I’ve believed for some time that Australian governments need to spend more on health and education. That conviction flows not from a social democratic orientation but from a classical liberal democratic belief in maximising equality of opportunity (not outcomes) for all citizens.
Mind you, for most purposes there’s probably not much practical difference between a moderate social democrat like John Quiggin and a “wet” liberal democrat like me: advocating a fairly significant role for government in achieving equality of opportunity and accepting that this will mean higher taxes than would flow from a doctrinaire libertarian “small government”/private provision approach. Sometime Howard government higher education policy adviser and Catallaxy blogger Andrew Norton is perhaps the best blogosphere exponent of the libertarian approach.
However, despite a desire for greater spending on health and education (and a willingness to tolerate somewhat higher taxes as a result), I also found myself warming to the “evil” Peter Saunders’ recent Oz article advocating quite dramatic cuts in personal taxation.
As Saunders observes:
The tax on higher-income earners is vicious. It is outrageous that people earning $62,000 per year are paying the top rate of tax.
The top tax bracket was worth 15 times average earnings in 1960; nine times average earnings in 1970; three times average earnings in 1980; but is just 1.3 times average earnings today. UK workers do not pay the top tax rate until they earn $73,000. In France it is $77,000; in Germany $85,000; in Canada $110,000. The Japanese top rate starts at $210,000. In the US it is $395,000.
Not only does our top rate cut in too low – the rate itself (48.5 per cent including the Medicare levy) is much too high. In Britain it is only 40 per cent; in Germany it is 45 per cent (and coming down). …
- A top marginal tax rate of 40% cutting in at $94,000 pa income (twice average weekly earnings);
- An increase in the tax-free threshold income to $12,500 for single people and $19,500 for couples (equivalent to welfare benefits for those who don’t work);
- Inflation indexation of all marginal rate thresholds;
- A non-means-tested family allowance payment, to reduce high effective welfare-to-work tax penalties.
It’s an attractive package. However, the problem with this prescription, for a “wet” liberal democrat like me, is that it would lead to major reductions in government revenue, with a consequent imperative to make large cuts to expenditure. There may be some scope to fund tax cuts by reducing waste, especially middle class welfare (as Saunders seems to advocate). Saunders also argues that tax cuts of this magnitude would lead to a major boost in productivity, so that tax revenue on a resulting larger GDP would also help reduce revenue shortfalls. He may well be correct, but I suspect there’d still be a shortfall. Moreover, I want the government to spend more on health and education, not less.
Is it possible to have our cake and eat it too, I wonder? John Quiggin has previously argued that the most politically palatable way of raising additional tax revenue would be to impose specific purpose “levies” like the Medicare Levy linked quite expressly to expediture programs universally supported by the community (while indexing marginal rates, which JQ, like me, regards as an important transparency measure that would help discipline governments and make them more accountable).
However, the problem with such an approach is that specific purpose income tax levies, however they’re sold to the public, really just increase the total tax on personal income. Australia’s top marginal rate is really 49.5% of income not 48%. Saunders is persuasive in arguing that Australia already taxes personal income too highly compared with many of our most comparable trade competitors, and that this has a direct and significant negative impact on productivity. Moreover, if you regard the (formally employer-funded) 9% occupational superannuation payment as being effectively just an element of personal income taxation (which we need to do to make valid comparisons with taxes in most European countries, where retirement incomes are directly funded from tax revenue), Australian income taxes compare even more unfavourably with our western nation competitors.
If we’re really serious about significant rational reform of Australia’s tax system, we need to find ways to maintain the total revenue base by reducing tax on personal income while increasing taxes (or introducing new ones) in other areas. Someone more expert than this maths-phobic armadillo would need to do the sums, but I suspect that we could fund income tax cuts of the sort Saunders advocates by:
- Increasing the GST rate to a still modest 12%;
- Re-introducing a federal inheritance tax/estate duty;
- Reverting to the previous basis for calculating Capital Gains Tax, where CGT was levied at the taxpayer’s top marginal income tax rate, but with full adjustment for inflation since the date of acquisition and for the value of improvements since acquisition.
Would it be “courageous” in a Sir Humphrey Appleby sense for a party to submit itself to the electorate with a tax reform program like the above? I suspect that it would be suicidal to do it from opposition, but John Howard’s 1998 victory showed that it is possible for an incumbent government to sell tax reform to the electorate. I reckon the combination of the Saunders package and my additions to it constitute a much more attractive, desirable and saleable program than the GST, which was in essence a fairly timid reform despite all the hype. I wonder if either a Costello-led Coalition government or a Latham-led Labor administration would have the guts to go to the electorate with such a package in 2008?