What can we expect from the Tax Forum at Parliament House today and tomorrow?
We may anticipate consensus that the tax system should be efficient, fair, understandable and effective in raising the revenue needed to pay for good public services and infrastructure. But the participants are unlikely to agree on who should pay the most.
The Gillard Government won’t want to embrace anything radical anyway. It presumably thinks it has more than enough on its hands implementing the proposed carbon tax and mining tax proposals.
The prospect of Opposition leader Tony Abbott parroting “another big new tax” if any further reform is proposed is all too predictable, but no less constraining.
Yet some fundamental consideration of tax reform would be thoroughly appropriate in the current economic conditions.
Economic inequalities are growing. We’ve got a mining boom that is benefitting some but disadvantaging others.
Further afield, the global economy is on a continuing roller-coaster ride of unsustainable debt and systemic instability.
So what should be done?
Financial transactions tax
An international financial transactions tax could help to rein in the speculative tendencies that have led to such a wild ride in financial markets.
A more broadly based Australia-wide land tax could help to reduce the speculative tendencies that have been driving land prices up and widening the inequalities between homeowners and the rest.
A broader resource rent tax could help to return more of the phenomenal wealth arising from the extraction of resources to the people as a whole.
And estate duties could help to create more inter-generational equity. As I have previously pointed out, Australia is unusual in having no tax on inherited wealth.
All that may sound like it is coming from the left end of the political spectrum, but support has recently come from some surprising on the right.
Conservative European leaders, such as French President Nicolas Sarkozy and German Chancellor Angela Merkel, have spoken out in favour of the financial transactions tax. European Commission President Jose Manuel Barroso last week proposed that the tax be used as a means of overcoming the Eurozone’s debt crisis.
A recent International Monetary Fund recent report also signals acceptance of the tax’s potential value in creating more economic stability.
Levied at a small percentage on trades in foreign exchange, it would discourage short-term speculation without having significant impacts on long-term investment. Its proponents have labeled it the “Robin Hood tax” because its effects would be conducive to progressive income redistribution on a global scale.
Perhaps even more newsworthy is the call by the American multi-billionaire Warren Buffett for very rich people to pay more tax.
Buffett has pointed out that he pays a smaller share of his total income in tax than his secretary does. This is largely because incomes from labour are taxed more highly than incomes from capital.
Taxes on capital gains and dividends tend to be lower than taxes on wages, and the wealthy get most of the income from capital.
No wonder economic inequalities are increasing.
Buffett suggests that an equitable tax system would ensure that wealthy people never pay a lower overall tax rate than people on average incomes.
Sounds fair, doesn’t it?
President Obama seems keen to take up the challenge, proposing a minimum tax rule that would require anyone with an annual income of over a million dollars to pay at least the average tax rate.
It won’t resolve the US administration’s debt woes, but it may signal an end to the acceptance of neoliberal orthodoxies that have favoured cutting the taxes for the rich.
A stronger version of the same sort of reasoning would reduce the gap between after-tax incomes for the wealthy and the poor.
For example, what if the tax system were changed so that the ratio of the highest and lowest 10% of household incomes never exceeded, say, ten to one?
That would still allow for strong economic incentives and capital accumulation for those so inclined. But it would set limits on overall economic inequality.
Australian society would probably be happier as a result – after the initial shock had worn off!
International comparisons show nations with greater income equality generally have happier societies, with lower incidence of ill-health, crime and array of social problems.
A reformed tax system could also contribute to reducing ecological stresses.
Creating a more sustainable society requires taxes to discourage exploitative use of natural resources, thereby steering the economy towards a more harmonious relationship to the physical environment.
A carbon tax is based on that principle. A more fundamental reform would be to tax the incomes arising from the use of the resources themselves.
Land is the most basic natural resource. However, its private ownership and use as a vehicle for capital accumulation has become a major source of unearned incomes, wealth inequalities, speculation and economic inefficiency.
The problem of unaffordable housing for many Australians is, at root, a problem of land prices.
Current tax arrangements, including exemption of owner-occupied properties from capital gains and land taxes and the existing negative-gearing arrangements, create incentives to invest in land in pursuit of capital gain without productive effort, driving prices up.
Much of the fruits of economic progress, particularly in the larger urban areas, is privately appropriated in this way.
More comprehensive national land taxation could capture more of that socially generated wealth for public purposes.
Broadly based resources rental taxation has a similar rationale.
The growth of private mining-based wealth has been prodigious in recent years as a result of rapidly rising commodity prices.
But the boom has created adverse macroeconomic and distributional effects, notwithstanding the short-term boost to wages and profits in the mining sector.
The rise in the currency exchange rate has disadvantaged businesspeople and workers in many manufacturing and service industries.
Of course, the Gillard Government is now trying to capture more of the minerals-based wealth, but its proposed mining tax has turned out to be extraordinarily modest relative to the total income flows.
The proposal for a more comprehensive resource rental tax needs to be revisited in these conditions, notwithstanding the evident power of the corporate interests involved.
In general, globalisation makes it more necessary to develop a wealth-based tax system.
The system needs to focus more on immobile sources of wealth, like land and natural resources, that are difficult to conceal from tax collectors.
It also needs to target speculative international financial transactions that undercut the capacity of national governments to manage their economies and provide for the broader needs of society.
Without significant tax reform we can expect growing economic and social imbalance – what the great Canadian political economist John Kenneth Galbraith termed the trend to “private affluence and public squalor”.
While it would be “pie in the sky” to expect the Tax Forum to tackle all these profound issues, it should be a first step towards discussing how we can collectively create a more equitable and sustainable society.
Frank Stilwell is a Tax Forum delegate.
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