A strong tax base reduces inequality

by Jim Stanford

A strong, progressive tax base and quality public services are the keys to reducing inequality

New research reveals the importance of a strong taxation base to fund public services and benefits.

With the Stage 3 tax cuts set to remove $5bn more each year than is spent on either JobSeeker or Child Care Support, there is a great danger of rising inequality due to a smaller revenue base and subsequent reduction in public income support programs and service delivery.

As the gap between the rich and poor in the private sector grows ever wider, the importance of public services paid by our taxes to reduce inequality increases.

Data gathered from the national accounts reveals how the taxation system combines with government benefits and public services to create a more equal society.

Counting only private or “market” income (from employment, investments, etc.), the gap between the richest 20% of households and the poorest 20% is a massive 21-to-1.

Then the tax and transfer system goes to work.

The current progressive income tax system which collects a higher share of taxes from high-income households, combined with income supports such as the Age Pension, Job Seeker, and other transfers going to those who need it, reduces the inequality ratio to 6-to-1 in after-tax disposable incomes.

But public services then reduce the gap further, to around 4-to-1. That’s because those services, even though used by everyone, lift the total living standards of poorer households by a larger proportionate amount.

Preserving quality public services, and a strong tax base to support them, is thus essential to maintaining any semblance of a fair go in Australian society.

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