Tax cuts and increased spending don't add up

Possible options for funding a progressive agenda to achieve distributive justice and improve Australia’s social wage include:

• the abolition of dividend imputation;
• repealing capital gains tax concessions;
• raising a progressively-scaled Medicare levy and possibly also an Education levy;
• introducing a 4 per cent Infrastructure levy on business (Australia’s corporate tax rates are already well below those in the United States);
• introducing wealth and inheritance taxes for those with assets of $1 million or more;
• introducing a media diversification levy of 1 per cent on media advertising revenues with the intent of broadening Australia’s public sphere;
• seeking international co-operation in the introduction of a “Tobin Tax” on international financial transactions; and
• a small carbon tax at the rate of $5 per tonne, providing an ideal vehicle for raising vitally needed revenue to fund innovation and investment in renewable energy.

We will now consider some of these options in greater detail:

Abolition of dividend imputation (credits for dividends to compensate for company tax), and the introduction of wealth and inheritance taxes can be justified by the growing inequality across the Australian social landscape.

According to a NATSEM (National Centre for Social and Economic Modelling) report released in 2002, the top 20 per cent of Australian households owned more than half of all household wealth - more than 40 times as much as the bottom 20 per cent, and more than double the wealth of the second richest 20 per cent. The richest 20 per cent owned 90 per cent of all shares, while according to an earlier study from 2000, the richest one per cent owned half of all shares and investments.

Here is a clear case where firmer measures are needed for the redistribution of wealth through the tax-transfer system and social wage.

Meanwhile, progressively scaled and more sharply redistributive Medicare and education levies would appeal to many Australians by redirecting revenue measures to specific programs and priorities in service delivery. It is these areas that rank highly as causes for concern among the majority of Australians who would rather see better health and education outcomes, as opposed to further tax cuts.

An additional infrastructure levy of 4 per cent would not be too onerous upon business, especially when you consider that Australia’s current rate of 30 per cent is already 10 percentage points lower than the effective US rate of 40 per cent (35 per cent federal rate plus a 5 per cent state rate).

An infrastructure levy would be an ideal way of raising the corporate contribution to infrastructure, such as roads, rail, ports, communications and education - infrastructure from which businesses benefit.

Finally, a media diversification levy could be used to sponsor greater media diversity from traditional daily and weekly newspapers, to emerging forms such as Internet journals and forums, and international co-operation in the introduction of a Tobin Tax could also serve to tame financial market fluctuations and provide a new, alternative source of public revenue.

Further equity measures include the introduction of tax credits for low income earners and those moving from welfare to work. Indexing the bottom two PAYG income tax brackets would stop bracket-creep from eroding the earnings of those on lower incomes. Tax credits would provide a less costly alternative to raising the PAYG income tax-free threshold, targeting tax relief directly to those who need it most.

This does not mean that the tax-free threshold should not be raised to counter the recent effects of bracket creep. The long term aim, however, should be the elimination of its effects on low income earners through indexation. In tandem with such measures, the PAYG income tax system should be progressively restructured so that when considered on its own, the effect of reform in this area is revenue neutral.