The answer to the meaning of life is, as we know thanks to Hitchhiker’s Guide to the Galaxy, “42”. What is less well known is that the answer to what Australia’s tax policy should be is also a single, specific and essentially arbitrary numerical figure.

[This article was first published in the Australian Financial Review – here]

Much like the absurdist sci-fi comedy of Douglas Adams found that the answer to the ultimate question was “42”, the government insists that Australia’s overall tax level as a proportion of gross domestic product must not rise above a specific number: 23.9 per cent. To the Treasurer, this 23.9 figure is the “speed limit” that drives whether new taxes will be introduced or slashed in the future and indeed the size and scheduling of the income tax cuts expected to be announced in Tuesday’s federal budget.

Where does this magic figure come from? Turns out that 23.9 per cent is the average of the ratio of tax receipts to GDP that occurred between the introduction of the GST and the global financial crisis, that is, between 2000-01 and 2007-08.

Treasury recognised the figure was only “an assumption … and does not represent a government policy or target”. For the bureaucracy to use a historical average is not unreasonable. Treasury has to make some assumption about how political decisions will affect bracket creep.

However, the Treasurer has now declared that a reasonable forecasting assumption will become a strict ceiling, never to be breached. Of course there has been no debate, the public has had no say in setting this 23.9 per cent target, nor has the government introduced any legislation to enforce it; yet it essentially guides all taxation policy and – by implication – spending policy in Australia.

While debate rages over specific tax policies like government’s controversial big business tax cuts or the opposition’s new franking credits tax plan, a bigger discussion is missed.

Australia has the eighth lowest tax-to-GDP ratio in the OECD. Australia Institute research reveals if we had the same ratio as the UK, an additional $90 billion in revenue would be collected every year. Our tax mix is different, but overall our level of tax is low in comparison to other developed countries.

Choosing the time between the GST and the GFC on which to target overall tax levels is also entirely arbitrary. In 2010 Australia voted for the NDIS and the increase in tax designed to fund it. Capping tax revenue cuts across community wishes. A sensible debate would ask the democratic question: what sort of society – schools, defence force, environment, infrastructure, hospitals – do we want to build and what level of taxation will be needed to pay for it? Then work out what is the most efficient and fair way to get that amount of revenue.

Instead the 23.9 per cent cap works to deny sensible politics and policy. The bank levy, for example, introduced with widespread community and parliamentary support in 2017, would, in the end, automatically lead to offsetting reduction in taxes elsewhere – reducing the very revenue it was designed to produce.

Of course different taxes have radically different economic effects. A large new tax on low income earners would likely effect demand and economic growth immediately. The closing of tax concessions on superannuation, raising the same amount of revenue, or a bank levy will have negligible overall economic impact. It is not the level but the type of tax that really has the impact.

Treasury’s own analysis reveals trade-offs worthy of debate that the arbitrary cap robs us of. What if we wanted a more reliable surplus? In 2016, Treasury calculated that a no-less-arbitrary cap of 24.4 per cent would – on Treasury’s projections – deliver us a surplus of 0.8 per cent of GDP in 2026–27, four times larger than the surplus would be under the 23.9 per cent cap. Or what if we wanted to pay the same or less income tax than we currently do? The government’s plan for company tax cuts would mean that income taxes will still increase as a percentage of GDP, regardless of the overall cap.

The great jurist Oliver Wendell Holmes Jr said that “Taxes are what we pay for civilised society”. That is true, but only the half of it. Deciding which taxes our society needs, and at what levels, is the key other half of our responsibility as citizens. An arbitrary tax cap not only starves our society of the civilising resources it needs, it also suffocates the debate that we need to have about what a fair and full tax system might look like. Civilisation does not stop at 23.9.

Ben Oquist is executive director of The Australia Institute @BenOquist

AFR Contributor

Originally published by The Australian Financial Review on May 6, 2018

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