Where have all the taxes gone?
By John Tomlinson
The controversy about the federal government's last budget and the current political shenanigans over introducing a consumption tax demonstrate the unrest changes to the tax system evoke. As the 17th century French writer Jean-Baptiste Colbert suggested, "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing".
The usual way governments quieten unease about taxation is to try to sell the tax as the only way to ensure socially desired ends — health, education, community services, social security. In the early days of the colony of New South Wales, taxes were justified as a way of providing shelters for orphaned children.
Before federation, taxation in the Australian colonies was raised primarily from custom and excise duties. Following federation, the Commonwealth took control of these indirect taxes. Taxation of land, deceased estates and income initially remained with the states. It was not until the late 1920s that federal income taxes impinged on the majority of the work force.
The majority of Australians believe that this is a high taxing country. However, compared with other OECD countries it is not. One feature of Australia's taxation system, which leads to the perception that Australians pay too much tax, is that it raises a considerable amount of tax revenue from direct taxation, particularly income tax, compared to other OECD countries. Australia is alone in the OECD in not having estate duties and, apart from land taxes, it has no declared wealth tax.
While there is no generalised wealth tax, there is a specific wealth tax which is mainly applied to less affluent people at a time they can least afford it. These are asset tests on social security payments and education allowances. The most recent addition is the nursing home entry charge, the cost of which varies between $26,000 and $250,000.
The overwhelming majority entering nursing homes for any lengthy period are the severely disabled or frail aged. Raising a wealth tax in this manner seems a strange way to ensure the least amount of hissing from the goose.
A duty on all deceased estates would provide enough money to upgrade all nursing homes in Australia.
The best time to recover a wealth tax would be during the most productive period of one's working life, when people have the most disposable income. Such thinking was behind the imposition of the progressive rate of income tax, in which Australia led the world.
The government's introduction of user-pay nursing home fees falls into line with economic rationalist policies behind many of the low tax campaigns also in the US, Britain and New Zealand. Economic rationalists claim that people, not governments, should determine how their hard earned money is spent. This works a treat whilst people are generating income and are healthy. The down side becomes more obvious should invalidity or frail age occur.
Ernest Lett, an elderly citizen, wrote to a Brisbane newspaper lamenting the imposition of the nursing home entry charge and pointing out that for most of his 39-year working life part of his taxes were earmarked to go to the National Welfare Fund from which social and community services were to be funded.
Lett asked: "Where is the money from this fund, into which I was contributing towards my own retirement, gone? Why am I now being told that my wife and I must pay an up-front, assets tested, non-interest bearing loan, in effect an entrance fee, to enter a nursing home? For my whole working life I believed my contributions to the National Welfare Fund were for this purpose."
Canberra taxation expert Julie Smith's research reveals that this fund grew out of special state government flat rate levies, imposed during the depression, introduced to compensate state treasuries for lower income tax returns, but which were notionally set aside to pay for unemployment relief.
In 1941, the Menzies government converted these various taxes into a payroll tax which employers paid at 2.5% of total wages into a National Welfare Fund. The fund was "used" to pay child endowment. During World War II, the Commonwealth took over income tax collections completely. As a sweetener, the public was told that 25% of income tax would go to pay for the widows' pension and future social welfare needs.
This guarantee went the way of many politicians' promises. Smith said, "In the early 1960s, with the principle of mass taxation well established, the Menzies government quietly absorbed the social security tax into general income tax rates". The absorption of the National Welfare Fund into general revenue took place surreptitiously.
When I worked for the Department of Social Security in the late '60s and early '70s, many applying for the pension would say, "I'm only getting back the money I paid into the National Welfare Fund". In a sense they were correct. Their past contributions had paid the benefits of those who went before, as the tax paid by that year's work force paid these pensioners' pensions.
I never had the heart to tell them that the fund no longer existed. I wonder how much the "geese<>70> will hiss the next time they are told the government needs to overhaul the tax system to ensure their future welfare?<>><>41559MS>n<>255D>