Governments around the world struggle with basic financial mathematics. In other words, many spend much more than they receive. Unlike individual households who cannot continue to run cash deficits indefinitely – since they will quickly go broke or deplete any savings they might have – governments have two “advantages” to individual households: they can borrow money and accumulate debt (which pushes the debt repayment to the future, usually future generations) and they have taxation powers. In other words, they can introduce new taxation measures to increase government revenues which purportedly can help get their finances in line.

In addition, both governments and individual households also have a basic tool at their disposal to help improve finances: reduce spending.

Many left-of-centre leaning governments, however, are not particularly quick to use that basic tool. It doesn’t fit their politics and ideology. In Canada, our current government has resorted to vacuous slogans (“spend less, invest more”), delayed budgets, a deceptive new budgeting methodology which wants to “separate the operating budget from the capital budget” and timid spending cut mandates which don’t go far enough. All of the above are basic political maneuvers to not cut costs to a point where they need to be.

Time will tell where our current government goes – will it simply pile up debt or will they introduce new taxation measures to support their spending? Or both?

Some countries are realizing that the continuation of the burgeoning welfare state is not sustainable and are looking at ways to rein in expansionary pressures. Some are still exploring new taxation measures.

In Australia, the current centre-left government has been struggling with recent budget deficits and have convened public discussions on a path forward. At a recent government sponsored Economic Reform Roundtable, there were numerous submissions put forward by interested parties on how to make the “…Australian economy stronger, fairer, more productive and more resilient into the future”. The submissions included a wide range of topics from deregulation to tax reform.

One of the tax submissions – made by a real-estate analytics firm – suggested that the Australian government should introduce an “empty rooms tax” to help assist with Australia’s housing challenges. According to the firm’s “research”, over 60 percent of Australian homes are occupied by just one or two people, while more than 75 percent of properties feature three or more bedrooms. It suggested taxing surplus bedrooms could shift housing demand toward smaller, “well-located” apartments (not sure where “well-located” is).

A methodology was not put forward on how the tax would be applied but public reaction to the proposal appears to have been swift and widely negative. As it should have been. How would the government even count “empty rooms”? Would officials measure floorplans and monitor bedroom usage?

This kind of stealth social engineering and property rights intrusion, masked as a taxation policy, would be very troubling for any democracy.

There are no shortage of ideologues and politicians who are convinced that governments should deploy their taxation powers as a routine tool to solve the issues du jour. Accordingly, the types of taxes that have been introduced over thousands of years are interesting with many of them being silly. One of the important historical lessons is that taxation powers should be deployed carefully so as to ensure such powers do not encroach on basic rights and can realistically achieve their objective(s).

A good and sound taxation system, as espoused by the Scottish economist, Adam Smith, in his 1776 landmark writing, The Wealth of Nations, should have four basic tenets:

1. Equity – contributions should be fair and proportional to a person’s ability to pay;

2. Certainty – the system should have rules that are clear, predictable and not left to arbitrary discretion;

3. Convenience – the timing and system of payment should be convenient for taxpayers; and

4. Economy – the costs to administer and collect taxes should be minimized and not consume the revenue it raises.

Australia’s empty rooms tax would most certainly fail Smith’s tests. On equity, it would penalize people for how they live in their own homes rather than their ability to pay. On certainty, the measurement of such a tax would likely be discretionary and subject to arbitrary market values. On convenience, it would also fail by intruding into private dwelling use that would require continuous monitoring. On economy, the administrative costs would likely outweigh any revenue raised.

Like Canada, I have no doubt that Australia’s tax system needs reform. Our system is mind bogglingly complex. Tax specialists like me struggle with it mightily and it is most certainly not approachable by the average person. While our current government has promised an “expert review” of the corporate tax system, the review needs to go much broader with a view to getting back to the basic tenets as laid out by Smith.

Such a review should eliminate the silly taxes that are equivalent to the Australia empty rooms tax proposal. That list is long but would include the federal Underused Housing Tax. Recent statistics show the UHT has generated far less revenues in 2022 – $49 million – rather than the $200 million originally projected. Administrative costs – $59 million – have also far exceeded such revenues with research showing that these taxes do not have a meaningful impact on real estate markets, housing availability and affordability.

Taxes are necessary to fund government, but they must be crafted with restraint, clarity, and respect for basic rights. When taxation strays into social engineering or intrudes on property rights it undermines both trust and liberty.

As former U.S. Chief Justice John Marshall warned more than two centuries ago, “the power to tax involves the power to destroy.” That is why Canada urgently needs real tax reform – to strip away gimmicks, and rebuild a simple, fair system that supports growth rather than undermines it.

And for the record, I sleep in every room in my house.