By Adam Creighton
The costs of complex income taxes are routinely underestimated and drag down real prosperity, according to Yale political science professor Ian Shapiro, who visited Sydney yesterday.
''On top of the obvious time costs, swathes of the accounting and financial advice industry are now (like people paid) to dig holes and fill them up again,'' Dr Shapiro said, citing John Maynard Keynes' famous ''cure'' for unemployment.
The Henry review of taxation found that tax complexity was a substantial burden on individuals and businesses, and noted that Australia had the second-highest usage of tax accountants in the world after Italy. Dr Shapiro would not be drawn on the specifics of Australia's current tax debates, but argued that ''governments should aim to get people off the income tax rolls completely''. Attempts to redistribute income were far better carried out on the spending side of the budget, not through a progressive tax system.
''There is an inverse relationship between the progressivity of an income tax system and how costly it is to implement,'' he said.
The government prevented the Henry review from considering changing the rate or base of the GST, but Professor Shapiro said consumption taxes were a far cheaper and easier way to fund government than income tax.
''Conservatives sometimes accept those arguments but worry that taxes like the GST are easier to increase than direct income taxes, which may be true, but having to fill out an income tax return creates powerful and costly incentives for tax avoidance that consumption taxes do not,'' he said.
Patchy tax reform in the US was a case in point.
''The Reagan administration's 1986 changes dramatically simplified the income tax system, but over time rent-seeking interests have successfully inserted loopholes, and the system today is perhaps even worse than what existed before,'' he said.
Income tax systems were ripe for insidious yet popular exemptions. Negative gearing on rental properties in Australia paled in comparison to the deductibility of all home mortgage interest in the US, for example. Dr Shapiro said that exemption had distorted the US home loan market, convincing people who could not really afford houses to buy them in order to qualify for deductions, and fanning the subprime financial crisis of 2008.
The tax debate in the US now revolves around whether to allow Clinton-era taxes, including inheritance taxes, to return later this year when president George W. Bush's 2001 tax cuts expire.
''Inheritance taxes are not as unpopular as people make out, and they score well on both distributive and incentive grounds,'' Dr Shapiro said.
''Andrew Carnegie, the 19th-century steel tycoon, and Bill Gates today, favour them as a way to ward off laziness among children of rich parents.''