The Guardian 23 March, 2005

When Howard speaks tax cuts,
read "social security cuts"


Anna Pha

Prime Minister John Howard last week raised the possibility of tax cuts in the May federal budget. He is certainly under considerable pressure from his mates in big business and from within his own ranks to lower the highest marginal rate on income tax. Debate is raging as to timing and the precise form the cuts will take but not over how they will be funded. Social security is the main target single mums and disability pensioners in particular along with a few more cuts to public sector health, education, child care and aged care.


As with previous cuts, dating back to the days of Labor Treasurer Paul Keating, the direction is towards lower rates and a flatter system of personal (direct) taxation.

Corporate taxation has been reduced to 30 cents in the dollar, where it is paid. The highest marginal rate of personal taxation (paid on taxable income above $70,000) is 47 percent plus the 1.5 percent Medicare levy. The demand now is for that 47 percent to be reduced to something much closer to, if not exactly, 30 percent and for the $70,000 threshold to be raised.

The lower the taxes on the rich and the flatter the tax system, the more regressive it becomes. A progressive tax system is one where people are taxed according to ability to pay the rich pay at a higher rate in the dollar.

Previous tax cuts were funded by squeezing social welfare and other essential public services by billions of dollars. For the corporate sector and rich, governments have created a low tax regime.

At the same time, they have also created a general image of Australia as a low taxing country, but nothing could be further from the truth. Ordinary lower income people are paying taxes as never before. The highly regressive GST has placed a 10 percent impost on almost everything that pensioners, unemployed, recipients of sickness and other benefits receive. The way the tax system is structured, attempts by welfare recipients to supplement their income or find casual or part-time jobs are punished with an effective tax rate of up to 60 percent on additional earnings as benefits are wound back and the extra income taxed.

Reform

Reform is needed. No one can argue about that. The question is what type of reform.

If the government cuts corporate or personal income tax in the budget, then those billions of dollars will have to be found somewhere. The government has no intention of using any of its hoped-for sacred budget surplus.

But that is not all that the government will have to find. Military spending is escalating with a special $50 billion program on top of normal budget allocations amounting to something in the region of $55 million a day.

The government also pays out billions of dollars in corporate handouts, directly or in the form of tax concessions. Earlier this month legislation went through exempting foreign investors from capital gains tax (CGT) on investments in managed funds in Australia. They are already exempted from paying CGT on direct investments (as shareholders or owners) in Australia. The loss of that income will also have to be found.

Liberal MP and multi-millionaire former banker Malcolm Turnbull, to his credit, acknowledges that it is the rich who avoid tax. He has come up with a novel idea: "The lower the tax rates are, the less incentive there is for avoidance and I think the greater moral authority governments have to say, 'Hang on, you're not being over-taxed here, so pay up'."

Reduce them to zero on business and the rich then there would be no tax avoidance!

He claims that lower taxes would result in more income and hence fund tax cuts without cutting social welfare. Be serious!

Self-provision

The Howard government, including Turnbull, are deadly serious about reducing taxes paid by corporations and the rich. They are also deadly serious about slashing social welfare and public services. They have a longer-term strategy to completely wind back government responsibility for the well being of Australian people.

As they cut taxes, they squeeze more and more people off benefits and starve public hospitals and public education of funds.

The government is bit by bit laying the basis for what their economic advisers refer to as "asset based welfare". Individuals will become responsible for their own individual welfare. The state will bow out for all except perhaps the most needy. Welfare will be privatised along with education, health services, aged care and retirement incomes.

It will be user-pays and self-provision. You get what you can afford to pay for, not necessarily what you need.

To pay for it workers will be expected to draw on assets such as on their superannuation funds or, particularly in the case of the elderly, extending mortgages on their homes where they own one.

Normally it is not possible to draw on a superannuation fund until retirement. The long-term plan is to broaden the fund and enable workers to draw on it for certain specified needs such as for during periods of unemployment, sickness or to fund education.

How else could a completely privatised social security system function?

Already there are calls to allow people access to their super funds for higher education. The next round of tax cuts could take us one step closer to such a system.

The Australian people have indicated in opinion polls that they would rather keep Medicare with bulk-billing and spend more on public education than have a tax cut.

Public provision and government responsibility for social security should not be sacrificed to fund tax cuts for the rich and to facilitate privatisation.

It comes down to a question of people or profits first

Under capitalism these sorts of issues become a struggle every time to prevent profits coming first. The only way in which a progressive tax system can be established and retained and the state take collective responsibility for the well being of the people is by changing the system to one where people come before profits. It is called socialism.

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