Constructing a Redistributive Agenda
New Possibilities, New Priorities III
Redistributing income and wealth in Australia has always been one of the most politically fraught things a government can do. While governments have access to the best technical expertise on tax and spending through Treasury and Finance, reform can never be solely guided by technocrats. Political considerations will always be just as important. For example, political considerations dictated why Labor adopted a small target approach in 2022, and I’ve argued in an earlier column why this made sense. But I’ve also argued that political considerations indicate that Labor should pursue bold action on tax and spending now that they are in government.
Read now: New Possibilities, New Priorities I: Is Labor constrained by its small-target strategy?
The obvious question is how best to do this, which I hope to answer in this article. It is a question which cannot be answered by just examining the optimal way to redistribute income and wealth without significantly hindering economic growth (though research on this is of course vitally important). Rather, a government’s strategy for tax and spending reform must be integrated with its strategy for re-election. A re-election strategy should be about developing a rhetorical case for how the government has materially improved living standards.
The Rhetoric of Redistribution
The key reason why this rhetorical case is easier to make in government than in opposition, is that new policies can improve material living standards before a government takes its case to an election. In other words, unlike oppositions, governments can run on their record. It is far harder to mount a scare campaign about an established policy change than about a hypothetical one. The carbon tax for example, was more unpopular with voters before it was implemented than after, as voters soon realised its impact on their material living standards was negligible.
Read now: New Possibilies, New Priorities II: A small window for big reform.
I would argue that there are three main strategies for funding increased social spending. The first is to permanently increase the budget deficit. The second is to fully or partially abolish the regressive income tax cuts scheduled for 2024. The third is to broaden the tax base, primarily through reducing regressive tax expenditures. Outside of the young, educated, primarily renting demographic base of the inner-city seats, these measures would be highly contentious, if not downright unpopular.
The key challenge is to link them in the electorate’s mind with popular social spending measures. It is the appeal of these social spending initiatives that should form the basis for the government’s re-election pitch, as it is these measures that will improve living standards. The nature of this social spending is crucial; universal programs should be prioritised, like free childcare, free mental health services or free dental health care. Universal programs benefit all voters, including the crucial middle-class voters that swing elections.
The key challenge is to link them in the electorate’s mind with popular social spending measures.
The first challenge to an ambitious tax and spending agenda for the Albanese government is explaining why such reform needs to happen, when the case wasn’t made by an Albanese opposition. This policy and rhetorical pivot requires time (Labor can’t immediately announce tax and spending changes that weren’t canvassed before the election) and a justification for why circumstances have changed since the election and new policies are needed. As has been extensively recorded by historical institutionalist scholars, it is during moments of crisis that a window of opportunity emerges for changes in policy or institutional settings.
The gas industry currently faces such a crisis, with the prospect of a domestic gas shortage next year providing a strong moral justification for introducing a gas super profits tax. Naturally, the opposition will attack the proposal on the grounds that Labor never canvassed it when in opposition. Yet, given the gas industry crisis has developed since the election, there’s a clear case that the changing circumstances warrant a new tax. To make the case for such a tax, Labor needs to offer a moral critique of the gas companies, to combat the counter-narrative that such a tax will hurt ordinary consumers.
Reform very clearly needs to be framed as beneficial to working families, at the expense of greedy, exploitative and impersonal gas companies.
It is clear that a strong rhetorical case can be made that a gas super profits tax is necessary because of immediate new economic circumstances. Similarly, universal free childcare could be framed as a measure to address the unexpectedly higher inflation that has occurred since the election. New spending on childcare has the advantage of reducing prices, rather than being potentially inflationary like other spending measures. The October budget presents the ideal rhetorical opportunity to declare a new gas super profits tax to fund universal childcare, thus linking the measures in people’s minds. The cold hard electoral calculus indicates that more voters are winners from this (working families) than losers (gas company executives and shareholders). It is not enough however, to assume that the material self-interest of voters is self-evident; the reform very clearly needs to be framed as beneficial to working families, at the expense of greedy, exploitative and impersonal gas companies.*
I’ve argued here that new taxes should be linked to new spending not because new spending should never increase the budget deficit; if a super profits gas tax doesn’t fully fund universal free childcare, this would certainly not be a case of ‘fiscal vandalism’.** Rather, it is more important that Labor makes clear that new economic circumstances have made popular spending essential, thereby requiring (potentially unpopular) new or higher taxes. By linking measures in the electorate’s minds, it helps build the case for retaining new taxes. If, at the next election, the Opposition proposes their abolition, Labor can say to the electorate: ‘if the Coalition wants to abolish new taxes, what cuts will they make to fund this? You can’t have free childcare without the gas super profits tax, so will they jack up childcare costs to help their donors in the gas industry?’
Drifting Toward Major Reform
When tax increases aren’t linked with new programs, they should be incremental. Again the HI literature classifies different strategies political leaders can pursue when immediate and significant policy changes are too politically difficult. One common mode of policy change the Albanese government should utilise is policy drift: when policies or institutions are not changed, but the context in which they operate changes. For example, from the mid 1990s to 2020, the real value of the unemployment benefit went from just below the relative poverty line to well below it. This was not because governments cut the rate, but rather because the context of the policy changed. Namely, real average earnings grew faster than Newstart, which was only pegged to inflation. Newstart was not originally designed to be well below the relative poverty line, but that’s what happens over time when policy settings aren’t updated.
Policy drift involves governments making relatively small upfront policy changes that eventually compound into major reforms over time. I argue that this can be done through a trifecta of changes aimed at taxing more, or reducing spending on, the wealthy. Including the family home in the pension assets test, removing the capital gains tax exemption on the family home and increasing the marginal tax rates of high income earners would substantially reduce inequality and raise a large amount of revenue (or reduce spending in the case of the assets test). They would also be political suicide — any talk of taxing the family home is toxic, and increasing income tax is a breach of promise.
Admittedly, these changes would not raise an enormous amount of revenue to begin with; however, through policy drift, substantive change would amount over time.
Through policy drift however, these changes can be implemented over time. Homes valued over, say, a $3 million threshold should have any capital gains they accrue taxed. Similarly, if a home has any value above $2.5 million, this portion should be included in the pension assets test. Finally, those earning over $200,000 should incur a ten percent ‘budget deficit levy’. The latter move would help ameliorate the regressive nature of the stage three budget tax cuts, while still keeping faith with the government’s pre-election promise to maintain the tax cuts. Importantly, a deficit levy is far more politically defensible than a direct income tax hike, partly because it is temporary (until the budget is balanced), and partly because the Coalition introduced a deficit levy when they were in government, a fact that can be thrown back at them if they criticise the levy.
All three of these measures would impact only the wealthiest Australians, the number of people worse off would be negligible, and, once implemented, the measures would be unlikely to have a huge electoral impact. Admittedly, these changes would not raise an enormous amount of revenue to begin with; however, through policy drift, substantive change would amount over time — revenue would eventually increase. Inflation automatically increases nominal incomes and house prices, meaning more and more people would incur the new taxes. Eventually, if the threshold were untouched, the measures would affect everyone, but this would happen so gradually as to limit the political contentiousness of the move. The extra revenue would eventually be enormous; while in the short term there might be scope to increase the budget deficit, in the long term it needs to be put on the path to surplus.
The reforms I’ve canvassed would do this. Moreover, front-end loading new social spending and increasing revenue more gradually is political smart. The cost is a larger deficit in the short term, but middle-class swing voters will be better off, an essential determinant of electoral success. Needless to say, raising taxes on the wealthy and increasing universal programs will also benefit the less well-off. Ultimately, these reforms perfectly exemplify the cliché that good policy equals good policies.
*This is one example of a rhetorical and policy pivot Labor could adopt. There are of course plenty of options, including extending the Petroleum Resources Rent Tax, reintroducing a mining tax, or abolishing the diesel fuel rebate.
**Indeed, research suggests that there is scope to increase the deficit, depending on whether such spending will boost growth.
Connor Harvey is a semi-regular contributor to Statecraft, and a member of the Australian Labor Party. This article is the third in a three-part series by Connor on the possibilities and priorities for the new Albanese Government. You can read the first installment here, and the second installment here.
Thanks to Djarah Koops-Gill and Genevieve Campbell for editing this piece.
