Heffron | Tax expenditure – what’s in a name?

Tax expenditure – what’s in a name?

According to Wikipedia, an oxymoron is a figure of speech that juxtaposes elements that appear to be contradictory. Anyone paying attention to the political debate in Australia will recognise its utility in the hands of a skilled (or not so skilled) politician. Unfortunately, some of these political oxymorons make their way into wider community conversations as an accepted and serious economic truth where they have the potential to cause a lot of damage.

The term “tax expenditure” is one of these. The term has its origins in the US in the 1960s as a means of communicating a political message.  It has become increasingly common in our own political debate where it is unfortunately being misused as a serious economic idea – even by the Commonwealth Treasury.  It’s a term very much in common use when talking about superannuation and the various tax “concessions” applicable to contributions and investment earnings.

This is dangerous for a number of reasons:

  • All taxation is revenue. Tax provisions cannot and do not result in government expenditures. Describing any measure as a tax expenditure is (at best) misleading and creates an environment in which a frank and truthful debate will become more difficult to achieve.
  • The user of the term assumes there is a normal level, amount or percentage rate of taxation that should be levied on citizens.  Therefore, any provision resulting in this normal amount not being raised is an expenditure. The assumption is based on a political and subjective paradigm of what that normal level of taxation should be.
  • It is therefore an entirely impractical idea because there can be no agreement on what represents that normal level of taxation. To illustrate, let’s have a quick look at what those normal levels of taxation could be:
  •  Before we had income tax legislation the normal level of taxation was presumably zero. If this was the case then a tax expenditure of any kind is an impossibility because any tax raised is revenue (funny that!)
  • If we assume the normal level of taxation is 100% of your income then every tax provision is a tax expenditure because every tax provision will reduce the level of taxation from 100% to something less than that
  • If we assume that the normal rate of income tax is the highest rate of personal income tax then our progressive tax system results in a tax expenditure of many, many billions because no one pays that rate on all of their income

Tax expenditure is a dangerous oxymoron because there is clearly no such thing. It has its origins as a means of communicating a political idea about the “right” level of taxation and has no place in Australia’s economic or taxation debate.

As George Orwell said in his famous essay on Politics and the English Language, “if thought corrupts language, language can also corrupt thought.”

Let’s be real careful out there.