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California’s hard lesson Australia could heed: sometimes you gotta increase taxes

Long after President Obama’s re-election was secure, another election day result came in, one that may be of comparable significance in the long run. By a 54-46 margin, Californian voters approved Proposition…

Former California governor Arnold Schwarzenegger was reduced to issuing IOUs to pay the state’s bills.

Long after President Obama’s re-election was secure, another election day result came in, one that may be of comparable significance in the long run.

By a 54-46 margin, Californian voters approved Proposition 30, which raises about $6 billion a year in additional income and sales taxes to prevent further cuts in education spending.

To appreciate the historic significance of this measure, it’s necessary to go back to 1978 and the passage of Proposition 13, which slashed property taxes, and imposed high barriers to any future increase in taxes.

Proposition 13 heralded the beginning of a global “Tax Revolt”, and the end of a century-long trend towards an increase in the share of national income allocated to public services.

In this country, the campaign was taken up by The Australian and had its echoes in the “Joh for Canberra” campaign a decade later, based on a 25% flat tax. More seriously, the Hawke government adopted the Trilogy commitment, promising not to increase the ratio of public expenditure or taxation of national income. Although the commitment was temporary, the constraint has proved durable in practice.

The government revenue share of GDP was 24% in 1984, when the commitment was made, and it has remained at that level, plus or minus a couple of percentage points, ever since.

More broadly, the Tax Revolt signalled the end of the postwar era, in which the social democratic welfare state provided security against the risks of unemployment, illness and poverty, and the rise of market liberalism (commonly, though misleadingly, called ‘economic rationalism’ in Australia).

The rich got much richer, while the poor and middle classes did as best they could - in the US, not very well at all. In California, Proposition 13 produced a slow-motion fiscal crisis, as a succession of governors struggled to reconcile rising expenditure needs and stagnant revenues. The problems were exacerbated by the “three strikes” law of 1994, also passed by referendum, which packed the state’s prisons.

By 2012, California was spending more on prisons than on higher education. With the exception of prisons, services were cut repeatedly, but never enough to balance the books. In 2009, Governor Arnold Schwarzenegger was reduced to issuing IOUs to pay the state’s bills.

A series of desperate expedients eventually staved off bankruptcy, but it was obvious something had to give. The pressure was sharpest in education. In 1960, California’s Master Plan for Education gave it easily the best public education system anywhere in the world.

The University of California system, with campuses such as Berkeley and UCLA attracts most attention, but the network of state universities and community colleges served a much larger section of the population and was also excellent, as were the public elementary and secondary schools. It takes a long time to erode that kind of advantage, but decades of financial stringency have done so quite effectively.

The cuts needed to balance the budget in 2013 would have been a death blow. Any plausible solution required more tax revenue, but Proposition 13 required a two thirds super majority in the state’s Assembly and Senate to pass such a change. The Republican party, although in a permanent minority, resolutely blocked all measures of this kind. As a result, Governor Jerry Brown was forced to go to the public with a referendum to increase taxes. That’s obviously a difficult question to push, even when the need is clear.

But, finally, Californians showed they had had enough of the failed ideas of the late 20th century. Not only did they approve the tax increase, they elected a Democratic supermajority. And, in a triple win for rational policy, they relaxed the three-strikes law, making it impossible for someone to be sentenced to a 25 year-to-life term for trivial offences like petty theft.

What does this mean for Australia?

It has becoming increasingly obvious that Australian governments cannot meet their basic commitments to provide health, education and welfare services while remaining within current budget constraints. The problem is only going to get worse if the problems in school funding identified by the Gonski review are to be addressed and if initiatives like the National Disability Insurance Scheme and publicly funded parental leave are to proceed.

The Global Financial Crisis signified the failure of the free-market policies for which Proposition 13 was the harbinger. It’s time to recognise, once again, that we can never be truly prosperous without high quality public services and that the only way to pay for those services is through taxation. California has learnt this lesson the hard way. Australia can surely do better.

Join the conversation

46 Comments sorted by

  1. James Jenkin

    EFL Teacher Trainer

    I'm not sure there are parallels with California. As John describes, California had a 'fiscal crisis' and raised taxes to avoid bankruptcy. Does that support a case for raising taxes in Australia?

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  2. Michael Brown

    Professional & academic

    Rapid technological developments in health care and demographic projections indicate that healthcare and pensions will consume more and more of governments' budgets, and eventually take it all, no matter how high taxes are. Clearly we need an alternative to the simple idea that we just keep raising taxes to pay for health and welfare - new funding models are required. We already have a reasonable Australian attempt to promote self-funded retirement incomes, and now we need new ideas for health funding.

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    1. Mike Hansen

      Mr.

      In reply to Michael Brown

      "...simple idea that we just keep raising taxes to pay for health and welfare"

      Do you have any evidence that this is happening in Australia? As John says
      "The government revenue share of GDP was 24% in 1984, when the commitment was made, and it has remained at that level, plus or minus a couple of percentage points, ever since."

      "...we need new ideas for health funding"
      We know what the new ideas are - same as the old idea - privatisation - or the Americanisation of health care - good luck with that new old idea - Australians are not stupid.

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  3. Chris O'Neill

    Retired Way Before 70

    Proposition 30 is not a reversal of Proposition 13. The overall effect is to shift taxes from property (which Proposition 13 reduced) to taxes on sales and high incomes (which Proposition 30 increased).

    This is not a rational tax reform. The property lobby have succeeded in screwing the rest of society.

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    1. John Quiggin

      Professor, School of Economics at University of Queensland

      In reply to Chris O'Neill

      Tax on high income earners almost certainly more progressive than tax on property. Since most property is residential housing, I don't think it makes sense to talk about a "property lobby"

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    2. Chris O'Neill

      Retired Way Before 70

      In reply to Chris O'Neill

      I also note Professor Quiggin said nothing about the regressive effect of an increase in sales tax.

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  4. Lincoln Fung

    Economist

    The GFC has also exposed some of the fault line of the European high welfare Model, hasn't it?
    Balance is the key, not too much and not too little. And the balance may change over time too.

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    1. Spiro Vlachos

      AL

      In reply to John Quiggin

      It is astounding that you believe it is sustainable for European governments' spending to be more than 50% of their GDP. It sounds quite Leninist.

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    2. Ben Smith

      logged in via Facebook

      In reply to John Quiggin

      I'm sorry John, respectfully I must disagree with you. An imbalanced welfare system will impact the economy especially if it is funded through the bond market. Borrowing money to prop up a welfare system is dangerous because you inevitably ware down your revenue and default on coupon payments.

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    3. Mike Hansen

      Mr.

      In reply to Spiro Vlachos

      I am not sure what Lenin has to do with it Spiro but I guess throwing his name in is more subtle than calling John a "commo".

      It is astounding that you believe that government spending as a proportion of GDP has no relation to the economic cycle. Or the specific circumstances of each country.

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    4. Spiro Vlachos

      AL

      In reply to Mike Hansen

      2010 Government spending in Greece was 50% of GDP, in Australia 24%. Does Greece provide better services than Australia? Or is it that since our spending to GDP ratio is low in comparison, there is room for it to increase? Both thoughts are nonsense. We provide better services because of the strong private sector. One that is not as hamstrung as those in Europe due to excessive government regulation and interference. I would hazard to say that if you believe that we can increase govt expenditure as a proportion of GDP, without a crowding out of private sector expenditure, then yes you are a bit of a commo.

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    5. Mark Harrigan

      PhD Physicist

      In reply to Spiro Vlachos

      Typical ideological nonsense reply from Spiro

      "We provide better services because of the strong private sector"

      Some services are well provided by the private sector, some by the public and some by a mix. It depends on the nature of the service, their structure, funding, accountability and suitabilty of regulation. It is ideologically driven nonsense to assert that one is superior to the other.

      If the "private sector" privision of services is always so good as Spiro states - why is expnediture on health Services in the USA one the highest as a percentage of GDP in the western world for some of the worst outcomes?

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    6. Spiro Vlachos

      AL

      In reply to Mark Harrigan

      That's just not science now, is it?

      Govt expenditure as a proportion of GDP:

      Germany 47% (2001) 46% (2010)
      Greece 45% (2001) 50% (2010)
      UK 37% (2001) 47% (2010)
      Australia 34% (2001) 37% (2010) source IMF(2011)

      Now John, tell me how with the lowest spending as a share of GDP for these four countries, we can improve by spending more? Is it that you do not believe the crowding out phenomena that we teach to first year students?

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    7. George Takacs

      Physicist

      In reply to Spiro Vlachos

      Spiros,

      Maybe some crowding out of the private sector would be a good thing, particularly in the example Mark gave. If we, with our primarily publicly funded healthcare system, get better outcomes than the primarily privately funded US system, and at half the cost in terms of proportion of per capita GDP, what is the problem? Or does ideology trump outcome?

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    8. Spiro Vlachos

      AL

      In reply to George Takacs

      I am sure John would all for an Australian NHS. It works in Greece as well. Greece has the highest number of doctors per capita in the OECD, but to get treated you best be sure you have Euros ready. Better outcomes?

      Ideology?

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    9. John Quiggin

      Professor, School of Economics at University of Queensland

      In reply to Lincoln Fung

      I was going to respond to Spiro Vlachos, but a quick check reveals that he's a serial troll, climate denialist etc. So, there is no point in engaging

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    10. account deleted

      logged in via email @gmail.com

      In reply to Lincoln Fung

      I note that John Quiggin prefers to cast aspersions as to motive than to engage on the facts.

      That's a standard tactic in debates when one knows one has nothing to say.

      Thanks for the admission, John, it's quite rare to see such honesty from those who make a living out of other people's taxes.

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  5. Reg Olives

    logged in via Twitter

    Taxation is a lazy government's way out of better understanding and delivering the social/public good services they need.

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    1. James Jenkin

      EFL Teacher Trainer

      In reply to John Quiggin

      Hi John, I think there could well be a case for more expenditure on education.

      But I think the case needs to be made - what is the vision and what are the goals? - and then working out how much it will cost. We can't start with the assumption we need to spend more, without a clear strategy.

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    2. Mike Hansen

      Mr.

      In reply to James Jenkin

      You have not noticed those "I give a Gonski" signs or if you have, have you wondered what they mean?

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    3. James Jenkin

      EFL Teacher Trainer

      In reply to Reg Olives

      Mike, the Gonski report is basically about funding. It has some general statements along the lines of 'Australia’s schools, government and non-government, should be staffed with the very best principals and teachers'. But overall it's a resource strategy, not an education strategy.

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    4. Andrew Hack

      IT Project Manager

      In reply to Reg Olives

      Not as opposed to magical ponies...

      In private practice you can't get away with just throwing money at issues. You get chewed up by the competition. There is this thing called 'efficiency' and 'value for money'. Concepts which are foreign to big government types.

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    5. Mike Hansen

      Mr.

      In reply to Reg Olives

      @Andrew Hack

      So you believe in magical ponies!

      In the wacko world of the Randian crank, is any taxation allowed? Or should we all start building bunkers now?

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  6. Ben Smith

    logged in via Facebook

    It sounds like you are attempting to vindicate the Federal Government for what is coming. With coupon payments on Australian bonds reaching around $12 billion and rising, and a declining revenue base, future Governments shall be forced to raise taxes anyway. The Federal Government has created a rod for its own back, it introduced a new resource rent tax which failed to generate any revenue in its first few months of operation. I think solid financial management is what Australia needs in the short-run, not an increase in tax.

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    1. Mike Hansen

      Mr.

      In reply to Ben Smith

      Ah yes - the Joe Hockey/Tony Abbott magic wand of "solid financial management" which will deliver surpluses forever without having to raise taxes. Basically economic woo.

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  7. Mark Harrigan

    PhD Physicist

    I think Australians would accept an increase in taxation - BUT only under conditions that would seem to be beyond current politcal parties of any persuasion.

    Governments need to demonstrate a better track record of spending public money wisely and efficiently, not to mention levying taxes wisely and efficiently.

    Unfortunately due to a combination of lobbying by special interest rent seekers coupled with political motivation to "buy off" swing groups perceived by politicians to enhance their electorability one doesn't see much evidence of this.

    However as our tax to GDP ratio is low by OECD standards it would appear our economy COULD support a higher taxation burden.

    If only we could spend it wisely? More and better managed educational services and infrastructure anyone?

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    1. Ben Smith

      logged in via Facebook

      In reply to Mark Harrigan

      Well said. It goes right back to my point (below) about better financial management.

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    2. Robert Tony Brklje
      Robert Tony Brklje is a Friend of The Conversation.

      retired

      In reply to Mark Harrigan

      First and foremost is a crack down on tax evasion practices by the corporations and the very wealthy. Multi-national Corporations are well for the creation of completely fictitious cost and charges in tax havens to shift income away from the point where it is earned so as to avoid paying taxes, straight up tax evasion upon a massive multi-billion dollar scale.
      Don't target the little man, force the United Nations to review tax evasion and establish treaties to ensure corporations and the very wealthy…

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    1. Tim Niven
      Tim Niven is a Friend of The Conversation.

      Chinese Student and EFL Teacher at Tzu Chi University, Hualien City, Taiwan

      In reply to Peter Ormonde

      Personally, I've benefited from heavily subsidised public education and now live in the wealthy suburb of Neutral Bay earning six figures. So have the other people I work with who drive the success of our business. It was an easy ladder to climb - but the time has come to kick it away because I want five luxury cars and the tax just doesn't suit my budget priorities. Maybe the peasants need education, but they can pay for it like I didn't. Tough sh!t to them.

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  8. Suzy Gneist
    Suzy Gneist is a Friend of The Conversation.

    Multi-tasker at Graphic Design & Montville Coffee

    At the base of raising revenue is the issue of trust. Trust that our political representatives will act in the interest of all people and also trust by same representatives in the ability of the people to prioritise spending through consultation. A history of supporting private interests and neo-liberal economic outcomes over social ones has eroded this trust.
    Valuing social outcomes over solely economic ones is another shift required - if GDP is the main indicator of the health of a nation, then…

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  9. Robert Clemens

    PhD Candidate, School of Biological Sciences, Environmental Decisions Group, fullerlab.org at University of Queensland

    Thanks for the post John, great to see. Paul Krugman has long argued for an increase in progressive tax. Seems to me the redistribution of wealth to provide services for those being left behind is best left to democratically elected governments rather than the benevolence of big earners. US history suggests the 'New Deal' resulted in more of the citizens being better off. In Australia, I'd suggest there is evidence of a widening gap between those doing well and those doing less well, and there are some big challenges that will require costly solutions.

    http://en.wikipedia.org/wiki/The_Conscience_of_a_Liberal

    http://krugman.blogs.nytimes.com/2011/11/22/taxing-job-creators/?nl=opinion&emc=tyb1

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  10. Peter Ormonde
    Peter Ormonde is a Friend of The Conversation.

    Farmer

    Seems the new approach to comments stops me having a chat with Spiro here. So I'll be the first subverter.

    Are you folks still preaching the "crowding out" notion to our children? This is what happens when lecturers stop reading and learning once they get tenure. I really thought we'd got over this silly notion ... I haven't heard it mentioned in polite company for 20 years.

    As a believer in crowding out then I'd be safe in assuming that your policy prescription for the GFC would be to actually cut spending and grind the economy to a standstill or even throw it into reverse, lest all that pent up private investment be scuttled?

    Nothing seems to die harder than a bad idea.

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    1. Spiro Vlachos

      AL

      In reply to Peter Ormonde

      I am not sure what you mean Peter. An increase in any deficit needs to be funded via the issuance of govt securities, which are lapped up by the major banks. Although, we receive financial flows from overseas, these funds usually do not go into borrowing from the private sector, i.e. Investment as the purchase of new capital creates a risky asset. This is too risky for overseas lenders who would rather lend us money to borrow for housing. Small and medium enterprises (employers) are therefore left with higher interest rates charged by our major lenders. Crowing out in the 21st century.

      Note that a correct response to a recession (at least for a benevolent Govt) is to increase govt spending until unemployment falls back to its level before the contraction. Not to increase the share of GDP that is accounted for by government spending. This is where Keynesian is confused with Marxism.

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  11. Spiro Vlachos

    AL

    Come on John. Tell us why Germany such such better quality public services when their govt spends 47% of GDP and ours only 37%. Is this too much of a challenge for you?

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    1. John Quiggin

      Professor, School of Economics at University of Queensland

      In reply to Spiro Vlachos

      Umm, this isn't even good trolling. As you say, Germany spends more and gets better services as a result - compare their technical education system to ours, for example, or their transport system. If we want better services we will have to pay more. Your point is ...?

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    2. Mike Hansen

      Mr.

      In reply to Spiro Vlachos

      Spiro's new economic indicator. - the home ownership rate.

      European countries with the highest owner occupancy rates:
      1. Romania, 97.5% 2. Lithuania, 93.1% 3. Croatia, 90.1% 4. Slovakia, 90.0%

      Lowest rates?
      1. Switzerland, 44.3% 2. Germany, 53.2% 3. Austria, 57.4%

      The conclusion seems to be that the most successful states are those that spent a period of time under Stalinism.

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  12. Warwick Brown

    Retired

    On the general point of whether the public will approve specific tax increases for particular things this is nothing extraordinary and could do some good (not that all the money from this initiative will necessarily go to education in this instance). Polls have shown before that in Australia, special levies for particular projects (even public transport) could get support.

    However, there could hardly be a worse example than California (well, maybe Illinois). This measure will do nothing to…

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  13. Andrew Hack

    IT Project Manager

    Man who receives funding from government demands increase in government expenditure. Surprise!

    Another 'professor of economics' claiming the GFC was caused by 'free-market policies'. Bit of an oxymoron, though. How can you have a 'free-market, government policy', unless that policy is to do nothing.

    The author does not understand the concept of free-market economics. If he did he would understand that the markets are far from free. If he had half a clue about economics generally, he might understand…

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    1. Mike Hansen

      Mr.

      In reply to Andrew Hack

      Another high income earner arguing against higher income taxes. What a surprise.

      Andrew - your economics free Randian rant is straight from the Murdoch press/Fox News fact free bubble that lead your fellow thinkers in the USA believe that they were about to win the US Presidential election.

      They didn't - look it up.

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    2. Chris O'Neill

      Retired Way Before 70

      In reply to Andrew Hack

      Andrew Hack:

      "The Labor government believes increasing taxes on alcopops and cigarettes creates a disincentive for this behaviour. By the same logic, wouldn't higher income taxes create a disincentive for people to earn more income"

      Der, yeah. So what?

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