ARPA: A little bit of Alabama: On Australia’s low tax consensus

National Party Senator-elect for Queensland, Barnaby Joyce, would like it in Alabama. Like the citizens of that state, Joyce makes no secret of the fact that he’s done it tough, is conservative, and likes low taxes. And Joyce is ready to act on his beliefs. In The Australian last week, Joyce was quoted as supporting ‘zonal taxation’, a proposal which would lower income taxes to a flat rate of a mere 15 per cent in some depressed areas of rural Australia (Riley & Lewis 2005).

Joyce’s belief that lower taxes solve the problems of depressed areas is understandable enough. In fact, it echoes what voters in Alabama must have thought when their poor state voted down a plan to increase taxes in 2003, and which attracted the attention of many American commentators (Krueger 2003; Vanden Heuvel 2003). Alabama’s exasperated conservative governor, Jim Riley, had proposed higher taxes in a referendum so that Alabama would have the revenue to pay for the state’s social services. The governor even went as far as to say that supporting higher taxes was ‘Christian duty’ (USA Today 2003). But the locals didn’t buy it, and their decision conveyed something about the power of low tax politics in America. New York Times columnist Adam Cohen made the point lost on the state’s voters when he declaimed that, ‘Alabama voted for fewer social services, less education, and a shoddier legal system to become, that is, more like a third-world nation’ (Vanden Heuvel 2003).

There’s a little bit of Alabama outside rural Queensland too. Kim Beazley’s decision to oppose the Government’s tax cuts, which benefit the wealthy, triggered a near frenzy in the Murdoch press. The Australian, which has been promoting a tax-cutting agenda since the October 2004 election, only calmed down again when Beazley offered even larger tax cuts to middle income earners. Although The Australian still appears to prefer the Costello tax cuts, it can draw comfort from Labor’s failure to challenge the low-tax consensus. By the time of his Budget reply, Beazley had left no-one in any doubt that Labor believed in lower taxes too.

The tax-cut push is a response to the Howard government’s spending activity in the lead-up to the 2004 election. Because of strong GST revenues, the Government has not reduced the overall tax share of national income since winning office in March 1996. But it has not been an expansionary government either, preferring to keep federal budgets in tight surplus. Circumstances changed, however, in 2004. The government, facing an appealing Opposition leader and a crumbling Medicare system, decided to increase spending on health and families. By extending the Medicare safety net and increasing family payments, the government finally committed to the two major social reforms of the Hawke and Keating era. In fact, Howard stopped sidelining Australia’s welfare state, and instead, decided to build on it to his advantage.

The shift paid off politically. Labor kept telling the voters that the Howard government was the highest taxing in history, but the voters apparently paid no attention. The government actually benefited from claiming Labor’s trademark policies as its own. Take Medicare. One commentator, Phil Senior, points out that the voters no longer think Labor is better for health and Medicare—they once did by large margins (2005). And the Australian Election Study of 2004 reveals that among the over-50 voters (those most reliant on health care), Labor’s lead on health and Medicare is just one or two per cent.

Howard’s shift to spending in 2004 was probably part electioneering and part concession to the scope and endurance of Hawke and Keating-era policy. But larger forces were at work. Howard was a reluctant pragmatist, moving ground to accommodate the public’s changing priorities. One simple measure of these priorities is to ask voters whether they’d prefer a tax cut or more social spending. Looking at how the public has responded to this choice over the last four decades tells a powerful story. Not since the 1960s has the Australian public been so supportive of spending. Trevor Breusch and I have shown that this new ‘fiscal mood’ displaces the tax-cutting politics of the 1980s, which so constrained Labor’s spending ambitions then (2004). The pro-spending mood is being generated, among other things, by perceptions that the government is neglecting public services, and Howard’s shift was designed to stop Labor benefiting from this.

Declining interest in tax cuts has shown up again in voter responses to the Election Study taken last year. The results show that only 36 per cent of voters went to the ballot box in 2004 preferring tax cuts over social spending, a decline from 42 per cent in 2001. The Election Study perhaps understates real voter preferences for tax cuts, and can be dismissed as another poll overstating support for the ‘socially desirable’ option of spending. (Indeed, this has long been a suspicion of right-leaning commentators.) However, of all recent polling, the AES measure still produces the highest support for the tax cut option. Perhaps most significant is that this measure has declined dramatically since the 1980s—with some 21 per cent of this decline over Howard’s tenure.

The fiscal mood has shifted towards higher spending. So why has Australian politics returned to its passion for cutting taxes? The simple—and tragically ironic—answer lies in Howard’s remarkable Senate victory last October; one built on the support of mums and dads, no doubt pleased with a ‘safe’ Medicare and extra family payments for their children. With a secure parliamentary position, the Government can now ignore the same public opinion it last year reacted to so deftly. It is free to reassert a long-held preference for ‘small government’ or, in Adam Cohen’s more disquieting words, to ‘starve the beast’ of the welfare state (2004).

Indeed, the politics of fiscal starvation are already evident. The 2005–06 Budget was about hiding a large amount of surplus cash that might have paid for immediate social improvements. A Future Fund (with unspecified ambitions) and a fresh round of tax cuts gave the impression of a new fiscal order—but one actually indifferent to the money troubles of neighbourhood schools and TAFE colleges that train young workers, and the poverty of many in the Government’s own heartland like aged pensioners and the semi-employed of rural towns. And the new fiscal order doesn’t give much priority to public dental care, which even Tony Abbott has called a ‘nightmare’, and which according to the Sydney Morning Herald makes available ‘about 240 public dentists to cater for more than 2.5 million health-card holders, children and the elderly, while more than 3,000 private dentists treat the rest of the state’s population’ (Pearlman & Ryle 2005).

These budgetary manoeuvres are really designed to hide larger contradictions. Before the May Budget, the Government announced cuts to the expanded Medicare safety net; the very policy that Abbott had masterminded in 2003 as a way out of the crisis brought on by Liberal complacency. And further cuts to the safety net have not been ruled out. The surplus showed that the government clearly does have the money to preserve the original scheme. This should have been obvious to everyone. But the government managed to stay on the safe territory of defending its tax cuts while attacking Labor’s threat to delay them. In the end, Labor wandered into political danger and the chance for a real debate about the need for any Medicare cuts was lost altogether.

While Labor remains desperate to prove its low tax credentials, we can expect few such debates. However, there are alternatives. If Labor challenged the tax consensus, the Coalition might find itself under pressure to explain why it won’t spend money where it is badly needed. And nerves about the risks of such a challenge could be soothed by looking elsewhere. British Labour’s third electoral success can be attributed to Chancellor Brown’s forthright efforts to spend more on education, health, infrastructure, and community services. Wanting to punish Blair for Iraq, voters still rewarded a Labour Chancellor for acting like one. By contrast, Australian Labor is committing itself to the same approach as the Howard government. At the moment, the only real dispute within Australia’s ‘thin’ fiscal politics is about who should get the tax cuts, a dispute lost on voters.

One reason why Labor is wedded to a low-tax consensus is the received wisdom about the Party’s current electoral misery. This wisdom is captured in a post-Budget headline in The Australian—‘Blue-collar verdict: any break is a good break’. The article quotes one worker as saying: ‘Any tax cut is a good tax cut’. And Labor believes that this—an overriding interest in the hip-pocket among Howard’s new working class allies—is depriving it of the marginal seats needed for government.

It’s true that Labor needs to do careful work to win back these suburban voters—and perhaps a different Liberal leader and harder economic times. But Labor’s problems with its heartland might be less to do with the Party’s failure to match voter aspirations and more to do with the Party’s fading political identity. Recall that Labor is no longer clearly seen as the preferred party on health and Medicare, a policy area that carried it through to five election wins. If we run through the list of policy areas in the current Election Study where the Coalition now leads Labor, we can add traditional Labor policy strengths in dealing with unemployment and industrial relations as well.

So Labor’s problems may be deeper and have more to do with its unclear standing in Australian politics. A summary measure of voter attachment—which party represents voters’ views best—shows that Labor is chosen by just 27 per cent of AES respondents, fully 17 per cent less than the Coalition. This might be reason enough for Labor to emulate a successful government. But are voters after two parties with broadly similar views about, for instance, small government and lower taxes? If they are, we might expect Labor to recover ground in the next few years as it battles its way through the tax wars. But if Labor’s fading political identity is its failure to maintain the Party’s traditional distinctiveness in Australian politics—as a party which believes that economic progress and social justice are inseparable—then following the Liberals will make matters worse.

The ‘Any tax cut is good’ mentality is convenient for the political right. While this view may play well in an electorate deprived of informed debate, and keep the political agenda free from pressures for greater spending, more and more evidence now condemns the low tax model of contemporary democracy. And this criticism is coming from a surprising source: the usually free-market loving economics departments of major American universities. It’s not just Paul Krugman, the New York Times columnist and leading trade economist, who’s doing the running for social democracy these days. Peter Lindert from the University of California has demolished the argument for ‘low tax democracy’ in his new economic history, Growing Public. Not only does Lindert show that rising taxes have done little or nothing to slow down economic growth in rich countries over time (2004, p. 17), the more generous welfare states that these taxes have produced are actually better at policy design. With more expenditure and tax revenue at stake, social democracies are obliged to pay greater attention to the consequences of their programs so that the equity benefits of universalism promote, and do not damage, economic growth (2004, pp. 296–307).

It’s fine for top economists to now recognise the successes of the earnest experiments of social democracy, but can this thinking translate into a politics clever enough to outsmart the politics of endless tax cuts? Part of the problem in America, analysts concede, is voter ignorance. Writing on support for Bush’s highly inequitable tax cuts in 2001, political scientist Larry Bartels argues that Americans really operate on an ‘unenlightened’ form of self-interest. He worries that ‘most Americans support tax cuts because … they largely fail to connect inequality and public policy’ (2004, p. 5). This might have a fair bit to do with the distinctive lack of universal programs in the American federal sphere: voters have little by way of a proper welfare state that would connect their experiences and economic interests to the very social programs that would suffer if tax cuts went too far. Fortunately, Australia need not face this depressing predicament. While local voters may be endlessly tempted by tax cuts, they would have much more to lose—Medicare and family payments, for instance—than Americans if the Federal government takes low tax politics a step further. The alternative for Labor, then, is to encourage voters to see the benefits of paying tax, and the stronger economy and society they get for it.

Barnaby Joyce doesn’t want very low taxes because he seeks more poverty in the depressed areas of Australia. Yet, international experience shows that low taxes are unmistakably connected to higher not lower poverty rates. In Figure 1, we can see from OECD tax revenue statistics and poverty rates compiled by the Luxembourg Income Study that low tax democracies all fare badly on the poverty front (measured as the proportion with incomes below 50 per cent of the median). For a country flush with surplus funds, the latest poverty statistics tell a story of national complacency and one that Joyce has experienced first hand. Of seventeen rich democracies cited in Mishel et al. (2005, p. 408), Australia had the second highest level of overall poverty (14.3 per cent), the second highest level of child poverty (15.8 per cent) and the highest level of aged poverty (a staggering 29.4 per cent). Dealing with poverty will inevitably require higher taxes, not just to improve income support but to reinvest in a national economy capable of producing new industries and good jobs.

When Joyce joins the Senate, he will find himself caught up in an agenda that will deprive government of the revenue to undertake precisely this investment. Lower taxes won’t deal with the shortage of good, middle paying jobs that is at the heart of the problem that worries him. These jobs come out of the exercise of nation-building, as Michael Pusey has called it.

In the past, government took upon itself, however feebly at times, to correct for the ‘self injuries of capital’—that is, to prevent the long term damage to business that, ironically, the small government/low tax agenda poses. That Heather Ridout of Australian Industry Group now seeks ‘public borrowing … to bring forward projects that would take a longer time frame if they were considered in a commercial framework’ demonstrates how far government has strayed from this task (ABC 2003). Paul Keating’s criticism of Labor’s pre-occupation with redistribution at the expense of wealth creation is also a call for nation-building as well (Hartcher 2005). But sadly Keating still appears to hold the view that redistribution and wealth creation are separate problems, something that Peter Lindert has persuasively debunked.

Barnaby Joyce’s flat tax plan made it onto the front page of The Australian. It’s an idea that many Australians, worried about the drought and tough times in the bush, might support. For constitutional reasons, however, it would probably never come about. And for the sake of his constituents—and other Australians left out of the current boom—we should hope that it never does.

References

Cohen, A. 2003, ‘Editorial observer: What Alabama’s low-tax mania can teach the rest of the country’, The New York Times, October 20.

Wilson, S. & Breusch, T. 2004, ‘After the tax revolt: Why Medicare matters more to middle Australia than lower taxes’, Australian Journal of Social Issues, vol. 39, pp. 99–116.

Hartcher, P. 2005, ‘The prime minister we had to have’, The Sydney Morning Herald, 28-29 May.

Krueger, A. B. 2003, ‘Connecting the dots for tax cuts for the wealthy to loss of benefits’, The New York Times, 16 October.

Lindert, P. H. 2004, Growing Public: Social Spending and Economic Growth Since the Eighteenth Century, Volume I: The Story, Cambridge University Press, Cambridge.

Mishel, L., Bernstein, J. & Allegreto, S. 2005, The State of Working America 2004/2005, Cornell University Press, Ithaca, NY.

Riley, J. & Lewis, S. 2005, ‘15pc tax plan for the bush’, The Australian, 24 May.

Shaun Wilson is Research Fellow at the ACSPRI Centre for Social Research at the Australian National University, a Principal Investigator of the Australian Survey of Social Attitudes, and acting Editor of the Australian Review of Public Affairs.

View other articles by Shaun Wilson:

Labor’s Bad Year (Digest, Mar 2011)
Election 2007: Did the Union Campaign Succeed? (Digest, Feb 2008)
Editors’ Introduction to Dental Symposium (Digest, Oct 2007)
Did WorkChoices Impact on the NSW Election Results? (Digest, May 2007)
After Howard’s Decade, is Australia More Conservative? (Digest, 23 Feb 2006)
Public Opinion and Democracy (Digest, 1 Oct 2004)
Obstructing Government or Stopping Bullies? (Digest, 13 Jun 2003)
Does the Social Capital Hypothesis Offer Hope for Untrusting Societies? (Journal, Mar 2003)
Supply Side Social Democracy (Digest, 13 Aug 2001)
Australia’s Secret Keynesianism (Digest, 11 Aug 2000)