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Address to ACOSS National Conference, Canberra 26 March 2010
26-March-2010
Tax has always been an element of civilisation. Oliver Wendell Holmes Jr who served on the Supreme Court of the United States once said that “taxation is the price we pay for civilisation”. The Internal Revenue Service liked that so much that they put it on the entrance to their headquarters in Washington DC.
While no one likes to give their money to governments, we do, because of a belief that it is for the benefit of society. Under this belief, people generally pay their tax. We pay our tax up to a point when we decide that the tax is unfair and then we typically respond with a revolution.
We shouldn’t just assume that it is just the high taxes that people think are unfair. The tax on tea that was imposed by Britain on the American colonies actually resulted in tea being cheaper than ever. But they decided that being taxed by a parliament they hadn’t voted for was unfair.
They responded by dumping the imported tea overboard. The events that followed led to the American Revolution and ultimately independence.
The salt tax imposed by Britain on the Indian colonies had a broad base and a single rate. Most academics would class it as a very efficient tax. But at that time salt was usually collected by people for free. So Mahatma Gandhi concluded that the tax was unfair. He responded by leading a mass protest march to collect salt for free. Just as in the American colonies, the events that followed led to the independence of India.
Looking back, it is interesting that a tax on tea led to the independence of the largest economy in the world and a tax on salt led to the independence of the largest democracy in the world.
It is just as well we excluded tea and salt from the GST or who knows what would’ve happened!
All taxes affect choices that individuals make, whether it is shifting from higher to lower taxed goods and services or activities or by lowering their income. Good public policy should consider the cost of the tax transfer system including how it affects these choices and also the cost of administration and compliance.
Australian governments raise 125 different taxes, the 10 largest of which account for 90% of the revenue raised. Governments provide transfers to individuals and families as direct payments eg Family Tax Payments and pensions. State government transfers are largely housing assistance and concessions eg travel.
Taxes on labour income account for 39% of taxes raised, consumption taxes 28%, taxes on capital 33%.
The top 20 % of taxpayers receive around 46% of wage and salary income. Income from capital (dividends and capital gains) is more distorted and the distribution of wealth more uneven again, much of it due to individuals accumulating wealth over different periods in their life.
Mention is often made of cradle to grave welfare of European countries, supported by high taxation rates. Australia and NZ are the only countries in the OECD that do not levy a social security tax. In Australia this means that the tax we pay on income from capital is higher. Our value added – or consumption – tax is lower than OECD average and our taxes on land are higher.
Our tax transfer system places a greater burden on those with higher incomes and it redistributes from young workers to the retired elderly. It is highly redistributive by OECD standards.
The tax and transfer systems have evolved separately but the way they interact determines the individual’s final income position. One of the issues identified by the Henry Review is churn – essentially taxpayers paying tax on the one hand and getting it back as a transfer in the same or the following year. This matters because it is complex and costly to both individuals and the system.
However we have the lowest level of churn of OECD countries and remember, we are highly progressive targeted and redistributive. This churning is therefore not necessarily all bad.
Our future tax system should find ways to better integrate the tax and transfer systems but we should take care not to simply pull the system apart and start again from scratch because it does have sound elements.
Far more of a problem, I believe is the one of effective marginal tax rates. The tax transfer system sometimes operates as a serious disincentive to workforce participation. The interactions between Newstart, Parenting Payment, family assistance combined with income tests with varying taper rates can mean people face very high effective tax rates when they either start work or increase their hours of work.
This is very evident in part time work which is becoming more popular – 15% of the workforce in 1978 to 28.4% in 2008 – particularly for mothers with small children.
Policies must encourage better part time participation at every level of income so people do not get stuck in either an unemployment trap or a low income trap.
Our Paid Parental Leave Scheme (PPL) will provide primary carers, usually mums, 26 weeks of paid parental leave at full replacement pay OR the federal minimum wage, whichever is greater. It will be available to all employees including contractors and the self employed. Part time and casual workers will also be eligible provided they have worked at least one paid day of work a week for ten out of the last thirteen months. In many cases they will be below the minimum wage because of hours worked but they will be lifted to the minimum wage.
The scheme will be funded by a levy of 1.7% on companies’ taxable income in excess of $5 million. This will affect about 3200 Australian companies.
We would prefer to fund our PPL scheme from a budget surplus but large debts and deficits under Labor mean the country cannot afford this. Our priority as Shadow Treasurer Joe Hockey has said is to repay debt. We are asking big business to step up in this instance and fund a scheme which, not only helps families manage work and family but boosts Australia’s workforce and productivity.
I want to say two things about the environment in which we are operating.
The first is that transfers in the form of allowances, pensions and payments are only part of the system that supports the disadvantaged. We also need a first class health system and that includes mental health, we need affordable housing, good public transport and a very good early childhood (including early intervention) education. Policies in these areas will no doubt be scrutinised carefully as the election draws closer. None of these things is possible without a strong economy.
The second point I want to make concerns Australia’s rapidly growing debt and the associated commitment to revenue restraint made by the Treasurer which is that taxation, as a share of GDP will stay below the level the Government inherited – 23.6% of GDP
The Government has projected seven years of budget deficits with net debt to peak in 2014 at $153 billion and not to be repaid until June 2022.
This requires 8 consecutive years of budget surpluses of around $19 bn each year.
The forecast debt for the Budget we are approaching is $58billion.
Think about it. If revenue and expenditure continue to grow at the same rates year in year out there would be no reduction in the deficit below the current level.
What this adds up to is very little room to move in terms of new government programs that better target the disadvantaged and those on low incomes.
The Coalition looks forward to the Government releasing their review into the tax and transfer system. We will approach the recommendations of that report with an open mind and our response will be based on three key principles; that taxes should be lower, fairer and simpler.
Lower taxes mean that people keep more of the money that they earn. The Coalition believes that individuals are better than governments at deciding what is best for themselves and their families.
As I said we will welcome the release of the Henry Review. Tax policy is a key part of the reform we have to undertake as a nation to lift productivity growth, economic growth and living standards.
The Prime Minister has said that annual productivity growth must be lifted to 2% a year. Tax Reform feeds directly into this. It is not the only way to lift growth but it is central because it determines prices, resource allocation and reward for effort in work or investment.
Post GFC we are reaching capacity constraints in the economy. All sides of politics recognise that the economy needs to continue to grow so that we can take care of our ageing population and provide assistance to the disadvantaged.
The tax and transfer system work hard to correct inequality. That is a good thing. As we design a future system, one of the challenges will be to make sure that we in no way sacrifice that essential principle.
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