Tax, capitalism and dodgy research.

Try this quick quiz. Given the scale efficiencies in running any Government service would you expect - all other things being equal - that a large economy would have a higher or lower tax to GDP ratio? Clearly you would expect it to be lower.

As a consequence if you were to average the tax to GDP ratio of a number of countries using both an unweighted average or a GDP weighted average, would you expect the weighted average to be lower or higher than the unweighted on? Clearly you would again expect it to be lower.

Finally, would you expect the tax to GDP ratio of a developed economy to be higher or lower than that of an undeveloped economy. Clearly you would expect it to be higher.

So when the IPA publishes a paper that simply confirms those outcomes it really only becomes news if you are The Australian.  Also if you are the Oz you write the story all about the comparison to the OECD average but use the graph that compares Australia to to the Asia-Pac countries.

The headline of the story though was really about whether in doing tax to GDP comparisons compulsory super contributions should or should not be included. The really good news is that even when they are included we come out below the OECD unweighted average.

It is actually a pretty amazing outcome because under this calculation we are measuring a tax system that is paying the cost of supporting the aged twice - once in current pensions and again in super for the future.

However, the benefit of the superannuation system isn't only in the future funding of the aged. It made a dramatic difference to the national savings story - which itself had been one of the economic crises of the 90s. (Unfortunately the story gets distorted by net household debt in residential property - but tat is another story).

The IPA has never liked compulsory super - not because of its economic effects but because of the "c" word.

The IPA paper is also amazing because it carries a section titled "Australiaʼs heavy reliance on high direct taxes leads to fewer taxpayers doing the heavy lifting." This is part of the new attack on a progressive tax system.  Apart from the usual trite economic arguments about "efficiency" this introduces a new argument based in public choice theory - arguing:

Lower and middle income earners, in particular, would tend to be less responsive to changes in public sector costs. Other things being equal, there is also the risk that tax progressivity ensures that the less wealthy may discount the importance of taxation cuts, as a fiscal and economic competitiveness reform strategy.

So now we have it - only the rich can be trusted to know what is good for the country. Before we know it the IPA will be arguing for the reintroduction of a property qualification for the vote!

Finally let me comment on the concerns by Tony Shepherd in the Oz article about the continued increase in Government expenditure. The role of government was expanded by capitalism, not in spite of it.

The first big welfare reform - the age pension - was introduced by Bismark in Germany. Though it was here initially a Labor cause it gained wide support because the change to family circumstance caused by mobile labour finding work meant families no longer existed to care for the old as they had in agrarian societies.

Today we see a similar trend as the economy tries to press more women into employment. It was a G20 goal to close the gender participation gap by 25%. That requires more government funding of the child raising function, just as earlier generations saw the shift for the aged, then the unemployed, then the infirm.

It is pretty pathetic to whinge and moan about the size of government if you are a capitalist - it was you that caused it.

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