As Labor spouts its values, gap rich poor gap widens

Why do I get the feeling that, after their just-short-of-disastrous showing in the August election, Julia Gillard and her ministers aren't so much engaged in soul-searching as in trying to improve their PR. They're all giving speeches about Labor's reason for existence, and they're all saying much the same thing, as though they were all briefed by the same spin doctor.

Their central message is that Labor stands for a "strong economy". Well, sure. Which party stands for a weak economy? Anything else?

Gillard says Labor's values are "a strong economy - and opportunity for all". Wayne Swan says Labor's core purpose is "prosperity and opportunity". Neither says much about what "opportunity" means. Maybe it means whatever you'd like it to mean.

Fortunately, Penny Wong is a little more explicit. She says Labor stands for "a fair go, a just society, a strong economy. A fair go encompasses Labor's tradition of fairness, of equality of opportunity and the aspiration for equity in outcome or worth.

"A just society references our social, legal and institutional frameworks, the principles that govern

our community and the relationships within it. Our rights and shared responsibilities."

Well, that's sounding more like Labor. But if Gillard Labor still stands for Labor's tradition of fairness it's got a fair bit of work to do, as I ventured to suggest when invited to deliver the ACTU's Whitlam Lecture in Melbourne last night. And so far its record has been mixed.

Every few years the Bureau of Statistics measures the distribution of disposable income between Australia's households. It's too soon for us to have any clear evidence on what's happened to equity under the Labor government, but we do know that, after changing little between 1995 and 2004, the gap between rich and poor widened markedly between 2004 and 2008 - essentially the Howard government's last years.

If disposable income was equally distributed between households, the bottom 20 per cent of households would have 20 per cent of total income and the top 20 per cent of households would also have 20 per cent of total income.

In fact, the latest figures show that the bottom fifth has just 7 per cent of the income, whereas the top fifth has more than 40 per cent. And over just the last four years the shares of the four bottom fifths fell by about 0.5 percentage points each, allowing the share of the top fifth to rise by 2 percentage points.

Why this sudden deterioration? No one can say with any certainty. Various factors could have contributed: the resources boom and the booming sharemarket before the global financial crisis, the continued rise in executive and finance-sector salaries and maybe the succession of income tax cuts that benefited people on high incomes.

One factor that seems to have limited the rise in inequality throughout most of John Howard's reign was his large and repeated increases in family benefits. But there was a lot less of that in his later years.

But the bureau's practice of lumping together the top 20 per cent of households almost certainly conceals the extent to which the incomes of a relative handful of households at the very top have risen inordinately (and it may well be the incomes of households in the second highest 10 per cent rose at much the same rate as for the bottom 80 per cent).

Though they're not strictly comparable, and are no more recent than 2002, income tax statistics show that the top 0.05 per cent of individual taxpayers accounted for about 2 per cent of total taxable income. The top 1 per cent accounted for 9 per cent, the top 5 per cent for 21 per cent and the top 10 per cent for 31 per cent. (This last is up from 25 per cent in the early 1980s.)

These figures laugh at the notion of Australia as the great egalitarian paradise. But they only put us somewhere in the middle of the developed country pack: much more unequal than the Nordic countries, but not as bad as the other English-speaking countries: Canada, Ireland, New Zealand, Britain and the United States.

Were Labor to want to reduce inequality in Australia, the conventional starting place would be with taxation. Had Labor had its "tradition of fairness" at the top of its consciousness in the 2007 election campaign, it wouldn't have promised to introduce essentially the same three years' worth of tax cuts as those designed by Peter Costello to advantage people on incomes well above the average.

Admittedly, Labor's minerals resource rent tax will even things up a little, but it could be doing more to make the taxation of superannuation less heavily biased in favour of high income earners. The same goes for the concessional taxation of capital gains.

Remember, however, that much of the budget's redistribution of income from the rich to the poor comes from the way means-testing is used to restrict social security payments to those who are genuinely needy.

The Howard government took steps to bypass means-testing and introduce middle-class welfare. Labor has rolled back some of this, but could do more. It gave generous one-off increases in pensions, but excluded the unemployed from this munificence and limited the benefit flowing to sole parents.

One institution central to the goal of equality of opportunity is public schools. Gillard claims to have doubled funding for all schools, but so far she's done nothing to reform John Howard's biased funding formula in favour of better-off private schools.

One trend that's worked against a fair go is the many means by which employers have transferred risk from their own shoulders to those of their employees. These range from the casualisation of the workforce and making workers supposedly independent contractors to the risks of superannuation accumulation.

It would be nice to see the Gillard government doing more to act on its values rather than talk about them.

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IS AUSTRALIA THE LAND OF THE FAIR GO?

ACTU Whitlam Lecture, Melbourne, Tuesday, November 30, 2010

In writing and talking about equality and inequality, I always feel myself at a disadvantage.

Everyone thinks they know more about it than I think I know. Just about everyone has it firmly fixed in their mind that the gap between rich and poor is growing - the rich are getting richer and the poor getting poorer. This trend, they know, has been running for decades, perhaps forever. My disadvantage is that when you express your opinions in a respectable newspaper rather than the pub, you’re supposed to base them on actual evidence. And when I recount the evidence, it’s never as bad as everyone knows to be the case.

Even so, let me try to summarise the evidence about the distribution of income....

Is Australia the Land of the Fair Go

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Tiny tax cut a blessing for battlers

Forgive me, but I'm tickled by the latest joke: the good thing about having a woman as prime minister is we don't have to pay her as much. Actually, the amount the prime minister gets paid is just one of the many things that won't be changed by Labor's leadership switch.

A new face, a new atmosphere, a new attitude towards the government for many people, but surprisingly little change in policy.

Take, for instance, the tax cut we get from tomorrow. Its arrival has been forgotten in all the excitement, but it's still coming. It's the third of the three annual tax cuts Kevin Rudd promised and, though our budgetary circumstances have changed markedly since then, there was never much doubt it would be delivered.

Even so, the government has waxed hot and cold on the promised cuts. This time last year it didn't want to draw attention to them, perhaps because it might have seemed profligate adding a tax cut to all the cash it had been splashing around.

This year it's happy to have us noticing the cut because people have begun complaining again about "cost of living pressures". So, we're told - conveniently - the cut is intended to help.

But that's not all.

It's remarkable the things politicians think our forgetfulness will allow them to get away with saying. Wayne Swan claimed recently, "the Rudd government designed these tax cuts to boost incentives for labour force participation..." blah, blah, blah.

In truth, the cuts were designed by Peter Costello. Rudd simply pinched them from John Howard during the election campaign. The cut we get from tomorrow, the first day of the new financial year, will be the eighth we've had in a row, surely a record.

And next year? Next year we'll get nothing. Indeed, unless a change of government brings a change of policy, we're unlikely to see another tax cut for four years, maybe longer. That's because Labor has vowed not to cut taxes again until the budget is back in surplus and the surplus is equivalent to at least 1 per cent of gross domestic product (by then, about $17 billion).

So it's good to take note of tomorrow's cut, even if for most people it isn't all that generous. People with part-time jobs, or full-timers close to the minimum wage, earning between $16,000 and $37,000 a year will save a princely $2.90 a week. Those earning between $37,000 and $67,000 will save $8.65 a week.

From there up to $80,000 a year, the saving drops to $5.80 a week. But from there on it starts rising, to reach a peak of $25 a week for those battlers on $180,000 a year or more.

The higher dollar savings going to people on very high incomes shouldn't surprise you and, since those people pay a much higher proportion of their income in tax, this doesn't prove the tax cuts are biased in favour of the well-off.

By the same token, however, the government's trick of showing us the percentage decline in the amount of tax paid at each level of income is another unreliable guide to who benefits most.

This will always show those on the lowest incomes - and thus paying the lowest amounts of tax - make the biggest proportional savings.

If, for instance, I was formerly paying just $1 a week in taxation and the tax cut relieved me of this, the government could claim it had given me a saving of 100 per cent. But that would hardly leave me much better off. No, the tax economists will tell you the right way to determine the fairness of a tax cut is to look at the change in the proportion of people's total income they lose in tax - that is, their "average tax rate".

Judged this way, it turns out the maximum saving of about 1¢ in every dollar of income goes to people earning between $37,000 and $50,000 a year - quite modest incomes, well below the average full-time earnings of about $67,000 a year.

The workers who do best from this tax cut are those earning up to $30,000 a year less than average earnings. But, surprisingly, those who do worst are those earning up to almost $30,000 a year more than average earnings.

People earning incomes a bit below or above $180,000 a year save only about 0.7¢ in every dollar of income. Someone on $300,000 a year saves just 0.4¢ in the dollar.

Tax cuts can be expensive from the taxman's point of view. Just how expensive they are turns not on how much you give the high-income-earners (there aren't enough of them to make a big difference) but on how much you give those on incomes around the middle.

That's because such a high proportion of incomes are clustered around the middle. But the middle (or median) income is actually lower than average (or mean) full-time earnings of $67,000 a year. And since there are a lot more people on incomes a bit below the mean than a bit above it, this seemingly modest tax cut is actually quite an expensive one, coming at a cost to revenue of $3.8 billion a year.

So, largely by chance, these tax cuts really will do a bit to help a lot of genuine battlers cope with the rising cost of living.

Will it satisfy them? I very much doubt it. Because wages - and age pensions - rise faster than the cost of living, complaints about the rising cost of living are actually a cover for worries about the success of our efforts to keep up with our peers' ever-rising standard of living.

Most of us are pounding away on this hedonic treadmill, as psychologists call it, and all our economists and politicians can think to do is help us run faster.

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