Tax
Grogonomics

It’s so obvious that tax cuts will lead to service cuts, you might think that was the intention all along

One of the benefits of having a prime minister and Liberal party as ideologically pro-business as the Donald Trump-led Republican party is that we get a nice taste for the way things are likely to head – and it is very much towards a less equal society.
Late last year, the Republican party legislated a massive tax cut for both companies and individuals that ensured the greatest cuts went toward the wealthiest. It was unfunded and would increase the budget deficit despite the fact that the Republican party has long held themselves up as the standard bearers of budget responsibility.
Sound familiar?
Of course conservatives don’t mind budget deficits when it comes to granting tax cuts, but they inevitably return with a desire to balance the budget and when they do, they always – without fail – target government services and benefits that assist the most vulnerable.
And so it was last week the Republican party announced a plan to cut Medicare (a different program to that in Australia), Medicaid and other social services.
And this is why when you hear all the guff spouted from the government about their tax cut you need to always be asking how will they pay for it. Because the personal tax cuts put in place will not only make the system less progressive, in some ways the biggest impact is that combined with the company tax cut, they will greatly reduce government revenue.
Those in favour of flat taxes and lower company taxes might talk crud about aspiration, but really their only aspiration is for a small government where the private sector provides a greater number of services that previously were publicly run and funded. It is the ideology that favours private education and health, and that prefers outsourcing of government services.
And this matters because while progressive taxation does help reduce inequality, the big driver is what is done with those taxes.
Last week, the Bureau of Statistics released its latest series on government benefits, taxes and household incomes. The survey, which is done only every five-to-six years, shows that inequality in 2015-16 was essentially unchanged from 2009-10, but remains well above where it was before the mining boom began in 2003-04:
But what the data especially highlights is the impacts of income taxes, government cash benefits, and services and production taxes (such as excises and the GST) have on inequality.
In 2015-16, the richest 20% of households held 49% of total private income while the poorest 20% held just 4%. Once the amount of government cash benefits (aged pension, disability and family payments etc) had been taken into account the top 20% held 45% while the share going to the poorest was up to 6%.
After income tax, the richest 20%’s share was down to 42% and the poorest was up to 7%.
The next step is to consider what are known as “social benefits in kind” – the dollar value benefit government services – such as education, health care, child care, housing benefits – to households.
Once these have been considered the share of income to the richest 20% is down to 39% and the poorest 20% is up to 8%.
Then, finally the impact of production taxes – the GST, excises and charges – is considered. Because these taxes are generally regressive it means that the share of “final income” going to the richest 20% increases – up to 40%, while for the poorest it falls back to 7%:
The data allows us to see how income, taxes, and benefits are all distributed across incomes. Cash benefits, for example, are very much targeted towards the poorest, while social benefits are more equally shared.
Similarly, while income taxes are more weighted towards the richest, the burden of production taxes is much more evenly shared:
When we look at the taxes paid as a percentage of final income, the progressivity of income tax and regressive nature of taxes like the GST is made quite clear. The richest 20% pay on average 32% of their final income in income tax, while the middle income quintile pay just 14%. But on production taxes, the richest 20% pay just 9% while the middle income quintile pay 10%:
The reason of course is that while the average costs of living for wealthier people is generally higher than that of poorer people, the cost of buying goods and services does not increase in line with your income. Thus taxes like the GST will inevitably be less progressive, and often regressive.
The distribution of cash benefits on the other hand a very much targeted towards the poorest, while government services are more even distributed – because while you may not qualify for a government cash benefit, universal education and health ensure a wide range of households are able to receive the benefit:
I have argued in the past that this is a very good thing. As soon as you start limiting services such as health and education on the basis of income, you quickly see the level of that service decline and a drive for it to be cut.
It also leads to situation such as we saw this week in a report by Anglicare on Centrelink – where the government treats those who use the service with contempt and where a desire to cut costs through automation actually makes a bad situation worse.
The data from the Bureau of Statistics also allows us to see the impact of taxes, cash benefits and social services on inequality.
The Gini coeffient in 2015-16, which measures inequality of a scale of 0 to 1 (a higher value meaning greater inequality), of private incomes was 0.442. But after cash benefits, it fell to 0.361 and then 0.241 after income taxes. The impact of social benefits reduced it even further to 0.241, before taxes like the GST caused it to rise slightly to 0.249:
While our progressive income tax system does reduce inequality, it is what is done with government revenue that really does the heavy lifting.
And this is the problem with the government’s tax plan. It both reduces the progressive nature of our income tax system, shifts a greater share of revenue to taxes like the GST, and because of the vast cost of the tax cuts, the government will have to reduce the amount it spends on cash benefits and services.
It adds up to a policy that will almost assuredly make Australia a less equal society, and so obvious is this outcome, you could be forgiven for thinking it was the intention.
  • Greg Jericho is a Guardian Australia columnist