Tag Archives: Piketty

Debt, Interest Payments and Choices: A Surprise in the SA State Budget

As we make our way through the first month of a new financial year, political economic debates are dominated by inflation, interest rates and “full employment”. But the discussion of interest rates is generally focused on their impact on inflation at the macro-level, and on mortgages and cost of living at the micro-level. The impact of interest payments on government budgets is usually noted in budget night commentary on the deficit/surplus scorecard, but promptly forgotten for the rest of the year.

However, an unusual occurrence (at least in recent times) in the South Australian state budget should serve to illustrate why interest rates matter to government and to the community. In 2023-24 the amount of government expenditure going to servicing state debt ($1,254m) will eclipse the budget for the Department of Human Services (DHS) ($1,148m). This difference grows over the forward estimates with the DHS budget subject to real cuts (low indexation and older operational savings) while interest payments increase substantially. By 2026-27, interest payments are predicted to be $1,684m, by comparison with a DHS budget of just $1,233m.

Column graph comparing SA State Budget expenditure showing interest payments increasing from 2022-23 to 2026, while DHS expenditure remains stable.

In practice, this means that we are spending more on debt repayments than we are on the Department that is the primary provider of support services for the most vulnerable and disadvantaged people in our state. That feels wrong – but apart from the shock value, does it really matter, or it is just a statistical coincidence with no budget or social impact?

A Debt Problem?

As I pointed out in SACOSS’ post-budget analysis, government debt and deficits are not necessarily a problem – and may represent important economic stimulus or long-term investment. And there is no suggestion that this level of debt in unsustainable, although the budget papers show that a 1 percent point increase interest rates in 2023-24 would equate to an extra $203m in service payments. That would obviously be a significant imposition on the budget, but even with the debt-to-income ratio rising, the government can clearly still maintain payments. However, if debt is unchecked or interest rates continue to rise, at some point interest payments either become unsustainable, or more likely, a significant constraint on budget spending in other areas.

In that sense, the comparison of interest payments and the DHS budget is important because it reminds us of the potential impact and opportunity cost of state debt. I am not suggesting that if we were not paying that money in interest, we would be spending it on human services. That would be wishful thinking! However, all government spending has distributional impacts, and interest payments are no different. The comparison with DHS expenditure simply serves to focus the interest payment discussion on inequality.

Debt, Interest Payments and Inequality

In providing concessions and emergency supports to those on low incomes, and funding charities to provide a range of other supports, the Department of Human Services functions to transfer money and resources from the budget to those most in need. By contrast, interest payments are a transfer from the budget to government bond holders – who, by definition, are those with excess cash to afford to lend money to the government (by buying bonds).

As Piketty has pointed out, (and [as ever] some of the concerns here come from my reading of his work) it is far more advantageous to those with capital to have public deficits and receive interest on their money than to have that capital taxed to balance the budget (Capital in the Twenty-first Century, p.130). So, in creating government debt we have already chosen to favour those with capital by borrowing rather than taxing their money and creating an ongoing flow to rather than from that capital.

Seen in this light, the contrast between the DHS budget and the amount going to debt servicing is an indicator of choices about government priorities – the choice to provide relatively less to the poorest in society (via government expenditure) than to those who are better off (via taxes foregone and interest paid out).

Caveats

Of course, as with everything in economics, it is not as simple as that. The initial use of borrowed capital may be used for things which support those on low incomes, and inflation may quite separately have a counter-balancing impact by undermining the real value of bonds and the interest payable on them. Further, bond-holders may not be South Australian residents and may therefore be outside the tax ambit of the state government. In that sense the taxing v borrowing from capital argument above is not about individual bondholders. Rather it is illustrative of the options of government in general and operates at the level of class: that is, the state government has options to tax local capital rather than borrow from capital in a national or global market.

To the extent that we can look at individual bondholders, it is also worth noting that, as Piketty points out, they are no longer necessarily the wealthiest people in society (as the super-rich can invest more lucratively elsewhere). ABS wealth statistics do not record bonds as a separate category, so it is hard to confirm this. However, it is clear that the low-inflation era of the first years of this century made bonds a safe investment for middle class superannuation and investment funds, so when we talk about bondholders it is likely we are talking about middle and above-average income earners (often via superannuation or investment trusts). In that sense, the DHS/interest payment comparison is not so much about rich vs poor, but about a form of middle-class welfare instead of a transfer to those in most need of the supports that a DHS might offer them.

Finally, there is another (non-taxation) route to balancing the budget and avoiding interest flows to capital owners. That is by cutting expenditure. However, cuts to expenditure (and therefore to services) usually impact disproportionately on the poorest people. Those with the fewest economic resources are likely to be most reliant on support services and have limited or no alternative options, so expenditure cuts usually also impact most on the poor. Further, it is notable that in this SA budget, government debt continues to increase even with operational surpluses from 2023-24 onwards, so balancing the budget is not simply done by cutting expenditure. However, there is little doubt that when government services are cut (the “austerity approach”) this exacerbates inequality, so if fairness or equality is a consideration in balancing the budget, we must ultimately return to revenue issues – and our preference for borrowing rather than taxing capital.

Why Debt and Interest Payments Matter

Budget deficits and surpluses matter, but not for the reasons often touted in economic commentary (“responsible government”, “living within our means”). They matter because they determine the level of debt, which in turn, within any given interest rate regime and revenue base, impacts on the money available to spend on services. And as interest rates increase, so too does the cost of servicing government debt. The choices made to borrow rather than tax capital increasingly manifest in a distribution of government revenue to the middle and upper middle classes rather than to those on the lowest incomes who would benefit most from government service provision.

The fact that the SA state government interest payments now eclipse spending on the Department of Human Services should make us think about government priorities and the need for a stronger tax base.

The Australian Inequality Index

The public policy think tank, Per Capita, has just released a new multidimensional measure of inequality, the Australian Inequality Index. The index combines various measures of inequality in seven areas: income, wealth, gender, ethnicity, disability, and intergenerational and First Nations inequalities. The measures are weighted and give a measure of inequality for each category, and for overall inequality.

Given my ongoing critique of the use of mono-dimensional and often misleading household income statistics as the primary measure of inequality, I welcome Per Capita’s initiative. In previous posts I have tried to develop consistent indicators of inequality in a number of similar areas, mainly in terms of shares of total income. However, the Per Capita inequality index is broader than simply income (or economics) and includes a range of social measures – something that makes its methodology bolder, and more fraught (more below).

Results

Because the Inequality Index combines different types of measures (for instance, gender inequality includes political representation ratios, crime victimisation rates, and the gender wage gap), it is difficult to get a common language and measure. Per Capita solves this partly by using indexes with values between 0 (perfect equality) and 100 (the furthest distance from equality). So, for instance, if wealth inequality was rates at 70, this would mean that the wealth of the highest income group would need to decrease by 70% for equality to be achieved. These index numbers are then tracked in each area (and combined) for the years since 2010.

The outcome is summed up in the graph below from the Summary Report. It shows stability in the immediate years after the GFC, followed by a bumpy decrease in inequality from 2013 to 2018, primarily due to improvements in gender and ethnic equality, and in some measures of equality for First Nations’ people. However, the first two of these indexes turned around late in the decade and, coupled with rises in income and wealth inequality, the index shows a resurgence in inequality.

Line graph showing the Inequality Index from 2010 to 2021, hovering just under 44 until 2015, declining to 40.5 in 2018 and increasing again to just under 44 by 2020.

Interestingly, alongside these index numbers, there is also an estimate of the time that it would take to reach equality – at the current rate of progress, and with a 1% per annum rate of catch-up. I have created the table below from the Index to sum up the key findings in each area of inequality.

Measure2021 Index NumberChange since 2010: Index PointsYears to Equality based on trend over last 10 yrsYears to Equality at 1% p.a. Catch Up
Income45.4-4.286 yrs45 yrs
Wealth64.47.7Never85 yrs
Gender21.0-9.818 yrs19 yrs
Intergenerational28.51.2Never29 yrs
Ethnicity45.9-4.137 yrs45 yrs
Disability63.416.8Never63 yrs
First Nations36.5-6.751 yrs63 yrs
Overall Inequality43.60.1361 yrs40 yrs

Statistical Issues in the Inequality Index

Given the Inequality Index was put together by a relatively small think tank rather than a government statistical agency, I think there are some minor anomalies in a few places, but this should not distract from the usefulness or ambition of the project. However, there is still devil in the detail.

The full methodology and assumptions have not yet been published, so what follows is based on the information in the Summary Report.

The bringing together of multiple dimensions of inequality requires weighting the relative importance of the various components – otherwise a few areas of harsh inequality potentially impacting relatively few people may overwhelm the index. Yet weighting is tricky: how do you weigh the relative importance of women’s political representation, with the gender wage gap – let alone those issues with rates of Aboriginal incarceration or numbers of people with disability reporting discrimination?

The process is inherently subjective, but all statistics are subjective in that their definitions reflect subjective or theoretical assumptions. The bigger question is whether the weighting and the subsequent index is statistically robust. That is, would the index or the trends be significantly changed by minor changes in the weighting or categories. I don’t have the data (or the statistical skill) to make that judgement, but I am prepared to take the Inequality Index on face value – not least because the important thing about indexes is not so much how they are constructed, but their ability to show trends over time. In some senses, as long as they capture key elements well enough it becomes more important to maintain consistency over time then to continually adjust to political nuances.

Broader Critique

The question then is whether the Inequality Index does actually capture the key elements of inequality well enough – and here I do have some questions and critique. For instance,

  • The income inequality data is based on standard measures household income, which I have argued previously are misleading as they fail to take account of housing incomes, social-transfers-in-kind, capital gains and capital income.
  • The intergenerational inequality index focuses on current differences between age cohorts in rates of poverty and intended retirement age. It is too easy to dismiss these as life-cycle effects, and to me, the bigger intergenerational issues are long-term: what sort of economy, infrastructure, natural resource base and environment are we bequeathing the next generation? Is the next generation going to be better or worse off than the current or previous ones at same point or overall in their lives? These aspects of intergenerational inequality are not considered in the index.
  • Both the ethnicity and disability inequality indexes are based on rates of reported discrimination and labour force participation, but there is no accounting for the income that comes from that participation (or not). I wanted to know the share of income and wealth held by those groups.
  • Similarly, the First National inequality measure has 12 different components, but not one relating to income.

There are all sorts of good reasons for the choices about what to include and leave out, including the challenge (or impossibility) of getting robust and continuous public data on some of the issues above. For that reason, my main critique of the Inequality Index is not the points above (although they remain important), but two areas where I think the issues are of a much greater scale – the omission of class and geographic inequality.

Class

Despite the Summary Report’s Introduction acknowledging the importance of Thomas Piketty’s work, the Index uses the very bald income quintiles which Piketty criticises, and it does not examine the top 10% and top 1% where Piketty sees inequality growing at its most obscene. More importantly, the distribution of (some) income across a stratified income spectrum arbitrarily divided into quintiles does not capture class inequality or the structural inequality of the distribution of income between labour and capital.

The labour share of GDP is a much more robust measure of class inequality, and one for which there is robust ongoing data. While capital and labour incomes eventually land (differentially) in households on the household income spectrum, so to do the wage differentials of the gender wage gap and the differing incomes of varying labour force participations of other groups. This is no reason to exclude class inequality or assume it is covered by household inequality. I would have liked to have seen class, measured by the labour share of GDP included as an eighth sub-index, separate to and alongside the household income data.

Regions

The other significant omission from the Inequality Index is geographic inequality. The Australian population, income and wealth is concentrated in a small number of cities, and the data is clear that residents of some states (SA and Tasmania in particular) and people in regional and remote communities have significantly lower average incomes than those in the capital cities.

Beyond simply income, geography matters in terms of inequality in access to services. Many services cost significantly more (e.g. telecommunications) or are simply unavailable in many regional areas. Differences in access to health, education and other services can be seen as inequalities in the social wage, but they also have direct impacts on quality of life and the sustainability of communities. To ignore the geographic dimensions of inequality is a major oversight in measuring inequality in Australia.

Conclusion

Despite these queries and critiques, I still regard Per Capita’s Inequality Index as a bold and important initiative – a significant step beyond the narrow and flawed income measures used in much inequality analysis. I hope that in time the Index can be revised to incorporate some of the measures noted above, but either way, if Per Capita can sustain the methodology and index, it will be a valuable tool for understanding whether (and where) we are becoming more, or less, equal.

However, any socio-economic index is a tool, not an end in itself, and I suspect the greatest challenge for the Index is not its construction but its use. There are other indexes (e.g. the UN HDI, the Genuine Progress Indicator, and most recently, Wellbeing Budgets) that also reflect multiple dimensions of equality and wellbeing, but they pale in comparison to the use and status of economic statistics like GDP, the unemployment rate and CPI. Those official measures are sometimes misused, misunderstood or politically dubious, but they dominate economic discussion. They do so, not because they are the best scorecards of well-being or economics, but because they are causal variables (within ruling economic theories) used in economic management.

Accordingly, to be truly effective, the Australian Inequality Index will need to be not just a scorecard, but an active instrument of policy. Whether it has the theoretical framework and the mobilising power to play that policy role remains to be seen, but it is a start to build upon– and given my statistical efforts at measuring inequality, I am slightly jealous!

Industrial Relations, Income Flows and Inequality

With Australia’s new industrial relations law now through the federal parliament, there is talk of increased wages, or at least a hope that real wage increases will be possible with workers having better bargaining tools to try to secure them. After years of wage stagnation, obviously any increase in wage levels is welcome, but much of the public debate has focused on the need for wage increases to help households, especially low-income households, with increased cost of living. But increasing wages is also fundamentally important to macroeconomic income flows and equality.

In his landmark Captial in the Twentieth Century, Thomas Piketty noted that in many western countries inequality was increasing to levels unprecedented since the turn of the last century because the growth of capital incomes was outstripping wage incomes. Capital incomes are concentrated at the high end of income distribution, so the relative share of society’s income going to capital and to labour was a crucial determinant of inequality.

However, in a really interesting exchange after the release of Piketty’s book, political economist Anwar Shaikh argues that Piketty’s work focuses largely on the final distribution of income, but a far more nuanced understanding of inequality could be gained by tracing the primary, secondary and tertiary income flows which lead into that final distribution.

Shaikh argues that in a capitalist economy, production is based on the harnessing of labour power to produce new value from which capital can make a profit. Accordingly, the primary income distribution is that between labour and capital in the production process. At the macro level this primary distribution is captured in the structure of the national accounts where the income side of Gross Domestic Product is divided into compensation of employees (labour income) and gross operating surplus (capital income). In June 2022, labour received 44% of GDP, and the historically low labour share was one of the driving forces of the government’s Future Work Summit and the push industrial relation changes (see for instance the ACTU Job Summit Paper: An Economy that Works for People).

However, this primary distribution does not tell us the full story because from this primary distribution there are secondary distributions. Wages (compensation of employees) is split between taxes and disposable “take-home” income – an important distribution as progressive taxation is a significant factor in equalising take home wages from what is a much more unequal original distribution between wage earners. But gross operating surplus is also split into rents, royalties, profits, interest and taxes. These distributions are the property claims of different types of capital on the surplus income. The relative amounts of the secondary flows between these types of capital reflect the structure of production and the balance of class power within capitalism – so that, for instance, it has been suggested that finance capital has claimed most of the gains of neoliberal economic growth over the last 20 years.

Finally, there is the tertiary distribution which is redistribution of the taxes (taken in the secondary distribution) to households through transfer payments and to capital via subsidies and industry support. This is important because these social security transfers are the most visible face of “redistribution” and efforts to over-come inequality (e.g. campaigns to increase income support payments, or to provide public services). However, as we will see below, it is also the smallest of the distributions. While interventions in this space are necessary – especially for those outside of the circuits of capital and production income – they are also necessarily limited as the size of the tertiary flow is inevitably determined by the primary and secondary income flows.

The focus on primary, secondary and tertiary income flows arises out of classical and Marxian political economy, but they are difficult to quantify because our national accounts are based on Keynesian and neoclassical principles. Accordingly, the accounts do not necessarily record these flows. However, some data is available and is captured in the table below.

Income Distributions, Australia, June Quarter 2022

Table showing primary, secondary and tertiary income flows: GDP $609,133m Wages $268,573m Surplus $182,263m Total Taxes $174,807m Social Security Transfers $36,991m

Source ABS, Australian National Accounts, June Quarter 2022, Tables 7, 22, 23.

These numbers are important because they show the magnitude of the different income flows and the potential impact of changes in them. For instance, a 2 percentage point increase in the labour share of the economy (compensation of employees), which would return labour to the levels of twenty years ago, equates to a $12bn or 4.5% increase in total wages for the quarter. By contrast, even a 10% increase in social security payments (personal benefit transfers), would only see a $3.6bn redistribution of income.

Again, this is not to say that arguments for social security increases are unimportant, but it does emphasise the importance of industrial contestation over the primary income distribution. Or put another way, it emphasises the importance of class (income flows based on relationship to the means of production) to understanding inequality.

A similar argument could be made around gender. Applying the proportion of the total wage pool noted in a previous post to the above national accounts data, a 2 percentage point increase in the female wage share would equate to a $5.3bn (5.1%) increase in women’s wages in the quarter. Again, that is more than the total of social security transfers (which also disproportionately go to women). Arguably then, closing the gender pay gap or increasing women’s labour force participation is a more direct route to gender equality than social security payments – albeit with application to different women.

Obviously these class and gender arguments reprise my previous arguments about the importance of a structural approach to addressing inequality, but they may be particularly important as the labour movement goes forward with the campaigns under the new industrial relation system.

Thomas Piketty, Councils of Social Service and Equality Advocacy

This piece considers the implications of the writings of Thomas Piketty for the work of the Councils of Social Service in Australia, but it is also relevant to other organisations and individuals fighting inequality.

Picture of two books: Capital in the Twenty-First Century; and Capital and Ideology Implications for Councils of Social Service

I have summarised Piketty’s major work in a separate article, and those who are unfamiliar with his work may want to read that first. Here I draw on my understandings of Piketty to challenge some familiar assumptions, data and policy prescriptions.

WHO AND WHY

Thomas Piketty became a “rock star” economist after the publication of his ground-breaking Capital in the Twenty-First Century in 2013/14. The book provided a macro-economic analysis of issues raised by the political mobilisations of the Occupy movements of the previous decade, and it helped put questions of inequality on the cultural and political agenda around the world.

The book contains new intellectual and data tools (resourced and built upon by a team of academics across a range of countries and presented in the World Inequality Database). It is also highly critical of the official data produced by agencies like the ABS and relied on by many of us. For this reason, it is a body of work we need to engaged with.

Piketty’s work was decried by right-wing think tanks (e.g. the Free Market Foundation, and the Cato Institute), but also threatened to be banned in China. And perhaps most famously, alongside an obsessive array of data, he used the nineteenth century novels of Jane Austen and Honore de Balzac as evidence of inequality.

What could be more inviting?

FOCUS ON WEALTH

Much of the public discussion of poverty, cost-of-living, concessions and income support (including my own work at SACOSS) focuses on inequality of income. However, Piketty’s work demands a new focus on wealth accumulation and inequality. His data highlights inequality of wealth, while the famous r>g formulation focuses on the role of capital/wealth in driving income inequality.

A recent study by Lisa Adkins and others builds on Piketty’s argument to argue that asset price inflation means that capital gains, capital income and inter-generational transfers are the preeminent drivers of inequality. This is important because those gains are mostly within the sphere of capital ownership. They may not show up as income at all.

It is well-known that inequality of wealth is generally greater than inequality of income, but the above suggests that a focus on income inequality may underestimate the true extent of economic inequality and miss key drivers of it.

Beyond mapping inequality, a focus on wealth is important because ABS data shows that there are significant differences in where particular households sit on wealth and income stratifications:

  • Only 35% of households in the lowest income quintile are also in the lowest wealth quintile, 23% have average wealth (home-owning pensioners?) and 7.3% have high wealth;
  • 42% of households in the highest income quintile are also high-wealth households – meaning that nearly 60% do not have high wealth.

Some recent SACOSS work has also shown significant differences between the expenditure patterns of households on essentials like water and public transport depending on whether their position is measured by income or wealth.

Insurance is another example of where expenditure is regressive in relation to income, that is, a proportionately bigger imposition on low-income households, but different when looking at households based on wealth. When considering income, making insurance cheaper (for instance by removing stamp duty on policies) looks like a good policy – and one that has been contemplated by SACOSS. However, such a policy will primarily result in a windfall for higher wealth households who have more to insure and proportionately higher insurance expenditures. For this reason, SACOSS has opted to call for an insurance concession for low-income households.

Similarly, policies that provide grants or subsidies to landlords for energy efficiency investments (as advocated in ACOSS’ NLEPP) are good in the income frame as they can lower energy bills for low-income tenants. However, such policies may also increase wealth inequality by increasing the value of the property and the wealth of the landowner.

In short, with an exclusive focus on income, we may be advocating and getting benefits for those who are financially well off, or we may not be targeting supports to where they are most needed.

DATA ISSUES

Even where the focus is on income, Piketty’s work raises questions about the data we use to categorise and measure income inequality. He argues that the household survey-data used in official measures of inequality is flawed both in collection method and categorisation. For instance, he suggests results vary if weekly, monthly or yearly income is used, while ratios between percentiles are volatile and surveys tend to significantly underestimate the income and wealth of the highest percentiles.

For this reason, Piketty prefers tax data and expresses inequality as a share of total income/wealth, rather than as the percentile ratios or Gini coefficients (found in ABS data). As per my previous post here, I also think the income share methodology is more versatile in that it can be applied to other areas such as gender. Indeed, the World Inequality database now includes this as part of its Australian data.

Piketty also suggests that the classification of households into quintiles is flawed. It suggests an even stratification of households and significantly fails to account for the massive increases in income and wealth in the top 10%, 1% or even 0.1% – and the power they exercise as a class. Instead he proposes a classification of classes defined as:

  • Lower = bottom 50% of income or wealth
  • Middle = from the 50th to 90th percentile of income of wealth
  • Upper = top 10%, which includes the “dominant class” which are the top 1%.

He admits this is somewhat arbitrary, but the lower bracket accounts for very little of society’s income or wealth, and the definition of middle is close to common usage of people who are doing better than most, but not the elite.

ACOSS’ flagship inequality report uses similar categorisations for wealth, but not for income. Other work around the network of Councils of Social Service (e.g. SACOSS cost of living reports) also uses income quintiles which may hide the real distributional dynamics. This is often because of the limitations of the data published by the ABS, but where there is the opportunity to use microdata to produce our own statistics, we should not be bound by ABS categories.

POLICY

The final chapter of Piketty’s second great tome, Capital and Ideology, outlines policy proposals which arise from his analysis. All reflect a base understanding that inequality should be limited and that to do this, we need to think about wealth as temporary and social, not a permanent and inalienable individual right. He proposes a number of large-scale policies or directions to limit inequality, including:

  • Co-management and power-sharing within corporations
  • Progressive income taxes and a basic income provision
  • Progressive annual wealth tax
  • Progressive inheritance taxes
  • Universal capital endowments of $100k or more paid to 25-ish year olds (and taxed back over time)
  • A public register of assets to facilitate greater transparency of wealth
  • A constitutional principle of fiscal justice based on non-regressivity and the publication of information on how tax is apportioned among the population
  • A progressive carbon tax
  • A just distribution of educational investment
  • Replacing tax deductions for political and charitable giving with funding vouchers for people to allocate to their preferred charities.
  • Transnational democracy and new global institutions.

The tax policies are obviously difficult to achieve politically, but go well beyond the timid tax changes the Councils of Social Service often champion. Apart from some mischievous SACOSS mentions of inheritance taxes, changes to negative gearing and capital gains tax are about as bold as we get (see for instance, ACOSS Budget Priorities, Section 10). These proposals are certainly steps in the right direction – but they are a long way short of annual wealth taxes. However, the power of Piketty’s historical and comparative analysis is that none of the big tax policies are utopian dreams. They all have existed at different times and/or currently exist in different places.

The universal capital endowment is more speculative. While I can see how it flows from the analysis, I worry about the implications for those who through fate/sickness/whatever don’t make the most of that endowment. Having had their perceived chance, will they simply be left behind with no support/sympathy?

Similarly, while in a previous post I have recommended removing tax deductions for charitable donations, I fear the alternative Piketty proposes. He proposes a voucher scheme where everyone can vote an allocation of money. But based on some local examples of where South Australians were asked to vote funding for neighbourhood projects, it is easy to see that such a scheme may simply lead to a populist contest where money does not go to where it is most needed.

THE ULTIMATE QUESTION

However, the quibbles above are relatively trivial issues for what are big proposals for broad policy directions. And beyond the individual proposals, Piketty’s work prompts one big final question: in the face of the macro-processes that are driving inequality, is the scale of change we often work at really going to make a dent on rising inequality?

I suspect not, but that is the ultimate challenge of Piketty’s work. It is a theme I will return to in future posts.

Proposal to Remove Tax Deductibility for Donations to Charities

This is a slightly longer and more generalised version of a presentation I made to the Reset arts conference (with a caveat that these are personal views, not a policy of my employer). My presentation was part of a series of seven-minute pitches of provocative ideas.

Reset: A New Public Agenda for the Arts

The Pitch

My provocative proposal today is to remove tax deductibility for donations to the arts, and to charities generally – because it will increase public accountability and fairness in funding.

Piketty

The idea is raised by French economic rockstar, Thomas Piketty, whose work has been pivotal in highlighting growing inequality around the world. Famously, in his best-selling Capital in the Twenty-First Century, he warned that processes of capital accumulation were leading western countries on a path to a level of inequality not seen since before the First World War. Yet while the argument, and the focus of the wealth of the top 1% has been celebrated, there has been less attention to or support for the policies he and his collaborators propose to promote greater equality. These proposals, contained in his later book, Capital and Ideology, are principally around controls on capital, taxation of wealth and progressive income taxation.

Most relevantly for the charitable sector, Piketty argues for the removal of tax deductibility for charitable donations because such donations empower and reward the preferences of the rich. He was focused on the large endowments to French and American elite educational institutions that promote inequality in education and opportunity, rather than on my $20 a month donation to whoever – but the argument is basically the same.

Tax deductions for charitable donations represent public money which is theoretically paid in taxes to the government, but handed back to be directed and expended by private individuals and corporations on programs which fit their personal priorities.

To be clear, in supporting this proposal, I am not suggesting that private donations to charities should be banned, just that those donations should not be tax deductible and that the extra tax revenue gained from this should be used to fund the same areas of activity through transparent public funding processes.

How Much Money?

Federal Budget papers suggest that the amount of tax forgone due to deductions for philanthropy in 2020-21 was around $1.6bn across all charities. That is about 32% of all Federal government grants to not-for-profit organisations.[1] In the arts, my back of envelope calculation is that it would be about $50m (based on the $132m donated to ROCO arts/cultural organisations in 2018-19). That is equivalent to around 20% of the funding of the Australia Council, or five times the Creative Partnerships program.

So, we are talking about a fair bit of money that could go into peer assessed, publicly funded programs.

Of course this assumes that the total amount of tax deductions simply switches from private philanthropists to public funding. Economists will tell us that this won’t happen, but the key question is, what is the net impact on funding for the not-for-profit sector as a whole?

It is possible that total funding could increase if donations do not drop by as much as the tax revenue gained. If donations drop by the same amount of the tax deduction, then there is net zero impact on overall sector funding.

But the bigger question is: if we oppose removing tax deductions because we think philanthropists will stop donating, what does that say about our view of philanthropists and about how we value art or the work of charities? Are we really just a tax avoidance plan? Are our donors really that self-serving – or is there a different value proposition at play? How confident are we in the public value of our work?

A side benefit

Removing tax deductibility for charitable donations also has an important side benefit. For the last 20 years, conservative governments and think-tanks have used the tax-deductible status of charities to threaten or curtail advocacy. This has been most prevalent in the environment movement where tree-planting is seen as charitable, but protesting is not.

However, the threat is broader, but it disappears if no donations were tax deductible. Organisations would then be freer to decide how best to pursue their charitable purpose without concern over government attacking their tax status or the need to fit into often arbitrary DGR categories. And advocacy/peak bodies would be able to fundraise on the same footing as the rest of the sector.

Caveats and Questions

Obviously, there’s devil in the detail of such a proposal.

  1. tax deductible donations would need to be removed for all charities (so nobody was choosing between charities with tax deductibility and others without [which is the current situation]);
  2. any extra tax revenue must actually go to the arts/charitable programs, not be “lost” to general revenue; and crucially
  3. government funding processes must be transparent and peer-reviewed (not a Catalyst for more sports rorts, dodgy car parks, or what seems like systemic corruption and pork-barrelling).

But these are implementation issues, not reasons to continue privileging the preferences of corporations and individuals over democratic public processes.

This proposal is radical, and for those who currently receive substantial philanthropic donations – don’t panic! It is not going to happen in the foreseeable future. But it should provoke big picture questions:

  • about the role of arts and charity,
  • about who we serve and are accountable to, and
  • it should challenge those neoliberal views that government funding is a social cost/dependency while private funding is somehow more worthy.

And mostly, we should be asking: are we happy that our sectors are funded in a way that reflects and increases inequality?

[1]              The 2020 Tax Benchmarks and Variations Statement shows deductions for gifts to deductible gift recipients (including private ancillary funds) at $1,655m. Budget Paper 1, Statement 10 shows total grants to NFPs at $5,198m.