Is Australia a ‘high taxing’ nation?   What is the responsible answer?

 

The oft-made accusation that Australia is a high taxing nation, deserves serious scrutiny. 

While it is true that income tax in Australia is relatively high when compared with some OECD countries, it is also true that many other countries with low income tax burdens have very high indirect tax burdens. (eg: taxes such as the GST)  The consequences for equity, here, are notable – with regimes of high indirect tax leaving the poor and average income earners worse off than would be the case under a more progressive regime of income-based and capital-based taxation.

That said, it is well worth comparing Australia with western Europe and the Scandinavian countries including Norway, Finland and Sweden. When considered on a country by country basis, with western Europe and Scandinavia included, Australia is the eighth lowest taxing nation in the OECD. (see: http://www.budget.gov.au/2005-06/bp1/html/bst5-05.htm)  In order to match Finland, which has rated as the most competitive economy in the world

(http://www.weforum.org/site/homepublic.nsf/Content/United+States+in+Second+Place+Behind+Finland+in+Global+Competitiveness+Report), Australia would need to increase taxation as a proportion of GDP by a massive 20%. In other words Australia would have to raise taxation (and thus also vital expenditure on social and economic infrastructure) by over $160 billion/year. (Australian GDP is over $800b) 

Competitiveness is not simply a ‘race to the bottom’ determined by who levies the lowest income and corporate rates.  It depends on the quality of institutions and infrastructure including education, health care, transport and communications as well as the level of innovation and the degree to which such innovation is actively supported by government.  

That facts are simple. Australia is lagging in its provision of social and economic infrastructure.  Hundreds die every year as a consequence of hospital waiting lists. We have a higher education system that is weighted more and more in favour of 'full fees' - with the consequence being that students from lower income backgrounds are deterred from study.  Universities are driven into a culture of dependence upon corporate sponsorship in the wake of inadequate funding for research. What is more, we have a secondary education system that is moving more and more towards defacto privatisation, with the imposition of ever higher ‘voluntary levies’, and a growing marginalisation of the public education system;  where accessibility and 'equality of opportunity' for poorer households will become 'a thing of the past'.  Finally, as we are constantly reminded, we have an aging population - and no idea how we are going to afford the continuance and expansion of programs such as the Pharmaceutical Benefits Scheme (PBS), nor how we are going to provide quality, dignified aged care in the future.  This contradiction between the demand for social services and the demand for ever lower levels of taxation, has been referred to as ‘the fiscal crisis of the state’.

At present, the solution to these quandaries is seen as being the application of Public Private Partnerships and market principles, and further drift towards the principle of 'user pays' in all spheres of life.  That PPPs are an inefficient means of providing infrastructure is an established fact. The Scoresby Freeway Public Private Partnership in Victoria, for instance, worth approximately $2 billion, would cost $7 billion to buy out as a consequence of foregone profits.  Ultimately, therefore, the project is likely to cost motorists over three times as much through regressive flat tolls than it would if levied upfront through progressive taxation.

( see: http://johnquiggin.com/index.php/archives/2005/10/20/ppps/ )  Furthermore, questions of efficiency aside, the very idea of allowing 'the market to sort us out' when it comes to health care, aged care and education is fundamentally unjust and inhumane.

In order to adhere to the principles of 'the fair go’ in this country, while funding the infrastructure development necessary for enhanced economic competitiveness, we need tax reform aimed at improving the progressivity of the overall tax mix and increasing government expenditure as a proportion of GDP.  Good places to begin would be as follows:

a) apply a system of 'tax credits' to lower income earners while paying for the difference through a progressive restructuring of the PAYE income taxation system so as to come up with a result that is 'revenue neutral'.   Combined with the indexing of the bottom two income taxation brackets to eliminate bracket creep, such reform could move to eliminate poverty traps in the process of moving from welfare to work.  Tax credits are superior to lifting the tax-free threshold as they target assistance to those most in need while denying tax relief to the wealthy.

b) apply a 4% 'infrastructure tax' upon business with the aim of improving transport, communications, education and training, and other vital social and economic infrastructure necessary to our international competitiveness. (such a tax would still leave overall corporate tax rates in Australia lower than the US rate)  

c) restructure the Medicare Levy on a progressively scaled basis, with a highest bracket of 4.5% and a low bracket of 1.5% (four brackets in all in alignment with PAYG income tax rates – themselves restructured after the introduction of tax credits for low income earners) and introduce an Education Levy on the same basis.  (nb: by making a directing link between taxation and priorities of expenditure, it is much easier to argue for increases in such taxation rather than arguing for increases in PAYE income taxation)

d) introduce wealth and inheritance taxes for those with assets of $1m and higher

e) repeal capital gains tax concessions

f)  Restore taxation of superannuation lump sum payouts, moving to curb conspicuous consumption amongst wealthy retirees, and provide greater equity in the taxation system

g) Remove dividend imputation  (refunds on the taxation shareholder dividends as compensation for company tax)  In 2002 the wealthiest 20% of Australians owned 90% of all shares. (see: http://www.wsws.org/articles/2002/nov2002/gap-n21.shtml ) This, if anything, should provide a rationale for this move in the interests of distributional justice and equity.

h) Impose a 1% media diversification levy on all commercial media with the intent of raising capital for a ‘Media Diversification Fund’, with the purpose of achieving ‘equal opportunity of expression’.  (originally conceived of by John Mathews in his pamphlet, ‘A Culture of Power’)

i) Introduce a ‘Tobin tax’ on international financial transactions at the rate of  0.1% with the intent of substantially improving government revenue and moving to tame financial market fluctuations.

By comparison with Scandinavian and west European rates of taxation, the suggestions made in this paper are modest – but nevertheless they provide an ample starting point in the long road towards enhanced economic competitiveness, greater social equity and better social outcomes. 

The alternative is to continue along the present course of never-ending neo-liberal ‘reform’ with smaller government and lower taxes leading, in turn, to what John Kenneth Galbraith referred to as 'private affluence' and 'public squalor': ever increasing levels of private consumption alongside the deterioration of public services and institutions.

Rather than moving towards residual and second-class systems of public health care and education alongside heavily publicly-subsidised private systems, further accentuating class divisions, we need, like the Scandinavians to move towards the principle of universality and ‘solidaristic’ taxation.  

Watching Kim Beazley at the National Press Club in May, the Labor leader seemed to promise everything –  including tax cuts to those on $60,000/year and higher.  Pitching his address to so-called ‘middle Australia’ – supposedly those on about $55,000/year – Beazley had little to say on how Labor’s taxation policies would benefit those on lower incomes.  As On Line Opinion writer, Andrew Leigh argued in March 2006, “income of the median Australian adult is just $26,000 per year”.   http://www.onlineopinion.com.au/view.asp?article=4232 How will these people benefit from Beazley’s tax cuts, and how will Beazley afford significant improvements in social services while maintaining his established commitment to a budget surplus throughout the economic cycle? 

Similar criticisms might be made of the last Federal Budget handed down by Peter Costello.  The Budget included massive tax cuts for the wealthy with the top taxation rate cut by 2% and with the top bracket’s threshold raised to $150,000.  According to The Age,”people on $250,000 will receive $253.85 a week more, or $13,200 a year”. The abolition of taxation for superannuation payouts will also disproportionately favour higher income earners.  Meanwhile, nothing was provided in the way of tax credits for those stuck in ‘poverty traps’ attempting to make the transition from welfare to work. 

All in all there are to be $37 billion in tax cuts over the next four years: enough to definitively tackle the waiting lists crisis in our hospitals, improve aged care services, invest in public education, provide R&D credits for innovative business,  provide tax credits to low income earners and eliminate full fee-paying positions for domestic university students.  And yet amongst all this we find the parliamentary Labor Party broadly supporting the budget and saying nothing on how the surplus might otherwise have been spent on social services and infrastructure such as interstate rail, public transport and roads.  Although without control of the Senate Labor is in no position to make amendments to the Budget, Labor does need, now, to begin seriously considering how it might, when in government,  progressively restructure the PAYG income tax scale as part of a broader package including indexation of lower thresholds and tax credits for lower income earners.

You can’t afford significant boosts to expenditure in vital areas without progressive tax reform including tax increases in some areas – and this is the message that needs to become the ‘common sense’ of the ALP well before the next election.

 

Tristan Ewins

The author is a Melbourne-based ALP activist, writer, teacher and Fabian Society member