FREE and FAIR-How Australias Low Tax Egalitatianism Confounds the World-Alexander-2010

8/6/2019 FREE and FAIR-How Australias Low Tax Egalitatianism Confounds the World-Alexander-2010

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FEATURE

Policy • V. 26 N. 4 • Suer 2010–11

Prosperity or egalitarianism—you haveto choose. I avor reedom—you neverachieve real equality anyway, you simply sacrice prosperity or an illusion.1

— Nobel laureate Mario Vargas Llosa

Our social cohesion, fowing directly rom a unique orm o egalitarianism,is arguably the crowning achievement

o the Australian experience over thepast century. Yet this cohesion will betested i wealth and opportunity can’tbe airly and broadly distributed acrosssociety as in the past.— Former Prime Minister JohnHoward

A ustralia is a conounding country or many observers. It has a habit

o throwing up anomalies thatchallenge existing ways o thinking.Educated opinion in Europe once

had it that mammals delivered their babieslive in contrast to reptiles that reproducedthrough eggs. Then along came the egg-layingmammalian platypus in Australia, whichshocked the scientic establishment and orceda redenition o the textbooks.

A similarly naïve binarism exists inclassiying the world’s political economies.On the one hand you can be a small government,inequality-tolerant country like the UnitedStates; on the other you can be a high taxing,egalitarian state like the Scandinavian countries,and all countries t somewhere on thisspectrum rom right to let.

What is not appreciated, but has beendemonstrated by recent research, is that Australia

oers a genuine alternative to these models—aunique orm o low-taxing egalitarianism—thatis both more successul and more sustainablethan other models. This combination o reedom and airness in Australia has providedan environment conducive to economic reormand can continue to do so in the uture.

Freedom

Australia is one o the most economically reecountries in the world, and has or some time

Davd Aeander argues that Australia has found apolitically viable way of keeping the state relatively small

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How AUSTRAliA’S

low-TAx EgAliTATiANiSmCoNFoUNDS THE woRD

Davd Aeander is a former senior adviserto Peter Costello and former economicseditor of the Canberra Times who is nowbased in London.


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Chart 1: Size of government

General government total tax and non-tax

receipts as percentage of GDP, all levels of

govt (Source: OECD, 2010)

been among the smallest governments in thedeveloped world, with low levels o tax andspending.

Last year, according to the OECD’slatest Economic Outlook , Australia was the

Thatcherite’s number one perormer, with notonly the lowest level o government spendingo all developed countries but also the lowestlevel o taxes o all developed countries(equal with South Korea).2

Although it is easy to nd waste in Australian governments, it is still a lean andsmall state when compared with other developedcountries.3 In act, Australia’s relative positionin Chart 1 is likely to be enhanced throughits very low levels o public debt—the highlevels o debt across most OECD countries

imply higher uture tax levels to repair severely impaired balance sheets.

The important point o this measure,though, is not a particular level and ranking in

any one year but the general level, which shows Australia as a very low tax country among peers.

Even when other indicators o economicreedom are included, Australia perormsextremely well. The US-based Heritage

Foundation think tank compiles an annualIndex o Economic Freedom, which measureseach country over a broad range o economicreedom indicators, including tax levels, businessreedom, trade restrictions, property rights andlabour market fexibility, among others.

The latest Index (2010) places Australia asthe highest ranking developed country oreconomic reedom (ranking third overall aterthe city-states o Hong Kong and Singapore).4

The smaller size o government in Australiais a key contributor to the dynamism and

strong economic perormance the nation hasdemonstrated over recent history. Treasury ocial David Parker is correct when hesays pinning down a precise optimal size o government is dicult, but:

[both] theory and empirical researchby the OECD lend support to thenotion that government expenditure,and the taxes required to nance it,can have negative eects on eciency

as governments become larger.Similarly, it appears that a largergovernment is associated with slowgrowth. So, it is reasonable to think that Australia has been well servedby having a general governmentsector that is relatively small andstable compared with other OECDcountries.5

Obviously, there is a limit to how smalla government can be without encountering

signicant drawbacks. Where that point is willbe a matter o innite debate, suce to say that it is below Australia’s current level.

As it is, Australia is a highly successuleconomy with one o the highest economicgrowth rates in the OECD over the last20 years. It has very low government debt,it avoided the Asian Financial Crisis in the1990s, and it was the only major developed



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country to have avoided a recession duringthe recent global nancial crisis. It also has oneo the highest standards o living o any country in the world.

FairnessFairness is an inherently subjective concept;nonetheless, it is critical to successul governance.In this article, economic airness is used in thesense described by ormer Prime Minister John Howard above, that is, the avoidance o levels o inequality that impede cohesion andopportunity.

Some classical liberals, such as MiltonFriedman and Friedrich Hayek, believe that theonly criterion o airness is adherence to properprocedural norms, and that measures o

income and wealth distribution are irrelevant.Peter Saunders (ormerly o the CIS), describesthis view o airness:

the liberal conception o airness deniesthe relevance o any distributionalprinciple, whether egalitarian ormeritocratic. Fairness simply requiresan open system governed by therule o law; it is judged by procedures,not outcomes ... Provided these rules

are ollowed, the result is ‘air.’

6

While this view correctly values rules-basedprocedures, ignoring the distribution o resources in society would be deeply unwise orpolicymakers.

To begin with, high inequality can impairsocial cohesion and lead to civil unrest andriots. History shows us that in extremis , wideincome disparities have contributed to countless violent revolutions. Indeed, the University o Chicago has published research estimating the

increased likelihood o revolution resultingrom measured increases in inequality.7

On a more mundane level, income inequality is a key source o populist economic policy. American libertarian judge and author RichardPosner has lamented some o the serious policy problems in the United States caused by adamaging level o inequality:

[It] can produce dire economicconsequences by increasing thedemand or trade protection, orrestrictions on immigration, or unionprotections, or other anticompetitive

measures, and or governmentsubsidies; it can also create classresentment, and thus lead to inecientregulatory policies, as we may beseeing with proposals to ‘rein in’the ‘greedy’ banks.8

Resource distribution patterns are alsoimportant in determining economic eciency.In highly unequal societies, the articial headstart to those with nancial resources (andattendant education, milieu and contacts), and

the corresponding articial penalty to those without those resources, results in a sub-optimalallocation o resources in labour (and other)markets.

There is o course, a contrary view, that is,that higher inequality can be benecial to aneconomy. Having a greater gap between therich and poor creates a greater incentive to work, and the greater the inequality thegreater the incentive. What one can say is that

economic growth ollows an inverted U curveregarding inequality. Extreme inequality isdisastrous or growth; extreme equality, suchas communism, is equally disastrous. Somewherein between lies optimum growth.

From where Australia sits on this curve(a long way rom communism), avoiding high

inequality should be a broad positive aim orpolicymakers. The higher degree o socialharmony that comes with lesser inequality minimises the chances o populist policies andallows policymakers more latitude or dicultreorms; the greater labour market opennessallows productivity gains and enhancesopportunities or genuine competition.

The higher degree of social harmony thatcomes with lesser inequality minimisesthe chances of populist policies.



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O course, whether one can avoid highinequality without economic cost is a criticalquestion, more on which later.

Australia’s egalitarian-ness

Australia eels egalitarian, and many outsidershave also commented on the egalitarian natureo Australian society. In his book Down Under ,the American-British travel writer Bill Bryson joined a long list o observers in describing Australians as ‘instinctively egalitarian.’ Apartrom this strong sentiment (which is importantin itsel), it is also interesting to consider a rangeo economic data released in recent years thatshed new light on the extent to which ournotions o egalitarianism translate into practice.

The data below looks at how Australia

compares in terms o wealth inequality andincome inequality, and shows the extent to whichthe government policies have contributed tothose levels.

The indicators chosen are the most recentavailable indicators rom reputable sources thatcontain readily comparable data. The measureused to assess inequality, the Gini coecient,is the most commonly used indicator o

inequality and is used by the OECD, the World Bank, and other reputable institutions. A higher Gini represents higher inequality,a lower Gini lower inequality.

Wealth inequality

All countries o the world have very largedisparities o wealth; developed countries alsohave signicant resource dierences betweenrich and poor. What is interesting is thatamong developed countries, the level o wealthinequality in Australia is relatively low.

Recent research rom the National Bureauo Economic Research (NBER), the premiereconomic research body in the United States,estimated wealth inequality across countries

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Chart 2: Wealth inequality

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Chart 3: Income inequality

Gini coefficient of income inequality

(Source: Warren, 2008)



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and ound only Japan, Korea, Ireland, Italy andFinland have lower levels o wealth inequality than Australia, as we can see in Chart 2.9

High inequalities o wealth are sometimesregarded as o greater concern than inequalities

o income due to the lower correlation o reward or eort and productivity; the twomeasures are o course related in various ways,and it is important to look at all inequality measures in context.10

Recent data rom the Reserve Bank suggestthat up until 2006 (the latest period ater thedata in Chart 2 rom around 2000), the levelo wealth inequality in Australia has declined.11 There is no comparable data available or otherOECD countries.

Income inequalityThe OECD recently recognised theshortcomings o the usual methodology usedto assess income inequality as it does not takeinto account two signicant actors—rst, thelevel o in-kind services provided to individuals,and second, the impact o consumption taxeson people’s eective incomes. In its recentmajor report on inequality, Growing Unequal ,the OECD says that conventional measureso income inequality ‘bias the assessment’

o distribution.

12

What this means is that with a low levelo consumption tax and a relatively high levelo in-kind services, previous Gini coecientestimates or income inequality in Australiahave been articially high relative to othercountries.

Incorporated in the OECD report areestimates o the impact o each o these actorsor dierent countries, and chart 3, producedor the OECD by the Australian tax expertNeil Warren, indicates that Australia is

considerably more equal in income distributionthan previously thought, now being distinctly below the OECD average level o inequality.13 (Note that these Gini estimates are appropriateor assessing each country relative to Australiarather than measuring specic Gini levels oreach country.)

When one looks at these measures o both wealth inequality and income inequality or all

the developed countries, only Finland rankshigher than Australia in both.

Australia’s ranking on the revised measure o income inequality probably still underestimatesthe actual position. Recent research at the

University o Melbourne has revealed the way that inequality measurements to date attributean articially low income equality to Australiaderiving rom its very high level o homeownership and an articially high income equality to European countries associated with lowhomeownership.

In short, the low levels o home ownershipin European countries necessitate high levels o government payments to low income retireesto pay or housing, and these higher paymentstally into a reduced measure o income

inequality; by contrast, in high proportionhome-owning countries like Australia, a large

proportion o low-income retirees live rent-reein existing homes, but the lower governmentpayments translate into a higher reading o

inequality. Correcting or this methodologicalfaw, according to researchers at the university,gives Australia a signicantly higher level o measured income equality versus Europeancountries.14

Australia’s position as an egalitarian country is all the more notable considering its highdegree o ethnic heterogeneity. As a generalrule, countries with a high degree o ethnichomogeneity such as the Scandinaviancountries, Japan and South Korea, will havea more equal distribution o resources due to

higher levels o intergroup trust.15 With itsdiverse population composition Australia isunlikely to ever display Scandinavian levels o income distribution, but amongst countries o comparable ethnic diversity Australia ranks aseconomically egalitarian in wealth andincome distribution.

There has been a trend amongst developedcountries including Australia towards higher

Previous estimates for income inequalityin Australia have been artificially highrelative to other countries.



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income inequality in recent decades. However,in its most recent comparison period rom themid-1990s to the mid-2000s, the OECDreports that Australia exhibited a declinein income inequality, which is against the

trend.

16

More recent data rom the AustralianBureau o Statistics (ABS) suggests an uptick in inequality again, but no comparable dataor other countries is available.

The egalitarian-ness of government

An interesting aspect o the egalitarian-nesso countries is the extent to which governmentpolicies might have contributed to the naloutcomes. There has been no such cross-country analysis attempted on the impacto government policy on wealth inequality,

but there has been signicant recent work on how government policies aect incomeinequality in dierent countries.

This analysis has been undertakenrecently or the OECD by Peter Whiteordo the University o NSW, who was alsocommissioned by the Henry Tax Review toconduct a comprehensive analysis o Australia’s

tax and transer system in comparison toother countries.17

Chart 4 estimates the change in inequality (Gini level) that tax and transer policies maketo nal income inequality levels, and it showsthat Australia has one o the most egalitariangovernments in the developed world, alteringthe outcomes o income distribution at a levelcomparable with Scandinavian countries suchas Sweden and Denmark.

When comparing the eciency o reducinginequality, that is, how much inequality is

reduced or the size o the welare bill andtax levels, Australia ranks as the most ecientcountry.18 The highly egalitarian result or

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Chart 4: Egalitarian-ness of government

Point reduction in inequality achieved by

household taxes and government transfers

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Chart 5: Government payments to better off

Share of transfers to wealthiest half of

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P e r c e n t a g e T a x / G D P i n 2 0 0 0 ( s o u r c e : O E C

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Wealth Gini coefficient (Source: NBER, 2009, data circa 2000)

Chart 6: Wealth inequality and size of goverment

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Gini coefficient of income inequality (Source: Warren, 2008, data circa 2000)

Chart 7: Income inequality and size of goverment



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Australia is achieved through the mostprogressive transer system in the developed world, coupled with one o the mostprogressive tax systems in the OECD.19 We have very little government money going

to higher income people and low levels o taxon lower income people.Chart 5 (page 8) illustrates this tight level

o targeting, showing Australia as the meanstesting capital o the world, with the lowestpercentage o government transers going tothe wealthiest hal o the population o any developed country.

The tight targeting o government spendingalso means that Australia has the second lowest

level o ‘churning’ among developed countriesater South Korea (churning is the simultaneouspayment o taxes and receival o benetsby households).20

Mapping the freest and fairest

It is helpul to conceptualise the previousmeasures o size o government and inequality by placing them on charts (6 to 8), which wecan call the reedom and airness maps.(Note the year o tax levels has been selectedto match the year o the inequality data, andsome minor countries have been omitted toreduce clutter.)

The most desirable sector or a country to inhabit in a reedom and airness map isthe south-west quadrant. Economic liberty

combined with egalitarian distribution shows usthe reest and airest countries, and the countriesthat best combine those two attributes willpossess both domestic harmony and economicstrength.

I call this combined quality o Thatcheritelow tax government and relative equality o resources an egalitory an quality (o course, somemight consider this a bit cheeky when one

considers the historic associations o Toryism).The north-east quadrant—high taxing

inequality—is the least desirable position toinhabit, and countries in this sector will exhibitsocial confict and poor economic perormance.

The other two quadrants contain outcometradeos.Socialists, blithely unconcerned by high tax

levels, would obviously preer the northwestquadrant, while some libertarians might preerthe south-east corner o high inequality andsmall government.

Classical liberals, according to the earlierdenition, will have no preerence or south-eastor south-west, as long as it is south (and wouldsimilarly have no view on whether north-westis superior to north-east).

So who is the reest and airest o them all? Australia is the only large developed country

that occupies the south-west quadrant in bothcharts.21 (South Korea would possibly occupy the same region, but Warren did not assessKorean income inequality under the moreappropriate methodology.)

Other countries that share the southwestsector in one respect ail in the other. Low-taxSwitzerland is quite even on income distributionbut has one o the worst wealth inequalities in

the developed world. Low tax Ireland, whateverits positions on the charts at the time o measurement, has an economic crisis and allindicators lurching to the negative.

Both graphs make a reasonable case or Australia as the standout egalitoryan country.In cricketing terms, we are an excellent batsman,a rst-class bowler, and possibly the bestall-rounder in the world. Certainly among themost relevant and comparable (high immigration,heterogeneous, Anglosphere) cultures, Australiastands out or its combination o small

government and lower inequality.In act, Australia’s position o relatively

low inequality is probably even better than itlooks on these charts because o its very lowlevel o government debt. Most other OECDcountries are likely to engage in regressivemeasures in coming years to repair their seriousnancial positions. In the United Kingdom,or example, the tax rises and spending cuts

Australia is the means testing capital ofthe world, with the lowest percentageof government transfers going to the

wealthiest half of the population of anydeveloped country.


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planned to repair the decit have been assessedby the Institute or Fiscal Studies as signicantly regressive, and that is not even looking atsignicant debt reduction.22 The nal chartillustrates the uniqueness o the settings o the

Australian state versus other governments.Chart 8 shows that while most othergovernments t along a broad north-west tosouth-east line, Australia is an outlier, the only sizeable developed country with very low taxesthat also makes a large eort at egalitarianism.(The crisis-hit Irish are currently exiting thequadrant.) Australian government policiesdo broadly refect the Australian sense o egalitarianism (which is not to endorse every particular policy used to achieve it). Otherresearch indicates that this government

egalitarianism has been signicant or a periodstretching back to at least World War II.23

An important point to note when lookingat these charts is that while one may view beingin a particular position or quadrant as attractive,

that this needs to be kept in perspective—ocusingpolicies too narrowly on specic criteria canbe a recipe or wider government ailure.

There are also many other policies apartrom taxes and transers that aect levels o inequality—education, health, welare, industrialrelations, retirement incomes, etc—and these will help determine a country’s position. A number o these other policies, not the ocuso this article, have contributed to Australia’sposition o small government with relatively equal resource outcomes.

P e r c e n t a g e T a x / G D P i n 2 0 0 5 ( s o u r c e : O E C D

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Egalitarianness of govt - size of reduction in inequality due to taxes

and transfers (Source: OECD, 2008, data from 2005)

Chart 8: Egalitarian-ness of goverment and tax/GDP



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Also, government policies only operate within the broader cross-currents infuencinginequality, such as globalisation, technologicalchange, the inormation revolution, massproduction o cheaper consumer goods, increasing

rewards or skills, shiting demographics,eminisation o the workorce, immigration,and changing cultural and economic values.

Happy people help reform

Australia is a happy nation, statistically. Analysis o the World Values Survey, the largestcross-national survey that measures happinessand lie satisaction, has ound that Australiaranks highly on both measures.24

Australia also has one o the lowest levelso dissatisaction with the rich-poor gap in

the developed world—the ourth lowest.25 (This does not mean that the gap is happily accepted in Australia—dissatisaction sitsat around 70%). This relative contentmentis not only a partial product o the relativereedom and airness that we enjoy in Australiabut it has also been vital to the successul

entrenchment o dicult economic reormsover recent decades.

The OECD has praised Australia as ‘a modelor other OECD countries’ because o the‘tenacity and thoroughness with which deepstructural reorms were proposed, discussed,legislated, implemented, and ollowed-up in virtually all markets.’26 A more disgruntledpopulation would more likely have resultedin more populist policy directions to assuage

public anger.The most interesting aspect o the success

o the Australian model is the knowledge thata country can achieve a signicant degree o egalitarianism without sacricing economicreedom. The act that it is not a priori impossible to achieve a low tax state with alower level o inequality through policy design ishighly signicant; the existence o a subset

o policies that can achieve both goals willbe o interest to policymakers in all countries.

Within Australia, it is useul to understandthe architecture while considering the rangeo reorm challenges that lie ahead. It is not

necessary that every uture policy in Australianeed satisy both broad goals—that would bemadness—but on a long reorm journey, thecompass points o reedom and airness shouldalways be borne in mind.

When looking at the major reorm challengesacing Australia, there are policy options thatsynchronise with those broad goals. For example,one o the key areas or reorm on the nationalagenda is addressing the high eective marginaltax rates aced at the lower end o the incomescale which inhibit people moving rom welare

to work.Reducing the taxes paid by low income

earners can help address this issue, but thesuccessul prosecution o such reorms alsoimproves the likelihood o addressing otherdicult areas such as consumption tax reorm,reducing welare levels, and liberalising thelabour market. Indeed, another area o promising reorm (rst suggested by the FiveEconomists’ Plan) is reducing taxes on the lowerpaid to enhance the acceptability o greater

fexibility in the labour market, including theminimum wage.27

O course, the Australian model is not apanacea or all ills; tight targeting o governmentpayments and lower taxes on the lower paidcarry their own issues. For example, wheneverbenets are limited rather than universal,there will be ‘penalties’ or earning more.This is an issue, but it is a lesser issue than themore expensive option o providing benetsuniversally. The robust principle should be toonly raise taxes sucient to cover those who

require it.Nobel Laureate and fat tax advocate

James M. Buchanan objects to means-testingprograms because it ‘violates the classical liberalpresupposition o equality’ and creates ‘parasite’groups resented by other taxpayers.28 There isan element o truth in the potential stigmas,but again, this is secondary to the massive costso extending benets without restriction and

Relative contentment has been vital tothe successful entrenchment of difficulteconomic reforms over recent decades.


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the ineciency o raising taxes to give benetsto people o adequate means.

Lower taxes on the lower paid also changeincentive patterns—while it is more attractiveto enter the labour market it becomes less

attractive at the margin to earn more up thescale. It is sometimes argued that that these‘penalties’ in progressive structures createpoverty traps absent in fat tax regimes.Treasury recently estimated that introducinga revenue-neutral fat income tax in Australia would require an across-the-board rate o 24%, a level representing a large tax increaseor lower income earners and a signicantdisincentive or working.29 It would seem that while the progressive tax penalises low earnersor doing better, the fat tax penalises low

earners or doing at all.In any case, while Australia has issues

arising rom the progressive tax and transermechanisms, these need to be kept inperspective. Whiteord, or example, nds thatin Australia, ‘the eective marginal tax rates onlow-income households are among the lowestin the OECD.’30 A generally low level o taxeshelps contain the problems.

Hayek’s mistake

For many years, a belie has persisted thatprogressive taxation is the enemy o peopleghting or smaller government. FriedrichHayek was a highly infuential exponent o this view:

The illusion that by some means o progressive taxation the burden can beshited substantially onto the shoulderso the wealthy has been the chie reason why taxation has increased as ast as ithas done and that, under the infuence

o this illusion, the masses havecome to accept a much heavier loadthan they would have done otherwise.31

But the Australian model shows that Hayek was wrong. Far rom being an enemy o smallgovernment, a progressive tax (and spending)structure is a useul catalyst o sustainable smallergovernment.

Let me illustrate why.I Australia introduced a fat income tax,

almost 80% o Australian taxpayers would pay more tax, according to Treasury.32 Which party is more likely to be elected to government—the

small government party proposing to introducea fat tax or the conventional small governmentparty supporting a progressive regime?33

A government that did introduce a fat tax would ace immediate challenge rom otherparties promising to revert to the progressivescale. The conventional small governmentparty has the most likelihood o successully reducing the size o the state because it has themore politically attractive means o reaching it.

The political disadvantage o the fat tax isnot just that it has more ‘losers’ than a

progressive tax but that the impact o theselosses on people’s sense o well-being is greater. A dollar has more value to a low income

earner than a high income earner, meaningthat, as the Henry Tax Review says, ‘reductions

in income caused by taxation reduce the well-being o low income earners more thanhigh income earners.’34

The error o Hayek was not in saying thatprogressivity can lead to bigger government—itcan. The error o Hayek was in notrecognising that progressivity is also conduciveto smaller government. The reason is thesame—progressivity is more politically appealingthan fat taxes. Progressivity can soothe thepolitical pain associated with either highertaxing governments or smaller spending

governments.Recent OECD research illustrates the

compatibility o progressive tax systems withsmall government. The OECD’s Growing Unequal report calculates the progressivity o dierent countries tax systems and nds thesix most progressive countries to be Ireland,the United States, Australia, United Kingdom,Canada and Korea (all lower tax countries),

A progressive tax (and spending) structureis a useful catalyst of sustainable smallergovernment.



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with (higher tax) European and Scandinaviancountries tending have the least progressivesystems.35

The Scandinavian countries demonstratethe limits o progressive taxes in unding bigger

government—i a country chooses very highspending levels, the revenue needed requires thestate to go beyond high earners and levy highlevels o tax at the lower end o the scale.

Apart rom progressive tax, the steepprogressivity o spending in Australia is alsoconducive to smaller government. The very low ‘middle class welare’ levels mean lower taxlevels to nance government. It is quite tellingthat the Fabian Society o the United Kingdomopposes means-testing benets on the basis thatit undermines ‘social solidarity’ and diminishes

middle-class support or higher taxes. A nal point: just because progressivity is

conducive to smaller government doesn’t mean

that countries should automatically adoptmore progressive systems. There are always

other actors to consider, there are limits toprogressivity, and sometimes there are compellingarguments or fatter regimes. But as a broadrule, i small government is the aim thenprogressivity through lower taxes on the lowerpaid and lower spending on upper incomeearners is more likely to achieve that goal thanfatter tax and spending structures.

Conclusion

A number o authors in recent years have tried todene the characteristics o the Australian model

that distinguish it rom the rest o the world.Respected commentator Paul Kelly suggests:

Free trade, competitiveness in world markets, a surplus budget, an

independent central bank, an enterprisebased industrial culture, an immigrantculture tied to an inclusive culture,retention o the egalitarian ethic, an Australian made synthesis o a decent

society and strong economy, the searchor reconciliation with indigenouspeoples, and entrenchment o a nationalinterest strategy.36

While these characteristics are quite trueo Australia, most are ar rom unique. A more useul and apt description o the Australian model is that o small governmentegalitarianism, a unique combination economicliberalism and egalitarian policy structuresthat contrasts with both European models o

welarism and the American model o inequality acceptance. Northern hemisphere thinking onthe let and the right equates egalitarianism with higher levels o welare and higher taxes;the Australian model wrong-oots this analysisby producing egalitarianism through lowertaxes on lower income earners and reducedgovernment spending on higher income earners.

In Australia, we benet rom the dynamismand reedom that comes with smallergovernment, but we have done it in a way that

refects our values about egalitarianism and theair go. Our arrangements are the end-producto our culture and history—a strong egalitarianethos grated onto a deep underlying Britishlove o liberty. Our pioneers’ strong senseo camaraderie and the bushman’s talent orrunning things on the smell o an oily rag hastranslated into lean but air-mindedgovernment.

The emergence o this Australian model—thisplatypus model—may conound the old northernhemisphere thinking that small government

and egalitarianism are mutually incompatible.But it presents a sustainable model orsuccessully addressing the two eternal challengeso statecrat—maintaining internal harmony while possessing external strength.

The steep progressivity of spendingin Australia is also conducive to

smaller government.


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FREE AND FAiR

Endnotes1 Independent on Sunday (London: 5 May 1991).2 OECD, 2010 Economic Outlook .3 The lean state result s come despite the

overspending o the Rudd government, and the very low debt level relative to other countries is

also despite the large deicit spending o recent years.

4 Heritage Foundation, 2010 Index o Economic Freedom. Like all meta-comparisons it has itslaws, but it remains the most comprehensivecomparison o economic liberalism.

5 David Parker, Executive Director AustralianTreasury, ‘The Economic Impact o Australia’s Ageing Population,’ Address to the Committeeor the Economic Development o Australia(14 June 2007).

6 Peter Saunders, ‘What Is Fair about a ‘Fair Go’?’Policy (Autumn 2004).

7 Robert MacCulloch, ‘Income Inequality andthe Taste or Revolution,’ Journal o Law and Economics (University o Chicago, 2005).I’m dubious about the exactitude o this sorto research, but the principle is unexceptional.For the record, the author nds that ‘a 1-standard-deviation increase in the GINI coecient explainsup to 38 percent o the standard deviation inrevolutionary support.’

8 Richard Posner, ‘American Wage Stagnati on,’Becker-Posner Blog (18 April 2010).

9 James B. Davies, Susanna Sandström, Anthony B.

Shorrocks, and Edward N. Wol, The Level and Distribution o Global Household Wealth, WorkingPaper No. 15508 (National Bureau o EconomicResearch, 2009).

10 For example, the high inequality o wealth inDenmark and Sweden creates a strong imperativeor policies to reduce the inequality o income, butit is also partly a result o policies o high welareprovision that lessen the need or low incomeearners to own assets.

11 Reserve Bank o Australia, ‘The Composition andDistribution o Household Wealth in Australia,’Reserve Bank Bulletin (April 2009).

12 OECD, Growing Unequal—Income Distributionand Poverty in OECD Countries (2008), chapters 9and 11.

13 Neil Warren, A Review o Studies on the Distributional Impact o Consumption Taxes inOECD Countries (OECD, 2008), 56.

14 Joachim R. Frick and Bruce Headey, Living Standards in Retirement: Accepted International Comparisons are Misleading (Melbourne Institute,2009).

15 Andrew Leigh, ‘Trust, Inequality and EthnicHeterogeneity,’The Economic Record 82 (September2006), http://people.anu.edu.au/andrew.leigh/pd/Trust inequality heterogeneity.pd.

16 OECD, Growing Unequal , as above, 27.

17 As above, Chapter 9; see also Peter Whiteord,Transer Issues and Directions or Reorm: AustralianTranser Policy in Comparative Perspective , Paperor Henry Review (University o New South Wales,2009).

18 Peter Whiteord, as above, 50.19 As above, 49.20 As above, 37.21 I have not shown some o the minor countries

on the graphs to reduce clutter—these countriesmake no dierence to the argument.

22 Institute or Fiscal Studies, The Distributional Eect o Tax and Beneft Reorms to be Introduced between June 2010 and April 2014: A Revised

Assessment (2010).23 Andrew Leigh, ‘Deriving Long-Run Inequality

Series rom Tax Data,’ The Economic Record 81:255(August 2005).

24 World Values Survey 2005–2008.25 Simon Chapple, Michael Forster, and John P. Martin,

Inequality and Well Being in OECD Countries:What Do We Know? (OECD, 2009), 5.

26 OECD Economic Survey (February 2005).27 The Five Economists are Chris Richardson,

John Freebairn, Ross Garnaut, Peter Dawkins, and

Michael Keating.28 James M. Buchanan, ‘Araid to be Free,’ Public Choice 124:19–33 (2005), 28.

29 Australian Treasury, Australia’s Future Tax System,Consultation Paper (December 2008), 81.

30 Peter Whiteord, as above, 57.31 Friedrich Hayek, The Constitution o Liberty

(University o Chicago Press, 1960), 311.32 Australian Treasury, Australia’s Future Tax System,

Consultation Paper (December 2008), 81.33 A fat-tax advocate might say that there need not

be losers i the total tax take is reduced enough.The problem with this argument is that the

concomitant spending cuts, which would need tobe substantial, would have a disproportionateimpact on lower income earners who are thegreatest recipients o government spending.

34 Australia’s Future Tax System, Report to the Treasurer,Part 2—Detailed Analysis (2009), 13.

35 OECD, Growing Unequal , as above (Table 4.5),107.

36 Paul Kelly, The March o Patriots—The Struggle or Modern Australia (2009), 2.

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