Taxing times?

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). …

Saunders advocates:

  • 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?

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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John Quiggin
John Quiggin
2022 years ago

Due to the shortage of tax-related puns (maybe we need a government program to generate more) your post shares its title with one of my books, which supports your second and third recommendations. I’m also somewhat sympathetic to the first, though the barriers (consent of all states and the Feds) are huge.

The book also shows that Saunders’ comparisons over time and between countries are grossly misleading, as I’ll explain on my blog when I get time.

Jacques Chester
Jacques Chester
2022 years ago

Well Ken, I used to feel the way you do; and I’m sure we could duke it out for hours.

But why is that people say they are prepared to pay more tax for education, health, if they won’t *just pay more for them*. Right now you spend more on a car than you do on an education and you spend more to take your cats to the vet than you do to visit the GP. How is this sensible, or even sustainable?

Jim
Jim
2022 years ago

Ken,

Wouldn’t it be even more “courageous” for a party to go into an election promising to abolish or dramatically reduce the outrageously wasteful overlap between State and Federal government?

I agree entirely that the concept of properly funding services like health and education to ensure (as much as possible) equality of opportunity and a decent standard of care for everyone are essential to create social cohesion and collective confidence in government – though not necessarily big government.

However, arguing about revenue and expenditure whilst ignoring such obvious inefficiency just doesn’t make sense.

Imagine a party prepared to advocate via a gradual process of referenda, either the abolition of State governments or the reduction of their executive and administrative powers to the point where there was little or no duplication between levels of government.

Regardless of which party proposed it, that would be a concept worth voting for!

Jim

dan
dan
2022 years ago

What about the impact of removing tax relief for property investment? The money saved could be spent on health and education, whilst reducing pressure on the housing market thereby assisting those poor first home buyers.

Factory
Factory
2022 years ago

# Increasing the GST rate to a still modest 12%;

Will be politically unpaletable.

# Re-introducing a federal inheritance tax/estate duty;

Depends of if it will affect superannuation, but generally I would assume most ppl will not be largely affected by this.

# 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.

Most voters eyes will glaze over when they read that, it’s far too complicated to explain to the electorate. Introducing it without a mandate would prolly not piss too many ppl off.

jim:
Abolishing state governments is prolly a bit of a too severe way of reducing government inefficiency. OTOH moving the health and education responsibilities to the federal government would be something that could at least be dwelled upon.

James Hamilton
James Hamilton
2022 years ago

I think most of the funding for “middle class welfare” comes clearly maked as education and health dollars. I would not support a non means tested anything.

Ive read the chat on blogs, read the articles about the polling, even listened to the dinner party talk, but I have a seaking suspicion that when we reveal our predisposition to spend more on education and health at the exepnse of $ in our pockets, we may well be:

1) lying; or
2) talking about other people’s money not ours

Now I have left myself open to the polite invitation to speak for myself so let me apologise in advance and decline. I have always said I wanted to pay less tax even if it was at the expense of health and education. They can do better with the money they get. They can do better still with less. These things are dollar eating beheomoths gone out of control.

Geoff said last week I didn’t qualify as a RWDB, perhaps I have been overcompensating.

observa
observa
2022 years ago

With unemployment as the biggest social and economic disadvantage most individuals face, I have long felt it ludicrous that we raise the price of labour via such tools as income and payroll tax, as well as compulsory superannuation and the like. There are no such price hikes on capital, although stamp duties may be one culprit if you are turning over land or motor vehicles regularly. As well there is the pressing problem of conspicuous consumption, waste of precious resources and lack of recycling. Our society needs to concentrate all its industry on quality not quantity, as well as more equitable distribution of the same. The truth is, that a slick car salesman can command more reward than the most diligent mechanic.

My response would be to tax real resource use, including heavy taxation of finite fossil fuels. This would include taxation of land and water use, with nil for pristine wilderness, rising for monotreme agriculture, through to the highest for concrete steel and bitumen cover.

Now such taxation would be a tax on consumption and not impact on savings. As well, there would be no different treatment of resource taxing for private, business or charitable purposes. No transfer pricing also. Pay as you consume. Notice also it does not price discriminate against labour, but would invoke a change in the relative costs, in favour of labour.

Such a tax regime would of course have an equity payoff, since the wealthy would be the highest consumers of fossil fuels(jet travel, aircond, heated pools and spas,etc) However, it is unlikely this would be enough by itself and so it would have to be complemented by a rigorous, annual net wealth tax.(estate and inheritance taxes have a history of being too easily planned for and largely impacting on the sudden dead)

The fly in the ointment, is that most developed countries would have to develop the same tax system, to prevent obvious leakages, unless one country was prepared to run a bit of a closed shop. Still, it might set an example the others would find hard to ignore, if it produced some impressive social and environmental outcomes.

Imagine a society that paid the cost of recycling in every consumer product it purchased. Throw it away and another would seize it instantly for its inherent economic value. I pay you, out of my retained gross pay, to paint my house and the ATO are not interested. Neither is the tax minimisation industry. Now petrol is say $10.00/litre, but it’s going there anyway, and I don’t notice too many fatties on my walk to the shops either. Not much imported stuff on the shelves these days.

Jason Soon
2022 years ago

What observa said- carbon taxes, land taxes and an inheritance tax. I’d happily cop all of these for a lower income tax.

John Humphreys
2022 years ago

I want to see more spent on education – but none spent by the government.

The total amount of resources we have does not grow when we hand it to the government – it shrinks. The deadweight loss costs of taxation mean that for every $1 we take from taxpayers, the govt has 70-80 cents to distribute. Then remove admin costs and compliance costs. Then account for the _inevitable_ misallocation by government (squeeky wheel, marginal seats, election years – lets not pretend the money will be spent perfectly).

Really – how dumb do we think people are that we will waste so much of their money in order to give them what they say they would buy anyway?

John Humphreys
2022 years ago

btw – I disagree with your self-assessment as a ‘liberal democrat’.

None of your views are inconsistent with social democracy, even if you come to your views in a slightly different way than some other social democrats. I imagine most social democrats agree with your views about equality of opportunity (which is not what the classical liberals and liberal democrats meant by equality).

woodsy
woodsy
2022 years ago

Why is more spending on education and health predicated on raising taxes ? The rate of tax is not the problem, the inefficiency of Government is! As pointed out above, only 70% of taxes collected are available for the purposes of government, the rest being ‘the deadweight cost’, which, I read recently has increased by $1 billion since the election of the existing Government.

Has anyone costed the repayment of billions of $ in middle class welfare? Why is it collected in the first place, simply to be repaid as ‘family’ payments and disability welfare ? Which taxpayers gave a mandate for payments of billions to dairy farmers and now suger farmers? And don’t get me started on the waste perpetrated by the ADF. How do they keep getting away with the likes of the submarine fiasco, compounded by the sea sprites, now the tiger helicopters and God knows how much the new fighters are going to cost.

Perhaps some one should do a careful analysis of how much is wasted by Government BEFORE we start talking about changing the amount of tax collected. It seems to me that we could have our cake and eat it too, because without the waste Government could concentrate on what it’s elected for, health, education, (an efficient) defence system and welfare for the really needy.

Ken Parish
Ken Parish
2022 years ago

John,

I’d be amenable to a private provision model for access to health and education if I was convinced that it would promote equality of opportunity rather than undermining it. I’ve yet to see a “voucher” or similar system that wouldn’t result in public schools (and presumably public hospitals) becoming third-rate institutions as they’re starved for funds through private schools skimming off families able/willing to contribute from their own pockets to their kids’ schooling.

I start from the proposition that children shouldn’t be disadvantaged at the outset of life by getting a third rate education because their parents can’t or won’t contribute to their getting a better one. That way, social class and wealth become advantages that can almost never be overcome by children whose parents don’t possess them. It’s hardly a meritocracy. The State should fund public schools at an adequate level to ensure that ALL children irrespective of their parents’ means (or willingness to devote those means to their children’s education) can get a decent primary and secondary education. If some parents want to pay from their own pockets to give their children a type of education the State doesn’t provide (e.g. religious values etc), or additional facilities like flash gymnasiums, then good luck to them. That isn’t to deny the reasonableness of state aid to private schools, as long as the State continues to discharge its primary obligation to provide quality free public education to anyone who wants it.

As for your point on whether I’m a “liberal democrat”, I agree that classical liberalism didn’t (by and large) place any emphasis on equality of opportunity. However, the later “welfare liberalism” of JS Mill and others, and more contemporary versions of liberalism like John Rawls’s notions of justice, gave much greater emphasis to equality of opportunity. That is, the late nineteenth and twentieth century liberal responses to the challenge of socialism, which attempted to give liberalism a human face by responding to the entirely justified criticism that classical liberalism was in many respects an inherently elitist “I’m alright jack” justification of existing wealth and privilege.

One can still differentiate these strands of “welfare liberalism” from any form of socialism or social democracy, because they still commence from the propositon that individual liberty and property rights are primary values. However, they evince a greater willingness to subordinate extreme individualism to the common good where a powerful enough case can be made (e.g. that equality of opportunity is better secured by government intervention than by other methods, and that this can be done without undue interference with individual freedom). The difference between welfare liberal and social democrat on this approach is in practical terms mostly one of emphasis i.e. the amount of proof needed that the social aim is a desirable one; and the degree of scepticism as to the likely efficacy of government intervention and its potential downside risks to freedom.

Ken Parish
Ken Parish
2022 years ago

Wayne,

You might be right that elimination of middle class welfare and wasteful defence spending would be enough to fund both Saunders-style income tax cuts and a boost to health and education spending. I don’t really have a clear feel for the orders of magnitude involved.

I certainly don’t have a burning desire for higher GST or an inheritance tax in themselves, if we can fund income tax cuts and higher education and health spending without them. I agree that rigorously assessing the potential for saving money in those areas before embarking on new taxes is a sensible starting point. It does, however, sound a little like the magic pudding or Paul Keating’s patently dishonest explanation of how he was going to pay for his “L-A-W law” tax cuts. There’s a point of diminishing returns in relation to elimination of waste, where the cost of the efficiency/anti-waste measures exceeds the money saved. And avoiding costly defence procurement fiascos is something no first world nation on earth has managed, as far as I know.

However, reverting to the previous CGT basis is another question, because it has avoidance minimisation aspects. So too with the carbon taxes mentioned by Observa and Jason Soon: they have social/environmental aspects in addition to their pure revenue-raising functions. So I’d still like to see them as part of a comprehensive tax reform package even if we COULD fund income tax cuts without them.

Ken Parish
Ken Parish
2022 years ago

A bit more on “welfare liberalism”. Here’s a succinct but fairly detailed extract from Encyclopedia Britannica Online that encapsulates what I’m talking about:

The social effects of laissez-faire capitalism led some liberals to rethink the meaning of freedom. Many came to view the unfettered market of laissez-faire capitalism as socially harmful. It resulted in deep seated poverty and other social problems. They argued that true freedom means not just being left alone to maximise one’s individual pleasure and minimise pain; it also requires assured and universal access to the positive power, resources and ability to maximise one’s potential. A child born in poverty with no real opportunity to escape is not free to grow and develop to the full extent of his/her abilities.

As a consequence, welfare liberals argue that society, acting through government, should ensure all citizens are able, if they so choose, to maximise their own abilities and talents. Accordingly, governments should establish public schools and hospitals, aid the needy, and regulate working conditions to promote workers’ health and well-being. It implies state intervention to provide a reasonable minimum standard of living for all and a comprehensive range of social services including education. Unlike classical liberalism, it has a strong concern for equal opportunity.

A central theoretical idea of welfare liberalism is citizenship. Citizenship is not just enjoying certain political and civil rights (for example, the right to vote and equality before the law). To be a citizen is to be able to participate fully in the life of the community. Consequently, where there is significant economic (or other) inequality, state intervention may be necessary before those disadvantaged can participate fully. This gives rise to the notions of social rights and social justice.

Some confuse welfare liberalism with socialism. Whereas socialists work to replace capitalism with publicly owned and democratically run enterprises, welfare liberals seek merely to civilise capitalism. While preferring market capitalism and private ownership, they see a positive benefit in social welfare, a mixed economy, and targeted economic planning.
Leading proponents of welfare liberalism include T H Green, T H Marshall and John Rawls. In the political sphere, US President Franklin Roosevelt’s “New Deal” program in the 1930’s may be seen as a manifestation of “welfare liberalism”, and in the economic sphere John Maynard Keynes was its most powerful advocate.

Stewart Kelly
Stewart Kelly
2022 years ago

“…you spend more to take your cats to the vet than you do to visit the GP” – Jacques Chester

Thats cos we have medicare that makes going to the docs nice and cheap. Of course, if this really is a problem we could always introduce universal pet health insurance. Peticare anyone?

James Hamilton
James Hamilton
2022 years ago

In my life time I have been through the F1-11 purchase debacle, the F18A purchase debacle, lately the Collins sub debacle and many say we have a chopper debacle happening now which should see us into this new fighter debacle. I am very much a layperson in defence technology but I find I am becoming rather debacle immune and wonder if they really were debacles or was it media beat up. This is not really a rhetorical question. Are we that bad at buying defence toys?

PS. Going to the Doctor is not cheap. I think anyone who is spending one and a half percent of their income every single year on their pet’s medical expenses needs to ask themselves if they might be better off sending Fido to the great dog beach in the sky.

woodsy
woodsy
2022 years ago

Are we that bad at buying defence toys?
It seems we are and worse still nobody is accountable. The armed forces (I hesitate to call them the defence forces, because, with the exception of defending Darwin in 1942, the entire effort has been directed toward ‘offense’. Indeed we should call them the Australian Offensive (pun intended) Forces) have continually bought weapons designed to attack rather than defend with no thought of efficiency or suitability for the task. But that’s another story.

If anyone questions the waste endemic in the administration of the AOF one is immediately labeled ‘traitor’. It’s treason to question profligate waste – I bet Kev Gillett can tell some stories about waste in the Army. I have heard stories about the horrendous waste perpetrated by the RAAF hospital in Darwin, and no I don’t think Collins, Seasprite etc. are media beatups. I read recently (I think it was in the WE AFR) that within the next decade or so, the majority of US military expenditure will be on PENSIONS. Is anybody looking at what the contingent liability of future retirement benefits for Australian military is?

And Defence spending is only one area of waste. Someone mentioned the overlap between state and commonwealth education and health departments. Why is it necessary to have two sets of public servants administering the delivery of the same services ? Surely the political parties have the resources to review service delivery from a zero base perspective instead of simply adding 10 per cent to last years budget.

Jock
2022 years ago

I’m all for properly funded Health and Education programs – Unfortunately Australia is just not putting the right resources into R&D and new innovative business to ensure its furture. The reasons can be found in the punishingly high tax rates and the risk averse culture of Australian business. Relieve the tax and you might find the culture will change.

Doug
2022 years ago

Couldn’t seriously claim to disagree with anything in Ken’s post, but I do wonder (as a temporary UK resident) the value of some supposed income tax system comparisons.

If the UK top tax rate is 73,000 Australian Dollars, that is only 28,400 GBP and could be paid by, for example, very poorly remunerated junior academics.

Given the real cost of living in the UK is basically the same as in Australia, if not higher (ie one pound here buys you what one dollar gets at home), one could argue that the UK top tax threshold kicks in at an outrageously low level in comparison to Australia, especially when the local “GST” is set at 17%.

Numbers, however, are not my strong point.

John Quiggin
John Quiggin
2022 years ago

I’ve responded to some of Saunders’ misleading claims here.

John Humphreys
2022 years ago

Ken

I don’t want to shift this thread into education vouchers, but I will say that public schools would not become (sic) third rate, because I can see no reason to continue with public schools once a voucher system was introduced. Fund the student, not the school, and there is no need for government provision.

Private provision of health/education does not change the distribution of wealth. If you think that the distribution of wealth is a problem which reveals itself (among other places) in education and health… then I suggest fixing the problem at its source (distribution) and not attempting to fix the symptoms through (generally inefficient) government provision.

Ken: “I start from the proposition that children shouldn’t be disadvantaged at the outset of life by getting a third rate education because their parents can’t or won’t contribute to their getting a better one”

Your starting point leads me to the following conclusions – (1) the government should ensure that parents have the means of educating their children and (2) the government should ensure that parents actually do educate their children. Building up logical policy from your starting point suggests to me that you should have (1) redistribution and (2) compulsory education. I don’t see the obvious link to the government entering the education industry. That seems to make the additional assumption that public provision is better than private provision – something that is often demostratably not the case.

I should add that I don’t think that the benefits of redistribution exceed the costs either… but that’s a totally different debate.

I would place Mill in the classical liberal basket – but that’s not too important. More to the point, I think you’ll find that social democrats differentiate themselves from liberal democrats by their emphasis on equality of opportunity. I think you’ll also find that social democrats believe that individual liberty and property rights are primary values. I don’t use social democrat as an insult… I think you’ll find most people alive today are social democrats. I certainly don’t equate social democrats with socialists. We live in a social democracy (as does pretty much the entire developed world) and life today is better than ever. Obviously, as a liberal democrat, I think things could be even better… :)

Ken Parish
Ken Parish
2022 years ago

John,

OK. By your definition of “social democrat” I’m happy to be labelled as one.

As for your proposition about public education (or rather the lack of any need for it in a voucher system), I disagree. If the voucher amount was sufficient to fund the full cost of an adequate education for a child, I suppose you might be right. Children whose parents were able and willing to fund some additional luxuries on top of that adequate voucher-funded education could send their kids to more expensive schools, while those happy to rely solely on the voucher could send their kids to a “no frills” (but still adequate) school.

However, there are two major problems with that utopian scenario. First, no voucher system that I’ve seen proposed actually offers to pay the full cost of an adequate education. Secondly, even if it did, it leaves families vulnerable to cuts by stealth over time. Just as the Medicare bulk-billing rebate has been effectively cut over the years simply by not being increased to keep pace with inflation, so would it go with education. Once governments are no longer responsible directly for providing adequate schools, the temptation would be overwhelming (especially for a Tory government) to save money by failing to adjust vouchers for inflation. If this problem was somehow addressed, however (e.g an independent authority with power to maintain the real purchasing power of education vouchers), then I would be prepared to support such a system.

Norman
Norman
2022 years ago

Whenever I come across comments like those of John Humphreys above, which purport to be serious contributions to the debate, I become even more despondent about the chances of there being any worthwhile reform in the education system.
His quaint “interpretation” of what Ken’s position allegedly implied, also made me realise that even if reform was accomplished, there’d still be enormous difficulties raising the standard of analytical skills.

Gary
2022 years ago

On an ideological point “inheritance tax” seems draconian. Isn’t that discouraging improving the next generation?.

woodsy :
What would you call a defensive weapon?

What were the differences between the weapons defending Darwin in 1942 and the ones that retook Indochina?

The wast in the RAAF hospitals are the same that goes on in public hospitals so I agree that should be addressed.

And finally if you supported the East Timor operation and future UN mandated ones , How would Australia participate?

John Humphreys
2022 years ago

I think you’ll find that we already spend enough money on education to be able to offer every child a voucher that covers a basic education.

As for top-ups, I think you’re underestimating the ability of parents to contribute to their children’s education. You may be shocked to discover how many poor families make sacrifices to send their children to private schools.

But even if you take the (in my opinion absurd) view that many parents can’t afford to spend a few hundred dollars a year on their child – then maybe (as I’ve said before) that problem should be addressed at the source. That implies WELFARE (or family?) policy, not EDUCATION policy. Certainly it doesn’t justify inefficient government ownership.

Finally – in a strange twist, the LDP (www.ldp.org.au) went to the 2001 ACT election with a education voucher platform that included a voucher large enough to pay for a standard education. The increased spending on education was funded by getting rid of the bus subsidy. But that’s a different story all together… :)