It’s good for taxes to be progressive. But it’s more important that they can’t be avoided.

There’s been a lot of talk recently (particularly out of the US) about increasing taxes on the wealthy – Elizabeth Warren has proposed a wealth tax of 2 per cent for assets over $50 million and 3 per cent for assets over $1 billion. Alexandria Ocasio Cortez (AOC) has proposed a top marginal income tax rate of 70 per cent for incomes over $10 million. Bernie Sanders wants to lower the threshold for the estate tax and make it more progressive.

On the face of it, there is a good argument for countries like the US collecting and redistributing more tax than they currently do. I've written before that there is a good inverse relationship between tax collection and inequality. Countries in the OECD with the highest tax revenue as a percentage of GDP (e.g. Norway, Denmark) tend to be the best at keeping inequality low while still maintaining some of the strongest free market economies. On the other hand, countries like the US with one of the lowest levels of tax revenue as a percentage of GDP and also one of the strongest free market economies have among the highest levels of inequality.

What is the best way to raise tax revenue though? Income taxes? Wealth taxes? Corporate taxes? Consumption taxes?

Warren, AOC and Sanders seem to think the first two. I think they're also considering a reversal of Trump’s corporate tax cuts. And it makes sense. Income and wealth taxes can be progressive, with the richest people paying higher rates. Consumption taxes disproportionately affect the poor who spend a higher proportion of their income on goods and services than the wealthy. The same applies to flat corporate tax rates and small vs. large businesses.

So I can understand why Warren, AOC and Sanders picked these taxes.

Unfortunately, income, wealth and corporate taxes are rife with avoidance. Wealthy individuals and companies have the means to use every form of accounting trickery to avoid actually paying these taxes. Shifting profits overseas to avoid corporate taxes. Minimising your official income with every imaginable deduction to avoid income taxes. Even wealth and property taxes can disproportionately affect the middle class because the wealthy tend to hold most of their wealth in shares rather than houses and therefore, avoid such taxes. It’s not easy to enforce these taxes.

This is why, according to a recent article by Bloomberg, the OECD countries that are able to raise the most tax revenue as a percentage of GDP are the ones with the *least* progressive tax systems – economies that rely proportionately more on consumption taxes (e.g. Denmark, Finland). The US on the other hand, has very little reliance on consumption taxes.

As mentioned above, consumption taxes disproportionately affect the poor, but are much harder for the rich to avoid. They also have the added advantage of not discouraging work (like income taxes can) or investment (like corporate taxes can).

Consequently, these countries are able to raise much more tax revenue, and then undertake much more income redistribution to offset the disproportionate impact on the poor – social welfare, infrastructure, education, health care, paid vacations, paid parental leave, child care, all provided by the State to greater extents than in the US.

This redistribution can also include much more targeted exemptions for specific items or activities society wants to encourage above others. This can include fruit and vegetables, health care and, in Australia, possibly new home building. Given the barriers that existed to new home building for much of the 21st century, the affordability crisis that developed, the sudden influx of supply (especially apartments) and the subsequent risk (though not expectation) of a deep and protracted correction, this is not something of which we’d like a repeat episode. Even if such sudden new taxes don’t discourage investment, extra incentives for new home building are still a good idea given our history.

The IMF too, in their latest assessment of the Australian economy, recommended a shift away from less efficient taxes like stamp duties to more efficient ones like consumption taxes (our GST) and land taxes.

This does not mean all taxes need to be consumption taxes but a greater reliance on them seems wise. If high tax collections are the best way to minimise inequality – thereby helping people into the Australian dream of home ownership – while retaining a strong free market, then the taxes that are most difficult to avoid are surely the preferred option over more progressive, but easier-to-avoid, taxes – even if it involves the extra step of greater redistribution.

Redistribution is not a dirty word after all – it’s literally the one and only job of government.