This is an edited version of an address to the Annual Congress of the Australian Council of Social Service, April 3rd 2009, by Julian Disney, Director, Social Justice Project, University of NSW
– promoting investment in affordable housing instead of promoting speculation in land and financial markets– promoting workforce participation instead of creating poverty traps– eliminating loopholes exploited by the asset-rich – private companies, trusts, golden handshakes and offshore income
The main role of governments is to promote economic and social opportunities for all their citizens. This includes opportunities to learn and work, to enjoy good health and relationships, to have affordable housing and transport options, to raise children and pursue pastimes, to be treated fairly and to be helped when hardship strikes.
The tax system is, of course, the main source of money on which governments can draw to promote these opportunities by, for example, funding education, health care, social security and transport, or by promoting economic or community development to provide people with work and income.
Public discussion of taxation often focuses on personal income tax scales. But much greater impacts, whether beneficial or not, can result from other aspects of the tax system. These impacts can affect when people are born and how they are educated, where they live and for how long, whether and how they raise a family, and even what they eat, drink and drive.
These impacts come from the design and structure of the tax system, relating not only to the way wages are taxed, but also to the provision of financial benefits that would otherwise be provided through the social security system (eg., Family Tax Benefits); tax concessions and exemptions for particular types of economic activity (Capital Gains Tax, Fringe Benefits Tax); and tax rules concerning specifice activities such as superannuation, housing, health insurance and child care. The design can create effects which greatly increase or reduce hardship and inequity.
Total tax revenue in Australia is very low by international standards, despite our large area and rapidly growing population, which might be expected to require above-average levels of public investment. On the most recent available figures tax revenue would need to increase by 10-20% to reach the OECD average as a proportion of GDP.
There are major unmet needs in areas like health, aged care, child care, education and transport.
The global economic crisis will sharply reduce government revenue while greatly increasing needs for public expenditure. The same applies to the longer-term effects of our aging population.
Governments should seek to avoid avoid distortions that provide unjustifiable tax advantages for some types of economic or social activity to the detriment of others and unnecessary loss of revenue through gaps and loopholes in the tax system.
Areas of current concern with the current system include:
The failures in our tax system tend to affect more severely those people who have lower incomes and lesser opportunities, and promote unfairness and divisive pressures in the community rather than equal opportunity and social inclusion.
Some aspects of the current system are unduly criticised, often with the aid of distorted statistics and inexpert media. When compared with both overall and specific taxes in other OECD countries, we find that Australians are not overtaxed, and we do not need to lower taxes in Australia to be internationally competitive.
The long-term investors we need will base their decisions on deeper assessments of competing tax systems and on factors such as a well-educated workforce and political stability.
The current woes of Ireland and Iceland starkly illustrate the dangers of attracting speculative or ill-conceived investment through excessively low tax rates.
The economic crisis is increasing the need to avoid imposing high effective marginal tax rates on lower-income people, especially those who can only find part-time or intermittent work. Key reforms would involve:
House price inflation has severely damaged our economy by inflating debt, increasing pressures on interest rates and wages, fuelling excessive luxury consumption and eventually creating a collapse in the housing industry. The main enduring victims will be lower-income private renters and would-be homebuyers who do not have access to substantial family assistance.
It is futile to expect ‘market forces’ to fix the problem when they are so severely distorted by the unrestricted exemptions which owner-occupiers enjoy from capital gains tax, land tax and the pension assets test. A better approach would be to:
Tax concessions for superannuation can be a desirable way of encouraging saving and reducing hardship in retirement. The current system, however, provides little or no tax concessions for lower-income Australians and very large concessions for those on higher incomes. Most higher-income people do not need this added incentive to save.
A much more cost-effective and equitable approach would be to:
Manylower-income people have special mid-life needs relating to parenting, unemployment, etc at least as pressing as those in retirement. Early access to some accrued superannuation should be allowed on a broader, fairer and more cost-effective basis; and tax concessions should be provided for designated Lifelong Savings Accounts into which contributions (up to a modest total) and withdrawals can be made at any time, subject to age related limits.
Each of these changes would make the tax system simpler, fairer and more cost-effective. Most would enhance productive economic development and none would retard it. A number of them are eminently suitable for immediate implementation to help minimise the adverse impacts of the recession, promote recovery and reduce the erosion of government revenue. Others could be planned for introduction over time, possibly as part of broad packages which provide a suitable balance of impacts.
(The taxation scorecard has been prepared by the Community Tax Forum and is available at http://taxwatch.org.au)
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