Sigh. Yet another round of debate on “inequality”. Yesterday Richard Denniss was warning us that even those “lefties” at the IMF thought inequality could be a drag on growth. Indeed – they do. In developing countries extreme levels of inequality often lead to political and social unrest. We in Australia don’t have too much to worry about on that front.
Arguments about inequality are always a two-pronged attack on the status quo. First that inequality is somehow bad, and second that a soak-the-productive will improve inequality by equally impoverishing everyone. I’m quite certain that North Korea has low levels of inequality.
It is unsurprising that in a dynamic and prosperous country like Australia we’d observe inequality. Remember – there is a huge difference between inequality and poverty. Poverty has come to mean households only have two large-screen televisions but still enjoy indoor plumbing and electricity. The fact is that those people who better satisfy the needs and wants of their fellow Australians in the market will, over time, earn more income than those who do not. Nobody thinks it is unfair that Kylie Minogue has earned more from her singing career than I have from my singing career.
The counterpoint to this sort of argument is always, but what about nurses and police and teachers and firemen and the like? Those people who perform extraordinarily valuable tasks yet don’t earn very much. The first obvious point to make is that these functions are invariably supplied by government and their salaries are determined not by a market process but rather by politicians and other public servants. Mind you, it is people in this income category who really benefit from those “tax rorts” such as negative gearing and novated leases that the ALP are so keen to shut down.
In a country like Australia there is a clear relationship between work and reward. Those individuals who study hard, work hard, save their money, avoid chemical dependency, don’t have more children than they can afford, tend to live happy and comfortable lives. Not always. To be sure there is bad luck and misfortune but then we have a generous and means-tested welfare system to provide a hand up. Welfare was never intended to subsidise the lifestyle choices of the idle.
Yet all that is ignored in a rush to get to the main game: soak the prosperous, the hard working, the adventurous, all in order to subsidise the idle.
That isn’t what the IMF seems to think should be done about inequality. They advocate things like liberalising labour markets, reducing budget deficits, and open capital markets. All worthy policy objectives anyway. The IMF also talks about things such as education and public health. Then they talk about redistribution.
What the Denniss argument overlooks is that Australia already has a highly redistributive fiscal policy. The single largest item on the commonwealth budget is welfare. Some 35 per cent of the budget is allocated to social security and welfare. If we include education and health that figure rises to nearly 59 per cent of the budget. All that is financed by high taxes on the few.
In a recent analysis undertaken by the OECD, the ratio of household wealth for the top 5 per cent of households relative to median households in Australia was 9.5 – less than half the average for 18 OECD economies (20.4). We rank just above “crisis economies”; Italy at 9.3, Spain at 9.0, with Greece at 6.4. An earlier OECD analysis undertaken by Professor Peter Whiteford, of the Australian National University, found that Australia ranked second in the OECD for the progressivity of its tax system.
Those Australians who do pay income tax are very highly taxed already. According to the latest data from the ATO the top 5 per cent pay 33.4 per cent of all net income tax. The ALP and the Australia Institute want them to pay an even greater share. But rather than say so directly, they speak of tax rorts and loopholes. To be clear, if people are not paying the tax they are legally obliged to pay the ATO should pursue those individuals through the courts. But loopholes are not rorts. Very often those “loopholes” were implemented as part of the tax design to avoid double-taxation or to maintain the ability to pay. Also many loopholes are negotiated outcomes that allow the tax to be implemented in the first place – think of the fresh food loophole in the GST.
The politics of envy is an ugly thing. It detracts from efforts to grow the economy and transforms open-ended economic opportunity into a zero-sum game. It may be the case that inequality is a problem is some parts of the world – but not Australia. Mind you, the IMF-mandated solutions to inequality such as labour market liberalisation and reduced budget deficits are policies we should adopt. We already do well in health, education, and especially well on fiscal redistribution.