The National Reform Summit that forgot Menzies' forgotten people

Bookmark and Share Economics & Deregulation | John Roskam
Australian Financial Review 4th September, 2015

In 1942 Robert Menzies delivered a speech over the radio entitled "The Forgotten People". For him the "forgotten people" were the middle class - "salary-earners, shopkeepers, skilled artisans, professional men and women, farmers and so on". According to Menzies the "rich and the powerful: those who control great funds and enterprises" could look after themselves, while unskilled workers had unions and laws to protect them. Meanwhile the middle class was left to fend for itself.

Menzies pronounced on a key insight. The members of the middle class "are envied by those whose benefits are largely obtained by taxing them". He went on to explain that the "great vice of democracy" is that too often "we have been busy getting ourselves on to the list of beneficiaries and removing ourselves from the list of contributors, as if somewhere there was somebody else's wealth and somebody else's effort on which we could thrive".

At the National Reform Summit in Sydney last week there were representatives of the rich and the powerful, unions, and the beneficiaries of the tax system.

The "forgotten people", the people who actually pay the vast bulk of the taxes, were forgotten. In the absence of the voice of Australia's 12.7 million individual taxpayers it's hardly surprising that representatives of the "Big Four" - big business, big unions, and big welfare, plus big government - concluded that one of the ways to fix Australia was to increase taxes. Big unions don't pay tax (trade unions are exempt from income tax), big welfare spends taxes, and big government collects taxes. The only group out of the big four that actually pays tax is big business. What little discussion there was at the summit about cutting taxes was limited to reducing the company tax rate - which of course would be offset by increasing taxes somewhere else.

By far the biggest source of tax are individual taxpayers. Company tax receipts are projected to be this year $71 billion (and that includes taxes collected from all businesses not just big business). Meanwhile individual taxpayers will pay $194 billion in tax. And big welfare really is big welfare - $154 billion will be spent on social security and welfare. The famed "military-industrial complex" is anything but in Australia - $26 billion will be spent on defence.

PROBLEM SOLUTIONS

The summit did some useful and important work in identifying some of the country's economic challenges, particularly around productivity and the ageing population. But the problem with the summit was the solutions it suggested. When it came to productivity there was little consideration of industrial relations reform, and the answer to the ageing population was almost universally regarded to be higher taxes on superannuation.

Much of the conversation at the summit assumed as Menzies put it "there was somebody else's wealth and somebody else's effort on which we could thrive". The absence of any real-life taxpayers from the summit meant there was no one to stand up and shout "hang on a minute! That's my wealth and my effort you're taxing. How much more tax do you want to take from me?" If a representative of flesh-and-blood taxpayers had been at the summit they could have pointed out that 50 per cent of all income tax in Australia is paid by 10 per cent of the working population.

Most of the summit participants happily assumed Australia was still a low-tax country. In fact the reality is that we're not and we've never really been such a place. On a like-for-like comparison Australia's tax to GDP ratio in 2012 was 33.5 per cent and the OECD average was 33.7 per cent.

And government is going to get bigger and the share of the economy that taxes take will get bigger too. The share of federal government taxes to GDP is forecast to go from 21.4 per cent in 2014 to 23.4 per cent in 2019. That's nearly a 10 per cent increase in five years. If taxes do go up like that we won't be an average taxing country - we'll be a high tax country with all the consequences that entails. The only way of stopping Australia going down that that path is if we stop forgetting about the "forgotten people".