Joe Hockey has called for an “end to the age of entitlement”. He added on Lateline that “we need to compare ourselves with our Asian neighbours where the entitlements programs of the state are far less than they are in Australia”. He says that “the age of unlimited and unfunded entitlement to government services and income support is over”. He compares the 16% of GDP that Australia devotes to social spending with Korea’s figure of “around 10%,” which is actually 7.6% on the latest OECD figures.
Malcolm Turnbull has an op-ed in Business Spectator in which he claims that:
there is evidence that increased compulsory contributions in Australia have largely been offset by falls in other forms of private saving, and by the public cost of the tax concession – leaving national saving little changed.
He doesn’t enlighten us as to what this evidence might be.
Like most people I know, I’m obsessed with the Wire. I’ve watched the entire five-series set from start to finish twice, and I’m itching to do it again. One of the strengths of the show is the way it manages to make extremely powerful political points in a subtle way – characters don’t give moralising sermons that are directed at the audience. Instead, we’re left to see for ourselves how the interconnected web of rotting institutions that comprise David Simon’s Baltimore conspire to keep its citizens down.
One of the more heartbreaking storylines concerns the Baltimore school system, which is depicted as a bleak, bureaucratic wasteland in which talented students, teachers and administrators labour in vain to overcome the inherent limitations of the system. A big part of the problem is simple: money. Specifically, they don’t have enough of it.
The school system’s lack of money, in turn, is due to the structure of the American tax system. In the US, a lot of the functions of government like education are devolved to the local level. The amount of money that’s available for schools, police and all the other vital functions of government therefore depends on the amount of tax revenue that the local government is able to raise. That means that poor areas, in which few people work and there are no significant businesses, can’t devote much money to these services, simply because the tax base isn’t there. Thus begins the horrible vicious circle in which poor areas stay poor.
In Australia, we’ve sought to overcome this problem by equalising the funds available between states. The idea is that each state or territory should have enough resources to fund an equal standard of government services, so that citizens can expect decent schools and hospitals no matter which state they happen to live in. This principle is known as “horizontal fiscal equalisation” and it underlies the Commonwealth Grants Commission’s calculations of the share of GST revenue that each state will receive. Formally, the CGC defines horizontal fiscal equalisation as:
a distribution of GST revenue to State governments such that, after allowing for material factors affecting revenues and expenditures, each would have the fiscal capacity to provide services and their associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources, operated at the same level of efficiency and maintained the average per capita net financial worth.
Behind that dense, nearly impenetrable fog of bureaucratic obfuscation is the simple idea that all Australians should be able to expect decent government services. In practice, this means that wealthier areas, which can derive a lot of extra revenue from activities like mining, transfer funds to states without the same ability to raise their own revenue. The Northern Territory is the prime recipient state, but Tasmania and South Australia both also receive more GST revenue than their citizens pay.
With the mining boom in full swing, the West Australian government is able to raise a lot of revenue from mining royalties, as well as from increased payroll taxes and stamp duties. That means that its citizens pay more in GST than the state receives back from the Grants Commission, as some of the funds are sent to the Northern Territory and elsewhere.
Colin Barnett, the WA Premier, does not support this system. He has suggested that WA’s diminishing share of the GST funds could incite a “Tea Party style revolt” in the West. Let’s set aside the fact that WA still received more GST revenue than its citizens paid as recently as 2005/06, when the rivers of royalty gold were already flowing strongly into State Treasury’s coffers. Let’s also forget the inconvenient truth that the Grants Commission and the principle of horizontal fiscal equalisation were created for WA’s benefit when the state was a struggling economic minnow back in the 1920s.
Barnett’s position is morally reprehensible not just for its hypocrisy, but for its callousness. The notion that there should be a special deal to allow WA to retain a greater proportion of its GST payments would imply, necessarily, that WA residents would be entitled to expect better quality schools and hospitals than residents of poorer states. Poor kids in the Northern Territory or Tasmania would have a lower quality education than citizens lucky enough to be born in WA, thus further entrenching and amplifying regional inequalities in future generations.
It’s this sort of ruthless indifference to poorer areas that underpins the American approach, illustrated so vividly on the Wire. I’m not claiming that a recalibrated Commonwealth Grants Commission funding formula would lead us to a situation like Simon’s Baltimore, but I am suggesting that any deviation from the principle of citizens’ equal entitlement to government services would be a disastrous and repugnant step, however tentative, in that direction.
Until January this year, I had never lived anywhere other than Perth. It’s a great city and a great state, but the collective indignation about the state’s share of GST revenue is unedifying and does the state no credit.
Warning: this is an entire post about tax.
The Australian Financial Review today featured a cover story about the Henry Tax Review, that three-volume behemoth that landed with a thud in early May. Apparently Tony Abbott has promised to make some tax announcements in the coming days, drawing from the report.
That could mean just about anything. The review panel made 138 recommendations; some big (resource rent tax), some small (a few taskforces and ‘further reviews’), some timid (weak language on bequests taxes), some bold (congestion charges).
The Government ruled out a couple of dozen recommendations, but promised that the rest of the report represented a “long term agenda”, of which the package it announced in May was merely the “first wave”.
So, what might the Coalition have planned for its imminent announcements? Unless you’re wonkishly inclined, you might not be aware of what’s in the report. The coverage of the resource rent tax drowned out discussion of the other recommendations made by the panel.
If they’re feeling particularly bold, Abbott might commit to the panel’s recommendation for the personal income tax system. This recommendation, if implemented, would represent possibly the most radical reshaping of the personal income tax system since its introduction. It would be a big step towards that radical libertarian dream beloved by rich people everywhere: the flat tax.
Here’s my rough approximation of what the current income tax system looks like for a single income earner (not including benefits like Newstart):
The darker line is the effective marginal tax rate, the rate you pay on an additional dollar earned. The lighter grey line is the average rate, the proportion of your total income that you pay in income tax. So, if you earn $50 000, you would lose 35c of an additional dollar you earned, but all up you would pay less than 20% of your income in tax (bear in mind that these are more of less back-of-the-envelope calculations).
The picture is a bit messy because of the effect of things like the Low Income Tax Offset and the Medicare Levy.
The panel’s strategy for dealing with that messiness is to propose a de facto flat tax. The panel thinks that if you get rid of the offsets, levies, and a lot of the deductions, you can raise the tax free threshold to $25 000 and get rid of the 37c marginal tax rate. Their proposed structure looks like this:
What could possibly be wrong with that?
Plenty. You see that big flat section of the marginal rate curve, where it’s stuck at 35%? Well, 97% of income taxpayers would fit somewhere along that section of the curve. That means that almost all of us would face the same marginal tax rate. Whether you’re a junior admin assistant, scraping by on $30 000 a year, or a manager making $150 000, you’re going to face the same marginal tax rate. The elimination of the Medicare Levy also helps those at the top end; instead of facing a 46.5% marginal rate including the levy, they pay only 45c in the dollar.
This would make the income tax system a lot less progressive, a lot less redistributive. To see what the effect would be, have a look at this:
That squiggly line shows my estimate of the tax cut (or increase) you’d receive under the proposed system. There are some concentrated gains at the bottom end of the scale, and big gains to anyone earning more than about $95 000 per year. People on middle incomes would pay more tax.
Support for a flat tax is an article of faith in radical libertarian circles. It’s pure, with none of that lefty social engineering stuff that comes about when you tax poor people more lightly than rich people. The Henry Review panel recommends a big step down the path to a complete flat tax. How long would it take before that top rate was abolished altogether? After all, it would only apply to around 3% of taxpayers.
I doubt the Coalition would propose a policy so regressive, with the losers spread across the middle income ranges, in the middle of a close election campaign. Still, this recommendation will sit there for years, tempting the Tory side of politics to implement it.
I wonder if any journalists will ask them to rule it out.