The tax debate has raised the ongoing issue of Australia's underlying inequality. By Mike Seccombe.

Taxation, inequality and the wealth gap

There are some words you just don’t utter in polite company. If you allude to them at all, it is by an initial letter. The “F” word, the “C” word. Particularly in America, the “N” word.

Andrew Leigh, one of Australia’s foremost academic economists before he became a Labor politician, suggests another: the “I” word. Inequality.

For a long time politicians on the progressive side were wary of mentioning it, for fear of being accused of engaging in class warfare or practising “the politics of envy”. Right-wing politicians tended not to mention it at all, as much as they were in favour of it. They preferred to sloganise with other “I” words, such as “individualism” and “incentive”, which were euphemisms for the same thing: allowing economic inequality to increase, in the belief that this would cause the economy to grow faster.

But in recent years, suggests Leigh, talk of inequality has been politically destigmatised.

“There has been a shift in the willingness of progressives to say the ‘I’ word,” Leigh says.

“It’s been steadily building over recent years. Obama talks about inequality more than Clinton did, Miliband talks about inequality more than Blair did. Shorten talks about inequality more than Keating did.”

They can do it safe in the knowledge that the old rejoinders have lost much of their sting. That hasn’t stopped conservatives from trotting them out, of course. Shortly after delivering his woefully unpopular budget last year, Treasurer Joe Hockey told an appreciative audience at the right-wing Sydney Institute that accusations it disproportionately targeted the least well-off for cuts “drifted to 1970s class warfare lines”.

“The gap between rich and poor has often been used to attack governments when all other avenues have been exhausted,” he said, and invited his audience to feel the pain of the wealthy.

“Just 2 per cent of taxpayers pay more than a quarter of all income tax. Maybe these taxpayers would argue that the tax system is already unfair.”

1 . Historic trends

For about 30 years after World War II, inequality declined across the developed world. Economic growth rates were generally high, unemployment generally low and wages increased pretty much in parallel with productivity.

“Then,” says Peter Whiteford, professor in the Crawford school of public policy at the Australian National University, “there here was a turning point. Something happened in the late 1970s and inequality started going back up again, particularly in the English-speaking countries. The United States is the most extreme [example].”

In the US, wages for most people are lower now, in inflation-adjusted terms, than they were 40 years ago. For those at the bottom of the income distribution scale, they have fallen. For those at the top they have risen dramatically. And wealth has risen even more.

A good indication of just how unequal a society the US has become was the Credit Suisse Global Wealth Report released late last year. It showed that average household wealth in America was $US301,000. But median wealth – that is, the amount held by those exactly half way up the income range – was less than $US45,000. The obscene wealth of those at the very top pushed the average up to more than six times the mean.

The comparative figures for Australia were $US402,000 and $US220,000.

Still, Australia has become a much less equal place.

Between 1975 and 2014, Leigh says, the income share of the top 1 per cent of Australians has doubled, and that of the top 0.1 per cent has tripled.

“And the top 10 per cent have seen three times the wage growth of the bottom 10. We’re in the top third of the most unequal countries in the OECD [the 34 wealthy countries of the Organisation for Economic Co-operation and Development].

“We’re more egalitarian than the Americans and Canadians but not as egalitarian as the Europeans and particularly the northern Europeans,” Leigh says.

As Whiteford points out, the 20 per cent of Australian households with the highest disposable income are now about five times better off than the poorest 20 per cent.

So, what caused this decline in equality?

Whiteford says: “The two macro-explanations are globalisation, which undercuts wages in rich countries … [because] working-class jobs are exported; the other is education and returns to skill.”

That is to say, those whose education has enabled them to work with new technologies have benefited more.

There are a couple of other factors, too. Leigh cites the “collapse of unions from half the workforce to less than 20 per cent”, and cuts in the top tax rates that have allowed the wealthy to keep more of their income.

Richard Denniss, of the left-wing think tank The Australia Institute, acknowledges the role of technological change, but puts much down to politics. The neoliberal economic theories that became influential in the 1970s “set out to increase inequality”, he says.

The idea was that if the role of government were reduced, economic activity deregulated, globalised and privatised, and taxes cut, it would incentivise business to grow, which would ultimately benefit all of society.

“They set out to give rich people more. It didn’t make the economy grow any faster,” Denniss says.

And indeed that is largely true, at least in the developed world. There were benefits, though, for poor countries that took up the jobs exported from the rich nations. The statistics show that in Australia average economic growth rates were no higher during the past 30 years than in the previous 30.

Still, Australia did very well. The Credit Suisse report showed the average Australian to be the wealthiest in the world (largely due to the value of real estate). Unlike America, in this country incomes grew across the board even as inequality increased.

Says Whiteford: “From the late 1990s until just before the GFC [in 2008], the poorest 10 per cent saw their incomes go up by 40 per cent and the richest 10 per cent saw theirs go up by 60 per cent. So everyone gained, but inequality still grew.”

From about 2000, inequality in what economists call “market incomes” – the amount we receive, excluding government taxes and benefits – decreased.

The only thing that prevented Australia from becoming more equal in the early 2000s, Whiteford says, was the federal government.

“The succession of tax cuts, post 2003, made the system less progressive than in the past.”

Those tax cuts, mostly brought in by the Howard government although some of them were matched by the incoming Rudd government, overwhelmingly benefited the wealthy. An Australia Institute analysis showed 42 per cent of the benefit accrued to the top 10 per cent of income earners – more than went to the bottom 80 per cent. Had those tax cuts not been given, Australia would not have a budget crisis now.

And it wasn’t just tax cuts. The Howard government, awash with money from the mining boom, made various other concessions to the wealthy, such as abolishing taxes on superannuation and halving the rate of capital gains tax.

Even the GFC, so devastating across much of the world, hardly touched Australia, a fact that explains why the “Occupy Movement” never took off here as it did elsewhere.

Indeed, Whiteford says, “inequality fell after the GFC, in part because the stockmarket crash affected the incomes of people at the top end, and in part because the aged and disability pensions were increased a lot, so the share of some of the poor went up.

“Inequality went down again in 2009-10 in the first stages of the recovery,” he says.

But then in 2011, the mining boom turned to a bust. The Labor government could not keep its oft-repeated promises of a budget surplus, and the Abbott government swept to power on the promise of fixing the “debt and deficit disaster” of its predecessor.

It has not done so. And, as unemployment grows and wages stagnate, the likelihood is that inequality is again growing, although official data cannot confirm it just yet.

Certainly the voting public feels it, and equally certainly, as attested by more than a year of consistent polling results, the voting public does not support the government’s proposed budget fix – spending cuts that all analysis has shown affected disproportionately the less well-off.

Says Richard Denniss: “I call it the ‘right-wing ratchet’. Costello cut taxes on the rich when times were good. Hockey is supposed to cut spending on the poor now times are tough. It’s not at all obvious to the public that we should cut spending on the poor rather than raise taxes on the rich.”

2 . Hockey's pitch

Having failed to get its most regressive budget measures through the senate, even the government appears to be coming to the realisation that it has to confront the “I” word.

Thus we now have a tax discussion paper in which “all options” are on the table. Thus we have a realisation that something must be done about the superannuation system, which delivers huge tax-free returns to the richest among us, and the negative gearing and capital gains regimes that are inflating a real estate bubble.

But old rhetorical habits die hard.

Just last week after the release of his tax reform white paper, in response to the CEO of the Australian Council of Social Service, Cassandra Goldie, who had invoked notions of fairness on behalf of the less well-off, Hockey repeated his line from the Sydney Institute speech.

“Two per cent of taxpayers pay 26 per cent of personal income tax – two per cent,” he said. He went on to suggest they might leave Australia because of the perceived unfairness of it.

It does sound like a lot when put like that, as an isolated fact, devoid of context about the distribution of income and wealth.

But now we know the context. Those top 2 per cent earn about 15 per cent of all income. So they are not paying 13 times over the odds, as Hockey’s bald statement would suggest, but less than two times.

They have benefited massively from income tax cuts, superannuation tax breaks, capital gains tax exemptions, negative gearing and other gifts bestowed by conservative governments over the past couple of decades. Not to mention income growth bestowed by a globalised economy.

In that light, do you suppose our wealthiest can afford to pay more?

This article was first published in the print edition of The Saturday Paper on April 11, 2015 as "Bind the gap".

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