Date created: 28 November 1996 Last modified: 18 November 1997 Maintained by: John QuigginJohn Quiggin
Feb 8, 1995
The fundamental economic problems facing Australia are those of high unemployment and inadequate provision of labor-intensive services such as health, education and law and order. These problems are two sides of the same coin and both may be traced back to the inadequacy of revenue to fund the necessary expenditure. It is claimed that we simply cannot afford adequate services. Yet Australia is a low-tax country, by standard measures the lowest taxed in the OECD. My recent book with John Langmore MHR, Work for All, sets out a program based on net additional expenditure of $8 billion a year, and shows how this could be funded with quite modest tax increases. As survey evidence has shown, the majority of Australians would accept higher taxes if they were used to fund improved services.
It is of course, impossible to raise any significant amount of revenue while confining tax increases to those who consider themselves rich. Any serious program must increase the tax burden on 'middle income earners' (in the Australian lexicon, those who earn more than the middle, or median, income). However, the increase in taxes would not be large, wcould exclude low income earners completely, and would be balanced by an improvement in services. As an illustration, a levy at a rate of one per cent on incomes above $30 000 (around the current median wage), two per cent on incomes above $40 000 and three per cent on incomes above $60 000 would raise about $3.2 billion per year in additional revenue in 1995/96. When combined with the abandonment of the second stage of the One Nation tax cuts, this would generate a large proportion of the revenue required to fund a major expansion in outlays.
A number of options could be considered to supplement increases in income tax revenue. While none of these would be politically easy, most could be pushed through the current Senate. With the right political leadership, a package of higher taxes and improved community services could be sold to the electorate.
The biggest potential gains are in the area of tax expenditures. Tax concessions for superannuation have failed over many years to produce a situation in which most retired Australians have had an adequate income independent of the old age pension. With the introduction of the Superannuation Guarantee Levy, there is little justification for continued subsidisation of superannuation, especially on the current regressive basis.
Home ownership is one of our most important forms of savings, and is much more efficient than superannuation. It would be a serious mistake, as well as political suicide, to eliminate the favourable tax treatment of home-ownership. Nevertheless, the current system of unlimited exemption is both regressive and inefficient. It would be preferable to cap the exemption, so that it applied only to an amount required to provide a reasonable standard of housing.
Australia is unique in offering full imputation of company tax against dividend income. This very generous concession has not produced the hoped-for results in terms of investment and should be scaled back. A move to half dividend imputation would save $750m a year in the short term and more in the long term as taxpayers adjsut their affairs to take more advantage of imputation. If we are concerned with distortions in investment, a much more important change would be to eliminate the tax on, and the deductibility of, the nominal component of interest. This could be done with little dislocation in the present low-inflation period, and would probably yield net revenue gains in the long run.
The abolition of Commonwealth estate and gift duties in 1979 left Australia as the only Western country without any form of taxation on accumulated wealth. Reintroduction of death duties (or, preferably, an inheritance tax paid by recipients of bequests) could generate around $1.5 billion a year.
The indirect tax system should be reformed to include at least some services, such as overseas travel, hotel accommodation and restaurant meals in the tax base. The tax treatment of alcoholic beverages, including wine, should be reformed to include a fixed tax on alcohol content, regardless of the form of the beverage, and wholesale sales tax at a uniform rate. Such changes could raise revenue of $1-$2 billion a year.
In a global capital market, it is impossible and self-defeating to attempt to raise the overall tax burden on business. However, it would be highly desirable to eliminate the payroll tax, replacing it with a combination of carbon taxes and higher general rates of company tax. This could easily generate a net gain of 1 to 2 per cent in total employment with a corresponding reduction in unemployment.
The dogma that tax rates must never rise and that the overall share of tax in GDP must decline is the central obstacle to a coherent economic policy based on full employment and a rational allocation of resources. Quite modest changes in policy could yield very substantial additional revenue.John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.
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