Spend or cut: ALP can’t have it both ways

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Labor leader Kim Beazley is set to appeal to so-called ‘middle Australia’ with an ambitious agenda of tax cuts in the run up to the next Federal election. Talking to The Age recently, Beazley argued ‘we will be lessening the burden on middle Australia.’

Continuing in this vein, the Opposition leader argued that any tax cuts would need to be directed towards ‘that part of the taxation system which produces the heaviest effective marginal tax rates.’

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Speaking earlier this year at the National Press Club, Beazley had identified ‘middle Australia’ as those earning around $60,000 per year. At the same press conference, the Labor leader said he would like to target his tax cuts at people on around $55,000 a year.

But the real ‘middle Australian’ does not earn the average wage. Economist Andrew Leigh pointed this out in On Line Opinion, where he explained that the median adult income (i.e. the income of the person at the 50th percentile) is a far more reliable indication of what most people earn than the average, which is distorted by a minority of very high income earners at the top of the scale. The median Australian income is around $26,000 per year; less than half of that characterised by Beazley as comprising ‘middle Australia’.

As a long-time Labor member, reading that Beazley was planning ambitious tax cuts for ‘middle Australia’ was tantamount to being kicked in the face. After years of campaigning for the kind of tax reform necessary to meaningfully expand Australia’s ‘social wage’, I now question just how a Beazley government would be able to afford to increased spending in vital areas, such as:

  • a universal dental care program as part of Medicare
  • a slash of hospital waiting lists and investment in medical training and health infrastructure
  • support for the expansion and maintenance of the Pharmaceutical Benefits Scheme (PBS),
  • a cut in the fees burden of Australian students by raising the HECS repayment threshold and setting uniform national HECS rates
  • the removal of full-fee courses for domestic students
  • the reduction of student: teacher ratios in public schools, and provision of desperately needed school infrastructure
  • increased welfare payments and a more relaxed means tests for single parents, the aged, students and the disabled, while providing additional support for carers of all kinds
  • increase Commonwealth funding for aged care, with the intent of lowering fees, providing additional staff for nursing homes and improving quality of care
  • investment in public telecommunications infrastructure, including the full re-socialisation of Telstra’s mobile network, and the rollout of fiber optic cable enabling high speed broadband access for all Australians
  • improved transport infrastructure such as road and rail with a movement toward providing free public transport
  • tax incentives and assistance for democratic co-operative enterprise, and
  • tax credits for low income earners, and for those moving from welfare to work.

Tax reform could also provide scope for targeted industry assistance, including research and development grants for innovative business, and targeted incentives for high-wage, high-skill ‘sunrise’ industries.

While Beazley has committed to a ‘nation-building’ agenda, the kind of initiatives mentioned above are simply not achievable without additional funding; funding which can only come through increased revenue, or through cutting existing programs such as the Family Tax Benefit or private health insurance rebate. Even assuming that Beazley commits to public borrowing to provide for an expansion of infrastructure — an uncertain prospect given his commitment to budget surpluses – debt servicing costs need to be factored into this equation.

Fortunately, Beazley’s commitment to provide relief to those on high effective marginal tax rates can be interpreted as support of those moving from welfare to work. However, tax cuts for people on as much as $60,000 per year – those whom the Opposition Leader refers to as ‘middle Australia’ – will only further reduce the progressive nature of a system already skewed in favour of the wealthy as a consequence of ‘reforms’ enacted by the current government. What is more, research demonstrates that voters would overwhelmingly prefer additional public expenditure on health and education instead of tax cuts. As former ALP parliamentarian John Langmore argues in Coming to the Party,

‘The [Australian Survey of Social Attitudes] confirms the findings of other opinion polls that have consistently shown that the proportion of Australians who prefer higher public spending on health and education to lower taxes has been rising steadily since 1990 to be a substantial majority in 2003. It is therefore an amateurish electoral misjudgment to claim that tax cuts are the highest political priority.’

Thanks to Ditchy

Instead of embracing a program of tax cuts for some illusory ‘middle Australia’, Labor needs to consider broader prospects for tax reform in order to finance a progressive expansion of Australia’s social wage.

Possible options for funding a progressive agenda to achieve distributive justice and improve Australia’s social wage include;

  • the abolition of dividend imputation;,
  • repealing capital gains tax concessions;,
  • raising a progressively-scaled Medicare Levy and possibly also an Education Levy;
  • introducing a 4% Infrastructure Levy on business (Australia’s corporate tax rates are already well below those in the United States);
  • introducing wealth and inheritance taxes for those with assets of $1 million or more;
  • introducing a ‘Media diversification levy’ of 1% on media advertising revenues with the intent of broadening Australia’s public sphere;
  • Seeking international co-operation in the introduction of a ‘Tobin Tax’ on international financial transactions;
  • A small carbon tax at the rate of $5 per tonne, providing an ideal vehicle for raising vitally-needed revenue to fund innovation and investment in renewable energy.

We will now consider some of these options in greater detail;

Abolition of dividend imputation (credits for dividends to compensate for company tax), and the introduction of wealth and inheritance taxes can be justified by the growing inequality across the Australian social landscape. According to a NATSEM (National Centre for Social and Economic Modelling) report released in 2002, the top 20% of Australian households owned more than half of all household wealth — more than forty times as much as the bottom 20%, and more than double the wealth of the second richest 20%. The richest 20% owned 90% of all shares, while according to an earlier study from 2000, the richest 1% owned half of all shares and investments. Here is a clear case where firmer measures are needed for the redistribution of wealth through the tax-transfer system and social wage.

Meanwhile, progressively scaled and more sharply redistributive Medicare and education levies would appeal to many Australians by redirecting revenue measures to specific programs and priorities in service delivery. It is these areas that rank highly as causes for concern amongst the majority of Australians who would rather see better health and education outcomes, as opposed to further tax cuts. An additional ‘infrastructure levy’ of 4% would not be too onerous upon business, especially when you consider that Australia’s current rate of 30% is already 10 percentage points lower than the effective US rate of 40%. (35% federal rate plus a 5% state rate). An infrastructure levy would be an ideal way of raising the corporate contribution to infrastructure such as roads, rail, ports, communications and education — infrastructure from which businesses benefit.

Finally, a ‘media diversification levy’ could be used to sponsor greater media diversity from traditional daily and weekly newspapers, to emerging forms such as internet journals and forums, and international co-operation in the introduction of a Tobin Tax could also serve to tame financial market fluctuations and provide a new, alternative source of public revenue.

Further equity measures include the introduction of tax credits for low income earners and those moving from welfare to work. Indexing the bottom two PAYG income tax brackets would stop bracket-creep from eroding the earnings of those on lower incomes. Tax credits would provide a less costly alternative to raising the PAYG income tax-free threshold, targeting tax relief directly to those who need it most.

This does not mean that the tax-free threshold should not be raised to counter the recent effects of bracket creep. The long term aim, however, should be the elimination of its effects on low income earners through indexation. In tandem with such measures, the PAYG income tax system should be progressively restructured so that when considered on its own, the effect of reform in this area is revenue neutral.

By far the most important equity measure would be the generous expansion of Australia’s social wage; through an increase in public expenditure for welfare, services and infrastructure across the board.

ALP members and others in a position to make a difference must speak up now. They must ensure Labor’s tax policies embrace distributive justice and social wage expansion without needlessly delivering windfalls to those who have already benefited from over a decade of conservative rule. The Left, in particular, needs to move now to extract a meaningful compromise on these issues. The above agenda, while it may seem radical by Australian standards, would still leave Australia well behind Scandinavia and Western Europe in its provisions for a social wage, vital infrastructure and industry incentives. It is by no means likely that the entire of the above agenda will pass Labor’s 2007 National Conference. However, the arguments for reform need to be made strongly in the hope that some compromise will arise that, while imperfect, serves those most in need.