By Sue Boland
The Howard government seems to have realised that it can't credibly argue that its tax package is one for "battlers" or that it's fair to everybody. Instead, it now asserts that a GST which includes food is "good for the nation". This change of tack was largely a response to the Australian Council of Social Service (ACOSS)exposure of the tax package as unfair to people on low incomes.
ACOSS states that the inclusion of food in the GST, the likelihood of price rises much higher than the government's projected 1.9% and the fact that high income earners reap most of the benefit of income tax cuts make the package unfair.
The government has been forced to make some concessions.
It was pointed out that nursing home fees are based on 85% of the pension, so most of the projected 4% pension increase to compensate for the GST impact would be eaten up by nursing home fees.
Treasurer Peter Costello responded that something would be done to prevent the increase being taken by nursing homes. However, whether the government can force privately run nursing homes not to touch the increase is questionable.
Anyone on a government pension or benefit who is a tenant in public housing or community housing faces a similar situation.
Their rent is set at 20% or 25% of their pension or benefit, so 20% or 25% of their pension/benefit increase will go towards rent, leaving them out of pocket when confronted by the price rises accompanying the GST. Costello's response was only that the government would look into the matter.
After it was pointed out that ventolin puffers for asthmatics would attract a GST, the Coalition announced that puffers would be exempt from the GST. However, it confirmed that health items bought from a supermarket, such as bandaids and headache tablets, would be charged a GST.
Aware that only a minority will vote for the tax package if it is seen as being too unfair, Howard, Costello and their supporters in the media have been particularly vicious towards ACOSS for having dared to criticise the package. The intention is to intimidate ACOSS into silence, or to divide the ACOSS constituency, so that criticism of the tax package is seen as not representative.
Unfounded optimism
What has received less attention is the fact that the tax package is predicated on overoptimistic economic projections. To get us to accept a GST, the government promised income tax cuts and compensation for people on pensions and benefits. The tax cuts and compensation, costing $18 billion, are to be funded out of budget surpluses over the next five years.
The projected surpluses are based on a very questionable assumption: that the Australian economy will grow by 3.5% each year for the next four years.
When questioned about the impact of the international economic crisis on these projections, Costello has tried to claim that the Australian economy is "fireproofed" against the crisis. The record slump in the value of the Australian dollar in recent weeks destroys that claim.
Most economists were predicting economic growth of little more than 2% in 1999-2000. This would drastically reduce the budget surpluses and could even produce a budget deficit rather than a budget surplus. Even 2% growth may now be too optimistic, since that figure was common before the crash of the Russian rouble and the shake-up in South America.
Since Costello insists that the government would not allow the budget to go into deficit to pay for the income tax cuts, the Coalition would be faced with two choices: either cancel the tax cuts and compensation package or make draconian cuts to government services.
Either course would result in a severe reduction in living standards for workers, retired people and anyone on government benefits.
Another questionable assumption in the tax package has been highlighted by ACOSS. It is the projection that the GST would result in an average increase in the cost of living of only 1.9% over the whole economy.
This figure was reached by assuming that high and low income earners have the same spending patterns, spending the same proportion of their incomes on food and other essentials.
Given that most people on low incomes spend 100% of their income on essentials, the real impact of a GST will be much greater than this. The Coalition admits that the price of food is likely to increase by 4.4% and clothes by 6.9%.
The Coalition excludes the increase in the cost of housing and tobacco and assumes that abolition of the wholesale sales tax and lower transport costs as a result of cheaper diesel fuel will be fully passed on to the consumer. In the real world, it is unlikely that business will pass on lower costs in full.
These factors mean that prices are likely to increase by considerably more than the projected 1.9%. A Coalition government would likely seek to lower inflation by increasing interest rates, thereby increasing unemployment.
All for business
The whole of the burden of the tax package is designed to fall on workers and relieve business of responsibility for contributing to government revenue.
The income tax cuts that the Coalition is offering will be illusory for the majority of workers.
Ross Gittins, writing for the Sydney Morning Herald on August 26, quotes interesting figures from the Australian Bureau of Statistics: while average weekly earnings for adult full-time employees are $39,000 ($744.90 per week), 63% of full-time workers earn less than the average income. This is because average earnings are inflated by the small number of people on very high incomes.
Median earnings (the real middle income) for full-time employees are $31,000 ($595 a week). The median earnings figure for all Australians is $15,184 ($292). Under the Coalition's tax package, 63% of workers will get a miserly tax cut of only 3% or 4%.
Gittins also points out that the median income for two-income families (which outnumber single-income families by more than three to one) ranges from $69,000 (where both partners work full-time) to $48,000 (where one partner works part-time). These figures mean that the coalition's proposed tax breaks for single income families will force women in the poorest families out of the work force, rather than women in the richest families.
The next stage of the Coalition's tax agenda is a review of business tax. However, the review committee won't report until after the elections. The Coalition has already indicated that a reduction of company tax to 30% is likely, in conjunction with the removal of some business subsidies that advantage some sectors over others.
Business is already salivating at the possibilities. It has put forward an ambit claim, calling for the removal of company tax altogether, removal of payroll tax, a reduction of the top marginal income tax rate to 30% (in line with the expected new company tax rate of 30%) and a reduction in the capital gains tax.
Stan Wallis from the Business Council of Australia and John Howard have both cautioned business to moderate its demands so that they can just "get the GST in": then its further concerns will be addressed.
What is being proposed by business is to make Australia "tax competitive" with the rest of the world. Alan Mitchell, writing in the Financial Review on August 19, states, "International competition for capital is putting downward pressure on company tax rates everywhere ... The cost of taxing income from capital at the same rate as income from labour will become too high."
Whatever compromises business is forced to make, the long term aim is clear in this statement: tax labour (workers) but not capital (profits).
ALP alternative
If the Coalition's tax package will harm workers and people on pensions and benefits, what is the ALP's tax package like?
The ALP's tax concessions will benefit lower and average income workers, and the ALP has ruled out a GST. However, it is not a package designed to shift the balance of taxation away from workers and onto profits.
This is evident from the fact that the ALP plans to use the Medicare levy as a basis for a funding increase for public hospitals. It doesn't propose to substantially decrease the burden of indirect taxes on low income earners, and it ignores the possibility of raising revenue by taxing corporate profits or cracking down on corporate tax avoidance.
The ALP's refusal to propose an increase in the tax on corporate profits will mean that an ALP government will continue to allow the running down of government services such as hospitals, schools, child-care and public housing.
The choice is to fund these services by taxing workers, allow the services to vanish altogether or tax profits. The ALP and the Coalition have chosen the first two options, although the ALP proposes to allow services to run down at a slower pace than the Coalition.