Australia’s Tax Army Costing Economy A$61 Billion Says New Study

by Mary Swire, Tax-News.com, Hong Kong

19 May 2005

In a paper to be released on yesterday by the free market think tank The Centre for Independent Studies, entitled 'The Costs of Taxation', Dr Alex Robson demonstrated that every dollar the government raises in tax has a cost.

"While tax revenues may be spent by government on beneficial uses, these benefits have to be weighed against the ‘deadweight losses’ (basically, the value of lost output) incurred as a result of levying the tax in the first place," observed Dr Robson, a lecturer in the School of Economics at the Australian National University in Canberra.

Robson calculates that the total deadweight loss of taxation could be as high as A$61 billion (US$46.2 billion) per year – more than the federal government spends on health.

"High personal income taxes not only reduce the ability of individuals to enjoy the fruits of their own labour and make workers worse off; they also create significant disincentives," he said.

The impact of these disincentives means every dollar raised in taxes is costing at least A$1.20 in lost output. Any new government programme should therefore generate benefits worth at least A$1.20 for every A$1 spent, but Robson is doubtful whether many new spending policies pass this basic test.

He is also critical of economists and politicians who claim Australia could afford to raise taxes on higher income earners without damaging growth. He points out that countries which significantly cut taxes between 1980 and 2000 enjoyed average per capita economic growth rates of nearly three times those that did not.

The study went on to observe that at 21,000, the number of people employed by the Australian Tax Office was almost equal to the Australian army in terms of personnel. However, when tens of thousands of lawyers, accountants and other specialists are added, Robson contends that Australia's total 'tax army' is nearer 82,000 strong.

"Whatever view one takes of the merits or otherwise of higher taxes, it is simply erroneous to assert that, at current levels of taxation and spending, confiscating an additional dollar from individuals and transferring it to one’s favourite bureaucrat or politician would have little or no effect on economic incentives," Robson argued.

Recommended