Government Expenditures and Taxation Levels

Some older data on government expenditures and taxation as a percentage of GDP. Australia spends less from government, and taxes less than the European countries. Yet of our direct competitors in the Pacific Rim, such as Japan, South Korea, America, Indonesia and others; we tax more, and spend more. We are a Pacific nation, not a European one. We also practice American style capitalism. Consequently we will have to reduce the size of the state to at least American levels, if not Japanese levels, so that the state doesn't over-burden us in relation to our regional competitors.

Pacific Rim - Government Expenditure to GDP Ratio

The data this comes from is old. If anyone has sources of more up to date data I would love to see it. Australia saw a growth in the ratio of government expenditure to GDP from 1991 to 1997, from 24.3% to 25.3%. Other Pacific Rim nations in 1997 had ratios of;

From that small list it is obvious our regional competitors spend less from the state than we do. Europe spends much more than any Asian country; France 53%, Germany 29%, Netherlands 48%, Sweden 44% and the UK 41%.

Total Tax Revenue as Percent GDP

The same page contains the ratio of total government tax revenue as a percentage of GDP for Australia between the years 1990 and 2000. This appears to include Federal, State and Local taxes.

By comparison, in 2000 the US was 29%, the UK 38%, France 46%, Sweden 50%. To compare central government tax revenue, which I assume in Australia's case means the Federal government, between 1990 and 2000 shows;

The American Federal government took 19%, the UK 36%, New Zealand 30%, Japan in 1993 took 17% and France 42%. These figures suggest that the Federal Government is doing the majority of the taxation in Australia. If all taxation is 33.6% of GDP in 2001, and the Federal government is taking 26.1% of the GDP, then it suggest the states only take a small slice of it. The GST, while going to the states, is a Federal tax; and as has been shown recently comes with Federal strings attached.

Australian Capitalism

Australia practices American style capitalism now. It has done so since the Keating reforms of the mid 1980s. A central principle of American capitalism is that the individual knows best where their money should go. If government is too big and too regulatory, it inhibits this flow of money from an individual and adds overhead to any enterprise.

The secure, static and stable state of the Menzies era is gone. So is the solve everything state of the Whitlam era. By the style of capitalism we have chosen to base our economy on, we will require a shrinking of the state to at least US levels; if not Japanese levels. This will be one way to ensure fluidity of money, and hence innovative services, products and enterprise.

This is not to say that Australian principles of fair-go and the reduction of inequity have no place in government policy and programmes. It does mean, that we will have to selectively choose the areas that government is currently involved in, where it is no longer the most efficient means of providing services or outcomes.

Australia is going to need political leaders that can reduce government and taxes pragmatically, and in a manner that eases those changes on Australian society, rather than Whitlam style "crash or crash through". In the last one hundred years, the Hawke government has been the only to embark on this style of programme.

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siento: Figures from Australia compares: How Australia Compares has figures for total taxation in 2000 of 32.5% and government outlays as 36.6% of GDP.

A countries \'style of capitalism\' is also about how companies are financed. Germans talk about Anglo-Saxon capitalism, meaning capitalism based on company funding coming through the stock exchange. This is how Australia has funded things. Wheras in Germany the banks have given loans to the \'Mittelstand\' small to medium sized enterprises at low rates and with high security. The Japanese fund things through Zaibatsus and collaboration, and also by having the world\'s largest financial institution, the Japanese Postal Service.

Each of these systems has their advantages. Anglo-Saxon style capitalism allows rapid exploitation of new technologies as shown by America\'s dominance in computers. The German and Japanese systems provide more stability that enables manufacturers to plan more for the longterm as shown by the superiority of the German and Japanese auto industries. While the Germans have invented electronic fuel injection and ABS braking over the past 20 years, the US auto industry has \'invented\' the SUV and the cupholder.

A better way of looking at government expenditure is by looking at what the government provides and if the government provides them well. One of the big things that should be taken into account with US figures is that the US, unlike Europe and Australia, does not have government health care. Another factor to take into account is the cost of University education. The scandalously rapid rise of University education in Australia means that for about one third of Australians the government has ceased helping them for a major expense.

It is also curious to view Asian levels of government expenditure as definitely a good thing. Japan has not done well over the last 10 years. Many Asian countries may be growing rapidly, but that is surely because they start from a fairly low base.

Australia\'s level of government spending is reasonable. Australia\'s government provides a good suite of effective services at a good price.
cam: Mo\' Money:
the US auto industry has \'invented\' the SUV and the cupholder.

When the Mini (BMW) was introduced to the US it didnt have a cup holder big enough. This was the largest complaint from customers. America is definitely consumer driven, and American companies are consumer focused, and extremely sensitive to their customers.

btw, the biggest innovation for me lately (last few years) has been ipod+itunes, it has totally changed how I listen, use and interact with music.

that the US .... does not have government health care.

According to this retarded applet , the Department of Health and Human Services had an outlay of 643 billion USD. More than the military gets (~400 billion).

That also does not take into account the money that the US States, Counties and Towns spend on health as well. I think the US has social health, just that it is the most inefficient one on the planet.

The scandalously rapid rise of University education in Australia means that for about one third of Australians the government has ceased helping them for a major expense.

I think education is one area that is rife for deregulation. Between expense and relevance to private industry, the University is losing its status. There needs to be innovative and more efficient means for people to obtain a specialist education.

It is also curious to view Asian levels of government expenditure as definitely a good thing.

We have chosen to be a consumerist economy, that means it is most efficient when individuals are choosing where their money goes. Giving more money to the state inhibits the efficiency of a consumerist economy as the government is an imperfect consumer of goods and investor of capital.

Government also skews the flow of money. Negative Gearing in Australia is a good example. It locks money up in brick and mortar, rather than making it available for entrepreneurs. In the US a good example of inefficient use of capital (ie squandering) is the use of government money to create stadiums. The Washington DC Nationals are one big taxpayer rort. In Australia, investment in infrastructure has been deferred for political reasons. Or has been used in attempts at electoral bribes (WA pipeline).

The Federal government should look to bringing down its receipts and outlays to the 20% of GDP mark IMO.

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siento: Innovation: The iPod and mp3s and the stuff to support it are innovative and they are also electronics and computer industry examples. Perhaps the best way to describe it is that US innovates better in ares where no one has any idea what to do, while Japan and Europe are better at improving things that have been done a million times. The walkman and the Playstation are high quality and involve some innovation, but are really examples of making everything work well together.

Those are interesting figures about the US health budget. The US spends about 13% of GDP on health, Australia 9%. The US government spends 56% of US money while in Australia our government spends 70%. I had thought the US government share would be lower.

It\'s funny how people like to target negative gearing as causing the housing bubble. The other factor is the lack of tax on people\'s primary residence. If capital gains tax were to apply even partially to family homes this would also cause a shift in housing funding.

There are some positives about home ownership for developing things. A large percentage of small business loans are made with housing as security.

As for choice, well, we have chosen political parties that like to tax and spend. Although the Liberal Party appears to be serious about tax reform.

Taxation always skews economic activity. It\'s inevitable. The government creates stable conditions and a branch of it sets interest rates.  Government always intervenes in the market. It\'s just a question of doing it well or badly.  
cam: America: The iPod/iTunes was just a comment on my part. I didnt mean it meant US capitalism was superior. It has changed how I listen to music. It also made our big stereo obsolete.

The Japanese also innovated what we call quality. The globalisation of manufacturing would not have been possible without the Japanese experience in Statistical Process Control. Australia and America didnt catch up with the Japanese in that area until the 1990s.

Japan had been doing it since the 1950s. I recall in the 1980s having a Datsun 180B that refused to die. More recently I have had a Suburu that didnt want to go either.

Interestingly though, it was an American W. Deming that did all the intellectual legwork for SPC to work. It essentially commoditizes the labor and location of the manufacturing line. Which enabled factories to be moved quickly from Alabama, to Mexico to China in the space of a decade.

Health in the US is super-messed up. There is also the requirement for many employers to provide health as an employment benefit too. There is so much money being spent on health. The recent Medicare bill looks like it was design to balloon out of control too. It is in a more fiscally precarious position than social security. American legislators are quite poor.

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Can The Cockroaches Survive a Nuclear Option?

Government power is decided by money. The ability to collect money as well as hand it out. The Australian federal government is a big collector of tax money, in 2000 consuming 26% of Australia's GDP in tax. It is also a big spender of money, with 25.3% of the GDP being handed out by the federal government in 2000.

The Australian federal government has polluted our system of federalism by stealing from the States a government's autonomous right to tax for themselves. This not only leads to over-taxation but entropy of power to the central government. Canberra not only dictates policy, but funds it as well. The States are nothing more than a popularly elected bureaucracy to disburse federal funds.

Fortunately NSW never got over the fact that it didn't become "Australia", and on the western coast of the continent there are the Westralians, constantly suspicious of the t'othersiders, especially the ones in Canberra. Bob Carr and Geoff Gallop are both holding out for the moment.

If Carr and Gallop give in, they will effectively be handing over any last resistance to centralist principles. Australia will devolve into a Westminster system like Britain's where London dominates and nothing lies between Parliament and the local councils. The fact remains, the States need to take back from the Federal government their ability to tax.

The Failure of Federation

The failure of Federation was NSW's fault. The Australian constitution is devoid of enlightenment innovations such as a Bill of Rights, or an elected Executive. The "bearded men" knew of many of the flaws of the system and even tried to add in a few of their own. Griffiths for instance in one draft making the judicial arm subject to the authority of the legislature. Deakin was aware of the flawed federalism in the constitution, George Williams comments;

These can be traced back to when the Constitution came into force in 1901 when Alfred Deakin, one of Australia's first Prime Ministers, predicted that the states would find themselves "legally free, but financially bound to the chariot wheels of the Central Government".

NSW was the strongest colony of the time. It could have placed its stamp on the constitution, instead the Deakinists held sway and the flaws in the Constitution and Australian federal government continue to dog the country. The Deakinist world-view of Australia was an inefficient one. As Prime Minister he enacted, protectionism, discriminative immigration policy and centralised government. The first one took eighty years to get rid of, the second seventy years and the final we are still trying to disentangle from.

The Australian High Court has also been activist. Deciding for themselves that they, and they alone had the authority to turn the Australian Constitution into a living breathing document. The corporation's power is an example of this activism.

The Australian Constitution has proven difficult to change through the strict referendum and majority system. We lag behind the Swiss in this area of Constitutional responsiveness. Even so the static nature of Australian Constitutional change does not give the High Court the right to modify the meaning of the Constitution and federalism without public consent.

Emergency

In 1942 the federal government decided it needed more money to pursue the war against Japan and Germany. The demanded and got the ability to tax income. Previous to this the Federal Government was unable to tax income. Several states opposed the legislation, taking it to the High Court, but they lost. War is always a poor time for liberty, and political opportunists constantly use it to accrue more powers around themselves. James Madison had wise words on this subject;

In no part of the [US] constitution is more wisdom to be found, than in the clause which confides the question of war or peace to the legislature, and not to the executive department ... In war, a physical force is to be created, and it is the executive will, which is to direct it. In war, the public treasures are to be unlocked; and it s the executive hand which is to dispense them. In war, the honours and emoluments of office are to be multiplied; and it is the executive patronage under which they are to be enjoyed. It is in war, finally, that laurels are to be gathered; and it is the executive brow they are to encircle. The strongest passions and the most dangerous weaknesses of the human breast; ambition, avarice, vanity, the honourable or venial love of fame, are all in conspiracy against the desire and duty of peace.

To Madison's world-view, war and centralising power undermined the very foundations of free government. We are saying the ripples, if not the super-waves, of the collapsing of income tax power to the Federal Government today. The Australian Federal government over-taxes in order to impose its will on the states.

Cockroaches and Sandgropers

In the 1930s, the NSW Premier was Jack Lang. He was elected on a platform that included bashing the Bankers in London for being unsympathetic and out of touch with the realities of depression era Australia. Lang was fortunate he was given the perfect foil in the imperialistic arrogance of Sir Otto Neidermeyer.

NSW was still carrying loans to Britain from the First World War at higher rates of interest than they were paying to other lenders, such as the United States. Lang decided that he would default on the loans until he got better terms from the London bankers.

The problem from the Federal Government's point of view was that they had under-written those loans. If NSW defaulted, they were liable for those payments. Once again the pollution of the federal system led to conflict between the Federal Government and the States; in this case though, it nearly ended in Civil War.

The Prime Minister, Joe Lyons, decided he would take NSW's income tax rolls and do the taxing instead of NSW. But those rolls had been hidden, as had any cash NSW had in banks. Lyons was stuck, unable to get money out of NSW, and with Lang not changing his mind on defaulting. Lyons readied the Australian military to take government buildings in Sydney, while the NSW Police Force backed Lang to the hilt. Militias began forming all over NSW, some pro-commonwealth and some pro-state.

In the end the ambiguities of the Westminster system and reserve powers defused the situation. The Governor of NSW, Sir Phillip Game sacked the Lang government. It was most likely unconstitutional to do so. All it would have taken was for Lang to not recognize Game's authority and civil war would have descending. Lang said the words, "I am a free man, the bastards sacked me." There was no blood on the wattle that day.

We Secede!

The Western Australians were reluctant participants in Federation, concerned about the concentration of power in the Eastern States. When Western Australia held the referendum to join Federation, they were the last colony to do so, with the other colonies already approving their referendums.

The regional streak is strong in Western Australia, in 1933 the state voted to secede from the Commonwealth of Australia. To many Westralians, the federal government and Canberra were remote, far from them, and disconnected from the issues of the state. Several Leagues formed to promote secession of Australian unity. The Dominion League led the secession campaign.

The vote on secession was overwhelmingly in favour of seceding. The only district to vote no was the goldfields, presumably because of an influx of eastern staters in the gold-rush. Ironically the voters also removed the incumbant secessionist government from parliament and replaced it with a federalist one.

A petition was presented to Parliament in Britain, but British officials claimed they were unable to act without the Federal Government in Australia approving any secession. This left the Western Australian secessionist nowhere to go, other than a straight out repudiation of the Australian Constitution.

From the song, " Westralia Free ";

Plains of our pastures boundless,
Seas of our rainbow'd pearl,
Destiny is your breezes
Liberty's flag unfurl!
See its folds flung wide
And the challenge cried
"On to conquer ride,
"Wave o'er Westralia free!"

Land of the karri spring,
Land of the wheat and vine,
Aye to thy sons and daughters
Faith's altar and Love's shrine.
Lo! Our vows were sworn,
And the triumph born
In a nation's dawn,
"We made Westralia free."

By being ignored by Australian Federal Parliament, and politely fobbed off by the British Parliament, Western Australia was forced to seek its style of freedom within the Australian Commonwealth.

Claiming State Power Back

George Williams writes that the States may have a way through the corporations law to claw back against the federal government. The law comes up for review after five years;

There is however one area in which the Commonwealth does rely upon the states. The states have referred power to the Commonwealth to ensure that the Commonwealth has the power to enact key national laws. Without such power, the coverage of these laws would be incomplete, leading to confusion and extra cost. Recent referrals include giving the Commonwealth power over de facto relationships and terrorism offences. The referral most likely to be contentious is that by the states over corporations law.

Over 1999 and 2000 High Court decisions led to instability, problems with enforcement and a lack of confidence in the previous corporations law, which covered the creation and regulation of companies across Australia. It is generally accepted that Australia needs a national law on this topic. The states recognised this and in 2001 referred power to the Commonwealth. However, they did so in a way that will cease after five years. After that time, unless the states renew the grant of power, the uncertainty that plagued corporations law in Australia will return and business will suffer. Unfortunately for the Commonwealth, it will be seeking a further referral of this power at the same time as a new deal on GST revenues and a national industrial relations law.

The aggressor here is the Commonwealth government. It is the one that needs its wings clipped. We can start by not allowing the Federal Government to tax for the states. Ken Parish has written that Federal Government taking over initial income tax powers is reversible and could be the basis for the States taking back control of their own taxation . Parish writes;

The States should all agree to set up a Joint State Tax Office that would levy a uniform state income tax on all Australian individuals and companies. The rate should be set so that it covers all state spending needs, so that the States can afford to tell the Commonwealth to shove its GST revenue and section 96 tied grants where the sun don't shine. The Commonwealth would then be under intolerable pressure to reduce its own tax take back to the level required to fund only it own spending needs. It should be fairly easy for people to see which polity was guilty of greed and duplicity in that situation, and it wouldn't be the States.

Governments don't let other governments tax for them. A government is also only supposed to tax for its needs and nothing more. The federal government collecting income and sales tax for the states is a gross perversion of the principle of government.

The Nuclear Option

The states other than NSW and Western Australia have already given in to Costello. So the larger states like Victoria and Queensland are going to be no help in forming a power-block against the Federal Government. NSW will probably have to show some of the guts and gumption that it was incapable of in the 1880s.

Governments are addicted to, get fat, get wealthy and get powerful on tax collection. Economically NSW is the biggest state in Australia, and the tick of federal government is getting fattest on NSW's neck. The NSW 2004-2005 Budget contains revenue from;

Which comes to the totals;

NSW is only fifty percent self-sufficient, it is reliant on the Federal Government for about half of its revenue. NSW has several choices, be the federal government's lackey and subject to their every policy and political whim; or decrease the size of the state by fifty percent, making the federal government irrelevant; or the nuclear option, tell the Federal Government that NSW no longer recognizes the Federal Government's ability to tax income. Even better, that the Federal Government cannot tax in NSW at all - a reverse grant scheme.

Carr should claim that in 2006 a new taxation regime will appear in NSW. The federal government is no long able to tax in the state and to maintain the upkeep of the Commonwealth government, NSW will apportion grants to the federal government to ensure common issues such as the national defence, coast guard, customs and trade are maintained at the appropriate level.

To further poison the naked power grabs of the Federal Government the state of NSW should institute innovative taxation means, such as a flat tax of 25% for individuals and companies. This will neuter Costello's plea to NSW businesses to leave for other states. A flat tax will be far more palatable to individuals seeking to lower their tax burden.

For instance in the year 2002-2003 NSW had taxable income of;

Twenty-five percent flat of that income would be $59,083,148,844. Of this amount NSW only needs 15 billion or so to top up the needs of the state, the rest it can send onward as grants to the Federal Government. See how the feds like it that way around. I wonder who will be quickly crying poor?

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cam: 6.6% Flat Income Tax: Is all that is needed from that amount of taxable income (individual+corporate) to fund the State\'s needs. Which suggests a 13% flat income tax would enable the state to get rid of all the miscellaneous taxes such as duties, fees, gambling, etc etc.

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avocadia: Trivia:

Entirely trivial addition to the above, Western Australia probably only joined the Federation in the first place was because of those eastern state gold seekers who had followed the gold finds around the top of Australia from Queensland.

On a more relevant note, a flat tax simply will not fly politically. It has the shadow of Hansonism over it after One Nation proposed a flat tax; that would leave it prone being discredited. I can\'t say as I would be disappointed either, I\'m not quite that libertarian/free-market.
cam: The GST is a flat tax: I dont think anyone would quibble with a 6.6% flat tax in NSW if it gets rid of the GST (as long as the feds cant continue to tax NSW onerously).

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avocadia: Ahh...: ...I didn\'t read that well enough (I read it in my five minutes between meetings :- ). I thought you meant replacing the Federal Income Tax structure with a 13% flat tax. 6% and change flat tax rather than a GST...I could probably go with that, but IANA Economist; I wash my hands of finding flaws.
cam: I did mean a flat income tax:

:)

The GST is a flat tax though, even if it is consumption based. Keeping the bloated state of NSW alive, and the feds out of its business, is surprisingly cheap.

A 6.6% flat income tax would make the feds unnecessary. Change it to 13% and the consumption and sin taxes could go too. Considering many (those earning over $21,600) get socked between 30% and 47% by the feds on income tax, I suspect they would be in favour of it too.

Hard to believe that the highest tax bracket kicks in at $70,000. That is an awfully long bow they are drawing.

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avocadia: Let me rephrase it.: Do you mean replacing the GST with a flat tax at the state level and retaining the federal income tax, or replacing the federal income tax and the GST with a state level income tax?
cam: Sorry: Yeh I meant kicking the feds out of the tax pie altogether and then have the states give the feds \"grants\". So fed income tax and GST would be replaced with state income tax.

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Some comparisons of the Australian income tax brackets to other nations. From the 2002 taxation statistics, I try to discern where the main burden of taxation is falling. It seems the Australian income tax system is progressive in name, but not reality, with two of the five brackets carrying ninety percent of the Australian federal income tax burden.
Permalink, Unprogressive Australian Tax Brackets

Australian Federal Income Tax Brackets

This is for residents in 2005 and does not include the Medicare Levy which is another 1.5%;

Non residents pay 29c for every dollar from $0-$21,600. The remaining upper brackets are the same as for residents. This is blatantly unfair and inequitable for non-residents. Many of the Australian Diaspora find partners overseas who return with them when they come back home. Once again the Diaspora finds itself discriminated against by government policies.

I think this table is the one that breaks out the amount of people in different brackets. The table is for 2002. They don't match the tax brackets either, so I have tried to approximate the tax brackets and the information in the table to get comparable sums to the 2005 tax brackets. From that table, the tax brackets approximately netted;

That is a very heterogeneous outcome. Two tax brackets are doing the lion share of funding government.

This suggests that the progressive tax system isn't as equitable in sharing the burden as it is presumed to be.

US Federal Income Tax Brackets

This is the American federal tax income brackets for 2004. These are for a single unmarried person. This is in USD, so add about twenty-two percent more at the current exchange rates to convert it to AUD;

The US Federal government does not leverage any consumption taxes, such as a GST. Many US states have sales taxes while others have no income tax.

British Income Tax Brackets

The British tax brackets for 2005 are in pounds. A pound is about 2.4 Australian dollars.

The British tax brackets have a very large and wide bracket which has a 22% tax rate.

Indonesian Income Tax Brackets

The only information I could find on Indonesia's tax rate was for 2001, and from a US embassy .

I could not find information on tax brackets for Japan, Germany, Sweden and South Korea. In 2002, China had nine tax brackets with tax rates progressing from 5% to 45%. It appears common for nations to have a mix of income tax and consumption taxes. The goods and services tax is usually between 10% and 15%.

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avocadia: More info...: Does the US system work the same way as Australia\'s; meaning at each step do you pay $x + y cents in the dollar? Or is it just a straight up and down percentage of your income?
cam: Same As Australia: The tax percentage is only leveraged on the tax bracket itself.

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cam: Graph of income for 2002: Here . Unfortunately the data from the tax office was imprecise above 87,000. No way to determine how the income is spread above that point.

It appears that the middle 30% tax bracket is designed to catch the largest part of the bell curve. That and the 47% one both look like bracket creep to me.

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Felix the Cassowary: I seem to have missed something:
This suggests that the progressive tax system isn\'t as equitable in sharing the burden as it is presumed to be.

I don\'t get this. I thought a progressive tax system is one that taxes people who earn more more. The system seems to be doing precisely that.
cam: Looks like Bracket Creep to me: I think those at the bottom end of the 20K-58K bracket are being overtaxed, as are those at the bottom end of the 70K+. Even though it looks like a five bracket system, judged from where the money comes from, it is really a two bracket system.

It also makes the back benchers, raising a raucus to have the highest tax bracket dropped to the same as corporate tax (35% IIRC), look silly. I think it is more important to even out the brackets a bit and give some tax relief to those earning between 20K and 30K.

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cheesy10: re: more info: Yes, it works the same in that way.
Otherwise, someone who earned $29,051 would run into a situation where they would end up with quite a bit less money in net income after taxes than someone who earned $29,050.

In this case, the person earning $29,050 would pay $4357.50 in taxes, leaving him with $24,692.50.
However, the person earning just one dollar more would pay $7262.75, leaving him with only $21,788.25.
That extra dollar in income would cost him $2,904.25!

However, because it\'s taxed in brackets, the person earning $29,050 actually ends up with $25,050 ($4,000 in taxes) and the person earning $29,051 ends up with $25050.72 ($4,000.28 in taxes).
avocadia: I\'d be interested to see:

I\'d be interested to see the same sort of chart, contribution by bracket, for the US and UK. When you chart out the number of people in the (approximate) brackets, it isn\'t all that surprising that the middle bracket contributes the most; 60% of tax payers are in that income range and earn 54% of taxable income. 10% of taxpayers are in the highest range, yet have 29% of taxable income, which kind of  explains why their contribution is so high.

Anyway, what I got most out of this was that I am against a flat tax like you suggested a couple of posts ago. I don\'t like the way the workers between $6000-$9824 would be paying 635% more than they do already; doing that will only mean more incentive to stay on welfare payments.

That verged on strawman, didn\'t it? Getting back to the point here, and I am so not a student of taxation, is to increase the threshold for the top two brackets out by 10K-15K each. The notion that someone on $60K (coincidently, what I earn) is a wealthy spiv is reasonably laughable. If I discounted credit debt and HECS debt, I still wouldn\'t be able to afford a mortgage, even in Campbelltown where I live. It doesn\'t matter where you stand on the notion of the Great Australian Dream of home ownership, if you can\'t afford a house you are not wealthy.

I\'m happy to pay a greater percentage than, say, your average call centre worker (coincidently, the majority of my co-workers); but what I am on is not wealthy.
cam: Increase in Cost of Living:

... means bracket creep is worse in chewing up people\'s wealth and economic liberty. There definately has to be a reduction of the tax burden on pretty much everyone. Howard\'s method is to increase taxes through nefarious means and then give it back in the way he wants as middle-class welfare. Usually as electoral bribes that fit his mythologized perception of Australia\'s golden path. [shh mr strawman]

There is going to have to be tax relief, and the folks that are taking it hardest are those in the lower levels of the two brackets that pay 90% of the tax. It is an inequitable system at the moment that is designed to make people dependant on the government.

I think I will email the tax department and try and get a breakdown of the incomes above 87,000. A better idea of how the higher incomes stretch out is needed. Like you said, $67,000 is not wealthy. The escalating cost of living and home ownership means aussie battlers occupy all brackets in the current tax system.

Their is a bill floating around Congress where they want to change the system entirely to a consumption tax. The poor who will get hit disproportionately by that, will get \"rebates\" back from the government. Those rebates will come with strings attached. Bad idea. With the current US style of conservatism the rebates will probably be provided as long as the working poor go to church, have babies and dont drive cadillacs.

I dont like that idea.

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cam: US Income tax 2000: This is the best data I could find for the US federal income tax system. It doesnt quite fit the tax brackets either. But it does at first glance appear better apportioned than the Australian system.

The blue is income, the maroon is the amount of money taxed (ie 10%, 15%, 25% etc).

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avocadia: It\'d be a right bastard to implement: …but it\'d be nice to have a lot of tax brackets each with a 1 percentile point increment from the last. Dibs on not being the one to try and codify it though.
cam: Part of the argument behind a flat tax: .. is simplicity. Since Au has a two bracket system in reality, it might be easier to formalise it and have 0% tax under 25,000 AUD, and 15% above that. We have consumption and capital gains taxes already, so the wealthier will get caught in that net anyway.

Whether income tax or consumption tax, the government is still outsourcing their tax collection. Which is not cool. Business is bearing the burden of collecting it.

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cam: Where-abouts in the states?: I am currently working in the Washington DC area.

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avocadia: I was creeping my way towards...:

…suggesting the only way a flat tax could be equitable would be to do it as a negative income tax, and then someone, Ross Garnaut, goes and says it for me.

I don\'t quite know yet. The second of my qualms about a flat tax is that the Government would end up wasting a heap of money in administration for more welfare making sure the bottom end of the income scale isn\'t clobbered  - the first being that they would be clobbered. I imagine there must be a fair amount of administration overhead in hading out $x to every adult citizen, working or otherwise. There is a few more Medicare cards than there are people living in Australia, fr\'instance.
cam: Negative Income Tax: I dont like that idea, as the government takes the money and then gives it back. A Republican fellow in Congress is trying to get a flat tax consumption through, it has rebates for the less well off. As soon as government hands out money it comes with strings attached. It is better if they dont take the money in the first place.

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Tax Bracket Creep

The Australian tax brackets are skewed. They are designed to extract a single tax rate of thirty cents in the dollar from nearly sixty-three per cent of the population. Those that earn $20,000 now rise quickly into that tax bracket and then remain there. With salary inflation it also appears that the forty-two cents in the dollar is set to catch a large number of Australians earning in the $40,000 to $50,000 range.

Salary earners in the range $20,000 to $40,000 need to be removed from the 30% tax bracket. The 42% tax bracket also need to be raised higher so bracket creep doesnt catch a large number of income earners.

Graphs On Tax Per Income Bracket

The data was taken from the Taxation Statistics 2002-03. These graphs were constructed from the data in Table 5, Part A: Tax Office calculated and miscellaneous items [XLS warning]. The personal tax payable includes the Medicare Levy and other taxes but which don't appear to include capital gains.

From the data it seems to count only 8.6 million tax payers. Is this a real number?

The first graph shows the number of taxpayers per income bracket. The curve rises near the 20K-30K before dipping and rising at 40K-50K. The largest tax accruing tax bracket is between $21,601 and $58,000 . It is designed to catch all these people.

From the number of taxpayers, the 21K-58K bracket approximately contains 63% of taxpayers. This is inequitable and unprogressive in my opinion.

The amount of tax payable is not evenly distributed either. The area to note is the amount of tax those earning between 20K and 40K pay. I would say these folk need tax relief and the 30% tax bracket needs to be raised to the 40K level.

The current tax system is set up to tax at 42% in the small range 58K - 70K. Those earning 40K-50K are rapidly inflating toward that bracket. Another example of bracket creep.

Those that earnt more than $100,000 werent included on the graph as their individual contributions were high and hide the difference between income earners in the 20K - 80K range.

cam
siento: Hang on: What do you mean when you say that the fact that the income bracket 20-58K contains 63% of tax payers in inequitable. Isn\'t it just the way it is? Why shouldn\'t people earn that much money?

The tax payable graph is also weird. What is the left hand scale? It looks like people on 20-25K pay 200 000 000 in tax.

And what is the scale on the tax burden? What does 500 mean on the left?
cam: Bracket:

What do you mean when you say that the fact that the income bracket 20-58K contains 63% of tax payers in inequitable. Isn\'t it just the way it is? Why shouldn\'t people earn that much money?

I dont think it is fair that a progressive system has 63% of taxpayers in one bracket. If it contains so many people that bracket should be split into three and some tax relief given to those at the lower end of that bracket.

Having one massive bracket designed to catch over half of the taxpaying population looks like bracket creep to me.

As to the tax payable, the gross tax for the 20K-25K says it is $2,852,151,316 ... I am only going by what is on that spreadsheet.

The left scale on the third graph is the (payable tax)/(number of people in the income bracket).

cam
siento: Right: The comment about tax payers now makes sense. Introducing more brackets makes it a little more complicated though.

OK, I understand the gross statement now.

But the final graph seems to indicate that somehow people are paying very little tax. It seems a little odd at least. Does it mean the average 60-80K earning tax payer only pays $2000?  
monkeymind: Tax and Hecs: One thing that has always pissed me off is that while it is possible to index hecs debts to the cost of living automatically each year the tax rates are static and not indexed.
ranomatic: From the raw data: the net tax for $60,000-$80,000 income is $13,491,610,227 with a total of 678,249 taxpayers.  This should equate to around $20,000 tax per taxpayer.  The chart Cam posted seems to be based on the tax payable row in the raw data.

That spreadsheet is confusing.
ranomatic: Salary Inflation: Looks like salary inflation wont be a problem after all.  The plan is to increase the top bracket to $125,000 by July of next year.
 
cam: That is necessary: ... but it looks like the 30c in the dollar bracket will still have a 21K entry point. The top half are getting relief but the 63% stuck in the 30c in the dollar bracket will remain stuck in there rather than getting relief.

I will run the numbers again on the new tax brackets once I see concrete data on the new tax brackets.

cam
avocadia: The consensus appears to be that...:

…the tax breaks are a sop thrown to the ginger group to curry votes in a party-room showdown.

I get the feeling that Costello is doing a Bush in some respects; the idea that tax breaks to the rich will provide enough economic impetus to make up for unmet infrastructure  and skills training needs. I\'d be inclined to support that idea if it was aimed at the people who don\'t already have the disposable cash to dump into the economy.
cam: Not genuine reform then: .. but instead a political purchase from Australia\'s most tax hungry government ever.

cam
avocadia: Reform: Genuine reform? Not really. Charitably you could describe it as nibbling at the edges.
ranomatic: Doing a Bush: Back in the day, when Ronald Reagan was running for the Republican presidential nomination against George H. W. Bush, Bush called Reagan\'s supply-side economics plan \"voodoo economics.\"  I don\'t think Bush ever believed in it, even after he became Reagan\'s VP.  George W. Bush, unlike his father, buys into supply side thinking.  Maybe he keeps a black cat bone and a mojo hand to ward off the bad juju.

Two-fer on Petrol Taxes

Tuesday, Fuel excise to increase petrol price burden . From the Liberal party room in Canberra was heard a loud OMFG WTF? Wednesday, Govt scraps fuel tax plan . Who says populism isn't alive and well.

From the Tuesday news report;

The already high cost of fuel may be boosted by a decision taken by the Federal Government to increase petrol taxes from next year.

Two years ago Treasurer Peter Costello announced the petrol excise, which is currently capped at 38 cents a litre, would increase from January next year.

He said the increase was a way of encouraging the production of clean fuels.

Tax coal too then. ... From the Wednesday news report;

But after press reports this morning, Prime Minister John Howard announced a policy review.

"I can assure the Australian public that it is being reviewed and is being reviewed very soon," he said.

This afternoon, Treasurer Peter Costello issued a statement, saying given the current market conditions, the Government has decided there will be no rise.

Mr Costello says the incentive for friendlier fuels will instead be funded from the Budget.

Excise will remain at 38.143 cents.

The Howard government is the most taxatious government in Australian history. That magic budget (pudding) can do a lot of things without needing to raise more taxes.

More Anti-Federalism

The Federal Government continues its hostility toward State autonomy in taxation. Costello is asking Western Australia to remove taxes it levies, and instead rely entirely on the federally collected GST for tax monies. As it is, the federal government collects nearly 90% of all tax collected in Australia. If any should be removing taxes it is the federal government.

The States should be autonomous taxing entities. Governments do not let other Government's tax for them. It removes any ability to fund independent policy. Western Australia should reject Costello's request and repeal the federal government's ability to tax through the GST and income tax.

Constantly Increasing Tax as Percent of GDP

In 1993 the government tax total as a percentage of GDP was 27.4%, in 2004 it is 36.6%. That is an increase of 9.2% in the space of eleven years. A difficult figure to swallow or justify.

A comment on Nicholas Gruen's post on the NZ economy led to me poking around in the NZ government stats site. I found this interesting little PDF which compares New Zealand to the OECD in several areas. A table from the PDF;

It shows Australia in 2004 extracting 36.6% of the GDP's wealth as tax. From this post on SSR which looked at government expenditures , a list of the change in total tax as a percent of GDP;

As can be seen from that list, the tax burden has been increasing consistently, to the point where it is 36.6% in 2004. Since the federal government is the dominant taxing entity in this country, taxing for the states, as well as themselves, blame must be apportioned there first. This also suggests that it is affordable for income taxes to be dropped for low income earners, as well as tax breaks for middle income earners.

A System Designed For Creep and Churn

Andrew Bartlett has been covering the possible tax reforms that Australia could benefit from . Craig Emerson also weighed in on the issue . But Emerson's website sucks and I can't find more information on what he is proposing. So I cannot be bothered discussing his policy ....

There is no polite way to say this. But compare Andrew Bartlett's website to Craig Emerson's . Andrew's is readable and accessible. Craig's is a rats arse. I wanted to get more info on what Emerson was proposing in terms of bracket creep. But on his website I can find nothing of use. Worse, his media releases are in PDFs.

Emerson got on the ABC feed, so congratulations, but I can't go into any more detail in his tax reform proposals because the information is not there. I don't live in Queensland, but my experiences here would influence my vote.

Bracket creep is an issue in the Federal taxation system, 30c on the dollar is taken after the 21K mark. In my opinion, any tax reform should occur at the lower tax brackets. Greater Sydney and Melbourne comprise about eight million people. Tack on Brisbane's two million and suddenly half the country lives in three cities. None of these cities are cheap to live in, and wages aren't appreciating at the same rate they were during the tech boom. Time to stop the bracket creep.

I also made a novel suggestion in trying to derive from first principles social organisation and an equitable means to pay for sustaining government (the dispossesive) ;

The goal of any social organisation is to foment prosperity. This can be taken as the starting point for an equitable system of taxation. Those that have prospered from economic liberty have a moral responsibility to not only maintain the present system of maximum liberty, but also to ensure those that have not prospered by it, are given every opportunity to achieve in this environment. It can be derived from this principle, that taxation should not begin until after the point of prosperity.

I took the point of prosperity as being;

I find using those that have half of the taxable income is a more equitable system of taxation. This would have the added advantage of removing the highly regressive nature of the current Australian taxation brackets. Those that have prospered carry an equal burden in ensuring not only maximum liberty remains, but also that those who have not prospered in such a system, get every opportunity to do so. This equal burden should be carried through to the taxation system. I recommend that;

A personal tax rate of 30% for those who earn income that is in the top half of all income. This would be adjusted every year. Currently this point is ~ $60,000

So basically no income tax until an individual earns over $60,000. The tax rate would be 30c in every dollar earnt over 60K.

More on Tax

Federal Government Inhibiting State Tax Policy Innovation

The Australian Capital Territory Treasurer Ted Quinlan and federal Territories Minister Jim Lloyd have rejected a plan to make the ACT an income tax and payroll tax haven . One of the problems facing the States is that Federal government's taxing of income and GST enforce homogeneity on the states. They have little chance to differentiate themselves or to innovate in areas of tax and economic policy. The Federal Government's unitarianism is an impediment.

This proposal has been put forward by the Canberra Institute. This is a think-tank with no internet presence what-so-ever. How can they be so stupid? I am getting annoyed that every article or rafferty's I write now has an opening paragraph which berates the ignorance of politicians, media, think-tanks and other industrial structures when it comes to the internet.

Anyway, I am stuck with trying to make sense, or an opinion, with what the Canberra Times has written on it. Stephen Bartos has put his backing to it. Bartos is a Director at the National Institute of Governance . But without more detail it appears that the plan consists of;

The plan would "declare the ACT and Jervis Bay tax-free advantage areas for both ACT residential PAYE [Pay As You Earn] and company taxpayers. ... The GST, and the Medicare and superannuation guarantee levies would remain from the Commonwealth and the ACT would continue to collect stamp duty, car registration and rates.

That is very innovative, and would probably draw people to Canberra. If the ACT had control over the income tax, they could lay a flat tax of say 5% and use that to fund health and education - they could let the federal government keep any GST revenues in return. But the federal government collecting all income and sales taxes for the states leaves them little room. Jim Lloyd's spokesperson was quoted as saying;

Minister Lloyd notes the idea proposed by the Canberra Institute as interesting but impractical in the context of the national taxation scheme," she said. "The Australian Government administers tax in the interests of all Australians, and the proposed changes would advantage one part of the Australian population over others.

Unitarianism. Canberra sees us as one homogeneous lump. This leaves no room for States to compete for skills, for workers, for families, for businesses or investment through state-based taxation, economic or labour policy. The federal government is inhibiting innovation. Supposedly the Liberals are about competition and free-market policies. They are against it when it dilutes their power at the federal level.

This is the failure of the Australian political system, it enforces federal conformity, entropy, weight and inertia. It is an inhibition to the states innovating and competing against each other.

The United States is a far more diverse federal system with greater state independence than Australia. On Sunday's you see New Yorkers streaming across the Hudson River to the malls in New Jersey. This behaviour is a result of sales tax being lower in New Jersey. New York competes in return by having "no sales tax" days.

Because the GST is leveraged by, and collected by Canberra before being disbursed to the States. The competition New Jersey and New York have over sales tax cannot occur in Australia.

Another example of American states competing against each other is Delaware's incorporation laws ;

More than half a million business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500. Businesses choose Delaware because we provide a complete package of incorporation services including modern and flexible corporate laws, our highly-respected Court of Chancery, a business-friendly State Government, and the customer service oriented Staff of the Delaware Division of Corporations.

This small state has captured a good chunk of the American incorporation market.

One of the few Australian States who has maintained a somewhat independent stance is good ol' Queensland. it still pursues development state policies which are more reminiscent of the autocratic Asian nations. One of the independent policies is the Queensland Fuel Subsidy Scheme . This knocks approximately 8.5c off the cost of each litre of petrol.

I am sure this act of local and regional policy making will meet a green federal challenge in the future where a federal government will use the power of Canberra to force homogeneity on Queensland and bring them into line with every other state. As it is the Federal government is forcing the states into a corner anyway with its own fuel taxes ;

One question remains to be answered. Why has the Commonwealth been allowed to escape criticism regarding underprovision of infrastructure and services, and the problem of traffic congestion?

While state and local governments have nominal responsibility for provision of most infrastructure and services, the Commonwealth controls the main sources of tax revenue. Hence, state and local governments depend on grants that are inadequate to meet their responsibilities.

The Commonwealth refuses to give back more than 16 per cent of fuel tax revenue for road infrastructure, and will not cut the fuel tax rate to make room for congestion pricing by state or local governments. So while special interest groups try to bludgeon the Queensland government into reallocating fuel subsidy monies in accordance with their particular interests, the Commonwealth laughs all the way to the bank.

Big government in Australia has a name - it is the Federal Parliament. It is enforcing control on the states through its taxation policies. This leaves the states homogeneous and incapable of reacting to regional economic pressures. The federal government is acting like a monopoly, extracting rents from the states and inhibiting innovation.

cam
adam: Bodges: Without this power to encourage business, or support society, through setting taxation levels, state governments employ all sorts of bodges.  Special sweetheart deals to encourage specific businesses to relocate come to mind.  eg Boeing was widely rumoured to have snaffled some sort of bonus for relocating to Brisbane.

Not only does this encourage an unhealthy backslapping co-dependence between politicians and particular businesses, but its also inefficient, and misses lower profile small or medium sized businesses.  State governments can\'t set the rules and then let the market sort it out, they have to pick winners instead.

Quick, Before We End Up Like London

George Williams has an op-ed in the Sydney Morning Herald warning against not only the vertical tax imbalance present in our system of government, but also the unrestrained anti-federalism. His recommendation is to have another series of constitutional conventions, as we did in 1890, toward solving the problem of federal/state authority and rejuvenating our system of government. While Williams did not state that his recommendation would be part of a Republican convention, this is what maximalist Republicans would desire. Australian Republicans are democrats too and demand good government above all. Republicans are more than aware of the weaknesses in our system of government.

Tax

The vertical tax imbalance has been a constant topic of discussion on SSR. Prior to World War II, the states collected income tax for themselves. This changed with the Curtin government taking over that role due to the exception that was the second world war. That state of exception became a state of permanence, and federal government never again dropped their collection of income tax. John Gorton went a step further and saw the federal government as the collectors of revenue and the policy makers. The state were reduced to disbursing federal funds in support of federal policy. Whitlam accelerated this process. This is the power of federal tax collection. We saw it again recently when Peter Costello demanded the states drop stamp duty charges in return for receiving GST.

Williams writes;

NSW, for example, depends on the Commonwealth for about 40 per cent of its revenue. This was predicted by Alfred Deakin, Australia's second prime minister, who said soon after Federation that the states would find themselves legally free, but financially bound to the chariot wheels of the central government.

I had a look at the NSW state budget in April last year . According to the 2004-2005 NSW budget, state taxation raised 15.52 billion dollars while GST and Commonwealth grants combined to 15.76 billion. GST revenue and deferral was 9.74 billion. So nearly half of the state money comes from the federal government. The point of federalism is that each level of government is responsible to raise revenues to meet its obligations. This is not happening in Australia - the system is broken.

Westminster

The Westminster system of government has poor separation of powers, this conspires to make the political process weak in warding off centralisation. Until recently British government was totally dominated by London, with the next layer of government being councils. They have actually federated to an extent with the addition of parliaments in Scotland and Wales. At the last Australian federal election, all the major parties and the larger third parties had explicit policies of dissolving the states and leaving nothing between the federal government and the local councils. Federalism is a forgotten political methodology in Australia.

In reality it is the federal government that should be the smallest. It should only be taking care of issues that require a response internationally, and to inhibit arbitrary punishment, political or economic, between the states. The states should be the point of greatest diversity. This strengthens the system, allowing for Australians to move between states when one state fails, and encouraging policy competition between states. It also ensures that the state governments respond to local needs. One big, fat, stinking federal government providing policy for us all is a weakness. In a systems world unitary outcomes are single points of failure and to be avoided - if not routed around as damage. Anti-federalism is not a viable policy for the public health or prosperity of the country.

Williams' proposes;

While Australia has achieved important reforms in other areas, it has a poor record of retaining the structural weaknesses in our system of government. This is especially a concern given that Australia now has one of the oldest systems of government in the world. To get this process off the ground we should, like the conventions of the 1890s, hold a summit that will focus national attention and create space for new thinking. We need to fix our federal problems and in doing so ask ourselves what should be the role of the states in the second century of our Federation.

I would add to this, if we are to fix the weaknesses in our system, including poor separation of powers, poor federalism and a weak as dishwater constitution which does not protect minorities and individuals from political discrimination, retribution and violence - then make it a constitutional convention for a republic. The Bearded Men did a second rate job in 1901, there is no reason why we should do the same in the twenty first century. Fix the whole shebang.

This requires; Small federal government which is constitutionally limited (so the High Court can't slyly increase federal powers), a bill of rights to limit legislative authority, better separation of powers between executive, legislative and judicial, improved checks and balances, and finally a republic where the people are the sole authority for the government's legitimacy and have a more active role in its upkeep, processes, outcomes and integrity.

cam
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