By the Nerds, For the Nerds

Some people find the growing requirements of modern bureaucracies to be a trifling problem—people who have time on their hands to attend to administrative matters, people unfazed by filling out forms, at ease with paperwork, record-keeping and red tape. For want of a better term, let’s call them nerds.

Then there are real people—parents with no time on their hands, frazzled by the never-ending demands of work and children; people getting on with their lives who don’t like extra hassles being loaded on them; business people so exhausted after their day’s work that the prospect of tackling government red tape is a nightmare.

As the modern state has grown, with its steady march towards greater complexity, the playing field has been tilted further and further in favour of the nerds and against real, time-poor people. The rolling accumulation of government policies and added accretions has subtly culminated in a quiet triumph of the nerds.

The increase in nerd-bias can be seen in a number of ways: the growing number of government programs whose benefits are likely to be disproportionately received by nerds; the extraordinary range and number of programs, which itself presents a disadvantage to real people who lack the time to keep abreast of government policies; and the increasing complexity and quantity of informational requirements which disadvantage real people, but not nerds.

Nerd-bias, it should be noted, did not start with the arrival of self-confessed policy nerd Kevin Rudd as Prime Minister, but the phenomenon has enjoyed a robust expansion under his stewardship.

Nerd-Bias Hits Individuals

Let’s start with some simple examples of policies showing nerd-bias. None of these policies is ill-intentioned or without merit, but they share a common theme of distributing benefits disproportionately to a particular group.

Two years ago, determined to do something about housing affordability, the government promised to create First Home Saver Accounts, a program of government subsidies and tax breaks to people saving for a home, estimated to initially cost around $1.2 billion over five years. The number of people eligible for this subsidy was estimated by Treasury at around one million, and the number likely to take it up expected to be around 220,000. So far the take-up has been abysmal, at 10,800, although this should be qualified by noting that some of the shortfall would have been due to the boosting of the First Home Buyers Grant.

Even with “full” take-up only one in five of eligible citizens is expected to benefit from the measure. And the actual beneficiaries will form around only one fiftieth of the taxpaying population.

What sort of person is receiving this government hand-out? Those with the time and inclination to keep abreast of government programs, those with the patience and determination to go through the application process.

And who are the majority that are not taking up their entitlement? Some people, of course, will have simply found it inappropriate to their circumstances. But many people will have been too busy to have heard of the benefit, or maybe know of it but haven’t the time, energy or disposition to apply for it. Some may simply find the application process a daunting prospect, another hassle to deal with in a life packed with other priorities. Some people feel uncomfortable claiming government benefits.

Many of the beneficiaries will be diligent, focused and competent people, in which case the question should be asked—is it worth the government raising taxes to hand to this capable group? The money in the handout will be taken from all taxpayers in the community, but the benefits flow back to only a very small proportion.

This is a policy that exhibits nerd-bias, that is, that disproportionately benefits nerds at the expense of real people.

Take another example. In 2003, determined to do something about low personal savings rates, the government introduced the Superannuation Co-contribution Scheme, where for every dollar a low- or middle-income earner personally contributed to their super fund the government would chip in a dollar (now more) as well.

The criteria indicate that more than 5 million people would be eligible for the benefit, but according to the Australian Tax Office only around a million receive it. The type of people benefiting tend to be those with the time, inclination and resources to participate in such a government scheme. Again the money flowing into the accounts of those benefiting is being drawn from those people who are for various reasons less disposed to participate in the program.

Nerd-bias has grown to be present in an extraordinary number of policies—from welfare and family policies to education, environment and housing. Take for example the nerd-bias that occurs through the system of tax deductions, rebates and offsets. The complex and ambiguous system rewards those who have the time and predisposition to work the system and penalises those who don’t.

The range of potential work-related and other deductions is very large—tools and equipment, union fees, overtime meals, self-education, travel, seminars, conferences, workshops, books, journals, magazines, tapes, compact discs, DVDs, records, videos, clothing, laundry, dry-cleaning, shoes, boots, sunscreen, sunglasses, protective wear, uniforms, computers, software, telephone, home office expenses, car expenses, transport, gifts and donations. Rebates available include the Private Health Insurance Rebate, Child Care Tax Rebate, Dividend Imputation Franking Tax Offset, Baby Bonus Tax Offset (separate from the Baby Bonus administered by the Family Assistance Office), as well as a range of other offsets such as the Dependent Spouse Tax Offset, Dependent Parent Tax Offset, Beneficiary Tax Offset, Mature Age Workers Tax Offset, Superannuation Spouse Contribution Tax Offset, Medical Expenses Tax Offset, Zone Tax Offset, Housekeeper Tax Offset, Child Housekeeper Tax Offset and Invalid Relative Tax Offset. Treasury recognises around 300 tax concessions in total for individuals and business, around a hundred of which have been added in the past decade.

For the humble citizen the claiming process can be stressful and time-consuming, which leads to an enormous number of people under-claiming their potential deductions, rebates and offsets. A range of reasons—lack of knowledge of the system, lost receipts, can’t be bothered, unease—contributes to under-claiming, and the result is that nerds receive a disproportionately lower tax load courtesy of a higher burden on real people.

The government has recently introduced a new category of deductible expenditure—primary and secondary school education expenses—aimed at assisting parents. While this tax break is likely to be exercised by most parents and broadly achieve its aim, a significant number of people are likely to under-claim (or not claim at all) through a combination of hassle, ignorance, or lack of record keeping. The education tax rebate is another policy that by itself is unexceptionable but unwittingly adds another small layer of complexity and nerd-bias to the high pile.

Despite the magnitude of the money involved, no one knows the extent of the under-claiming problem because the Australian Tax Office makes no estimate of either the number of people under-claiming or the amount of money forgone. 

With the amount of work-related deductions reaching over $14 billion in recent years, and total deductions up to $35 billion, there are compelling economic reasons to investigate the economic distortions resulting from nerd-bias and under-claiming, but to date the Tax Office has displayed a casual indifference to the matter.

The daunting complexity of the tax system that contributes to nerd-bias is demonstrated by the number of people who engage tax agents to compile their returns rather than do it themselves. In Australia the number of taxpayers using a tax agent to manage their tax returns has rocketed from around 20 per cent in 1980 to a massive 73 per cent in 2007. This compares with 30 per cent in the simpler New Zealand tax system, and 56 per cent in the United States.

The growing complexity not only imposes a financial penalty but also undermines broader trust in the fairness of the system. Australian Tax Office surveys show that 43 per cent of people find the tax system “very confusing”. And ATO research into public attitudes has found that a key flaw in the system of tax deductions is the gnawing fear in the minds of most people that other people are getting more than they are, that they are missing out somehow.

The stress induced by the complicated tax system manifested itself recently through the under-utilisation of the government’s cash handouts distributed as part of the economic stimulus. Many thousands of Australians did not receive their $900 handout because they hadn’t submitted their tax return in the specified time. The government literally could not give the money away.

Apart from tax, the profusion of government benefit programs across portfolios over time, while understandable for other reasons, has exacerbated the problem of nerd-bias. Previous generations had very few benefits available for citizens to access. Old age and invalid pensions were introduced in 1908, widow’s pensions and child endowment in the 1940s, but up until the 1980s this was about as far as Commonwealth benefits went.

Today a welter of programs and benefits is available. At Commonwealth level there is Family Tax Benefit Part A, Family Tax Benefit Part B, recent Household Stimulus Payments, the Child Care Benefit, the Child Care Rebate, Child Care Fee Assistance, the Baby Bonus, and the Maternity Immunisation Allowance. You might also be eligible for a Large Family Supplement, Multiple Birth Allowance, Rent Assistance or a number of other benefits. Apart from the Age Pension, Disability Support Pension, Carer’s Payments and Veterans Pensions there is a Bereavement Allowance, Mobility Allowance, Partner Allowance, Pension Bonus Scheme, Pension Loans Scheme, Pharmaceutical Allowance, Telephone Allowance, Health Care Card, Pensioner Concession Card and Commonwealth Seniors Health Card.

Treasury has recently estimated the number of cash transfer payments paid by the Commonwealth government at around forty, with numerous other payments available at state and local levels.

Many of these programs are quite desirable, with useful policy objectives, but there has been little or no recognition of the growing burden of stress and complexity for time-poor people. There is also little recognition of the under-claiming of these benefits and the implications of this for meeting policy objectives efficiently.

Few of the vast array of programs available have 100 per cent take-up from the pool of eligible people, and many have a significant number of people who never exercise their potential rights for a variety of reasons. Under-claimers are not just missing out on benefits, but tend to pay extra through the tax system to fund the programs that others use. The sheer number of programs can lead to anxiety in the community, with a feeling that they are not keeping up with things, that the effort required is too much.

From the point of view of the average citizen, the proliferation in the range of government programs needs also to be seen in the context of the explosion in the amount of information emanating from the private sector. The amount of consumer choice for almost any product or service has grown exponentially, with the consumer being carpet-bombed with information and advertising from ever more companies offering an ever expanding range of products, services, discounts, deals and payment options.

Government policies are competing for the attention of consumers in this crowded marketplace of information, and it should be no surprise that for many people the informational expectations are just too burdensome.

Nerd-Bias Hurts Business, Too

Nerd-bias affects not just individuals but businesses as well. There is now a plethora of government-sponsored business benefits and programs that many people in the private sector do not have the time to know about let alone apply for.

On the federal government’s business portal website (www.business.gov.au) there is a Grant Finder which lists 138 grants and assistance benefits available for businesses, from apprenticeship vouchers to wage subsidies and everything in between. Most small businesses are too busy to be aware of many of these 138 programs, or indeed the much larger number of Commonwealth programs which only exist on separate departmental and agency websites. And these 138 benefits are just federal programs and do not include state and territory government measures.

The same website also directs you to grants and assistance benefits available from state and territory governments. The eight state and territory jurisdictions provide 316 benefits in all, ranging from twenty-one in Western Australia to seventy-seven in South Australia. However worthy they are, the large number of programs presents a complexity problem for the average businessperson.

Small business people are usually extremely busy. They don’t have the time to check through the vast range of the possible programs that they might qualify for. But those businesses that are not accessing programs still have to pay through their taxes for other businesses to use them.

The growth in complexity also benefits bigger businesses at the expense of small business. Big business can more easily deal with the complex requirements demanded of the modern state, and can more easily monitor, access and exploit opportunities that governments make available.

One of the growth areas of nerd-centric policies in recent times has been measures aimed at dealing with climate change. A smorgasbord of programs offering cash benefits is available to individuals and businesses with the time and inclination to go chasing them—for example the Climate Ready Program (grants of $50,000 to $5 million), Re-tooling for Climate Change ($10,000 to $500,000), Green Building Fund ($50,000 to $500,000), Low Emission Assistance Plan for Landlords ($1000), Low Emission Assistance Plan for Renters ($1000), free Home Sustainability Assess-ments, Interest-Free Green Loans, Home Insulation Program ($1600), Solar Credits for solar power, and a Solar Hot Water Rebate ($1600) to name a few.

Many of these programs have had a minuscule take-up, but that does not seem to have slowed the sprouting of even more schemes. So rapidly have these climate-related initiatives been pullulating that the federal government commissioned a report to examine their effectiveness. The Wilkins Review found a bewildering sixty-two different government policies (many of which are grant programs), and recommended rationalising them into a smaller number.

Revenge of the nerds

Part of the reason for the growth in nerd-centric policies is the need for governments to do something, or at least be seen to be doing something, about social problems. When governments turn their minds to possible options many classic nerd-bias programs have all the right attributes—the government is taking action with a pot of money, the relevant lobby group is satisfied, the media report something being done, the winners are happy with tangible benefits, and the costs are dispersed so broadly that the losers don’t notice.

Nerd-biased programs can be difficult to dismantle for the same reasons. One reason that the complex system of tax deductions continues is that many of those who benefit from the current arrangements are quite vocal and prepared to defend what they have come to see as an entitlement.

Apart from the political imperatives driving nerd-bias, there is also the human factor of the increased distance between policy-makers and the population. In modern times government ministers, their advisers, and senior public service officials are almost all university-educated, with high levels of literacy and numeracy. Their professional and social milieu is predominantly peopled with like-minded “policy wonks”. They are a caste of technocrats comfortable with administrative bureaucracy and its complex requirements.

When they devise policy they often assume that members of the public are similar to themselves—that is, a bit nerdish—when in fact they are quite different. The policy-makers tend to overestimate people’s capacity or willingness to deal with complexity, and underestimate the visceral distaste that real people have for dealing with governmental administration.

One will often see a public official blithely declare of a new program that it is actually quite simple, that the application process is quite easy, that ongoing requirements are minimal and that it shouldn’t present any great difficulties for the average person. In the real world, that average person is likely to view any new administrative requirements as another hassle, will find the application form complex and littered with jargon, will resent the ongoing burden of paperwork, and will wonder why their quality of life seems more difficult to maintain these days.

People who are concerned about complexity can sometimes receive little sympathy from policy-makers who do not see a problem. Take the attitude of our Harvard-educated Tax Commissioner, Michael D’Ascenzo, who told a group of group of tax professionals in 2006 that the public should stop worrying about complexity:

In Australia, 73 per cent of people go through tax agents and the tax profession. Ninety-five per cent of companies go through the tax profession. So in a sense, who cares? … Who cares if it’s this big [one volume] or that big [four volumes]? If you live in a complex society, the laws are going to be complex.

Treasury Secretary Ken Henry recently referred to a seminal conversation that he struck up with a fencing contractor while holidaying in outback Queensland last year that alerted him to the complexity faced by ordinary people dealing with the tax system. Talking in the bar of the Jericho pub, Jim the fencer had complained to the eminent economist about the complex considerations of claiming expenses on fencing wire for tax purposes, which can be done in three ways, all with different implications.

"The conversation,” Dr Henry later told the National Press Club in Canberra, “got me thinking about how seldom policy people approach issues from the perspectives of everyday citizens."

Jim, Dr Henry realised, faced complex questions about whether to be a sole trader or a partnership, a fixed or non-fixed trust, or a company, each with different tax outcomes, financing implications and superannuation consequences. Depending on entity choice, Jim needed to be aware of dividend imputation arrangements, non-commercial losses and distributions to associated entities.

Jim’s family needed to know the financial consequences of the interaction between work participation, Family Tax Benefits Part A and B, and separate child care benefits with different entitlement arrangements. Jim also needed to consider complex retirement decisions involving the tax implications of investments and asset holdings for eligibility requirements for pension benefits and annuities.

Summing up the implications of a revenue system with 125 taxes, Dr Henry said, “This system complexity acts like an additional tax, but the worst kind of tax: a tax that provides no revenue, is indiscriminate in whom it affects and serves little social value.” Dr Henry’s conclusion was welcome, if belated, but it was also misleading on one point—complexity is not indiscriminate in whom it affects. Complexity lands hardest on busy people like Jim from Jericho, and those in the community who are less adept at dealing with bureaucracy.

The growth of nerd-centric policies has the potential to affect economic productivity through the expansion of benefit-mongering. Where a significant number of people are chasing benefits and distorting their behaviour to cadge what they can out of the system, the efficiency of the market is undermined and the overall economy suffers.

Nerds who enjoy hunting down all potential entitlements relish the expansion of government programs and benefits, as it gives them a relative advantage over real people. The growth of nerd-centric policies has created an environment where benefit-mongering flourishes at the expense of useful and productive behaviour.

Revenge of the Real People

Policy-makers can draw a number of lessons for future policy development. They need to make an effort to correct themselves for nerd-bias, and think more deeply about the consequences of policy proposals for busy, time-poor people. Who is really going to benefit from this new initiative? Will it have the effect of penalising real people through subtly higher taxes and another layer of hassle?

Policy-makers will often test proposals with experts in the field, which gives them a useful but nerd-biased response. Policies should also be tested with real people, busy people, people who hate paperwork, and people who are incapable of complex tasks, in order to get an understanding of the likely impact among the community.

There should be a systematic review of under-claiming across government to assess the extent of the problem. Who are the under-claimers, how many are there, and why aren’t they exercising their rights?

The government should abandon the current ad hoc and woefully incomplete disclosure of program and benefit take-up, and should introduce a system of automatic annual disclosure of both actual program take-up and potential program take-up. Knowing the take-up rate of programs in a timely fashion would immediately allow the public to better scrutinise the effectiveness of all programs with a baseline of hard data.

The number of nerd-centric tax deductions and concessions should be rationalised, and the revenue saved passed back to taxpayers in the form of tax cuts. Under-subscribed programs should be reformed or abolished.

The government should be looking at informational requirements from the point of view of citizens rather than departmental structures. A single collator of financial information for taxes and benefit transfers, rather than the current variety, might offer simplicity for citizens as well as integrity against fraud.

More broadly, the government needs to elevate simplicity to a primary policy virtue, a key property which can build confidence and trust in the community at ground level. The current environment where legislators and officials “seldom” approach issues from the perspectives of everyday citizens, to use Dr Henry’s description, needs to be changed to an environment where they constantly consider the everyday citizen.

Nerd-bias, benefit-mongering and increasing complexity are serious problems. The policy-coddling of nerds needs to be brought to a close; it’s time, you might say, for the revenge of the real people.

David Alexander was a senior adviser to the Howard government and has recently been Economics Editor of the Canberra Times.