Originally published in The Australian Financial Review on May 13, 2019

by Richard Denniss
[Originally published in the Australian Financial Review, 16 May 2019]

The political debate about tax has become unmoored from the economics of tax. The idea that cutting taxes is good for the economy and collecting more revenue is bad for the economy is not just simplistic, it’s wrong. But it should be no surprise that in a country where politicians link electric cars to socialism, talk of removing tax loopholes leads to claims of economic disaster.

Closing tax loopholes and spending more money on services won’t harm the economy. On the contrary, reducing the disposable income of high income earners, who save a lot of their money, and spending more on nurses and child care workers will boost GDP. Not all Australians have the same “marginal propensity to consume” and collecting more tax from those who save the most and spending more on those who spend the most will increase consumer spending. The economic benefits of such redistribution aren’t complicated, but they are inconvenient for the wealthy.

Similarly, the suggestion that increasing the tax-to-GDP ratio will harm the economy is simply absurd. While individual taxes might impact the decisions of individuals or companies, the average tax-to-GDP ratio across Australia is as irrelevant to individual decision making as the average temperature across Australia is to a person deciding whether to wear a jumper.

There was a time in Australia where proponents of tax reform focussed on the need to simplify the tax system

When Tony Abbott increased the excise on tobacco he increased Australia’s tax-to-GDP ratio, but his decision had no impact on the health of the Australian economy. Similarly, closing the tax loopholes favoured by Australia’s wealthy will have no adverse impact on retail sales or the attractiveness of Australia to foreign investors.

While changing the tax treatment of capital gains, negative gearing and dividend imputation credits might influence how some people organise their private investments, economists have always distinguished between things that impact portfolio structure, and things that impact real investment. Removing cash refunds for spare imputation credits might affect the desirability of owning BHP shares, but it won’t affect BHP’s decision to build new mines.

There was a time in Australia where proponents of tax reform focused on the need to simplify the tax system, reduce opportunities for tax engineering and to “broaden the base and lower the rate”. But then again there was a time in Australia where the Coalition and business leaders took scientific advice from the CSIRO seriously.

While economics textbooks describe the benefits of horizontal equity –where people with similar incomes pay similar amounts of tax – modern conservatives know that special groups deserve special tax deals, and retirees earning $100,000 should pay less tax than those who work full-time for the same amount.

Australia has a GDP similar to that of Russia but … we have one of the smallest public sectors in the developed world.

Fairness is always in the eye of the beholder. At present someone working full-time on the minimum wage of $37,400 pays about $4000 per year in tax and a retiree receiving $50,000 from their super pays no income tax but can receive tens of thousands of dollars in tax refunds for “spare” imputation credits. Some people want to reform that system and some don’t.

Australia has a GDP similar to that of Russia but all of the tax concessions and loopholes in our supposedly progressive tax system mean that we have one of the smallest public sectors in the developed world. Defenders of the status quo love to talk as if all wealthy older people “worked hard all their lives” while remaining silent about the fact that low-income young people saving for a house pay more tax than older people with high incomes who already own a few houses. Likewise, the silence about older people who worked hard their whole life in low-income jobs who retire without owning their own home is telling.

There is no right amount of tax for a millionaire retiree to pay, and there is no right amount of support to provide to pensioners who live in poverty after they’ve paid their rent. But those who have to pretend that changes to the current system would wreck the economy, must not have a lot of faith in their ability to convince people that the current system is fair.

Richard Denniss is chief economist at The Australia Institute.

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