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Tax reform ruined by rule of thumb
The tax debate Morrison refuses to have. How much government spending do we actually want and how much tax is healthy for us? Michael Pascoe comments.
Most countries with our top-rung credit rating spend much more than that, some more than double.
Fraser has proposed 25 per cent as a "useful marker" for government spending, a rule-of-thumb for best practice, without any attempt to justify it beyond an assertion that, otherwise, bad things might happen.
Presumably, bad things like increasing taxation or losing our enviable AAA credit rating from all three US ratings agencies.
Such rules of thumb are dangerous and dishonest things, yet they characterise the taxation debate that the government refuses to have.
Prime Minister Malcolm Turnbull was quick to hose down the threat of a lesser credit rating, but he did nothing to point out the underlying falsehood.
It's alleged that our current level of taxation must not rise, that we need to increase the GST to cut personal and company income taxes to stimulate the economy.
But that's only a theory, a self-serving one for its most prominent proponents, as Ross Gittins explained yesterday.
What can be clearly shown is that there is no correlation between relatively low government spending and the very best possible credit rating.
Lest the usual low-tax, small-government zealots complain about a dubious left-wing source or comparing avocados and eggplants, I'll quote the latest figures available from the right-wing Heritage Foundation's 2016 Economic Freedom Index, which compiles all government spending – federal, state and local.
On that basis, Australian government spending is running at 35.6 per cent of GDP.
There are only 11 nations with AAA status from S&P, Moody's and Fitch.
Only two of them score substantially lower government spending as a percentage of GDP.
One is within a couple of percentage points of Australia and the rest are considerably higher, some much higher.
Here's the list:
Government spending as proportion of GDP
- Australia: 35.6%
- Canada: 40.7%
- Denmark: 57.1%
- Germany: 44.3%
- Hong Kong: 17.6%
- Luxembourg: 43.6%
- Netherlands: 46.8%
- Norway: 44%
- Singapore: 18.2%
- Sweden: 53.2%
- Switzerland: 33.5%
Canada, Germany, Netherlands, Luxembourg and Norway are all in the 40s. Sweden and Denmark scored 53.2 and 57.1 per cent respectively.
Switzerland was closest to us on 33.5 per cent. Hong Kong on 17.6 and Singapore on 18.2 were the two low scores – though it's debatable whether those two Asian city states are comparable countries at all.
Furthermore, the two countries just below unanimous AAA status – Finland and Austria – were both in the 50s as well with 57.5 and 50.9 per cent respectively.
So it turns out that having markedly higher government spending isn't so necessarily disastrous after all.
Unless, perhaps, your primary concern is paying as little tax as possible.
Which comes back to the important missing part of the tax debate that Scott Morrison refuses to have: how much government spending do we actually want, how much tax is healthy for us, how equal a society do we aspire to?
Instead of considering, researching and debating those issues, it's the unquestioned Morrison/Fraser/Turnbull edict that we accept their meaningless and misleading rules of thumb.
In civilised debates, mere assertions don't score points.
Paragraph by paragraph, Ross Gittins' fine aforementioned column pulled apart the ideological and rent-seeking nature of the current dominant drive to fiddle with the tax system. Two paragraphs were particularly telling:
"There are two giveaway signs that the present push on taxes isn't genuine reform. First, the one area where there's solid evidence that high (effective) marginal tax rates are discouraging work effort is in returning mothers' transition from part-time to full-time work, but no one's proposing to do anything about this.
"Second, if people are so anxious to respond to globalisation's threat to our tax base by shifting it away from taxing mobile resources, how come they're so set on increasing the GST rather than taxing the ultimate immobile resource, land?"
I personally don't mind the idea of a broader or even a higher GST, but only if it was part of genuine overall reform of our taxation system that did not reduce its progressive nature and – more importantly – was the outcome of a considered, evidence-based examination of what level of taxation we want, not the width of a former investment banker's thumb.
The mantra that lower taxes are necessarily better for the nation is so politically ingrained as to make such an examination nigh on impossible. The nation's most powerful voices chant and promote it, primarily because they see it in their own vested interest.
The inequality effect
Very unfortunately, that trickle-down effect is a short-term view. The greater inequality that low-taxing, low-spending government promotes is increasingly recognised as antithetical to strong economic growth.
You want to promote growth in Australia? Don't increase inequality.
A full-time employee or entrepreneur who will down tools if his or her marginal dollar slips into a higher tax bracket? I've never met such a person.
There's something intrinsically bad about federal government spending being above 25 per cent of GDP? Show me the evidence, not your thumb – or is that a middle digit?
Note: The accompanying video uses 2014 Heritage Foundation data.The figures are not materially different.