Does this seem like a trick question? After all isn’t the Australian Taxation Office (ATO) supposed to collect and report on the revenue raised from citizens and companies as a consequence of incomes, expenditure and profits? That would be a textbook summary, but like so many things in the economics textbook it is not nearly the whole picture in either reality or in prospect.
This article aims to expand the breadth and depth of the public conversation concerning the capacity of income tax collection systems. One particular function with arguably great potential for the ATO involves what are known as “income contingent loans” (ICLs), which might strike you as odd, and explaining and making this accessible is the goal. The use of ICLs ultimately might turn out to be a radically different role for the public sector and for public policy.
The journey should begin by highlighting that a major role recognised for government involves the management and distribution of risks. When government is so seen, new aspects of existing and future potential policies are revealed. In When All Else Fails, for example, David Moss provides this interpretation of the role of the public sector in the US, which can take many diverse forms, such as laws associated with limited liability, road rules and social security.
There are many similar risk management features of the engagement of the Australian public sector, with two notable additions to the government risk management armoury. The most obvious is that Australia has a universal public sector health insurance system, Medicare, which provides protection for citizens in a world of health uncertainty. The other is our ICL system for tertiary education, known as the Higher Education Contribution Scheme (HECS), the first of its kind (similar higher education financing policies have now been adopted in eight other countries). With HECS, there is no up-front charge – graduates have to pay for their tuition costs when and only if their future income situation is secure.
The innovation of HECS
The novel, efficient, and administrative innovation of HECS is that the repayments are collected through the income tax system. Professor Joseph Stiglitz has recently argued that this aspect of the system is one of its major benefits because it is a very efficient method of conducting student loan transactions (chapter 2 of Income Contingent Loans: Theory, Practice and Prospects). HECS has been found to be inexpensive in administrative terms; specifically, it costs less than four per cent of its annual revenue to collect the debt.
HECS is a classic risk management system since debt repayments are determined by capacity to pay with no repayments being required if incomes are less than a set amount; thus those assisted are provided with the twin benefits of consumption smoothing and protection from default. ICLs are essentially an insurance mechanism, which transfers the risks and costs of unforeseen adverse outcomes from assisted parties to the government.
What about ICLs as a general risk management policy instrument?
Over the last 15 years or so there has been considerable research into the application of ICLs to many disparate social and economic policy reforms well beyond student loans, with all obligations to be collected through the ATO. These include for the financing of extensions to Paid Parental Leave (PPL), the collection of low-level criminal fines, drought relief and a housing credit for low earners.
Let’s explore briefly how several of these ICL interventions might work through the ATO, a critical point being that loan rules and parameters have to suit the particular circumstances of the financing need. Most importantly, it matters that policy proposals maximise the prospects for the government to be able to collect a large proportion of loan outlays and this means paying close attention to idiosyncratic design issues. Two examples are now considered.
Financing paid parental leave
The first concerns PPL. The idea is to allow those assisted to extend PPL from the current 18 weeks with a government grant to up to say nine months, to be facilitated with an ICL of around $15,000, collected through the ATO. This would involve the same sort of mechanisms currently used in collecting HECS: those accepting the loan would have their tax file numbers recorded and employers would then deduct the appropriate amount at a rate to be decided.
Tim Higgins has examined conceptually and empirically how the above would work (chapter 10 of Income Contingent Loans: Theory, Practice and Prospects), a big concern being that some parents assisted might not ever repay. The solution is to make the debt an obligation of both parents, since the whole family will have enjoyed the benefits at the time of the outlay. In this circumstance the ATO would be informed of the debt with employers transferring (low) proportions of incomes from the mother and the father in line with the chosen parameters until the debt is extinguished. The modelling reveals that a judicious choice of repayment parameters is possible to make the scheme work effectively.
Low level criminal fines
A second example is the use of both the tax and transfer systems to recoup low level criminal fines, an idea originally from John Quiggin. This would involve the transfer of very small proportions of income from employers as currently operates with HECS, and/or welfare payments being treated identically.[1] From the ATO or social security the funds would be automatically transferred to the relevant legal jurisdictions.
Having income contingent fine repayments as described would replace the highly clunky administrative process now operating, one characterised by very high levels of default and other social costs, including the prospect of gaol. Offenders could be given the option of such an arrangement, and the courts would need to provide advice and information as to how the process would work.
While we have explained very briefly just two options for the extension of ATO functions into social and legal jurisdictions, a plethora of other such applications has been examined in great detail in recent years (see here, here and here). There are of course many complexities not discussed here, but the case for seriously rethinking ATO functions in the area of government as a manager of risk seems incontestable.
[1] We suggested the use of the Child Support parameters. Modelling revealed that this could work effectively.
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