Why we can’t just raise taxes, as Stage 3 tax cut debate rages

We should take proposals to raise taxes seriously — not least because the Labor party has shown a fondness for new revenue measures, both in government and in opposition.

According to some on the left, it’s the most taboo topic in politics: how to set about increasing revenue.

However, it’s hard to take the ‘taboo’ claim seriously. After all, the Australia Institute recently hosted the latest iteration of its ‘Revenue Summit’ with almost two dozen prominent academics, politicians and public servants who “explored revenue raising options to meet Australia’s growing public spending needs”.

Nor are they alone in wanting to raise taxes. If the government had a dollar for every time some pundit called for a ‘conversation’ about increasing revenue, they’d have so much money they wouldn’t need to have the conversation in the first place.

But we should take the substance of these proposals seriously — not least because the Labor party has shown a fondness for new revenue measures, both when in government and opposition.

There is also a rather large budget deficit that probably won’t close by itself. It is important to note that this deficit is almost exclusively a result of the massive increase in government spending during the pandemic. However, many on the left would rather keep the spending and raise taxes than go back to pre-Covid levels.

Not that there is any good reason to think that even Covid levels of spending would be sufficient. The desire to expand government services and spending seems limitless. Over time, the pressure to expand government would continue to increase.

However the issue goes beyond just spending. Many also pretty clearly believe the tax system is just another weapon to be deployed to address inequality more broadly (including some who have suggested punitive taxation of high incomes).

This inequality emphasis has undeniably distorted our tax system in recent years. A good system should also be balanced around the principles of efficiency, adequacy and simplicity — not just equity.

Yet many recent reforms (such as the Low and Middle Income Tax Offset) have made the system more complex, and less efficient, because every individual component must be justifiable on ‘equitable’ grounds.

The notable exception is the Stage 3 tax cuts, which would promote simplicity and efficiency. This violates two principles of the ‘raise taxes’ and ‘more revenue’ crowd: not only their insatiable desire for higher taxes but also their equity-above-all approach.

But there are two problems with this pro-revenue approach to raise taxes. The first is that it lets government off the hook for known inefficiencies in government spending.

The reality is that many government programs do not work. Some are pure pork barrelling, or at least created for political reasons. Some create massive bureaucracies that impose costs well beyond their benefit. Some duplicate or displace private sector activity. Some create bigger problems than they were trying to solve.

We also know that many government programs are never evaluated to see if they achieve anything at all.

While these programs all generate an ecosystem of cronies feasting on taxpayer funds, we would be better off as a country if they were culled. Although it has proven a less effective discipline in recent years, limitations on revenue generation create at least some pressure on government to look at this waste.

The second problem is that an obsessive focus on increasing revenue in the short term will almost certainly reduce potential revenue in the longer term.

Fundamentally, the question comes down to whether you are better off with a larger slice of a smaller pie or a smaller piece of a larger pie.

To be clear: this is not about ‘trickle-down’ economics or ‘neoliberalism’ or any other made-up term designed to denigrate those who believe in government taking a step back and not forward.

The government should focus on improving the efficiency of the tax system, as part of a broader agenda laser-focused on rebooting productivity — ideally while also reducing the overall tax burden.

At this point, this needs to be the most important goal on the revenue side regardless of the state of the budget. We have spent at least the past 15 years focused on how to distribute the largesse of two mining booms and the proceeds of several decades of hard won economic reforms.

Instead of deregulation and efficiency, we have increased regulation and tax. Governments of both sides have passed law after law, regulation after regulation. Hard decisions have been shelved in favour of an annual budget handout.

Benign economic conditions and good luck have allowed us to do this. These are now both running out.

This leaves a deficit problem, but it should be closed by reducing spending. Government should cut wasteful spending permanently, and temporarily reduce non-urgent expenditure to ensure debt doesn’t get out of control.

Raising taxes to cover a blowout in spending is a bandaid solution at best. Spending will always continue to ratchet up, widening the deficit and putting more pressure on revenue.

This doesn’t mean fairness isn’t important in a budgeting sense. But the main place we should address equity concerns is on the expenditure side, not the revenue side. A generous — but strictly means-tested — safety net is the important thing, not that an already progressive tax system becomes even more progressive over time.

However, too often the left want a licence to try and engineer some kind of equality of outcome. Across the OECD we see countries with higher levels of spending and taxation than ours, yet in many places, they have worse outcomes in terms of inequality.

In fact, there is a strong argument that the government should focus almost exclusively on issues of absolute poverty and disadvantage. Relative measures of inequality are second order issues, and governments that prioritise them are forever trying to balance the incomes of those in the middle. Often to the detriment of those they are claiming to help.

Simon Cowan is Research Director at the Centre for Independent Studies.

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Photo by Tara Winstead