Government, tax, democracy: Careful now

I note Gareth Morgan is discussing the idea of an independent tax authority.  On paper I don’t disagree, I’ve seen similar sentiments pop up in 2009 and 2011 😉

As mentioned in the 2011 piece though, the idea of what is “democratic” is important.  Recently we touched on this by discussing the appropriate scope for independent monetary policy.

I think the idea of an independent tax authority makes sense for the following:

  • setting a “tax level” given a structure for the tax system that is set by a democratically elected government.  The goal of adjusting the tax level is solely to ensure that the “medium term balance budget” condition is meet … or in other words that the stock of debt to GDP is held at a given target level in the medium-term set by a PTA.

This is fine, this is an operational issue, and implies that if political parties promise to “spend up large” the independent authority will note that this implies the tax burden will have to be higher.  It is transparent, consistent, and neat 🙂

Gareth Morgan is taking things a step too far in my opinion.  He is saying that the authority should set the structure of the tax system itself, rather than leaving it to politicians.  To me, this is an example of a technocrat taking matters too far – it is not up to some tax authority to determine the “optimal level of redistribution”, it is up to society as a whole to push towards this through democratic engagment.  Yes this process is slow and imprecise, but it is preferable to relying on the value judgments of technocrats.

This is not a small distinction.  The idea of having tax levels set to make sure that operational policy is consistent, and parties can’t “lie” is good.  The idea of having the structure of tax policy being set by unelected technocrats who “know best” is not – no matter how many economists belive otherwise 😉

I love economists to the point where I host “sexiest economist” competitions on my blog – but even given this, I don’t believe that a dictatorship of economists is preferable to the democratic ramblings of society as a whole.  And this distinction needs to be made.

Note:  I would even point out that the “technocrats” disagree with each other on issues of tax, adding layers of value judgments makes this even worse – in that sort of environment having technocrats set the structure is even more tenuous.

  • JC

    I wouldn’t want to see something set up that impacted on the Fiscal Responsibility Act. Rather something under the section of that Act could be added to:

    “Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.”

    • Indeed – don’t get me wrong, I have a huge amount of sympathy for the idea of making sure the debt/GDP ratio remains at a target level. And if we felt short-termist governments could not manage that (looking at you UK) there could be scope for an independent tax authority based on that mandate.

      Of course, even then it is about setting a level – not a structure. Morgan’s article creeps across into structure when he starts presuming that a independent tax authority would magically pick his preferred tax structure … and this smacked a bit to much of dictatorial technocratic design for me

  • boristhefrog

    Another way of thinking about this would be to look at some independent crown entity whose role was to assess tax setting and comment publicly on tax policy settings. This information flow would be a way of keep politicians honest without the loss of sovereignty that you worry about…

    Mind you how much attention did the Govt pay to the last Task Force on taxation?? Sweet FA by all accounts…

    • I am indeed a big fan of the sort of authority you are mentioning – when I wrote on it back in 2009 that was the idea I had in mind. And when I read Blinder that is what I took from his piece as well.

      I just felt the suggestion that the authority would pick his tax structure and just set that up a little self serving and unrelated to the initial idea – so had to ping it 😉