Raise taxes to reduce inequality

Despite unprecedented economic prosperity over the past twenty years, income inequality is still rising in Australia. Radical change – including tax reform – must take place to address this imbalance.

In order to address rising income inequality in Australia we must start by reforming campaign financing and addressing taxation. Our tax system must become more progressive and the government must reduce and replace wasteful tax expenditure.

On Wednesday, following the release of an Oxfam report Working for the Few, I addressed the problem of rising income and wealth inequality in Australia (Australia’s inequality shame can no longer be ignored, January 22).

Over the past thirty years, the income share of the top 1 per cent of income earners has effectively doubled to around 10 per cent of our national income. Real incomes of the top 1 per cent increased by 178 per cent between 1980 and 2010, compared with just 34 per cent for the bottom 90 per cent.

Despite unprecedented economic prosperity over the past twenty years, successive governments at both the state and federal levels have failed to address inequality. They have failed to address our infrastructure needs, failed to plan for the future and failed their social obligations. We have, quite simply, wasted billions of dollars.

But how should our governments address this issue? And what changes should we demand?

First, we need to address campaign financing and increase the progressivity of the tax system. Income redistribution needs to be greater but we also need to create a tax system that is less susceptible to cyclical downturns.

Second, welfare needs to be means tested and more focused than the current slapdash system that lacks coordination and too often provides welfare for people who don’t need it.

Third, education and health policies are, as always, keys to address inequality and savings on tax reforms should be dedicated to improving the quality of services, particularly for the poor.

There are a number of changes that need to be made to Australian policy to address inequality. This list is far from exhaustive and is designed as a discussion starter rather than a comprehensive list of what needs to be done. I’ll discuss the first two – campaign financing and taxations reform – in this article, while my next article will focus on welfare, education and health.

Campaign financing

According to Oxfam, the major driver of inequality has been the influence that the wealthy have over the political process. Consequently, the starting point must be to address how decisions are made.

Campaign contributions are often, in crude terms, legalised bribery and in many cases are undertaken with the belief that the donator will be paid back. It could be a lucrative government contract, favourable regulation or deregulation, or a cushy government job down the line but large government donations are rarely done without a catch.

In 1996 the Coalition increased the disclosure threshold for political donations from $1,500 to $10,000, creating a less transparent political system, and Australia now has some of the most lax regulations regarding campaign financing in the world.

I’d recommend a radical change in campaign financing by banning political donations of over, say, $5,000, while simultaneously banning corporate contributions. Corporations do not vote so why should they manipulate the decision-making process?

Campaign financing should primarily be financed using public funds. Government represents the people and the people can finance the election in proportion to the taxes they pay. The rich would continue to finance most of the campaign, the same as now, but without the influence that comes with direct donations.

Taxation

A central pillar of the Australian taxation system is that it is progressive in that the marginal tax rate paid by an individual increases as their income increases. This would obviously remain intact, although I propose increasing its progressiveness.

The tax free threshold should be raised – providing tax relief for the poor – with the tax burden for middle income earners also falling. Below is a quick example of a more progressive tax system, which provides relief for the poor and middle class while increasing the tax burden on the wealthy.

For someone earning $80,000 they would pay $3,797 less in tax each year, while for those earning $1 million they would pay around $30,000 more in income taxes.


Graph for Raise taxes to reduce inequality

Although politically problematic, the government should also address GST and company tax. The GST is more stable than most taxes – we all have to eat after all – while reducing company taxes encourages foreign investment, which will be necessary to meet our infrastructure challenges. Both changes enhance the government’s ability to address inequality and undertake other policy initiatives.