Taxation gone topsy-turvy

Taxation gone topsy-turvy

After reading last week’s Federal budget, Australians could be forgiven for thinking the world has gone completely topsy-turvy. How is it that a deficit levy and an ongoing rise in fuel tax has been introduced by none other than new Prime Minister Tony Abbott, who has only recently been crowned the heavyweight champion of anti-tax campaigning?

This seems to be a strangely blatant departure from not only Abbott’s own rhetoric as Opposition Leader, but also from Liberal Party ideologies of small government and low taxes. What’s more, the Labor Opposition – traditionally a party of ‘larger’ government, social democracy and a strong state sector – has lambasted the budget measures.

So what is going on?

As it turns out, it might be our perception of the major parties’ approaches to taxation that is actually topsy-turvy. Last year, the ABC’s FactCheck investigated a claim by Kevin Rudd that the tax to GDP ratio under the most recent Labor government had been lower than during the previous Coalition period, and found that the claim checked out.

Could it be true? Using the 2014 budget papers, and allocating revenue in each year to the government that handed down the preceding budget, results in the following:

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The average figure rose over each of the Whitlam, Fraser, Hawke/Keating and Howard periods, but as FactCheck found, was lower under Rudd/Gillard. Rather than reducing the burden of government, it seems that the last two Coalition governments have increased taxation within the economy from the time of their predecessors.

Perhaps even more intriguingly, the most recent period was the only one in which tax as a percentage of GDP was lower across the final year in power than in the final year of the previous government’s tenure.

To top it all off, the average across both Coalition governments was 22.5 per cent, higher than the 21.2 per cent across all three Labor periods.

So it seems that instead of Labor, the Coalition has been the real champion of big government in Australia of late, and despite the public discourse of great-big-new-taxes, the most recent Labor government was the first to reduce the burden of government over its term in recent memory.

Could it be that the parties’ taxation rhetoric has no currency? The effect of Abbott’s attacks on Gillard and Rudd over tax suggest this isn’t the case, at least when it comes to campaigning and election winning. Similarly, while no one is likely to win much support campaigning on a policy of higher taxes, Labor was able to win the conversation on a levy to help pay for the NDIS, a traditional community safety net idea that was fully in line with the party’s roots.

Looking at tax revenue over time paints a more complete picture.

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Revenues bottomed out most significantly in the early ’90s and during the recent Global Recession, helping the country through periods of global economic turmoil, while in good times such as the mid ’80s and ’00s, taxes absorbed more of the country’s economic strength, with revenue taking a high proportion of GDP for an extended period.

These trends point to governments responding to the circumstances of the day rather than simply applying ideology to the nation’s finances – a reassuring sign in the midst of a hyper-partisan political climate. They also suggest that Labor’s lower average might be the result of its misfortune in having to govern more often during times of crisis than the Coalition.

Most importantly, however, they show a Liberal Party that is more than comfortable keeping taxes high, even when its rhetoric is one of tax cuts and small government. Ultimately, that means Tony Abbott isn’t so far from the tree in the latest budget – just from his rhetoric as Opposition Leader.

With the deficit tax in place, this is likely to be the highest-taxing government in the nation’s history. The budget papers show an average tax to GDP ratio of 22.7 per cent over the four-year forward estimates, higher than any of the preceding governments in this analysis.

That ratio will rise every year, leaping from 21.6 per cent in 2013-14 to 23.3 per cent in 2017-18, which constitutes the highest aggregate rise since the Whitlam Government.

And ironically, that’s exactly what we should have expected from a Coalition government.

Image: ‘Spending’ by 401(K) 2012, (Website credit: Licence at by-sa