Opinion & Commentary
We're all working for the man and it seems we have to do it for longer
What if every dollar of income the economy generates went to governments as taxes? How far into the year would that unhappy state of affairs need to continue for the annual tax demands of government to be satisfied? This is the what-if question behind the concept of Tax Freedom Day and, when the latest figures are plugged in, the answer is that today is Tax Freedom Day 2011.
Up to yesterday, Australians had spent the whole time since New Year's Day working for governments - federal, state and local. From today, we will be working for ourselves.
In reality, of course, our tax payments are spread through the year, but Tax Freedom Day is a what-if concept that graphically illustrates the scale of the overall tax burden. It highlights how much we pay through all forms of taxation to all levels of government. This aspect of the tax system gets little attention in all the talk about the need for tax reform, which advocates often present as a revenue-neutral exercise in restructuring, reshuffling and substituting one tax for another. The structure of the tax system is important, but so is the overall burden of tax.
The history of Tax Freedom Day traces the growth of government. Bear in mind that the earlier the date, the lower the tax burden. Until the 1920s, the tax burden was so low that the day fell in January and until World War II it fell in February. That was before the welfare state mushroomed. But as recently as the 1960s, Tax Freedom Day was in mid-March. Since the mid-'70s it has been in April, becoming later on average in each decade, until it reached April 19 in the noughties.
The past two years have gone against the trend, with Tax Freedom Day becoming 13 days earlier this year than in 2009. For various reasons, this retreat is likely to be temporary. It's not as if governments have been busy cutting or eliminating taxes, though there has been a little of that. It has happened mainly because Commonwealth tax revenue fell as a result of the global financial crisis - something that will be reversed with the recovery. A similar thing happened in the early 1990s recession, when Tax Freedom Day was pegged back by 11 days. Within four years, it was back to its pre-recession level.
This time, as well as the usual cyclical rebound, there is the prospect of three new and permanent taxes (the mining tax, the carbon tax and, possibly, a national disability support scheme tax) and one temporary tax, the flood tax.
When government spending is running well above revenue, as it is now, Tax Freedom Day tells only part of the story. Ultimately the level of spending dictates how much revenue has to be raised, unless spending is to be cut back. If taxes were increased so as to fully fund the current level of government spending, we would all have to work another 13 days for the government, and Tax Freedom Day would not come until April 19. That, we must hope, is an unrealistic example, but there is not much doubt that it points in a realistic direction.
For all these reasons, Tax Freedom Day is destined to become later. The tax reform debate should not just accept this and proceed on the assumption that reform has to be revenue-neutral. Many of the reform options are consistent with a lower tax burden. Reform discussion should not be limited by a requirement that it be revenue-neutral, let alone revenue-increasing. But if a lower tax burden is to be sustainable, and Tax Freedom Day is to become earlier, a lot of effort will need to go into curbing government spending over the years ahead.
Robert Carling is a senior fellow at the Centre for Independent Studies.
