Credit:<\/span>Joe Benke<\/cite><\/p>\nWhichever way the government chooses to do it, the effect on the budget balance is the same. And the effect on the people the government\u2019s trying to help should be the same.<\/p>\n
The only difference is that the two ways of assisting people appear on opposite sides of the budget. One adds to government spending while the other subtracts from government tax revenue. But, reason economists, this is a distinction without a difference. In principle, it doesn\u2019t really matter.<\/p>\n
Which is why economists have long sought to highlight the lack of difference between the two ways of assisting particular people or businesses by referring to special tax concessions as \u201ctax expenditures\u201d.<\/p>\n
But though there may be no difference between the two in principle, in practice there\u2019s an important difference. Government spending \u2013 on the age pension, for instance \u2013 is highly visible. It\u2019s \u201csalient\u201d as psychologists and behavioural economists say.<\/p>\n
By contrast, tax concessions \u2013 such as those applying to income that\u2019s saved in a superannuation scheme, for instance \u2013 are much harder to see.<\/p>\n
The practical consequence of this big difference in visibility is that actual government spending is examined carefully each year by the bureaucrats and by the Expenditure Review Committee of Cabinet, whereas all the spending on tax concessions tends to be ignored until someone decides to play around with a few of them.<\/p>\n
This relative lack of attention paid to our many tax breaks prompted Treasury many years ago to begin estimating the value of the most important of them and publishing an annual Tax Expenditures Statement.<\/p>\n
In 2019, however, the statement\u2019s name was changed to the snappier, more enticing and informative Tax Benchmarks and Variations Statement. What a page-turner.<\/p>\n
When the latest statement, for 2021, was published a few weeks ago, Dr John Hawkins, of the University of Canberra \u2013 in an earlier life, a senior Treasury official \u2013 used an article on the universities\u2019 The Conversation<\/em> website to explain that the name change reflects the truth that the amount of tax the government forgoes by granting a certain tax concession isn\u2019t necessarily the same as the amount of tax it would regain if it abolished the concession.<\/p>\nWhy not? Because when you make certain actions \u201ctax-preferred\u201d, people become more likely to take those actions, whereas when those actions cease to be tax-preferred people become less likely to take them.<\/p>\n
But there\u2019s another, less-defensible reason for switching to a title that will make tax expenditures even less visible than they already are. In the main, when governments want to help people in the bottom half of the distribution of incomes, they pay them money or buy things for them. But when governments want to help people in the top half of the distribution, they give them tax breaks.<\/p>\n
(Hawkins points to one exception to that rule: the exemption of fresh food from the goods and services tax favours the poor over the rich because fresh food accounts for a higher proportion<\/em> of the spending of the poor.)<\/p>\n![](\"https:\/\/static.ffx.io\/images\/$zoom_0.224%2C$multiply_0.3541%2C$ratio_1.776846%2C$width_1059%2C$x_0%2C$y_101\/t_crop_custom\/q_86%2Cf_auto\/984b9fe242213f01bdd6b984832704382ff5e881\")
<\/p>\n
The exemption of fresh produce from the GST favours the poor.<\/span>Credit:<\/span>Edwina Pickles<\/cite><\/p>\nIf you\u2019re well-off, and so have to pay proportionately<\/em> more tax to support government spending to help those not doing as well as you are, it suits you for government spending to be highly visible and regularly scrutinised by politicians looking for ways to save money.<\/p>\nConversely, it suits you for the support you<\/em> get from the government to come in the form of tax concessions and thus be hidden from the public\u2019s and the politicians\u2019 view.<\/p>\nHawkins notes that the biggest annual tax expenditures are: $64 billion because private homes are exempt from tax on any capital gain when they\u2019re sold; $23 billion because the earnings<\/em> on money in superannuation funds are taxed at a concessional rate; $21 billion because contributions<\/em> to super funds are taxed at a concessional rate; and $12 billion because capital gains are taxed at only half the rate that income from \u201cpersonal exertion\u201d (work) is taxed.<\/p>\nLast financial year, the top 10 tax expenditures totalled just under $120 billion, which compares with total actual tax collections by the federal government of $460 billion. This year, 2021-22, the cost\u2019s expected to be $150 billion. That increase of almost a quarter is explained mainly by the boom in house prices and share prices.<\/p>\n
While tax expenditures primarily benefit the individual taxpayers who receive them, there\u2019s a flow-on benefit to the industries conducting the economic activity that\u2019s getting favourable tax treatment.<\/p>\n
One stand-out is the property industry \u2013 developers, builders and real estate agents \u2013 which sees itself as benefiting from negative gearing and the 50 per cent discount on capital gains tax.<\/p>\n
Another stand-out is the superannuation industry. It\u2019s selling a product that\u2019s heavily subsidised by the government \u2013 apart from the small fact that the government compels employers to buy its product on behalf of their employees.<\/p>\n
The super industry has led claims that Treasury\u2019s estimates of the value of tax expenditures are overstated. But Hawkins notes that its estimates of the revenue gained by canning a tax break don\u2019t differ greatly from its estimates of revenue forgone.<\/p>\n
A final \u201cbenefit\u201d from the near invisibility of tax expenditures is that it allows recipients to delude themselves \u2013 and others \u2013 that they\u2019re not dependent on government handouts.<\/p>\n
Once, when I wrote that the Institute of Public Affairs think tank had its snout in the government trough, I got an indignant denial from its boss. When I replied that it benefited mightily from having donations to it declared tax-deductible, I heard no more.<\/p>\n
Ross Gittins is the economics editor<\/strong><\/p>\nThe Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. <\/i><\/b>Sign up to get it every weekday morning<\/i><\/b>.<\/i><\/b><\/p>\nMost Viewed in Business<\/h2>\nFrom our partners<\/h3>\n
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