A tonic for Australia's inequality ills

Income inequality is rising in Australia and very little is being done to address it. Despite decades of prosperity in this country, the rich are getting richer, while the poor fall further and further behind.

Last week, following the release of an Oxfam report Working for the Few, I looked at the problem of rising income and wealth inequality in Australia (Australia’s inequality shame can no longer be ignored, January 22) and how reforming taxes and campaign financing could improve the worsening situation (Raise taxes to reduce inequality, January 24).

Aside from tax and campaign financing reform, there are a number of other changes that need to be made to policy to address inequality in this country.

Education and health

Equal opportunity begins with health and education. Children from low socio-economic backgrounds often hit the ground well behind their richer counterparts. Rather than diets rich in iron and other important nutrients, they consume diets that include more fast food and soft drink and fewer fruit and vegetables. The health outcomes and habits obtained early in life have an unfortunate habit of sticking with people and then affecting the next generation.

Children from low-socio backgrounds will typically go to less successful schools, with greater class sizes and sometimes less accomplished teachers. The outcomes of public versus private schools reflects this.

Health and education have both immediate and long-term implications. Improving both the quality of health across the economy – via both health care itself, preventative measures and education on the importance of a healthy diet – and education will go some way to improving the opportunities for young Australians.

The important thing to note with education and health care expenditure is that it has a multi-generation payoff. Improve the health of the poor now and it will feed through to their children and then grandchildren down the track. The same can be said for education spending.

Housing policy

Housing policy provides an opportunity for the government to save significantly and improve equality without harming housing outcomes. Housing policy is plagued by policies and taxes that redistribute tax towards the wealthy, while providing no identifiable effect on home ownership or housing affordability.

Negative gearing should be reformed so that losses on housing assets can only offset profits from housing assets. The current system allows housing losses to offset any taxable income. Alternatively it could be scrapped all together.

Stamp duty should be axed in favour of a broad-based land tax that would be levied on a per square metre basis. This would simultaneously reduce an unnecessary cost associated with purchasing a house, while creating a more stable and progressive tax.

Stamp duty is inherently volatile since it is reliant upon the volume of housing sales and is also a cyclical tax that falls during downturns and recessions. It also discourages labour mobility by increasing the cost of moving and therefore reduces opportunities for Australians.

Superannuation and pensions

With an ageing population we are likely to see rising inequality among our elderly population. While many have large housing assets, too many have insufficient superannuation assets and will be overly reliant on the aged pension to make ends meet.

Budget savings will need to be made to ensure that pension benefits are not cut but it is also important that the pension goes to people who actually need it. In addition, the superannuation system has to be improved to reduce the reliance on the aged pension.

According to Treasury estimates, superannuation tax concessions cost taxpayers around $32 billion per year, with most benefits accruing to the middle and upper-class.

Superannuation tax concessions should be changed so that they are progressive, the same as income tax, rather than the current flat 15 per cent tax on superannuation contributions. It would simultaneously be fairer and boost the budget bottom line.

The means test for the aged pension should be adjusted so that the family home is included. Too often older Australians sit on million dollar properties while also receiving the aged pension; instead the aged pension should be there to support the genuine poor and middle-class.

Aged Care and Disability

As I have noted previously, Australia has an ageing population problem (There’s no silver lining in Australia’s ageing labour market, January 16). Unfortunately we have nowhere near the aged care infrastructure to handle it.

The policy recommendations in my previous article were designed to improve the stability and scope of the tax base, reduce wasteful spending and increase tax revenues. While we should use some of this in a redistributional sense, we also need to address our failures on infrastructure and a key to that is aged care.

The National Disability Insurance Scheme (NDIS) is another policy that will go some way to addressing inequality for many Australians. Those with disabilities and the people who care for them are often those most in need of support. The early intervention programs may also provide additional opportunities for those with disabilities to contribute directly to the economy.

Trade

One of the major drivers of inequality over the past few decades has been globalisation, which has opened our markets to a range of low-cost alternatives and reduced the bargaining power of low income employees. While the economy as a whole has benefited from trade liberalisation, specific sectors and individuals have suffered greatly.

While trade barriers would help to reverse this process it is unadvisable. Instead the best option is to pursue trade and use the tax system to redistribute wealth from the winners to the losers of trade. To offset these losses, the government should provide extensive retraining opportunities for those who have been adversely affected by trade liberalisation.

Despite the obvious importance of inequality, it is unlikely to be addressed in the near future. The Coalition’s Commission of Audit is a sensible idea but the commission itself is loaded with members of the business community, headed by Business Council of Australia President Tony Shepherd, and includes no representatives from consumer or welfare groups or even small business.

The commission may go some way to reducing government expenditure but it is unlikely to be at the expense of the wealthy or big business. To some extent it is just more evidence of the influence big business has over the political process.

So it is not surprising that addressing inequality begins with the political process itself. We must have a more transparent system and a system that removes the influence of big business and lobby groups. Only with an uncompromised decision-making process can we effectively begin to reduce inequality itself.

Most of the tax savings I have identified come from policies that achieve little – housing policies that do nothing to promote home ownership or affordability for example – and the billions of dollars could be used more efficiently to address inequality. The policy recommendation also doesn’t discriminate, addressing inequality for the young (via education and health), the poor (via lower taxes and greater income redistribution) and the elderly (via improved superannuation and greater infrastructure investment).

These policies also have the advantage of addressing inequality while improving the budget bottom line the efficiency of government spending. While Australia does not currently have a budget crisis, an ageing population will ensure that one day we will have to reform expenditure and taxation extensively. It would be prudent to be proactive and address some of these social issues now.