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Has Labor’s tax aversion left them on the verge of electoral defeat?

Regardless of the result of the next election, the ALP will hold an inquiry into what went wrong. How on earth, they will ask, could a government presiding over low unemployment, low inflation, low levels…

Small tax, or Big Picture? Labor wants to be seen as low taxing, but are actually big spending reformists. AAP

Regardless of the result of the next election, the ALP will hold an inquiry into what went wrong. How on earth, they will ask, could a government presiding over low unemployment, low inflation, low levels of public debt and a triple A credit rating be seen as poor economic managers at a time when the rest of the major economies are struggling?

And the answer they will find is a simple one. The government simply didn’t collect enough tax.

Last night’s budget papers make clear that if the proportion of national income collected as tax (the so-called tax/GDP ratio) had remained at the 23.7% the Rudd Government inherited from the Howard Government, then last night’s budget would have been comfortably in surplus even after the expensive Gonski and NDIS announcements.

Similarly, if the government had simply maintained the Howard-era level of tax it wouldn’t have had to cut payments to single mums last year, it wouldn’t have had to scrap the buyout of coal-fired power stations and it wouldn’t have had to cut funding to universities.

Much was made last night by the political commentators of Wayne Swan’s attempts to “booby trap” the budget for an incoming Abbott government. But it was Rudd, Gillard and Swan who walked into John Howard’s booby trap. In fact, so effective was Howard’s trap that many in the ALP don’t even see that they are in it.

Last night the treasurer bragged that “if we were taxing Australian families and Australian businesses like our predecessors did, we’d have an extra $24 billion in taxes in 2013-14 and be comfortably in surplus every year of the forward (estimates)”.

That’s right, that was the Labor Treasurer bragging that he was much better at lifting the “burden” of tax on Australian families and businesses than his neo-liberal counterparts.

The fundamental problem for Labor, however, is not that some of them want to be low taxing neo-liberals; it’s that most of them want to be big spending reformists. Gonski, NDIS, hospital reform, public transport and homemade submarines all cost serious amounts of money. And while a country as rich as Australia can easily afford them, it can only afford them if it’s willing to collect the requisite amount of tax.

So, how did Labor wind up with a strong economy and a weak budget? The same way it wound up with the Pacific solution: John Howard set them up to fail.

In the lead-up to the 2007 election the economy was booming and revenue was flooding in. Howard and Costello had used that revenue to fund substantial income tax cuts and for the 2007 election campaign they promised even more. The Labor party promptly promised almost identical tax cuts which it implemented in the years following Kevin Rudd’s election win.

Those tax cuts have had a big impact on the current budget. Along with those Howard and Costello made in their last three years in office, these cuts are now costing the budget $40 billion a year.

Costello was able to keep the budget in the black because of the cyclical increase in revenue from the boom. But this increased revenue was always going to be temporary. With that temporary windfall gain they funded a permanent cut to income taxes. This was always going to be unsustainable; when the economy returned to more normal economic conditions the structural budget problems were revealed.

These income tax cuts have made the budget unsustainable by creating a structural hole in the ability of the government to collect revenue. Last year’s budget lost a quarter of the income tax it could have collected because of the tax cuts. Such a big change to the ability of the budget to generate income was always going to have an impact when the boom slowed down.

The income tax cuts were also heavily skewed to high income earners. Over the past seven years they have cost the budget $169 billion, of which 43% or $71 billion went to the top 10% of income earners. This was more than the total benefit of tax cuts to the bottom 80%, who together received only $63 billion.

The income tax cuts mainly increased the threshold at which the top marginal tax rate applies. In fact, this threshold was increased so much that as of last year only 2.7% of taxpayers faced the top tax rate.

Of course, it isn’t just the income tax cuts that have prevented the Gillard government from achieving its big reforms and cherished budget surpluses. There was the mining tax - designed to appease miners rather than collect revenue - and the carbon price that came with such generous compensation it runs at a loss.

Australia is one of the richest countries in the world, living at the richest point in world history. The idea that we can’t afford to invest in excellent health or education is ridiculous; the claim that we can’t afford to provide more help to poor countries is appalling.

Australian governments can afford to do anything they want, but they can’t afford to do everything they want. Especially when they want to brag about how little tax they collect.

One day soon the ALP is going to have to decide if it wants to chase the Liberals down the low tax/fend for yourself American path or talk honestly with the public about the fact that tax is the price we pay to live in a civilised society. Hopefully the party chooses the latter. And hopefully it hurries up and actually makes a choice, because the current farce is as destructive to public debate as it is to policy development.

Richard Denniss is the Executive Director of The Australia Institute, a Canberra based think tank. Matt Grudnoff is The Australia Institute’s Senior Economist.

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15 Comments sorted by

  1. Greg North

    Retired Engineer

    Some interesting paragraphs there Richard and I particularly like
    " The fundamental problem for Labor, however, is not that some of them want to be low taxing neo-liberals; it’s that most of them want to be big spending reformists. Gonski, NDIS, hospital reform, public transport and homemade submarines all cost serious amounts of money. And while a country as rich as Australia can easily afford them, it can only afford them if it’s willing to collect the requisite amount of tax. "

    Even nearer…

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    1. Henry Verberne

      Once in the fossil fuel industry but now free to speak up

      In reply to Greg North

      Howard left a huge tax problem booby trap; he enacted large and unsustainable tax reductions to bribe the electorate and Labor now faces the unenviable task of undoing those reckless reductions.

      And I doubt that the LNP will reduce the boats to any degree- due to push factors not pull factors as may soon find.

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  2. Greg North

    Retired Engineer

    The other aspect you could approach Richard with a rephrasing of your heading.

    Is why with a seemingly head long dive into defeat is Labor avoiding increased taxation?

    Perhaps some psychology is being deployed and Wayne Swann has more than hinted at it in stating that now it is up to Tony Abbott to show what he will offer.
    Another booby trap?

    Certainly, it would be a great gamble for Tony Abbott to come out and say taxes need to be increased.
    Is honesty and trust more paramount than taxes?
    Certainly been little by way of trust between the three shown from Wayne and across to his right and it may be that this election is going to be about trust not just in financial figures.

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  3. Michael Wahren

    Self employed

    An incisive analysis of the moribund system we live under in Australia. I would guess that the ALP (Another Liberal Party) is firm in their intention of heading the American way. It seems to me that the Australian public has been convinced that tax=bad at least that is the impression our esteemed press would have us believe. As to talking honestly with the Australian public, that presupposes that the Australian mainstream media would honestly participate in such a conversation, something I rather…

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  4. Aden Date

    Service Learning Coordinator at University of Western Australia

    This article is a must-read for the single-issue echo chamber on social media in response to the budget. Every group is clamouring for it's piece of the pie: Foreign aid protectionists, University funding protests, NDIS supporters, single mums, the list goes on. The pie gets smaller and the competition gets fiercer. The only solution is to be welcoming of tax reform and to challenge the creeping neo-liberal ideology that we insist on sliding towards.

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  5. Max JUST DEFIANCE Cook

    REALPolitik Outlaw Journalist

    Good article! Clearer than we get elsewhere.
    Simply defining the war going on between the two cults, showing the level of cunning.
    To let this business go-on, only spirals down, and has to one day end with a "no-win" for all but those in that top 10%, who live and play in a different universe.
    No matter what recession, depression or other major economic calamity might strike the lower 90%, the top 10%, most living off unearned inherited income - THE place to reform for a healthy tax intake…

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  6. Liam Hanlon

    Student

    "There was the mining tax – designed to appease miners rather than collect revenue – and the carbon price that came with such generous compensation it runs at a loss."

    I think that just about says it all. I read it was somewhere close to $600 million cut from renewable energy, clean technology and biodiversity funds yet coal generators are still getting $1 billion in compensation from the carbon tax. Pretty ridiculous

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  7. Phil Johnson

    Community Publican at A

    Is this really the decision they have to make, is it really one way or the other or is this just our perception of labour and liberal and the unfortunate pressure we the media and electorate put on them to behave to type?

    I think the majority want to live in a civilised society (Gonski, NDIS) but we also do not want to see our taxes wasted, a civilised society isn't wasting money on growing bureaucracy and 'middle class welfare'.

    What they really need to do is find / develop some real leaders to lead and sell what would seem to be a good vision put together by quality caring politicians and some smarter people to assist them put it in place without stuffing it up.

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    1. Greg North

      Retired Engineer

      In reply to Phil Johnson

      " Is this really the decision they have to make "
      Well, it's rather the kind of life that politicians have Phil, attempting to not just make good decisions and also not just being seen to make them but appearing to be the right people for the job.
      We hear often enough what people think of both leaders of the two major parties and there's good and bad for both of them.

      Gonski, the NDIS and even the NBN all have great merit going for them and yet the ultimate test is how well implementation is managed and that is where our taxes can be wasted.
      That we have a level of bipartisanship with the NDIS and partially with the NBN now does at least say something for leadership and I reckon there will be plenty of smart enough people already in the public service even if they are not the types to be getting their hands dirty.

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    2. Max JUST DEFIANCE Cook

      REALPolitik Outlaw Journalist

      In reply to Phil Johnson

      Obviously, it's a huge leap, of faith, of insight and understanding for voters mainly, to get passed the fallacies inherent - a larger term, with deeper meaning, than is today recognized - in all models of "democratic leadership".
      Actually, "democratic leadership" is the same as "Christian Democrats" in that they are both oxymorons. In the least contradictory.

      Phil writes, ".... What they really need to do is find / develop some real leaders to lead and sell what would seem to be a good vision…

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  8. Lee Emmett

    Guest House Manager

    Howard-Costello's 'income tax cuts were also heavily skewed to high income earners. Over the past seven years they have cost the budget $169 billion, of which 43% or $71 billion went to the top 10% of income earners. This was more than the total benefit of tax cuts to the bottom 80%, who together received only $63 billion.' This says it all, and these facts should be put before the electorate!

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  9. Ron Chinchen
    Ron Chinchen is a Friend of The Conversation.

    Retired (ex Probation and Parole Officer)

    Always amazes me that there is this call for lower taxes, less government, and striving for privatising public utilities. The only people who benefit from this crazy principle are the wealthy.

    Australia, like many countries in the western world, faces a crisis. The infrastructure that holds us together in communities is getting old. Things are beginning to break down. Entropy is here. And I remember my father always saying that its better to fix something straight away than to let to deteriorate…

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  10. Michael Shand

    Software Tester

    Great Article, its amazing how everyone, absolutely everyone feels they deserve a tax cut

    Its a sense of entitlement based on narrow unenlightened self interest and its disgusting, they want to tackle climate change, they want better schools, they want to help the disabled, they want better public transport and they want tax cuts....it doesn't add up

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  11. John Doyle

    architect

    Really good article. I also hope we don't embark on the "fend for yourself" American path. I didn't realise the trap idea from the Howard Government was such an important factor in our budget woes. It's academic but if Howard had been returned in 2007 then today they too would be flapping about trying to balance a budget.
    I was more focussed on the ALP leadership travails and put that down to the inability of K Rudd to function as an administrator which left the government with little alternative to his overthrow.
    Still as I mentioned in another thread it's all small beer compared to the future population "bomb".

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