March 18th 2006

  Buy Issue 2727

Articles from this issue:

COVER STORY: AUSTRALIAN EXPORTS: Why we need a single desk for wheat

EDITORIAL: Net foreign debt soars towards $500 billion!

CANBERRA OBSERVED: Talentless, faction-torn Labor on the skids

TAXATION REFORM: Governments not facing the important issues

NATIONAL AFFAIRS: Australian Democrats, Greens move to restrict religion

SCHOOLS: Science teaching turned upside-down

STRAWS IN THE WIND: The future-eaters / Still more Turkish delight / Paul the train-wrecker is back

POLITICAL IDEAS: The new dark ages that are already upon us

CULTURE AND CIVILISATION: Perils of banishing religion from society

CULTURE: Hollywood, religion and C.S. Lewis

RUSSIA: Russia's population implosion

OPINION: AMA and RANZCOG taken to task over RU-486

Attorney-General's 'grave concerns' over national security breach (letter)

Labor's Kevin Rudd on abortion drug (letter)

Anti-life politicians 'a useless commodity' (letter)

Capitalism raises living standards (letter)

BOOKS: SOCIAL IMPACT ASSESSMENT: An Introduction, by C.J. Barrow

BOOKS: Eleventh Month, Eleventh Day, Eleventh Hour: Armistice Day 1918, by Joseph E. Persico

Books promotion page

Governments not facing the important issues

by Colin Teese

News Weekly, March 18, 2006
Governments must decide whether or not they are prepared to provide the services the community wants, writes Colin Teese, former secretary of the Department of Trade.

Currently, orthodox economics seems at odds with sensible policy at practically every level; and nowhere is this more obvious than with taxation. As a consequence, so-called taxation reform now turns almost entirely on the level of income tax rates and, within that debate, on which categories of taxpayers should benefit most from any tax reductions.

Of course, at a personal level, income tax is important; but in policy terms, other issues merit priority attention. As things stand, with tax policy focused almost entirely on tax cuts, any public discussion immediately becomes hopelessly enmeshed with election politics and timing - for quite understandable reasons.

Giving the largest tax cuts to the low income-earners, who are by far the greatest in number - and incidentally, those most in need - means that the individual cuts are so small that the Government gains minimal political benefit from that act.

The temptation, therefore, is to give the larger cuts to the higher incomes, from which better political advantage flows - and, all the more so when orthodox economic opinion keeps telling the Government that high taxes stifle initiative.

Yet there is absolutely no evidence to support this assertion. It has been criticised most effectively by American economist John Kenneth Galbraith, when he rather dryly observed: "One of the great doctrines of our age is a belief that the rich don't work because they have too little money, while the poor don't work because they have too much."

In the debate on tax policy - or, if you prefer, "tax reform" - the true focus should not be solely on income tax rate levels; rather, it should be on the purpose behind governments collecting taxes in the first place.

If we think this a curious idea, we should recall that governments have only been collecting income taxes in their present form for about 100 years. Effectively, these collections followed in the wake of widespread industrialisation, from which arose the needs for various forms of communal services - initially in the areas of health, education and public transport.

That our politicians need to be reminded of this has been made clear from a mini-debate in the weekend papers on the merits or otherwise of free public transport in Victoria. The idea was floated in the Melbourne Age newspaper and was understandably popular with certain sections of the community. As a result, various politicians were invited to have their say.

The Liberal Party shadow transport minister, surprisingly to some, gave cautious and considered support for the idea. The Victorian Bracks Labor Government's Transport Minister, Peter Batchelor, expressed the opposite view. It was a bad idea, he said somewhat petulantly; it meant that those who did not use the system would be paying for it through taxation.

So there it was - apparently unqualified support for the principle of "user pays". Never mind whether there was any community benefit. Those actually using a service should pay for it. Full stop.

Presumably, the same principle should be applied to hospitals, medical treatment, medicines, schools and police. And why not welfare? To extend Mr Batchelor's ideas to their logical conclusion is to deny the existence of either society or the public good.

If the minister is, in fact, expressing the view of the Victorian Labor Government, then the Premier Steve Bracks should make clear to voters that that is Labor's official position. At the same time, he presumably would inform them that, since the Government believes it has no responsibility for the provision of services from communally-collected revenues, it will no longer be levying taxes for these purposes. Some hope!

Put this way, the proposition sounds absurd; but it is what the Government spokesman on transport - one who is perhaps committed more than most to the virtues of neo-liberal economics - said in what was probably an unguarded remark. But we should be in no doubt that the same view has its champions in Canberra.

Sadly, this underlying philosophy appears to have infected Australian governments of all persuasions and at all levels. Yet, curiously, this has not stopped these same governments from imposing and maintaining the highest levels of tax in our history. And it is this fact, rather than any fiddling with income tax rates at the margin, which should be the starting point of any genuine "tax reform".

The first thing our governments must be required to decide is whether or not they want to be in the business of providing services which promote community values. And these services include health, education, communications and transport.

Nobody is talking about this. And it has hardly been discussed since government bailed out of accepting responsibility for these functions about 20 years ago, for reasons which it claimed were associated with budget deficits.

Note, please, "bailed out of accepting responsibility". Government is still funding some or all of these activities, but in ways which allow it to avoid responsibility for outcomes or expenditures.

Budgetary constraints can no longer be used as an excuse. Our various governments have gone, first, from budget deficits to balance; then to what appears to the casual observer as deliberately contrived surpluses.

Understating revenues

It is hard to avoid the conclusion that budgets are being deliberately constructed to understate revenues and overstate expenditures. The resulting credit balances are accumulated and later used to distribute largesse at election time. This practice should have no part in responsible government, and it certainly should be a major focus of any review of tax policy.

This new-found largesse has found its way into government coffers as a result of conscious acts of policy change, two of them in particular:-

First, governments - state and Commonwealth - have sought to pass on to consumers the cost of providing many community services while still continuing to collect taxes as if governments were funding them.

Second, we have now introduced a goods and services tax (GST), which in simpler terms would be called a consumption tax. It applies to almost all goods and services.

In part, this tax has helped replace the revenue lost when we embarked on the policy of tariff reductions some 20 years ago. But it was justified on the basis of allowing income tax and company tax to be set at lower levels.

It is a matter of record that this tax has collected revenue far in excess of what was expected. Accordingly, either far greater tax reductions should have been delivered, or else much more could have been spent on funding of community services. This applies to both the Commonwealth and state governments.

GST revenue, we were told, would be distributed to the states in the form of untied grants - and so it was. But the states were not given the proceeds of the GST collections on top of what they previously received from the Commonwealth in general grants.

Instead, the funds for the old general grants were kept by the Commonwealth as a lovely windfall gain. What should have been done was for the Commonwealth to cut income taxes by an amount equal to this windfall gain.

State governments cannot escape our criticism either. Consumption taxes were supposed to provide opportunities for them to remove various imposts collected in their own name - notably payroll taxes and the taxes they apply to various transactions, including the buying of items such as houses and motor vehicles.

All of this points to the obvious fact that state and Commonwealth governments are collecting more revenue than is needed to carry out the limited level of spending to which their political philosophies have committed them. Either they should spend more on community services or they should lower their total tax take. And we should require them to take full accountability for moneys they spend on our behalf.

That's the direction a fully effective program of "tax reform" should be taking us.

And still on the subject of tax, a word about "compliance" - that is, making sure that taxes paid actually are in line with earnings.

Not too much time should be spent on this, nor on whether those on high incomes are paying too much tax. It is always easy to collect the right amount of tax from those whose incomes are a matter of record. What cannot be done is collect from those wealthy taxpayers who are able to conceal the sources of their incomes. Effectively, they are able to limit their income tax commitments.

Taxes on luxuries

We should accept that reality. But we can catch them with the right sort of consumption tax, if we allow ourselves to break free of current orthodoxy and set higher levels of consumption taxes for luxury goods.

If the wealthy want to consume luxury goods and services - and they usually do - the nation is in a position to benefit from these consumptions. And doing so would probably yield a better return than any effort to collect more income tax.

There is plenty to do if we want to fix the tax system. But before anything useful can be done, we need to get the really important issues onto the negotiating table.

At the moment, they are not there.

  • Colin Teese is a former deputy secretary of the Department of Trade.

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