The art of taxation

ON LINE opinion – Australia’s e-journal of social and political debate

Posted Friday, 1 April 2005

According to the Macquarie Dictionary the word “re-form” is a verb meaning “to form again”. Whereas the word “reform” is a noun meaning:

The improvement or amendment of what is wrong, corrupt, etc: social reform … to restore to a former and better state; improve by alteration, substitution, abolition, etc. to cause (a person) to abandon wrong or evil ways of life or conduct … to put an end to (abuses, disorders, etc) … to abandon evil conduct or error.

Politicians use the noun “reform” as if it were a verb. Whatever alterations they intend to the make to the welfare system, no matter how draconian, are announced as “welfare reform”.

In 1975, the Whitlam Government seemed to accept the suggestion by Professor Ronald Henderson in the First Main Report of the Poverty Inquiry that the social security system of income support be changed into a two- tiered Guaranteed Minimum Income scheme. Such a scheme would have resulted in $900 million dollars being transferred from more affluent Australians to low income Australians. Had such a Guaranteed Minimum Income been introduced, then that would have been real welfare reform. Instead, since 1975, Australia has become a far more unequal society.

Recently, Treasurer Costello has been speaking about “tax reform” and just like his welfare colleagues, is confusing “re-form” and “reform”. He simply asserts that cutting taxes improves the tax system. The welfare system and the tax system are intimately linked. There is no difference to the budget bottom line between evading tax and fraudulently claiming social security. Governments can whip themselves into a salivating lather pursuing welfare clients over quite small amounts of money yet happily ignore the $8 billion in tax that the rich in this country evade each year. The social security system pays welfare payments to some families and the tax system is the vehicle used to pay other families. Until 1927 the Taxation Department administered all social security payments.

The tax debate in Australia is invariably plagued by partisan pundits preaching to an ill-informed populace. It is widely believed that Australia is a high taxing country. Compared with many OECD countries we are a low taxing country. Part of the public confusion derives from the fact that Australia relies substantially upon federal income taxes but does not have the death, wealth, ecological or other taxes that many comparable countries have. It is for this reason that much of the focus falls on the rate of income tax rather than on the total tax take.

The other side of the debate is what is done with the taxes that are raised. Australia does not provide the range of health, welfare and community services which other OECD countries, particularly continental European countries, supply to their citizens. Any sensible tax debate should take account of how taxes are raised, from whom they are collected and on what they are expended. The ways in which the tax and welfare systems interact should also be considered.

In Australia, many families and individuals face very high effective marginal tax rates precisely because of the abysmally designed multiple withdrawal rates of the tax and welfare systems. A large part of the problem is created by having a “means-tested” rather than a universal social security system. Another part of the problem is the progressive income tax regime. The effective marginal tax rates are even more of a problem for some when extra income places them in a higher tax bracket and leads to withdrawal of social security simultaneously. In addition some low-income recipients can also lose pharmaceutical and other concessions or services at various steps in the income ladder. As a result some low-income earners can lose 200 per cent of extra income earned.

The solution: real reform of the tax and welfare systems

Julie P. Smith in her book Taxing Popularity makes the point that progressive rates of taxation were “a distinctive Australian invention – along with the stump jump plough”. The purpose of having those with higher income paying a greater percentage of tax than those on lower incomes is to increase equity. For some taxpayers this system works but others find ways around the system. Many higher earners in fact pay a lower percentage of their income in tax than those who earn much less.

What is needed is a fair system of taxation and welfare that is widely understood and respected. To reinforce this point Julie Smith quotes Jean Baptiste Colbert (1619-83) who said, “The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing.”

It is possible to improve the tax and welfare systems simultaneously and to increase knowledge, compliance and efficiency. Instead of the all too easy to evade progressive tax system we currently have, it is possible to build equity in to the system up-front, by paying all permanent residents a universal Basic Income and partly financing that with a flat rate income tax. All tax-free thresholds would be abolished so tax would be paid on the first through to the last dollar earned. If nothing else changed, the rate of the flat tax necessary to pay for a basic income would be in the order of 45-50 per cent. But equity could be further enhanced by increasing consumption taxes and by adding wealth, environmental and death taxes. Such additional taxes would lower the required flat rate income tax to below 40 per cent. These taxes would fall on people who could afford them and at a time when they had the capacity to pay.

The necessary level of the universal basic income would be the base rate of the single age pension plus $500 per year to help compensate for the loss of pensioner tax-free thresholds. Children under the age of 16 years living at home would be paid half the basic income rate. All income support payments: pensions, benefits and allowances would be abolished. The failed attempt to build fairness into the targeted social security system through means and asset testing would be consigned to the dustbin of history. Everyone would pay tax and all would receive welfare.

After paying tax and receiving the basic income:

  • those on lower incomes would be advantaged compared with the present system;
  • people who earned between $20,000 and the average income would be in about the same position as they are now; and
  • richer Australians would pay more tax.

Because worker and workless would be paid a basic income this would put an end to the corrosive downward envy which has been eating away at our humanity in this country for the last nine years. It would end the moral panic about “people getting something for nothing” and the ridiculous suggestion that if a government gives people without income enough to live on, they are obliged “to give something back”. A basic income would put an end to perverse incentives to remain on welfare because, unlike the present system, people will always be better off whenever they earn extra income.

Governments would not have to pay the administrative costs of maintaining an exceedingly complex welfare system. There would be greater compliance with the tax system because it would be understood, people would see they get something as a result of their permanent residence in this country and they would regard the system as fairer. In addition the government would be better placed to monitor tax collection once it lets go of its obsession with chasing welfare cheats.

Such a change to the tax and welfare systems would be a reform in the sense meant by the Macquarie Dictionary. A Basic Income would ensure no one lives in poverty. It would allow people to know what they are paying in tax and what everybody is getting as a right of membership of this society and it would provide an efficient base on which to build a more productive and decent country.