A Tax We Can Well Afford

Last Updated Mar 20, 2011 5:00 PM EDT

Australians who are complaining about an extra tax to pay for the Queensland floods are either callous or stingy, or they've missed the point.
The choices are simple. A heap of public and private infrastructure needs rebuilding. The public side needs to be paid for by the government (the state or federal) --- the private stuff, in an ideal world, would have been paid for by insurance companies. When they don't play ball, charity has to step in. Or, better still, lawyers.

That's why it's confusing how Australians, who repeatedly tell themselves they are the most giving people on earth, say they'll stop paying voluntary contributions if they're forced to pay for flood repairs through higher taxes. If they're forced to help the government look after the public infrastructure, to help the economy prosper, it seems they're prepared to say sod-it to anyone whose house was left water damaged.

Public infrastructure is crucial, of course, and it helps the country, not just Queenslanders. It's needed, for example, to freight resources to the coast to help our economy to kick along, albeit at two or three speeds. The question is, how do you pay for it?

Well, there are four options. One, you take a bit longer to balance the federal budget. The government has already said that the $40.8 billion deficit in 2010-11 was $16.3 billion less than they'd expected one year before. So what's wrong with putting it back $1.8 billion, instead of charging a flood levy?

A second option is cutting budgets. That's a Coalition-preferred approach and Julia Gillard is doing a bit of that in her flood crisis plan too. Yet isn't this the time to be investing more, rather than cutting back? Should we really be spending money earmarked for future growth to fix what's broken. With both parties, future infrastructure needs appear to be a lower priority than balancing the budget. Clearly accountancy ranks higher than economics with the country's political minds.

The third option is the patently foolish notion of saving for a rainy day. To make sure we're not caught short again, let's start a fund for future catastrophes. I only mention this one because it's been mooted time and time again by devotees of whinge-back radio. They seem to think we should run the country as if we were a retiree struggling on a pension. In other words, let's save what we have, ignoring the opportunity cost of using that money now will generate extra wealth in the short-term. Instead, let's hide it under the matress.

The final option is that we introduce extra taxes --- a bold move taken by Gillard, considering the inevitable backlash from a nation that sees even the slightest increase in payments to the government as tantamount to communism. Even so, the veracity of the response has been surprising for such a charitable nation supposedly keen to get Queenslanders and Victorians back on their feet.

So why are we so scared of an extra tax? The truth is, we can well afford it. The OECD tax database claims that in 2009 the Australian personal income tax and social security contributions (by the employee and the employer) for a single worker amounted to 27 percent for an average wage earner. This compares to 29 percent in the US, more than 30 percent in the UK, Turkey, Spain, Slovak Republic, Portugal, Poland, Norway, Netherlands, Luxembourg, Denmark and Canada, more than 40 percent in Austria, Italy, France, Finland and Sweden and more than 50 percent in Germany and Belgium. In many countries the figure is higher because employer contributions to social security are so much higher than here.

To look at it another way --- let's look at the "all-in" tax rate, ignoring the employer contribution element, expressed as a percentage of gross domestic product. In other words, how much tax are we collectively paying as a proportion of the wealth generated by the country? The answer is 27 percent of GDP, which places us close to the bottom of the league table of OECD nations --- only Mexico, Chile, Turkey, US and Korea pay less. None of these are countries we'd aspire to be right now. At the other extreme, in Denmark 48 percent of GDP is paid in personal income tax.

Yet doesn't high tax inhibit growth? If so, shouldn't the highest-taxing nations be some of the least wealthy? Yet, of the five OECD nations with a per capita GDP higher than Australia, only the US pays less tax, and even then it's marginal. Norway, for example, sees tax paid equivalent to 43 percent of GDP, yet their GDP per capita is one-third higher than Australia's. It's a similar story in the Netherlands. (The GDP comparison is based on the Geary-Khamis dollar, usually called the international dollar, which attempts to produce a comparable measure of wealth).

So what's the issue with an increasing tax burden of somewhere between 0.5 percent and 1 percent for higher income earners, particularly as the money is being spent on public infrastructure? Surely tax-funded infrastructure is what's needed to build for future generations, and it looks like the government can raises taxes without penalising growth potential. I can't help wondering if the wealth generated by some of the higher-taxing nations --- in particular in Scandinavia --- is more sustainable than our current lower-taxed resource-boom funded economy.

So let's stop bickering and pay the tax. Then pay a bit more to build more public infrastructure to help extend, not just replace, our transport and communications links. When it comes to lower-taxing OECD countries, in terms of quality of life of late, we're hardly in esteemed company. And despite what you might think, our collective tax bill has been steadily dropping. The OECD database claims the total tax wedge for an average income in Australia was just short of 31 percent in 2000 --- it's fallen 4 percent since then. No wonder nothing is getting built.

Data source: Peruse the OECD tax database here.

Read more By The Numbers articles by Phil Dobbie here.