One of the many inequities of Australia’s welfare system is the exclusion of family homes from the means test. Recipients of age or disability pensions can own houses worth millions of dollars while remaining eligible for pensions funded by the taxes of people who cannot afford to buy a house at all. 

In private, many politicians agree that excluding the family home leads to unfair consequences. However, neither side of politics is willing to change it. There are simply too many Australians who insist they are entitled to a pension. 

It is much the same with the National Disability Insurance Scheme (NDIS). It is widely known to be extensively rorted, with scheme providers charging participants several times what they charge non-participants for the same service. It is also well known that many people on the scheme are only mildly disabled, if at all. And yet, even as the cost threatens to bankrupt the country, even minor reforms prompt screams of protest. 

Australia relies more heavily on individual income taxes than other developed countries

Also threatening the national budget is the cost of childcare. It is no longer sufficient to keep small children happy while their parents are at work; it is now early education. Advocates have created a narrative that children who remain home with their mothers are somehow deprived. Childcare is rapidly becoming yet another entitlement to be funded by the government.  

There was a time when Australians liked to think of themselves as self-reliant and quick to help each other, while receiving welfare was an embarrassment and an indication of failure. 

This has been replaced by a culture of entitlement in which there is absolutely no compunction about receiving money from the government. Many people insist they have a right to a pension simply because they have paid taxes, despite that never having been the situation in Australia. Even those who have never paid tax (apart from GST), or who frittered their savings away on gambling and ‘substance abuse’, demand it. 

Some of this thinking is attributable to the fact that a proportion of immigrants originate from countries which have contributory pension schemes. They assume it is no different in Australia. But a far bigger factor is the entitlement mentality. If someone else can get a pension, I should also get it. If someone else is receiving benefits via the NDIS, it’s only fair that I obtain them too. In fact, if there is money being handed out for anything, I’m entitled to it. 

There is no longer any disgrace in receiving government benefits. Indeed, a thriving industry of accountants and Financial Planners specialises in rearranging their client’s affairs to meet eligibility requirements for government benefits, especially pensions and the Commonwealth Seniors Health Card. 

There is even intergenerational welfare, with extended families living on welfare their entire lives. This is particularly the case with certain indigenous communities, while “Lebanese back” is apparently sufficient to qualify for a disability support pension.

Some admit that ‘government money’ originates with taxpayers, but it makes little difference. The sense of entitlement defies guilt, facts and reason, hence the reluctance of politicians to make changes for fear of losing votes. Even worse, many politicians use taxpayers’ money to buy votes. 

The sense of entitlement owes it origins to the growth of the welfare state over the last half century, together with the rise in taxation that accompanied it. Although Australia has had an age pension for more than a century, disability assistance, childcare subsidies, unemployment benefits, medical benefits and many other handouts and subsidies are far more recent. 

It has led to the perception of an all-pervasive government with unlimited resources. Moreover, if you go about it the right way, money can be extracted from it. 

Also a factor is the level of income tax. Getting something back from the government to compensate for the amount of tax paid makes sense. Australia relies more heavily on individual income taxes than other developed countries, on average taking 25% of earnings. Plenty of people see little benefit for themselves. 

Obviously, this situation is unsustainable in the long term. As Margaret Thatcher once said, “The problem with socialism is that you eventually run out of other people’s money.” 

Australia is already living beyond its means, with budget deficits year after year. It is also actively discouraging industries that support the economy – think coal exports, gas exports, sheep exports – while increasing energy costs. It obviously cannot last. 

What the country needs is a government that encourages self-reliance rather than dependence on the state. Unfortunately, there is no sign of that.

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Some taxes are more damaging than others. But when working out which taxes are more damaging than others, you should not judge a tax by its name.

The impacts of income tax and GST can be much the same, because income tax and GST largely tax the same thing.

So a special hatred for the idea of income tax relative to GST is unjustified.

Let me explain with a simplified scenario.

First, imagine a country with five citizens and no government.

One of the citizens, ‘the entrepreneur’, establishes a business by borrowing money from one of the other citizens, ‘the capitalist’. In the first year the entrepreneur pays the capitalist $100,000 in interest. 

The business imports 500,000 raw inputs at $1 each, and employs three citizens at a salary of $100,000 each. 

The business produces 1,000,000 products and sells half of them to foreigners and the other half to the five citizens of the country, all at $1 each. So the business makes $1,000,000. 

The business pays $100,000 of dividends to the entrepreneur.

Australia’s income tax and GST do not have identical impacts on purchasing power and do not have identical discouragement effects. 

A scenario with no government

Now imagine instead that this scenario includes a government. The government demands enough money to buy 100,000 products. And for now, let us assume that this taxation does not discourage the citizens from producing as much as they would in the absence of government.

The government could get the money it demands via a 20 per cent income tax on the salaries, interest, and dividend received by the citizens. In year 1 this would leave the five citizens with $400,000 instead of $500,000 in their pockets, and with the capacity to buy only 400,000 rather than 500,000 of the business’s products. The government would have $100,000 and the capacity to buy 100,000 of the business’s products.

A scenario with income tax

Alternatively, the government could get enough money to buy 100,000 products via a 25 per cent GST.

The foreign supplier of 500,000 raw inputs would charge the business $625,000, send $125,000 of GST to the government, and, just like in the scenario without government, would end up with $500,000.

The business would continue to sell half of its products to foreigners for $500,000, at $1 each, given that no GST applies to exports.

The business would sell the other half of its products domestically for $625,000, at $1.25 each. The business would pay $125,000 of GST on these domestic sales, but would claim a $125,000 input tax credit, so overall the business would send nothing to the government.

The government’s overall receipts from both the business and the foreign supplier of raw inputs would be $125,000, enough to buy 100,000 products.

The business would continue to provide $500,000 as salaries, interest, and dividends to the five citizens, but this $500,000 would now only be enough to buy 400,000 products.

The impacts of income tax and GST can be much the same, because income tax and GST largely tax the same thing.

A scenario with GST

Under these income tax and GST scenarios, the dollar outcomes differ but the real outcomes are identical. 

In the income tax scenario, each citizen receives $80,000 that enables the purchase of 80,000 products.

Regardless of which tax is imposed, foreigners are unaffected, and the purchasing power of each of the citizens is hurt to the same degree.

The reason for this is as follows. In the GST scenario, the tax base is the difference between the business’s domestic receipts and its outlays on imported raw inputs. Yet this tax base is also the money the business pays to the citizenry as income. So the tax base for GST is also the tax base for income tax.

Because the citizens’ purchasing power is hurt to the same degree under both scenarios, the discouragement effect of tax would be the same in both scenarios. Contrary to popular belief, there is no great difference in the discouragement effect of income tax compared to the discouragement effect of GST.

Now, in the real world, Australia’s income tax and GST do not have identical impacts on purchasing power and do not have identical discouragement effects. 

This is partly because of inherently different impacts on savings, that I will discuss in a later article.

But the main reason why our income tax and GST have different impacts is that they each have odd exemptions, and our income tax has various rates unlike the flat-rate GST. 

In other words, a broad-based, single rate income tax would have much the same impact as a broad-based, single rate GST. 

So the special hatred many feel for the concept of income tax seems unwarranted.