We all bemoan the fact that during an election campaign we only talk about policy insofar as it affects the horse race. I plead guilty! So let’s balance the horse race analysis with some policy discussion and start again with the tax cut policy. Earlier this year, Treasury Secretary Ken Henry famously set out 3 Ps for responsible election year policy – which if I remember correctly were productivity, participation and productive capacity. The tax cuts announced today are being spun today as fitting in with this agenda. Partly, I suspect to inoculate the policy against claims that it will put upward pressure on interest rates and partly because the lifting of the growth numbers requires some explanation of how capacity and participation will increase the “speed limit” if the “right leadership” aren’t to be accused of hurtling us towards a boom/crash cycle.
So far all the discussion in the blogosphere I’ve seen has concentrated on the politics – whether from (Labor) left or (Liberal) right. Let me see if I can turn things around a bit. By quoting this from an article Ross Gittins wrote last year, riffing off a paper from the blogosphere’s own Nick Gruen for CEDA [I'm citing a post from LP so please go and read it and follow the links from there as the broader context is important to my argument]:
The argument that our high top tax rate makes us uncompetitive internationally is weaker than people realise. It’s true that, in a workforce of 10 million, we lose about 75,000 skilled workers a year overseas. But we have more skilled workers coming in than going out.
To the extent that people’s decisions about which country to work in are affected by tax rates, it’s their average tax rate that matters, not the rate they pay on the last part of their income. In any case, research shows that tax rates don’t figure greatly in people’s decisions.
As for the gap between the top tax rate and the company rate, its significance is exaggerated. While it allows people who incorporate to defer paying tax, in doesn’t allow them to avoid it. When you try to get your money out of the company, it’s taxed at your normal rate.
Almost all developed countries have such a gap and some have wider ones than ours.
It’s a mistake to imagine that changing the tax system to give an advantage to the well-off is the way to improve the economy.
And, as Andrew Leigh said, that’s what this policy does. And even Coalition friendly market economists admit there’s no particular evidence that small cuts to low income tax scales will increase participation markedly. There are other better, and more equitable ways of doing that. Wayne Swan and Lindsay Tanner are well across these issues. Let’s hope Labor responds well.
The response needed (although it might be bad politics) is to outline the failure of the Liberals to adequately fund public health and education (Labor strengths), and now are caught like deers in the headlights with too much money, and well, they look greedy. If they were reinvesting the money in Australia’s future, instead of hoarding it for an election handout, then perhaps our institutions wouldn’t be in such a parlous state.
It’s a handout vs an investment. One is a simple redistribution and the other is a reinvestment which actually adds capacity over the long term. Put simply, you can have your howard tax cut, but you’ll probably lose it when interest rates go up again on November 7. Pushing more money into an economy that is nearing full capacity is going to add to the pressure for interest rate rises.
Paragraphs, Kim! Paragraphs!
“One is a simple redistribution and the other is a reinvestment which actually adds capacity over the long term.”
That’s right Nahum, and phrased well, hope Rudd argues this way.
That is, Howard, with his fistful of dollars, is proposing a redistribution of the nation’s wealth (ring socialist bogey bell) upwards towards the rich (will you sell your vote for a measly $15?), while Rudd, the fiscal conservative in the pale blue tie, will responsibly reinvest the nation’s wealth in necessary infrastructure like telecommunications, renewable energy, education and training, and health, to guarantee future prosperity for us all.
The evidence so far is that the ALP is not going to play Howard’s tired old “tax policy” auction, which is just code for my tax cuts are bigger than your tax cuts. Let’s hope that the ALP has listened to voters who repeatedly say they want better services before tax cuts.
Costello’s tax cut announcement on the first day of the campaign proper smells like desperation, and has set the tone for the next six weeks. The Liberal Party is listening to some very poor advice if they think this is a killer tactic. Voters are not grateful anymore for a few crumbs from the table of a booming economy while our physical infrastructure fall apart around our ears, and extreme weather events remind us daily how unprepared we are for advancing climate change.
My recollection is that the last “fistful of dollars” election was in 1983 when Fraser lost to Hawke. We might be watching an interesting reprise of electoral history here.
Nahum, I like your distinction between handout and investment of government monies.
TV phone in polls are notoriously unreliable, but it still interests me that Sunrise this morning had over 2,500 people ring in within 20 minutes of their poll opening, and the vote was 84% in favour of better services compared to 16% for tax cuts.
I bow to no one in my desire to see the back of this govt, but GOD I hate this constant effort to produce a gaffe. And that oh-so-innocent look on Grimshaw’s face. Gah. Swan is making hay as you’d expect but move on, plz. The editor at News behind the Votamatic was on the radio and openly said he was hoping “citizen journlists” would be out and about over the country with mobile phones and other devices to record any gaffes by candidates. Gah.
I agree Amanda. It’s cheap journalism and irrelevant. Details can be looked up when required. What’s next? Asking the price of washing power?
The Labor response has been so far pathetic.
I think I can hear Keating going on the mother of all rants from here.
All this stuff is weird.A report suggests for those under sixteen thousand a year ends up to be the princely amount of twenty dollars,and yet as I listen to the ABC. every voice is opposed to it because all the service failures and other problems amounting including one woman going on about her apprentice son,needing to pay for transport education etc. So not taking the twenty dollars would seem to some to be in the interest of the general community according to the ABC participators.And yet the existing advantaged taxpayers,who seem everywhere in the services and may have had their tax advantage,cannot stop the problem of failures of services.Only the apprentice types and the young, how wise and productive of them.And we of not quite any income derived from work ,but still effectively work,await with some interest what the ALP will dream up.Too late for me to be inspired by them to vote.
I was thinking exactly that Austin. C’mon Paulie, bring the noise!
grace pettigrew
My recollection of the “fistful of dollars” Liberal campaign ads is that they preceded a Fraser/Howard victory. 1977? Not sure, though. In Bob Hawke’s immortal phrase, I am but a “silly old bugger”.
What I found interesting about Howard’s interest gaffe replayed this morning on the Today show, was not the gaffe itself. If you put it alongside the Howaedian response to Kerry O’Brien asking for his comment on the polls last night on the 7.30 Report. what you get is a cranky old man. Lets have more of this cranky old man. It will help lose him the election.
Not much of a gaffe from the old gaffer. Did you hear sWayne Wann last night saying “The Prime Minister isn’t even aware what interest rate families with mortgages are paying!!”… well, sWayne: the mortgage rate is NOT the cash rate. The rates are closely related, but they’re not identical.
I thought sWayne was poor on this: yes the gaffer gaffed. But it sounded like the sort of kindergarten playground stuff “nah nah, na nah nah!” that so many voters find irritating when they see it played out in Question Time.
Gaffer Tape anyone?
I thought it was an interesting juxtaposition on the front page of the SMH – Howard’s ‘king hit’ tax cuts of $34 billion alongside a story about a woman miscarrying the toilet of a Sydney hospital because of inadequate services.
I know the Libs will say the hospitals are a state government responsibility, but if Labor were smart about economic policy (and they’ll certainly need to be smarter than their roll-up-into-a-ball effort of 2004), they need to pick up on the story from the AFR last week about federal outlays to the states being at their lowest proportion of GDP in a decade.
In layman’s terms, the national tax take pie is getting progressively bigger thanks to the commodities boom. But rather than sharing it with the states (who pay for most services) for health and education, Howard uses it as a slush fund to get himself re-elected every three years.
Rudd needs to say we can grow this economy faster and more durably if we put aside some money for a rainy day – a $20 tax cut is only going to be eaten up by higher mortgage rates anyway.
I think most people sense this, even if they can’t articulate it. Come on Rudd. No more me-toos!!
Ambigulous, from one silly old bugger to another, you might be right…
So, not taking money from me to give to someone else is a “redistribution”.
Nayum Ayliffe – 2008 Nobel Prize for Economics for redefining “redistribution”. Previously redistribution had been defined as:
re·dis·tri·bu·tion /ËŒridɪstrəˈbyuʃən/ Pronunciation Key – Show Spelled Pronunciation[ree-dis-truh-byoo-shuhn] Pronunciation Key – Show IPA Pronunciation –noun
1. a distribution performed again or anew.
2. Economics. the theory, policy, or practice of lessening or reducing inequalities in income through such measures as progressive income taxation and antipoverty programs.
Now, according to Ayliffe – not taxing somebody is a redistribution. Why didn’t we think of this before?
Brilliant!!!
Dear Grace, you are neither silly, old, nor a bugger. Those who remember the fistfuls of dollars shall not grow old, as we grow old. At the setting down of the ballot boxes, WE WILL REMEMBER THEM.
Not so fast with the 2008 Nobel Prize in Economics, Razor! Other nominations include:
* trickle-down theory of poverty reduction [any brand]
* the “you scratch my back, I’ll scratch yours” theory of tax cuts
* the “Theory and Practice of Razor Gangs”: Canberra: AGPS, Lynch & Fraser & Howard, joint authors, circa 1976-1982
* The Laffer Curve
* The Laff-a-Minute Curve
* Tax Havens for the Working Poor – policy papers IV to XI, Tax Agents Institute, c/- West Australia Inc, submerged in Sydney Harbour; High Court of Australia: the Hon Legal Wisdom of a Nation, presiding
. . . Bueller?? . . .Anyone???
(chirping) . . .
Can anyone explain to me how not redistributing my income is a redistribution????
Please.
It’s not. Everyone knows that. It was just a misplaced word. You understand Nahum’s point about tax cuts vs. investment, though.
Interestingly, Nahum gives us this: “Pushing more money into an economy that is nearing full capacity is going to add to the pressure for interest rate rises.” immediately after getting stuck into Howard for not spending enough on health and education. Weird.
BBB
It wasn’t misplaced – it was plain wrong.
Not really BBB – unless you misunderstand the difference between investment and consumption. We have the second highest interest rates in the OECD (behind only NZ) despite the economy growing at just 3 pct per annum. Why? Because the economy has run out of spare capacity. Why? Because governments in Australia, at both federal and state level, have under-funded investment on infrastructure and education.
For ideological reasons, Howard has underfunded the states (leaving them hooked on gambling revenue to fund essential services), while hogging an ever increasing pile of commodity-driven revenues to pay for income tax cuts that are spent on consumer goods.
Ergo, consumption is running ahead of the economy’s productive capacity.
Yes, all that is fine. Couldn’t agree more (although it’s not true that all income tax cuts are used for consumption – some is saved). The answer, of course, is to create the conditions for more investment, private and public. Are you on board the ‘abolish capital gains tax’ bandwagon, too?
But please, show me how you can ramp up seriously ramp up health and education expenditure, as Nahum presumably would prefer, without ‘Pushing more money into [the] economy’.
BBB
Oh it’s elementary Bingo: you see, the recipients of the wages (teachers, tutors, nurses, doctors and the notorious doctors’ wives) do not consume – they invest. All of their wages would go into superannuation, private tollways, new mining ventures, rail links. And they’d invest for the long term; no seeking quick dividends, not they!
And the infrastructure: libraries, labs, lecture theatres, hospital wards, machines-that-go-bling, nursing homes – well, that would all be put on the never-never. The builders and subbies and the suppliers of materials wouldn’t be paid. They’d all see it was in the national interest to leave their invoices unpaid, for how long?…Well let’s say 3 years, shall we?
Welcome to voodoo economics, 2007 style.
Sounds a bit like the “IOU chits” that Whitlam wanted to issue to public servants in lieu of wage cheques, when the Senate was delaying Supply late in 1975…..
I thought voodoo economics was all about the Laff-and-a-haff curve?
BBB
Ambigulous – you forgot the ports, mate. That’s where all the subbies who won’t be paid to build the new infrastrucutre will go fishing to feed the family.
Yep – building new infrastructure in a labour shortage scenario is not inflationary.
I’ve learnt something today they never taught me in economics at three different unis!!! No wonder education is up the kyber!!
Assuming these tax cuts put up inflation, the question then is: How much inflation will they cause? Given that it’s $34 billion over three years in a ~$1 trillion economy that averages out to $11.3 billion in tax cuts per year = ~1% of GDP. Any ideas how much inflation that would cause.
I guess the other question is; how could that money be used in a way that’s not inflationary? Presumably it has to be sequestered away somewhere and not used to fund schools/hospitals/roads?
Kim, Lindsay Tanner is too busy looking after his own bacon in Melbourne doing ridiculous YouTube videos slagging the Greens off and pumping up Family First. I kid you not.
Err, Razor, maybe then you went to a different school than Glenn Stevens, the RBA governor. Asked at his last parliamentary testimony about government spending on infrastructure, he said:
“If the spending is putting in place genuine infrastructure, that does two things. It
adds to demand in the short term, but it also adds to supply in the long term. Without wanting to endorse or otherwise particular projects, I think it is reasonably clear that we need more supply
of infrastructure over time for the economy to grow; otherwise we will be capacity constrained
permanently. So it is a matter of putting in place that longer term supply capacity and trying to manage the short-term impact of that on demand so that we do not kind of blow up inflation on
the way through. If we can manage that then the economy has good growth prospects in the
medium term because of the additional supply capacity that has been put in place.”
Like the economic arguments, but I go with my gut instinct. This is John Howard trying to buy our love on the never-never and hoping we will forgive any inflationary trend which occurs when the tax cuts kick in.
Mr Denmore – you only bolded the bits that suited you.
Grace and Nayum, et al, appear to be saying that reducing taxes is inflationary and building infrastructure isn’t.
Stevens obvioulsy agrees that infrastructure building is inflationary – “trying to manage the short-term impact of that on demand so that we do not kind of blow up inflation on the way through.”
Spending on infrastrucutre in a labour supply constrained economy creates wage inflation pressure, additional to the demand for limited goods and services. Tax cuts are not only spent on domestic goods, they are also spent on imports, saved, invested, reduce debt, etc.
So you tell me – which is more inflationary – tax cuts or infrastrucutre investment (and maybe a comparison of the inflationary effects of social versus productive infrastructure spending)?
And note that Stephens was talking about GDP increasing infrastructure “longer term supply capacity”, not social infrastucture (which is what I assume the left would want the money spent on) which adds little to GDP.
Razor, you only replied to the points that suited your case. Yes, investing in infrastructure has short-term inflation pressures, as Stevens says. But he also says it has positive long-term implications in adding to supply capacity.
As to “social” infrastructure, I would be interested to hear how you define that. I would have thought that investing in our skills capacity through improved education increases our long-term ability to grow without stoking inflation pressures.
In any case, there are social goods in improving our health and education systems beyond dry arguments about productivity.
Mr Denmore – no one is saying that there shouldn’t be spending on infrastructure and the benefits that they bring.
The argument that was being made was that the tax cuts are inflationary and the alternative was infrastructure spending, implying that that was non-inflationary.
You have now admitted that, as Stevens said, infrastructure spending is also inflationary. It then comes down to the question of which is worse – tax-cuts inflation or infrastructure inflation.
Potential scenario – AUD keeps rising, Turkey backs off on it’s Kurdish incursion rhetoric causing oil prices to fall from current highs, it rains at least averagely next year in the Murray-Darling causing falls in grocery prices. All having a deflationary effect. If that happens, what is so bad about not collecting so much tax revenue? Inflation is currently under control, no reason why it shouldn’t continue to be so.
Razor, in setting monetary policy, the Reserve Bank focuses on where inflation will be in 12 to 18 months, not where it is now. Domestically-driven sources of inflation are running well above the RBA’s comfort zone. The bank has raised cash rates five times since the last election. And, as the policy wonks at Access Economics in Canberra point out, that has had a lot to do with the government hitting the accelerator with tax cuts in an economy at or near full capacity.
In terms of the inflationary impact of infrastructure investment, you have failed to respond to Stevens’ point about the difference between managing short-term inflation impacts and the more difficult job of counter-acting longer-term structural inflation.
There is a very sound case that Howard and Costello have mismanaged fiscal policy by using it in a pro-cyclical fashion. They have masked their irresponsibility by using the nonsensical argument that the tax cuts are not inflationary because the budget is being kept in surplus. Tax cuts fuel consumer spending without any concomitant increase in supply. That is why they pose a greater threat of longer-term difficult-to-manage structural inflation that investing in infrastructure.
In saying this, I think the state governments have been just as lax in failing to address supply issues. New South Wales, for instance, surfed the wave of the property boom for years, gladly sucking in stamp duty and spitting it out in non-productive pump priming.
The point is Rudd’s Labor would be on strong ground, if it has the guts to do so, to pass up the opportunity for more tax cuts and paid more attention to infrastructure – both industrial and social.