The consistently measured and sensible Ken Henry this week criticised both major parties for promising not to raise taxes. The Labor party has promised not to increase the total federal government tax take beyond 23.5% and the Coalition have promised to always be lower taxing than Labor. These promises are distressingly reminiscent of Swan’s ludicrous promise to return to surplus in 2012/13 no matter what.
Ken Henry’s criticisms were founded on the knowledge that we face unavoidable government expenditure increases in health and age pensions due to our aging population and that, if we don’t increase taxes, we will have to keep making deep cuts to other government programs. I agree with Dr Henry and have written about this topic elsewhere. However, I believe the reasons that we should increase the total tax take are much more profound than just covering the expenses of an aging population – we should do it for the happiness, health and future prosperity of our society.
What are the things that really improve our quality of life? More money in our pockets can help if we’re really poor but it has diminishing returns the wealthier we get. A lot of organisations and researchers have built indexes measuring different elements of quality of life in different countries and cities around the world. Looking across many of these measures, we see that those OECD countries with higher proportion of GDP taken in tax tend to perform better on measures of wellbeing. It’s complex and there are certainly measures which don’t show this trend and countries that buck trends within each measure but the underlying trend remains. Normative judgements about what is important shape every individual’s view about wellbeing making this a very difficult area in which to generalise.
Environmental protection is fundamental to happiness, health and prosperity but rarely generates enough income to pay for itself (tourism in some places is an exception). Our greenhouse gas emissions must be dramatically reduced if we are to avoid catastrophic effects of climate change. This requires either a high price on carbon through a tax or trading scheme or a large commitment in government expenditure. We also need to address salinity problems in our agricultural lands, biodiversity loss and the declining health of our river systems. These things are all critical imho but we currently lack the government funds to address any of them effectively.
Australia sits towards the lower end of OECD rankings with a total tax to GDP ratio of just over 30% (OECD average is around 36%). We can well afford to collect more tax in order to provide the best of what a wealthy country can offer its citizens. If we should choose to do so, I would again agree with Ken Henry that we should focus on taxing resource extraction and land values rather than increasing taxes on wages and profits.
I intend to make this the subject of future research so will likely make more posts on this topic over the coming months.