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Raising tax revenue just to throw it away is no answer

Simon Cowan | Australian Financial Review | 23 April 2014

From troubling deficit figures in recent budgets, to dire predictions of blowouts in health and ageing spending in the intergenerational reports, and Treasury secretary Martin Parkinson's warning of threats to our living standards, all signs are pointing to the upcoming budget as a crucial juncture for Australia's fiscal future.

It is now a cliche to say government must make "tough decisions" to solve Australia's short- and long-term budget sustainability problems. For many, such as former Treasury secretary Ken Henry, the Grattan Institute, and Greens leader Christine Milne, this is code for tax rises.

The solution to ending inefficient and wasteful spending is not to raise more money to throw away. It's to prioritise spending in the right areas and improve the efficiencies of government programs.

Indeed, raising taxes isn't a tough decision at all. There has hardly been a shortage of new or increased taxes in recent years. The previous Labor government introduced the mining tax and the carbon tax, increased the Medicare levy to help pay for the national disability insurance scheme and imposed an interim tax after the Queensland floods. It also increased excise on alcopops and tobacco.

Meanwhile, the Coalition won a solid majority at the last election despite supporting the NDIS levy and promising to raise company taxes to pay for its gold-plated paid parental leave scheme.

But raising taxes fails to address either the cause of the current budget deficits or the factors driving our future fiscal crisis.

Our budget problems have been largely caused by increased spending.

Over the past 10 years, real spending has outgrown gross domestic product by approximately 15 per cent, while real health spending alone increased by nearly 70 per cent in the decade to 2011-12.

We've also seen a steady increase in benefits for middle-class families through family tax benefits, childcare payments and education support.

In addition, the previous government committed to expensive new programs (such as the disability scheme and Gonski reforms) beyond the forward estimates.

Much of the recent increase in spending has been inefficient – for example, the pink batts fiasco – while wasteful spending in other areas, such as the billions provided in corporate welfare, has proceeded mostly unchecked.

Curbing this rampant government expenditure is even more important in the longer term. The burden of financing the increasing health costs of our ageing population will fall on a smaller proportion of workers.

Raising taxes on those workers only exacerbates the pressure on the system and further slows innovation and productivity growth.

Beyond the economic costs of higher taxes, increasing the tax take without bridging the intellectual chasm between the ever-increasing demands on government and what people are willing to pay for can only ever be a stop-gap arrangement. The solution is not getting people to pay their fair share but determining what the role of government should be.

The European experience of debt and deficit makes clear that a broad-based entitlement system cannot be funded by taxes on millionaires and the super-rich alone. It is the middle class that bears the increased tax burden and, according to the attitudes towards taxation measured by the 2012 Per Capita tax survey, the middle class have no desire to pay more tax.

Roughly half of respondents with a household income between $40,000 and $80,000 felt they paid too much tax, while 40 per cent said they paid about the right amount. For those with a household income between $100,000 and $150,000, more than 60 per cent felt they paid too much tax. Almost no one (1.2 per cent) thought they paid too little tax.

Yet there is also incredible resistance to reducing middle-class welfare, as objections from Labor, the Greens and others to recent proposals to introduce a modest Medicare co-payment show.

This suggests the real problem of the age of entitlement is not the truly needy but rather the relatively well-off who believe they pay too much tax, yet are owed government support.

Australia can maintain a welfare safety net for the truly needy and have the benefits of a low-taxing small-government system that encourages continued economic prosperity.

However, we can't do both and have an interventionist government providing widespread middle-class welfare. That isn't merely undesirable, it is unsustainable.

Instead, the path to sustainable government involves ending taxpayers propping up higher living standards for the relatively well-off.

This year's budget will be a success only if it starts this difficult process to save the nation's finances. Calling for tax rises instead is taking the easy way out.

Simon Cowan is a research fellow at the Centre for Independent Studies.