23 Oct 2012

Who's Ready To Raise Taxes?

By Ben Eltham
Labor deserves credit for the tough decisions made to deliver this surplus, even if it hasn't tackled the big issue - for a developed country, we're not collecting enough tax, writes Ben Eltham
As budget debates go, we've been particularly short-sighted in Australia lately. Commonwealth policy-making has been dominated for more than two years by Labor's overriding political goal of returning to surplus. Yesterday's announcement of the Mid-Year Economic and Fiscal Outlook — really a mini-budget — moves the Government six months closer to the magical surplus figure. Perhaps now Wayne Swan and Penny Wong can finally minimise their spreadsheets and turn their minds to the policy settings Labor will take to the next election.

It's an unfashionable thing to say these days, but the Government deserves considerable credit for the tough decisions made to deliver this surplus. This Labor government is a model of fiscal discipline. Whatever the Opposition and the hawkish commentators say, Labor's fiscal management under Wayne Swan has been incredibly disciplined. There has been no blow-out in spending. Far from it: despite the charges levelled against it, this government has been very restrained.

As tax revenues continued to evaporate throughout Labor's second term, the Government has found the surplus an ever-receding target. The Government has had to cut, and keep cutting, just to keep the budget in the black.

But were the cuts necessary? As Fairfax's Tim Colebatch sagely observes today, there is no good economic reason for Australia to run a budget surplus. Australia's public debt is tiny and our bond yields are at record lows. Colebatch points out that many sectors of our domestic economy are in trouble:

"Non-mining business investment is at the lowest share of GDP for 40 years. More and more shops are empty. Mining export prices have fallen, yet the dollar remains crushingly high. The job market has weakened. Housing appears to be turning, and more mines are ready to produce, but falling prices and weak overseas demand mean they can't support a fragile economy."

Given the weakening domestic economy — not to mention the gloomy outlook in much of the rest of the world — the Government is looking pretty optimistic with its 3 per cent growth forecasts. In purely economic terms, this would be a good time to be borrowing ultra-cheap foreign money to invest in productive assets for the future competitiveness of the economy. If growth stutters, all these spending cuts will look rather hollow.

Instead, the Government has cut half a billion dollars out of research infrastructure funding, for no good reason other than to deliver a surplus. It's likely to be counter-productive in both the short and long terms, as I argued last week.

The other decision that has attracted media attention today is the sudden announcement that company tax will have to be paid monthly instead of quarterly by big businesses from July next year. This decision won't actually increase the rate of company tax, but it will bring forward a lot of revenue — as much as $8 billion over the forward estimates — as companies shift their accounting practices to meet the government's new timetable.

There's been some predictable squealing about a "lack of consultation" for the business lobby about the decision, but the truth is it won't represent a big impost for big businesses, most of whom will be comfortably able to finance the more frequent tax payments. Medium-sized businesses will eventually suffer though, as the new rules move down to those turning over $20 million or more. For these outfits, the extra payments will suck up much-needed liquidity. Even so, as Rob Burgess notes in today's Business Spectator, the actual impact on business cash flows will be less than $1 billion, most of which will come from the most profitable companies.

Another talking point today has been that hardy perennial — "middle class welfare." Labor has wound back the baby bonus for second and subsequent children, saving $461 million, and will further tighten the private health insurance rebate in various ways, saving more than a billion. Both of these decisions are justifiable. The baby bonus reduction is covered by the fact that Labor's comprehensive parental leave scheme is now up and running — and the private health insurance rebate was never good health policy anyway.

But the various cuts, nips, tweaks and fiddles can't disguise a more fundamental problem in Australia's fiscal outlook. Australia doesn't collect enough taxes. Tax receipts remain at levels below what they were for much of the Howard government, and the GST is also growing less strongly than anticipated. As Ian McAuley observes today, "we aren't collecting enough revenue to provide the economically important public services required in a developed country".

The Australian's George Megalogenis also notes that the Government has a revenue problem. Federal tax revenue collapsed in the 2007-08 downturn, especially compared with earlier, more severe recessions. "Paul Keating's taxation system still yielded 22.2 per cent of GDP at the bottom of the last recessionary cycle when the unemployment rate was still above 10 per cent," he points out. "The Swan and Costello regime collected its low of 21.6 per cent of GDP with unemployment at less than 6 per cent."

Why is out revenue so anaemic? The reason is that our tax system is now far more cyclical than it used to be. The Costello years saw personal income tax rates slashed, with expanding company taxes making up the difference. New taxes under Swan have also been directed towards the corporate sector, such as the carbon tax and the mining tax. But in an economic downturn, company profits evaporate and big losses can then be carried forward into future tax years. As a result, corporate tax revenues can take a long time to recover. Australia is going to have get used to very tight government spending in coming years. Big, transformative reforms like Gonski or the NDIS are going to be that much harder to deliver.

Of course, it's not all bad news. The weakening economy and the tight constraints on government spending have helped keep inflation low. This gives the Reserve Bank plenty of ammunition to keep cutting interest rates. The RBA has already cut interest rates quickly in recent months. Expect another quarter per cent rate cut, as early as Melbourne Cup day.

Eventually, all that cheap money washing through the economy will make an impact. But just at the moment, it's hard to see where. The government and many economists hope it will be in housing, where cheaper mortgages might just restart the sick home construction sector. But there's not much evidence of that so far. If lower interest rates helped the Aussie dollar depreciate, that would certainly help exporters. But there's no guarantee that will happen.

What about the politics of the MYEFO? At present, it's something of a stalemate. With his typical anti-charisma, Wayne Swan has again failed to make a case for the government's superior credentials in economic management. Also typically, the opposition has done little but bluster in rebuttal.

Wayne Swan and Penny Wong have done what they needed to do to keep the budget in the black — a boast on which Labor has foolishly staked much of its credibility. Really, they should be crowing about the result, which makes some of the doom-laden commentary from a year ago look rather silly. But voters and the media seem to be giving them few brownie points for all that hard work. The MYEFO is hardly a triumph for Labor. But in the current climate, an absence of disaster for the government is a type of victory in itself.

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meski1
Posted Tuesday, October 23, 2012 - 14:01

They'd be silly, politically speaking, to raise taxes before the next election. If they win, they can do it after, if they lose, Abbott will raise them and blame them. Economically, why raise them when you are trying to stimulate by cutting interest rates? Much of what the government does spend money on provides little to no stimulus, so raising taxes and then returning that in government spending won't help. Remember the Second Law.

lev_lafayette
Posted Tuesday, October 23, 2012 - 14:27

Once upon a time, the commonwealth collected a Federal land tax. It was a particularly bad move by the Menzies government to send that to the states.

It was the Labor Party which for over sixty years had a federal land tax as part of its platform.

When the Menzies government abolished the federal land tax in 1953, the Labor leader of the opposition stated: "We of the Australian Labor Party have always believed that the land is the patrimony of the people and that nobody has a complete and absolute title to it ... The land belongs to the people, and its use must be safeguarded and protected at all times ... We have always believed in the land tax, and when happy days come again we shall restore the measure imposing the tax to the statute book of this country."

If you ever want to introduce a "tax" which actually improves productivity and raises revenue for the public, a land tax is the way to go. That is why Ken Henry recommended it.

Nico Machean
Posted Tuesday, October 23, 2012 - 15:59

Land tax is alive and healthy, operated by the states. Henry's recommendation was that there shouldn't be exemptions and that all land owners should pay a form of land tax. I've seen his argument and I remain unconvinced how this will improve the rental market and lower house prices. Maybe house prices will be made stagnant for a while (not a good thing for recent first home owners). His arguments to abolish transfer duty (stamp duty) I believe are correct. It is a high and restrictive cost.

I remember when GST was introduced, the argument was that transfer duty would be eventually phased out. This never happened. Lets face it, a new tax will come in but the old taxes never seem to go. Whilst I oppose the idea of a carbon tax, now that its in, give it a few years to do its job and start making revenue. Don't tax the middle any more. Most ordinary home owners really aren't that well off, with most of their equity mortgaged to the bank, paying interest, increased utility prices, no significant increase in wages; the costs add up.

When the economy turns around, GST revenue will be up, as will company tax etc. Today I read an article that Australia is now the 10th easiest place to do business (http://www.news.com.au/breaking-news/national/aust-ranked-10th-easiest-t...). We should be striving to be the 1st. We should be looking to reform our systems rather than increase our taxes. This will entice people to do business in this country, help stimulate the economy and result in more tax revenue.

P.S. Ben I love how you say that Labor has brought in some questionable or even poor fiscal policies, however, we must give them credit as to their discipline in upholding poor choices. Love it. Long live Labor

gerard oosterman
Posted Tuesday, October 23, 2012 - 16:09

gerard

To introduce a fat tax would give benefits that are 'win win'. The domino effect of Denmark's first in introducing a fat tax is taking place as we speak. Hungary, Romania, Switzerland, Finland (where else?)France, England and others all have introduced a form of tax on unhealthy drinks or foods. Even New York with Bloomberg introducing a cap on their gallon/beaker size containers of sugar drinks has been introduced. Japan is now also doing something about their increase of waist and girths sizes.
Australia either at the top or near the top of the most obese is paying dearly for this plight.
Swan ought to be commended for keeping expenditure less than income. A few weeks ago, Holland introduced an increase in GST from 19 to 21% without as much as a murmur.
If the money has to come from somewhere, why not a fat tax, rather than cutting on health and education? If people ( mainly the poor) buy less unhealthy food, they will get healthier with less demand on hospitals. If people continue with the bad dietary habits, an increase of revenue would result. So, a 'Win Win' in keeping to the budget.
Of course, Abbott as the previous health minister thought that 'free choice' ought to prevail. Just look what that has done, we just about doubled in size! Free choice is only part of the solution. Making unhealthy life styles more expensive does work; just ask the slim Danes.

outrider
Posted Tuesday, October 23, 2012 - 17:15

Outrider
All the governments have to do is return to the old device of bracket creep. Too much fiddling with the tax scales at the moment. Just do nothing each budget and the steady rise in wages will see increased revenue as more of each wage shifts into higher brackets.
People whine, but it doesn't reach a crescendo for many years.

Atheistno1
Posted Tuesday, October 23, 2012 - 18:03

A good article again Ben but meaning no disrespect to you Ben, I have to disagree with your measures of credit you think they deserve.

I say that on the basis that they have sat lazily back on a one sighted economy, ignoring the lack of manufacturing & relying excessively on mining & mining alone to support this economy. the success to manoeuvrings of an economy to land on it's feet the way it has, is basically overtaxing & sheer luck & of course their going to promote themselves with a big political train 'whistle' whilst the luck is receding into a slow growth country & the financial burden of manufacturing investment slowly blowing away in the wind, until the budget is at an all time deficit.

hherb
Posted Tuesday, October 23, 2012 - 18:03

Before coming to Australia 15 years ago, I lived in Norway. Supposedly a high taxing country. With my reasonably high income as a surgeon I paid reasonably high taxes, and I did so gladly. I honestly would even have paid a few more percent without complaining would the government have asked, because I saw a point in paying them and through them doing my part in society. In return the government provided me with a splendid infrastructure, reliable social security, free public education including tertiary education for my kids, and fantastic free health services for everybody as well as a rich culture subsidised by public money. The government could afford it because they played no silly war games on behalf of imperialistic bullies, saw no point in subsidising international mega-corporations, and did not dabble in wasteful election time pork barrelling. They had a slim and trim and COMPETENT administration - and there were no loopholes for the rich wheedling out of their tax duties.

You might not believe it, but here in Australia I pay 3% more on average in taxes for a comparable income, and yet the government provides me with - what exactly in return? As a doctor, I see the inequities in the health system every day. Education is a costly endeavour unless one is content with the public standards that appear to be in free fall, and tertiary education has turned into a profitable sham that fewer and fewer can afford. Infrastructure - what infrastructure? Everything is falling to pieces here, and acceptable public transport infrastructure never existed here in the first place and is only getting worse. The government indulges in costly assaults on countries far away that never did us any harm, subsidises wasteful industries and mega-corporates, and maintains a bureaucratic hydrocephalus of previously unheard of levels of incompetence. And for that I should pay more taxes? I'd rather move on to another - more enlightened - country. Even to one where I had to pay a lot more taxes. Or stop working alltogether and spend my days surfing on the dole - while it still lasts.

Elbert
Posted Tuesday, October 23, 2012 - 21:25

Another good assessment, particularly this: "the Government has cut half a billion dollars out of research infrastructure funding, for no good reason other than to deliver a surplus. It’s likely to be counter-productive in both the short and long terms,"
However, it is incomprehensible to me that no economic commentator, not even you, Ben, ever mentions the black hole in government revenue that is the tax free status of all aspects of all religious enterprises, even the enormously profitable businesses of some of the largest and most profitable corporations in the country such as the Catholic Church and the Anglicans. [Other religions are catching up fast].
Their refusal to pay the several billions of dollars they should have to pay for profits on enterprises that have nothing to do with charity, means everyone else has to make up the shortfall. This is compounded by the fact that their 'charitable arms' are heavily subsidised by the taxpayer; they pay no rates on any of their buildings, making local rates higher for everyone else; their employees engaged in 'religious' activities pay no tax, and religious corporations demand and get millions of dollars in assistance with the maintenance of their buildings. Unsatisfied with that, they exert a disproportionate amount of political pressure that has resulted in Australia being one of the least socially tolerant countries of the 'western' world.
So, before telling us the government should raise personal taxation, how about suggesting that our representatives stop the criminal theft that for too long has been perpetrated on the Australian people by religious corporations whose finances, expenses and profits are never even audited! No one knows exactly how much they make or where the money goes!
When financial commentators start complaining about this gross injustice, then I will take them seriously.

This user is a New Matilda supporter. aussiegreg
Posted Wednesday, October 24, 2012 - 15:59

@Elbert

Just making the churches pay tax on the profits of their businesses will not result in a net gain to revenue. Those newly-taxpaying businesses will immediately donate to their owner-churches the amount of revenue surplus that would otherwise have been profit, and claim a tax deduction for the donation, thereby reducing their tax bill to nil.

The only way you make this work is to abolish tax-deductibility of donations to charity – there have been a number of government enquiries into church-owned businesses and they have all come to this same conclusion.

And no government of either political persuasion has been willing to bite that particular bullet.

This user is a New Matilda supporter. aussiegreg
Posted Wednesday, October 24, 2012 - 16:38

Now, Ben, you really shouldn't say "tax receipts remain at levels below what they were for much of the Howard government" when what you mean is "tax receipts <i> as a percentage of GDP</i> remain etc".

In absolute terms, the Labor governments of Rudd and Gillard have had substantially more money to spend than Howard had in any of his 11 years. For example, in the last financial year for which we have firm figures, 2010-11, tax receipts were $288billion, and Labor managed to run a record deficit. By comparison, in Howard's best and last year as the then record holder for the biggest-taxing, biggest-spending government in Australian history (eclipsed in every year since), total tax receipts were $262billion and the Liberals put $50billion of that away in the Kitty for Labor to squander when it came to office. And if we look at the last year for which Howard had firm figures, 2005-06, the take was an even more modest $245billion.

http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5506.0Main%20Features22010-11?opendocument&tabname=Summary&prodno=5506.0&issue=2010-11&num=&view=

There are arguments for governments to take a consistent chunk of GDP (bad ones, IMHO), that is for government spending to increase in real terms as the economy grows, regardless of whether the costs of providing government services have increased by the amount the economy has grown, or at all. But those arguments are more than offset by the established law of economics that increasing taxes always suppresses economic activity in the real economy, and thus the amount of taxation revenue yielded by existing taxes.

This user is a New Matilda supporter. paul walter
Posted Wednesday, October 24, 2012 - 16:39

The tendency has been for the neoliberal ideology-"market forces"- to dominate public policy thinking over the last generation, particularly as sponsorship of politicians who subscribe to the theory by the 1% has seen the eventual"capture" of government by these forces.
The example of the last five years with the US, the world's power house, should have been instructive. First came the doctrinally justified organised loot of wealth that came with the GFM of 2007 and more recently in the US election process where the Republican candidate is largely a tax dodger who pays no more than 15% of his declared income in tax, while his party demands much lower wages, higher taxes for the low end, an end to welfare, "security"nazism, theocracy and media dumbing down to consolidate its"new world order".
We are comparative laggers in ending taxation for the rich in Australia and instituting inequality and austerity, as the Murdoch press daily screeches angrily at us.

meski1
Posted Thursday, October 25, 2012 - 10:39

@Aussiegreg: Howard/Costello could only achieve their figures by selling assets. Yes, I know that's part of the conservative mantra of privatise everything, but using the money you get simply to give bread and circuses to the people (Costello tax cuts) is hardly the thing to do with what is after all a once-off..

This user is a New Matilda supporter. aussiegreg
Posted Thursday, October 25, 2012 - 12:43

Sorry, @meski1, those figures are explicitly <i>taxation</i> receipts -- the proceeds from the sale of assets were accounted for differently, and far from funding tax cuts, funded sovereign wealth funds like the Future Fund, which in turn covered liabilities for government superannuation which had been left unfunded by previous governments of both political persuasions.

K Brown
Posted Friday, October 26, 2012 - 14:30

Progressive income tax is the most stable source of revenue but it is steadily being undermined by tax breaks that favour those on high marginal rates and the change in the tax-free threshold to $18,200 that will encourage income splitting. Reports leading up to the MYEFO that the Government was looking at superannuation tax breaks made me think that Wayne Swann was finally developing the spine to address this unsustainable budget problem but no "hard, courageous, difficult" decisions were the usual claptrap we have come to expect.

Labor should have cut middle class welfare and tax breaks and restored progression to the income tax system as they implemented the Howard tax cuts they promised to retain before the 2007 election. Any tax break that isn't equally accessible or does not confer equal benefit to all should be eliminated.

Atheistno1
Posted Friday, October 26, 2012 - 21:36

It's nice to see some common sense prevail K Brown. Well said mate.

Labor are well out of their depth when it comes to capabilities on leading the charge of an equitable tax system, in my opinion.