The Coalition's tax plan will make for a very different Australia – one that's much less equal

Extract from The Guardian

Opinion

Australian economy

Greg Jericho

The government’s tax cuts are set to favour the wealthy and massively reduce revenue because they want them to

@GrogsGamut

Thu 18 Jul 2019 04.00 AEST Last modified on Thu 18 Jul 2019 04.04 AEST

‘The honest truth is the conservatives don’t cut rates because they want to raise more tax; they cut them because they want to raise less tax.’ Photograph: Mike Bowers/The Guardian

The government’s tax plan will massively reduce the progressive nature of the tax system and also cause a large cut to the government tax base. But as the latest household income and wealth data shows, the flow-on aspect to reduced government services will do just as much to increase inequality.
Let’s get a couple things out of the way straight off the bat. Cutting tax rates does not increase tax revenue. If you want to live in Laffer curve land idiocy, go off and apply for work at one of the assorted libertarian thinktanks for economic fantasy. The rest of us in the real world know lower tax rates equals lower tax revenue.
Take the Trump company tax cuts – profits before tax have remained steady, even rising a bit in nominal terms, but company tax revenue? Utterly smashed, and not improving at all:

The honest truth is the conservatives don’t cut rates because they want to raise more tax; they cut them because they want to raise less tax.
This isn’t a secret, they say it out loud.
They also like tax cuts that mostly favour the wealthy because they prefer to favour the wealthy in all things.
Sure there might be a few conservatives who lie in bed hugging their Milton Friedman teddy bear below their life-sized portrait of Ronald Reagan, telling themselves that they are doing this because it is the best way to make life better for everyone.
But come on. We know reality; let’s not pretend otherwise.
Thus it is clear that the government’s tax cuts are set to both favour the wealthy and massively reduce revenue because they want them to.
But the most recent survey on household income and wealth released last week showed that government income tax and spending on welfare are key drivers for reducing inequality, and equally important is the provision of government services.
The income and wealth survey highlighted just how progressive is our tax and transfer system.
Households in the lowest income quintile received on average $420 a week in cash benefits compared to $33 a week for those in the highest quintile, while the richest 25% pay on average $1,332 in tax compared to just $18 by the lowest:

When we translate these amounts to a percentage of household disposable income, the bottom quintile gets 31% of their disposable income from cash benefits, compared to just 0.8% for those in the top 25%:

But what is also vital to households’ disposable income are things called “social transfers in kind”. These are the dollar value for public services such as education, health and child care.
These are more equally delivered across income groups because public education and health are open to all regardless of income.
But they are very important for reducing inequality.
Households in the lowest income quintile, for example, get $420 a week on average from cash benefits, and they also receive a total of $570 a week from social transfers.
And this has a great impact on inequality.
Households in the highest income quintile have 12.9 times the private income of those in the lowest quintile and 2.8 times those in the median quintile. After cash benefits this is reduced to 6.4 times and 2.4 times respectively. Income taxes alone only reduce it to 10.1 and 2.4, while social transfers in kind reduce it to 5.7 and 2.3:

It means that while a lot of the focus for reducing inequality is on cash benefits, especially for increasing the income of the poorest, for households in the second, median and fourth quintiles the big items are the progressive nature of income tax and social security transfers in kind.

The ratio of the income of the highest quintile to the median quintile is reduced by the same amount by income tax paid as it is from receiving social transfers in kind:

It is worth noting that all households on average pay $437 a week in tax on income and receive $477 a week from social transfers in kind – reduce one and it is clear so too must you reduce the other.
And what is the government’s tax plan? It is to lower the progressivity of income tax while at the same time lowering the overall tax raise.
And as the Grattan Institute noted, the government forecast that this will occur in a budgetary space that sees a surplus exceeding 1% of GDP by 2026-27.
The only way that can be done is (as the budget papers show) by government expenditure falling steadily over the next decade to 23.6% of GDP in 2029-30 from the level of 24.9% in 2018-19.
The last time payments were that low was at the height of the mining boom when unemployment was below 5% and 12.3% of our population was over the age of 65 compared to 14.6% now.
That is important because retirees are those who are mostly dependent upon both cash benefits and social transfers. As the Grattan Institute noted, “the Parliamentary Budget Office says ageing will add 0.3% of GDP a year to spending by 2028-29”:

So the ageing population is adding to the need for government spending at a time the government is cutting taxes and saying it will reduce overall government expenditure.
The only way this and a surplus can be achieved is through massive cuts in spending that does not affect retirees directly.
That means cuts to spending on education, health care for non-retirees, and also reductions in non-aged pension cash benefits.
It will make for a very different Australia – one much less equal, and one where people will be expected to pay for services they currently take for granted will be provided by the public.
And don’t think that this is just an unfortunate consequence. Lower tax rates leading to lower tax revenue requiring lower government spending on services is the point of the policy, not a side effect.

• Greg Jericho writes on economics for Guardian Australia