At the moment, the federal, state and many local governments are doing a poor job because they are suffering from a chronic shortage of revenue. It shows up as things like long waiting times for hospital treatment, endless arguments about the amount of money the states are getting from the commonwealth and Hockey’s ridiculous and grossly unfair attempt in 2014 to solve our alleged financial problems by really screwing those at the bottom.
In addition, the shortage of funds often leads to irrational decisions. For example, Brisbane has serious congestion problems yet somehow all the tolls on roads, bridges etc. are on congestion bypasses and even concession public transport fares are much higher than the cost of using an already owned car to add to the congestion.
Given the above it is good news to hear that the government is actually starting to look at ways of increasing revenue. Better still, both Labor and the Greens about raising revenue and reducing benefits to the rich.
The aim of this post is to put forward a few general propositions about increasing government revenue. It is not about discussing the details of what the government is considering.
The revenue conversation needs to be about more than tax. Government charges, the role of borrowing, the possibility of following the US and EU lead towards some form of quantitative easing as well as tax deductions and subsidies are also worth talking about.
It is also worth noting that that taxes, charges and tax deductions are also used to influence the decisions individuals and investors make.
(NOTE: Unless otherwise stated, the word “tax” includes government charges.)
Australia’s overall tax burden is relatively low compared to other developed countries
Australian tax revenue is drawn from more than 100 different taxes.
Complexity and compliance costs have many drivers and are a growing problem in the tax system. Tax compliance costs are in the order of $40 billion per year. (This is about 10% of total tax collected!!)
Australia relies heavily on income taxes, particularly company income tax, compared to other developed countries as well as our Asian competitors.
The Australian Government raises around 81 per cent of total tax revenue in Australia.
State and territory governments collected around 15 per cent of tax revenue, largely through payroll taxes and property taxes (especially stamp duties).
The states and territories received around 45 per cent of their revenue from the federal Government by way of specific purpose payments and general revenue assistance, including all GST revenue.
In 2013-14, state and territory governments generated around 31 per cent of their total revenue from the taxes they administer. The remainder of state and territory revenue comes from other sources, including the sale of goods and services and royalties.
Local governments collected around 3 per cent of tax revenue through municipal rates.
The tax rates, thresholds and exemptions for state and local government taxes vary across jurisdictions.
ABC Fact Check had a few more bits of useful information:
In 2013-14, the federal Government gathered $338 billion in taxation, representing 21.3 per cent of GDP. Australia’s taxation revenue comes from more than 100 different taxes. However around 90 per cent of all tax revenue comes from just ten taxes. Total taxes estimated at $417 billion including state and local.)
Personal income tax makes up 49 per cent of tax revenue. Company and resource rent taxes are next highest at 20 per cent.
The GST raised $56 billion (16 per cent of total Australian government tax revenue in 2013-14.) All of this money is currently distributed to states and territories.
Australia’s company tax rate is 30 per cent, on par with the average rate in the world’s ten largest economies and around 10 percentage points below the United States. Company tax represents around 5.2 per cent of Australia’s GDP, compared with an OECD average of 2.9
The Goods and Services Tax (GST) is charged at a rate of 10 per cent on a range of goods, services and other items sold or consumed in Australia. Around 47 per cent of the consumption of goods and services in Australia is covered by the GST. That is below the OECD average of 55 per cent and way behind New Zealand where 96 per cent of goods and services are covered by a consumption tax.
Sometimes the GST gets complicated: For example, apple cider containing alcohol attracts GST; apple cider containing no alcohol but containing food additives also attracts GST; while apple cider with no alcohol and no food additives is GST-free.
In 2011-12 around 9.8 million Australians paid individual income tax. Australia’s top marginal tax rate is 45 per cent plus a 2 per cent Medicare levy, plus a 2 per cent temporary budget repair levy on income over $180,000. In the early 1950s the top tax rate was 75 per cent.
Desirable features of a good revenue raising system include:
- Provides enough money for governments to do their job properly without pushing debt to unwise levels.
- Each level of government raises the revenue required to do its job. Asking one level of government to take the tax political pain while another enjoys the credit for expenditure is not good psychology. (This feature doesn’t preclude arrangements like the GST arrangement where the commonwealth manages tax raising on behalf of the states.)
- Robust: Largely based on sources of revenue that, like the GST are relatively stable.
- Progressive: Overall the better off are taxed a higher percentage of income than the poor. Note that progressive may be achieved by compensating low income earners for the effects of a regressive tax.
- Fair: For example, Families with similar average income over a number of years pay similar tax no matter how the income varies over the years or the income split between partners.
- Taxes internet imports in the same way it taxes more tangible imports.
- Exporters pay their fair share of tax. (Make it hard for exporters to move their profits to low taxing countries overseas.)
- Encourage desirable outcomes.
- Low compliance and collection costs.
A few propositions:
- It is the overall system that counts, not how individual taxes and charges meet the desirable features. Overall may include government expenditure as well as revenue raising. For example, welfare expenditure is very progressive in the sense that it is good for low income earners and could be looked at as a “negative tax.”
- One of the reasons the states are short of money is that the compete with each other for new investment by offering lower taxes and charges for business.
- It concerns me to see that the states appear to be resisting an increase in the GST for political reasons even though they all need the extra revenue.
- Do we really need 100 different taxes?
- We all pay more tax to pay for other people’s tax deductions and subsidies (and the cost of the related complexity.) Might be smart to simply get rid of most of them and reduce taxes.
- When you think about it, most of the “added value” that the GST taxes is made up of company profits and payroll costs in addition to government taxes and charges. However, in addition to the GST, we continue to tax profits and payroll separately as well as part of the GST. Perhaps we could do something radical like getting rid of company tax completely, replacing it with an increase in the GST? (Add exporters to businesses that pay GST and remove all of the GST exceptions to keep the GST rate increase low while, if necessary, paying some compensation for low income earners?
- Any tax or government charge to business is just as regressive as the GST. (Where possible, businesses will raise their prices to pay for these charges.)
- We have a floating currency that moves to compensate for perceived changes in Aus competitiveness. This means that many claims that tax and other changes will affect Australia’s competitive position will be false because the value of the currency will drop as a result of the change.
- Many countries are looking for ways to tax online imports. We should be trying to do something similar.
- High frequency transfers (HFT) on the share market allow users to skim money from the share market. HFT also causes market instability because all their algorithms tend to react in the same way to market movements. Many countries are using variations on The Tobin Transfer Tax to Suppress HFT. High frequency trading only makes a very small amount for each transfer. A very small tax per transfer takes all the profit out of HFT.
- We would have a much simpler version of the carbon tax if we taxed fossil carbon as it came out of the ground or came in over our border. For the sake of the planet we should not give a refund for fossil carbon that is exported over our border.
- Flat income taxes are simple to administer and remove the unfairness between families that i talked about above. They also get rid of tax avoidance schemes that depend on income splitting or evening out variable income over time. Problem is that the basic flat tax is very unfair because moves more of the tax burden onto the poor.
- A flat tax combined with a fixed payment to all adults can overcome the unfairness of the basic flat tax as long as the fixed payment is large enough. The fixed payment may also reduce welfare requirements and avoid some of the disincentives for people on welfare to work.
Fact check: Do Super Tax concessions Favour the Rich? You might like this graph showing just how good the government is to the top 20%:
|Personal and superannuation taxation|
|Annual income||Marginal personal tax rate (%)||Tax on contribution phase (%)||Tax on accumulation phase (%)||Tax on retirement phase (over 60) investment earnings and benefit payments (%)|
|*Applies to the taxable concessional contributions above $300,000. Source: ATO income and deductions, Re:think tax discussion pape|