Flattening taxes will undermine our economic foundations

Australia's businesses have benefited from employing workers  supported by the 'social wage'.

Australia's businesses have benefited from employing workers supported by the 'social wage'. Photo: Getty

Slowly it is sinking in that Tuesday night’s budget contained a major turning point in Australian policy making – a flattening of our progressive tax scale in the name of ‘simplicity’.

The short version of that change is that upper-middle-class families – doing well, living in good areas, sending their children to very good schools – would be released under the Coalition’s tax cuts from the onerous 37 cents in the dollar tax rate.

Now who wouldn’t want that? If you are fortunate enough to be earning between $87,000 and $180,000 today, Treasurer Scott Morrison is promising that your higher-earning group will be relieved of the second-highest tax band, and for the most part just pay the rate of the next band down – 32.5 cents in the dollar.

That means that in 2024, somebody earning $140,000 would save about $3000 a year in tax, or those on more than $200,000 more than $7000 a year.

It’s a promise to wealthier Australians that our silly progressive tax scale will be trodden flat in six years’ time, so they can spend that money in the private sector instead of wasting it on frivolous public spending such as Medicare, the NDIS and tertiary education.

The ideological idea behind that is that the private sector should provide as many of Australia’s goods and services as possible, and the ‘wasteful’ public sector should provide only the barest of essentials.

It is the worst kind of ‘reductionist’ thinking, because it looks at the tax cut in isolation from the broader economy and society.

It is a political ploy that tempts upper-middle-class Australians to think “What would I spend that extra money on?” – private school fees, better health insurance, a better car, more superannuation savings, or whatever.

But to talk about the fortunes of one household is not to talk about the Australian economy, nor about the role of the progressive tax scale in achieving the miraculous record of 26 years of positive economic growth.

The reductionist view is like a scientist putting drops of fertiliser into an aquarium to see at what level of nitrates the algae begins to kill off the fish.

The holistic or ecological view is quite different – out in the big bad world, interactions with all sorts of other plants and creatures may make that ‘maximum level’ irrelevant.

So too with economics. As economic historian Ian McLean showed in his magisterial analysis, Why Australia Prospered, in 2012, no single factor can explain how we’ve been so ‘lucky’ for so long.

Our success has been part resources boom, part agricultural boom, part legal and democratic institutions, part financial system, part early adoption of ideas and technologies from abroad and so on.

Most relevant to the Coalition’s proposed flattening of the tax scale, however, is the fact that our 26 years of positive growth has been done with a progressive tax scale that funds elements of the ‘social wage’.

The Hawke reform era

The social wage concept was used by the Hawke and Keating governments in the 1980s and early 1990s to convince unions to stop striking and pushing for ever-higher wages, on the basis that universal health and education would be funded and everyday people would start to be weaned off state pensions via the superannuation guarantee.

To the reductionist economic thinker, these policies might be an affront to liberty – why shouldn’t I get to spend as many of my dollars as possible on myself and my family?

Well there is a clear answer to that – because it makes us all better off, including the reductionists. Our ‘eco-system’ has produced a standard of living that is the envy of the world, and has done so with a progressive tax scale and social wage in place.

Arguably the tax scale was too progressive in the early years of that era – the bands of tax rates in 1985-86, for instance, were 60 cents, 48 cents, 46 cents, 30 cents and 25 cents.

But those rates have been brought down over the years to the current bands: 45 cents, 37 cents, 32.5 cents and 19 cents.

If the government wants to maintain our economic success, ‘flattening’ a system that has worked very well is not the way to do it.

Why? Because as billions of dollars are taken out of the federal coffers to be spent in the private sector, the publicly funded services of the ‘social wage’ have to take a hit – and tens of thousand of jobs with them.

That might thrill the reductionist thinker superficially, but not if they have any idea how modern businesses in Australia invest, create jobs, and create wealth for the nation.

Those businesses rely on well-educated, healthy workers who have a backdrop of financial security through the super system – they are not looking to recruit members of the underclass that will develop if social-wage services are decimated.

To tear all that up and make the political promise that certain individuals will have ‘$3000 extra to spend each year!’ is to fundamentally change one part of the ecology.

And like the cane toads released into Queensland in 1935 to save money on pest control, that’s simply risking too much in a system that we already know is working.

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