Wednesday, June 01, 2011

Tax me more, by all means, but make it a voluntary contribution

With the stresses and anxieties of tax-return time fast approaching, Gavin Mooney and Alex Wodak, writing in yesterday's Herald, would have us believe that higher taxes are good for our health.

My first reaction was to check the date to establish if this was an April Fools' Day joke.  Alas, the proposition that higher taxes promote well-being is drawn from The Spirit Level:  Why More Equal Societies Almost Always Do Better by British epidemiologists Richard Wilkinson and Kate Pickett.

Wilkinson and Pickett's analysis should be taken with a grain of salt.  They exclude high-wealth countries from their published data sets, for example, and their credibility has been diminished by the thorough critical analysis of researchers including Peter Saunders, Christopher Snowdon, Roger Kerr in New Zealand and, if I may say so, myself.

The experience of modern history shows that the best way to ameliorate poverty is to promote economic growth by freeing up markets.

Perhaps the best case study of this is the largest reduction in human history in the number of people living on less than $US1 a day as a result of pro-market reforms in east Asia, including South Korea and China.

By contrast, no country has become wealthier, or more equal for that matter, as a result of higher taxation.  This is because higher taxes reduce the amount of disposable income available for people to feed, house, clothe, transport and entertain themselves and their families, which keeps poverty at bay.  Higher taxes also distort consumption and production decisions, reducing the capacity of the market economy to generate the growth needed to scoop people out of wretched poverty.

An insidious effect of progressive income taxation is to substitute leisure for work and, combined with a large welfare state, to impose high effective marginal tax rates that punish individuals financially for supplying more labour.

There has been much community discussion since the federal budget about the merits of a large welfare state.  The higher tax burdens needed to fund a large welfare state promote a sense of dependency on the state.  And we know by now that there are significant health and social-inclusion costs for those people, including the unemployed, who are stuck on the low road to welfare.

The truth is that the primary beneficiaries of big welfare are the middle-class bureaucrats who administer the welfare state in fine detail.  To get a sense of how much welfare-state funding is being misdirected, consider this:  based on an upper estimate of 13 per cent of Australians living in poverty, the Commonwealth's social security and welfare budget of $117 billion could have been evenly shared among the poverty stricken with a $40,817 payment.

While there are difficulties in making comparisons between countries, there is also no clear and simple link between higher public expenditure on health and better health outcomes.  Singapore, which has 70 per cent of its health expenditure channelled through the private sector, has a level of life expectancy similar to that of other Asian economies, achieved at a parsimonious 3.5 per cent of its gross domestic product.

While the US is criticised for its relatively high health spending, available indicators suggest that the quality of care is very good, even accounting for lifestyle-related diseases.

Mooney and Wodak suggest that Australians should be prepared to pay more taxes to promote the ideal of the ''fair go''.  With cost-of-living pressures affecting many low- to middle-income families, and with likely new federal carbon and mining taxes in the next couple of years, the call for even more tax is going to be a hard sell.  But there are two ways out for those who wish to donate more to Treasury's coffers, on whatever grounds they may choose.

First, governments can establish ''tax me more'' funds for those who wish to make gift contributions to the consolidated revenue fund.  Such a system exists in the US, but unsurprisingly it does not secure great bucketloads of money for government.

Second, if some people are so keen to pay more for health and social equality, they could volunteer extra payments to the Tax Office as part of their tax-return assessment.  In this way they can pay more, without obliging the rest of the population to cough up as well.


No comments: