Author: The Hon Bob McMullan is the Shadow Treasurer. This address was delivered to the 2003 AFS Conference: Investing in Ourselves: Fair and Effective Taxation for an Enterprising Australia.
Simon Crean in his Budget Reply speech quoted his father's favourite quotation about tax, from the American jurist Oliver Wendell Holmes, who famously said: "When you pay taxes you buy civilisation".
Similarly, the Commission for Taxation and Citizenship in the United Kingdom in its report Paying for Progress, published by the British Fabian Society, found a direct connection between peoples' views of taxation and their views of citizenship and society.
In Australia, while that fundamental recognition exists, Australians are not convinced that if tax is the price we pay for living in a civilised society, then it follows that the more tax we pay, the more civilised we become. It is important for us to recognise there is no automatic reason why they should think that.
Those who advocate new functions for government must win the support of the community for the argument that the new functions are so valuable, worthwhile or necessary, that we should be prepared to pay more tax for them.
This is not a task that is impossible; but it is a task that is more difficult than is sometimes acknowledged by those on the left of Australian politics.
One example can be seen in the response to an excellent piece of research on the 2001 federal election by Shaun Wilson and Trevor Breusch of the Australian National University. This research was interpreted by many as showing that Australians are prepared to pay more tax to fund higher quality services. But this is in fact a misreading of their research. Wilson and Breusch's study does show that a growing number of Australians are prepared to pay more tax or forego tax cuts in return for improved services. But they make it clear that that is - or was at the 2001 election - a minority view.
Recent polling conducted for Hawker Britton, a government relations consultancy from Sydney, prompted a similar response. This polling found that a majority of Australians were prepared to forego their tax cuts if the money was spent on health. This is an interesting argument, but my suspicion is that it is more of a commentary on the perceived trifling and inadequate nature of the tax cuts than a commentary on overall attitudes to tax cuts versus public spending.
We need to address the important issues of the adequacy of taxation to meet social objectives, the structure and composition of our taxation system, and the social, economic and environmental consequences of the tax system. But to address these issues we need to go back to first principles.
The Fabian Society report I referred to before offers an unremarkable but worthwhile description of the three roles of taxation:
1. Tax as a source of revenue for government;
2. Tax as an incentive or disincentive; and
3. Tax and its role in redistribution.
The paper also outlines ten principles of taxation. Not all of these are relevant to Australia, and I don't agree with all of them. But from these principles we can set out six principles to guide Labor's thinking on taxation in Australia.
1. Progressivism and equity
2. Efficiency in the economy
3. Incentives to reduce socially damaging behaviour
4. Administrative efficiency both for government and taxpayers
5. International cooperation to maintain effective tax systems; and
These ideas on the role and principles of taxation give us some worthwhile guidance on the directions we should take in reforming our tax system.
A comprehensive assessment needs also to look at the risks and burdens associated with taxation, which we should seek to minimise.
The first and most obvious is the burden of taxation on individuals and families. The money governments take in taxation is money not available to individuals and families to meet their everyday needs and aspirations.
The second burden of taxation is its capacity to create economic distortions. In his excellent book Where to from here Australian egalitarism under threat, Fred Argy says taxes have efficiency costs because they tend to distort the economic decisions of consumers and producers, forcing them into less-preferred choices. Taxes also have administrative and compliance costs, and encourage avoidance and minimisation practices that are wasteful and distorting.
In recent years it has been extremely difficult to conduct a rational discussion of taxation policy. The only acceptable topic for discussion has been the competition to see who can produce the lowest taxes, rather than on striking a balance between the need to keep taxes to a minimum consistent with providing the requirements of a decent society and the social aspirations of our citizens. This has been similar to the broader debate on fiscal policy, in which rational discussion has been extremely difficult because of the surplus fetish.
Some have claimed that good fiscal policy can only be achieved by delivering permanent surpluses irrespective of the economic circumstances. Fortunately, this fetish has been killed off. It was killed off primarily by the fact that Peter Costello ran a budget deficit in 2001-02. He tried to explain it away by claiming that it was a necessary measure to provide economic stimulus. In fact, we all know it was actually a panicked reaction to what was then the government's declining political fortunes.
The final nail in the surplus fetish was driven in by the Howard Government's refusal to criticise any decision of the Bush administration. This prompted Peter Costello to defend the Bush tax cuts and the massive budget deficits which it will generate.
Mr Costello told the parliament on 5 February:
The US President sent his budget to Congress in the last day and has put forward a budget program with a projected deficit of 2.8 per cent of GDP for the United States in 2003‹a sum of some $US300 billion. In Australian terms, that would be the equivalent of a deficit in our budget of $A20 billion in the forthcoming year. Obviously, that is very substantial fiscal stimulation, which we welcome. And we welcome the fact that fiscal stimulation, together with monetary policy, is now being put forward to stimulate a return to sustained growth in the United States...
In the wake of Mr Costello's argument that his 2001-02 budget deficit is justified, and after his claim that George Bush's deficit is justified whenever he does it and for whatever purpose -- because it must be right because he is the President of the United States after all and a Republican at that -- the facile suggestion that we should have a surplus under any circumstance will not arise again for quite some time.
That takes us back to the more rational proposition that we should balance the budget over the cycle. Accepting this proposition means accepting that we will have surpluses in good years and deficits in bad.
I hope we can also move to a more rational basis of tax policy discussion in the future. This Fabian Society seminar is a useful place to start.
After addressing the role of tax and the first principles, we should address frankly the question of whether it is a good thing or a bad thing or whether it matters at all that the Howard government is the highest taxing government in history.
Some commentators have suggested it really doesn't matter at all or that it is an inevitable by-product of the continuing and growing demand for public services.
To an extent, the second argument, about the rising demand for services, has merit -- although it is extremely difficult to point to the improved or increased public services that are being provided at the moment by the Howard government's record tax take. But I believe that the decision to focus on Peter Costello as the highest taxing Treasurer was correct and appropriate, for the following reasons:
... First, it helps explain why Australian working families the battlers are feeling under real financial pressure despite the reports they read each day about how happy they should be about the economy;
... Second, families know they are taking on more and more of the responsibility for funding what used to be core public services such as health and education and they wonder why in spite of this they are paying more and more tax; and
... Third, it explains why Labor believes we will be able to go to the next election offering tax cuts. We don't need more revenue. The current high level of tax should be enough to meet our commitments. The misguided priorities of the Howard Government will give us ample opportunity to reallocate money to meet the objectives of an incoming social democratic government.
The Baby Bonus remains the starkest example of these misguided priorities. It gives assistance to families based on the principle that those with the highest income get the most assistance and those with the lowest income get the least.
The government has estimated the Baby Bonus will cost $500 million a year when it is fully operational, but the scheme is so poor, and therefore the take-up rate is so low, that it may ultimately cost less.
Labor is committed to abolishing the Baby Bonus program and redistributing the money to assist families in more equitable ways. We will outline the details of our alternative over the months ahead.
The only tax increase we have in mind is the continuing commitment we have had for some years of a small, 0.1 percentage point levy on top of the Superannuation Guarantee Charge, which we will use to guarantee a national scheme of employee entitlements. This would replace the taxpayer funded and totally inadequate government guarantee of employee entitlements. This is hardly a generous guarantee. It guarantees Australian workers eight weeks redundancy pay if they are low-paid, while the government supports the highest paid executives having 52 weeks and more in redundancy pay. This means $2 million redundancy payment for the wealthiest, compared with $5000 for the average worker. Needless to say, we remain committed to our comprehensive, totally-funded scheme to replace the government's unfair approach.
There is another tax change we have proposed that is relevant here. It is the so-called golden handshakes tax. Our proposal is to deny tax deductibility to companies for golden handshakes to executives for the portion of their package above $1 million. While this will generate some revenue in the first few years, it is not our ambition that this should be a revenue measure. This fits rather into the role of using the tax system as a disincentive to anti-social behaviour. What we want is to have the golden handshakes cease. If companies wish to pay executives handsomely, they should disclose the agreements and the shareholders should approve them. Let them make these excessive payments, and society will get its share of these payments through the income tax system. But let there be no more golden handshakes subsidised by the taxpayer.
The next point about this being the highest taxing government is that while the $4 tax cut for most Australians was derisory -- and as the Hawker Britton research shows, not valued significantly by taxpayers Labor will support the tax cut and still responsibly pay for our spending commitments. We have shown that we can manage the Budget responsibly and at the same time deliver the $4 tax cut in full, save Medicare, save the Murray River and offer tax cuts on superannuation. That is a worthwhile social package of which the tax cut is a modest and useful element.