Michael Keating said if we raise personal income marginal tax rates, we could avoid crisis levels of future deficit. (Flickr: CafeCredit (CC 2.0))
Australians need to pay more taxes to “fund the health, education and transport services we need”.
That’s the call from Paul Keating’s former Cabinet secretary Michael Keating, who has backed an open letter on taxation reform which has been sent to Prime Minister Malcolm Turnbull from a left-leaning think tank.
- The Australia Institute says Australia can’t afford tax cuts
- It recommends a tax rise of 1 per cent of GDP over a decade, for three decades, to pull back the deficit
- The Institute says a failure to increase revenue will result in a recessionary crisis
Mr Keating, who served as the head of the Department of Prime Minister and Cabinet under his namesake, has joined 46 other high-profile signatories calling for significant tax reform focusing on “fairness”.
The letter from the Australia Institute specifically calls on policy-makers to focus on tackling tax avoidance, closing tax loopholes and cutting unfair tax concessions.
It also says by raising taxes we could avoid crisis levels of deficit and pay for the services “that everyday Australians rely on”.
Mr Keating told RN Breakfast the group is recommending a small tax increase over a period of 10 years.
“[We are] talking about a very small increase over a decade — 1 per cent of GDP over a decade, it’s not huge,” he said.
The institute warns if we do not improve the nation’s tax take, future governments will not be able to fund the services and infrastructure that the country needs.
Government ‘spending beyond its means’
Mr Keating says the federal budget is currently in a “structural deficit”, meaning the Government is spending beyond its means.
He says the Federal Government has claimed an imminent return to surplus many times, and not yet achieved it.
Even if the budget does return to surplus, he says, the Government’s own Intergenerational Report shows that if it continues with its existing policies, the budget will be back in deficit a few years after 2021 and then steadily grow to a crisis point of 6 per cent of GDP by 2055.
“Fundamentally you should judge the Government’s deficit by the rate of private saving within your own country,” Mr Keating said.
“But the reality is the households in Australia are just about the most indebted households in the world.”
If there is a continuing deficit, the government will need to rely on foreign capital coming in — something Mr Keating says you cannot do, especially if the deficit is high.
He believes Australia cannot afford the tax cuts proposed by the Turnbull Government.
“If they want tax cuts, they should produce the plan that will show how they’ll pay for it, and not by going into deficit.”
Tax rise vs spending cut
Mr Keating says if we do nothing over the next 30 years, Australia will go to 6 per cent GDP deficit.
But the current Government’s attempt to cut spending in its first budget in 2014 was widely rejected.
Australians would rather pay tax than lose services, says Michael Keating. (Unsplash: Andrea Natali)
“Voter surveys show that people want to pay the taxes that are needed to maintain the services which they see as essential,” Mr Keating said.
“[If] we raised the share of revenue to GDP by 1 per cent every decade, we’d avoid that.”
Australia’s tax-to-GDP ratio was 28.2 per cent in 2015.
Mr Keating says that is actually lower now than it was in the John Howard-era, and about the same as it was during the Paul Keating government.
Canada’s latest figure was 31.7 per cent and New Zealand’s 32.1 per cent.
Mr Keating says that even with the rise, Australia would still have lower taxes than Canada and New Zealand.
He says a revamping of the tax scales, meaning some people would pay a bit less tax and some a bit more, would be appropriate because of “fiscal drag” on people’s incomes.
However, company tax cuts are a different matter.
“In the case of company tax, everybody says we have a high rate, but the average rate of company tax paid relative to profits is only 17 per cent … and that is the fourth lowest in the OECD.”
He says the Government’s assertion that Australia has the highest company tax rate in the world “suits their argument, but it’s a distortion”.
Today Federal Treasurer Scott Morrison told AM he doesn’t intend to be “the Grinch”.
“You can’t have a stronger economy if you are going to tax it within an inch of its life,” Mr Morrison said.
But Mr Keating disputes the idea that tax cuts will increase investment in the economy.
Treasurer Scott Morrison says raising taxes is a “numpty of an idea”. (ABC News: Matt Roberts)
“The evidence is against the Government’s contention that this will produce an investment boom,” he said.
He believes it is more important to get wage growth going again, saying a lack of consumer demand is fuelled by rising inequality in the Western world.
“Profits in the Western world are as high as they’ve ever been in history, but we’re not getting the investment and that’s because there’s not the consumer demand.”
He suggests a higher taxation base could pay for government programs that would help people adapt to technological change, which he says is the principal driver of increased inequality.
Closing tax loopholes and cracking down on compliance alone will not increase tax take by the required amount of 3 per cent, he argues.
Commenting at a doorstop interview, Mr Morrison called the tax rise “a numpty of an idea”.
“I mean, the idea that you increase taxes to grow the economy is stupid,” Mr Morrison said.
“It is a stupid idea; it will result in Australians paying more.”