Tax Myths Debunked

Tax Myths Debunked

Experts and pressure groups favouring high taxes and high levels of public spending have repeatedly claimed that Australia is a relatively low tax economy.

In a new paper to be released on Wednesday 24 August, titled Are There Any Good Arguments Against Cutting Income Taxes?, Dr Sinclair Davidson addresses four key arguments used by opponents of lower taxation, and finds they are misleading or contestable.

1) The claim that tax cuts benefit the ‘rich’ at the expense of the ‘poor’

In a sharply ‘progressive’ tax system like ours, higher income earners pay much more than their fair share in taxation. This inevitably means that when taxes are cut, higher earners tend to benefit the most, for they pay the most. Many voters do not even realise that higher earners are paying vastly more than their ‘fair share’ of income tax.

2) The claim that tax cuts will not improve work incentives, and may even encourage people to work less

Critics of tax cuts claim they have little impact on work incentives, but Davidson shows that ‘cuts in marginal tax rates induce people to work harder in situations where they have an effective choice between work and leisure hours.’ Self-employed physicians, for example, tend to work more hours if taxes are cut. There is also evidence that people work longer in countries with lower taxes and take more leisure in countries with high taxes, and that entrepreneurial activity, such as new business start-ups, is stronger when taxes are lower.

3) The claim that tax cuts reduce government revenue and lead to damaging cuts in necessary areas of public expenditure

The Laffer curve suggests that at certain tax levels, a decline in tax rates could lead to an increase in tax revenue, but critics deny this. Davidson reviews the evidence and looks at occasions when big tax cuts have resulted in increased rather than decreased government revenues. Whilst there are also contrary examples, he suggests current Australian tax rates may be higher than the Laffer optimal point. If true, this would mean tax rates could be cut without dramatic loss of government revenues.

4) The claim that tax cuts are immoral because they pander to human selfishness

Davidson shows that the highest earners in Australia already pay much more than their ‘share’ of charitable donations, and that ‘high levels of taxation – especially high rates of taxation – crowd out philanthropy.’

‘High levels of taxation have adverse economic effects. It is important to notice, however, that it is high tax rates that do the damage. The 2005 budget brought in tax relief – there will be more money in people’s pockets. The budget, however, did not bring down the top marginal tax rate. In other words, the government has incurred the political costs of tax relief, but few of the benefits of tax reform will be realised.’

Dr Sinclair Davidson is an Associate Professor in the School of Economics, Finance and Marketing at RMIT University.

He is available for comment.

Are There Any Good Arguments Against Cutting Income Taxes? is the ninth in a series of CIS monographs, Perspectives on Tax Reform, discussing tax reform in Australia.
Embargoed copies are available on request or from the CIS website.

Read it here: http://www.cis.org.au/publications/policymonographs/pm69.pdf

ENDS

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