Since the proposed “debt reduction levy” was first reported earlier this week, commentators and the opposition have made much of Abbott’s decision to break his promise that there will be no tax increases in he led. Recent polls suggest his government’s popularity is suffering the consequences too. But the mistake Abbott made was not breaking his promise: it was making it in the first place.
You don’t have to look any further than the US to see how dangerous anti-tax rhetoric can be. So fierce is the anti-tax movement that every single Republican Party nominee for President in 2012 stood on a stage and pledged not to raise taxes by a single dollar, not even in exchange for $10 in reduced spending for every additional dollar in tax revenue.
In that environment, governments are put in a situation where deficits spiral yet to make the decision to raise additional revenue is electoral suicide. So services are cut, especially those that serve the most vulnerable, yet it is never enough.
It’s not surprising the Abbott seems to look to the US Republican party for inspiration: it is largely ideologically consistent with his own views and it has been effective in shaping the American political landscape to serve its interest, even with a Democratic president. And so Abbott stole another page from the Gingrich playbook and cast his party as the anti-tax party.
In opposition, Abbott made much of Gillard’s “great big new tax”. His message was clear: all new taxes were unacceptable. The Commission of Audit was instructed not to consider taxation arrangements. Neither was the Financial Systems Review. But balancing a budget and providing essential services to citizens sometimes requires tax increases. Anti-tax rhetoric and responsible economic leadership are mutually exclusive.
So Abbott stand accused of breaking his promise, when his real mistake was making the promise to begin with.
Taxes are inevitable and essential: rather than casting them in a negative light, politicians should talk their ideas on who pays tax, how it is paid, and how much is paid. Do we want a flat tax or progressive taxation? Should we tax income or expenditure? How should the tax system account for the additional expense of having a family? What level of taxation should businesses pay?
On the other side are the questions about which services should be provided to citizens and whether government is the right group to provide or fund them. Are we committed to universal free access to basic medical care? Should there be a safety net? Do we want all talented students, regardless of family background, to be able to access high-quality tertiary education?
And if the answer to all these is yes, then who among us should pay for them?
But rather than having these important conversations, in Opposition Abbott used phrases like “great big tax”, “class warfare” and “budget crisis”. When he assumed responsibility for the budget, there were few options available to him that he hadn’t publicly denounced. So rather than admit that perhaps a tax increase might be a responsible decision, and explain why a particular design is preferable, his policy of choice is a piecemeal approach designed to give the maximum amount of rhetorical wiggle room.
Reactive short-term solutions hiding under the rhetoric of a “levy” is not a way to build an effective or efficient taxation system.
Such policies fit poorly with existing taxation arrangements and can often have significant unintended consequences.
In this case, the proposed 1% levy applies to those earning over $80000 and, by media accounts, applies to all income for those earning over that amount, rather than just to marginal income. When you add the medicare levy surcharge and HECS repayments brackets into that, a single person on $80,258 with no private health insurance could be slugged with an addition $1534 compared with their equivalent peer on $79,999. The latter’s take home pay would actually be $1275 higher than their better-paid peer.
These sorts of unintended consequences are the result of reactive solutions from politicians afraid to commit to more fundamental change, lest they face they electoral consequences. In opposition, Abbott exacerbated this problem through anti-tax rhetoric. He is now suffering for his own games.
A smarter approach would be to remove these “levies”— which often bear little relationship to the actual cost of the service delivered — and to increase marginal tax rates. To stop playing games and raise revenue in a way that will preserve the progressive nature of our tax system. Progressive taxation is a social good that ensures those who can afford to pay more do, but that nobody is ever worse off if the earn an extra dollar.
Other options, such as reintroducing a small inheritance tax on estates over a certain value or increasing the GST are other ways to raise revenue, each with its own political and social implications. But to weight the options against each other requires us to talk about tax increases as not inherently wrong.
Rather than committing to no new taxes, good leaders should commit to be constantly thinking about how to make taxes better, fairer and more efficient. In engaging in lazy, though effective, anti-tax rhetoric, Abbott dug the hole he now cannot escape.