The Prime Minister has promised that his Tax White Paper will not be about increasing the tax take. This is heartening, because a look at the numbers confirms that the Government’s Budget woes are not due to the Government forgetting to tax us.
After allowing for inflation, Commonwealth tax collections per person have increased by more than 15 per cent since introduction of the GST. Moreover, the tax-to-GDP ratio is higher in Australia than in many countries with which we compete for investment and skilled workers, including South Korea and the United States.
And, although the Commonwealth tax-to-GDP ratio is currently below the post-GST average, the Government expects bracket creep to deliver an above-average tax‑to‑GDP ratio within two years, and a far heavier tax burden after that.
Yet Labor and the Greens want the tax burden to rise, and argue that some taxes can be increased without hurting everyday Australians. It’s an appeal to the politics of envy, and it’s false.
The Labor/Greens alliance wants to increase taxes on superannuation, the mining industry, rich individuals and large corporations. The problem is, heavier taxation of superannuation would penalise saving, a Commonwealth tax on mining would encroach on the States’ tax base, the top marginal tax rate is already 49 percent, and our corporate tax take is the second highest in the world.
Each of these proposals represents an increase in income tax. Economists familiar with tax theory (like Shadow Assistant Treasurer, Professor Andrew Leigh) know that income tax is the worst tax of all.
Income tax represents more than two thirds of the Commonwealth Government’s tax take. If there were any further opportunities to extract money via income tax without causing huge damage, you can rest assured that previous governments would have already figured them out.
Any increase in income tax would require us to employ more ATO staff to engage in the unproductive activity of chasing tax dollars, adding further complexity to a tax system that already drives Australian taxpayers crazy.
As well as rejecting calls to increase income tax, we should reject calls for a return to a carbon tax or an abolition of fuel tax credits.
A return to a carbon tax would hurt our economy and wages, as shown by the previous Government’s modelling. Even the Garnaut review suggested that carbon pricing would be (slightly) in Australia’s interest only if the world’s major emitters adopted carbon pricing. As decisions on global emissions are currently made by the Chinese Government, Vladimir Putin, sundry Middle Eastern dictators and the US Congress, we shouldn’t hold our breath.
Abolishing fuel tax credits would increase tax on heavy vehicles. This would add an arbitrary and hidden cost to the everyday products that heavy vehicles deliver. It would also increase tax on off‑road fuel use, such as generators. Taxing make-your-own electricity but not mains electricity makes no sense.
The GST causes far less damage than these taxes. As such, a case could be made to apply GST to currently-exempt items like food, healthcare, education and childcare — and even to increase the GST rate — so long as this was part of a package that clearly reduced the overall tax burden each year.
But a GST increase would still be damaging. It would exacerbate the inequity that occurs when some avoid GST through cash-in-hand transactions and small purchases from overseas. And it would discourage backyard businesses from growing to the point where they need to collect GST.
Rather than look to increase tax, we need to recognise that current Budget difficulties are driven by excessive spending.
After accounting for inflation, Commonwealth Government spending per person has increased by more than a third since the introduction of the GST. It is currently more than a quarter of GDP and well above the post‑GST average.
Growth in Commonwealth spending over the last decade has been fastest in the areas of health, schools and universities, housing, environmental protection, road and rail transport, and support for the arts and sport. Cuts need to be made in all these areas. And since public sector wages have grown faster than private sector wages over this period, a sustained period of public sector wage restraint is also in order.
A substantial improvement in the Budget position is required to sustain everyday Australians in the years and decades to come. This improvement needs to come through lower government spending, not higher taxes.
