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Why we should stop the levy

February 5, 2011

The primary way that taxes hurt the economy is by changing people’s incentives at the margin. Each small change in taxes may not seem like a big deal to any one person, and for many people it won’t change their behaviour, but it is possible to measure the change in behaviour and assess the economic consequences through statistical analysis. The economic cost caused by changed behaviour from taxes is called the “deadweight loss” and has been estimated at anywhere between 20% and 40% (depending on the study and depending on the tax). That means that for every $100 in tax raised, the economy shrinks by $20 to $40. So for a levy of $1.8 billion the deadweight loss costs are likely to be in the order of $0.4 to $0.7 billion.

In addition to this, there are the administrative and compliance costs, but these are likely to only be in the millions and so are less costly that the deadweight loss described above. A third way that tax can negatively impact the economy is if the government is more wasteful in their spending. Generally, people spend their own money more carefully, and there are good reasons from public choice theory (and plenty of evidence) to suggest that the government can be wasteful in their spending of taxpayer money.

These are the broad economic costs. Of course, there will also be some pain to families who will pay an extra few hundred dollars a year. For many, that extra impost will be easy to pay. For some, it will be more difficult as they juggle their household budget. You need to remember that while each tax increase may seem small, the sum of many small increases eventually creates a substantial cost. Seventy years ago there was no federal income tax, and next financial year it is expected to raise $156,050,000,000.

But for me, one of the biggest reasons to be opposed to this tax is that it is another small knife in the back of voluntary community and a vibrant civil society. Humans are social animals, and we get a lot of value out of the social interactions we have through social and community groups. These are the places where we learn how to be decent people, and were we learn the value of tolerance, compassion, love, belonging, self-esteem, and forgiveness. Civil society groups promote independence, strength of character, consideration for others and a sense of moral responsibility to get active and make the world a better place.

There is clear evidence that big government crowds out civil society, and I think we have seen some of the consequences of that in long-term dependence, sometimes leading to low self-esteem, xenophobia, and anti-social behaviour. Children in dependent households have worse health, worse educational outcomes, lower life expectancy, and are more likely to end up in jail. These are innocent victims of a system that has prized the bureaucrat over real community.

It may not be easy to fix this, and I don’t pretend to have all the answers. But the first thing to do is to stop going in the wrong direction. Stop increasing taxes and stop increasing the size of government.


This article was originally posted on a pro-levy facebook page, and has also been published at Menzies House, which is running a “Stop the Levy” campaign. If you agree, please sign the petition and join the “stop the levy” facebook page.

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