vested interests

When Paul Keating was prime minister, the top marginal tax rate kicked in at $50,000.  Yes you read that right: in Australia, in 1996, every dollar earned over $50k was taxed at 47% plus the Medicare levy. In fact, the same was true in the year 2000. But today, only 3% of tax payers are in the top tax bracket, which kicks in at a whopping $180,000. Even when John Howard was prime minister, four times as many people were in the top bracket as are there today.

That is, while the rate seems high to some, relatively few pay it.

In fact, Australia’s top tax rate is not that high by international standards, despite the squawking of some who say that we will no longer be able to attract and hold high-flying talent with a tax rate as proposed by Bill Shorten. Australia’s top tax rate is the 16th highest in the Organisation for Economic Cooperation and Development (OECD), keeping it where it is, plus an additional 0.5% Medicare levy, is not going to result in a talent flight from Australia.

Many commentators get it wrong when it comes to assessing which factors attract high-income earners to stay and work in Australia. It’s our democracy, lifestyle and high-quality public services that make this country such an attractive place to live, work and invest. It is culture, not economics, that determines who wants to stay in a country. And, as Saul Eslake pointed out on the weekend, if you are earning that much, you are not necessarily doing it for the money. More likely, you are doing it because you like the work you are doing.

But revenue needs to come from somewhere and Australia has modest taxes on wealth compared to international standards. In fact, we have some of the lowest property taxes in the OECD. Unlike most countries, Australia no longer has estate taxes or death duties. Our capital gains tax is modest and distortionary. Large parts of housing wealth are not taxed at all with the exemption of the family home, regardless if it is a humble unit or a $20 million mansion. With so much wealth that is lightly taxed, it is left to the income rate to keep our system progressive.

Budget week 2017 has marked the last of the great economic ideological transformations going on, the final acceptance that Australia has a revenue problem. The quadrella is in: first the government accepted debt was no longer bad; then it was OK for the government to build and own things (owning a second Sydney airport, buying Snowy Hydro etc); then education and health spending were the go; now, the final retreat on revenue. As Paul Kelly said on Sky News yesterday, there is a new general agreement that budget repair needs to be done on the revenue side and the debate is now who pays.

And once we accept that we need to collect more revenue, it is difficult to argue that poorer Australians are the ones who should be slugged. But that would be the net result if the income tax system is not kept progressive. If the capital gains tax discount is not reduced; if estate taxes are not put in place; if family trusts get exempted, then it is income tax that needs to do the heavy lifting.

Of course, revenue could be raised through other forms: a carbon tax, a mining super profits tax or keeping company taxes where they are, but apparently that is not on the table for the right. Careful what you wish for, boys and girls.

And, overall, of course, as Adam Creighton said in The Australian on the weekend, as a society develops and its income increases, government spending as a share of the economy grows. Creighton points out that this is the story of the last 100 years worldwide. Put another way, it’s the price of civilisation. Indeed, as research is beginning to show, addressing inequality — most obviously via an increased role for government — is actually needed for growth and prosperity. It seems that Australian politics has caught up with reality. Now it is no longer a decision of if we should pay but how much should be paid and by whom. Welcome on board everyone.

*Ben Oquist is the executive director of The Australia Institute @BenOquist