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The end of the tax revolt

November 10th, 2012

The crushing losses suffered by Republican culture warriors in the US elections shouldn’t blind us to the fact that from the viewpoint of the 1 per cent, the culture war is just a useful distraction to ensure that those they are exploiting never combine against them. The big issue for them is taxation, and the opening round will be the struggle to keep the Bush tax cuts and the preferential treatment of capital gains. They’ve had an unbroken sequence of wins on these issues ever since California passed Proposition 13 in 1978. But things are finally turning around.

Over the fold, a piece on this topic that should be coming out in The Conversation next week

The end of the tax revolt

Long after President Obama’s re-election was secure, another election day result came in, one that may be of comparable significance in the long run.

By a 54-46 margin, Californian voters approved Proposition 30, which raises about $6 billion a year in additional income and sales taxes to prevent further cuts in education spending.

To appreciate the historic significance of this measure, it’s necessary to go back to 1978 and the passage of Proposition 13, which slashed property taxes, and imposed high barriers to any future increase in taxes.

Proposition 13 heralded the beginning of a global “Tax Revolt”, and the end of a century-long trend towards an increase in the share of national income allocated to public services.

In this country, the campaign was taken up by The Australian and had its echoes in the “Joh for Canberra” campaign a decade later, based on a 25% flat tax. More seriously, the Hawke government adopted the Trilogy commitment, promising not to increase the ratio of public expenditure or taxation of national income. Although the commitment was temporary, the constraint has proved durable in practice.

The government revenue share of GDP was 24% in 1984, when the commitment was made, and it has remained at that level, plus or minus a couple of percentage points, ever since.

More broadly, the Tax Revolt signalled the end of the postwar era, in which the social democratic welfare state provided security against the risks of unemployment, illness and poverty, and the rise of market liberalism (commonly, though misleadingly, called ‘economic rationalism’ in Australia).

The rich got much richer, while the poor and middle classes did as best they could – in the US, not very well at all. In California, Proposition 13 produced a slow-motion fiscal crisis, as a succession of governors struggled to reconcile rising expenditure needs and stagnant revenues. The problems were exacerbated by the “three strikes” law of 1994, also passed by referendum, which packed the state’s prisons.

By 2012, California was spending more on prisons than on higher education. With the exception of prisons, services were cut repeatedly, but never enough to balance the books. In 2009, Governor Arnold Schwarzenegger was reduced to issuing IOUs to pay the state’s bills.

A series of desperate expedients eventually staved off bankruptcy, but it was obvious something had to give. The pressure was sharpest in education. In 1960, California’s Master Plan for Education gave it easily the best public education system anywhere in the world.

The University of California system, with campuses such as Berkeley and UCLA attracts most attention, but the network of state universities and community colleges served a much larger section of the population and was also excellent, as were the public elementary and secondary schools. It takes a long time to erode that kind of advantage, but decades of financial stringency have done so quite effectively.

The cuts needed to balance the budget in 2013 would have been a death blow. Any plausible solution required more tax revenue, but Proposition 13 required a two thirds super majority in the state’s Assembly and Senate to pass such a change. The Republican party, although in a permanent minority, resolutely blocked all measures of this kind. As a result, Governor Jerry Brown was forced to go to the public with a referendum to increase taxes. That’s obviously a difficult question to push, even when the need is clear.

But, finally, Californians showed they had had enough of the failed ideas of the late 20th century. Not only did they approve the tax increase, they elected a Democratic supermajority. And, in a triple win for rational policy, they relaxed the three-strikes law, making it impossible for someone to be sentenced to a 25 year-to-life term for trivial offences like petty theft.

What does this mean for Australia?

It has becoming increasingly obvious that Australian governments cannot meet their basic commitments to provide health, education and welfare services while remaining within current budget constraints. The problem is only going to get worse if the problems in school funding identified by the Gonski review are to be addressed and if initiatives like the National Disability Insurance Scheme and publicly funded parental leave are to proceed.

The Global Financial Crisis signified the failure of the free-market policies for which Proposition 13 was the harbinger. It’s time to recognise, once again, that we can never be truly prosperous without high quality public services and that the only way to pay for those services is through taxation. California has learnt this lesson the hard way. Australia can surely do better.

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  1. Matt W
    November 10th, 2012 at 08:48 | #1

    Just a slight correction. You wrote: “Not only did they approve the tax increase, they elected a Democratic majority.”

    The California state Senate has had an unbroken Democratic majority since 1970, as has the Assembly, with the exception of the two year period from 1995-6. What we did on Tuesday was elect a 2/3 Democratic super-majority in both Houses of the legislature. This allows Democrats to both raise taxes and pass a budget without Republican votes.

    D’oh! I absolutely meant to type “supermajority”. Fixed now, thanks

  2. Jim Rose
    November 10th, 2012 at 09:10 | #2

    Then why does Obama want to extend the bush tax cuts for most americans?

  3. John Quiggin
    November 10th, 2012 at 09:21 | #3

    Because Obama, contrary to the rantings of your loony friends at Catallaxy, is a rightwing Democrat on economic issues, equivalent to a moderate Republican in the Eisenhower era. Hopefully, the election outcomes will drag him a little way to the left.

  4. Katz
    November 10th, 2012 at 09:23 | #4


    That’s orthodox Keynesianism. Poorer folk have a propensity to spend. Richer folk have a propensity to save. Obama wants stimulus. He proposes to use tax laws to encourage consumption.

    It is worth noting that your disingenuousness is too blatant to conceal your feigned ignorance.

  5. Jim Rose
    November 10th, 2012 at 09:34 | #5

    @John Quiggin made a posting to that effect at Catallaxy yesterday and often in the past

  6. may
    November 10th, 2012 at 11:24 | #6

    Katz :JR,
    That’s orthodox Keynesianism. Poorer folk have a propensity to spend. Richer folk have a propensity to save. Obama wants stimulus. He proposes to use tax laws to encourage consumption.
    It is worth noting that your disingenuousness is too blatant to conceal your feigned ignorance.

    but richer people after spending quite large amounts have, after all that, money left to save
    and poor people after paying for living costs that(at a guess) are much lower than the rich have less to save.

    is that too obvious?

  7. November 10th, 2012 at 11:25 | #7

    Abbot’s success at attacking the carbon tax came because the majority had been programmed to believe that increasing taxes was evil. The damage being done to him now is because the tax hasn’t had the impact he predicted, not because we have had a change of mind about taxes.
    Having said that I think that Labor would be in a better place now if it screwed up its courage and raised taxes to the level where it could implement popular items like the dental scheme before the next election. It really needs to start saying that these are the things we think are doing and these are the tax increases we need to make them happen. Voters may actually appreciate being treated like adults.

  8. November 10th, 2012 at 11:32 | #8

    Some of the big tax reforms Australia needs are the ones that return taxing powers to the states. For too long we have suffered from below standard state services that are there because the commonwealth effectively controls the bulk of state revenue.
    Having the commonwealth supply the money creates numerous problems. For example, there are the commonwealth bureaucracies set up to make sure that the states are giving value for money. There is this crazy system where the commonwealth cops political damage for raising taxes and premiers gaining brownie points for the spending of these taxes and……

  9. Graeme Bird
    November 10th, 2012 at 11:53 | #9

    I think the tax revolt is over. Under todays conditions it seems mean-spirited or stupid. Mean-spirited in that if gives more dollars to the rich then to the poor. Stupid in the face of huge deficits. I’d want a tax revolt in that I’d want the tax free threshold to be lifted. I’d want no sole trader to pay taxes on retained earnings. But this is not the sort of tax revolt we saw with the Laffer curve, the Reagan revolution, and the earlier Californian tax revolts. Small government egalitarianism forever. Thats my motto. The rich guys can look after themselves. Certainly they seem to be rather good at doing so. They require no political cover from the rest of us.

  10. Ernestine Gross
    November 10th, 2012 at 12:34 | #10

    Interesting post, JQ. I didn’t know about the role played by California, then and now.

    Hopefully this is also the beginning of the end of celebrity politics, celebrity TV, celebrity bla bla bla.

    If the ship is really turning in the direction you indicate, the conditions for a sensible solution to the debt crisis in some EU countries becomes more likely. To the best of my ability of reading the tea leaves of political speak, France and Germany would pull on the same string to turn the ship as done in California.

  11. November 10th, 2012 at 12:50 | #11

    Nice work, JQ. As per this Rachel Maddow clip which is doing the rounds (http://www.youtube.com/watch?&v=SVwXA7sHUlE#!), sometimes it helps to patiently re-state some facts about the real world instead of garbage partisan talking points.

    I think (hope?) that the Western public is finally waking up to the absurdity posed by the proponents of economic rationalism. There is no longer a blind belief that taxes can always be cut and that the economy will grow as a result. We may whinge about taxes but we always want better services, even in Oz where we have some of the best services in the world.

  12. Chris O’Neill
    November 10th, 2012 at 13:35 | #12

    the only way to pay for those services is through taxation. California has learnt this lesson the hard way. Australia can surely do better.

    Not while the property lobby has such enormous influence that costs taxpayers more than $4 billion a year in lost tax just from property negative gearing alone: http://blog.lvrg.org.au/2011/05/logically-bankrupt-and-factually-wrong.html and its citation: http://smh.domain.com.au/home-investor-centre/axe-negative-gearing-for-a-healthier-property-market-20110427-1dvqx.html

    And this doesn’t include the vast amount of untaxed increase in wealth from land ownership and untaxed rental value also from land ownership. The property lobby had a huge success with Proposition 13 in 1978 in California but now the chickens have come home to roost there.

    However, I won’t be holding my breath for anything similar here. The property lobby in Australia has enormous influence. The fight against shameless and selfish people who don’t want to pay their fair share of taxes has a long way to go yet.

  13. Sancho
    November 10th, 2012 at 14:32 | #13

    John D :
    Abbot’s success at attacking the carbon tax came because the majority had been programmed to believe that increasing taxes was evil.

    I count that more as a win for the science denialists. Low-information voters were persuaded to doubt whether carbon emissions are harmful and not something made up by governments looking for excuses to tax high profit industries.

  14. Jim Rose
    November 10th, 2012 at 14:35 | #14

    @Wombat why does tax reform trouble you so? efficient taxes lead to higher taxes to support a larger public sector. when do you next expect a cut in the GST? many tax reforms are sold as revenue neutral.

    Buchanan and Brennan wrote The Power to Tax where their message was if you don’t always trust governments, beware of efficient taxes. Efficient taxes make it easier for government to extract more tax revenue from the population with less resistance.

    When Brennan said at a tax reform conference in Australia 20 years ago or so that efficient taxes are bad because they lead to higher taxes and a bigger public sector, no one understood him. Idealists all, the audience assumed they were advising a benevolent government, not a size maximising leviathan – a beast that needed to be staved with constitutional constraints on tax bases and tax instruments.

    Tax reform saved the welfare state by raising the same or more revenue with less taxpayer resistance. Taxes are very efficient in the Nordic countries – high taxes on labour income and consumption, and low taxes on capital income and light regulation.

  15. rog
    November 10th, 2012 at 14:48 | #15

    @Matt W I did not realise the significance of a super majority until looking it up – and that the voters apparently opted for a democrat super majority rather than a republican govt.

  16. Jim Rose
    November 10th, 2012 at 14:53 | #16

    @rog be careful for what you wish for. the super majority means the Dems can’t blame the GOP for their problems.

    when you share power, you can share the blame too.

    don’t californian state government bonds have junk bond status?

  17. Sancho
    November 10th, 2012 at 15:06 | #17

    @Jim Rose

    To that end, I wonder what proportion of US voters went to the polls with a clear understanding of just how obstructionist and reckless the Republicans have been over the past four years.

    It’s one thing for an opposition party to demonstrate a lack of competence, and quite another to prove that it carelessly abuses whatever power it obtains.

  18. MG42
    November 10th, 2012 at 15:42 | #18

    Jim Rose :
    @rog be careful for what you wish for. the super majority means the Dems can’t blame the GOP for their problems.
    when you share power, you can share the blame too.
    don’t californian state government bonds have junk bond status?

    Not this oft-abused canard yet again.

    Standard Republican argument since at least Reagan:

    “There is a Democrat President.”

    If that doesn’t fit:

    “They have a Democrat governor.”

    If that doesn’t fit:

    “They voted Democrat in the last election.”

    Somewhere, somehow, link them to the Democrat party. And then proclaim….


  19. November 10th, 2012 at 16:04 | #19

    Jim Rose, you’ve confused tax reform with lower taxes. They are not the same thing.

    I don’t know about Wombat, but my idea of tax reform is to return the tax rates (particularly on the wealthy) to where they were 40 years ago, before all this madness took over the world.

  20. Chris O’Neill
    November 10th, 2012 at 16:13 | #20

    California has learnt this lesson the hard way. Australia can surely do better.

    Actually, after looking through California Proposition 13 (1978), I think it would be a miracle if Australian states did as well as California. This is simply because even California Proposition 13, with its 1% per annum property tax, is better economically than the land taxation regimes of Australian states (which are mainly stamp duty transaction tax). The property lobby in Australia is not going to let state governments in Australia do anywhere near as well as California’s. (Of course, state governments here are either partly made up of the property lobby or in fear of it.)

  21. rog
    November 10th, 2012 at 16:32 | #21

    @Jim Rose Once you again don’t get it, Californians went down the Repub path and have now voted in the Democrats. It’s a free market.

  22. Jim Rose
    November 10th, 2012 at 17:04 | #22

    @David Irving (no relation) taxes used to voluntary for the rich 40 years ago. did you miss the bottom of the harbour scandal etc?

    The optimal rate of tax on income from capital and capital gains is zero. such a tax regime would increase the capital stock by 30-60% and real consumption per capita by 2-4%.

    Rawls opposed income taxes. He advocated progressive consumption taxes. These taxed what people take out of the common store of goods rather than what they contribute.

  23. November 10th, 2012 at 17:06 | #23

    @Jim Rose

    @David Irving

    Yes, don’t mix tax reform with lower taxes. I think history has shown that the Oz tax-GDP ratio of approx 25% is capable of paying for adequate services, whereas the US ratio of 15% is grossly insufficient. Personally, I am of a more socialist mind and would be happy with a ratio closer to 30% – I accept that middle Australia disagrees and prefers to stay at 25%, but I think the nonsense spouted by the Right (and it is always the Right) that we can have taxes at 15% and the economy will grow faster to cover the cost of the services is finally being correctly perceived as fallacy.

  24. Jim Rose
    November 10th, 2012 at 17:21 | #24

    when was the Oz tax-GDP ratio 25%? In menzies era, which is John’s golden age, taxes were 20% of GDP or less.

    see http://www.actu.org.au/Images/Dynamic/attachments/7477/ACTU_Tax_Paper_Myths_and_Realities.pdf

  25. PSC
    November 10th, 2012 at 21:42 | #25

    don’t californian state government bonds have junk bond status?

    They’re A1 from Moody’s, and A- from the other two, a good four notches above junk. They trade better than that however – California 30 year GO’s are trading a little over 3.3% yield now, as compared to AAA munis at around 2.5%. The spread’s in the order of 80-90 basis points, so a “market” credit rating would be around A+ to AA-.

    If you talk to credit analysts they worry a bit about the debt levels and pension funding. Prop 13 is not a such big worry right now – what’s happened is that with property prices crashing, assessed valuations have moved closer to actual valuations, so the effect of Prop 13 is not so bad right now.

    tl;dr – california’s not so bad.

  26. Ikonoclast
    November 11th, 2012 at 13:40 | #26

    Forgetting the USA for a moment, it seems impossible for Australia to develop a rational and equitable Federal taxation/welfare system. I mean impossible politically.

    A rational (logical) taxation system would have to be melded with a rational welfare and rebates system. We need to remember that taxation is negative welfare and welfare is negative tax. Any time that the two systems work against each other, we have pointless and costly churn. For example middle class taxes and middle class welfare often work against each other (for the same family) so they are, in part, “churn”. Also, if a welfare recipient with some part time work pays taxes, gets welfare (as stated) and has welfare reduced by the income test withdrawal rate then this is a three way churn. This used to happen and probably still does though I am not now up to date on welfare policy.

    Wherever tax and welfare/rebates work against each other in this fashion, they should be rationalised. The best way to achieve this would be to meld the income tax and income support payment systems as one calculation system. Separate departments (tax and social security) would still be required for administration and assessment. The “social philosophy” of each of these departments is different. We don’t want the tax administration mindset to be applied to welfare nor the welfare administration mindset applied to tax. However, these seperate departments would feed their assessments into one system. This system would then calculate the applicable tax rate (per fn in the case of PAYE). If the tax rate was negative (due to low income and social wage allowances) then of course welfare is paid. Tax is negative welfare and negative welfare is tax.

    Pigovian taxes would be preferred wherever possible over anti-Pigovian taxes. For example a carbon tax would be required and preferred over a payroll tax (again for example). All significant social ills and negative externalities (as agreed by democratic debate and legislation) should be taxed. For social ills (tobacco, alchohol, gambling, junk food, junk entertainment etc.) the tax should be set at that level (for each class) which generated the best mixed outcome of maximum revenue with minimum incentive to deal illicitly in such goods. For negative externalities, the tax should be set at the best estimate of the real cost of prevention and/or full remediation of the negative externality.

    Dual taxes should be avoided. For example there is no need to have a fuel excise or royalties on fossil fuels. Simply, roll the fuel excise etc. into the carbon tax and then set the carbon tax at the full required rate as set out above. Remove all rebates and subsidies on fossil fuel. Remove GST from food. The junk food tax (a tax on fats, sugars and salts content of all foods except fresh, unprocessed foods) would replace it. Definitely remove negative gearing.

    Finally, when all the above is done, adjust taxes on incomes, profits and capital gains to keep the whole approach roughly revenue neutral. This is assuming it is determined the current total tax take is adequate. It is very likely that taxes on incomes, profits and capital gains could be brought down after all these other measures. Put progressive tax rates on income and profit on a par so it would not matter where incoming money came from, the tax rate would be the same.

    The above is simple, logical and equitable. Therefore it will never happen. Too many narrow and privileged vested interests will prevent it happening even though the nation as a whole would be considerably better off, more efficient and more productive.

  27. JB Cairns
    November 12th, 2012 at 07:19 | #27

    Tax reform should be about getting rid of the narrowly based taxes and broadening the few remaining ones.

    You can only reduce taxes if you reduce spending.

    NO party does that.

  28. may
    November 12th, 2012 at 11:51 | #28

    Sancho :

    John D :Abbot’s success at attacking the carbon tax came because the majority had been programmed to believe that increasing taxes was evil.

    I count that more as a win for the science denialists. Low-information voters were persuaded to doubt whether carbon emissions are harmful and not something made up by governments looking for excuses to tax high profit industries.

    here it is again,the trope that abbot had success.

    the so called success was all noise from a group whose business is words and couldn’t pronounce specificity.

    it’s not hard–


    “tha blood oath wrecking ball python”?


  29. JamesH
    November 12th, 2012 at 12:33 | #29

    @Jim Rose
    Why is a capital tax rate lower than the rate on labour and other things desirable? This sounds like a recipe for massive stock and land speculation, and for rapidly increasing inequality.

  30. rog
    November 12th, 2012 at 14:51 | #30

    Jessica Irvine calls for the abolition of stamp duty as per Henry review, plain common sense


  31. Chris O’Neill
    November 12th, 2012 at 19:21 | #31

    Jessica Irvine calls for the abolition of stamp duty

    State governments prefer ambush taxes like stamp duty to taxes that most people get reminded of every year like land tax in order to minimize political damage. State governments operate on politics, not common sense.

  32. David Irving (no relation)
    November 13th, 2012 at 11:00 | #32

    Jim Rose, IIRC the participants in those bottom-of-the-harbour schemes got caught, so their tax-paying was only voluntary in the short term.

  33. 2 tanners
    November 13th, 2012 at 14:50 | #33

    Coming back to the original topic (I don’t know why you guys let trolls derail discussions so easily) this article from a Californian well known to Australians kind of hits the mark.


  34. Fran Barlow
    November 15th, 2012 at 09:21 | #34

    I assume the basis for Obama shielding all those earning up to $250K (and businesses!) from higher taxes is purely political — pandering to RW populism. Does anyone know how much revenu he would be giving away compared with steadily increasing marginal tax rates on what we might call “the more than comfortable” (i.e those on $80k)

    I know he talked all through the campaign about “the middle class” — but most people read that as code for working people or at any rate the lower middle class, but is seems to me anyone earning more than $80k pa in today’s America is fairly privileged at worst and certainly could contribute somewhat more.

    I’d increment the rate dollar by dollar until by $250k the marginal rate was 50%. By the time it got to $500k you’d be paying 90% at the margins, just as they did in the old days — and there’d be few rebates, or loopholes.

    If US people really are patriotic and want to save America from fiscal ruin let them put their money where their hands should go — into their pockets rather than onto their hearts.

  35. Jim Rose
    November 16th, 2012 at 18:07 | #35

    @Fran Barlow I would prefer a system where people can choose to pay higher income taxes, if they want.

    At say before the age of 25, you and those like you and any one who you can take with you can make an irrevocable choice to pay taxes at whatever high marginal rate you each choose. Would you sign-up to this?

  36. Chris O’Neill
    November 23rd, 2012 at 18:29 | #36

    Of course, none of this makes the slightest difference to the biggest form of tax avoidance by far, the absence of wealth tax: http://blog.lvrg.org.au/2010/01/problem-price-of-land-is-infinite.html

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