The end of the tax revolt

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.

36 thoughts on “The end of the tax revolt

  1. 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.

  2. 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.

  3. 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–

    speh-sih-fih-city.

    “tha blood oath wrecking ball python”?

    wow.

  4. @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.

  5. 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.

  6. 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.

  7. 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.

  8. @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?

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