Tax cuts and increased spending don't add up

Labor leader Kim Beazley is set to appeal to so-called middle Australia with an ambitious agenda of tax cuts in the run up to the next Federal election. Talking to The Age recently, Beazley argued, “we will be lessening the burden on middle Australia”.

Continuing in this vein, the Opposition leader argued that any tax cuts would need to be directed towards, “that part of the taxation system which produces the heaviest effective marginal tax rates”.

Speaking earlier this year at the National Press Club, Beazley had identified Middle Australia as those earning about $60,000 a year. At the same press conference, the Labor leader said he would like to target his tax cuts at people on about $55,000 a year.

But the real middle Australian does not earn the average wage. Economist Andrew Leigh pointed this out in On Line Opinion, where he explained that the median adult income (i.e., the income of the person at the 50th percentile) is a far more reliable indication of what most people earn than the average, which is distorted by a minority of very high income earners at the top of the scale. The median Australian adult income is about $26,000 a year; less than half of that characterised by Beazley as comprising Middle Australia.

As a long-time Labor member, reading that Beazley was planning ambitious tax cuts for middle Australia was tantamount to being kicked in the face. After years of campaigning for the kind of tax reform necessary to meaningfully expand Australia’s social wage, I now question just how a Beazley government would be able to afford to increased spending in vital areas, such as:

• a universal dental care program as part of Medicare;
• a slash of hospital waiting lists and investment in medical training and health infrastructure;
• support for the expansion and maintenance of the Pharmaceutical Benefits Scheme (PBS);
• a cut in the fees burden of Australian students by raising the HECS repayment threshold and setting uniform national HECS rates;
• the removal of full-fee courses for domestic students;
• the reduction of student: teacher ratios in public schools, and provision of desperately needed school infrastructure;
• increased welfare payments and a more relaxed means tests for single parents, aged people, students and  disabled people, while providing additional support for carers of all kinds;
• increase Commonwealth funding for aged care, with the intent of lowering fees, providing additional staff for nursing homes and improving quality of care;
• investment in public telecommunications infrastructure, including the full re-socialisation of Telstra’s mobile network, and the rollout of fibre optic cable enabling high speed broadband access for all Australians;
• improved transport infrastructure, such as road and rail with a movement toward providing free public transport;
• tax incentives and assistance for democratic co-operative enterprise; and
• tax credits for low income earners, and for those moving from welfare to work.

Tax reform could also provide scope for targeted industry assistance, including research and development grants for innovative business, and targeted incentives for high-wage, high-skill sunrise industries.

While Beazley has committed to a nation-building agenda, the kind of initiatives mentioned above are simply not achievable without additional funding; funding which can only come through increased revenue, or through cutting existing programs such as the Family Tax Benefit or private health insurance rebate. Even assuming that Beazley commits to public borrowing to provide for an expansion of infrastructure - an uncertain prospect given his commitment to budget surpluses - debt servicing costs need to be factored into this equation.

Fortunately, Beazley’s commitment to provide relief to those on high effective marginal tax rates can be interpreted as support of those moving from welfare to work. When considering the option of tax cuts for people on as much as $60,000 a year, however, - those whom the Opposition leader refers to as Middle Australia - tax cuts will only further reduce the progressive nature of a system already skewed in favour of wealthy people as a consequence of reforms enacted by the current conservative government.

What is more, research demonstrates that voters would overwhelmingly prefer additional public expenditure in health and education instead of tax cuts. As former ALP parliamentarian John Langmore argues in Coming to the Party:

The [Australian Survey of Social Attitudes] confirms the findings of other opinion polls that have consistently shown that the proportion of Australians who prefer higher public spending on health and education to lower taxes has been rising steadily since 1990 to be a substantial majority in 2003. It is therefore an amateurish electoral misjudgment to claim that tax cuts are the highest political priority.

Instead of embracing a program of tax cuts for some illusory Middle Australia, Labor needs to consider broader prospects for tax reform in order to finance a progressive expansion of Australia’s social wage.