Tax is not a dirty word. Far from it

Taxes create space in the economy for a thriving and robust public sector. They allow us to educate our children and have a world-class healthcare system. They make a dignified retirement possible for millions of Australians, and build our roads and public transport systems. They keep us safe - both locally and globally - and help us prepare for and respond to emergencies. Taxes also allow our creative industries to thrive, propel us towards scientific discoveries and let us build remarkable public infrastructure for generations to enjoy.

But if tax is the superfood that supports the health of the Commonwealth, then politically convenient tax cuts are the junk food of our economic debate: cheap sugar hits that undermine the long-term fitness of the nation.

Australia is already a low-tax country - the ninth-lowest, according to the OECD. This is soon to be made worse by massive inequitable income tax cuts, which will see the wealthiest 10 per cent of income earners receive over half the benefit, and will reduce government revenue by $15.7 billion a year.

When the Coalition legislated these tax cuts, it promised that a "booming economy" would pick up the tab. Despite the now radically changed Covid economic environment, and the now bipartisan commitment to collect substantially less revenue, there is not even a conversation - let alone consensus - about what comes next. Should Australia run bigger budget deficits forever, should we cut spending on health and education, or should we introduce new taxes on things like wealth or pollution?

It seems Australian politics is simply not up to having a frank conversation about the realities of revenue. Moreover, it is not just within our own country that this head-in-the-sand approach is letting us down.

A particularly bizarre feature of the current Australian tax debate is the fact that the Morrison government would seemingly prefer European countries to collect a carbon tax from Australian industry than collect the revenue for itself. Under the proposed EU Carbon Border Adjustment Mechanism, goods coming into the EU from countries like Australia that do not have a carbon price will have a tax imposed on them at the border. This means Australian businesses get all the disadvantages of producing in a coal-dependent country, while the Europeans get all the revenue from a carbon tax on our goods, which they can spend transitioning their economy.

To make matters worse, Australia's Minister for Energy and Emissions Reduction, Angus Taylor, is lashing out at the Europeans for looking after the interests of their manufacturers and our planet. Writing in The Australian, Mr Taylor accused the world's largest trading bloc of not understanding the world's trading rules. Whether he does not know Australia is trying to negotiate a trade deal with the EU, or simply does not care, is not clear. What is clear is that Australia seems determined to pay a high international price to make a small domestic point. Diplomatic eyebrows have been raised already.

Globally too, the Covid pandemic has been an important reminder of why a highly competent public sector, supported by adequate public investment, is so crucially important. Surely this is the great lesson of Covid in Australia and around the world: we need a stronger, not a weaker, state.

The pandemic has turbocharged growing economic inequality. Swiss bank UBS found that over just four months, in the middle of the Covid economic crisis, the world's billionaires increased their wealth by 27.5 per cent, to a mind-boggling $US10.2 trillion.

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Regrettably, Australia has responded to this crisis of inequality by permanently reducing income taxes for the wealthy. It is not yet obvious what this means for Australia's budget, economy or society, because we are not as a nation discussing it. Has Mr Morrison decided to follow the Trump model of big tax cuts and big deficits, or will he follow John Howard and Tony Abbott and swing the axe into health and welfare spending? And, while it is unlikely to tell us today what it might do in 2025 when the stage-three cuts come in, Labor will also need to find answers to these difficult questions.

Fortunately, we can look to other countries for alternatives. In the newly released book The Nordic Edge: Policy Possibilities for Australia, my colleagues at the Nordic Policy Centre use an analysis of 188 national economies to show that higher levels of taxation, such as those found in Nordic nations, correlate with stronger economies, higher average incomes, and improved social outcomes. This examination also shows that higher rates of taxation correlate with reduced economic inequality and increased happiness.

Domestically our tax debate needs a reset. To that end, the Australia Institute has just released research outlining five principles on which sound taxation policy should be based. Taxes should be simple to understand, hard to avoid, designed to reduce economic inequality, effect behaviour only in ways we want and be paid by those who are most able to pay them. The point of this work is to provide Australian policymakers with the necessary tools to sort self-interest and ideology from constructive policy advice. This is all so essential - after all, our taxation system is the tool we use to weave the fabric of our collective society.

Reducing income taxes to curry political favour is nothing new. In 2003 John Howard announced a tax cut that became known as the "hamburger and a milkshake" handout. But, just as a person who eats only junk food will eventually become anaemic, our nation's public sector will inevitably waste away if we maintain our fiscally reckless addiction to tax cuts.