Monday, August 20, 2012

Treasury thinks the unthinkable: tax rises

Note well: the secretary to Treasury, Dr Martin Parkinson, has provided voters with the only no-bulldust budgetary advice they're likely to get between now and the federal election. Everything they get from the politicians - on both sides - will be straight from vote-chasers' fantasy land.

Even much of the media believe their interests lie in feeding their customers more of the self-delusion they prefer to hear rather than reminding them of the harsh realities of fiscal arithmetic.

In a speech last week, Parkinson noted the community's demand for the sort of "superior goods" governments provide - such as healthcare, aged care, disability assistance, education and social welfare - will only continue to rise.

That's because demand for superior goods grows faster than our income grows. Using that term is an implicit admission the community's demands are legitimate rather than populist.

"At the same time, the taxation base is weaker than we had imagined in the mid-2000s," he says. "With hindsight, it is apparent that part of revenue collections then reflected a temporary bubble in the economy."

Translation: perhaps it wasn't smart to award ourselves eight income-tax cuts in a row. (Some of us don't need to rely on hindsight for that judgment.)

"The take-out message is that the days of large surpluses being delivered by buoyant tax receipts are behind us ... tax receipts are expected to remain substantially lower - around $20 billion per annum lower at the Commonwealth level alone - than pre-crisis projections.

"The outcome is that ... we face, as a community, a widening gap between the demands we are placing on government and what we are prepared to pay to fund government."

Now get this: contrary to every impression the pollies will be giving you, "we will not be able to meet these demands for new spending by increasing the efficiency and effectiveness of existing government spending alone (although this is important in its own right)".

"Nor can we rely solely on our existing tax bases, as these are expected to deliver less revenue as a proportion of gross domestic product ... What will be required - of governments at all levels - to meet the community's demand for new spending, will be more revenue or significant savings in other areas."

That's the news the national dailies didn't think fit to print: the Treasury secretary, high priest of economic rationalism, has countenanced higher taxes and even new taxes.

All this is a blow to those people anxious to see both sides of politics commit to introducing the national disability insurance scheme at an extra cost of $8 billion a year (closely followed by those people anxious to see both sides commit to introducing the Gonski reforms to education at an extra cost of $5 billion a year).

So what on earth can we do? Limiting our focus to the disability scheme, how could we possibly find that kind of money?

Well, one possibility not to be dismissed lightly is using an increase in the Medicare levy to pay for it. But as Dr Richard Denniss and David Richardson of the Australia Institute suggested last week, there's another, less obvious source of revenue: reform the concessional tax treatment of superannuation to make it more effective and less inequitable.

Using the savings to pay for the disability scheme would strike a double blow for fairness.

It would take money disproportionately from the well-off (the top 5 per cent of income earners get 37 per cent of cost of the super tax concessions) and give it to some of the most disadvantaged people in our community: the disabled and their carers.

The Treasury secretary is telling us we have to make hard decisions about our priorities; we can't afford all the things we'd like to do. Just so.

So consider this: within a few years, the rapidly growing revenue forgone on super tax concessions is projected to equal the cost of the age pension itself: $45 billion a year.

That's way more than the feds spend on education, almost twice what they spend on defence, and more than twice what they spend on the family tax benefit or on Medicare.

We can afford to shower this largesse on the better-off 60 per cent of the population of pension age while the disabled get screwed?

The grossly underpaid financial services industry and the direct beneficiaries of the super concessions argue they're justified by the consequent saving to the taxpayer in reduced pension payments.

But as best Denniss and Richardson can determine it, it costs the taxpayer $2 for every $1 saved. That's an overall average, of course. People at the top would save a lot more than $2 for every $1 they gave up, while many towards the bottom would save less than they gave up. (We should know the exact distribution, but the government won't tell us, for some reason.)

It's not hard to see why the super tax concessions offer other taxpayers such a rotten deal. As a supposed incentive to people to make their own provision for retirement they're hopeless.

Most of the people who receive it save no more than they're compelled to, while people at the top of the tree are hugely rewarded for saving they'd do anyway. The less your ability to save, the smaller incentive you're given, and vice versa.

For those organisations urging us to spend big on worthy causes, the "take-out message" from Parkinson's sobering assessment of our scope for greater spending is clear: don't waste your breath unless you're prepared to get your hands dirty and suggest a good way to pay for it.