Tax purists hate levies, but the public is likely to support an increase to the Medicare levy to help fund the national disability insurance scheme because they like knowing exactly where their money is going.
“In terms of tax theory they [levies] are bad because they are less flexible and a little more complicated to administrate,” Stephen Bartos from ACIL Allen Consulting told Crikey. ”But that’s only in theory; in practice Australia’s experience has shown that people are more willing to pay a levy. They don’t like just general tax increases going to things they don’t know about.”
Which will come as a relief to Prime Minister Julia Gillard, who unveiled a permanent increase in the Medicare levy from 1.5% to 2% on taxable income, in order to raise an extra $3.3 billion next year for the NDIS. It will cost $1 a day for Australians earning around $70,000 a year, or as Gillard explained it in her speech:
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“Someone earning $30,000 a year will pay an extra 41 cents a day in Medicare levy, but still be paying $903 less income tax per year than they were in 2007; someone earning $70,000 a year will pay an extra 96 cents a day in Medicare levy, but still be paying $953 less income tax per year than they were in 2007; someone earning $110,000 a year will pay an extra $1.51 a day in Medicare levy, but still be paying $1903 less income tax per year than they were in 2007.”
The changes to the Medicare levy are expected to raise $20.4 billion between 2014-15 and 2018-19, when the full scheme comes into place. But with the total cost of the NDIS estimated at $8 billion a year, the levy won’t come close to fully funding the scheme. The Medicare levy (including the surcharge) raises around $9 billion a year; Medicare costs over $17 billion.
That’s a problem, says Bartos. “It is, I think, better to have a levy that fully covers the cost of what you’re trying to fund in the way the guns buyback did because that makes the connection between the money being handed over by the taxpayer and the use it’s being put to and makes it much more transparent,” he said.
To fund the gun buyback scheme after the Port Arthur massacre, the Howard government announced a 1% levy on income tax for one year. The scheme cost around $500 million.
Most Australian taxpayers pay the Medicare levy. Seniors, pensioners and low-income families can be exempt in part or in full depending on income. Pensioners earning roughly under $30,000 are exempt, as are families with a combined income under $38,521. The ATO offers a table that outlines the thresholds for a decrease or exemption of the levy.
Then, higher income earners (like those earning roughly over $80,000 per year) are asked to pay an additional Medicare Levy Surcharge if they don’t have private hospital cover. This used to be charged at 1% across the board but was last year raised to 1.5% for some of the highest earners (those with incomes above $130,000). The government claims the surcharge acts as encouragement for high earners to take out private hospital cover to reduce demand on the public Medicare system.
The last big federal levy was for the Queensland floods in 2011. The Temporary Flood and Cyclone reconstruction levy was a one-off tax imposed on those who earned over $50,000. Treasury estimated the levy would raise $1.8 billion, much less than the government estimates of $5.6 billion to rebuild infrastructure in flood-affected regions.
In 2000, the Defence East Timor Levy was introduced by the Howard government in 2000 to pay the costs of the East Timorese humanitarian intervention. The levy deducted 0.5% from taxpayers on incomes from $50,001 to $100,000 per annum, and 1% for those earning more than $100,000. It was estimated the levy would raise about $900 million in 2000-2001 but the cost of the defensive effort was $2.5 billion.
Although the public may prefer calling these schemes a levy “it’s a tax increase”, Bartos insists. “But it’s what is called a hypothecated tax increase,” he said of a tax earmarked for a particular use.
“Hypothecation is not theoretically the best way to deal with taxes, but in reality that kind of earmarking has been quite helpful for funding, especially new pressures,” said Bartos. ”What it comes down to is taxpayers’ willingness to be comfortable about paying extra taxes and I think the evidence is pretty clear that the willingness is higher when they see where the money is going.”
But it does raise the notion that politicians need to get better at explaining government finances to the public, rather than relying on levies as an easy way to sell a message. “There’s merit in broadening the debate that says that taxes actually get used for things and it’s not just the government taking them and throwing them in to a great big pit,” said Bartos. “Making it clearer to people what taxes are used for would be actually quite helpful in terms of general acceptance of taxation.”
This story first appeared on Crikey.