By Greg Ogle
With so many government services being slashed, access to education curtailed and public assets sold off to appease the government's obsession with "balancing the budget", the need to focus on government income and expenditure has never been greater. The existence of an $8 billion (or was it $10 billion or $13 billion?) "black hole" was always highly debatable, but this does not relieve the left of the obligation to put up options for funding the sorts of community, health, education and welfare programs we want.
This is particularly vital because what we are facing is not just a right-wing ideology of cutting government spending. We are faced with a deeper "revenue crisis of the state" — a diminishing ability of the state to raise the money to pay for its programs.
In part this crisis is caused by the globalisation of capital, which has undermined many approaches to raising revenue, including those traditionally advocated by the left. However, of these traditional left approaches, progressive income taxation remains an economically viable way of raising government revenue.
But before considering this option, it is worth looking at why other approaches are problematic.
The left's usual answer has been a combination of Keynesian-style budget deficits and broad ideals of "taxing the rich". The premise was that, by running a budget deficit, the government could stimulate demand and economic growth.
This growth was vital because deficit spending was premised on the government repaying the debt from increased revenue generated by new growth. There is now considerable doubt on the left and the right as to whether such demand-side policies can generate the promised growth and employment in an open economy.
The record of government deficits coupled with high unemployment since the 1970s suggests that the sceptics are right. Government expenditure didn't create growth in the long run, and thus there was no real extra revenue base. The government debt remained, as did the high welfare burden, thus creating a revenue crisis for the state.
The crisis of Keynesian demand-side economics is a problem for any left strategy. But the problems are worse when we turn to the supply-side considerations which have filled the vacuum left by the collapse of Keynesianism in the 1970s.
Taxing the rich, and specifically corporate business, is the other favourite strategy of the left. But taxes on business, like company or payroll tax, and even environmental taxes like carbon taxes or polluter pays charges, are basically a cost to industry.
This is a problem because globalisation has brought new cost pressures. The massive expansion of world trade has introduced international competition into industries which had previously been dominated by a few large corporations. These corporations could largely determine market prices and so pass on any increased wage or production costs. Not so now.
International competition has meant a return to more competitive pricing both domestically and in the export market. High or increased taxes, unless balanced by greater efficiency or cheaper wages or other costs, will reduce profitability. In a world of internationally mobile capital, if taxes and costs are too high, capital will move offshore. This threat of capital flight makes it difficult for national governments to tax internationally mobile capital, even apart from the separate problems of transnationals avoiding taxes by juggling international books.
Clearly, this is a worst case scenario. Capital is not perfectly mobile and does not flee the country at any tax or cost increase. However, the dynamic described above does represent the logic of global capital — a logic which is a major constraint on the state's ability to tax capital. As it becomes easier for capital to move around the globe, so the state's ability to levy taxes on business is increasingly limited.
Unfortunately, the answer is not simply the (re)regulation of capital movement. Tight regulation of capital flow is the equivalent of a cost to business because it prevents it from operating where/how it is most profitable. This is not to say that no regulation is possible or desirable, but again, the ability of any one state to regulate capital flow is (inversely) proportionate to the mobility of capital.
So what is left for the left if Keynesianism is dead and business will fly the coop if the welfare/tax burden is passed on to it?
Perhaps ironically, one answer lies in the nature of globalisation. If the problem is that capital is able to move around the world, then perhaps the appropriate way to levy taxes on a global capital is through international institutions operating with the same global reach. The left should certainly support any suggestions along these lines, but any such taxes are still a long way off. We still need to address the revenue crisis as it exists now.
Perhaps the relative immobility of labour is a key. Labour does not have the potential to move around the world as quickly or as easily as capital. Most people are bound to one country by custom, emotional ties and/or immigration laws. Thus there is more potential to increase taxes on labour than on capital because workers are less inclined and less able to flee the country.
Ignoring for a moment the political difficulties of increasing taxes on wage and salary earners, the crucial economic argument here is that higher income tax rates pose little or no extra cost to business. They do not threaten international competitiveness or profitability. The only cost may arise where companies are bidding to attract "top international talent". Such international talent would judge rewards by net salary, and so companies may have to increase the salary they pay to make up for the higher personal taxes.
Of course, much of this "talent" is corporate executives with experience of "rationalising" companies and laying off workers, so from a left perspective we may not be too worried if Australia misses out on such talent. But at the theoretical level, the point remains that the numbers of people involved is relatively small. For the bulk of people, including most middle and high income earners whose income is from wages and salaries, increased taxes will be grudgingly paid. This is not to say that there will not be attempts to shuffle income to avoid taxes, but the options available for tax avoidance here are considerably fewer than the options open to global capital.
So in terms of the traditional left responses to financing government expenditure (i.e. budget deficits/borrowings and taxing the rich), only taxing the wage and salaried part of the rich remains an option under the rules of global capital. Obviously, from a socialist perspective this is not an ideal solution. We would rather tax profit than wages, but I am suggesting that, even within the limitations of global capital, there is an option for increasing the revenue base in a more egalitarian way. That option is through a more progressive income tax system where those on high incomes pay proportionately more than those on low incomes. While the tax burden would fall on labour, the greatest burden would fall on those most able to pay, rather than on the poor, who bear the brunt of cuts in government services.
This greater tax burden may appear unfair to middle and high income earners who have worked hard to achieve their income levels, especially when richer people who live off capital are more lightly taxed. Certainly it is not fair that capital does not pay its share, but socialists should not apologise for this — it is the nature of the capitalist system. Contrary to the myths about individuals striving to do well, and the apparent power and status of the middle classes, ultimately the system benefits wealth and ownership, not hard work.
It is an unfair system. Within the limits of this system, progressive personal taxation simply shares the unfairness around. If the tax burden must be borne by wage and salary earners, then socialists and the left generally must push for redistributive/progressive taxation rather than accepting cuts to government and welfare services.
Clearly this does not address the problem of the political difficulties of introducing a more progressive tax system. Nobody wants to pay more tax, but the political difficulties should not be exaggerated. Australia has traditionally had a progressive tax system, and that tradition was strong enough to defeat Joh Bjelke-Petersen's flat tax campaign in 1987 and Hewson's GST in 1993.
Both the Greens and Democrats have talked about the need to put some tax increases on the agenda, and recently 114 Australian economists wrote an open letter to the prime minister arguing that "if necessary, increased taxation and other revenue measures should be under consideration". Moreover, John Howard (of all people) has recently set an example with the budget's increase in the Medicare levy on people earning over $70,000 a year. Of course, the Liberals are unlikely to implement a more progressive income tax system, but the question is whether the left and Labor would?
In government the Labor Party and some parts of the union movement succumbed rather than confront the revenue crisis of the state. While the government cut expenditure, unions continued campaigning for income tax cuts (often to balance real wage cuts).
When Labor came to power in 1983, the top marginal personal tax rate was 60 cents for every dollar earned over $35,788 (which was nearly twice average weekly earnings). It is now down to 47 cents in the dollar for income over $50,000 (about 1.5 times average weekly earnings). Progressive tax was weakened as the highest category of income tax was abolished. By contrast, the top tax rate paid by the average earner increased from 30.6 cents in the dollar in 1983 to its current 34 cents in the dollar
Thus to argue that a return to a more progressive income tax system is politically impossible denies history. The real problem is that, with left inactivity and Labor hostility, the prophecy that "increased taxes are not politically possible" becomes self-fulfilling. Redistributive taxes require political campaigns which must be mounted by the left, but they are not utopian dreams. They are not structurally impossible.
Capital is not perfectly mobile and therefore can be forced to pay some taxes. And in the longer term, the left can look at ways of regulating and taxing capital at an international level. But in the mean time, the options at the national level are limited. Progressive income taxation is a realistic and relatively egalitarian response to finding the funding to pay for social and welfare programs.