations.</p>
<p>The data I’ve reviewed indicate that about <a href="https://psidonline.isr.umich.edu/">32% of nonitemizing taxpayers already give</a> at least $300 each year. So the new law won’t encourage them to give more money than they already do. Instead, those people will just get to deduct donations they had already made or planned on giving in 2020.</p>
<p>That leaves 68% of the people who aren’t able to itemize their tax returns and might see the new tax break as an incentive to donate. But the majority of this group hasn’t been donating any money in recent years, and it’s not clear that this will be a strong enough incentive to change that.</p>
<p>About 50% of these nongivers make less than $40,000 per year before taxes. It is unlikely that reducing their taxable income will have much of an effect on how much federal income tax they will ultimately pay in 2020. So, in my view, this tax incentive to give is not very strong.</p>
<p>There’s another hitch.</p>
<p>The <a href="https://www.taxpolicycenter.org/briefing-book/what-are-largest-tax-expenditures">government loses out on tax dollars</a> when Americans get tax breaks of any kind. Ideally in this case, the benefit to the whole country from an increase in private donations that help people right now will offset some government spending and justify Uncle Sam missing out on some revenue in the future.</p>
<p>But should the $300 charitable deduction prove to not spur new giving, the <a href="https://www.brookings.edu/policy2020/votervital/how-worried-should-you-be-about-the-federal-deficit-and-debt/">federal deficit</a> would just get even bigger at a time when federal <a href="https://www.usatoday.com/in-depth/news/2020/05/08/national-debt-how-much-could-coronavirus-cost-america/3051559001/">spending is rapidly increasing</a>.</p>
<p>[<em>Get facts about coronavirus and the latest research.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-facts">Sign up for The Conversation’s newsletter.</a>]</p><img src="https://counter.theconversation.com/content/138247/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benjamin A. Priday does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>This measure, included in a pandemic relief package, is supposed to encourage Americans to give more to nonprofits.Benjamin A. Priday, Doctoral candidate of Economics, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1367422020-05-05T09:08:21Z2020-05-05T09:08:21ZEconomic recovery will come with high levels of unemployment: how should governments respond?<figure><img src="https://images.theconversation.com/files/332095/original/file-20200502-42918-9t08e7.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-illustration/economy-health-care-economic-pandemic-fear-1658915128">Shutterstock/Lightspring</a></span></figcaption></figure><p>Two key factors distinguish the economic consequences of coronavirus from those of previous crises. One is the <a href="https://fred.stlouisfed.org/series/ICSA">catastrophic decline in employment</a> in such a short space of time. The other is the incredibly swift digital transformation which has changed the way society works and consumes.</p>
<p>In this new digital landscape, as well as a widespread shift to home working, the resurgence of e-commerce and even the <a href="https://eur03.safelinks.protection.outlook.com/?url=https%3A%2F%2Fedition.cnn.com%2F2020%2F03%2F14%2Fpolitics%2Ftelehealth-us-federal-response-coronavirus%2Findex.html&data=01%7C01%7Cgulcin.ozkan%40kcl.ac.uk%7Cea4b2b59f9674a9b8df208d7e2ce22d3%7C8370cf1416f34c16b83c724071654356%7C0&sdata=1ZNqkh01NZrakbUNvU8E27XbjvJYouGdxFexXOxOP%2BY%3D&reserved=0">remote provision of healthcare</a> have become facts of everyday life. In effect, the credit for the rapid digitising of most companies <a href="https://www.forbes.com/sites/blakemorgan/2020/04/05/is-covid-19-forcing-your-digital-transformation-12-steps-to-move-faster/#19a04188617b">does not belong</a> with business leaders – but to the arrival of Covid-19.</p>
<p>Any exit from the current lockdown is likely to reverse some of this digital transformation, but not all of it. And the unprecedented scale of what has happened will have a significant impact on employment levels for a long time – even as economies rebuild.</p>
<p>Indeed, weak employment growth has been a key feature of previous economic recoveries – a phenomenon economists call “jobless recovery”. In the US, following the global financial crisis of 2008, it took over six years for employment to <a href="https://cdn0.vox-cdn.com/assets/4264343/rrfinancialcrises.png">get back to its pre-recession peak</a>. The recessions of 1991 (after the Gulf War) and 2001 (the dot-com bubble crash), also saw long-lasting high levels of unemployment, with <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.stlouisfed.org%2Fpublications%2Fregional-economist%2Fapril-2011%2Fjobless-recoveries-causes-and-consequences&data=02%7C01%7Crichard.mcmanus%40canterbury.ac.uk%7Ce6368853488c45fd415708d7e2b9c987%7C0320b2da22dd4dab8c216e644ba14f13%7C0%7C0%7C637227160197900943&sdata=Tqv2DvhqbKl4XXShz%2BSh7e23G6dETLdOvikJHI2sQx4%3D&reserved=0">immense economic and social consequences</a>.</p>
<p>In Europe, the effect on employment after 2008 was even more dramatic. It took the EU 11 years to return to its <a href="https://www.economist.com/sites/default/files/images/print-edition/20200104_EUC244.png">pre-crisis unemployment rate of 6.7%</a>. </p>
<h2>Recovery without jobs</h2>
<p>Put simply, these jobless recoveries were caused by a mixture of globalisation and digitisation. Essentially, manufacturing jobs end up moving from advanced economies to destinations offering cheap labour, while advances in technology <a href="https://eur01.safelinks.protection.outlook.com/?url=https%3A%2F%2Fwww.nber.org%2Fdigest%2Ffeb13%2Fw18334.html&data=02%7C01%7Crichard.mcmanus%40canterbury.ac.uk%7Ce6368853488c45fd415708d7e2b9c987%7C0320b2da22dd4dab8c216e644ba14f13%7C0%7C0%7C637227160197910897&sdata=fqynhCMbQ7nBs7aw9S7RB1ZjFWoI42M8UqQCuwT%2BZ6s%3D&reserved=0">replace labour</a>. </p>
<p>The vast scale of the digital transformation caused by coronavirus is likely to make any recovery even more jobless than in the past. </p>
<p>This leaves politicians with the difficult task of formulating policies that will counteract these unfavourable effects. They will need to come up with a plan that reverses the contraction in economic activity, reduces income inequality (or at least doesn’t worsen it) and minimises impact on government debt.</p>
<p>On that final point, it is worth mentioning that in the UK, national debt as a percentage of income is forecast to edge towards 100% – although some believe <a href="https://theconversation.com/coronavirus-will-drive-public-debt-far-higher-than-expected-but-that-doesnt-mean-a-return-to-austerity-136295?utm_medium=email&utm_campaign=Latest%20from%20The%20Conversation%20for%20April%2016%202020%20-%201595115277&utm_content=Latest%20from%20The%20Conversation%20for%20April%2016%202020%20-%201595115277+CID_3e9dbea4d5e992925e8d7b5e5645ac3f&utm_source=campaign_monitor_uk&utm_term=Coronavirus%20will%20drive%20public%20debt%20far%20higher%20than%20expected%20%20but%20that%20doesnt%20mean%20a%20return%20to%20austerity">it be even higher</a>. This figure was 75% in 2010 – and widely seen as unsustainable. </p>
<p>Our recent research has shown that <a href="https://repository.lboro.ac.uk/articles/Fiscal_consolidations_and_distributional_effects_what_fiscal_austerity_is_least_bad_/9824219">there are trade-offs</a> among these three objectives. For example, policies which stimulate the economy and reduce government debt often benefit business owners at the (relative) expense of workers. But policies which help the poorer in society have less of an impact on government debt as these households contribute less tax. </p>
<p>We also found that higher spending and lower taxes are <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/ecca.12340">particularly effective in economic downturns</a>. This is because households tend to spend any additional earnings, helping the economy to bounce back faster. </p>
<p>Also, when interest rates are at record low levels, there is a potential for what we call “<a href="https://onlinelibrary.wiley.com/doi/full/10.1111/sjoe.12269">fiscal free lunches</a>”. That is, tax cuts could raise income to such an extent that the additional tax revenue generated more than pays for any initial rise in government expenditure. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/332096/original/file-20200502-42929-dx9zfl.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Time for the UK chancellor to make major changes.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/london-united-kingdommarch-11-2020-rishi-1670260216">Shutterstock/Cubankite</a></span>
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</figure>
<p>So policy looking to minimise the potential for a jobless recovery should look to increase production in the economy and increase the marginal returns from hiring labour. </p>
<p>For example, cuts to corporate tax rates can help by improving business profits, although cuts to employers’ national insurance contributions would be a more effective approach to directly addressing employment levels. </p>
<p>Also, while corporate tax cuts might end up increasing income inequality (by increasing dividends for shareholders) reducing national insurance contributions would increase demand for labour, raising both employment and wages. The government could also look to accelerate infrastructure spending, improving the productive capacity of the economy and providing a spending stimulus which targets long-term results. </p>
<p>Overall, the most significant impact on the economy and employment would come from a complete structural reform to tax and spending policy. In 2011 a <a href="https://www.ifs.org.uk/docs/taxbydesign.pdf">comprehensive review</a> of UK tax structure highlighted many inconsistencies and inefficiencies, concluding that the system was “inefficient, overly complex and frequently unfair”. </p>
<p>Since then, some small changes have been made, but these inefficiencies and complexities persist. If there was ever a good time to initiate truly bold reforms, it is now.</p><img src="https://counter.theconversation.com/content/136742/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Employment levels regularly dip after crisis.Gulcin Ozkan, Professor of Finance, King's College LondonDawid Trzeciakiewicz, Lecturer in Economics, Loughborough UniversityRichard McManus, Director of Research Development, Senior Lecturer in Economics, Canterbury Christ Church UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1231612019-09-23T20:05:50Z2019-09-23T20:05:50ZHow raising tax for high-income earners would reduce inequality, improve social welfare in New Zealand<figure><img src="https://images.theconversation.com/files/293502/original/file-20190923-135101-19iu8hk.jpg?ixlib=rb-1.1.0&rect=94%2C49%2C3600%2C2414&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Tax reforms generally imply a trade-off between average income and inequality. </span> <span class="attribution"><span class="source">from www.shutterstock.com</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>If we asked people in New Zealand what they think the best income tax reform would be, we would expect a range of responses. People will no doubt have different views about which of the four income tax rates and corresponding income thresholds should be lowered or increased.</p>
<p>In our <a href="https://link.springer.com/article/10.1007/s10797-019-09558-5">new study</a>, we examine how tax rates should be changed to improve social welfare in New Zealand. </p>
<p>At 33%, the current highest marginal income tax rate in New Zealand is relatively low compared to other major advanced economies. For instance, it’s 45% in both the UK and Australia.</p>
<p>We find that, under a range of assumptions, lifting the highest income tax rate and using the proceeds to lower one of the two lowest tax rates achieves the greatest improvement to welfare.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/to-tackle-inequality-we-must-start-in-the-labour-market-105729">To tackle inequality, we must start in the labour market</a>
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</em>
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<h2>The tax reforms trade-off</h2>
<p>Social welfare is a composite measure of inequality and average income. Tax reforms generally imply a trade-off between the two. </p>
<p>Highly progressive taxes can contribute to reducing income inequality, but this improvement in equity generally comes at a cost as taxes can reduce average incomes and generate “<a href="https://en.wikipedia.org/wiki/Deadweight_loss">deadweight losses</a>”. </p>
<p>In other words, taxes can reduce the size of the economic pie, for instance by reducing the total amount of hours worked in the economy, and waste resources in the process.</p>
<p>Of course economists, like anyone else, should not impose their own value judgements about how much a society would be willing to “pay” in terms of income loss to reduce income inequality. Instead, we seek to quantify this trade-off under different assumptions about peoples’ preferences. These include levels of “willingness to pay to reduce inequality”, or inequality aversion.</p>
<p>To make the tax reforms comparable, we restrict the analysis to revenue-neutral reforms, meaning that if a tax rate is lowered another one must be increased to offset the lost revenue. </p>
<h2>Tax reform package at no cost to government</h2>
<p>We assess potential tax reforms using a <a href="https://melbourneinstitute.unimelb.edu.au/research-programs/labour-economics-and-social-policy/behavioural-microsimulation">behavioural microsimulation model</a>. This model is based on a household survey that is representative of the population and incorporates the details of the highly complex income tax and transfer system. The model allows us to quantify the trade-offs of tax reform.</p>
<p>This is how it works. Let’s consider, for instance, an increase in the highest income tax rate from 33% to 34%. Such a tax reform, by reducing take home pay for some workers, would typically lead to a reduction in total hours worked in the economy, and thus in a reduction in average income (and in government revenue). </p>
<p>In the case of the highest tax rate in New Zealand, the model indicates this effect would be small. But tax reforms like this could <a href="https://www.tandfonline.com/doi/full/10.1080/00779954.2017.1293140">lead to other responses besides changes in hours worked</a> such as tax evasion and avoidance, which are ignored in our model, even though they may be important in New Zealand. </p>
<p>A first approximation of the welfare loss for households impacted by this reform could be the reduction in net income due to reduced hours of work and higher taxes. But this would clearly be an overestimate because it ignores the corresponding increase in leisure time, which most people value positively.</p>
<p>Our model addresses this issue by putting a monetary value on leisure time, while accounting for the fact that different households value leisure differently. Thus, the increase in the highest tax rate reduces welfare, but by less than the reduction in net income.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/unions-do-hurt-profits-but-not-productivity-and-they-remain-a-bulwark-against-a-widening-wealth-gap-107139">Unions do hurt profits, but not productivity, and they remain a bulwark against a widening wealth gap</a>
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<h2>What about equity</h2>
<p>Because it mostly affects high-income households, an increase in the highest tax rate typically leads to a reduction in inequality. As there is generally some degree of preference for lower inequality (inequality aversion), this partly offsets the decline in average income. </p>
<p>Obviously, there is no consensus in society as to how much of an improvement in equity is required to offset a given reduction in average income. Our approach is to consider a wide set of views ranging from low to high inequality aversion.</p>
<p>We examine a wide range of tax reforms in a search of revenue-neutral and welfare-improving reform packages. </p>
<p>We find the tax reform that would increase social welfare the most consists of a reduction in one of the two lowest tax rates, funded by an increase in the highest tax rate. Such a reform would lead to more rate progression in the tax system, come at no revenue loss to the government, and increase social welfare.
This conclusion applies whether one gives a high or low priority to reduction in inequality.</p><img src="https://counter.theconversation.com/content/123161/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nicolas Herault works for the Melbourne Institute: Applied Economic &Social Research, at the University of Melbourne.</span></em></p><p class="fine-print"><em><span>John Creedy received funding from the New Zealand Ministry of Business, Innovation and Employment for this research. </span></em></p><p class="fine-print"><em><span>Norman Gemmell received funding from the New Zealand Ministry of Business Innovation and Employment for this research. </span></em></p>At 33%, New Zealand’s highest income tax rate is relatively low compared to other economies. Lifting it and cutting tax for low-income earners could improve welfare.Nicolas Herault, Academic, Melbourne Institute of Applied Economic and Social Research, The University of MelbourneJohn Creedy, Professor of Public Economics and Taxation, Te Herenga Waka — Victoria University of WellingtonNorman Gemmell, Chair in Public Finance, Te Herenga Waka — Victoria University of WellingtonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1197992019-09-17T12:49:50Z2019-09-17T12:49:50ZExpanding direct democracy won’t make Americans feel better about politics<figure><img src="https://images.theconversation.com/files/291863/original/file-20190910-190007-1bovpnz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Nurses in November 2016 expressed support for a ballot proposition to limit what California state agencies pay for prescription drugs.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Drug-Prices-Ballot-Initiative/f5a1f66a30c04a908e8f814542b85cc1/247/0">AP/Nick Ut, file</a></span></figcaption></figure><p>As Americans watch the Brexit-related <a href="https://uk.reuters.com/article/uk-britain-eu-backstop-nireland-explaine/explainer-focus-back-on-northern-ireland-only-backstop-as-johnsons-options-narrow-idUKKCN1VV17C">political turmoil in the United Kingdom</a>, it is important to remember that the chaos there began in a form of direct democracy. When U.K. voters set in motion their exit from the European Union, <a href="https://www.bbc.com/news/uk-politics-32810887">they did so by voting directly on the so-called “Brexit” initiative</a>.</p>
<p>Normally, such major policy would have been initiated, deliberated and voted on by their elected officials in Parliament.</p>
<p>The Brexit mess is an example of the disruptive potential of direct democracy, a practice that Americans <a href="https://news.gallup.com/poll/163433/americans-favor-national-referenda-key-issues.aspx">have long believed</a> leads to a healthier democratic society. </p>
<p>Recent polls show Americans are increasingly dissatisfied with their system of representative democracy. <a href="https://www.vox.com/mischiefs-of-faction/2018/10/31/18042060/poll-dissatisfaction-american-democracy-young">Many</a> see sharp and unhealthy partisan divisions and lack confidence that the system will produce the results they desire. </p>
<p>Against this backdrop, some advocate for greater use of direct democracy. This includes <a href="https://ballotpedia.org/States_with_initiative_or_referendum">ballot initiatives, such as those practiced in 24 states</a>, including California, Massachusetts and Michigan. </p>
<p><a href="https://ballotpedia.org/Ballot_initiative">Ballot initiatives</a> bypass the normal legislative process. They can be written by anyone and receive a public vote without input from lawmakers, provided enough petition signatures are obtained to get the initiative on the ballot. </p>
<p>Well-known initiatives have dealt with issues like <a href="https://ballotpedia.org/Maine_Same-Sex_Marriage_Question,_Question_1_(2012)">same-sex marriage</a>, <a href="https://ballotpedia.org/California_Proposition_24,_Repeal_of_Corporate_Tax_Breaks_(2010)">tax reform</a> and <a href="https://ballotpedia.org/Alaska_Marijuana_Legalization,_Ballot_Measure_2_(2014)">marijuana legalization</a>. Advocates say <a href="https://www.youtube.com/watch?v=qwRHJn3rQP0">greater use of such measures</a> could help address citizen disengagement from – and cynicism about – politics.
Based on 15 years of <a href="https://link.springer.com/article/10.1007/s11109-014-9273-5">our</a> <a href="https://journals.sagepub.com/doi/10.1177/1532673X08330635">own</a> <a href="https://link.springer.com/article/10.1007/s11109-008-9081-x">research</a>, <a href="https://doi.org/10.3998/mpub.9993024">we believe that the commonly held view of the initiative process – that it’s good for democracy – is wrong</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=387&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=387&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=387&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=487&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=487&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291864/original/file-20190910-190050-1a7qakx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=487&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Direct democracy, say the authors, produces greater political conflict and polarization, such as this demonstration in London on Sept. 4 of Brexit supporters and detractors.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Britain-Brexit/f65578fc29c840b880b629c1eee245cc/11/0">AP/Alastair Grant</a></span>
</figcaption>
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<h2>Progressives’ unfulfilled hope</h2>
<p>Claims promoting the positive benefits of direct democracy on voter turnout and engagement have appeared periodically since the wave of <a href="http://www.loc.gov/teachers/classroommaterials/presentationsandactivities/presentations/timeline/progress/">Progressive Era reforms during the early 20th century</a>. Those reforms led to the establishment of the <a href="https://ballotpedia.org/History_of_initiative_and_referendum_in_the_U.S.">state ballot initiative process</a>.</p>
<p>Americans practice a form of <a href="https://www.historyonthenet.com/what-is-a-representative-democracy">representative democracy</a> by choosing among candidates for office. <a href="https://journals.openedition.org/siecles/1109?lang=en">Advocates for direct democracy</a> maintain that by voting directly on policy proposals, people become more knowledgeable about government, confident of their own abilities and positive about the capabilities of others. </p>
<p>As political theorist <a href="https://www.ucpress.edu/book/9780520242333/strong-democracy">Ben Barber asserted</a>, the “initiative and referendum can increase popular participation in and responsibility for government, provide a permanent instrument of civic education, and give popular talk the reality and discipline that it needs to be effective.” </p>
<p>Beginning about two decades ago, some <a href="https://www.cambridge.org/core/journals/british-journal-of-political-science/article/democracy-institutions-and-attitudes-about-citizen-influence-on-government/F6DFDF0A30CE0D9E7A38EA0465D31FBB">political scientists</a> <a href="https://www.press.umich.edu/11463/educated_by_initiative">claimed to find support</a> for the idea that greater use of direct democracy tools, especially the state ballot initiative, helps people get more interested in and engaged with politics and spurs more trust in government. </p>
<p>Direct democracy has been popular with both political parties, and liberals as well as conservatives. </p>
<p>Modern-day progressives often claim the ballot initiative can fix problems like gerrymandering, campaign finance abuses or growing income inequality. The Ballot Initiative Strategy Center <a href="https://ballot.org/why-were-here/">states that</a> “[W]e envision a future in which progressives have harnessed the power of ballot measures as proactive tools for success – to increase civic engagement, enact forward-looking policies, and strengthen progressive infrastructure in key states.”</p>
<p>Yet not so long ago, <a href="https://ballot.org/why-were-here/">conventional wisdom held</a> that ballot initiatives and referendums were the <a href="https://www.press.uchicago.edu/ucp/books/book/chicago/F/bo3615566.html">tools of conservatives</a>, at least in the last 40 years. </p>
<p><a href="https://ballotpedia.org/California_Proposition_13,_Tax_Limitations_Initiative_(1978)">In 1978, California passed Proposition 13</a>, sparking tax-cutting measures across the country. <a href="https://guides.ll.georgetown.edu/c.php?g=592919&p=4182201">Before the Supreme Court ruled that same-sex marriage was legal</a>, states with ballot initiatives and voter-approved constitutional amendments passed laws defining marriage as between a man in a woman in more than 30 statewide votes between 1998 and 2011. </p>
<h2>Conflict and polarization</h2>
<p>Drawing on a wide variety of data, we conclude in our book <a href="https://www.press.umich.edu/9993024/initiatives_without_engagement">“Initiatives without Engagement”</a> that the initiative process mainly encourages greater conflict rather than produces political and social benefits. </p>
<p>Ballot initiatives can increase voter turnout, which seems like positive news. But they do so through <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6237.2010.00688.x">mobilization of occasional voters</a> and encourage voting commonly based on fear <a href="https://doi.org/10.3998/mpub.9993024">without making people more generally knowledgeable or engaged</a>. </p>
<p>Initiatives can also be a tool for ideological extremists and opportunists. They use the process to circumvent the American legislative process, long noted for its incrementalism and premium on compromise. </p>
<p><a href="https://doi.org/10.3998/mpub.9993024">Our research</a> finds that the relationship between party identification and polarized issue attitudes – where Democrats increasingly take the more liberal position and Republicans take the more conservative position – is about 25%-45% bigger in states that frequently use the initiative than in noninitiative states. </p>
<h2>Tyranny of the majority</h2>
<p>Our research also confirms that initiatives often inflame occasional majority group voters. They do this with measures targeting the rights of minority group members. </p>
<p>This has been the case with attempts to <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-5907.2006.00175.x">limit the rights of immigrants, curb affirmative action</a> and <a href="https://academic.oup.com/poq/article-abstract/72/3/399/1836972">define marriage as between a man and a woman</a>.</p>
<p>Examining all post-World War II ballot measures in California, we found numerous examples of votes that sought to curtail the rights of minority groups, including the LGBT community, racial/ethnic minorities and immigrants. Only <a href="https://ballotpedia.org/California_Proposition_11,_Fair_Employment_Practices_Act_(1946)">one initiative was aimed at expanding them</a>. </p>
<p>The 1946 ballot initiative, Proposition 11, was called the “Fair Employment Practices Act” and <a href="https://ballotpedia.org/California_1946_ballot_propositions">would have barred employers from discriminating</a> on the basis of race, religion, color, national origin or ancestry. It received only 28% yes votes to 72% no. </p>
<p>This is exactly the “majority tyranny” that worried the American founders. <a href="https://avalon.law.yale.edu/18th_century/fed10.asp">James Madison famously argued</a> that pure democracies were incompatible with “personal security” and “property rights.” Given the opportunity, he believed, the masses might vote away the rights and wealth of the elite. His ultimate point, that majorities can be myopic, has proven prescient. </p>
<h2>Distrust in government</h2>
<p>In the wake of all this conflict <a href="https://doi.org/10.3998/mpub.9993024">our research</a> shows that frequent use of ballot initiatives makes citizens trust government less, not more. This is because initiative campaigns often stress that government is broken. Voters then conclude that we would have fewer direct democracy campaigns if government was more competent. </p>
<p>Many people have a visceral attachment to the idea that “the cure for the ills of democracy is more democracy.” Presidential candidate and Democratic donor Tom Steyer and others <a href="https://calmatters.org/blogs/california-election-2020/2019/07/tom-steyer-presidential-bid-california-ideas-for-country-politics-direct-democracy/">advocate for expansion of direct democracy to the national level</a>. </p>
<p>By contrast, some scholars express concern that extending direct democracy to the national level would result in a lack of effective deliberation <a href="https://heinonline.org/HOL/Page?handle=hein.journals/vanlr56&div=17&g_sent=1&casa_token=sTW3qRG9S4cAAAAA:5guUerCiGxZQGghrOoJj4LXD7rBcAgqqC6hhojjZYxZMp1r9mNaev43qUj-URtiTSfQRNW309Q&collection=journals">if critical policy issues were decided by popular vote</a>. And because direct democracy addresses issues one at a time rather than in relation to one another, it can <a href="https://heinonline.org/HOL/Page?handle=hein.journals/hlr112&div=20&g_sent=1&casa_token=70_gQ1kcthIAAAAA:D0vBOia73vGdM5RKTkAYbi29IWa5234af2b7m9a6l8wYqZhrMIg4X2Sq95fALikT9rx9N4CoYw&collection=journals">hamper the ability to set priorities</a>. This is especially true of measures that affect state budgets. </p>
<p>Our research goes further, raising concerns about the consequences of extending direct democracy for citizens’ engagement with their government. We think the likely effects of taking something like the state initiative process to the national level would be to deepen distrust between citizens and government as it has in the states. That in turn would give parties and presidents another tool to strengthen polarization. </p>
<p>The consequences of a national referendum process in the U.S. could resemble what has transpired in the U.K. more than the anodyne promises of would-be reformers. </p>
<p>[ <em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/119799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Citizens voting directly on policy seems like a good idea. But that led to the Brexit mess in the UK. In the US, two scholars say direct democracy deepens distrust of politics and government.Joshua J. Dyck, Associate Professor of Political Science; Director of the Center for Public Opinion, UMass LowellEdward L. Lascher Jr., Professor and Chair, Department of Public Policy and Administration, California State University, SacramentoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1200632019-08-27T12:59:20Z2019-08-27T12:59:20ZA new tax on big college and university endowments is sending higher education a message<figure><img src="https://images.theconversation.com/files/289503/original/file-20190826-8868-1ahl8uq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Stanford will most likely have to pay a new higher ed tax.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/California-Universities/6f90297c842c4007a370e4bae0dc4337/2/0">AP Photo/Marcio Jose Sanchez</a></span></figcaption></figure><p>The nation’s wealthiest private colleges and universities have a new expense.</p>
<p>Thanks to a provision in the <a href="https://www.investopedia.com/taxes/trumps-tax-reform-plan-explained/">tax reform package</a> that President Donald Trump signed in late 2017, these schools are paying a <a href="https://federalregister.gov/d/2019-13935">1.4% tax</a> on their net investment income. This highly targeted tax only applies to schools with endowments worth at least US$500,000 per tuition-paying student. </p>
<p>One aspect of this new legislation surprised me, even though I’m an expert on the <a href="https://scholar.google.com/citations?user=QOWY7xUAAAAJ&hl=en">growth of university endowments</a> and potential government responses to this trend. In my view, the structure of the tax implicitly warns elite schools that they need to do a better job of serving low-income students.</p>
<h2>Mega-endowments</h2>
<p>Endowments fund student financial aid, academic programs, research and overall university operations. Schools build endowments by soliciting money or other financial assets from donors and then investing those
assets to grow principal and create income for future expenditures.</p>
<p>The vast majority of colleges and universities have modest endowments of no more than <a href="https://www.clevelandfed.org/en/newsroom-and-events/publications/economic-commentary/2018-economic-commentaries/ec-201804-college-endowments.aspx">$50 million</a>, but some schools have what I call <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1124544">“mega-endowments”</a> that are <a href="https://theconversation.com/how-should-we-measure-the-size-of-a-universitys-endowment-54634">far larger</a> than what is necessary to support institutional operations.</p>
<p>The Internal Revenue Service <a href="https://www.federalregister.gov/documents/2019/07/03/2019-13935/guidance-on-the-determination-of-the-section-4968-excise-tax-applicable-to-certain-private-colleges">estimates</a> that up to 40 schools may have endowments large enough to owe the tax.</p>
<p>Based on the latest available <a href="https://www.nacubo.org/Research/2019/Public-NTSE-Tables">data, from 2018</a>, this surely will include <a href="https://www.harvardmagazine.com/endowment-18">Harvard, with a $39 billion endowment</a>. The tax will also no doubt hit <a href="https://news.yale.edu/2018/10/01/investment-return-123-brings-yale-endowment-value-294-billion">Yale, with its $29 billion endowment</a> and <a href="https://facts.stanford.edu/administration/finances/">Stanford, with $26.5 billion</a>. </p>
<p>With an endowment as large as Harvard’s, for example, the school would have to enroll more than 76,000 students before it fell beneath the taxing trigger. But it has a total of only about <a href="https://www.harvard.edu/about-harvard/harvard-glance">20,000 students</a> enrolled in its undergraduate and graduate programs. </p>
<p>Some of the other schools that will likely owe the new tax are less prominent, but have large endowments relative to student body size. For instance, <a href="https://www.amherst.edu/offices/office_of_the_chief_financial_officer/annual_reports">Amherst</a>, a private college in Massachusetts with a nearly $2.4 billion endowment and about 1,800 students, will surely face this new obligation. <a href="http://www.intentionalendowments.org/grinnell_college">Grinnell</a>, a private college in Iowa with an almost $2 billion endowment and roughly 1,700 students, is also likely to pay.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&rect=0%2C1505%2C4509%2C1938&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&rect=0%2C1505%2C4509%2C1938&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=451&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=451&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=451&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288827/original/file-20190820-170935-1qznu0p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Princeton’s endowment is among the nation’s biggest.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/New-Jersey-Daily-Life/8e21a0352e744fef8ad348a0e8757057/2/0">AP Photo/Seth Wenig</a></span>
</figcaption>
</figure>
<h2>Proposed regulations</h2>
<p>Within the next few months the complete list of schools that have to pay the tax will become a matter of public record.</p>
<p>The upcoming months will also provide a better sense of what counts as investment income. This will certainly include income produced by a school’s endowment, but may include more.</p>
<p>In July, the IRS issued <a href="https://www.federalregister.gov/documents/2019/07/03/2019-13935/guidance-on-the-determination-of-the-section-4968-excise-tax-applicable-to-certain-private-colleges">proposed regulations</a> that would also include other sources of income, such as interest on student loans and rents from school-owned housing.</p>
<p>The IRS is currently taking comments on these <a href="https://www.federalregister.gov/documents/2019/07/03/2019-13935/guidance-on-the-determination-of-the-section-4968-excise-tax-applicable-to-certain-private-colleges">proposed regulations</a>. It will issue final regulations after the comment period closes on Oct. 1.</p>
<p>Prior to this latest round of tax reforms, the income of all nonprofit colleges and universities was exempt from any federal tax so long as the income was derived from activities related to an educational purpose, such as instruction and research. </p>
<h2>Why tax these endowments</h2>
<p>To help offset the costs of overseeing the nonprofit sector, the government has long made <a href="https://www.cof.org/public-policy/private-foundation-excise-tax">foundations pay either a 1% or 2% tax</a> on their net investment income. The new rules for taxing the richest colleges and universities’ net investment income are akin to how the government taxes private foundations.</p>
<p>But Congress did not make clear why it decided to levy a tax on the net investment income of the wealthiest colleges and universities. </p>
<p>Undoubtedly, Congress wanted to find revenue to offset the cost of <a href="https://www.crfb.org/blogs/tax-cut-and-spending-bill-could-cost-55-trillion-through-2029">assorted tax cuts</a>. But its Joint Committee on Taxation has projected that the tax on investment income will generate only <a href="https://www.jct.gov/publications.html?func=startdown&id=5053">$200 million</a> per year – hardly a book-balancing sum when the budget deficit is pushing <a href="https://www.cbo.gov/publication/55551">$1 trillion</a>.</p>
<p>Most of the schools that will pay the tax are in liberal strongholds. People like former President George W. Bush adviser <a href="https://www.nytimes.com/2017/12/22/business/the-peril-of-taxing-elite-higher-education.html">N. Gregory Mankiw</a> have suggested that a Republican-controlled Congress may have wanted to tax the elite colleges and universities that it perceives as <a href="http://nymag.com/intelligencer/2017/11/the-republican-plan-is-the-opposite-of-tax-reform.html">overwhelmingly liberal</a>.</p>
<p>But an exemption from tax on investment income is only one of the <a href="https://www.taxpolicycenter.org/briefing-book/what-entities-are-tax-exempt">many governmental</a> subsidies that private colleges and universities receive. They enjoy a range of other <a href="https://theconversation.com/american-giving-lost-some-ground-in-2018-amid-tax-changes-and-stock-market-losses-118892">preferential treatment</a> – all because government believes that higher education does a lot of good. In my view, the new tax sends a message to wealthy schools about what is expected in return for these subsidies.</p>
<h2>Immunity for Berea College</h2>
<p>Perhaps the key to deciphering the message lies in the phrase “tuition-paying student.” There was bipartisan agreement that this language needed to be included so that <a href="https://www.berea.edu/admissions/academic-requirements/#1542730503284-bb1625a2-2536">Berea College in Kentucky</a> would not be taxed. Berea has an endowment of about $700,000 per student, well above the taxing trigger Congress set.</p>
<p>What’s so special about this small college? Its core mission is to serve “students of academic promise with limited financial means.” Berea charges no tuition and admits only academically promising, lower-income students – primarily from Appalachia. </p>
<p>The college fits precisely at the <a href="https://www.theatlantic.com/education/archive/2018/10/how-berea-college-makes-tuition-free-with-its-endowment/572644/">intersection of education and the American dream</a>: It prepares poor students to compete in the marketplace and thereby helps them climb the economic ladder. </p>
<p>Many of the schools that will pay the 1.4% tax on net investment income are in the group of institutions that <a href="https://blog.collegevine.com/a-guide-to-need-blind-schools-complete-list/">admit students without considering their ability to pay tuition</a> and <a href="https://blog.collegevine.com/schools-that-meet-100-percent-financial-need/">meet 100%</a> of a student’s demonstrated financial need. <a href="https://college.harvard.edu/financial-aid">Harvard</a>, <a href="https://admission.princeton.edu/cost-aid/how-princetons-aid-program-works">Princeton</a> and more than a dozen <a href="https://www.usnews.com/education/best-colleges/paying-for-college/articles/2018-09-18/18-schools-that-meet-full-financial-need-with-no-loans">other wealthy colleges</a> and universities point to these policies when defending the size of their endowments. They argue that their institutional wealth helps make these policies possible.</p>
<p>But research has demonstrated that elite colleges and universities are <a href="https://www.vox.com/policy-and-politics/2017/2/28/14359140/chetty-friedman-college-mobility">not nearly as good as they should be</a> at getting poor students to apply. These schools also fail to create <a href="https://www.theatlantic.com/education/archive/2019/03/privileged-poor-navigating-elite-university-life/585100/">environments in which students with limited means</a> feel that they belong, sometimes hindering academic success.</p>
<p>When Congress protected Berea, I believe it sent a signal. The real message behind this new measure is that the surest way for colleges and universities to hang onto their tax breaks is to figure out how to better serve poor students.</p>
<p>[ <em>Like what you’ve read? Want more?</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=likethis">Sign up for The Conversation’s daily newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/120063/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sarah Waldeck does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The IRS estimates that up to 40 privately run schools may be affected by this measure in the 2017 tax reform package.Sarah Waldeck, Distinguished Professor of Law, Loyola University ChicagoLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1196372019-07-01T10:57:26Z2019-07-01T10:57:26ZStages 1 and 2 should pass. Stage 3 would return tax to the 1950s<figure><img src="https://images.theconversation.com/files/281978/original/file-20190701-105191-q5ea0k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There's a retro quality to Stage 3 of the Coalition's tax plan, one the parliament ought to carefully consider before saying yes.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>The first item of business when parliament resumes today will be the proposed tax cuts. </p>
<p>They are actually three rounds of tax cuts, up to half a decade apart – each very different in its cost, beneficiaries and rationale. </p>
<p>The government’s refusal to “split the bill” holds the first and most sensible of the three hostage to the fate of the third and least affordable.</p>
<p>Stage 3 is not due to be delivered until 2024-25, in the lead-up to the election after next.</p>
<h2>Stage 3 costs many times Stage 1</h2>
<p>All three stages are already legislated. What’s before the parliament now is supercharging each, boosting the cost of Stage 1 by two thirds, increasing the cost of Stage 2 by half, and tripling the cost of Stage 3. </p>
<p>Stage 1, the Low and Middle Income Tax Offset (the so-called “<a href="https://theconversation.com/your-income-tax-questions-answered-in-three-easy-charts-labor-and-coalition-proposals-side-by-side-115450">lamington</a>”) was set to cost around A$20 billion over four years. The boost, extending it to a tax offset of up to $1,080 for taxpayers earning up to $126,000, will cost an extra $14 billion.</p>
<p>Stage 2, which largely compensates low and middle income earners for the withdrawal of the lamington in 2022-23 while extending the benefits to high-income earners was set to cost $87 billion out to 2029-30. The boost would cost another $45 billion.</p>
<hr>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/281941/original/file-20190701-105187-q51iwc.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p>Stage 3, which delivers the same marginal tax rate of 32.5 cents for all income between $45,000 and $200,000 in 2024-25 was to cost $46 billion. The boost, which would cut that rate to 30 cents from July 2024, would on our estimates cost <a href="https://grattan.edu.au/report/budget-blues-why-the-stage-3-income-tax-cuts-should-wait/">an extra $85 billion</a>.</p>
<p>The treasury’s estimate is bigger – <a href="https://www.budget.gov.au/2019-20/content/bp1/download/bp1.pdf">$95 billion</a>. There are big questions about whether this is affordable, on top of the substantial costs of the already legislated cuts.</p>
<p>The government says that the budget numbers point to a decade of surpluses, exceeding 1% of GDP by 2026-27, even with the tax cuts. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/its-the-budget-cash-splash-that-reaches-back-in-time-114188">It’s the budget cash splash that reaches back in time</a>
</strong>
</em>
</p>
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<p>But beyond the next two years those budget numbers look highly optimistic. The projections assume that the economy grows at a healthy pace every year for the next ten years and that the government is able to keep spending growth at a level below that achieved by any government in the <a href="https://grattan.edu.au/report/budget-blues-why-the-stage-3-income-tax-cuts-should-wait/">past half century</a>. </p>
<p>Should things be less rosy, the cuts would prevent the government from delivering on its <a href="https://www.budget.gov.au/2019-20/content/bp1/download/bp1.pdf">promise</a> of surpluses on average over the economic cycle. </p>
<h2>The economic case for Stages 1 and 2 is clear</h2>
<p>The extra Stage 1 tax cuts are well timed to <a href="https://theconversation.com/its-the-budget-cash-splash-that-reaches-back-in-time-114188">offer stimulus</a> as the economy softens. They will put money in the hands of low and middle income earners who will likely spend it. </p>
<p>Some estimates say these tax cuts will have an impact equivalent to a <a href="https://www.afr.com/news/economy/monetary-policy/three-reasons-the-rba-might-not-cut-20190530-p51syk">50-point cut</a> in interest rates.</p>
<p>There is also a broader economic case for tax cuts. Over time, as wages grow, bracket creep will push more of people’s incomes onto their highest marginal tax rate, eroding incentives to work and invest. Tax cuts hold bracket creep at bay. </p>
<p>Stages 1 and 2 would give back some bracket creep, right across the income distribution. Stage 3 would <em>over</em>-compensate for bracket creep but only for the top 15%.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/your-income-tax-questions-answered-in-three-easy-charts-labor-and-coalition-proposals-side-by-side-115450">Your income tax questions answered in three easy charts: Labor and Coalition proposals side by side</a>
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<p>The government has emphasised the benefits of Stage 3 in <a href="https://www.budget.gov.au/2019-20/content/tax.htm">boosting incentives to work</a> and maintaining reward for effort. But more targeted interventions would deliver a much bigger “bang for buck” in terms of workforce participation. </p>
<p>The group most responsive to effective tax rates in work decisions are <a href="http://www.taxreview.treasury.gov.au/content/downloads/final_report_part_2/AFTS_Final_Report_Part_2_Vol_1_Consolidated.pdf">second-earners</a> (mainly women) working part-time. </p>
<p>Those on the highest wages who would benefit the most from Stage 3, are among the <a href="http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_a1-1.htm">least likely to be responsive</a>.</p>
<h2>Stage 3 would make income tax the least progressive since the 1950s</h2>
<p>The distributional effects of the tax package have been hotly contested. </p>
<p>Our <a href="https://grattan.edu.au/report/budget-blues-why-the-stage-3-income-tax-cuts-should-wait/">new work</a> finds that if all three stages of the plan were enacted, the top 15% of income earners would pay a lower share of their income in tax than they do now, but middle-income earners would pay a higher share of their income in tax. </p>
<p>Using a simple measure of progressivity (the difference in the proportion of income taxed between someone on half average earnings and someone on two and a half times average earnings) we find that that the Stage 3 cuts would make income tax its <a href="https://grattan.edu.au/report/budget-blues-why-the-stage-3-income-tax-cuts-should-wait/">least progressive since the 1950s</a>. </p>
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<p>Australia would go from having a relatively progressive income tax system by international standards to having one below average among OECD countries. </p>
<p>Whether this is desirable or not is a values decision, but it is a decision that parliament should make with its eyes open. </p>
<h2>Stage 3 can wait</h2>
<p>The tax bill unnecessarily bundles together three very different cuts. </p>
<p>The Stage 1 and 2 cuts should pass without encumbrance. They are likely to be needed and they are nowhere near as expensive – they should not be held hostage to Stage 3.</p>
<p>The case for – or against – Stage 3 will be clearer nearer to 2024-25. There are few benefits (and big economic and budget risks) from locking it in now. </p>
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Read more:
<a href="https://theconversation.com/buckle-up-2019-20-survey-finds-the-economy-weak-and-heading-down-and-thats-ahead-of-surprises-119455">Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises</a>
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<p class="fine-print"><em><span>The Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Kate Griffiths and Matthew Cowgill do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Stage 3 cuts would make Australia’s income tax system the least progressive in 60 years.Danielle Wood, Chief executive officer, Grattan InstituteKate Griffiths, Deputy Program Director, Grattan InstituteMatthew Cowgill, Senior Associate, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1188922019-06-18T16:28:27Z2019-06-18T16:28:27ZAmerican giving lost some ground in 2018 amid tax changes and stock market losses<p>The <a href="https://www.irs.gov/tax-reform">sweeping tax reforms</a> that took effect in 2018 meant fewer Americans could itemize their taxes and benefit from the <a href="https://philanthropy.iupui.edu/news-events/news-item/tax-policy-proposals-would-reduce-charitable-giving,-new-study-finds.html?id=227">charitable deduction</a>. </p>
<p>Has that brought about any dramatic changes in charitable giving?</p>
<p>We are the <a href="https://philanthropy.iupui.edu/people-directory/osili-una.html">lead researcher</a> and an <a href="https://scholar.google.com/citations?view_op=list_works&hl=en&user=0r8HrKwAAAAJ">author</a> of <a href="https://givingusa.org/tag/giving-usa-2019/">Giving USA 2019: The Annual Report on Philanthropy for the Year 2018</a>, which the <a href="https://givingusa.org/">Giving USA Foundation</a> releases every year in partnership with the <a href="https://philanthropy.iupui.edu/">Indiana University Lilly Family School of Philanthropy</a>.</p>
<p>Overall, our team found, total giving was virtually flat in 2018. It increased by 0.7% in current dollars to US$427.71 billion. Adjusted for inflation, that was a 1.7% decline from 2017. If the tax code changes did have an effect on giving in 2018, we see it mainly in giving by individuals: It fell by 3.4 percent in real terms – the largest decline since the Great Recession ended.</p>
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<h2>Tax changes</h2>
<p>According to IRS data, more than <a href="https://www.irs.gov/statistics/soi-tax-stats-individual-income-tax-returns-publication-1304-complete-report">45 million households</a> itemized their deductions in 2016. This number dropped by an estimated <a href="https://www.jct.gov/publications.html?id=5091&func=startdown">16 to 20 million</a> in 2018, according to the congressional Joint Committee on Taxation – to about <a href="https://taxfoundation.org/90-percent-taxpayers-projected-tcja-expanded-standard-deduction/">12% of all taxpaying households</a>.</p>
<p>Even with that sharp decline, however, individual giving remained the largest source of charitable dollars. Accounting for 68% of all donations, it far exceeded the next largest source – foundations, which composed 18% of the total.</p>
<p>At the same time, the share of all giving from individuals declined from 70% in 2017 and an estimated high of 85% in 1979. It marked the first time individual giving fell below 70% since 1954. The rest of the country’s donations came from bequests from the estates of deceased individuals and gifts from corporations.</p>
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<p>However, it is too soon to tell what the full extent of the ramifications of the changes to tax policy will be.</p>
<p>Some Americans may not have completely understood how the changes would affect their giving before filing taxes in 2018. Therefore, they may not have changed how they donated in 2018, yet they might make adjustments in 2019 and beyond.</p>
<h2>Stock market</h2>
<p>The economy was relatively strong in 2018, buoyed by many of the economic factors that can boost giving, such as rising <a href="https://www.bea.gov/news/2018/personal-income-and-outlays-november-2018">disposable personal income</a> levels and <a href="https://www.bea.gov/news/2019/initial-gross-domestic-product-4th-quarter-and-annual-2018">GDP growth</a>. </p>
<p>But the <a href="https://doi.org/10.1016/j.econlet.2010.10.016">stock market’s performance</a> also influences how much Americans give to charity, as economists John List and Yana Gallen have found. And the S&P 500 stock market index <a href="https://www.cnn.com/2018/12/31/investing/dow-stock-market-today/index.html">fell 4.4% in 2018</a>. This drop likely made an impact on giving in ways that are difficult to separate from the effects of the tax changes.</p>
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<h2>Generational changes</h2>
<p>Despite declining from 2017, overall giving to religious congregations, at $125 billion, and giving to educational causes including higher education, at nearly $60 billion, continued to exceed all other types of charitable giving in 2018. </p>
<p>Organizations dedicated to environmental issues and animals, as well as international affairs organizations, account for a smaller share of overall charitable giving, but they were the only categories to see any growth in 2018. Giving to international affairs groups grew 7% adjusted for inflation, comprising 5% of all donations. Giving to environmental and animal organizations rose 1.2% adjusted for inflation.</p>
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<p>We believe that the uptick in giving to these causes may reflect generational changes. Environmental and international causes tend to receive more support from younger Americans than older adults.</p>
<p>These trends might indicate that there could be some additional challenges ahead for philanthropy beyond the tax code changes. <a href="https://doi.org/10.1177%2F0899764018770281">Older Americans</a> have traditionally played an outsized role in American giving, <a href="https://www.ingentaconnect.com/content/tpp/vsr/2011/00000002/00000003/art00004?crawler=true">increasing the amounts donated as they age</a>.</p>
<p>Several scholars have emphasized that the <a href="https://doi.org/10.1080/13504851.2017.1319556">lasting impact of the Great Recession</a> and <a href="https://www.federalreserve.gov/publications/2019-january-consumer-community-context.htm">other economic factors</a> could change that trajectory for millennials. Taken together with how <a href="https://doi.org/10.1177%2F0002764219850859">each generation’s</a> unique experiences and resulting values and beliefs shape distinct philanthropic identities, today’s younger adults may <a href="https://knowledge.wharton.upenn.edu/article/generation-impact/">give differently</a> than earlier generations as they gain economic and financial stability.</p>
<p>[ <em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=youresmart">You can read us daily by subscribing to our newsletter</a>. ]</p><img src="https://counter.theconversation.com/content/118892/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Una Osili is the lead researcher for Giving USA, which is funded by Giving USA Foundation and a board member of the Central Indiana Community Foundation.</span></em></p><p class="fine-print"><em><span>Sasha Zarins' tax policy research was partially funded by Independent Sector.</span></em></p>Although far fewer Americans took the charitable deduction on their tax returns, giving stayed fairly steady, according to the annual Giving USA report.Una Osili, Professor, Economics and Philanthropic Studies; Associate Dean for Research and International Programs, Lilly Family School of Philanthropy, IUPUISasha Zarins, Project Coordinator, Doctoral Student, Lilly Family School of Philanthropy, IUPUILicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1149242019-05-01T00:58:34Z2019-05-01T00:58:34ZIssues that swung elections: the ‘unlosable election’ of 1993 still resonates loudly<p><em>With taxes, health care and climate change emerging as key issues in the upcoming federal election, we’re running a series this week looking at the main issues that swung elections in the past, from agricultural workers’ wages to the Vietnam War. Read other stories in the series <a href="https://theconversation.com/au/topics/issues-that-swung-elections-69985">here</a>.</em></p>
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<p>The 1993 election is known as the “unlosable election” for the Liberal Party. It highlights how the course of a campaign can shift voter opinion to produce a result few would have predicted a month out from polling day. </p>
<p>As the current election campaign unfolds, a foreboding message may resonate from the 1993 campaign. Namely, that being the clear frontrunner tends to foster complacency, and touting a “big target” invites more intense scrutiny.</p>
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Read more:
<a href="https://theconversation.com/fake-news-is-already-spreading-online-in-the-election-campaign-its-up-to-us-to-stop-it-115455">'Fake news' is already spreading online in the election campaign – it's up to us to stop it</a>
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<h2>Labor’s unlikely triumph</h2>
<p>Labor in 1993 was a triumph, comparable to Whitlam’s 1972 win. After a year languishing in the polls, Labor won a fifth term and increased its majority by two seats. </p>
<p>In his <a href="https://www.youtube.com/watch?v=IwtR6bIIYKY">victory speech</a>, Prime Minister Paul Keating declared it “the sweetest victory of all”, and “a victory for the true believers – the people who in difficult times have kept the faith”.</p>
<p>For some, these words reflected one of the great Labor speeches; for others, they reflected the hubris that would eventually envelop the Keating government. </p>
<p>To win a fifth term having recently presided over a severe economic recession and a bitter leadership challenge was unprecedented. The combination of these factors should have sunk the Keating government.</p>
<h2>Why Labor should have lost</h2>
<p>The <a href="https://en.wikipedia.org/wiki/Early_1990s_recession_in_Australia">early 1990s recession</a> was far worse than the 1974 or 1982-3 recessions that contributed to the Whitlam and Fraser governments’ defeat. And Keating appeared heartless when, as treasurer in November 1990, he <a href="https://theconversation.com/cabinet-papers-1990-91-lessons-from-the-recession-we-didnt-have-to-have-52153">remarked</a>: </p>
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<p>This is a recession that Australia had to have.</p>
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<p>A year later, he challenged Prime Minister Bob Hawke in a leadership spill and defeated him by 56 votes to 51. </p>
<p>For the nation, mired in recession, Labor seemed indulgent and power-hungry. It was no surprise that the Liberals led comfortably in the polls. </p>
<h2>Hewson’s policy platform was a ‘large target’</h2>
<p>Keen to move beyond the bitter rivalry between Andrew Peacock and John Howard during the 1980s, the Liberal party turned to John Hewson after the 1990 election. </p>
<p>Hewson was inexperienced in politics, having only entered Parliament in 1987, but skilled in his working life as a merchant banker, former advisor to John Howard and professor of economics at UNSW. </p>
<p>Hewson was a visionary who managed to unite both the Liberal and National Parties around one of the most significant policy platforms ever enunciated in Australian politics: a 650-page document titled “Fightback!”. </p>
<p>Fightback’s enduring virtue lies in its coherent articulation of reform, accompanied by detail. Its problem was that it pushed too far into the realms of a neo-liberal economic reform. With such a “large target” as Fightback, Keating was able to make the opposition the issue during the campaign.</p>
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Read more:
<a href="https://theconversation.com/the-budgets-dirty-secret-is-the-tax-hikes-youre-not-meant-to-know-about-115457">The budget's dirty secret is the tax hikes you're not meant to know about</a>
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<p>Fightback’s centrepiece was a 15% GST, set alongside big personal income tax cuts. Fightback also detailed the introduction of enterprise bargaining, cuts to Medicare bulk billing, the sale of government owned assets, and other commitments aimed at limiting the size of government expenditure. </p>
<p>Over the course of 1992, voters observed a colossal political struggle as Hewson worked at selling Fightback to voters, and Keating warmed to the task of dismantling its vision. This would reach a crescendo in February-March 1993, with one of Australia’s most memorable election campaigns. </p>
<p>The <a href="https://australianelectionstudy.org/wp-content/uploads/Trends-in-Australian-Political-Opinion-1987-2016.pdf">Australia Election Study</a> surveys show this election stood out because voters recognised that there was “a good deal of difference” between the parties. </p>
<h2>Different styles of leadership</h2>
<p>Arguably, this was not just about policy, it was also about the fact that Hewson and Keating had different leadership styles. </p>
<p>Hewson was committed to “policy as an end in itself” and he tended to shun the hard sell, preferring a more earnest type of advocacy delivered through public rallies. </p>
<p>Hewson’s problem was with Fightback’s complexity. According to the political journalist Laurie Oakes, he often appeared “mean and shifty” when he tried to explain the details. This was most evident when he tried to explain on television how the GST would apply to a <a href="https://en.wikipedia.org/wiki/Birthday_cake_interview">birthday cake</a>. </p>
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<p>Keating fundamentally believed that the strength of political leadership would prevail. Lampooning Fightback, Keating said: </p>
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<p>If you don’t understand it, don’t vote for it; if you do understand it, you’d never vote for it! </p>
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<p>With his superior command of rhetoric, Keating framed the campaign as one about core Australian values. Keating shied away from defending Labor’s achievements, instead making his opponent the focus. He championed Australian egalitarianism while painting Hewson as a radical. Keating once referred to Hewson as “the feral abacus”, a theorist hopelessly out of touch with average voter. </p>
<p>By the eve of the election, the parties were evenly balanced, but pundits were still predicting a Liberal win.</p>
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<strong>
Read more:
<a href="https://theconversation.com/discontent-with-nationals-in-regional-areas-could-spell-trouble-for-coalition-at-federal-election-115364">Discontent with Nationals in regional areas could spell trouble for Coalition at federal election</a>
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<h2>In favour of a detailed policy platform</h2>
<p>Why did Hewson take such a political risk with Fightback? The answer can be found in Hewson’s <a href="https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;adv=yes;orderBy=_fragment_number,doc_date-rev;query=Dataset%3Ahansardr,hansardr80%20Decade%3A%221990s%22%20Year%3A%221995%22%20Month%3A%2202%22%20Day%3A%2227%22%20Speaker_Phrase%3A%22dr%20hewson%22;rec=0;resCount=Default">valedictory speech to parliament</a>. </p>
<p>In the speech, Hewson reflected on the purpose of Fightback. He said it was to convince voters “in the midst of the worst recession in 60 years” that significant change was required, that the Liberal Party was once again credible because it “stood for something”, and that it was prepared to “challenge vested interests”. </p>
<p>He also said that entering government required a mandate based on detailed policy if there was to be any hope of getting legislation through the Senate. It is worth noting how pertinent this last point is today.</p>
<p>Since Fightback, no opposition has put forward such detailed policy. Putting aside one’s own ideological preferences, Hewson’s Fightback should be viewed as positive because voters deserve to be presented with detailed policy choices rather than just <a href="https://www.abc.net.au/news/2014-05-21/hewson-i-live-in-hope-of-spin-free-politics/5465054">political spin</a>.</p><img src="https://counter.theconversation.com/content/114924/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Haydon Manning does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>All the polls suggested the Keating government would be finished at the 1993 election – until Opposition Leader John Hewson launched a 650-page policy document called “Fightback!”.Haydon Manning, Adjunct Associate Professor, Politics, Policy and Global Affairs, College of Business, Government and Law, Flinders University., Flinders UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1152832019-04-11T10:57:02Z2019-04-11T10:57:02ZHow US tax laws discriminate against women, gays and people of color<figure><img src="https://images.theconversation.com/files/268694/original/file-20190410-2921-lcydzk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Marital status is a defining characteristic of U.S. tax law.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/2018-IRS-Tax-Forms/8d78b6e0ac774f2d8d8e9b97899cd22a/9/0">AP Photo/Keith Srakocic</a></span></figcaption></figure><p>What and how a country chooses to tax says a lot about its values. </p>
<p>A core value <a href="https://www.loc.gov/exhibits/creating-the-united-states/interactives/declaration-of-independence/equal/index.html">built into the DNA</a> of America, for example, is equality. And in practice, <a href="https://www.theatlantic.com/business/archive/2012/08/americans-want-to-live-in-a-much-more-equal-country-they-just-dont-realize-it/260639/">Americans imagine</a> their country to be more equal than it is and strive to treat every member of society that way. </p>
<p>But, as I learned in researching <a href="https://mitpress.mit.edu/books/our-selfish-tax-laws">my book</a> “Our Selfish Tax Laws: Toward Tax Reform That Mirrors Our Better Selves,” America’s tax laws paint a different picture. </p>
<p>Instead of reflecting a society constantly striving to better itself, U.S. tax laws are mired in the past. They reinforce the social and economic marginalization of women, racial and ethnic minorities, the poor, members of the LGBTQ community, immigrants and people with disabilities.</p>
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<span class="caption">Even after gay marriage was legalized in the U.S., same-sex couples still struggle with taxes.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Same-Sex-Marriage-Religion/2557ab1de9bb40a597dba9e62b892336/2/0">AP Photo/Jacquelyn Martin</a></span>
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<h2>Tax and marriage</h2>
<p>For instance, U.S. tax law has chosen marriage as the defining characteristic of all individuals when deciding how income tax returns should be filed. That is, <a href="https://www.irs.gov/pub/irs-soi/16in16ag.xls">most Americans</a> file their <a href="https://www.irs.gov/pub/irs-pdf/f1040.pdf">1040s</a> either as “single” individuals or as “married filing jointly.” But even when taxpayers in these two groups have equal incomes, they aren’t necessarily treated equally.</p>
<p>Among married couples, our tax laws give preferential treatment to those whose marriages comport with “tradition” – that is, with one spouse working in the labor market and the other in the home. These couples <a href="https://taxfoundation.org/tax-cuts-and-jobs-act-marriage-penalty-marriage-bonus/">are rewarded</a> because they pay less tax than if they earned the same amount but hadn’t married. </p>
<p>In contrast, those in “modern” marriages – with each spouse working outside the home – often suffer marriage penalties. These couples pay more tax than if they earned the same amount but hadn’t married. </p>
<p>And <a href="https://www.huffingtonpost.com/bella-depaulo/married-single-taxes_b_3079065.html">“single” taxpayers</a> never receive a bonus but instead often pay more tax than a married couple with the same income.</p>
<p>While the <a href="https://taxfoundation.org/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-americans/">Tax Cuts and Jobs Act</a> passed in 2017 temporarily mitigates the marriage penalties for some two-earner married couples, it fails to address <a href="https://taxfoundation.org/understanding-marriage-penalty-and-marriage-bonus/">other aspects</a> of the tax laws that contribute to the marriage penalty. Low-income married couples, for example, are still hit with significant marriage penalties under the <a href="http://prospect.org/article/penalizing-marriage-poor">Earned Income Tax Credit</a>. </p>
<p>At the same time, the act increased the bonuses paid to single-earner married couples that provide financial encouragement for one spouse – traditionally, the wife – to stay at home. To take a simple example, an individual making US$100,000 with no dependents who takes the standard deduction would see a 43 percent reduction in taxes in 2018 by marrying a stay-at-home spouse but would have seen a reduction of only about 38 percent in 2017. </p>
<p>The penalty for not marrying increased correspondingly. </p>
<h2>Rewarding discrimination</h2>
<p>The tax treatment of employment discrimination awards is another example. </p>
<p>Traditionally, <a href="https://www.law.cornell.edu/uscode/text/26/104">personal injury awards</a> have been excluded from taxable income. Courts <a href="https://www.congress.gov/104/crpt/hrpt586/CRPT-104hrpt586.pdf">differed</a> on whether employment discrimination awards were covered by this exclusion, with some courts allowing these awards to be recovered tax-free and others requiring them to be taxed. In 1996, Congress <a href="https://www.congress.gov/104/plaws/publ188/PLAW-104publ188.pdf">stepped in</a> to end litigation over this issue and decided to take away the exclusion, thus requiring workers to report an employment discrimination award on their federal taxes. </p>
<p>Disadvantaged groups are the ones most likely to suffer from employment discrimination. The top categories of discrimination <a href="https://www.lexology.com/library/detail.aspx?g=876b4bbe-d177-4e60-a52f-8352c47552b6">reported by the Equal Employment Opportunity Commission</a> include race, disability, sex, age and national origin. Members of the LGBTQ community also suffer <a href="http://www.latimes.com/business/la-fi-mo-a-rundown-of-lgbt-workplace-discrimination-20131121-story.html">discrimination</a>, but legal protection is <a href="https://www.hrc.org/state-maps/employment/pdf">not available</a> for them in every state. </p>
<p>All of these groups bear significant <a href="https://www.eeoc.gov/employers/remedies.cfm">monetary and psychological costs</a> as a result of employment discrimination. The awards they are given are intended to help mitigate those costs – to make them whole. Such awards <a href="https://heinonline.org/HOL/Page?handle=hein.journals/scws7&div=17&g_sent=1&casa_token=">should not be taxed</a> any more than the awards that make victims of car accidents whole for their injuries, which are still covered by the exclusion. </p>
<p>On the other side of the ledger, Congress continues to let employers required to pay these discrimination awards deduct them from their tax bills as <a href="https://www.law.cornell.edu/uscode/text/26/162">business expenses</a>.</p>
<p>If the <a href="https://www.eeoc.gov/laws/statutes">goal</a> is to prevent employment discrimination, it’s counterproductive to penalize victimized workers with a tax while rewarding employers who allegedly or actually discriminated with a benefit.</p>
<p>Again the Tax Cuts and Jobs Act <a href="http://mjbuscalaw.com/new-tax-law-prohibits-sexual-harassment-deductions/">made a nod at reform</a> – and the #MeToo movement – by taking away that employer deduction for settlements in certain sexual harassment cases. But that misses the bigger picture and deeper problem with the tax code. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/268693/original/file-20190410-2924-156qepu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Politicians often talk of ‘tax reform.’</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Republicans-Taxes/5a30c7c0e7634d6bb36e747abdbbfc6c/93/0">AP Photo/Andrew Harnik</a></span>
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<h2>Meaningful tax reform</h2>
<p>These are but two examples among many of how U.S. tax laws present a distorted picture of what Americans value and the type of society that America aspires to be. </p>
<p>So when <a href="https://www.theguardian.com/us-news/2017/dec/19/donald-trump-tax-bill-plan-house-approves-senate">politicians talk about “tax reform,”</a> much more is at stake than retaining political power or doling out tax cuts. True tax reform takes time and should entail discussions among the electorate and with politicians regarding the role that the tax laws play in exacerbating social and economic inequality.</p>
<p>That way, Americans can build a tax system that helps create a more just society rather than one that just rewards privilege.</p>
<p><em>This is an updated version of an <a href="https://theconversation.com/how-american-tax-laws-encourage-inequality-104027">article originally published</a> on Oct. 24, 2018.</em></p>
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<img src="https://images.theconversation.com/files/248895/original/file-20181204-133100-t34yqm.png?w=128&h=128">
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<header>Anthony C. Infanti is the author of:</header>
<p><a href="https://mitpress.mit.edu/books/our-selfish-tax-laws">Our Selfish Tax Laws: Toward Tax Reform That Mirrors Our Better Selves</a></p>
<footer>MIT Press provides funding as a member of The Conversation US.</footer>
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</p><img src="https://counter.theconversation.com/content/115283/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>MIT Press provides funding as a member of The Conversation US.</span></em></p>A country’s tax policies say a lot about what it values – and some of America’s tend to promote inequality.Anthony C. Infanti, Professor of Law, University of PittsburghLicensed as Creative Commons – attribution, no derivatives.