Opinion: Family-based tax to fight churning

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The Government could put an end to the churning problem by simplifying the country’s complex tax transfer system and adopting a family-based taxation system. Monash University department of accounting and finance senior lecturer Stephen Smith explains:

There are several arguments for simplifying the tax transfer system. Firstly, the current means-tested tax transfer system, which is designed to alleviate poverty may actually entrench poverty, particularly at low income levels, where the system imposes large penalties for earning extra income.

Secondly, the current system confuses child rearing responsibilities with welfare. A single universal payment would recognise that the difficult work undertaken by parents to rear the next generation is of great benefit to society. The value of this work does not diminish as family income increases, so neither should payments that recognise that work.

Thirdly, the large bureaucratic structure set up to assess each family’s eligibility for tax transfers only exists because the current system is complex. The amount of Family Tax Benefit received is based on a complicated formula that takes into account both individual and family income and is difficult to calculate.

Other payments, such as childcare benefits, are even more complicated and virtually impossible for individuals to assess. This complexity creates a burden for many taxpayers, particularly those with limited English language skills or poor numeracy. In these circumstances, the operation of government programs is anything but transparent and therefore antithetical to good governance.

Finally, and arguably, most compelling of all, simplifying the tax transfer system will reduce the amount of what is known as fiscal churning, a mutually offsetting tax and expenditure flow, or in plain terms, spending tax revenues from someone to provide income and government funded services ‘back’ to that same person.

The main problems with churning are that it is associated with the development of a welfare mind-set that lowers self-esteem and individual responsibility and encourages political rent-seeking.

Churning also distorts economic behaviour via rules associated with both the tax and the transfer related effects, if the net value of the transfer is zero.

Another problem with churning is it requires significant administrative support at all stages of the process, particularly ones that are intrusive and complicated, for example, those that involve means-testing of payments.

Churning, from a purely economic perspective, is undesirable because it is a deadweight loss in that the transfers destroy resources needlessly while producing nothing that citizens can use or enjoy.

The marginal social cost of transferring one extra dollar in the US system may be as high as $3.50, and there is no reason to expect that transfers in Australia will be close to cost-neutral either.

Computer-based systems can reduce the administrative cost of churning by executing simple repetitive tasks efficiently but, unfortunately, the activities that generate the most cost in any business process are difficult to automate.

These activities include ongoing maintenance of highly complex computer systems, dispute resolution, and debt recovery. Simplifying the tax transfer system will help to eliminate these inefficiencies and therefore reduce both churning and the associated cost of administration.

Simplifying transfer rules and rolling transfers, such as family tax benefits, into the taxation system will cut churn dramatically. The existing family payment system already treats the family as a single economic unit, so administering revenue on this basis will merely simplify the existing system. For example, if revenue is family-based, some existing family-based payments could, in principle be abolished because they would be unnecessary.

From the government’s point of view, simplifying the tax transfer system should not just be cost-neutral, but actually provide significant costs savings. The total cost of the tax transfer system, including health and education, is in excess of $250 billion per year. Eliminating even a small proportion of churn from these programs would save hundreds of millions of dollars.

This article was originally published at The Conversation. Read the original article.