“A tax system is a political philosophy expressed in numbers.” Stefan Collini, writing in the London Review of Books (19 October 2023) went on say:
“(a)lthough introduction of a tax can seem to be just a matter of brute politics, public acceptance of a new imposition is affected by the extent to which a justification can be provided. Elements of economic theory usually figure in the argument, but there are also widely held, albeit conflicting, moral intuitions in which ideas of fairness and desert play some role.”
In fact, the clash of opposing moral arguments clustering around the promotion of particular concepts of fairness and desert form the primary grounds on which the politics of taxation play out in liberal democracies like the United States, United Kingdom and the ex-Dominions of the British Empire. Supporters of both the right and left, as well as those clustered around the centre, all claim to promote policies that treat citizens fairly, while rewarding desert or merit. It’s just that they place a different gloss on the morally slippery concepts of desert and fairness, and a different priority ordering.
John Rawls’ famous 1971 book A Theory of Justice, started life in the 1950s as ‘Justice as fairness’. He argued for a set of social and economic institutions that had the greatest probability of maximising the life chances of the least advantaged – his contentious ‘difference principle’. He was comfortable with the implication that this would require substantial intervention by a benign state through redistributive taxation and social expenditures. He seemed to believe that the America of his day was well on the way to this state of nirvana.
This may seem incredible to us today as we witness the gathering wreck of the Trump train. Yet even though Rawls published his magnus opus on the eve of the stirrings of neoliberalism, his optimistic vision was fairly widely shared in the West. The preceding two decades had been a period of rapid economic growth and rising living standards throughout the working and middle classes. Social democratic and (genuinely) liberal political parties introduced variations of the welfare state across the capitalist world. Strong labour movements effectively provided what John Kenneth Galbraith termed the necessary ‘countervailing power’ to grab a share of the growing economic pie from the owners of capital. The profit share of GDP was held in check, while progressive taxes on incomes and wealth constrained the natural tendencies of capitalism towards inequality, much to the annoyance of the rich and powerful.
Parliamentary pollical rhetoric was replete with notions of fairness, a recognition that class (though not gender and ethnic) differences entrenched disadvantages creating ‘uneven playing fields’ that necessitated correction. This was a less prevalent view in America, which lacked a major European-style social democratic political party and where Galbraith in his most famous book, An Affluent Society, saw extant economic inequality as a transitory phenomenon that would gradually wither under the twin force of economic growth and countervailing power (unless ringbarked by endemic inflation), leaving only the irredeemable ‘poor’ to a miserable dependence on private charity.
Although Galbraith later recanted and accepted that he had badly underestimated the grip of inequality in capitalist societies, many conservatives jumped at the chance to resurrect concepts of ‘just desert’ and an individualist conception of fairness. Soon after Rawls’ book, his Harvard colleague Robert Nozich published his own book Anarchy, State and Utopia, in which he put forward a view based on John Locke’s classical liberal moral claims of ‘life, liberty and property’. (The slave-owning framers of the US Constitution substituted ‘happiness’ for ‘property’, a linguistic fudge that continues to fool the MAGA crowd.) Nozich propounded an ‘entitlement’ view of distributive justice that effectively denied the scope for redistributive policies. Individuals were entitled to keep whatever wealth they acquired through just means, defined as voluntary social interactions through the market and other institutional settings. Thus, the wealthy deserved to keep ‘the gains from trade’. By implication, it was unjust to appropriate any of a person’s wealth through taxation or other imposts; from this moral claim it was a short step to the political slogan that ’tax is theft’. – a neat rejoinder to Proudhon’s claim in the nineteenth century that ‘property is theft’.
As Collini notes in the quote above, economics has long contributed to the politics of tax. Orthodox or mainstream economics holds itself out as a neutral, scientific body of analysis competent to comment on the effects, intended and unintended, of particular tax policies. However, the doctrine and practical effects of economic analysis in this field have reflected and reinforced the broader political economic environment. During the long post war boom, the tenets of public finance accepted an interventionist role for government, broadly conceived as:
- fixing the allocation of resources to offset market failures caused by the abuse of market power, the existence of third-party effects or externalities, asymmetric information, and the provision of ‘merit goods’ that are undersupplied by markets.
- counteracting the built-in tendency to economic inequality by progressive taxation and regulatory standards.
- ensuring that the tendency to macroeconomic fluctuations is contained through countercyclical policies.
The rise of neoliberalism, underpinned by the retreat of Keynesian and other heterodox economic approaches in favour of the ‘new classical’ school, has supplanted the earlier interventionist bent with an austere focus on ‘leaving it to the market’. The advent of Reagan in the US and Thatcher in Britain during the 1980s signalled the shift. Taxes (any tax) were now inherently suspect, a potential drag on market-driven economic growth, something to be shunned if possible, or limited to a minimum if unavoidable. This hegemonic view implicitly refused to countenance the existence of market failure – or at best claimed without evidence that government failure was worse – licensed whatever distributional consequences flowed as ‘natural’ and therefore desirable and banished the business cycle to the distant realm of the past.
This view was not simply the playing out of brute politics. It has come to reflect widely held convictions of a mass of voters in liberal democracies. The views expressed by orthodox economists and those trained by them has helped to confine discussions on taxation and social expenditures within a narrow rhetorical universe. The major political parties vie to be ‘the lowest taxing government’, the soundest managers of the economy, the ones that can be trusted to reward those deserving of success. ‘We’re all right-of-centre now’. Any attempt by wannabe social democratic parties to break out of this universe risks political irrelevance or worse. I will demonstrate this claim below by reference to the recent history of Australian politics at the national level.
In 2007, Kevin Rudd led the Australian Labor Party to a convincing victory, ending the eleven-year rule of the conservative coalition. The latter had introduced a broad-based consumption tax against ineffective opposition by the labour movement and community sector organisations. This regressive tax was accompanied by changes to income and company taxes that mostly benefitted higher income earners and the rentier wealthy, as did a halving of the capital gains tax across the board. This largesse was financed by distributing the budget surpluses fed by mining royalties and profits.
The new Labor government felt unable to wind back these moves and called for a review of the whole tax system. The Henry Review, chaired by Head of Treasury, duly provided a list of 138 recommendations, only three of which were endorsed by the new government. The basic principle was to focus revenue raising on the most efficient tax bases, including appropriating economic rents from natural resources and land. Rudd moved to introduce a ‘super profits tax’ which would fall most heavily on the mining sector. Inevitably, a coalition of the largest companies in the world, egged on by the conservative Opposition and media, levelled their guns on the government, causing the latter to recant. This fiasco, coupled with Rudd’s reversal on Labor’s promise to introduce an emissions trading scheme, also vociferously opposed by the mining lobby, resulted in his replacement, starting a political roundabout that saw six changes of Prime Minister over the following decade. The eventual upshot was the introduction of a ‘Petroleum Resources Rent Tax (PRRT), enthusiastically welcomed by the big resource companies due to the ease with which they have been able to avoid actually paying the tax by indefinitely pushing any liability off into the indefinite future.
Tony Abbot’s new conservative government set about reintroducing the neoliberal program, reducing taxes on the better off, cutting back on social expenditures, attacking the trade unions and public broadcaster, and downsizing the public service through outsourcing key services. His conservative successors continued along this path, culminating in presentation of a three-stage income tax reduction bill by Prime Minister Scott Morrison after his surprise win in the 2019 federal election. This was cleverly crafted to provide modest initial cuts to those on lower and middle incomes in the near term, with much larger and escalating cuts to benefit high income earners five years down the track, with effectively no significant lasting benefits to lower income people.
By tying the three stages together on a take it or leave it basis, Labor was wedged into supporting this legislation for fear of being accused of denying tax relief to lower and middle income earners who would benefit immediately from stages one and two. This cave-in came in the wake of Labor’s ‘courageous’ promises at the 2019 election to radically expand social provision funded by cutting tax breaks on property investment and retirement incomes. The former was dubbed a recipe for stagnation in housing supply, the latter a death tax on the elderly. Any attempt seriously to attack climate change was likewise dismissed as levying a ‘tax’ on growth.
Understandably, Labor went to and won the 2022 election by dropping any mention of new taxes and promising not to drop the ultra-regressive upcoming stage three cuts. Inheriting public debt bloated by the costs of surviving the Covid pandemic, the new government was fortunate to enjoy revenue boosted by a quickly recovering export-led economy that enabled the Treasurer to ‘bank’ unexpected surpluses to reduce national debt, while also offering minimal ‘cost of living relief’ to ‘those doing it tough’. In early 2024, with the clock ticking towards and barely a year from the stage three cuts going live, the Albanese government signalled its intention to reallocate the stage three tax relief away from the top end towards the middle. Everyone would receive an effective tax cut, but higher income earners would get less than under the original scheme and lower income earners would get more than they otherwise would have. The former would collectively still receive the lion’s share of relief, but with less of a roar.
Labor justified what the Opposition and fellow travellers inevitably dubbed a broken election promise, with the claim of greater ‘fairness’. Conservatives responded that the changes penalised thrift and hard work, drawing on moral intuitions tied up with ‘desert’. Higher income people deserved bigger benefits because they worked and saved hard; lower income people deserved less because they didn’t. This individual-centred, class-blind view is deeply entrenched in liberal capitalist societies and ignores the structural causes of economic inequality and insecurity.
In this case Labor seems to have got way with it. Public polls indicate widespread support for the changes. And Labor held on to win an inconvenient byelection with only a modest swing to the conservatives. Grumbling, the Opposition supported the stage three amendments in Parliament, while hammering the government on the broken promise theme. The irony is that the Morrison government’s earlier wedge of Labor has been neatly reciprocated. The Opposition can hardly deny tax relief to everyone while claiming to be the low-tax party and continuing to blame the government for not offering cost of living support.
What the current tax battles in Australia highlight are the political barriers to real taxation reform in capitalist societies living in the shadow of neoliberalism. At best the Labor government has managed (for now) to barely hold the line against the incessant power of wealth to self-augment.
One large question remains. Why does the majority of Australians – and by extension, similar citizens in like countries – continue to accept policies that reinforce rather than reduce current inequalities? The influential force of wealth on public opinion and political institutions offers part of the answer. But beyond that, deep-seated moral notions of fairness and desert, allied to the fractured nature of social class relations today underpin the effectiveness of ideology. Increasing economic inequality and conservative individual responses form a positive feedback loop. This is most apparent in the support offered by the petty bourgeoisie – sole traders and small businesspeople in retail, the building trades, farming, personal services – for conservative parties and politicians. Working on narrow margins in highly competitive and insecure circumstances they are desperate to capture any crumbs of tax relief that fall from the table on which large corporations and wealthy individuals feed voraciously. The more unequal and insecure the economic environment, the more desperate the scramble for crumbs.
These people are working hard, they are doing it tough. They do object to others, say the unemployed, those with disabilities and others suffering entrenched discrimination, receiving tax-funded benefits. These are members of what forty years ago the sociologist Erik Olin Wright called ‘contradictory class locations’, neither real capitalists nor real workers. Of course, many real workers, those whose labour is bought and controlled by real capitalists also internalise conventional views of hard work and individual responsibility and object to their taxes going to support those who are not working in the paid work force.
As such, this growing constituency offers a favourable political market for conservative forces and, in todays topsy-turvy world, allows the party of capital to claim to be the protectors of the working class, often branded as ‘working (conventional) families’.
No wonder debate over real taxation reform is silent.
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