Interview: Head On
Unions: Do You Have a Moment?
Industrial: Vital Signs
Economics: Taxing Times
Environment: It Ainít Necessarily So
History: Melbourneís Hours
Immigration: Opening the Floodgates
Review: Pollie Fiction
Poetry: The Cabal
The Locker Room
The Cowra Clause
Belly Spreads The Word
Lying Lies And the Lying Liars Who Tell Them
The Federal Treasurer, Peter Costello, has initiated an inquiry into the current structure of the Australian tax system and how it compares with other countries. The inquiry is being conducted internally in the Treasury and there is no opportunity for submissions to me made by the general public.
Some influential people have already been making their voices heard about the sorts of 'reform' that they would like to see. For example, Malcolm Turnbull, the Liberal wealthy businessman and Liberal parliamentarian, has been getting a lot of attention during the last year for his view that the top rate of income tax should be cut. The presumption is that this would benefit the economy because high income earners would then have even greater incentives than they currently enjoy. To be fair to Turnbull, he has also been advocating the closure of some of the tax loopholes that allow high income earners to avoid paying their proper share of income tax in practice. Given the circles that Turnbull moves in at 'the top end of town', he is presumably well familiar with those rorts.
Indeed, there may be a case for redistributing the tax burden among the wealthy, if that is what Turnbull's proposals imply. But there is a much stronger case for redistributing the tax burden to the wealthy and away from lower and middle income earners. It is that potentially progressive aspect of the tax system that should have priority.
Can we expect progressive tax reform from the Howard government? I think I just saw a pink elephant flying overhead... Indeed it is hard to imagine any progressive policy coming from a government whose industrial relations 'reforms' have the clear intention of squeezing the wages of individuals with lower incomes who do not have significant 'economic clout' in the wage bargaining process.
People in the labour movement, and those generally concerned with fairness in Australian society, should be making their voices heard about what tax arrangements would produce fairer outcomes. Otherwise there is a danger that we face twin assaults on what remains of Australian egalitarianism - a more unfair wages system and a more unfair tax system too. We need to think carefully about what arguments can be mounted for reforms that could take us in a quite different direction.
Why reform tax?
The basic function of tax is to raise revenue to finance government expenditures, but how this is done has a major bearing on the degree of economic inequality. It hardly needs to be said that the Australian taxation system is currently not well suited to achieving egalitarian objectives.
The wide array of allowances against income tax (so-called 'tax expenditures') reduces a nominally progressive income tax scale to one which is less progressive in practice. The gulf between the top marginal rate of income tax and the company tax rate provides a strong incentive to conceal individual income as company income. And taxes on corporate income are often very low in practice because of the widespread use of tax minimisation schemes. Meanwhile, the 'dividend imputation' system allows individuals to get their income from share ownership tax-free, because the income is taxed previously when it accrues as company profits. Capital gains taxes are offset by the deductions allowed for inflation in the value of assets and the exemptions accorded to owners of owner-occupied properties. There is an absence of wealth taxes, other than land taxes that are levied by State and local governments. There is no inheritance tax.
Changes to government policy in recent years have made the tax system more regressive. The introduction of the Goods and Services Tax was a case in point. As a flat-rate tax on goods and services, the GST bears less heavily on high income recipients than a progressive income tax. The reduction in income tax that was introduced as a 'compensation' to the public for the introduction of the GST meant an overall reduction in the progressivity of the tax system.
The Howard government's decision in 1999 to reduce capital gains taxes also had a markedly regressive effect on income inequalities. In effect, it halved the tax on income from capital, relative to income from labour. It caused a decline in the annual capital gains tax revenue from $5.3 billion to $3.3 billion over the next three years. It produced a situation whereby it has become more tax effective to buy and sell assets than to work for a living. The official tax statistics also showed that, in the year following the capital gains tax cuts, some 68,000 taxpayers earning over $100,000 - less than 1% of all taxpayers - received half of all the capital gains received by individuals that year. So the benefits resulting from the capital gains tax cuts have been remarkably concentrated among the richest Australians. They amounted to an average tax cut of $220 per week for those top 68,000 income recipients.
The 'dividend imputation' system has also had a particularly significant and more long-standing effect on income distribution. Ostensibly designed to alleviate 'double taxation' of dividends, this system allows tax paid by companies to be refunded to shareholders receiving franked tax-free dividends. The effect has been a massive redistribution of income to shareholders - again illustrating the more favourable treatment of income from capital than income from labour.
Equally striking in terms of regressive distributional effects were the income tax changes announced in the 2005-6 Federal government budget. The tax cuts were worth around $7 a week to someone on an income of $55,000 per year, but $42 a week to those on $80,000 or more. All these are illustrations of the abandonment of egalitarian goals in the design of the tax system.
Progressive Tax Reform
The drift towards a more regressive tax system and the corresponding abandonment of egalitarian goals can be reversed. There are numerous tax changes that could redress economic inequalities if there were the political will to do so. The income tax scale could be made more progressive. The capital gains tax rate could be restored to the level before the 1999 cuts. 'Dividend imputation' could be cut to half of the current level, or eradicated altogether. 'Tax expenditures' could be reduced. The company tax rate could be aligned with the top marginal income tax rate. The tax exemptions applying to 'family trusts' - commonly used as a general means of tax avoidance - could be eliminated.
A yet more fundamental shift would be to put greater emphasis on taxation policies affecting the ownership of assets. These are potentially more effective than income taxation as a means of tackling economic inequality. This is because the distribution of income depends substantially on the inequality of ownership of the labour, land and capital resources producing incomes in the form of wages, profit, rent and interest. 'Who owns what' substantially determines 'who gets what'. Concentrated ownership generates greater income inequality, whereas a less concentrated ownership would lead to a more equitable distribution of income even without any changes in existing wage rates, profit rates, rents, interest rates and income tax rates. So taxes levied directly on wealth could have radically redistributive effects in the long term.
At present increases in wealth are subject to capital gains tax, but this only applies when assets are sold and thereby converted into income. An annual wealth tax (eg. on asset holdings of more than a million dollars) would more effectively capture some of that private wealth for public purposes. Inheritance taxes could also capture part of the unearned incomes which perpetuate economic inequality inter-generationally. Such taxes could impart more flexibility in the composition of the capital-owning class over time, although they do not undermine the property relationships on which the continued functioning of capitalism depends.
Australia is currently unusual in having no wealth or inheritance taxes. Extra tax revenues derived from their introduction could be used to finance government spending on public education, health, transport infrastructure and other services which would create more equality of opportunity throughout society, as well as contributing to a better quality of life. The result would be a more egalitarian society, less fractured by the tension between private affluence and public squalor.
Policies to introduce wealth or inheritance taxes would be resisted, of course. Strong vested interests are at stake, not to mention the widespread belief that such taxes affect the rights of the elderly regarding the disposition of their property. There are also real concerns about whether inheritance taxes, or wealth taxes more generally, might generate incentives for the concealment of wealth in non-productive forms. Finally, it needs to be noted that, in the Australian case, the reintroduction of inheritance taxation would require a Federal government initiative because it was inter-State competition that propelled the dismantling of the taxes that formerly existed. All such concerns would need to be addressed by a government committed to using wealth taxes to serve the goals of social justice and equity.
Land Tax Reforms
One particularly interesting aspect of wealth taxation is the role of land. As the most immobile of resources, land cannot be shifted or hidden. As environmentalists emphasise, it is also appropriate to tax the 'gifts of nature' that have been appropriated for private gain. On this reasoning, land tax could potentially feature prominently in a process of tax reform aimed at reducing wealth inequalities, and also at producing a more effective use of natural resources.
Landowners currently capture unearned income at the expense of the rest of the community. Rising land values are typically the product of social processes rather than individual effort. For example, land values usually increase when new public infrastructure is built nearby. Landowners can also receive tremendous windfall gains when their land is rezoned to allow development. Yet more fundamentally, the driving force causing higher land values, particularly in urban areas, is the nature of the urban growth process itself. Whilst demand for sites for residential or commercial activities is continually growing, the supply remains fixed, so the result is a long-run tendency for inflation in land values. Without adequate taxation on land to recoup this social dividend, the rising land values resulting from the community's economic activities add to existing landowners' wealth, while those unable to afford land are further excluded from the market.
These processes are a major contributor to economic inequality. They have a dubious ethical basis too: those fortunate enough to have owned land in desirable areas capture the economic surplus at the expense of those making a productive contribution to its creation, and at the expense of future generations saddled with higher prices of access to urban land and housing.
Land tax can counter these adverse features of property markets and the distribution of unearned wealth. Levied on the site value of the land, it provides a means of stabilising land prices by reducing the attraction of real estate as a speculative investment. All the State governments in Australia already have their own structures of land taxation, but land for owner-occupied housing is exempted in every case. Local government rates are also, in effect, land taxes, because they are usually levied on the unimproved capital value of properties, but their form varies considerably from locality to locality.
To be effective in addressing economic inequality, a land tax must be uniform nationwide. This would prevent property speculators from simply shifting their investments inter-State to reduce their exposure to land tax. One option, then, would be to replace the current array of State land taxes and local government rates with a nationally uniform scheme. This could be linked to a reform of local government finance - for example, replacing the existing local government rates with an apportionment to local governments from a uniform land tax.
More radically, a nationally uniform land tax scheme could be linked to a replacement of the existing local and State governments by regional governments. That could provide an institutional basis and a fiscal means of seeking more balanced regional development. In general, land tax would generate more revenue from those regions where land price inflation is most pronounced. So the metropolitan areas would tend to be more highly taxed than non-metropolitan areas, particularly rural areas, thereby tending to encourage regional decentralisation of population and industry. That tendency would be further accentuated if additional revenues from a more comprehensive system of land taxation were used for financing improved infrastructure and services in non-metropolitan areas.
The current tax arrangements reflect the Liberal agenda, favouring capital over labour. The pervasive emphasis on promises of income tax cuts limits the government's capacity - whether Liberal or ALP - to spend on socially necessary infrastructure and public services. So the generosity to the owners of capital is matched by a corresponding austerity in respect of welfare recipients as well as wage-earners. It is an unhealthy situation, threatening the legitimacy of a good public sector financed by taxes and providing for the collective needs of society. It creates a more unequal and divided society.
It is reasonable to anticipate that Treasurer Costello will be aiming to cut the higher rates of income tax, and maybe company tax too. He may not embrace the proposals coming from Malcolm Turnbull, but there is a common element in all Liberal Party thinking on this issue. That common element has everything to do with the interests of the major weath holders but nothing to do with the interests of the labour movement.
There are clear alternatives for tax policy that the labour movement could be pushing for, including generating more revenue from taxes on wealth. This is a need for genuine reform, but not for the sort of neoliberal 'reform' envisaged by the likes of Turnbull and Costello.
It is a tough call to take on this issue at a time when dealing with the Howard governments IR changes is top priority for the trade unions, of course. But there is a common element - the struggle for an Australia in which the principle of social justice is a central to public policy.
Frank Stilwell is Professor of Political Economy, University of Sydney
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