Tag Archives: Tax

State Tax Reform: A South Australian Perspective

In 2014, I was part of an unusual campaign – to call for increases in state taxes. The SACOSS “Without Taxes, Vital Services Disappear” campaign was a response to the social service sector constantly being told that there was no money to fund the various services and policies to address poverty and disadvantage. This was true in that budgets were in deficit, so the state government was already spending more money than it was getting in through taxes, grants and other income.

Ten years on, the situation has changed. The last state budget brought in an operating surplus for 2023-24 and forecast surpluses across the forward estimates. In this sense, there is money to expand expenditure on addressing poverty and disadvantage, so the issue would seem to be political priority rather than needing to raise taxes and revenue. However, the tax questions remain crucial because, despite the budget surpluses, state debt is increasing and the interest payments on that debt are undermining the state budget.

Opportunity Cost

As SACOSS noted in its analysis of the last state budget, the South Australian government will spend more on interest payments on debt than it will on the Department of Human Services – the department responsible for supporting the most disadvantaged South Australians. The graph below shows the increase interest payments, both in absolute terms and as a proportion of state expenditure.

Graph showing state budget interest expenses going from under 2.25% of state expenditure in 2021-22 to a projected 6.7% in 2027-28.
Source: SA State Budget Papers

The interest payments are growing because of a combination of higher interest rates, and increasing state debt driven by infrastructure spending. Conventional economics would suggest that going in to debt to fund infrastructure is not a problem, and the government argues that the debt is not a problem as the debt-revenue ratio is under control. However, this has always struck me as an apples and oranges comparison. It says little about the capacity to repay the debt or the impact of the debt on the government.

The more important ratio is the cost of debt servicing to total revenue. The red line in the graph above shows that this is increasing as interest rates account for more of the state budget. This inevitably has an opportunity cost as that money is not available to be spent on government services.

This is why the level of debt and deficit matters – not because it shows mismanagement or over-spending, or a need for austerity, but because it constrains the operations of government and their ability to support citizens.

And underlying this is a concern about equality. As I have noted previously, governments have a choice in financing their activity as they can tax or to borrow from those with surplus cash. Taxation represents a flow from those with resources to the common good, whereas borrowing creates a flow from the common treasury to those with capital resources to loan money.

This is not to say that there should never be state debt, but simply to recognise that it comes at a cost – an opportunity cost and a cost to equality. But in light of the rapidly increasing impact on the state budget, there is a fair argument now that we need to raise more state revenue.

Tax Reform Opportunity?

Unfortunately, the record for tax reform in South Australia, at least in terms of increasing taxes or introducing new taxes, is not promising.

The last time there was a broad public review of SA state taxes was in 2015, when the then Labor government released a discussion paper canvassing a range of reform options. The highest profile reform, a proposal to replace conveyance duties with a broad-based property tax – including on owner-occupied housing, was met with a media outcry about a “tax on the family home” (which ignored the fact that conveyance duties are also a tax on the family home). The proposal was ruled out in a matter of days – even before the formal consultation process closed.

Overall, despite the Treasurer publicly welcoming the SACOSS submission (which proposed raising revenue), the 2015 review resulted in the abolition of a range of taxes and decreases in other taxes totalling some $670m in lost revenue over four years to 2018-19 – all in the name of improving the business environment.

Outside of the 2015 review, the record is no more encouraging:

Panel of 8 men speaking at a forum organised by SA Best to oppose tax reform to closing avoidance loophole in land tax aggregation.
Adelaide’s “men of property” at a forum opposing
closing loopholes in land tax aggregation, August 2019.

Of course, over the years there have been changes to rates and thresholds of existing taxes, but these are generally in the direction of tax “relief” rather than revenue raising.

There are two notable exceptions where new revenue-raising taxes have been introduced over the last 20 years. There was the 2017 introduction of the Foreign Ownership Surcharge – a 7% extra stamp duty for foreign owners purchasing real estate, and the point of consumption wagering tax introduced in the 2016-17 state budget. The former had been explicitly rejected in the government’s response to the State Tax Review a year earlier, while the later was flagged but not immediately implemented.

These two examples are telling – not so much because they show that new revenue measures are possible, but because they show the importance of the politics. By definition, the Foreign Ownership Surcharge had no resident vested interests opposed (because they were overseas), while the point-of-consumption wagering tax came at a time when the sports betting industry’s peak body and political lobby was in disarray (and the big companies did not want to risk their own brands in defending registration in tax havens).

Not exactly repeatable examples as a basis for a campaign strategy or a hope of reform.

A similar story could probably be told at the federal level from the experience of mining super-profits taxes, Labor’s 2019 mild capital gains and negative gearing reforms, and more generally in relation to the Henry Tax Review – comprehensive and steeped in Treasury’s market logic and legitimacy, but still largely gathering dust.

Conclusion

The reality is that it is always much easier to oppose a new tax than to pass one. A new or increased tax creates a vested interest in opposition, and they can always find or invent a deserving case study for whom the tax is unfair, or tell us how the tax will cripple the economy. By contrast, the vested interests who will benefit from the tax (the general public who will benefit from government revenue and spending) are too amorphous or too far removed from the specific proposal too mobilise in support.

I think the point of the story above is not to abandon all hope of tax reform and of raising sufficient revenue to fund vital services, but rather to see it as a political exercise rather than a policy one. It will require a long-term shift in public thinking and a mobilisation of political power, not simply a well-researched policy or a polite proposal. It will require political resources to oppose the vested interests, and an appropriate vehicle to drive the change.

In that sense, tax reform is both a part of a bigger project of social democratic renewal and dependent on that project.

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.