The ethical basis of a good tax system

‘Q 1.1 In considering the community’s aspirations for the type of society that Australia should become over the next two decades and beyond, which key features should inform or drive the future design of the Australian tax‑transfer system?’

This question opens the Henry Tax Review’s list of hints for writing submissions to an inquiry which will hopefully result in a major overhaul of Australian taxation and payments system. It is an important question, because it puts society back on the economic agenda, breaking from the failed neoliberal ideal in which both tax and the public sector are minimized.

So, what sort of society do we want?

The global financial crisis revealed flaws in the argument that the pursuit of rational self interest and growth in free markets is the main driver of human happiness. Irrational exuberance and greed create toxic societies. Alternate viewpoints can offer economic frameworks that recognise that societies are the sum of human connections and that the quality of those connections determines quality of life.

To sustain better societies we need tax policies that encourage a judicious mix of individual and collective effort. How much is collected and what our representatives and public servants do with it should be determined by a vision of how many risks we want to share collectively and what levels of social equity we regard as necessary.

In the absence of such vision, cutbacks and shortfalls in funds for public health, education and community services have created tensions and inflated demand for user-pays alternatives in private markets. Citizens cannot be redefined as customers without consequences. The unequal competition for services and funds undermines collaboration and creates two tier services, in which there are choices in the private sector for those who can afford them, alongside residual public services for those who can’t.

The need to solve social, environmental and economic risks is already increasing demands on governments. Only a rise in collective risk sharing can meet these demands equitably. Unfettered growth has in the past helped to paper over rising inequities, but with our existing growth model under question, it can no longer be relied upon to provide money to remedy existing injustices and new problems. We will need to build more resilient social connections to manage the redistribution necessary to maintain civility and create sustainable equitable lifestyles. This will require larger public spheres, not smaller ones. Our relatively low level of overall taxation and public spending, compared with other developed nations, may be insufficient to manage an ageing population, climate change, and mobile workforces, as well as increasing demands for education, care and other services which need to be paid for.

Some of the current social exclusions and tensions derive from the privatisation of risk taking to individuals and family units over the last three decades. It has created pressures for more public subsidies to individuals and families so they can afford to purchase private schooling, private health and their own retirement income. Tax rebates and deductions have assisted private consumption while other money is distributed to support those who cannot earn enough income. This type of policy skews both the decisions and perceptions of the general public.

A fundamental rethink of the roles of markets and of the public state may help increase our perception that governments can be trustworthy, competent and ethical. Social democratic governments need to be seen as fair and effective when they collect and redistribute what is, after all, our money. The very act of taxing, funding and spending constitutes a public affirmation of what is valued and what is not. The choice of who benefits and who loses is the de facto expression of official approval and disapproval.

Tax/transfer reform must therefore reverse the situation in which which tax expenditures tend to favor the rich and income support penalises the poor. This would involve decreasing those tax incentives that favour high income earners such as super tax concessions, capital gains tax, and a range of other deductions, and reducing the double penalties of high marginal tax rates for those on payments. There must be a recognition that a $5,000 super tax concession and a $5,000 Baby Bonus both cost the public purse the same net amount and should be jointly considered in a tax policy review.

The second part of question 1 from the Review’s submission guidelines is more worrying. More public spending should be on the agenda but the wording below suggests that this is not so. No community representatives were on the Taskforce, so maybe it wasn’t even discussed.

‘Q1.2 Assuming that the absolute size of government will not fall, should (and can) Australia nonetheless aim to reduce the burden of taxation over time by promoting faster economic growth than public spending growth? Can it be demonstrated that alternative tax policies could help deliver that outcome?’

Why does the Review assume that tax is a burden? This should not be an official viewpoint. While some may complain that taxes are too high this view should not be legitimated. Official documents should counter the often promoted view that ‘taxation is theft from the entrepreneurial and the thrifty and welfare payments encourage sleaze and sloth’. This self serving myth is too often reflected in the media and by spinners who claim that such prejudices are widespread. As Ross Gittins has pointed out, even when surveys consistently show that people are prepared to pay higher taxes for services, the results are not believed by politicians.

The ‘taxes are bad’ cry derives from now-discredited views about the supremacy of the free market and the evils of government interventions that limit individual freedom. When we recognise that humans are essentially connected and interdependent and that it is usually our relationships that define us, we open up the possibility for a much better tax system. This system should be based on a much fairer distribution of both risks and
rewards. It should fund shared services and balance individual desires with  collective work and the pooling of funds for the common good.

This may be seen as a feminist viewpoint, as most women are acutely aware that many of their needs (both those that they meet and that they need met) are not easily supplied by markets. Publicly funded collective provision of personal services and income support are therefore often more important to women than men. Women are still the main unpaid carers in households but need services to allow them and those in need of care to access outside services. Education, health and personal services are seen as both public and private goods that contribute to both individual/family quality of life and the public good.

The unmet needs and inequities of the present will continue to grow. So the total tax to GDP ratio must not fall below its current level, and should in fact be increased. There are public funding gaps, such as increasing payments for people who cannot earn enough to support themselves or their dependents. Many low paid workers are women, whose pay rates are affected by the ongoing undervaluation of feminised jobs such as child care, as well as by the proportion of unpaid care that they provide. Public funding of community organisations’ wages and services is therefore another case in which more spending is needed. This kind of spending contributes to both family wellbeing and economic growth.

By asking whether Australia should ‘promote faster economic growth than public spending growth’ the Review reveals its assumption that economic growth is in opposition to public sector growth – presumably based on the idea that more public spending crowds out private investment. The current economic crisis suggests that this assumption may well be quite wrong. On the contrary, a secure public sphere with better payments, services and funding may well create an economic environment that increases people’s capacity to take productive economic risks, knowing that their social wellbeing is more secure. The use of wider income redistribution and better social wage payments together may lead to a much more creative and resilient society to deal with future tensions.

If our income support system is to be seen as fair and antagonism to higher taxes is to be reduced, we’ll need to use payments for a wider range of circumstances than the currently approved lot. The antipathy towards ‘middle class welfare’ reveals a gender-based disapproval of social support: payments that relate to child bearing and rearing are often seen as unnecessary if the family unit is not low income, while tax expenditures, which provide higher income earners, mostly male, with rebates such as capital gains tax and super taxation are rarely criticised as ‘upper class welfare’. Those who receive tax deductions and rebates accept them as a right, even if they don’t need them. If more payments were seen as a right, then more people may become recipients and therefore have a stake in higher taxes.

This means transforming how the transfer payment system is seen. Rather than only being useful for transfering money from higher to lower income people, it should be seen as a system that supports people across the life cycle, based on their ability to contribute and their need for support at that point in their life. Assisting those categories of people who have extra costs that contribute to public well being, is referred to as horizontal equity. It pays to ensure this allows similar spending power for people on similar incomes. Therefore payments to compensate for the costs of children, disability/mobility costs, for caring time, lack of access to paid work and other socially approved activities may be appropriately subsidized for all who incur them, regardless of income.

The combination of universal payments with a progressive tax system would reduce the need to means test, stop people fiddling to get payments and avoid creating a sense of resentment amongst those who just miss out. In countries with more universal payments, higher tax bases are regarded as much more legitimate.

The tax system must be the public affirmation of shared (public) responsibilities. It must therefore have the capacity to redistribute resources both over the life cycle and between categories of groups and individuals to create the society we all would like to have.

The above suggestions will be fleshed out in a longer submission I am preparing for the Women’s Electoral Lobby. Other articles in this issue deal with other aspects of reform but I would like to note that I fully support Ian McAuley’s plea for more services as a ‘social wage’ and better rates of individual pay.