Beyond the Budget:What would a fairer tax and transfer system look like?

Last Friday Paul Smyth encouraged us to think beyond individual policies to begin reimagining the future of the wage earners welfare state. Below Jackie Brady, Acting Executive Director, Catholic Social Services Australia, also calls on social policy advocates to look at the big picture of reform – this time, the tax system. Jackie questions the logic and morality of applying concepts of ‘deservingness’ to the transfer side of the tax system, but not the taxation side. 

Much of the debate over the federal budget is over whether everyone is doing their fair share of the heavy lifting needed to get spending and revenue back into long-term balance. But with the government holding reviews of both the tax and welfare systems, we need to broaden the debate. What would a fairer tax and transfer system look like?

As the leader of a Catholic social welfare organisation I start with the Church’s position: “When we attend to the needs of those in want, we give them what is theirs, not ours. More than performing works of mercy, we are paying a debt of justice.”

People who cannot support themselves or their families are entitled to an income that is adequate to meet their basic needs. In a socially just society we meet this obligation through the tax system as well as through charitable giving.

Analysis by the University of Canberra’s National Centre for Social and Economic Modelling (NATSEM) found that the budget most negatively affected low and middle income families with children. Their analysis was relatively uncontroversial, but the idea that this showed the budget was unfair was hotly debated.

NATSEM’s Ben Phillips told reporter Tom Allard: ''It's a problem when you want to fix a budget deficit by massively cutting spending and doing relatively little on the revenue side … spending predominantly goes to those on low- and middle-incomes.''

But some media commentators didn’t see any problem at all believing that because many low income earners get more from the income support system than they pay in tax, they weren’t doing any heavy lifting at all. All they were being asked to do was to lean a little less heavily on the taxpayer.

There’s an assumption lurking behind these arguments — that a person’s market income is a reflection of their contribution to the community.

The idea is that people who create the greatest value for others earn the highest incomes and those who contribute the least, should earn the least. Together with the claim that people are only morally entitled to what they can earn it suggests that Family Tax Benefits and income support payments are actually a gift that productive people make to those unable or unwilling to pull their own weight. So far from complaining about budget cuts, low income families should be grateful they get anything at all.

We’re on the brink of a new age of entitlement where questions are being asked about the legitimacy for government to take money they have earned in the marketplace and give it to someone else.   It’s an age where Government is deciding to deny an adequate income to entire categories of people, such as the young or some people with disabilities, effectively removing or reducing an income safety net predicated on a need to find savings.

Questions about the incomes people deserve are almost impossible to resolve:

Does a mining magnate who earns more in a minute than most people earn in a week deserve to earn so much more?

Does someone who markets junk food to children deserve a higher income than a child care worker?

In practice, the question of deservingness is only being asked about people at the bottom of the scale — people who receive payments from government. When it comes to deciding how much tax people should pay we don’t ask  who contributed more to the community’s welfare, we just look at the numbers. The tax system isn’t designed to ensure everyone ends up with income they deserve, so why do we expect the income support system to work this way?

The free market is spectacularly good at generating wealth. It’s the best way we know to lift living standards and inequality is part of the price we pay. But as the global financial crisis showed, it is not a system that automatically rewards merit and punishes vice. On its own, the market fails to give everyone a fair opportunity to develop their potential and access the resources they need to live a decent life.

A market society is justified because it allows us to lift up everybody in society including those at the bottom. But to achieve this, we also need a system of taxes, transfers and services such as health, education and welfare.

What we need to ask is whether a just tax and transfer system is one that tries to make sure everyone ends up with the income they think they deserve or one that works with the economy to generate wealth, with transfers and taxes based on objective measures of adequacy and ability to pay?

After all, if we admit that taxation is justified, how is it fair to apply standards of deservingness on the transfer side if we refuse to apply them on the taxation side?

Posted by Gemma Carey & John Kelly