Rethinking tax and income policy practices to make our society more civil
by Eva Cox
There are two good arguments for framing policies to create more civil societies: one is that life will be better for all, the other is that we will feel it is. Democracies should be social systems that distribute the myriad of experiences, resources and relationships fairly and civilly. Effective policy responses to global financial and climate crises require high levels of good will, resilience and generalised trust rather than a culture of fear and self interest. Governments need the trust of voters to make legitimate decisions for the common good, and that depends much more on social well-being than on individual economic circumstances.
Policies that increase social well-being must take into account the quality of our links with those we know, whether at home, at work or in communities, as well encouraging the growth of quality ties with those outside our immediate circle.
Good policy making, whether in the classically social portfolios, on environmental issues, or economic ones, must also be framed by accepted views of the kind of society we want to live in. Setting overarching social priorities would improve both the effectiveness and coherence of public policy making and avoid damaging the social fabric through the application of inappropriate economic models.
This distinction has become necessary because too much policy making by both past and current federal Governments has failed to recognise the limits of economic analysis and applied it willy-nilly to inappropriate areas. Economics is a social science, built on limited assumptions about human behaviours that can usefully explain some but not most behaviours. Good policies need to balance the social purpose of the nation state against the practice of making more money to fund its expenses.
When policy-makers assume that the economy is an end in itself the policies shaped by that assumption can be socially damaging. Whether it’s through the attempt to enforce engagement in economic activities through coercive policies or the implementation of economic policies that increase inequality, the blindness to the social purpose of policy creates social rifts, damages social cohesion, increases anxieties across the board and reduces engagement by those who feel excluded and disrespected.
This chapter looks at two main areas in which flawed assumptions are skewing our policy priorities: the mix of tax and transfer policies that collect and redistribute public dollars, and the suite of measures grouped under the inaccurately named ‘social inclusion’ portfolio.
‘Social inclusion’ should be about more than paid employment
The word ‘social’ features only rarely in current policy agendas, and there is no priority given to this area of policy in election debates. This reflects the dominance of economic over social equity issues reflected in the ‘What does ‘progress’ mean to you?’ chapter of this publication. 1 It is no surprise, therefore, that the Social Inclusion 2 portfolio has ended up having social in its name but not in its mandate or its measures of success. When economic activity is seen as the most important measure of social progress then welfare reform is seen as employment policy, paid parental leave is justified by its contribution to workforce participation and productivity, and the Indigenous closing the gap strategy is too often seen through the lens of jobs. 3 This assumes that the primary aim of social policy is to make all individuals fit a narrow definition of ‘independence’ and that paid work is the most socially useful way that anyone can spend his or her time. It leaves out all questions of social relationships, as well as failing to recognise the importance of cultural connections, social responsibilities and care for country and others.
There are interesting questions being raised internationally on the important role that making time – not just money – plays in increasing social well-being. The New Economics Foundation 4 is exploring ‘time banking’ as a way of recognising the non-monetary value of time spent helping others. The Foundation describes the outcome of time-banking programs as ‘a parallel economy, using time as the medium of exchange, putting these forgotten assets to work meeting the forgotten needs, and by doing so making connections between people and rebuilding a sense of trust.’ 5
The sharing of paid and unpaid work is part of good parenting and good communities. Full time employment (or over-employment) for some and none for others is not a good basis for dealing with climate change and diminishing resources. However our tax and transfer systems continue to penalise part time workers, particularly those with limited time or paid work capacities, while rewarding the wealthy.
Higher participation and productivity requires a workforce that is comfortable with its non-work roles as well. This means a tax and transfer system that is not clearly linked to the residual Justice Higgins wage earner model, which assumes that an unpaid support system exists for all workers. It must recognise the value of the informal care and cultural sectors to enhance the capacities of communities to manage workplace and other changes.
Better policies for tax and an income security system should involve integrating ideas from successful Indigenous standpoints and some related feminist critiques of current public policies. These marginal viewing points provide useful guides for moving outside the overly influential economic models to a more inclusive social system. Using the failure of western (male) goals for education, health and family functioning in Indigenous communities can contribute to our understanding of how to engage in collective well developed social cultures. Similar, but less obvious, is the need for inclusion of aspects of the social system that have been seen traditionally as female or the private domains of home, care and social cohesion. A system that balances and integrates the social and cultural domains into forms of income support can provide both better social outcomes and economic ones.
Human nature: we’re just not that simple
These and other policy mistakes can be traced to flawed but deeply ingrained assumptions about human nature:
- Classical economics assumes that humans are rational self-interested individuals, so all that’s needed for good policy is to get the price incentives right. The logical consequence is that those who make the ‘wrong’ choices should suffer the consequences. This assumption triggers a contradictory conservative desire to enforce ‘good’ behaviour and avoid the costs of deviance.
- This assumption creates policies to make people self supporting and assumes that if they don’t have jobs, it is because they have problems: they’re lazy, or maybe have other personal flaws. Therefore, at best, they may need treatment for lack of skills or for personal or group health or character flaws. The implication is that government needs to change, pressure or punish them until they get a job.
This approach ignores systemic bias: the inequalities of how societies allocate resources and opportunities. Instead it assumes individual problems with fitting in. It is an approach which denies the fact that there is such a thing as unequal power in society.
Being part of fractured, unequal, untrusting societies is stressful even for those who benefit from inequality and more so for those at the bottom of the pile. Increases in income don’t automatically lead to better social outcomes, as has recently been shown in the work of Michael Marmot, Richard Wilkinson and others. 6Their meticulous research finds that equality levels are better indicators of the quality of life than average per capita GDP.
The explanation for this finding is that well-being rests more in perceptions rather than the direct material impact of inequalities. Other recent research shows that humans mix emotions with reasons in assessing quality of life, and in particular that there is a gut reaction to unfairness, however defined. 7 Therefore people’s perception of their societies as unfair can affect well-being overall and undermine the sense of agency required for society to function well and for people to be willing to contribute to the common good.
Governments need to make policies that help society become more civil. Individuals exist within a network of relationships – individuals’ happiness does not only depend on their own circumstances, but on their relationships with those around them. The quality of a society rests on the ways in which it values the connections between people – not just on the sum of their individual well-being.
When social inclusion becomes social exclusion policy
The government’s social inclusion policy is a major indicator of its social agenda, despite the policy being relatively low profile and having few budget items. This policy area states that its aspirations are ‘reducing disadvantage, increasing social, civic and economic participation and developing a greater voice, combined with greater responsibility’. This may sound relatively broad but the actual priorities are much narrower, as indicated in their documentation of the issues on their webpage – and the programs they fund for implementation. 8
The delivery model for welfare payments puts many conditions on recipients which are designed to push them into certain activities and make them employable. 9 So it assumes that the major faults lie with the excluded, whether as individuals or in some type of community. Therefore the current government view of its own role is to provide remedial services, coercively if necessary, to ensure that the people involved move into approved slots in the economy. The way to show success is to become employed, or at least be obviously preparing for employment. The message is clear. People are only valued and included if they are self-supporting members of the paid workforce.
This area was part of the current Prime Minister’s portfolio and her various statements about the importance of hard work and the emphasis on finding people jobs as the way ahead suggests the deep embedding of these assumptions in the newly-elected Gillard Government. The Coalition already signalled its views when in government by its Welfare to Work policies, which have continued under Labor.10
Evidence-less policy – unfair and ineffective
These approaches to what is seen as individual, or at best community, dysfunction fail to take into account the findings of Marmot et al. Their research seriously suggests we need to look at whether high levels of social dysfunction, as is seen within some Indigenous communities and other poorly functioning outsider groups, may derive from the loss of a sense of agency because of perceived systemic unfairness.11
The Northern Territory Intervention and the more recent expansion of its income management scheme to other working age recipients is the wrong response to long-term despair as it focuses on fitting ‘flawed’ individuals into an existing social system without recognising the flaws in the system itself. This is despite the lack of evidence that such strategies work.12
There is no recognition that many of those who end up on Newstart may be excluded because of prejudice or inappropriate workplace demands. Nor does the current system recognise the difficulties single parents face in finding jobs that fit in with care, let alone dealing with employer prejudices against them, as shown in research I and others did for the New South Wales Department of Women. 13
Not only is such policy making seen as unfair, it does not work. The experience of the original compulsory income quarantining of 50 per cent of government payments in the 73 communities has produced no evidence that it has improved life and reduced risks in these communities. However, it is being extended to the rest of the Northern Territory and de-racialised under claims that it will restore fractured families.14 This demonstrates an official conviction that income control results in positive behaviour change that overpowers evidence, reason and logic.
By pressuring all those out of paid work into jobs, without regard for their other responsibilities, the time for care of others is limited. This may sometimes reduce direct government spending, but at what social cost?
Changes are needed
Recognising the socially useful activities requires an equitable tax and transfer system to redress the cultural and gendered divide between activities that are publicly recognised or not. This becomes a problem when payments are income tested on joint incomes, which unfairly penalises the lower income earner, as recognised in the Henry Review, or by intersections of tax and welfare payments. 15
Indigenous societies value the activities of engaging with kin, sharing stories, caring for country, ceremony and traditions, as highly as earning money. Similarly, most unpaid activities within other communities, households and family are overlooked despite being essential to wider social functioning. The way that public policy undervalues the costs of our social obligations for care and social maintenance can be particularly harmful to the more vulnerable, less resourced people who have to cope with difference and change.
Ken Henry, in the Tax Review 16 and in other speeches, showed his awareness of social and ethical issues involved in taxing and spending designs. The design of tax and transfer payments can be powerful affirmations of what a society values and what it condemns. The distinction is best illustrated by the attitudes of the media, public opinion and in policy making towards ‘entitlements’ to tax cuts and concessions compared to the moralistic, controlling and downright mean attitudes to ‘welfare’ payments. Yet $100 paid under either system costs the public the same amount.
Therefore, any examination of these major policy areas needs to define its principles and purposes. The overview of the Henry Report starts with the following claim in the letter to the Treasurer: ‘The Report presents a vision of a future tax and transfer system that would position Australia to deal with the demographic, social, economic and environmental challenges of the 21st Century and would enhance community wellbeing.’
Note the word social is there as it is in an earlier Australia Council of Social Service (ACOSS) speech where Henry was quite explicit about his aims in the Review.
‘I chose the title of this speech — ‘how much inequity should we allow?’ — for a couple of reasons. For a start, it is mildly provocative, which I thought might help pique your interest. The instinctive response of many to the question would be to answer — none; a just society would not tolerate any inequity. Of course, beyond this instinctive reaction things get complicated. I will return to this later.
Secondly, I selected this title because I consider this to be one of the most significant choices society faces. Indeed, the question assumes inequity is a social choice. And it is. Leaving fairness solely to the market to determine should be unacceptable to a civilised society. Societies will choose how much inequity they allow according to the institutions, norms, laws, policies and programs they adopt.’ 17
The following recommendations and principles follow his stated intentions with more emphasis on the social than he was able to do. Therefore a tax/transfer system, in what it collects and redistributes, should affirm what is seen as socially as well as individually valued.
Principles for change
This involves setting up principles for long term changes to policies that:
- Recognise engagement in social as well as economic activities needs to be on the government’s agenda when setting the criteria for funding and taxing.
- Policies need to balance earning income through producing goods and services for money with the many other aspects of life which warrant public encouragement and support.
- This should include the full gamut of useful social roles, some paid and many unpaid, some formalised but others informal. Public recognition should encourage appropriate engagement with personal wellbeing, the needs of others and the common good.
- Payments, tax imposts, concessions and rebates need to contribute to the overall progressiveness of the system, or at least be justifiable as fair.
- Systems changes need to recognise diverse cultural values and be gender neutral.
- This may involve reviewing the units of payment to deal with the clash between taxing individual incomes and transfer payments that assume interdependence and shared resources.
- New de facto legitimation also carry problems as transfer payments can assume that co-habiters may be responsible for each other, even if they deny this
- The gap between pensions and benefits needs to be decreased or abolished to recognise minimum income needs are related to workforce participation.
- The tax/transfer system should be based on assumptions that people, in general, will be prepared to take responsibility for their income needs if the wider social system treats them fairly.
Specific policy proposals
- Stop the extension of income management in the Northern Territory and possibly other disadvantaged areas in Australia as it permanently shifts the basis of income support from facilitative to punitive, particularly for parents.
- Where communities require income management, they should be offered the option of voluntary community based packages of income management and allied support services or in response to individual or household behavioural triggers.
- Return all sole parents income recipients with children under 12 to the parenting payment rates and conditions to ensure that they have enough basic income
- Urgently review the payment levels of Newstart and other benefits and raise it to an adequate base payment.
Reforming the broader system – mainly from the Henry Review
- Establish an independent tribunal to set and maintain payment levels to remove the decisions from populist political pressures with a brief to establish a basic income support level for all.
- Design categorical income supplementation and support programs that recognise needs for financial support for both the direct costs of children, and the costs of reduced access to paid work and the extra costs of disabilities.
- To facilitate movement between paid work and care-based time demands, accept the principles outlined in the Henry report for reducing effective marginal tax rates but inquire further into whether this is best done by changes to the tax or to the means test to reduce current effective marginal tax rates.
- Set up a review of cohabitation and interdependence under the Human Rights Commission.
- Accept the principle in the Henry recommendation that there be a single family tax benefit payment and that the total amount of family assistance should be withdrawn with a single rate to avoid overlapping withdrawal disincentives for working.
- Explore the Henry proposal possibilities of taxing payments rather than income testing them and other ways to reduce the savage effective marginal withdrawal rates.
Retirement and non employment income
- There should be a retirement bonus payment as a top up for those who have zero or very limited superannuation ($10,000) or other forms of saving by themselves or legal partner. This payment would supplement those solely receiving the single age pension who have often had good reason for being unable to save or contribute and balance the public contributions to substantial retirement income via tax concessions.
- A longer term options could be a social investment income support payment to be made available for people who engage in extensive socially valuable tasks in communities. This could encourage community services generally as well as make viable communities where there are no other sources of funding e.g. in isolated areas such as homelands.
- Questions of joint income testing (transfers) versus individual own income testing should slowly move towards being similar across tax and transfer systems, but in the meantime co-habiting should be assessed on shared income and costs.
- The law should recognise that social relationships do not equate with financial ones where there is no legal obligation or evidence of shared financial resources.
- Pooling of incomes should be assumed only where there is evidence of shared control over a set proportion of incomes or a formal agreement for funds to be pooled for use by both parties.
The above recommendations are a very brief set of policy proposals in response to complex issues. They point to alternative approaches to those adopted by both the major parties during the 2010 election, and seek to counter the scramble to sell the economic credentials of the major parties to voters via bribes and fear of tax increases. The evidence can be read to show that people distrust those who offer bribes and bargains and prefer trustworthy leadership. 18 In the long run politicians cannot hope to retain voters’ trust while pursuing unfair and ineffective policies based on flawed assumptions about what is important to people and society.
- Shaw, T. (2010) ‘What does progress mean to you?’ Centre for Policy Development, available online: http://morethanluck.cpd.org.au/more-than-luck/what-does-progress-mean-to-you/ ↩
- Australian Government (2010) Available online: http://www.socialinclusion.gov.au/Pages/default.aspx ↩
- Department of Families, Housing, Community Services and Indigenous Affairs (2010) Available online: http://resources.fahcsia.gov.au/IEDS/ ↩
- New Economics Foundation (2010) Available online: http://www.neweconomics.org/publications/time-banks ↩
- ibid ↩
- Equality Trust (2010) Available online: http://www.equalitytrust.org.uk/ ↩
- Wolpert, S. (2008) ‘Brain reacts to fairness as it does money and chocolate, study shows’ UCLA Newsroom. Available online: http://newsroom.ucla.edu/portal/ucla/brain-reacts-to-fairness-as-it-49042.aspx ↩
- Australian Government (2010) ibid ↩
- Centrelink (2010) Available online: http://www.centrelink.gov.au/internet/internet.nsf/home/index.htm ↩
- Horin, A. (2010) ‘Welfare crackdown misses targets’ The Sydney Morning Herald. Available online: http://www.smh.com.au/national/welfare-crackdown-misses-targets-20100310-pzea.html ↩
- NSW Health (2010) Social determinants on health. Available online: http://www.health.nsw.gov.au/publichealth/chorep/soc/soc_intro.asp ↩
- Gibson, P. (2010) ‘Working for the BasicsCard in the Northern Territory’ Jumbunna Indigenous House of Learning. Available online: http://www.jumbunna.uts.edu.au/publications/pdf/JIHLBP12.pdf ↩
- NSW Department of Premier and Cabinet (2007) ‘Welfare to Work: At What Cost to Parenting?’ Available online: http://www.women.nsw.gov.au/women_and_work/partnership_projects/welfare_to_work ↩
- op cit Jumbunna ↩
- Australian Government (2009) ‘Australia’s Future Tax System Review’. Available online: http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/home.ht ↩
- Ibid ↩
- Henry, K. (2009) ‘How much inequity should we allow?’ Speech delivered to Australian Council of Social Service national conference. Available online: http://taxreview.treasury.gov.au/content/Content.aspx?doc=html/speeches/05.htm ↩
- Cox, E. (2010) ‘Cox: vote 1, trust, seems to be the order of the day’ in Crikey. Available online: http://www.crikey.com.au/2010/07/19/cox-vote-1-trust-seems-to-be-the-order-of-the-day/ ↩