Opinion & Commentary
Tax circle good for no one
In the past 40 years, our relationship with state and commonwealth governments has been revolutionised. Before the 1960s, most people lived the majority of their lives relatively autonomously of government. Today, however, most of us rely increasingly on government to provide things for us.
One in six Australians of working age now relies almost wholly on welfare payments for an income (in the 1960s it was one in 30). Nine out of 10 families with children receive family payments, eight out of 10 people over the age of 65 get a government age pension, six in 10 households rely entirely on the government for health care, and two-thirds of parents rely on government schools to educate their children. There is no getting away from big government.
The cost of all this is staggering. In 2004-05, commonwealth and state governments raised more than $260 billion in taxes, and more than 70 per cent of this went on social expenditure. If you want to know why we have such big governments, look no further than the welfare state.
Worryingly, there is no sign of this juggernaut slowing down. Government spending on health, for example, is predicted to double in the next 40 years, and the proportion of the population covered by private health insurance is dwindling. Before Medicare, two-thirds of us had private health cover; now it's barely more than 40 per cent.
While recent policy changes should slow the rate of increase of spending on welfare payments, the number of older workers claiming to be disabled is still rising, as is the number of single parents, and both groups will continue to put pressure on the benefits budget. Pressure to expand government financing of child care will also drive spending higher.
Many people believe high levels of government spending on things such as health and child care are a good thing.
We are a prosperous society, they say, so it's only right that government should make generous provision for people's needs and wellbeing.
But what this argument overlooks is that somebody has to pay, and to a large degree the people who receive the benefits often end up paying for them, too. The tax office takes money from us and hands it to Centrelink and other social welfare agencies, who promptly return it to us (less overhead costs).
Last month, the Australian Bureau of Statistics released its latest analysis of the impact of tax-welfare churning. It found that the average Australian family with dependent children receives $501 worth of cash transfers and benefits-in-kind each week from government, but they pay $519 each week in direct and indirect taxes in order to get it. The government giveth, but the government then taketh away.
There are many reasons why we should try to reduce churning. It is obviously inefficient for one government agency to take money from us only for another to give it back, and the high taxes and means-tested benefits this entails do much to undermine work incentives, particularly for families on lower incomes.
But the real damage is more sociological than economic, for the more governments take it on themselves to provide for us, the less inclined we become to take responsibility for ourselves and our dependents. Whenever we have a problem, we are encouraged to look to government to solve it, rather than sorting it out ourselves. This infantilises us and destroys our can-do spirit of independence. It also politicises our society as voters demand more and more from politicians, who then compete with each other to offer ever-bigger bribes to win our support.
In my new book I explore routes out of this vicious circle of dependency. I estimate that less than half of welfare state spending is redistributed from richer to poorer households; the rest is merely churned. This means it should be possible to continue to help those who really need it while slashing total spending. The secret is to allow those who wish to provide for themselves to reduce the tax they pay in return for reducing their demands on the government purse.
For example, we could allow people to take more responsibility for their own healthcare costs in return for reducing their tax burden. By putting a proportion of their income into their own medical savings account, rather than handing it to the government, they could afford to pay for routine health care and insure against expensive treatments without needing to call on government for assistance. This would reduce the pressure on government spending and would rebuild a culture of personal autonomy and responsibility.
We are already doing this to some degree in superannuation, and this is the model we should adopt more broadly. Private superannuation is gradually replacing mass reliance on the government age pension, and it is hugely popular. In the future, we should apply the same principle to other needs, including health security and securing incomes during sickness and unemployment.
Most Australians no longer need a big government to look after them. At the coming federal election, we should demand that politicians return responsibility to us, rather than giving us more handouts which we ourselves will end up financing. It is time to break free.
Professor Peter Saunders is author of The Government Giveth and the Government Taketh Away, published today by The Centre for Independent Studies.
