23 Oct Ibis World Report – October 2012 – “More Tax Please”
Ibis World Report – October 2012 – More Tax Please
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Who could be serious about raising taxes, short of suggesting a political death wish for an incumbent government or an opposition party seeking to govern?
Most genuine and pragmatic economists and politicians: that’s who would support the idea. Australia is a low-taxed nation by OECD standards, and we are struggling to make ends meet. Some of that is to do with waste, and always will be – it is the nature of the bureaucratic behemoth. But much of it is to do with social equity and equanimity, without suggesting the creation of a ‘nanny state’ such as a number of the EU members have become. But there are pressing social needs still to be addressed.
Australia is now taxed at a lower rate than five years ago, partly due to the impact of the Global Financial Crisis (GFC), as the first chart shows.
Our taxes are now 5% of GDP lower than at the end of the last century in F2000.
That is $75 billion less taxes this year than would have prevailed at the then 30.6% of GDP, compared with 25.6% currently. And we don’t have to quite go back to the 30.6% level to balance this year’s or the immediate future years’ budgets.
Given that we have been running deficits now for some five years, governments have been avoiding tax (increases) in an attempt to show responsibility. It is nothing of the sort: it is tax avoidance.
In this second decade of the 21st century, it is tax avoidance by governments across the world that is more serious than corporate or personal tax avoidance – all three sectors involving cheating as they do. Tax dodging by individuals and corporations is a practice that is a century if not millenniums old. But tax avoidance by governments, while sporadic throughout history, has become rife in recent decades.
It is silly to just look at an international taxation league table without looking at the actual spending by governments – the difference being deficit spending which, if becoming chronic, leads to a GFC crisis of the sort now led by Japan, the European Union and the United States, which account for 44% of world GDP this year.
The second chart shows the estimated government spending – some at scary levels – by 22 of the world’s largest nations in 2012, together with the shortfall in taxes (deficit).
Hardly any of these shortfalls are serious for a single year, although those for the United States, Japan and the United Kingdom would be of some concern in any year. But if continued, they lead to the GFC we now grapple with: a classic ‘boiling frog syndrome’.
Government tax avoidance occurs when governments promise an unfunded agenda. Doing that at the onset of a recession is considered sound economic and fiscal practice, especially if the excessive spending is in capital expenditure rather than consumption expenditure, as it creates more immediate jobs and jobs for the future.
But when it is done during the long business cycle (averaging 8.5 years in Australia), and year after year when there are no recession-prone conditions, it converts to careless if not dishonest government. Economics and government budgets will always be about unlimited demands being constrained by limited resources.
We have this situation in Australia where over $150 billion was spent without being covered by taxes and other income – which dropped by 5% of GDP over the past decade as mentioned earlier – and the government now needs to find more receipts to cover honourable goals such as universal dental cover, disability support, better education, higher refugee numbers and other programs.
Promises from any party in power should be accompanied by the wherewithal.
The solution is simple in Australia’s case: raise the GST income by removing the exemptions and raising the rate to 12.5% instead of the current 10%. The average in the OECD group is currently 17.5% (ranging from 5% to 23% as seen in the third chart) so a 12.5% rate still leaves the nation lightly taxed both at the GST as well as the total tax level (only back to the 2007 level) and could pay for the government’s promises.
Compared with nations that are direct participants in the GFC, unlike Australia and most of Asia that are bystanders, we have a relatively painless way of balancing budgets and avoiding chronic tax avoidance by government. It’s not that hard.
Other nations on the second chart, however, face the dual challenge of raising taxes and cutting expenditure during the course of this decade – especially those nations that have turned themselves into what is called a ‘nanny state’. That probably fits most nations where the tax take is at an unsustainable level of 40% or more of GDP.
Some would suggest the bar should be drawn even lower in the interest of more self- reliance, say one-third of GDP and certainly no more than 37.5% of GDP.
Thankfully, Australia is nowhere near either of those levels. And we have been instituting some self-reliance measures such as the superannuation level, now on its way to 12% of wages, that should ensure an adequate and comfortable retirement for most Gen Xers, and virtually all of the Net Generation (currently under 30 years of age).
But for Australia and other countries – many far worse off than us through massive debt and other problems – to suggest low taxes or fixed levels as a share of GDP is a virtue is to have heads in the sand, and usually it is a case of pure political hypocrisy. It is bad government, lacking in vision and leadership. Properly explained, voters can accept – albeit grudgingly – a modest rise in taxation. Need we be reminded of the tragedies of Greece, Spain, Italy, Japan and others with debt mountains and, in some cases, horrendous unemployment problems.
Citizens deserve better.
www.ibisworld.com.au | (03) 9655 3881 | [email protected]