II. Social Security Contributions
13.17. In the brief comparison between Australia's taxation system and those of other OECD countries in Chapter 2, it was noted that this country is unique among the countries represented in Table 2.E in having no levies entitled to be classified as ‘social security contributions’. The OECD definition of this category confines it to non-voluntary contributions made to ‘general government’ (widely defined) specifically for expenditures within the ‘social security’ area. Apart from Australia only three member countries had taxes thus classified which amounted to less than 10 per cent of total tax revenues over the years 1965–71 (Canada, Denmark, Ireland), while six had them to the extent of between 30 and 40 per cent (France, Germany, Italy, Luxembourg, Netherlands and Spain). The figure for the United Kingdom was 14 per cent, and for the United States 18 per cent.
13.18. As an indication of the comparative level of the social services in these countries, such statistics are, needless to say, quite valueless. They merely reflect the fact that in Australia government has chosen to finance social services directly out of general revenue and indirectly by concessional deductions, such as those for contributions to medical benefit funds, without tying particular taxes to those services. It is simply a matter of form and presentation.
13.19. An arrangement not unlike those of OECD countries was once used in Australia. A separately named social services
contribution existed from 1945 to 1950, in administrative substance an addendum to personal income tax but formally
separate and formally not a tax. Furthermore its proceeds were earmarked to the National Welfare Fund for expenditure in
the area of social security to which the proceeds of
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payroll tax, until 1952, were also paid. Though the tax
was eventually abolished and the earmarking of payroll tax rescinded, the National Welfare Fund itself still exists,
though since it is now wholly financed from Consolidated Revenue Fund and from interest on its unspent balances, it is
very little more than a paper archway with a well-sounding name through which tax revenue is channelled to individuals,
via appropriations for the Departments of Social Security, Health, and Housing and Construction.
13.20. So long as what was called in Chapter 3 the ‘burden’ fallacy forms part of the attitude of us all to the payment of taxes, there is some truth and good sense in this presentation. Much public expenditure such as that on defence, general administration, law and order and research confers benefits on the community which cannot, in any but an arbitrary way, be traced to individuals quantitatively. But expenditure on, say, hospitals can and so of course can cash transfers to individuals. Moreover, in this area all are entitled to receive them when in need, as defined, and though the definition of means will exclude many people, no one can be certain that he will be excluded all his life.
13.21. As a matter of logic it is in general defensible to conceive of the money required to pay for these social services each year as the out-goings of an insurance fund financed by the compulsory contributions of the actual and potential beneficiaries. Quite possibly many of the public do not see it this way and think rather that all their taxes disappear for ever into the maw of a distant Leviathan. If so, it is arguable that there would be a real gain if it could be done simply by relabelling some specific quantum of existing taxation social security contributions and passing them through explicit national superannuation, medical or unemployment insurance funds or some agglomeration of such funds. The taxpayer might then better understand what he is getting for his money and perhaps the standard of discussion of future policy would be raised. The idea, at first sight, is especially attractive when large increases in benefits of this kind are under discussion, somewhat ahead of their costing.
13.22. There are, however, conditions to be met before this representation of a slice of what are now taxes could be made entirely convincing:
- (a) The individual contributions would have to be related to expected benefits. Whether the fund actually existed or was of the ‘notional’ kind, it would have to be demonstrably solvent.
- (b) Though age, sex and family situation might be relevant variables, income could not be (except in the case of an income-related superannuation scheme of contributions). Premiums progressively or even proportionately related to income would, as premiums, be indefensible if benefits were equal for everybody. In all but name social security contributions would be poll taxes and thus regressive on income.
- (c) As a corollary of (a), the contributions would have to be confined to beneficiaries. In terms of the insurance principle a general medical fund could only be financed by contributions from individuals, not from business employers.
13.23. Though terms such as ‘fund’ and ‘insurance’ abound in the titles of such schemes overseas, these conditions are
never, so far as the Committee is aware, in practice met. In the OECD countries the employer contributions are usually
larger than the employee, and are generally payroll taxes of such universality that they are probably passed on in prices.
And even when the government is not committed to a direct annual contribution when they start, inflation and changes in
the desired levels of benefit end by making them dependent on general revenue. When contributions
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cease to be
genuine premiums, it is likely that even the most innocent taxpayer will come to think of them as taxes, if indeed he ever
thought otherwise.
13.24. Even if they were not so, a deeper difficulty remains. The basic social issue to which Chapter 4 was devoted, that of the proper degree of progressivity in the taxation system, would not go away. It might be deflected into a debate about the right distribution of the ‘true’ burden imposed by the finance of the rest of public expenditure. Or it might take the form of questioning the fairness between persons of the social service contributions themselves, as it was in fact questioned in Parliament when Australia's National Welfare Fund was established in 1943.
13.25. The Committee in no way disputes the importance of appropriate names and of the right formal presentation of public accounts. But in this and other areas of taxation policy it believes that the most genuinely urgent and constructive task is to present the citizen with information about public finance in a way that allows him to understand his own personal transactions with the State and to compare them with those of other people.
13.26. It is doubtless true that at the present time normal Australian taxpayers do not clearly identify any part of the tax they pay with the social service benefits to which they are entitled, and that it would be well if they could. But this is only one gap in their understanding. They may know their own income tax payments, though they are likely to know their marginal rate rather than their average. They will not know what they pay in taxes on the goods and services they consume. They may know what cash social service payments they have recently received, but not what, in a prospective lifetime of average health and length, they are likely to receive. They doubtless know that their taxes pay for much of their children's education; but not how much they cost annually or over their childhoods, nor what taxes contribute, say per week, towards the hospital and medical services they and their families may have made use of. The most normal families do not know these elementary facts about themselves and those in their same income group: still less do they know them about other income groups. Still less again do they know how many are in these various groups and what their total contributions are, or could be, to the average finance of the services of the State. It is small wonder that in this vacuum prejudice and myth flourish.
13.27. In the Committee's view detailed and up-to-date estimates of the transactions with the State of all persons and families in normal situations, at different income levels, together with estimates of the distributions of income and wealth, are the necessary foundation for informed debate on tax policy. That they do not now exist has been a handicap to the Committee, and must be one too to those who have to assess the validity of its analysis. The Committee recommends that, as soon as possible, information of this kind be made widely available. It is needed not only by the experts but by every citizen who thinks about the size and fairness of the taxes he pays.