Debate on Tax and Small Government Flares Yet Again

Recent Claims by Joe Hockey that Australians pay about half their income to the Government through the tax system has once more spurred a broader debate about tax reform - and the falsehoods spread by the Conservatives and Economic Liberals to rationalise their Ideology.

Tristan Ewins

January 25th 2015


Recently debate has arisen once more about rates of tax in this country. Again Joe Hockey has come out with totally unfounded claims that individuals on average pay half of their income in tax.

 In response ACOSS chief executive Cassandra Goldie has argued that in fact middle income earners pay only 11 per cent of their income in personal tax, and higher income groups only about 20 per cent.  

Peter Martin of ‘The Age’ further explains how: “ACOSS [arrived] at the figures by including all household income in its total, including untaxed or lightly taxed…Income washed through superannuation, family trusts and negatively geared properties.”

Martin also explains how:

“The bottom one-fifth of households pay 3 per cent of their income in personal tax, the next group pays 7 per cent, middle group 11 per cent, the second-top group 15 per cent and the top group 20 per cent…

But [this] progressivity vanishes when other forms of tax are included. Including the goods and services tax and other consumption taxes such as petrol and tobacco excise, the lowest earning household pays 24 per cent of its income in tax and the highest earning household only a little more at 28 per cent.”

So the existing system is also barely progressive when taken as a whole; and the Conservatives want to dilute or reverse this even more!

 And today Gareth Hutchens of ‘The Age’ has also questioned the facts surrounding Joe Hockey’s claim that increased taxation through bracket creep is ‘the only alternative’ if Labor does not support the Conservative government’s austerity agenda. 

Crucially: improper reliance on bracket creep and increases in the GST and other regressive taxes and charges – including user pays mechanisms - are not the only alternative.

 The Liberals’ offensive against and all forms of redistribution rests upon their commitment to a classical liberal economic philosophy which naturalises the inequalities in wealth, income and power that arise under capitalism. Employers rather than workers are seen as ‘the real wealth creators’. Workers are seen as freely entering into contracts with employers. Their bargaining power as relates to skills in the marketplace are recognised; but the influence of trade unions in improving that bargaining position of workers is not. Differences in recompense based on demand and supply in the labour market are also ‘naturalised’. Because of this ‘naturalisation’ government intervention in the economy is rejected outright – except for instance in cases where this paradigm is enforced – for instance through impositions against the industrial liberties of organised labour. Hence the Conservatives and economic libertarians press for ‘simpler’ tax and lower tax because that means less redistribution.

 There is also the question of peoples’ own liberties in their capacities as consumers. This issue is raised by the Conservatives and economic liberals and deserves a considered response. There is the question of whether or not we are better off to determine our own ‘needs structures’ freely through consumption.

 Very few socialists today would aspire to abolishing ‘the market’ in its entirety. Most socialists today would recognise the place of ‘the market’ as a medium by which workers and citizens in their capacities as consumers hold corporations accountable through the play of market signals. Importantly, though, this entails the organisation of people in their capacity as consumers – both to improve the quality of information they can access as consumers – but also improving their market power through collective bargaining as consumers.

 But there are problems with this ‘market utopia’. Information is not perfect. Consumers are not sufficiently organised. There are monopolies and oligopolies which minimise the effective role of competitive market forces and signals. And there is the possibility of consumers prevailing to the expense of the more poorly organised workers. That is: the prospect of more – not less –exploitation. 

ALSO where there is intense competition there is the problem of investment in ‘the means of production’ growing so disproportionate compared with recompense through wages that the market is no longer able to absorb these costs – or provide sufficient consumption power to absorb what is produced.

 But if all this is true what are the alternatives?

 Firstly Labor should support a progressive restructuring of the tax system as a whole. That must mean winding back superannuation concessions for the well-off – a good proportion out of about $50 billion in total by 2016-17. In total superannuation concessions cost about as much the entire aged pension budget. It could also mean partially withdrawing dividend imputation (tax breaks ostensibly to negate ‘double taxation’) - justified on distributive grounds – and with exemptions for ‘small investors’. 

Further – it could entail an active restructuring of the income tax system – as opposed to ‘passively’ waiting for bracket creep to ‘do its work’. ‘Passive’ reliance on bracket creep for lower and middle income tax thresholds would have a regressive distributive effect. (which is why Hockey is willing to consider it despite his preference for ‘ever smaller government’) But restructuring and altering income tax scales and rates could allow bracket creep to work for higher income earners, delivering billions while actually reducing income tax for those on low incomes. A new top income tax rate could also be established for the millionaires. And restoration of a robust ‘resource rent’ tax for mining could deliver billions; as could ‘super profits’ taxes in crucial areas such as banking. Finally: with modest increases in corporate tax we could signal our desire to end the ‘race to the bottom’ that results in effective ‘corporate welfare’.

If an incoming Labor Government succeeded in raising at least $45 billion in new Commonwealth revenue (in today’s terms) through these and other measures in its first term upon retaking government it would be in a strong position to deliver on Australian taxpayers needs in education, health, transport, communications, welfare and more. Specifically it could fund big initiatives such as the National Disability Insurance Scheme progressively; And could also provide for another area of critical need – for a National Aged Care Insurance Scheme. Without austerity.

 In response the Conservatives and economic libertarians would insist that public provision ‘rejects the market’ which is the proper arbiter of all goods and services.

 But Labor must reject such claims for several very practical reasons; as well as for the sake of economic justice.

 Firstly ‘collective consumption’ as taxpayers can often secures for us ‘a better deal’ than in our capacities as isolated private consumers. Private infrastructure means user pays – which hits low and middle income citizens hardest. It also involves higher rates of borrowing – with the cost structures passed on to consumers. Finally it means private profit margins and dividends – which demand that as much income be extracted from consumers as is possible. And in the case of private toll roads, for instance, can mean the exclusion of public transport investment to artificially support the particular private investors.

 Competition in place of ‘strategic and natural public monopoly’ also passes on increased underlying cost-structures to consumers. A ‘hybrid’ economic system which delivered those efficient cost structures on would mean more consumption power – not less. Business actually gains from this. Both through cheaper infrastructure and services – but also through the increased consumption power of workers and citizens.

 Hence there is ‘the bottom line’ that tax-payers would have more to spend in the areas where choice is most important as a consequence of strategic ‘collective consumption’; including ‘social insurance’ for instance. And frankly ‘market forces’ do not necessarily make enough of a difference when it comes to roads and rail; or in the provision of water and energy; or in areas that are properly the reserve of ‘natural public monopoly’. (eg: energy, water, communications, and transport infrastructure) Often it all comes down to a contest as to which provider can most efficiently fleece consumers with unintelligible deals and plans foisted upon people who would much rather take ‘the basics’ for granted. And in areas like Education – ‘market choice’ just sorts us out on the basis of our capacity to pay. That is, on the basis of class. And that is unfair.

 But if ordinary people secure a ‘better deal’ through collective consumption in these areas that frees up more money for determining our needs structures in the areas where that really counts. For instance, including but not limited to the consumption and other participation in culture, sport, fitness, social activity and art. 

The time has come to question neo-liberal shibboleths around ‘small government’ and ‘the market’. An alternative is possible which delivers a better deal for the general public in our capacities as workers, citizens and consumers. But which has also learned from the mistakes of the old socialism which thought it could supersede ‘the market’ entirely.

Mitt Romney - A Remedy or a Diagnosis?

above: The same of 'neo-liberal medicine' will be in order if Mitt Romney becomes US President

In this latest 'Left Focus' article, Russian economics and political writer Boris Anisimov critiques Mitt Romney's economic prescriptions for America. Specifically, Anisimov criticises the ususal Republican agenda of austerity and tax cuts: but also looks more deeply to the price America may end up paying for re-industrialization. Debate Welcome!!!!

nb: The Left Focus Facebook Group posts updates whenever we add new articles and also hosts wide-ranging political debate. You can join our facebook group here - See: http://www.facebook.com/groups/58243419565/

Boris Anisimov, September 9th

Who is this Mr. Romney: a new remedy for the old ailment or a new symptom of the old diagnosis?

In November 2012 we are anticipating the sequel to the much-talked-about drama serial known as the US elections. The air is going to be filled with celebration: flags, ribbons, ardent slogans from the pulpits and reciprocal exclamations from the crowd. Having completed the regular public debate ritual, US voters are going to line up in front of ballot boxes in order to entrust the urns with their most precious possession, namely their hopes for a brighter future. And judging by what is now happening to the American middle class, they hardly have anything else to entrust them with [1]. The danger of the middle class’ extinction is being seriously discussed in the US. One can think of some old truism about living in debt being fun until it is time to pay up. Households, corporations, banks, governments are all stepping up their debts while the resentment of the masses is growing bitter upon a realization at the outbreak of the on-going crisis that if there is a binge, there is going to be a hangover.

In times like this, the political farce gets unfurled in the most ruthless way. Any means which serves the purpose gets put to use. As highly-paid professional windbags publicly compete in slinging mud at one another, the voters, disunited into small interest groups, get distracted from the important matters and rail furiously for farfetched reasons.

I would probably say that the novelty of the current political season in the US is Mitt Romney, a well-to-do Mormon with experience of a businessman and a governor. The American political machine has once again demonstrated to the whole world its ability to come up with unexpected arrangements. The winner of the previous season, the African American under the non-Anglo-Saxon name of Obama, is no longer a thrill. He already acquired the status of a political old-timer and managed to lose some of his appeal. Now the public is presented with a new office-running novelty – a Mormon millionaire.

It is not his millions that became the talk of the town (well-to-do candidates for high political positions are common in the US), but his religion. Romney’s opponents did not miss the opportunity to ridicule his faith. However, any sound-minded individual understands that religion does not occupy the number-one position in a politician’s list of priorities – a politician is not paid for religious views but for protecting somebody’s interests.

It is also obvious that it is not theological preferences that will decide the outcome of the ultimate battle between Romney and Obama for the top position, but the future of the US economy. In crisis, this topic gets repeated more often thus implying that the number of economic promises pronounced from the lofty pulpits is going to increase. It would be interesting to count how many times during the debates each of the candidates will resort to some variation on the unofficial slogan of Bill Clinton’s campaign in 1992 – “It is the economy, stupid». [2]

Any unusual phenomenon, which disrupts the conventional order of things, is either a precursor of a change or an inertial consequence of existing problems. I am wondering what Mitt Romney is all about from this standpoint. Who is this Mr. Romney: a new remedy for the old ailment or a new symptom of the old diagnosis?

Mr. Romney’s official site will dazzle you with promises [3], the main one being a sharp turn away from the «current course», by which policies of the present occupant of the White House are implied. Romney recognizes the need to boost employment, and puts this issue as his number-one priority in his economic policy.

So what is he suggesting?


1. Tax cuts;

2. Further deregulation;

3. Opening new external markets for US industries;

4. Producing more domestic energy in order to cut costs;

5. Greater “flexibility” of the labor market;

6. Retraining workers;

7. Government spending cuts.


Honestly, there is nothing new here – it is the “good” old neoliberalism, which is called neoconservatism in the US. It is all in line with the western economics manuals, which Mr. Gaidar and his bunch used for reforming us in the early 1990’s. That same economic policy with certain alterations is preserved in Russia until this day. The local “Chicago boys” – the Russian pro-western neoliberal monetarists, whose notorious heritage we can still see today – had quite a fancy for such a policy.

Interestingly enough, Romney and the Russian neoliberal reformers have the same flaws in their economic reasoning. Allowances must be obviously made to the United States’ position as the global hegemon. There is a growing suspicion that the program that Romney revealed only constitutes a portion of the real agenda because a set of mutually contradicting items in it make it unfeasible in its current form. What are the contradictions?

Taxes vs. Budget Deficits. Tax cuts for the sake of economic growth and lower unemployment make sense, but budget deficits due to tax cuts do not. Over the last decades, the US budget has been passed with a constant deficit, which gets monetized by the Fed. Many economists attribute the growing public debt in the US to the lack of funds due to tax cuts. The debt increment started accelerating astronomically in the early 1980’s, precisely when neoliberalism as politico-economic project came into existence. That very period was also marked by the advent of Republican Ronald Reagan at the White House where he convincingly played the role of a US president as he advocated tax cuts for the rich. And reaganomics – the economic constituent of the neoliberal theory – received this informal name after him.

In other words, upon taking office, Romney will be able to cut taxes only by increasing public debt, which contradicts his commitment to cut the latter and teach America to live within their means.

Austerity vs. Growth. Budget deficits can be lowered by cutting government spending. Romney’s reasoning that supports this initiative is based on the well-known maxim that one must live within one’s means. This very principle is noble and proper, but the way the Republicans are going to implement it does raise questions. Thus, Romney insists on cutting non-security spending while it is security spending, which takes up the largest portion of the budgetary expenditures. The second largest is the servicing of the government debt. In the US federal budget for the year 2012, the security expenditures planned at $881 billion make up 23.82% of the total expenditures, the deficit working out at $1,090 billion. We can hardly expect Romney to cut security spending at least because his promises to maintain the US geopolitical standing and thereby show the world an American equivalent of Kuzma's mother are going to require significant financing. On the other hand, it is possible to cut the expenditures on the police, firemen and teachers as well as social programs like the recently adopted law on the mandatory medical insurance [4].

I agree that government spending does not automatically lead to economic growth. But the problem is much more profound than what we hear about it from the American establishment in general and Mr. Romney in particular. It is not a matter of whether to run into more debt or not – it is a matter of whether households’ aggregate solvent demand is sufficient to finance a way out of the economic impasse or else the government will have to make up for the deficiency. In this case, there are no other options but three: to raise taxes for the well-off, run into more debt or “print” more money. The last option does not only threaten to push up inflation but also increases the budgetary debt load since the Fed in actual fact issues money by monetizing the public debt. If national governments could do it without the involvement of their central banks, the currency issue would be quite a stimulus for the internal demand, but it does not mitigate the danger of inflation. So whether Romney likes it or not, the US public debt is going to grow bigger.

Internal growth vs. geopolitical expansion. In words, Romney believes that internal resources will make economic growth possible. In accordance with the neoliberal doctrine, the main task is to restore the functioning of business. It is believed that once supply is restored, demand will follow suit automatically. Encouraged by another tax cut, entrepreneurs should allegedly start hiring, and the country’s economic motor should kick start itself – this is the so-called “supply-side economics”, which currently holds sway over economists’ minds. But there is an alternative approach. The “demand-side economics”, represented by various schools, underlines the impossibility to boost the economy by stimulating supply unless the solvent demand is ready to foot the bill. Economists who share this viewpoint are speaking of a widening gap in the US between the growth of average wages and the growth of productivity, which has become evident since the mid-1970’s [5]. The old Karl Marx called this phenomenon a crisis of over-production, the essence of which is quite simple – wages grow more slowly than productivity and cannot pay for the ever-increasing supply of goods and services [6]. And the US households’ growing debt load only confirms this concept. As a result, we see sagging sales, falling revenues, lay-offs, bad debts, banks refusing to lend, and finally a depression.

One can draw the same conclusion about the falling solvent demand in the US economy by analyzing the statistics of income distribution among the population.

Income Distribution in the US from 1982 to 2006 [7]
Year	Top 1 percent	Next 19 percent	Bottom 80 percent
1982	12.8%	39.1%	48.1%
1988	16.6%	38.9%	44.5%
1991	15.7%	40.7%	43.7%
1994	14.4%	40.8%	44.9%
1997	16.6%	39.6%	43.8%
2000	20.0%	38.7%	41.4%
2003	17.0%	40.8%	42.2%
2006	21.3%	40.1%	38.6%

Interestingly, the lowest rates for the majority of the population occurred at the beginning of the Great Depression in the late 1920’s and before the on-going crisis in the early 2000’s. And it is not a coincidence. The recent drop started in the early 1980’s upon the emergence of neoliberalism and is still continuing. 

Can we expect that American debt-ridden consumers will start spending their evaporating incomes with renewed energy in order to bring up sales to the pre-crisis levels? This is at least naïve. According to economist Mikhail Khazin, the US household expenditures over the last 30 years have exceeded household incomes by 20-25% [8]. And Romney also seems skeptical about the internal economic growth in the near future since expansion by American industries into foreign markets has been put on his economic agenda. In other words, does that imply that, should internal resources turn out to be insufficient for economic growth, we are going to see new geopolitical crusades to expand markets and boost sales? Do the American elite realize that otherwise it will be difficult to restore internal consumption pre-crisis levels? I think they do.


Reindustialization vs. outsourcing. As Boris Kagarlitsky writes in his book The Revolt of the Middle Class, the very notion of a middle class appeared in the middle of the 20th century as a result of the implementation of Keynesian prescriptions in the economic policies of the West. By redistributing a portion of incomes in the economy for the middle class’ benefit, the elite managed to ensure high consumption levels for various goods and services. The western ideologists did not miss the opportunity to demonstrate this achievement as evidence that the West was at a more advanced stage of socio-economic development in comparison with the Soviet “socialism” while, in essence, it was a left-center compromise caused by the fear of popular discontent following the Great Depression.

When the elite’s fears finally subsided, a gradual right turn started bringing about falling incomes and growing inequality among the American common folk. The «fattening» of the middle class was no longer in fashion. In order to cut costs, corporations began relocating production facilities to countries with low wages. This resulted in the United States’ love and hate relationship with China where millions of workers were ready to toil for peanuts while China’s internal solvent demand remained immensely low.

Now that the global demand is falling, China is trying to stimulate internal consumption, but this raises all production costs. So the US has already started talking about the production facilities moving back from China [9]. It is still too early to talk about the US reindustrialization. It is hard for me to imagine that the debt-ridden US middle class should consent to wages low enough to start attracting jobs in large numbers back from the third-world countries. Also, I cannot get rid of an impression that Romney’s initiatives to limit the clout of trade unions and improve workers’ re-training programs are all aimed specifically at labor cost reduction. The labor market’s “flexibility” – which, in essence, simplifies the hiring and firing of employees – can lower job security, intensify competition among the workforce and bring down wages as a result.

I think turning the US back into a leading industrial superpower in the near future will be quite problematic since a massive industrialization will require a significant reduction of the working population’s living standards. Is the American public ready for such a turn of events? Will they be able to increase spending and pay off their loans as their liabilities continue to rise merely because of accrued interest?

All initiatives aimed at reducing the middle class’ income in the US economy are likely to raise questions from the international community. As you know, the demand in the US is the largest in the world and “feeds” corporations in a lot of countries. Neither China alone nor all the BRIC countries put together have so far been able to offer the globalized transnational world consumption levels comparable with those of the US. If global consumption does not rise to the pre-crisis levels soon and continue to grow further, the danger of major financial meltdowns is going to remain acute because the world still has enormous amounts of debt previously extended in hopes that global demand should continue to expand.

When demand declines, economics manuals turn into worthless paper waste. The neoliberal economics deals mostly with the expansion of supply and believes that demand expands automatically. Our government and corporate strategies, educational programs, politics and ideology are all based on this view of the world. And Romney is one of the best representatives of this system. So, is Romney a remedy or a diagnosis? Alas, only a diagnosis. He is too symptomatic of his epoch to symbolize any kind of renewal. All his convictions on economics and foreign policies were voiced before. Carbon copied from previous republican candidates’ programs, they sound more like populist chants than a real action plan. Romney is obviously trying to win the favor of the American conservatives. You can hear him talk about “the American dream that built America” and “the spirit of entrepreneurship inherent in the American nation”, but all his talk of self-sufficiency is coupled with geopolitical rhetoric. Romney does raise the issue of the US public debt, which is now approaching $16 trillion, but fails to bring up the issue of the growing household debt, which financed the growth of corporate incomes over the last decades.

A politician who tells his or her voters that their incomes are going to decline does not stand a chance in politics. Instead, a politician must shine with optimism and make believe that he or she knows how to fix things. This is exactly Romney’s case. He is a slave to the American conservative ideology of success. In reality, he can offer even less than Obama, who is striving to pass some center-left initiatives. From the ideological stand point, Romney is hog-tied. The policies he was pursuing as Massachusetts governor were more socially oriented in comparison with what he is promising to implement if elected US president. He is now trying to prove his hawkishness, but is only turning the steadily impoverishing middle class away.

Boris Anisimov

P.S. The original article in Russian can be found at http://www.odnako.org/blogs/show_19857/