Tax and inequality
Tax and inequality
Terri Butler & Andrew Giles*
A good society – a more prosperous and more equal one – rests, among other things, upon tax settings that are genuinely progressive, and felt to be both fair and efficient. Taxes are more than simply the price of civilisation: they profoundly shape economy and society. Tax policies are matters of political choice. Past experience shows how tax choices have exacerbated inequality. It also shows how tax choices can reduce inequality. Taxes aren’t just about revenue raising, they also shape economic, social and political behaviour.
Australia, with record levels of inequality, is set for a new Gilded Age which the lucky few can enjoy at the expense of confined and insecure lives for the many. Despite more than 25 consecutive years of economic growth, Australian workers are experiencing the lowest wages growth recorded. This is compounding wider income inequality. The gap in earnings between the richest and the poorest Australians has increased dramatically and this has a lot to do with tax settings. The research of Andrew Leigh, with the late Anthony Atkinson, has shown reductions in personal tax rates were responsible for nearly half the increase in the income share of the top 1 per cent of Australians.
Increasing income inequality is exacerbating inequality of wealth. Earnings from capital significantly outpace wage growth. The wage share of national income has been falling continuously and dramatically since the late 1970s. Disparities of wealth are even greater than disparities of income. Wealth is concentrated at the top, with the bottom 40 per cent of Australians owning only 5 per cent of the total national wealth.
Excessive levels of inequality impact negatively on prospects of economic growth. That the poor are getting poorer is only part of our inequality story. There is no clear evidence of a positive impact on economic growth or job creation from tax reductions.. Indeed, Christine Lagarde, head of the IMF, has warned of the risks of a race to the bottom on tax (as well as on regulation, and trade).
We believe that government should promote egalitarianism and prosperity – our nation’s values, and our sense of purpose. These concepts are closely linked: we believe that more equal societies are capable of greater prosperity. High levels of inequality represent a handbrake on economic growth. Without prosperity, there’s nothing to redistribute.
Choosing tax policies
Tax policies are important political choices. It’s simply not the case that Australia is ‘over-taxed’ (whatever that means). Australia is in fact a low-tax nation, the fifth lowest in the OECD when comparing the ratios of tax to GDP. The suggestion that Australians are somehow weighed down by an excessive tax burden isn’t just a furphy, it is a major barrier to the tax conversation we need to have. It implicitly blames too-high taxes for the real stresses on individuals and households – rather than more plausible, and inter-related, culprits like low wages growth, job insecurity, high asset price inflation and the high levels of private debt that households are bearing.
The OECD uses a standardised measure to compare tax rates across countries. This takes account of income taxes and employee social security contributions minus transfers received (like Family Tax Benefit). Australians contribute less compared with people in other nations. For the average married Australian worker with two children, take-home pay, after tax and family benefits, was 87.1 per cent of their gross wage. The OECD average was 85.4 per cent.
Importantly, these figures apply to taxable, not gross, income. Some people are very good at making sure their taxable income is much, much less than their gross income – like some of the 60,000 or so Australians who are own negatively geared property and declare no taxable income. The capacity of many to minimise, or simply avoid, their obligations when many others cannot is a critical element of a tax debate.
Our income tax system is highly progressive, and one of our most effective means of stemming the flow of inequality in this country. Of course, the very rich are more likely to own income-generating assets. The growth in returns on such investments usually outpaces growth in wages and growth in the economy as a whole. The result is that the incomes and wealth of the very rich grow more quickly than those in the middle. But without our income tax system’s progressivity, the gaps would be even greater. The US income tax system is much less progressive than ours, and this shows.
Corporate tax rates
Liberals and much of the business and financial community hold that lowering corporate tax rates is a self-evident economic good (though they rarely ask ‘good for whom’). Many countries that have lowered their corporate tax rates have not had better growth outcomes than Australia. It is asserted that a lower company tax rate is necessary to attract investment, but this flies in the face of the inconvenient truth that most of our capital from overseas today comes from jurisdictions with lower rates than Australia’s.
Thomas Piketty contends that there simply isn’t empirical evidence to support the ideological argument that lowering the corporate tax rate boosts growth. Research by the Australia Institute demonstrates that, since we last lowered the rate in Australia, the wage share of the economy has in fact fallen. Moreover, the research shows there is no relationship between lower corporate income tax rates and economic growth. Nor is there a clear relationship between lower taxes and investment.
We think that placing more money in the hands of senior managers and shareholders does not give the capital deepening and better human or social capital required to increase productivity and/or create more jobs. “Trickle down” is no sounder now than it was thirty years ago – unless the problem we are trying to solve is how to give more to those who already have more than enough.
Australians should not let conservatives get away with pretending that individuals carry a huge personal tax burden, or that our overall taxes are too high compared with other countries. They simply aren’t. And nor should we accept that progressivity – high marginal tax rates for those on incomes that are double (or more) average earnings – is a problem.
Unless and until we can overcome these powerful falsehoods, it will be next to impossible to successfully mount a political campaign to make more effective use of the tax system to challenge inequality. We must have regard to wider economic consequences of tax decisions, and, noting the powerful signalling effects of taxation, the democratic and societal consequences too. Tax can be the key to reducing political as well as economic inequality, by responding to the real sense of grievance that people are shut out from decision making.
Yet, the haves continue to ask for more. Nearly twenty years ago, Peter Mandelson, an architect of British New Labour, famously said that he was ‘intensely relaxed about people getting filthy rich as long as they pay their taxes’. But, too often, they haven’t been paying. The social contract between globalisation’s biggest winners and the rest of us has been torn up: by the winners. Revelations in the ‘Paradise Papers’ and the ‘Panama Papers’ show a shocking, worldwide epidemic of tax evasion by significant political figures. These follow the ‘Luxembourg Leaks’ which demonstrated the lengths many multinationals went to in order to avoid taxation.
Tax avoidance goes to the very legitimacy of taxation systems and to the capacity of governments to ensure that everyone pays their share. The system is structurally unfair. Because some people are able to avoid taxes, public revenue is reduced and less able to fund services and infrastructure. Domestic and international effort to reduce tax evasion is imperative.
Whichever came first, political and economic inequality are now running together. At the most fundamental level, people both have less social mobility, and feel that they have less social mobility. This diminishes confidence that power relationships can be reshaped. Right around the developed world, there is a powerful sense that the rules of the economic game have been rigged, against the interests of ordinary people.
Tax and the good society
The proposition that we are a high-tax nation is the first conservative falsehood that has shaped Australia’s tax debate. A second, equally powerful, untruth is that government spending is ‘unsustainable’. When conservatives assert that Australia’s fiscal challenge is all about constraining spending, and not concerned with revenue sustainability, this is an ideological proposition. It is a direct attack on our social compact, on those policies which have constrained inequality.
There’s no formula for the perfect tax-to-GDP ratio. But there are features of a good society, many of which are derived, directly or indirectly, from tax policies. For example income distributions in Denmark and the other Nordic countries are considerably less unequal than here. The size of the state is considerably larger than it is in Australia. In part these countries generate more tax revenue due to having more direct taxpayers with more people in work (also by having settings designed to boost workforce participation), who earn higher wages. And economic growth has been comparable to, indeed greater than, growth in many other OECD economies. These examples spur us to be skeptical at claims that current levels of Australian government social spending are ‘unsustainable’.
The key lessons of the recent past are that the need to respond to growing inequality does not go without saying, and that good policy is of itself insufficient. There is an urgent need to articulate, clearly, consistently and constantly, a framework for approaching the tax debate, in order to build and sustain support for, and a commitment to, those reforms which would found a more equal and more prosperous nation. It cannot be assumed that this goal is shared by all Australians, even though it is in Australia’s interests.
Those seeking to respond to growing inequality should be making the case for measures which:
- support our social compact with one another;
- promote sustainable and inclusive economic growth; and
- ensure fairness in the distribution of wealth, income and life opportunities.
Tax and Fairness
The challenge is to locate proposed tax changes within a wider agenda for a fairer and more prosperous Australia. When the economist Anthony Atkinson asked what could be done to reduce inequality, he found the maths – for the UK – were such that tax changes alone cannot do the trick, as there’s simply too much ground to be made up. Questions of the distribution of market incomes need to be addressed; so do fiscal measures. Reducing inequality is not all about tax settings and changes, but these measures are fundamentally important to making progress: they can set the agenda and send powerful messages about what sort of nation and society we want.
Through such a lens, those who are alarmed at rising inequality should be bold in exploring new ideas and in making the case for applying old ideas to changed circumstances. One of these is how to have a genuinely progressive approach to taxing income in light of changes occurring in the nature and methods of work and employment.
Those of us who want to contest neoliberal ideas that the collection of tax is somehow inherently illegitimate should also consider the importance of language. The way that tax revenue is used, and the way that the use of tax revenue is described, matters. Talking about tax is actually talking about how we see ourselves: our priorities, the things we value, the things we’d like to change, and, fundamentally, whether it’s ‘them and us’, or just one big ‘us’. It must be the latter. We are all in this together. Rising inequality is causing our social compact to fray. That compact needs to be rebuilt, and reinforced.
Terri Butler is the MHR for Griffith; Andrew Giles is the MHR for Scullin
This is an edited from a longer article originally published by the Australian Fabians.