Where has all the money gone?

By Allen Myers "Where's the money coming from?" This standard response to election spending promises has had a bigger than usual run in the current federal campaign. The state of budget projections — with the implication that this determines how much is "available" to spend — featured in the Keating-Howard debate on February 11. On the same day, Keating announced planned savings of $4.7 billion over four years, plus an estimated $800 million a year to be reclaimed from millionaire tax cheats — more than enough to fund new spending promises. John Howard released his answer to "Where's the money coming from?" on February 15: from abolition of public service jobs and cuts to social security for migrants. The question has taken such prominence, perhaps, partly because there are few policy differences between Labor and Liberal that might provide an alternative focus. But it also reflects a more enduring concern — the idea, widely encouraged by establishment media and politicians, that our society can no longer afford some things we used to be able to. The push for superannuation, for example, is driven by the argument that we have to "increase savings" and that governments can no longer afford to provide an age pension except, perhaps, as a "safety net" for a small minority who lack super. It's the same with other measures of social welfare: we "can't afford" free tertiary education or as many hospital beds as are in demand or improved public transport or free child-care. Since we used to have some of the things we "can't afford" now, you could be excused for thinking that Australia has become poorer over the last few decades. But just the opposite is true. Measured in constant 1989-90 dollars, Australia's gross domestic product increased from $308 billion to $415 billion from 1984-85 to 1994-95. Per capita, it rose almost 19% — from $19,439 to $23,077. Australian society as a whole certainly isn't poorer. If the government can't afford to pay for things it used to pay for, then it must be taking a smaller share of GDP, which means that someone else has a larger share. That someone else is business. For a start, since the federal ALP government came in 13 years ago, there has been a shift of around 10% of GDP — some $40 billion a year — from wages to profits. Of course, that doesn't automatically mean that government would have less revenue. Theoretically, the government could make up for lower tax revenue from workers by increasing taxes on business and the wealthy. In reality, just the opposite has happened. The ALP government boasts about measures such as dividend imputation (which makes dividend income tax free if the company which pays the dividend has paid income tax) and the reduction in company tax rates. Here I want to look at what has been happening with personal income tax. In 1982-83, the top marginal income tax rate was 60%, applying to income over $35,788 a year. Beginning in 1986-87, the top rate was reduced in several steps; today it is 47%, on income over $50,000. As was intended, this has significantly reduced income tax paid by the wealthy. Non-PAYE (pay as you earn) income tax was 2.4% of GDP in 1982-83. It rose to a high of 3.7% of GDP in 1987-88, and then began falling, reaching 2.3% in 1993-94. However, if we exclude those individuals taxed under the prescribed payments system — which applies mainly to small business people — non-PAYE income tax has gone from 2.3% to a high of 3.3% to 1.9% of GDP. It is also worth looking at tax rates actually paid by different income groups. The following figures from the Australian Taxation Office are for the 1993-94 fiscal year. Individuals with a taxable income of $31,000-33,000, roughly the national average, paid an average of 22.1% of their taxable income. Those a bit further up the scale, on $35,000-40,000, paid 24.1%, and those on $40,000-50,000 paid 26.8%. And what about the wealthiest Australians? In that year, 491 people reported taxable incomes over $1 million. Their average tax was 25% — less than that paid by many skilled workers. (The highest rate — 34% of taxable income — was paid by the $100,000-500,000 bracket.) Furthermore, these percentages refer only to taxable income. Most taxpayers also have some non-taxable income. (This is not from misreporting of income, such as the use of trusts to hide income referred to in Keating's February 11 statement, but income which the tax law excludes from taxation.) The typical person on an average income in 1993-94 had non-taxable income of $1154. The 419 millionaires averaged non-taxable income of more than $57,000. Overall, total federal tax revenue from all sources dropped from 24% of GDP in 1982-83 to 21.9% in 1993-94. Last September, the OECD reported that, among its members, only Turkey had a lower overall tax rate than Australia. In 1993 Australian governments (at all levels) took 28.7% of GDP, some 10 percentage points less than the OECD average. How have workers fared from the Labor government's income tax changes? Calculations for the Sydney Morning Herald last year by accountants Coopers & Lybrand found that a single male on average weekly earnings in September 1983 paid 23.08% of his wages in tax; the comparable figure in August 1994 would have been 23.8%. However, defenders of the government might point to the figures on total revenue, which show PAYE taxes declining from 12.1% of GDP in 1982-83 to 10.9% in 1993-94. In fact, there is no contradiction between these figures if wages have been declining as a share of GDP, which they have. But there is one further aspect to this question that deserves mention. Repeatedly throughout the Accord years, workers have been promised income tax cuts in exchange for wage restraint. It appears that those "cuts" are largely illusory, but for the sake of argument let's say that the total of workers' income taxes might have remained at 12.1% of GDP had it not been for the Accord deals. Even in this case, working people have lost out. Business has gained because its wage costs have been lower. But what working people may have gained through lower income taxes has been lost through government cutbacks — because government now "can't afford" the services it used to provide. Where has the money gone? It's gone to the rich mates of both major parties, the people who always get richer no matter which party is in government. Getting it back requires, as a first step, a shift back towards a progressive income tax system.