Codifying TABOR for Australia

This is my attempt at codifying a constitutional TABOR reform for Australia. The intent of the reform is to put the power of taxation much more into the hands of the people. As such it is a democratic reform. It does not attempt to take away from government the power to formulate the nature or structure of the tax system. It merely seeks to constrain the overall ability of the government to raise its price without the direct consent of the people.

In drafting this reform there is a tension between finding a form of wording that is specific enough to prevent a later creative legal misinterpretation, simple enough to be communicated during the reform process and generous enough to negate most serious arguments against it.

There are terms and concepts within my codification that could theoretically be fleshed out in more detail but having reflected on this over a long period I think that it is better to keep the terminology as simple as possible and to leave the interpretation to the courts. Some may see risks in this given the history of courts to discover unexpected interpretations, however I don’t think additional detail would guarantee against this risk and I have been careful in crafting the wording to avoid any ambiguity. Further more I think additional detail would make communicating and selling such a constitutional reform much more difficult.

I have avoided any reference to inflation to avoid any subsequent legal redefinitions of how inflation is measure or how high inflation is. Instead I have opted for a fixed figure that corresponds to the current upper limit of inflation targeted by the reserve bank.

My codification leaves open the opportunity for taxation to be increased at the state level and leaves jurisdictional competition to deal with such eventualities.

Here is my wording as I would seek to have installed in the Australian constitution:-

The total taxation revenue appropriated by the commonwealth government in any given tax year, must be less than the national population multiplied by $20,000. However whilst retaining this formulation an alternate to the $20,000 figure may be substituted through legislation so long as the alternate figure effective in any given tax year meets one of the following two criteria:-

     i) the alternate figure is approved by a majority of the citizens in a plebiscite.

– or –   

     ii) the alternate figure is no more than 3% higher than the figure effective in the preceding tax year

In the event that the otherwise lawful total taxation revenue collected in relation to a given tax year should breach the proscribed limit then each tax payer shall, in proportion to that excess, be entitled to a reduction in their tax liability for that year.

58 thoughts on “Codifying TABOR for Australia

  1. I don’t think it would work, because whenever there are formal barriers like this they simply call it something else, e.g. the way the USA doesn’t need a formal declaration of war to make war if it can get war powers without one. Here, if (say) there were a problem with getting a tax, e.g. if there were a problem with taxing superannuation, they could (say) just call it a levy and take it anyway, all the while denying they were taxing it. Oh, wait, they already did that…

  2. PML – the difference as I see it is that the US war powers is not something individual citizens have a personal incentive to test in court. TABOR has worked in Colorado. The TABOR proposal outlines above offers a clear entitlement (tax rebate) if the government over taxes. The issue then hinges on whether the court regards a compulsory levy as a tax. However maybe the opening sentence could be amended as follows:-

    The total revenue from taxes, levies, charges and fees received by and otherwise lawfully due to the commonwealth government in regards to any give tax year, must be less than…

  3. It seems the LDP is so afraid of being seen as radical, that it embraces statism to such a point that the incredible morals, utility and vision of libertarianism is diluted so much as to seem unworthwhile.

    Talking about constitutional amendments that would slow the tax growth of government? People already know that they don’t like taxes, duh. You’re never going to get taxes lower unless you can persuade people to think that public spending is unnecessary and HARMFUL.

  4. I don’t think the Australian traditions support TABOR.

    The Australian Constitution isn’t infused by a Declaration of Independence, and right there the TABOR falls down.

    Australia pioneered insane levels of bureaucracy for the same reason- no reminder of our rights and liberties, no strong declaration against tyranny.

    Other than the Eureka Oath of course. 🙂

    Gary

  5. ATP – I have the most problem selling TABOR to libertarians. Most other people seem to agree that there is some virtue in the people deciding when the price of being governed should go up, if at all.

    Buddy – as outlined previously TABOR would mean a vast reduction in tax rates. Put a cap on tax revenue per capita for one decade and you pretty much abolish personal income tax. And all by being democratic and relying on peoples natural conservative instincts.

  6. Referenda to modify the Constitution fail unless supported by both Liberal and Labor. I imagine that if this came up, one or both would oppose it by claiming it would mean fewer hospitals or schools.

    The idea has merit nonetheless. Have you identified where it would be located in the Constitution? There is no logical location that I can see.

  7. DavidL – I don’t doubt the difficulty of reform but I do think good meaningful reform ideas should still be thought about and put forward. I don’t know the best place in the constitution to insert this reform but I’ll think about it.

    PML – your concern regarding this reform seems to me to be an argument against having a constitution. However constitutions and institutions have a proven record at putting limits on government. Just because the record isn’t perfect doesn’t mean it doesn’t work or isn’t workable.

  8. It should be in its own new section at the end of the Constitution – Reform Matters and Declarations. 🙂

    “We the Australian people hold the following truths to be self-evident, conferred not by our fellow humans but originating ab initio ex nihilo”

    🙂

  9. ATP – are you trying to package this so the referendum might succeed or just so certain rights based libertarians will like it?

  10. That’s like an attitude I’ve sometimes come across among computer users when they see test results. If you come up with something, they think you should just fix that one thing and that that will solve the problem, not realising that finding a bug indicates a wider bugginess, that you need to look deeper and more thoroughly and do more than that as a fix.

    Here, I’ve pointed out that governments can call (and have called) taxes levies instead – and your proposed fix is to change the wording so that levies are covered as well as taxes. But levies aren’t the problem, they are just an example. The real problem isn’t that governments can call taxes levies, it’s that they can call them something else, something you haven’t covered. Any specific list you can think of will always have something it doesn’t cover, so you can’t get a fix that way. If you put a limit on government spending, they will create an obligation for someone else to do things or to provide them with means at some statutory price, and so on (this isn’t speculative or hypothetical either; I am drawing on historical precedents, particularly from Charles I’s ingenious schemes in the run up to the Civil War).

  11. People hate taxes. They obviously think that the resulting public spending is good for them and others. As long as they do, things will not change.

    A libertarian’s role should not be one of policy, but one of education. Explaining throughly the good that comes from lower taxes. Explaining (and perhaps better understanding themselves) the harm done by public spending. Explaining how a system of voluntary interaction is far more moral and helps far more people than anything else. Appealing not to self-interest, but to the interest that humans have for other humans.

  12. We need the TABOR to say that Government *charges* can only be transfer costs that are not paid twice.

    Stamp duty on cars would fall, and no developer would pay twice for a road they built themselves.

    A tax must be called a tax.

  13. ???

    Take stamp duty for example. It is levied “to register a motor vehicle”.

    I would say that the tax cannot exceed transfer costs of doing so, plus any associated, fully accounted and budgeted for, user charges.

    Speeding fines for example, should be costed to fully accessible risk metrics and subsidise CTP if any exists, compensation funds and then used to fund court costs and roads.

  14. Not a great example…but what I’m saying is Government revenue levied for a service (hopefully under a TABOR) must be properly trasnfer priced and earmarked appropriately. Not used for collecting, bolstering or otherwise used as general revenue.

  15. Perhaps the reason you get most resistance from libertarians is because they understand better than interventionists why these sort of interventions tend backfire with the result that government gets bigger.

    Take Milton Friedman. He is considered by the left wing to be ‘ultra-right’. But Friedman was responsible for two interventions which were intended to make government more efficient, and which ended up being two of the biggest government-growers in the last century. One was to take income tax direct from employers, with the inevitable result that the mass of the workers didn’t notice it so much so of course government took more. Another was the idea that growth in the government should be limited to the rate of growth in the money supply, to be administered by… guess who?

    Constitutions have proved to be abysmal failures at restricting government. The US leviathan is virtually unrecognisable from a reading of the US Constitution, so useless has it been. Similarly the protection of property rights in the Australian Consitution has been blatantly disregarded by the environmental religion, which effectively confiscates use-rights with every legislation.

    The idea of reducing tax is great, of course. I prefer the approach in one of the ancient Greek city-states. Anyone proposing a new tax has to stand on a stool in the agora with a noose around his neck. If the motion is not carried, the stool is kicked away.

  16. Sorry that should read “growth in the money supply should be limited to the rate of growth of the economy”- which continued a Fed-friendly approach after Keynesianism had failed to continue to supply legitimacy for it.

  17. Mark – I think TABOR should limit revenue in totality including fines and fees for government services. I don’t mind your alternate proposal except that it’s too complicated to sell in a campaign to the masses.

    Sienna – what exactly is it about this reform that you think libertarians “understand”. If they see a flaw that I don’t see then they should speak up.

  18. Speaking of monetary policy there is one ironic twist in the proposal I mounted. And that is that under my TABOR rule if you want government to stay big then you have a strong incentive to minimise inflation.

  19. Terje – I ain’t a marketing expert.

    Here’s my dig “No more revenue raising through fines! Stop the fines racket!”

    I reckon it would go down well in the sticks. It isn’t an alternative. It’s an addition.

  20. With fine revenue – rebate it to the taxpayers as a whole. Removes the entire incentive to take it. If the government gets no net benefit from it, their enthusiasm for imposing it will drop like a stone.

  21. Take Milton Friedman. He is considered by the left wing to be ‘ultra-right’. But Friedman was responsible for two interventions which were intended to make government more efficient, and which ended up being two of the biggest government-growers in the last century. One was to take income tax direct from employers, with the inevitable result that the mass of the workers didn’t notice it so much so of course government took more…

    This is a widespread misunderstanding. That was not his contribution; PAYE (Pay As You Earn) income tax systems like that had already been pioneered in other countries, and were already being considered for the USA when he came along. Claims of his making this “innovation” aroused my suspicions, so I went and looked up what he actually did. What he worked out was, how to sweeten the transition by ostensibly waiving one year’s income tax at the date of implementation. The thing is, the previous system collected the tax in arrears, and simply implementing PAYE would have brought forward the payments – a windfall gain for the government but cash flow problems for many tax payers in a year in which they had to pay out for both the previous year and the current one. By foregoing that the government did not actually lose out but the US public was not penalised and even believed it was being given something.

  22. Since this TABOR thing will only be used as something to woo voters (at least in the short to medium term) I don’t see it holding a lot of value. Since you don’t also discuss spending cuts, voters will likely think that it is a modest tax cut that they could get from the Libs.

    Just because libertarians don’t believe in big government projects doesn’t mean they cannot believe in big free market projects. Big projects evoke a perception of leadership and vision.

    Libertarians do not have to reduce government slowly slowly over its entirety. You can discuss ideas of big reforms, like encouraging a free market in health or education or transport. Envision bigger, better hospitals, better schools, better roads. Decentralising state services, like policing, to the local level, promoting greater efficiency and representation. A wide ranging reduction of taxes and regulations on the food industry in order to reduce grocery prices (it would need economic analysis but a 25% cost reduction would be quite achievable).

    These things are very explicit in their benefit to people, in the same way as public spending is. You can easily claim to help the voter, the pensioner, the unemployed, the generally poor and whatever. And voters like vision.

  23. Buddy – are you stupid? Tabor could effectively see income tax abolished within ten years. That is a faster cut in the tax rate than almost any tax cut in the history of the planet. Okay I admit you could abolish income tax in five years instead but let’s have some political realism.

  24. Look there seems to be a lot of willful ignorance here regarding how Tabor performs in practice. In practice the voters will almost never vote for an increase. In practice the economy will grow faster than inflation. In practice the effective tax rate will plunge. This is what happened in the state of Colorado when Tabor was inserted into their constitution. It didn’t happen before Tabor was put in place. When the people have a lever to directly control the price of being governed the price does not rise, it falls.

  25. Sure, if we could get and sustain Tabor that would be amazing, but I don’t see this happening any time soon. It can only be as good as it can communicate with people about libertarianism and to gain support. People do not take time to understand politics, instead engaging in production or leisure. People either need something that will get them more interested or that will quickly engage with them when they have a fleeting interest of policy. I don’t believe tax cuts themselves will inspire this.

  26. Buddy – Tabor isn’t a tax cut. It’s a democratic lever with a track record of delivering tax cuts. And with Tabor it doesn’t matter so much what people think of libertarianism.

  27. I’ll throw out an alternative lever. Rather than restricting tax growth, restrict voting rights to those who are net contributors to government. In no other system that I’m aware of do we give the right to determine how funds are spent to people other than those who contributed the funds.

    This is how governments were run until recently. The increasing number of voters reflected the increasing number of contributors, until somewhere along the line we lost sight of why people were allowed to vote, and figured that more people voting was a good thing.

    The right to vote should be universally available, not universal.

  28. Everyone pays GST, and most pay income tax. But many also receive more from the government than they pay in. That is what I mean by ‘net contributor’.

    If, when its all added up, you are on the take, you don’t get a say.

    If you’re paying in to the system, you do.

  29. Given the prevalence of generational welfare recipients that are thos way in part due to poverty traps built into the welfare system, I don’t think it is fair.

    As an attack on middle class and corporate welfare, this should be applauded.

    I favour simply reducing all other taxes until we have a GST and nothing else (and maybe other efficient taxes such as land value taxation or properly designed royalties). The alternative that we don’t acutally support but use for illustrative purposes is we *choose* a GST only option now and set the rate around 40-45% to show people how costly Government actually is.

    Not a vote winner, but it would be illustrative to show people the illusion they’ve bought into.

  30. Part of the change has to be removing those traps. I think the 30%/30k arrangement that the LDP proposes sounds good as a starting point.

    The GST should be fixed – i.e without exclusions.

    What I’d potentially add into the mix is a debt tax. Say 3% annually on all debt. Debt is the real enemy of the system we have, and has to be dealt with. The only realistic, ongoing way it can be dealt with is by making it more expensive.

    One of the biases I believe the government should build into the system is to benefit long term growth over short term gains. Humans have a short term bias built into them, mostly to our long term detriment. Some not so subtle ‘encouragements’ towards this are important.

  31. What I’d potentially add into the mix is a debt tax. Say 3% annually on all debt. Debt is the real enemy of the system we have, and has to be dealt with. The only realistic, ongoing way it can be dealt with is by making it more expensive.

    This would also discourage good debt, which is a pretty important part of growth, but because of it’s ‘shock’ value I think it has merit.

    Maybe something like a debt tax of 3% in order to drop income tax rates by 1% or 2%? I think the case could be made that this arrangement is overall less destructive than just taxing income, but the difference wouldn’t be great when offset against the hit on business and the need for housing.

    Could you imagine trying to sell this to business owners or people with mortgages? You’d need to offset with income and company tax cuts in other areas so people felt better off pretty quickly.

  32. I think a better solution is more austerity with respect to money supply and removing any bias in fiscal or microeconomic poilicy that encourages foolish behaviour.

    If housing wasn’t undersupplied due to artificial supply constraints, household debt would be much lower, as well as tackling the housing affordability problem.

  33. On the ‘good debt’ issue – is there such a thing? I suspect the best that can be said is that there is ‘productive debt’. And maybe productive debt needs to be a separate issue from non productive debt.

    I suppose part of my thoughts on why I haven’t at this stage chosen to separate that out is that a) a simple, effective method of separating the two isn’t immediately evident and b) if it is productive, it can afford the extra. If its not productive enough to cover the hit, then debt shouldn’t be involved.

    As long as the rate is consistent over time, it can be priced in to any productive debt.

    To put this in perspective, 3% will initially net about $45billion, or a similar amount to the GST. I would do this in conjunction with a reduction in income tax / business tax of greater value. The point is not to raise more money – we are looking at reducing government impost here. It is to mitigate the distorting and destabilising effects of debt on the economy.

  34. I doubt that debt is distorting in the context of significant monetary largesse and one of the most expensive property markets in the world, due mostly in part to artificial supply constraints.

    There is even some inferences that the property squeeze has forced the participation rate to rise, thus destroying work-life balance.

  35. Property is expensive due to cheap debt, not artificial supply constraint. If cheap debt were not available, property would not be as expensive as it is because it couldn’t be afforded. Property has become a self fulfilling cycle of continual increase in value.

    The appearance of supply shortage isn’t an actual supply shortage – it is the disconnect due to pricing being too high. It’s not that nothing is available, just that nothing is available at a price people a willing to pay. There is a pricing disconnect, and one that will tear rather than correct.

    Should there be a downturn for any reason, or an increase in the cost of debt, property values will plummet Australia wide.

    It’s often said that we are not as bad as the US was. There may be some truth in that, but all that means is that the point of failure will be a little later for us than it was for them.

    The benefit there is that we can look across the way and see what things will look like in a couple years time and take appropriate steps to prepare.

  36. Don’t listen to Keen. He lost money on his own predictions.

    Cheap debt occurs because of cheap money, which causes inflation, a stealth tax. We shouldn’t levy taxes on taxes.

    Do you agree?

    The supply constraints exist. We know this because there is unmet demand, but with a genueine boom, there is no unmet demand – when this occurs, so does the bust. Unmet demand has continually increased since 2003.

    Compare the levying of developer fees in NSW to the increases in undeveloped land values and unmet underlying demand. From 2002-3 onwards, the supply constraint is very evident.

    Cheap money does cause asset price appreciation. It however does not contribute to affordability, even to buyers. All it does is create an arbitrary transfer of wealth to those who got in early. Supply constraints therefore make those wishing to buy a house now very financially inept.

  37. It’s worthwhile charting the money supply in Australia – data available at the RBA website – if you want to see 3% inflation writ large. You also see that financial crisis cause monetary growth that never does recover to the pre-crisis intention, although it must be said the RBA has done a pretty good job both times (dot com, GFC part I).

    Keen provides an interesting but unfinished piece to the economic puzzle. I suspect that he is working towards a similar model to that which Armstrong had working 10 years ago. Keen has the theory, but hasn’t correlated it with the data yet, so is only able to determine broad conclusions, not specific ones. Worth taking in context, not ignoring.

    I understand that what I am proposing is the conversion of a stealth tax (that feeds the banks, not the government) into a open tax. The argument here is solely whether one option is better than the other. I’m not sure, but I’d have to say that at this stage, the RBA isn’t doing what it needs to to bring private debt levels back to a rational level, and someone needs to.

    A leverage level of 1.5 on a country, much of this on unproductive debt is not good for stability.

  38. It is important to understand that with a fractional reserve monetary system, money is created out of nothing, which means debt becomes cheaper. Artificially cheap debt is very damaging, but you don’t need to tax it. Getting rid of the federal reserve bank will cause the cost of debt to naturally rise to the most appropriate level. Monetary inflation would also cease.

  39. Keen’s conclusions are wrong. Something is missing then right?

    I have a lot of respect for him. There are plenty of forecasters that won’t stake their money on their own forecasts, but will take yours.

    Do you agree that inflation is already a tax and then so we shouldn’t levy double taxation, but aim for more monetary austerity?

    buddy – I’m sorry but that is utter crap. Leverage in a banking system doesn’t cause inflation. Supplying too much money does. Bank leverage doesn’t cause inflation.

    Rothbard was just wrong on monetary economics. His theory is sloppy, lazy and contains no real analysis.

    If you disagree, please tell us how debt would be issued without bank leverage. I’m thinking that even insurance would cease to exist and that bonds bought with no leverage themselves would be the only form of debt available.

  40. Which conclusions are wrong? And are they wrong in timing, or in outcome?

    I think inflation is actually important and useful for fiat currency. It keeps currency moving. There just has to be a functional and exchangeable hard money in use for wealth storage at the same time.

    Inflation isn’t a tax. It is a cost, but the government doesn’t receive the benefit of the new money. In our case, the banks do. Let’s not confuse the two.

    What do you mean by monetary austerity? Fairly broad term that could mean a swath of different things. If you are using this as a term for low cost governance, then it is a goal, not a means.

    I’m not sure I see the value in debt that you do. I think if you have to have debt, it should be limited in length (3 month).

    Without leverage, debt is simply capital issued on a fixed return basis – as you say, a bond.

    I don’t see how this precludes insurance?

  41. Keen was wrong. If you say he just needs to wait then all predictions are basically true. His predictions were late, actually..see SW Sydney in late 2007. 40% declines. Absolutely brutal. Once again I commend his backing of his own predictions and his efforts to mathematise some aspects of the business cycle.

    Property prices are high, but I don’t think there is a boom. Rates of return for investors are actually low. This points to a supply squeeze and increasing costs.

    Inflation and deflation in themselves are not useful. What we need is: money supply adjusting to money demand. This is actually “monetary austerity” resulting in low inflation and never letting booms arise. What is also necessary is the allowance of different goods and services to adjust in monetary terms as their relative scarcities and demands change.

    Debt isn’t for me. I tried it and I personally don’t like the stress. I will never have a big mortgage. It does work for other people though.

    What utility is there in shutting down bank leverage? Bonds and CDOs can have very long durations. In fact, reducing their duration increases the lend long, borrow short risk profile of banks. Theoetically a deposit has instant maturity but banks also have “core” deposits.

    Insurance firms basically have the same asset/liability constraint that banks have, and are included as part of the banking system under risk guidelines, even if they are not deposit takers as such.

  42. Of course rates of return are low – that is exactly what it means to have overpriced housing.

    Don’t forget what you are dealing with here – this is housing, not an optional extra. So you are going to see people stretch themselves beyond their limit rather than not buy. You will see buying well beyond what you would rationally expect. Then at some point, where a general system shock occurs, the stress will tear the market, leaving an unbridgeable gap between what people are willing to sell for and what people are able to pay.

  43. “Counterfeit is fraud and its effect is theft. There is nothing libertarian about fraud or theft.”

    There is nothing counterfeit or fraudulent in bank leverage buddy. There are plenty of other things which lend long/borrow short or have a long asset and short liability. Maturity mismatch isn’t fraud. This is fact as found in the common law per Foley v Hill.

    Australia dropped the 25% RAR in the early to mid 1980s. Inflation didn’t triple as RARs went down to 8%. It tracked the excess of base money growth minus GDP.

    “Of course rates of return are low – that is exactly what it means to have overpriced housing. ”

    Except in this case, the supply constraints reduce the investment returns on new development – which then make housing scarce. The only winners are current owners who receive a supernormal capital appreciation.

    “So you are going to see people stretch themselves beyond their limit rather than not buy.”

    Yes that’s right.

    “Then at some point, where a general system shock occurs, the stress will tear the market, leaving an unbridgeable gap between what people are willing to sell for and what people are able to pay.”

    Except the unmet demand in housing is forecast between 120000-200000 dwellings (various banks and macro forecasters). [Some who doubt this think we have high vacancy rates – they’re nuts].

    I do not beleive this is a boom. It is a very sick market. It has all of the fallout of a boom without any of the possible wealth creation.

    “Austrian school” economics has an insight into booms – that there need be no external shock. The fall in aggregate and labour demand is internally generated as the quality of the capital base declines.

    I believe the property crisis will basically set in like cancer or rust. Slowly it will drive away talented young workers away from where they are demanded. Either we have labour cost inflation as a result or massive allocative inefficiencies as we will not get the best matching of workers and jobs. This may be the internally generated driver of lower demand, but it might be like a slow train wreck – but with an even slower than normal recovery.

  44. Voluntarily traded leverage is a whole different idea to that of fractional reserve banking. On the one hand you have a voluntary transaction without any deception, with both sides accepting risk. On the other you have money-holders who are forced to leverage their own money at full risk. They are forced to use this money and told that they hold real money, not leveraged money only benefiting one party.

    When leverage is a mutually beneficial trade there need not be a bureaucracy to manage it and force people to use it. That the government-imposed federal reserve exists at all, shows that this really is a coercive system of leverage and no different to fraud and theft.

  45. I think creation of nothing is dangerous and inherently wrong whether it is done by a private bank or a central bank.

    It means that when push comes to shove, everything is only worth a fraction of its original, even if in normal times it all works out ok.

    All central banking does is spread the consequences of that collapse over the whole currency base, not make it less dangerous.

  46. Central banking is just something the Governement took over from large private banks who issued currency.

    Bank leverage does not “create nothing”. Have you ever deposited money that was unearned or redistributed after it was earned? Have you ever took out a loan without either investing it or paying off the loan from an income (earned or redistrubited), derived from productive activity?

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