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4. Chapter 4 The Problem of Progressivity

4.1. The question of the proper degree of progressivity, of the extent to which a fair distribution of the burden of taxation requires that taxes should increase more than proportionally as one moves up the income scale, is perhaps the most difficult of all the basic issues in taxation policy.

4.2. To begin with, some general remarks may be offered about the phrase ‘burden of taxation’. It is frequently used, but it is misleading. It may have had some descriptive validity in pre-democratic days (and in some undemocratic countries today) when taxes supported government activities from which most taxpayers received no obvious benefit and which indeed may have been damaging to many of them. But the implication that all the taxes a citizen pays constitute a straight diminution of his welfare, that he gets nothing noticeable back from them, is not true of any advanced democratic society. Many of the public activities financed from taxation are prerequisites to the functioning of the private economy, and many of them are conducted by the State because by any reckoning the State is the most efficient instrument available. If they were not done at all, or left to private enterprise, everyone would be a great deal worse off than they are. To call such payments a ‘burden’ is to encourage confusion and prejudice. Also, much present taxation is one side only of a continuing process of removing money from people's pockets at one stage of their lives and returning it to them at another when it is more urgently needed. Again, scarcely a ‘burden’.

4.3. The belief that taxes as a whole are a burden has more rational origins in the normal human resentment at compulsion, and in the fact that, though few of us evaluate all that we get from paying them, all of us know of some government expenditure that we believe to be useless and wasteful. Nevertheless the phrase is an unhappy one and misleading especially in the discussion of progressivity. The central and sensitive question here is that of the relativity of one individual's tax bill to another's. In analysing this issue it is unavoidable to proceed by comparing the total taxes they pay, but the argument is properly about the differences between the totals rather than about the totals themselves. Even then the problem is best seen as one of the role of the tax system among the whole complex of policies by which the modern State affects the distribution and the size of the community's income and property. Thus regarded, the problem loses its false air of simplicity but it can then be approached in a more constructive fashion.

4.4. A succession of three groups of questions has to be posed:

  • (a) What are the present facts of the distribution of income between persons and families in Australia (i) gross, and (ii) net of all taxes and social service payments? In other words, taking the tax system as a whole and allowing for cash transfers from the State, who pays what? In particular, how progressive apparently is the present Australian system? These are statistical questions.
  • (b) Supposing that the situation revealed by (a) suggests a need to consider changes in the distribution of income that are unlikely to occur naturally in the evolution of society on existing policies, how far are alterations in the tax system capable of bringing them about, and to what extent should tax rather than other public policies be adapted to the ends preferred? These are substantially problems in economic analysis.



  •   ― 24 ―
    (c) Granted that the tax system is one of the necessary and, at least to some extent, effective instruments for distributional objectives, what in fact should these objectives be? This is clearly a question going far beyond the statistical and the economic into the realms of the social, political, ethical.

4.5. In the three sections of this chapter these issues will be examined in turn. Advance warnings are, unhappily, necessary. The discussion of the statistical questions will be far from providing an adequate account of the basic facts: such facts are, at present, not available. It is hoped here to go some way in a part of the analysis that might have been expected to be the easiest, but the welter of myths existing in this area cannot yet be wholly dispelled. Similarly in the examination of the second question, to which it might also be expected that an agreed expert answer could be assembled, no such answer exists. Here, too, it is necessary to end up with best estimates from which many will dissent. The third question is one to which even in principle there is no hope of attaining any scientifically demonstrable answer, and it would be foolish to pretend otherwise.

I. The Statistical Situation

4.6. Any description of the taxes actually paid by some millions of taxpayers must consist of broad generalisations. Since income is the magnitude to which most of us first look in comparing the position of individuals and families, it would be convenient to be able to classify individuals into income groups and present for each group the average of all taxes paid by members of that group. Then from further information about the family situation and other particulars of individuals, it would be desirable to go on to present a summary picture of the average taxes paid by family groups of different size and composition, again classified by income. It is lamentable that estimates of the former kind cannot be made from the data available in Australia, and that the only source from which estimates of the latter kind can be developed is largely out of date and deficient in other ways. The extensive sample survey of family income and expenditure now being conducted by the Australian Bureau of Statistics may begin, in a year or two, to give results on which greater confidence can be placed. Meanwhile the Committee can only argue from ‘best guesses’.

4.7. A large array of statistics is inevitably generated in the administration of income tax, and in the annual volume Taxation Statistics a selection of the data is presented to the Australian Parliament by the Commissioner of Taxation, analysed in a variety of informative ways. These are, perhaps, the figures most inquirers turn to when considering the distribution of taxation, if only because they are virtually the only official ones available. Table 4.A, which presents a summary regrouping of data from the latest Taxation Statistics, reveals something of the distribution of individual net income as defined for statistical purposes—broadly, income less expenses of deriving income—and of average personal income tax paid by individuals in the income ranges indicated. But such information hardly serves as a basis for a general discussion of taxation policy. For example, it includes in the lower income ranges many persons who were unemployed for part of the year and omits many others who were not required to lodge returns; it excludes some income from trusts; it also excludes the undistributed income of companies and the bulk of social service grants; and of course such light as it throws on the distribution of taxation is confined to personal income tax, only about 40 per cent of total taxation. To use the Commissioner's figures in the present analysis would therefore be entirely misleading.




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TABLE 4.A: INCOME TAX: INDIVIDUALS, 1971–72 INCOME YEAR

                 
Number of taxpayers  
Grade of net income   Male   Female   Total   Net income   Net tax   Average rate of tax on net income  
’000  per cent  ’000  per cent  ’000  per cent  $m  per cent  $m  per cent  per cent 
0–2,999  849  23.4  1,418  68.7  2,268  39.8  4,124  18.1  338  9.4  8.2 
3,000–5,999  1,980  54.6  553  26.8  2,533  44.5  10,860  47.6  1,459  40.7  13.4 
6,000–9,999  642  17.7  75  3.6  716  12.6  5,255  23.0  970  27.1  18.5 
10,000+  155  4.3  20  1.0  175  3.1  2,589  11.3  817  22.8  31.5 
Total  3,626  100.0  2,065  100.0  5,691  100.0  22,827  100.0  3,584  100.0  15.7 
note  

4.8. For a fuller picture of tax distribution it is necessary to rely upon estimates originally based on the material contained in the Australian Survey of Consumer Expenditures and Finances, which was conducted in 1966–68 by Professors Drane, Edwards and Gates. This ‘Macquarie survey’ is a mine of information for students of social affairs and contains vital tax data unavailable elsewhere. Though it suffers from statistical defects fully acknowledged by its authors, is now somewhat dated and will be superseded before long, the Committee has found it, and the work done upon it on the Committee's behalf, indispensible.note

4.9. Figures in the Macquarie survey were collected on a household basis: indeed, with so much expenditure being shared, they could only have been collected on that basis if the results were to be meaningful. Taxes paid in cash are readily identifiable, but not taxes on goods and services paid indirectly: the latter have had to be estimated from expenditure information. To complete the picture company incomes, and the taxes on these incomes, have had to be assigned to particular income groups; so too have estate and gift duties. Thus in such an exercise a great many assumptions of a largely arbitrary kind have had to be made. No one, least of all the statisticians making them, would say otherwise. But if sets of alternative assumptions are made, each in its way reasonably plausible, it is at least possible to see how far the overall results differ and, when they mostly reveal much the same pattern, to attach some credence to the broad picture (if not the exact set of figures) that emerges. Over a hundred alternatives have been explored on the Committee's behalf and the patterns revealed are not in fact widely spread. One resulting estimate is shown in Table 4.B.

4.10. Though Table 4.B has to be interpreted cautiously, especially as regards the details of particular taxes, it suggests an overall distribution of taxation rather different from what most people would probably expect. Taxation, it seems, is quite sharply regressive at the lower end of the household income scale, nearly proportional in a wide middle band, and progressive only at higher levels. Indirect taxes are chiefly responsible for the large difference between this sequence and the progressivity apparently displayed in Table 4.A. (The surprising figure for company income tax paid by households with the smallest incomes is to be explained by the disproportionate number of elderly persons on low incomes living off investments.)




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TABLE 4.B: TAXES AS A PROPORTION OF INCOME, 1966–67

                           
Australian Government taxes  
Income range(a)  Personal income tax   Company income tax   Estate and gift duties   Indirect taxes   Total   State government taxes   Local government taxes   Total taxes  
$ per annum  per cent  per cent  per cent  per cent  per cent  per cent  per cent  per cent 
0–1,449  11.5  18.9  30.4  5.6  4.9  40.9 
1,450–2,899  2.9  7.2  13.0  23.1  4.1  2.8  30.0 
2,900–4,349  7.8  3.4  11.6  22.7  3.8  2.1  28.6 
4,350–5,799  9.4  1.9  9.9  21.2  3.3  1.7  26.3 
5,800–7,249  10.3  2.9  9.0  22.1  3.0  1.5  26.7 
7,250–8,699  11.1  2.5  8.6  22.2  2.9  1.4  26.5 
8,700–10,149  11.9  1.7  7.5  21.1  3.0  1.2  25.3 
10,150–13,049  13.2  3.1  7.4  23.7  3.3  1.2  28.2 
13,050–17,399  15.8  9.5  0.9  8.0  34.2  5.4  1.3  40.9 
17,400+  17.0  13.3  3.3  6.8  40.4  7.0  1.0  48.4 
note note  

4.11. However, as an account of the apparent impact of public finance upon households, these estimates represent only one side of the picture. The impact of transfers received from the government sector by way of age pensions, child endowment, sickness benefits and the like is ignored. Not surprisingly, these cash grants are heavily concentrated upon those families with small original incomes, and their inclusion substantially alters the overall result. The necessary calculations can be made in only a very rough and ready way, but some results are shown in Table 4.C. The importance of including transfers is apparent. When taxes and grants are considered together, progressivity is restored at the lower extremity of income distribution, but the system remains proportional in the middle range—a point of some importance in the Committee's argument. Despite the shortcomings of these estimates and the conceptual problems involved in constructing and interpreting ‘tax burden’ tables, the Committee is prepared to accept the validity of this conclusion as a broad statement of the apparent impact of the current tax-transfer system.

TABLE 4.C: DISTRIBUTION OF TAXES AND TRANSFERS ACROSS RANGE OF NET-OF-TRANSFER INCOMES, 1966–67 (a)

                             
1   2   3   4   5   6   7   8  
Income range   Original income   Transfers received   Total income (2 + 3)  Tax rate   Taxes (5×4)  Net taxes (6 - 3)  Net taxes as fraction of original income (7÷2) 
$ per annum  per cent  per cent 
0–1,449  194  1,417  1,611  41  661  -756  -390 
1,450–2,899  2,195  447  2,642  30  793  346  16 
2,900–4,349  3,679  283  3,962  29  1,149  866  24 
4,350–5,799  5,008  226  5,234  26  1,361  1,135  23 
5,800–7,249  6,412  232  6,644  27  1,794  1,562  24 
7,250–8,699  7,853  228  8,081  27  2,182  1,954  25 
8,700–10,149  9,368  189  9,557  25  2,389  2,200  23 
10,150–11,599  10,778  229  11,007  28  3,082  2,853  26 
11,600–13,049  12,142  207  12,349  28  3,458  3,251  27 
13,050–15,949  14,407  286  14,693  35  5,143  4,857  34 
15,950+  23,947  310  24,257  45  10,916  10,606  44 
note note  




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4.12. Even with grants included, the picture is far from complete, since no account is taken of government expenditure on goods and services and of the distribution of the benefits of such expenditure between families. Many of the benefits of direct government spending would, by any reckoning, be very unequally distributed, and at least in certain areas like education rather more heavily concentrated in the bottom half of the income scale. But ultimately there is no way of apportioning the benefits of public spending that is not completely arbitrary, and it seems best therefore to focus only on the tax-transfer operations of the budget.

4.13. It is impossible to assess the practicability, let alone the desirability, of any substantial alteration in the incidence of total taxation and grants without regard to the number of persons and families within each income range. Given that taxation in an advanced economy may have to be of the order of one-third of national income, it is simply not arithmetically feasible to secure a major part of it from the highest income groups if the great bulk of income is earned by those in the middle and lower ranges. Some estimates of family income distribution drawn from the Macquarie survey, and from a valuable pilot survey conducted by the Australian Bureau of Statistics in 1968–69, are shown in Table 4.D. They suggest that the top fifth of families in the second half of the 1960s received about 40 per cent of total income, the bottom fifth something less than 10 per cent, and the remaining three-fifths over 50 per cent—a very substantial bunching. It needs, however, to be borne in mind that high rates of tax at the top require reasonably high rates in the middle as well, if marginal tax rates are never to reach excessive heights: reducing the tax paid on income within the range from $8000 to $10,000, for example, necessarily reduces the tax paid on that slice of income from those whose incomes lie above $10,000. If the treatment lower down the scale is too generous, then the required revenue cannot be obtained without pushing marginal rates applying on upper incomes to extreme levels. It is the joint operation of revenue requirements and the constraint that marginal rates of tax be reasonable that compels the weight of tax in lower and middle income ranges to be significant.

TABLE 4.D: DISTRIBUTION OF ANNUAL INCOME, 1966–67 AND 1968–69 SURVEYS (Cumulative percentages)

                         
1966–67(a)  1968–69(b) 
Percentage of surveyed families   Percentage of income excluding transfers   Percentage of income including transfers   Percentage of income including transfers and imputed rent   Percentage of income  
10  0.1  2.4  2.9  2.2 
20  2.9  6.4  7.3  6.8 
30  9.2  12.8  13.8  12.8 
40  16.6  20.1  21.2  19.7 
50  25.2  28.5  29.6  28.2 
60  35.0  38.0  39.1  37.5 
70  46.1  48.7  49.8  48.1 
80  59.0  61.1  62.1  60.3 
90  74.6  75.9  76.7  75.2 
100  100.0  100.0  100.0  100.0 
note  




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4.14. These are annual figures and it is of the greatest importance in the present context to avoid being misled by them. It is tempting with annual statistics to argue as if families in each income group are there all their lives, which of course is not the case. Almost everybody's income starts, on entry to the work force, at a much lower level than it reaches later in working life and falls on retirement. Almost anyone, too, may have years of exceptionally low income during a normal working career because of sickness, unemployment or even extended holidays. Moreover, the figures in Table 4.E, drawn from the Australian Bureau of Statistics survey of 1968–69, reveal a further significant fact: the lifetime pattern of earnings varies greatly according to occupational level, at least in so far as this level is indicated by educational attainment.

TABLE 4.E: AVERAGE ANNUAL INCOME OF FULL-TIME MALE WORKERS, BY EDUCATIONAL ATTAINMENT AND AGE GROUP, 1968–69 PILOT SURVEY ($)

                       
Age group (years)  
Educational attainment   15–24   25–34   35–44   45–54   55 and over   All age groups  
University degree  (a)  6,940  8,910  10,320  8,920  8,170 
Non-degree tertiary  3,430  5,180  6,600  6,360  7,150  5,940 
Technician level  3,200  4,470  5,410  5,620  5,010  4,970 
Trade level  3,270  4,030  4,270  4,120  3,620  3,950 
Matriculation only  2,840  4,460  4,940  5,120  5,650  4,320 
Left school at: 
17  2,640  3,970  4,530  4,360  5,010  3,750 
16  2,290  3,750  4,380  4,630  4,210  3,510 
14 or 15  2,320  3,440  3,810  3,770  3,600  3,420 
note note  

4.15 The implication is clear that were it possible to ascertain the distribution of Australian income in terms not of annual income but of the probable average lifetime income of persons now alive, such a distribution would (after eliminating the effects of general economic progress) be considerably more bunched than any annual figures. The great majority of individuals in the lower intervals of annual distribution (the sick, unemployed, aged) would move into higher income groups; equally, many of those towards the top on the basis of annual statistics (persons at the temporary peak of their careers or old enough to have incomes from their own savings and from inheritances) would move into lower groups. There would be far fewer very rich and far fewer very poor; the bulk of the population would be even more concentrated in the middle ranges.




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4.16 It would have been desirable to round off this section with some arithmetical calculations showing the alternative patterns of progressivity in the overall taxation system consistent with a given total revenue. But available information on the distribution of income, even on an annual basis, is unfortunately too dated and too sketchy for such working estimates as the Committee has been able to make to deserve reproduction. A few brief observations of a qualitative nature must suffice:

  • (a) By manipulating rates on existing taxes and widening their bases, by their tighter administration, and by such new levies as a tax on capital gains, it would certainly be possible to raise more revenue from those at the top end of the income and wealth scale, were this considered desirable.
  • (b) The number of persons in those groups is so small that the additional revenue would inevitably be very modest in relation to total revenue requirements.
  • (c) Revenue needs are now so great, and the underlying distribution of income is so concentrated in the middle ranges, that the bulk of revenue must come, in one way or another, from those ranges.
  • (d) Within the middle ranges there is certainly scope for more or less progressivity in marginal and average rates as opposed to the near-proportionality now apparently exhibited, but the degree of variation practicable is much less than is often supposed.

II. Tax and Non-Tax Policies in Redistribution

4.17. Even if the current distribution of income after tax were known more accurately than it is and were judged to be satisfactory, it would still of course be necessary to discuss whether the existing tax structure is contributing to the result in as simple and efficient a way it could. But if it may be assumed that society desires eventually to achieve a more equal distribution, it becomes necessary explicitly to discuss the relative effectiveness of the policy instruments available. Of these the taxation system is by no means the only one actually or potentially employable in Australia, and it is probably less all-powerful than appears at first sight. There is thus a very real problem in finding the right mixture, the most efficient balance, between the various kinds of instruments that are or can be brought into use. Hence the Committee cannot reach recommendations about the tax system without referring briefly to the other policies available, though any detailed examination of them would involve an unwarrantably wide interpretation of its terms of reference.

4.18. It is evident that were the government to possess effective and wide-ranging controls over all earned incomes and all payments for rights in land and industrial property and financial assets (rents, dividends, interest, etc.), it would thereby have a dominant control of the distribution of income. The equity objective of taxation would largely become superfluous except as regards the distribution of property income between persons as determined by the initial and evolving distribution of ownership of the property itself. The tax system could be operated instead primarily with the objectives of simplicity and efficiency in mind. Such control over incomes may effectively be the situation in totalitarian economies and they can have very simple tax systems. While it is here assumed that control to this extent will never exist in this country, it is worth recording that in so far as, within Australia's political framework, government or other public agencies have some direct influence upon the


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evolution of relative gross incomes, the redistributional tasks of the tax system can be to that extent lightened.

4.19. Policies towards monopoly and restrictive practices of all kinds are plainly relevant. The distortions of the market tackled by such policies usually, though not always, tend to increase inequality.

4.20. Policies towards land-tenure and urban development, even though primarily directed towards the achievement of decent urban conditions in the right places, may have important implications in one area of great difficulty for tax policy, that of capital gains from transactions in land.

4.21. Much social service expenditure, for example on health and counselling of one kind or another, even when not involving direct cash transfers is evidently important in preventing extremes of poverty.

4.22. Finally, and perhaps of the greatest general significance, there is the State's part in determining the amount and influencing the composition of education, general and technical and professional. At the lower end of the scale some persistent poverty can be attributed to failures at the level of elementary education. Higher up the scale much of the difference in earned incomes certainly derives from the scarcity of skills that are costly in time and money to acquire. This is a large issue, and not without many intricacies, but the point must be made that in the long term education policy is a powerful weapon in the pursuit of greater equality in incomes—perhaps indeed the most powerful available in a democratic community.

4.23. To return now to the use of taxation as a redistributive measure, one remark should be made at the outset. When contemplating any table showing the distribution of income gross, the taxes paid and grants received at each level, and the resulting distribution net, it is tempting to suppose that simply by altering taxes and grants an exactly equal alteration can be made in after-tax incomes, i.e. that the gross distribution can be taken as something fixed and upon which one may operate at pleasure. This, of course, is a mistake. A change in the tax pattern will in general have an effect upon both the size and the distribution of gross incomes, and the final result to net incomes will be affected by this interdependence, or rather by the combined outcome of a whole set of interdependencies. Some judgments about those tangled and still controversial issues must be offered.

4.24. It is important to distinguish between the initial effect of a change in the progressivity of the rate structure and the permanent effects. Obviously a large change coming suddenly is liable to have sharp impact effects which may or may not last and which may even be reversed. In this part of the analysis it is necessary to consider only the more permanent steady differences that might be made to gross and net incomes by more or less progressive tax structures, after any initial reactions to alterations in the present structure had worked themselves out. The case of an increase in progressivity via personal income tax can be taken by way of illustration. Three types of permanent reaction have to be considered: upon work effort, upon savings, and upon gross income claims.

4.25. Few issues have been more elaborately argued at the theoretical level or more inconclusively tested empirically (or are more difficult to test) than the effects of varying tax levels upon the individual's choice of work against leisure. It is generally held that a high marginal rate of tax will limit the desire to work, but the real question is whether the effect will be large or negligible. It need not be doubted that a marginal rate of 80 per cent or more, imposed on the marginal earned income of a man who


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can live comfortably on a few hours' work, will inhibit him from working longer unless he has an exceptional delight in the kind of work he is doing. But within the range, more relevant to practical discussion, of say 40 to 70 per cent, the matter is problematical. It is evident on all sides that most well-to-do people now earning incomes that are taxed towards the top end of the scale do work hard and long and it may be judged that pride and interest in their work are dominant reasons for this. The effects of tax rates may well be small. At the lower income levels the consequences of medium and high marginal tax rates are perhaps much more mixed, and very much more dependent on personal and job characteristics. Hence in general the Committee is doubtful whether, within the kinds of limit that need to be considered seriously, changes in the progressivity of the tax scale would have important effects upon work incentives.

4.26. Any progressive tax system must to some extent be inimical to savings. This follows from the familiar fact that within the working-age groups the proportion of income saved, generally speaking, increases with income. But the precise sensitivity of savings to tax rates on any permanent basis is extremely hard to judge, and the difficulty is compounded in inflationary conditions when the volume and pattern of savings are likely to be dominated by varying expectations about potential returns, real and monetary, and about the stability of income. It is also to be remembered that in the industrial sector (the needs of which are often in mind when the importance of saving to growth is being emphasised) much investment is internally financed and its productivity may be determined as much by its quality as its quantity. The Committee regards incentives to save, as it regards incentives to work, as important but not crucial factors in deciding whether the tax system should be made rather more or rather less progressive.

4.27. A still more enigmatic problem is that of the connection between the progressivity of tax rates and the occupational and hierarchical spread of gross incomes. In conditions such as those of Australia at present and in the foreseeable future, where a high proportion of incomes from effort is in one way or another collectively determined with considerations of ‘fair relativities’ very much to the fore in the debate, it is at least theoretically conceivable that any attempt to compress (or expand) established differentials in real income may be defeated by countervailing adjustments in gross incomes. This would be so if it were relativities net of tax that were involved in ideas about fair shares, and market forces were no obstacle.

4.28. It is a reasonable inference from the very frank specification of ‘fringe benefits’ which takes place in the recruitment of senior staff in many areas of the economy, that in that range levels of real income net of tax are a prime factor in settling remuneration. At other levels the matter is not so clear. Taxation is not overtly considered by the Arbitration Commission. But facts that will be relevant to the intensity of emotion behind a dispute do not need to be explicitly stated to enter the minds of negotiators. The notion of taxes as a burden may be misleading but it has a deep hold. When an increased wage, arrived at by either a Court award or direct negotiation, proves disappointing when received in the pay packet with tax deducted, consequences to the next claim may be expected. Explicit bargaining in ‘real’ terms, net of tax, is spreading overseas and the higher the general level of taxation becomes the more probable it is that it will come to Australia, more especially as, with continuing inflation, everyone is becoming used to thinking in ‘real’ terms. The matter is further considered in Chapter 6.




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4.29. There are limitations on the possible extent of such tax-offsetting income adjustments. As the relative prices of the services of those who secure an upward shift of gross income increase, it will be to the interest of their purchasers to economise and to change techniques so as to use more of other, now relatively cheaper, factors of production. But this may not always be possible, even in the long run, and the power of interest groups may be such as to hamper it when it is.

4.30. The kinship is obvious between the argument here and the questions of relative shares (and inconsistent group claims about them) that are central to the debate on the causes of the inflation now endemic in western economies. There seems unfortunately to be as little hope of agreed conclusions in this debate as in the wider one.

4.31. It is about the relationship between taxation and earned incomes that these doubts principally arise. Taxes on property income can be expected to prove more or less progressive in accordance with the rate structure. So can estate and gift duties, if adequately tightened up, and so too would a wealth tax if technically feasible. Hence the Committee does not come quite to the conclusion that the distributions of income net of tax and of property are not significantly amenable to tax policy when all repercussions are taken into account. It does however believe that the distributions are by no means so readily malleable as may appear at first sight.

III. The Distributional Objective

4.32. Even if it had been possible to provide an accurate and precise account of the distributions of income, gross and net of taxation, and even if the potentialities for changing them in any desired direction by means of the taxation system were assessable in a far more clear-cut way than they are, it would still be a problem of the utmost difficulty to decide how much should be done. It is however implied in the Committee's terms of reference and must be broached, though with all the diffidence that befits a non-political Committee offering views on problems that are essentially and acutely political.

4.33. To start with some simple generalities. If asked what the government should do about the distribution of income and property and how taxes should be used in doing it, it seems likely that nearly everyone would agree on certain vague propositions: that taxes should be related to ability to pay, that they should be used to assist the aged, the unemployed, the sick, the economically weak, and those burdened with the upkeep of large families; that while poverty exists some limits should be put upon the passage of growing accumulations of wealth from generation to generation. They would agree, on the other hand, that part at least of the extra rewards given by the market to those who work especially hard or have rare abilities should certainly stay with them. But if pressed to translate such merely qualitative statements into quantitative terms—to indicate the actual level of grants to those requiring help, to specify tax rates and so forth—plainly a welter of divergent answers would be elicited, even from intelligent respondents doing their best to give practicable figures. It is apposite to consider the principal explanations that might be discovered for this variety.

4.34. There would in the first place be the most widespread ignorance of the statistical facts of the present situation (and of the trends in it) and in consequence all kinds of inconsistent myths and legends and distorted views would be honestly believed. Secondly there would be, among most of those questioned, much ignorance also of the qualitative nature of the lives of people socially remote from themselves. Not


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many of the well-to-do know what it is to be very poor, and most of us may have strange ideas of the daily lives of the very rich. Finally, and quite separately, there would be the widest divergences in the extent to which people in fact cared very much what happened to the rest of the population, in the extent of their mutual sympathy, in the extent of their exclusive self-interest or group loyalties, in their willingness, in the last resort, to pay up for the good of others.

4.35. It is reasonably to be supposed that were the first kind of ignorance remedied there would be a reduction in the spread of opinions about distribution policy. Such too might be the consequence of remedying the less tangible ignorance that surely exists under the second head. But even then, residually, there would remain the variations in social and political attitudes last mentioned as a cause of different views on this basic issue of social justice. Such variations stem ultimately from the moral—or if you will, immoral—beliefs of individual citizens, which may indeed change over the generations but which are of a kind not amenable to alteration by the expression of ‘expert’ views. It is by reason of the inevitability of these variations that distributional policies must be decided in the political process and cannot be determined on any impartial, scientific, objective basis. But it does not follow that, were ignorance remedied, the dispersion of basic political attitudes would be so great as to make a reasonably settled policy unattainable. Some extreme views will doubtless always persist in small minorities. More importantly, whatever objective is currently being pursued, many may want more done and many less. But the differences among the moderate majority may be, quantitatively, of no great magnitude, no greater than can be accommodated by changes in tax rates, without changes in the whole structure.

4.36. Australia has a very homogeneous society, both economically and socially. It is sometimes abused for over-valuing material well-being, perhaps because it is a country with a very high standard of living, but it is predominantly tolerant and individualistic. Most Australians are self-reliant and indisposed to believe that there exists any kind of exact social scale in which they have their own precise place, still less to identify such a scale and their own place in it by reference to their own and their neighbours' income or wealth. Hence it seems to the Committee that some such near-consensus as that just suggested may exist here, behind and below, so to speak, the existing ignorances and myths and despite Australia's tradition of vigorous language in political debate. In recommending a direction of reform in the Australian tax system it is one of the Committee's tasks to attempt to define in general terms what this underlying national unity suggests for fiscal policy.

4.37. In the Committee's judgment there will be almost universal agreement that, overall, taxation should be progressive at the upper end of the scales of income and wealth, and that at the other extreme proverty and threats of poverty reflecting situations of special need should be relieved of taxation or assisted by social service payments. But it is convinced that there will neverthless long remain debate and disagreement about the exact extent to which it is economically safe, administratively feasible, and socially justifiable to push taxation at these higher levels and to assist poverty and need.

4.38. At the same time and quite consistently with this recognition of sharp disagreements about the extremes, the Committee's belief is that over the middle band of income and wealth, the band in which the great majority of them spend their lives, most Australians will accept as fair and convenient an approximately proportional taxation system. When the estimates are made as best they can, that appears to be the


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quantitative outcome of the present system, and the Committee sees no reason to depart from it.

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