What’s fair about tax?

Bankrupting Australia would fail the ultimate fairness test

Ramesh Thakur

Economics and finance, Social policy | Australia, Asia

20 May 2016

A growing sense of entitlement in modern Australia is risking the economic health of the nation and  could ‘kill the goose that lays the golden eggs’, warns Ramesh Thakur.

On ABC’s Q&A on 9 May, audience member Duncan Storrar asked Assistant Treasurer Kelly O’Dwyer: “If you lift my tax-free threshold that changes my life. That means I get to say to my little girls, ‘Daddy’s not broke this weekend, we can go to the pictures’. Rich people don’t even notice their tax-free threshold lift. Why don’t I get it? Why do they get it?”

The audience erupted in applause at the poster man of a loving father unjustly victimised by a corporatist tax structure.

Fairfax columnist Josh Gordon opined that Storrar made his point about the budget doing little for people on low incomes “with simple eloquence” that “resonated.” Megan Doherty reported on analysis from The Australian National University (ANU) that budget reductions in welfare payments will make the bottom fifth of families worse off by $1209 in 2018-19, while the top fifth of income earners will gain an extra $211 per year. “The report appears to confirm the concerns of Geelong dad Duncan Storrar who caused a stir on Q&A this week,” Doherty concluded.

The sense of justice, right and wrong, is one of the most powerful human emotions and shapes individual and social behaviour, sometimes even at considerable economic cost. But there’s many a slip between fairness as principle and actions that translate it into policy. It is deeply unfair to look at assets portfolios at retirement, ignore earnings during working life, and heavily tax the prudent and thrifty citizen looking to a self-reliant payout to minimise the income gap from working into retirement, in order to subsidise those who frittered away comparable working incomes on frivolous expenditures.

To come back to Doherty’s interpretation of the ANU study, on that basis, any budget that gives a bigger break to higher income earners is unjust. Fairness can only ever be in one direction culminating eventually in total confiscation of income above a threshold – which too will face constant pressure for downward adjustment. Over time, the numbers of net beneficiaries (those who get more state benefits than they pay in taxes) will swell and the economy will be bankrupted. Known as killing the goose that lays the golden eggs, the argument was captured in Margaret Thatcher’s warning that the trouble with socialism is that eventually you run out of other people’s money to spend.

Now link this to Storrar. My immediate twofold reaction to his question was unexpectedly tough, probably because I have seen (not experienced) poverty at its harshest extremes.

More on this: Let's get real on tax Australia | John Hewson

His question and the strong audience applause are symptomatic of much that is wrong with ‘entitled’ modern Australian society. Storrar does not have a right to money earned by others. Because the creation, ownership and enjoyment of wealth requires the provision of public goods, everyone contributes to the costs of maintaining the public service infrastructure which underpins the provision of public goods. As US Supreme Court Justice Oliver Wendell Holmes said in 1927, taxes are the price we pay for civilisation. The transfer of income is made possible by the sense of community and rests on the generosity of society as a whole. It is not an entitlement to be demanded by anyone.

Second, the brutal but simple reality is that the lot of the poor, vulnerable and disabled is infinitely worse in the poorest countries of the world. The rich will always manage to look after themselves whether their country is rich or poor. Being a wealthy country does not guarantee that the bottom fifth will be looked after. But being a truly poor country does guarantee that the bottom fifth cannot be looked after through a public welfare system.

Wealth creation and economic growth are necessary for affordable social services. Policies that promote and reward growth are therefore essential for the self-interest of the Duncan Storrars of this world. Choices come down to three: keep benefits reasonably generous for a small cohort of beneficiaries; cut benefit levels as recipients grow; or maintain the generous social welfare system for growing numbers until the nation goes bankrupt like Greece.

The key question is not if the tax readjustments give more to the top or bottom fifth based on a flawed notion of fairness. Rather, which is the best scheme to promote and sustain national prosperity so some of the financial gains can be used to cushion the deprivations of those less fortunate?

The unfairness charge is better directed at the refusal to end negative gearing which badly distorts the housing market, locking out young Australians from home ownership; at the resistance to scrutinising predatory and rapacious banking practices; at the failure to end the generous perks of ex-politicians; and at the reluctance to address the perpetuation of inter-generational inequality through death duties and inheritance taxes.

We need to have a national and international conversation about three critical questions that political leaders have been too timid to address. To avoid eventual bankruptcy with a steady drift into state dependency, does it make policy sense to cap the proportion of net beneficiaries, say at one-third of the population? Similarly, should there be a cap on the share of the total tax intake that the top fifth of income earners pay, to avoid fewer and fewer taxpayers subsidising a growing share of the population?

If these two questions are ignored, society will divide into those who work for a living and those who vote for a living. The growing vote bloc of the entitled will capture increasing benefits through de facto cash-for-votes transfer schemes.

But third, to reverse the rising tide of inequality that has fuelled growing global anger against politics as usual, should there be a cap on CEO compensation packages tied to maximum multiples of salaries for their employees? Maybe we should revive the 1:12 movement where no CEO can earn more in a month than the average worker earns in a year?

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One Response

  1. Carol Ey says:

    Thanks for being the first commentator I have read who has appreciated that many of those caught up in the super changes are not the very wealthy, but middle income earners who have saved into super rather than enjoy lavish lifestyles or negatively gear property. I would also agree with your other suggestions for raising revenue.
    However, in relation to the Duncan Storrar issue, one aspect that you do not seem to have considered is that increasing the income of lower paid workers typically results in increased local consumer spending, whereas reducing taxes on the wealthy does not have the same positive impact on the economy. It was one of the reasons the Rudd stimulus packages were so effective.

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Thakur, R. (2016). What’s fair about tax? - Policy Forum. [online] Policy Forum. Available at: http://www.policyforum.net/whats-fair-tax/

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