Income and Property Tax Should be Increased, Not the GST
Australia’s governments face major and growing budget problems. We have to reform and increase Australia’s tax base. This is essential for our democracy because democratic governments need room to flexibly provide services that voters clearly want. And the responsibilities and revenue of our three levels of government need to fit better into a sensible whole.
In the words of the Australian Council of Social Service, if we fail to change “Governments will be trapped in a vicious cycle of austerity and recrimination”.
Australia needs at least an extra $60 billion per year in tax revenue. In order to promote more jobs and national income, fairness and sustainability, this revenue should come mainly from income and property taxes and not from increased consumption taxes
There are structural problems in both spending and revenue.
On the ‘spending’ side, demand for services and investment is increasing and concessions such as superannuation are huge and growing rapidly.
On the ‘revenue’ side, collections from the Goods and Services Tax (GST) and Company Tax are declining as a proportion of Australia’s Gross Domestic Product (GDP). Taxes are under pressure due to low growth, lower export prices, tax-dodging and unsustainable tax deductions. Revenue-raising taxes across Australia total about $440 billion or about 27.5% of our GDP, well below the 33.7% OECD average.
It is estimated that, after making substantial spending savings, over the next 30 years Australian governments will need at least $60 billion extra per year in 2015 dollars (and possibly up to $170 billion) to cover existing budget shortfalls and new programs.
How is this calculated? Vigorously pruning low priority spending and waste could provide $90 billion a year ($180 billion a year savings, less half used simply to extend existing programs to more people). Existing budget shortfalls total about $60 billion per year. New programs and investments over thirty years will add $90 to $200 billion per year.
Raising income and property taxes
How should Australia Raise Extra Revenue?
I propose a package to progressively increase revenue, mainly from income and property taxes and not from increased consumption taxes. This would provide $60 billion per year in extra revenue and promote jobs and income, fairness and sustainability.
Australia’s Company Tax rate is below many other countries, including the USA, it’s on the average of the ten largest economies, and is very close to the OECD average.
$46 billion extra per year would come from slightly higher and more progressive Personal Income Tax rates and reduced concessions (superannuation, capital gains, negative gearing, trusts, dividend imputation etc).
Expanded Land and Resources Taxes would deliver an extra net $12.5 billion per year. Most stamp duties would be abolished.
The company tax rate would not be reduced. Companies should pay their fair share of tax. Profit is a sound and fair tax base, broadly reflecting companies’ ability to contribute. Australia’s Company Tax rate is below many other countries, including the USA, it’s on the average of the ten largest economies, and is very close to the OECD average. Further, dividend imputation substantially lowers tax for local investors in Australian companies. Cutting company tax rates would be self-defeating – benefits to economic growth are arguable, the main beneficiaries would be foreign investors and revenue would be cut (optimistic forecasts predict that extra growth would, after ten years, restore half the revenue initially lost). Payroll taxes, which discriminate against employment, should be reduced first.
Savings could also be made in the over $7 billion per year fuel excise tax credits paid to farmers and miners.
This package would make our total tax system more progressive:
- Those on low incomes would contribute a total of 24% of their income (as now);
- Those on average incomes would contribute 28% (up three points); and
- Those on high incomes would contribute 35% (up seven points).
I do not favour increasing the GST. Net extra revenue would be very small. GST revenue growth has been low - from 2008-9 to 2012-13 Federal Government tax revenues excluding GST increased 30%, State and Local Government revenues plus GST increased only 13% and GST increased only 8%.
The Australian Government is considering raising the GST, and New South Wales Premier Mike Baird recently proposed that GST should rise to 15%. Extra revenue would range from nil to just $5 billion per year because avoidance and evasion would increase, consumption of GST-taxed items would fall and compensation would be substantial.
Evidence shows that the overall level of taxes does not change jobs or national income. But taxes that reduce excessive inequality can impact, especially where inequality has increased, as in Australia, or the public believes inequality is excessive or unfair. A May 2015 OECD report found that rising income inequality reduced economic growth in 1990-2010 by around 5% across OECD countries, mainly because people on lower incomes had less opportunities.
Most people want a “fair” tax system where they contribute to a fairer society and civilised progress, especially through education. Polls show an increasing majority of Australians – now 80% - want more spending, mainly on health, schools and infrastructure, ahead of tax cuts.
To promote sustainability, revenue-raising taxes need to rise at least in line with GDP, attract high revenue for each dollar of collection costs, avoid volatility and result in a sustainable tax system which the public respects. The package outlined could be applied incrementally over 30 years to give a better breakup of revenues and responsibilities between levels of government.
With $60 billion more tax revenue, would Australia’s taxes be above other developed economies? No. Australia’s tax revenue would be 31.25% of our GDP, 2% below the OECD average (see Figure 1).
To avoid being “trapped in a vicious cycle of austerity and recrimination”, our political leaders should not promise to cut or cap taxes. They should pledge to provide for future services and development that Australia needs, whilst fixing Budgets in a fair, long term way.
Australia needs at least an extra $60 billion per year in tax revenue. In order to promote more jobs and national income, fairness and sustainability, this revenue should come mainly from income and property taxes and not from increased consumption taxes.
Should Australia increase its taxation by $100 billion to be in line with the average for OECD countries of 33.7% of GDP? Maybe.
Or should Australia go even further and raise our taxation to Scandinavian levels? I suspect that’s a step too far. Scandinavian people are openly proud of the quality of their services and infrastructure, and of the taxes that pay for them. They’ve enjoyed a high degree of personal and political co-operation over a long period and have avoided scare campaigns to reduce tax and services. That culture requires long-term consistent policy agreement. And we’re certainly not there.
The democratic challenge for Australia’s future is to encourage greater co-operation to reform and increase our tax base. We need to give our democratic governments room to flexibly provide services that voters very clearly want. And the responsibilities and revenue of our three levels of government need to fit better into a sensible whole. Australia’s democracy requires these changes.
Image credit: Laura Thorne, Flickr