You Get What You Pay For: Tackling The Tax Taboo
Dr Richard Denniss
Australia’s public sector isn’t big enough to meet the challenges of the twenty-first century, good enough to meet the expectations of the Australian public, or well governed enough to cope with the inevitable expansion heading its way. It was entirely incapable of protecting Australians from the cronyism and the contemptuous use of public money for political gain that became apparent in recent years.
It took decades of neoliberalism to destroy both Australia’s institutions of governance and the public’s expectations of those institutions. And it will take more than one term of office to repair the rot that has set in. But if that repair doesn’t begin soon, and the public do not begin to see rapid returns from that repair, then it’s not inevitable that Australia’s Westminster democracy will last as long as the building it is named after.
The simultaneous election of a majority Albanese Government, a record number of Greens and independents in the lower house, and what is likely to be the most progressive Senate crossbench in our history, creates a unique moment in Australian politics. How this moment is used, or stymied, will likely shape Australia for decades to come.
While people and policies come and go, institutions created by parliament last a lot longer for the simple reason that what both Houses of Parliament create, only both Houses of Parliament can dissolve.
Which is why decades after John Howard lost office, his 1990s-era policy thinking lives on through institutions like the Productivity Commission – which have overseen the steady decline in Australia’s productivity. It’s also why decades after the Hawke Government created Medicare it still survives, albeit in increasingly shabby shape.
Anthony Albanese has already committed to creating Australia’s first Federal Integrity Commission by the end of this year. And while the Commonwealth will be the last jurisdiction in Australia to create such a dedicated corruption watchdog, the consequences for the way that policy is made, public funds are awarded, and key personnel appointed, will likely be seismic for Australia.
After a decade of Commonwealth Ministers, and public servants, ignoring FOI requests, questions on notice and the obligations of the Archive Act, ministers, their staffers and the public service will soon work in an environment where the possibility that their phone calls may be recorded, their deleted emails retrieved, and their truthful answers to simple questions demanded by a body with the power to compel their appearance.
No wonder Scott Morrison reneged on his promise to create such an agency.
But while the long lasting consequences of creating a federal corruption watchdog are hard to overstate, the creation by this parliament of such a body will hopefully mark the beginning of the renovation of our democratic architecture, not its end.
Imagine, for example, if the Productivity Commission was replaced with a National Interest Commission to provide both the parliament and the public with broad advice on the range of options available to help us meet the challenges that face us today, rather than the narrow advice currently provided by an advisory body conceived a decade before the first smart phone was released.
Most ministers, industry groups and NGOs argue that their own preferred policies are in the national interest, but what is the national interest? Not only is there no widely accepted definition of the national interest, not even all the Commonwealth Departments share a common definition of what the term might mean.
While it is beyond the scope of the social sciences to accurately define and accurately measure what the ‘national interest’ is, it is not beyond the wit of our parliament to debate and define what factors contribute to the national interest. In turn it is not beyond our wit to redeploy the substantial resources of the ageing Productivity Commission to create a freshly constituted body to investigate the consequences of both emerging issues and new policy ideas on the broad components of the national interest.
© Stefan Powell-Flickr
Likewise, the machinery of government responsible for the efficient delivery of public programs needs to be expanded and refreshed. Bodies such as the Audit Office, the Commonwealth Ombudsman, the Administrative Appeals Tribunal, the Information Commissioner and even the ABC all have a crucial role to play in evaluating the efficiency and effectiveness of government policies. Sadly, all have been side-lined and subjugated over the past decade in ways that have made the waste, and even abuse, of taxpayers’ money all the easier.
Reforming, restructuring and resourcing these institutions is just as important as the creation of new bodies such as a Federal Integrity Commission.
The funding cuts and political contempt for bodies with the ability to question the merits of ministerial decision making is no accident. On the contrary, the practice emerged during the same period in which Australians were told that as long as the government of the day was spending less money on something it was increasing its efficiency.
But, to be clear, there is nothing in any economics textbook that would support the idea that the less money a government spends on oversight the more efficient it will be. More broadly, there is no economic basis at all for the widely held view in Australia that transferring responsibility for an issue from the public sector to the private sector will inevitably lead to an increase in economic efficiency or enhance the national interest (however defined).
But the most significant change that needs to occur in Australia is not a new policy, but a new mindset. The idea that Australia’s public sector is ‘too big’ and that cuts to public spending will inevitably lead to an increase in economic growth and community wellbeing have become so ingrained in the Australian debate that the complete lack of any supporting evidence for such a view is rarely discussed.
The countries with the strongest economies, highest productivity growth, best health and education performance and happiest populations are the Nordic countries, which also happen to be the highest tax countries in the world with the biggest public sectors.
Indeed, over the past 30 years as Australia embraced the need to cut the public sector, cut taxes, cut wages and cut regulation the highly taxed big government economies of Northern Europe have consistently delivered higher productivity growth than Australia.
But just as it was once impolite to talk about the war, it is now considered impolite to talk about the economic performance of the Nordic countries in Australia. Indeed, in a recent radio interview about my latest book Big: The Role of the State in the Modern Economy, the host asked me if it was possible to make a case for increasing the size of the public sector without making reference to the Nordic countries! Luckily it is.
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Most European countries have bigger public sectors than ours and provide a wider range of free or heavily subsidised services to their citizens. While Angela Merkel led a centre-right government in notoriously fiscally conservative Germany, she provided free university education not just to all Germans, but all residents in her country including refugees.
Boris Johnson leads a Conservative government in the UK whose National Health Service relies far less on private health insurance and co-payments than Australia’s flailing Medicare system. And of course the US spends a far larger percentage of its national income on defence than any other country in the world.
How much money a society wants to spend on the health, education, housing, transport and security of it population is an entirely democratic question. While such decisions have some economic consequences, economists are no better equipped to determine how much money a society should spend on education or health than they are to advise on how much a family should spend on pizza or hamburgers.
This is not to say that the decision to increase public spending would not have economic consequences, it clearly would. But in the absence of any clear definition of the national interest, and in the absence of any clear evidence that private provision of health or education services is more efficient or effective than public provision, the role for economists in such decision making should be minor.
The same can be said for the amount of tax a country chooses to collect from its residents and the firms that do business within its borders. As with the alleged necessity to cut public spending, Australians have been told for decades that unless we cut income taxes, profit taxes and avoid the introduction of taxes on carbon, mining profits or wealth, Australia will somehow become ‘uncompetitive’. Again, there is no strong economic evidence to support this preference.
The simple fact is that many countries that collect far more tax than us have economies that are more productive, more innovative, and faster growing than ours.
It is true that there is no need to collect enough tax each year to ‘fund’ that year’s level of expenditure, and it is true that there are no particular sized deficits or levels of public debt that are ‘bad’, but it is also true that if a country wants to have a permanently bigger public sector than it used to, it will need to collect more tax than it used to.
Put simply, it should come as no surprise that the countries that have the biggest public sectors collect the most tax.
While it is possible to design taxes in such a way that they discourage people from working and discourage firms from investing, it is also possible to design them in such a way that they improve the efficiency of the economy and the equity of society.
The introduction of a well-designed carbon tax, for example, would not only provide a significant source of revenue but, by design, to the extent that it created any ‘distortions’ to the economy it would be to discourage the kind of polluting activities that the Australian people have said they would like to discourage.
Likewise, well-designed wealth taxes, resource rent taxes and super profits taxes would improve our economy and society, not harm it.
Currently gas companies are making enormous and unexpected profits due to the war in Ukraine. Imagine, for example, these companies being subject to a windfall profits tax, the proceeds of which were used to support energy efficiency and insulation in low income households.
Big: The role of the state in the modern economy
Who we elect determines which problems we solve. Democracy thrives on high expectations. We can afford to do anything we want, but we can’t afford to do everything we want. The big choices are all ours, including the choice of whether we can be bothered to make them.
For decades Australians have been told that the less government spends, the better their lives will be. In his new book Big: The Role of the State in the Modern Economy, Richard Denniss, Chief Economist at The Australia Institute, shows we must abandon decades of denial that the public sector can play a bigger and better role in improving our lives.
Available now from Monash University Publishing: https://publishing.monash.edu/product/big/ or your local independent bookshop.
The benefits to the economy and society would be substantial and the ‘costs’ to business would only be the loss of some of a windfall that they had no reason to expect. Put simply, the idea that taxes make economies less efficient is not based on economics.
Returning to structures, there is a structural asymmetry at the heart of the Australian budget process that makes it a lot easier for governments to cut spending than it does to increase revenue.
While the Expenditure Review Committee plays a central role in evaluating all government spendings before the government of the day seeks annual parliamentary approval for its ‘appropriation bills’, there is no similarly powerful committee focused on finding new sources of revenue.
© Simon Doggett-Flickr
While it is appropriate that the Treasurer and Finance Ministers play a central role in the Expenditure Review Committee, it would also be appropriate for ministers who oversee large spending programs to play a central role in a newly formed Revenue Review Committee. Such a committee should evaluate, on an annual basis, whether the tens of billions of dollars worth of tax concessions that have been granted to select industries and communities are succeeding in their stated goals and evaluate whether it would be in the national interest (there’s that term again) to abolish some tax concessions and replace them with similarly sized, but differently targeted, spending programs.
At present, the Department of Treasury has policy responsibility for overseeing the vast majority of Australia’s enormous annual expenditure on so called ‘tax concessions’ but they have shown little interest in conducting detailed analysis of the effectiveness of those measures.
Australia is one of the lowest taxed countries in the OECD and, if we wanted to collect more revenue we could easily do so by reducing the generosity of tax concessions for superannuation, private health insurance and fossil fuel use.
Likewise, the introduction of new taxes on either things we would like to discourage (like pollution) or on the super profits of industries like mining and banking will do no harm to the economy as a whole but will significantly reduce the nature and extent of inequality in the country.
State premiers desperate for more commonwealth funding should work together, and with the Commonwealth, to build the case for new sources of revenue which could be added to the revenues from the GST in the pool of funds that are distributed to the states.
It was John Howard that decided that the GST should be hypothecated for the states and there is nothing to prevent any of our state premiers, or indeed Anthony Albanese, from arbitrarily deciding that another new tax should not be added into the mix. As John Howard clearly showed, such structural decisions deliver the longest lived change.
Australia is one of the richest counties in the world, but decades of neoliberal rhetoric have made Australians feel poor. Despite decades of economic growth many Australians believe that we ‘can’t afford’ to have the quality of services that we enjoyed decades ago and that it is unrealistic for Australians to expect the same level of services as those provided in Northern Europe. Nothing could be further from the truth.
Just as there is no mention of the role of the Prime Minister in our Constitution, there is also no mention of how much tax we should collect, what kind of services our government should provide and what kinds of oversight bodies, if any, we should create to ensure that our elected representatives are spending our money on our priorities rather than their own.
Democracy thrives on high expectations and in turn it is no surprise that for the last decade our democracy has withered on the vine. The election of not just a new government, but a radically new parliament and a new progressive Senate provides a unique opportunity to create not just new policies, but new institutions and, in turn, new institutions.
Indeed, the new parliament might even be progressive enough to shake off the view that Australia can’t afford to make itself a better country. Building a bigger better public sector is not the only way forward for Australia, but after decades of cuts and cronyism surely it’s time to try what works so well in the richest, happiest countries in the world.
Dr Richard Denniss is Chief Economist of independent think tank, The Australia Institute. Richard contributes columns to The Guardian, The Monthly and the Australian Financial Review. His latest book is Big: The Role of the State in the Modern Economy. Follow him on Twitter @RDNS_TAI