by Richard Denniss
[Originally published on Guardian Australia, 17 April 2019]
When a magician says you must look carefully at the cards that they’re shuffling, they don’t want you to see what their assistant is doing. And when a politician tells you to focus on one key economic issue, it’s a sure thing they don’t want you looking at the bigger picture.
Take tax for example. The Liberal party would have you believe they’re the party of low tax, but they love collecting tax. When Malcolm Fraser beat Gough Whitlam in 1975, his then treasurer John Howard went on to collect far more tax than Whitlam ever dreamt of.
When John Howard defeated Paul Keating in 1996, the Coalition government spent the next decade – you guessed it – collecting far more tax than Keating did while prime minister. Needless to say, the Abbott/Turnbull/Morrison government pulled off the same trick.
Magicians use tigers and flames to distract people from the trap-doors and dark curtains that make something magically disappear. Liberal governments use big tax cuts for high-income earners and big spending cuts on welfare, to hide the simple truth that they love tax. They just don’t like taxes on their friends.
The best way for governments to disguise their high-taxing ways is to make a big song and dance about the large tax cuts they do make, even if they’re just for the highest income earners. This benefits the Liberal party’s most loyal supporters, but also has the advantage of being cheap, because there simply aren’t many people who earn high incomes.
The Liberal’s approach to tax cuts is based on the principle of modern weddings: It’s a lot cheaper to host a very nice wedding for a few people than it is to host an average wedding for a couple of hundred guests. And the really nice wedding looks better on Instagram. Likewise, it’s a LOT cheaper to provide tax cuts to the 500,000 or so people who earn over $180,000 per year than it is to provide tax cuts to the five million people who earn between $40,000 and $90,000 per year.
The tax cuts announced by Josh Frydenberg in the recent budget will provide 20 times more money to the highest income earners than they will to someone on the minimum wage. The inevitable consequence is that the gap between those with the most and those with the least will widen substantially.
Of course, the Liberals’ tax tricks aren’t confined to income tax. While the tax/GDP ratio was rising under the stewardship of Peter Costello and John Howard, they were busy announcing the halving of capital gains tax, the abolition of tax on multimillion dollar superannuation accounts and, of course, the introduction of cash refunds to shareholders who paid no tax. The Howard government delivered significant tax cuts to the highest income Australians, and the tax/GDP ratio rose while they did. The trick to “managing the economy” is to get people to look where you want them to.
The idea that cutting taxes is “good for the economy” is politically convenient but economically absurd. No economics textbook spells out the right level of tax for a country, and it’s obvious from the data that some of the highest taxing countries in the world are the richest (think Sweden, Denmark, Norway) while some of the lowest taxing countries in the world are among the poorest (think Albania, Mongolia and Tajikistan). It’s not the amount of tax that is collected that matters, but the way it is collected and how it is spent.
And while economics textbooks don’t tell us the right level of tax, they do have a lot to say about better and worse ways to collect it. For example, the overwhelming majority of economists would agree that collecting tax on something that causes harm, like pollution, and spending that money on something that causes benefits, like education, is good for the economy.
But sometimes our leaders are adamant that we must listen to economists, and sometimes they are adamant we must ignore them. Take the debates we had about the GST and the price on carbon.
When Howard decided to introduce a “great big new tax on everything”, the arguments of economists were central to his storytelling. Indeed, back then the power of economic language was such that we were collectively persuaded to cut the taxes on jewellery from 32% to 10%, while increasing the tax on electricity and water bills from zero to 10%. All while agreeing to leave private school fees and private health insurance tax free. What powerful magic that was!
When he was health minister, Tony Abbott took the advice of economists and significantly increased the tax on cigarettes – a product consumed disproportionally by low-income earners – on the basis that doing so was good for society. But when it came to a simple tax on greenhouse gas emissions, or a super profits tax on the mining industry, the same Liberal party that gave us the GST on electricity argued that a carbon tax was inequitable.
Australia is one of the richest countries in the world and we live at the richest point in world history. While we can’t afford to do everything we want, we can afford to do anything we want – which is why elections and budgets are so important. It’s when we get to talk about what we want more of and what we want less of. And while there are no right answers, there are clear choices.
Here are some things that the Liberal government doesn’t want you to see:
Howard ran a higher taxing government than Whitlam.
Australia was a low tax country under Howard and it is a low tax country now.
The highest income Australians will get the largest share of the government’s proposed tax cuts.
If Australia taxed pollution and the super profits of mining companies, we could all have a big income tax cut.
Democracy is about choosing what we want more of and what we want less of but the magic of politics is tricking us into choosing what they want us to choose. It’s not real magic, it’s misdirection and distraction.
Richard Denniss is chief economist at The Australia Institute @RDNS_TAI. His new book, Dead Right: How Neoliberalism at itself and what comes next, is out now.