The great American jurist, Oliver Wendell Holmes, is reputed to have said, ‘I like to pay taxes. In this way I buy civilisation.’ The contrast with the present public debate about taxation in Australia could not be greater. Of course taxes have never been popular, but as the United Kingdom Commission on Taxation and Citizenship (2000) has noted, today they are usually described in terms that make them seem fundamentally illegitimate. For example, taxation is typically referred to as the ‘tax burden’, as if by definition it represents an unwarranted load that would be better lightened.
In reality taxation reflects our mutual obligation to one another as citizens. Taxation underpins an inclusive society and is an efficient way of paying for those services that enrich society and are collectively consumed. Moreover, many of the services paid for by taxation add to our quality of life and are a natural way to spend our incomes as they increase through economic growth. We have, however, become increasingly schizophrenic, wanting increased access to more and better services on the one hand and less taxation on the other. Unfortunately the link between taxation and citizenship has been broken.
The result is a lop-sided debate about taxation, with governments under constant pressure to promise lower taxes with little regard for the consequences. In the end these promises are frequently exposed as hollow, and public cynicism about the political process further increases. Interestingly, resistance to taxation has not always been a key determinant of Australian public policy. During the 1960s the outlays and receipts of all Australian governments (Commonwealth and State combined) rose fairly continuously relative to GDP (Chart 1). But government outlays spurted ahead during the mid 1970s. Possibly as a reaction to the speed of the accompanying increase in taxation, ever since the Whitlam Government Australian politics has operated on the assumption that taxes should never be increased and preferably wound back. Thus the Fraser Government was expected to reduce taxation, and has been regularly criticised for its failure ever since. The Hawke Government committed itself to the ‘fiscal trilogy’, which was intended to limit the size of government by allowing no further increase in the level of taxation and expenditure. The Howard Government has tried to keep taxation within a ceiling ratio of taxation to GDP established in 1996-97, combined with a target of wiping out public debt, rather than maximising the nation’s net worth.
Nevertheless the present ceiling for taxation is essentially arbitrary. It does not reflect any consideration of the future demands upon government revenue, nor of the nature of any limits to the level of taxation. Accordingly the purpose of this paper is to try and promote a more balanced appreciation of the future needs for taxation and what that means for the future of our society. The paper will argue that we should frame our target levels of government expenditure and taxation by assessing what level of public spending will be necessary to preserve and enhance our society and civilisation. Or as the present Prime Minister, John Howard, put it in a recent radio interview, tax cuts should be considered ‘after you have met all necessary and socially desirable expenditures’ (my emphasis).
Of course, different people will have different views concerning the nature and extent of the public expenditure necessary to sustain our civilised society. Neoliberals, for example, have a narrow conception of citizenship, where as far as possible individuals should be free to pursue their own private interests. The role of the state is then limited to the provision of a narrow class of public goods, such as defence and law and order that the market cannot provide. But in Australia a much broader conception of citizenship prevails, for the most part. Thus each of the political parties represented in parliament accepts that a defining characteristic of Australian society is the notion of ‘a fair go’ where the community has a responsibility to ensure that each individual has an equal opportunity to realise her or his potential.
Accordingly there is general acceptance that Australians should have access to a minimum income and to basic services including housing, education, health, childcare and aged care. Governments are also expected to guarantee security, including security from misfortune that is beyond an individual’s control, such as natural disasters, disability and involuntary unemployment.
Interestingly the political debate in Australia tends not to be about the coverage or standards of service provision that the government should finance, but rather about how much if anything individuals should contribute on their own account. Even then the tradition has been that the majority of Australians will rely on a government funded age pension, and fully government funded education and health services.
Consistent with the view that expenditure needs should determine taxation, the main part of this paper will therefore consider the outlook for future public expenditures and what this would then imply for the level of taxation. But in order to establish the validity of this approach whereby the level of taxation is based on the amount of ‘socially desirable expenditures’, the paper will begin by considering whether there are economic limits to the level of taxation that might constrain what our society can afford. In addition, the latter part of the paper will examine possible alternatives to taxation that might be used to finance the expected increase in expenditure demands. First, what scope is there to achieve savings by re-ordering priorities and reducing waste? Second, how much of the cost of government services should be met by the individual who directly benefits, and how much by society because of the common benefits typically associated with public expenditures? The paper will then consider the critical issue of how we might achieve a better match between the demands for public expenditure and people’s willingness to pay for it through taxation. Finally the paper discusses the mechanisms that might be used to achieve a higher level of taxation and how fiscal discipline might be maintained when governments have greater freedom to choose the future level of taxation.