Taxes are no substitute for savings

My piece on taxes in the AFR today

The Government is kite flying a one-off income tax surcharge for the coming budget, perhaps to be deceptively called a deficit levy to side-step the “no new taxes” pledge.

Commonwealth expenditure has blown out as a result of long term commitments made under Rudd and Gillard.  As a share of GDP, it grew from 23 per cent in 2007/8 to 26 per cent this year with that level set to gradually increase over the next decade.

The blow-out commenced in 2008with windfall payments to lower income people that fuelled a splurge on flat screen televisions and poker machine gambling.  It progressed to school hall programs, “building the education revolution”, “pink batts” home insulation spending, and compensating lower income taxpayers for the carbon tax.

All those spending decisions were in pursuit of kick-starting the economy by funding consumer spending increases that would, so the Treasury and others said, lead to a new burst of investment and higher incomes.  This would enable the debt from the spending to be paid back effortlessly.  That didn’t work in Australia or anywhere else it was tried.  Instead the spending cannibalised savings and detracted from underlying income growth.

The spending momentum will be maintained by Gonski recommended educational outlay measures and the program for vastly increased funding for people with disabilities. In these and other cases, including Bill Shorten’s decision to increase payments to the largely government-funded careworkers, the payment load is encased in an income redistribution framework and higher levels of debt.  The income redistribution involves soaking the better off, the side effects of which are to adversely impact on savings, investment and work effort.

One-off taxes are can only be effective if they carry with them a strong perception that they will not indeed be repeated.  Once a tax is factored into perceptions it brings adverse consequences in distorting spending, as firms and individuals start rearranging their activities to minimise the impact.  The tax will almost always bring diminished levels of income, though some may cite as exceptions one-off taxes by Jeff Kennett (as part of the electricity market reforms) and a 1981 special bank tax that Margret Thatcher implemented.

Whatever the credibility of these two examples, they have no relevance as responses to correct current fiscal imbalances faced by the Commonwealth.  The present dilemma is a budget deficit that goes on forever, created by a spending splurge.  A one-off tax is no solution.

Nor is a more permanent increase in taxation. The Rudd-Gillard governments ratcheted spending up to new levels and the response must involve spending cuts.  Unfortunately, though the Abbott Government has said it will rein-in spending, it has also indicated areas of increase, including on carbon emissions, paid parental leave and the (very necessary) increases in Defence spending.

IPA has previously identified $22 billion in annual on-going savings.  These have ranged from eliminating all but emergency foreign aid, through to privatising the ABC and SBS, and  to making massive savings in environmental expenditures and industry hand-outs.  In addition to these are one-off savings from the negative value-added that is the $10 billion Clean Energy Finance Corporation.

Eliminating the waste of these programs takes us half way towards the required contraction in spending.  For the rest, some bounds to aggregate spending – rather like the tithe of old – must be found.  There is no limit to needy causes that justify government spending.  But each dollar outlayed on these creates an increase in the demand.  Each program inevitably expands to meet marginal cases beyond its original reach and some recipients opt to place themselves in the supported categories.   In addition, the tax load required to fund the programs reduces incentives to work on the part of those paying the taxes.

There may be areas where tax policies can be tightened  – including increasing the age at which aged pensions cut-in and the $800 million a year that education expert Andrew Norton reckons is available from better administering student loan repayments.  But more is required and this means focussing saving measures on the sixty per cent of Commonwealth spending allocated to health, education and welfare.

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48 Responses to Taxes are no substitute for savings

  1. sabrina

    When it comes to screwing hard working tax-paying citizens, this government is shaping up to be as idiot as the perevious one. There is hardly any credible choice in our idiodemocracy.

  2. As you rightly point out, Alan, Gonski and disability got us into this mess, and other inefficiencies are contributing.

    One-off taxes are can only be effective if they carry with them a strong perception that they will not indeed be repeated.

    Even then I doubt this one will be effective.

  3. johno

    I voted for Abbott at the last election because he promised to get rid a great big new tax.
    I didn’t vote for him so he could introduce a great big new tax.
    If Abbott brings in this new tax, he will be breaking an election promise.

    He already takes too much of my money. He needs to try harder in cutting spending, rather than take more of my money.

  4. JohnA

    If we could eliminate 60% of government overhead (HEW), we could almost afford to defend ourselves….

    The business of government is Law & Order and Defence. othing more.

    Sell of the ABC/SBS, every GBE in existence, and eliminate all the subsidies and welfare – business as well as personal.

    Simply allow a deduction for health insurance premiums and exempt investment income from tax.

  5. JohnA

    Typo alert: “othing more” = Nothing more”

  6. I voted for Abbott at the last election because he promised to get rid a great big new tax.
    I didn’t vote for him so he could introduce a great big new tax.

    well put.

  7. Luke

    Abbott is proving to be nothing but a major disappointment!

  8. .

    What a beautiful set of prose, Alan.

    I ask what is the raison d’être of the Liberal Party right now?

  9. .

    IPA has previously identified $22 billion in annual on-going savings. These have ranged from eliminating all but emergency foreign aid, through to privatising the ABC and SBS, and to making massive savings in environmental expenditures and industry hand-outs. In addition to these are one-off savings from the negative value-added that is the $10 billion Clean Energy Finance Corporation.

    Eminently sensible. All other cuts can be made through efficiency dividends, pay cuts from the top and culling low ROI projects or offices. Further privatisation of GBEs and assets are another option.

    We ought to be scaling back spending as well as cutting taxes at the same time as well as paying off the deficit in a short period.

  10. pete m

    the (very necessary) increases in Defence spending

    Why is it “very necessary”?

    I agree there is a huge amount that can be done without having to raise any levy. Seems a cheap way to avoid hitting the social security, ndis and gonski handouts.

  11. Alfonso

    As the remote activation electric dog collar is the solution for most behavioural problems, so the sacking of 20% of all federal public servants tomorrow morning will solve most deficit problems. By drawing names out of a hat. The only exception sharp end military.
    The LDP are going to suck votes off Mars if Abbott beatifies spending. Tony still doesn’t get it.

  12. Dazza

    I am fast becoming very disappointed in this government. As a taxpayer that didn’t receive anything from any stimulus package it now looks like I will be paying even more back in taxes to pay off the spending spree. FFS but how much more do they think the average punter can pay in tax? As Abbott said in the election campaign “you can’t tax your way to prosperity”.

    Cut spending. It’s not rocket science. Abbott needs to grow some kuhuna’s and heed his own advice.

  13. The problem with one-off taxes is that they tend to become permanent taxes…

    The problem is, Australians have become addicted to the idea that their government has to give them money, for everything and anything.

    Let’s be realistic, they’re not going to start hacking into the 30% increase in welfare that happened under the previous socialist regime, or the ever increasing burden of Medicare/PBS and we’re stuck with the idiotic Gonski and NDIS programs which will see spending and rorting balloon in years to come.

    So what else is there?

    It may actually be smart of the PM to begin reminding the people, if not re-educating the people about how government spending works, that being, everything you want the government to spend money on you yourself have to pay for through taxes, don’t want higher taxes, stop demanding the government pay for everything.

    Well, that’s my opinion anyway…

  14. I should support a proposed “one-off income tax surcharge” on one condition: it apply only to public servants, employees of their ABC and SBS, and present and former MPs.

  15. .

    Today we propose a bill which will ban Canberra forever. Airstrikes will commence in five minutes.

  16. Econocrat

    Still waiting for the 14,000 public service job cuts. Coming anytime soon Tone, or is that another broken promise?

  17. Gab

    “Taxes are no substitute for savings” excellent headline and Abbott would agree – in theory. Abbott last night:

    Every dollar that government spends is a dollar taken from the people in taxes or in borrowings.

    Clearly, Hockey has not cut enough out of the budget. Labor Greens voters should be pleased though as they love new taxes.

  18. rickw

    Cutting the Federal Government Spending should be like shooting fish in a barrel, yet these clowns don’t seem to have any clue how to do it.

    The business of government is Law & Order and Defence, nothing more.

    Exactly.

  19. .

    WTF?

    Apart from Federal-State duplication (really, what does the Fed. Education Dept actually do?), didn’t the “good” Peter Saunders say about a decade ago that there was 90 BILLION DOLLARS annually of welfare churn?

    …and Abbott and Hockey can’t cut fat to the above suggestions of myself or the 22 bn of ongoing savings proposed by the IPA, and more suggested by Alan or Andrew Norton, as well as removing said churn?

    This is sheer bloody madness.

  20. Alfonso

    Bailleu was the ultimate evolution of the modern Liberal.

  21. .

    It’s a damn shame David Lleyonhjelm and Bob Day are not in the Senate yet to block this fiscal absurdity and recklessness.

  22. candy

    So what else is there?

    It’s unrealistic to think that pensioners and low income earners should reduce the deficit, if that’s the suggested alternative of savings from welfare. Given the high cost of living and high power bills, it would be cruel. And yet the electorate wants the NDIS, Gonski, NBN, etc.

  23. Infidel Tiger

    A bigger disappointment than Godfather Part 3.

    What an arsehole. What a complete arsehole Abbott has turned out to be. Fuck him and all his supporters to hell.

  24. Baldrick

    The Liberals want to attack their own voter base, with a levy, to pay for Labor/Greenfilth deficits, because they’re not serious about cuts to guvmint spending. Brilliant … NOT!

  25. Alan, Friedman wrote about temporary tax surcharges in 1967 and 1968 in Newsweek.

    People spend out of their permanent income, so they will dis-save to smooth consumption.

    This tax surcharge is the exact opposite of Obama’s ineffectual tax rebate in 2009 that John Taylor denounced.

  26. Des Deskperson

    ‘….and the (very necessary) increases in Defence spending.

    The problem with Defence, as anyone who’s actually worked there and is honest will tell you, is that it has too much money. It may be different at the very sharp end – I certainly hope so – but in both civil and military administration and management it’s never really mattered much whether things are done well or ill because there’s always plenty more money. It’s all a case of, as they say, going through the motions without much regard as to whether a particular program, system or training course actually works or adds value.

    I’ve watched Defence witnesses at Senate Budget Estimates Committees, and while the rest of us from ordinary agencies were s**ting ourselves about our forthcoming grilling, these people were calm, somewhat disdainful and while not actually evasive, certainly non-forthcoming in their answers.

    They know they could get away with it because of both the military and administrative mystique around Defence. It’s regarded even by libertarians as a core function of government, so it takes a great deal of moral and intellectual courage to tackle Defence waste and in efficiency.

  27. dianeh

    Totally agree with the fine posters here.

    Joe, Tony, Cut the bloody spending, dont raise a new tax.

  28. Leo G

    Surely, private sector employers will tend to adjust upward the salaries of their higher-income employees and compensate by reducing employment of lower-income employees. The net effect might be to depress real GDP growth and depress employment growth.
    And what’s the effect on public sector employment. There’s no increased cost to the Australian government in increasing the salary of affected employees to maintain their after-tax incomes and no incentive to reduce employment of lower-income workers.
    Won’t the effect of this proposed tax fall on the same group who lost most through the GFC- older lower-income workers with incomes supplemented by investments.

  29. Empire Strikes Back

    We were promised a razor gang. We got a feather duster co-operative.

    I didn’t have Abbott pegged as a coward. He’s looking more jellyback everyday.

  30. Dave Wane

    This debt-tax idea is a very disappointing development. The catastrophic and sickening mess bequeathed to us by Rudd-Gillard-Rudd should be seen as a golden opportunity to drastically and permanently reduce the massive size and control of the federal government – not a reason to slug taxpayers with yet another impost. It is to be hoped that Hockey sharpens his spending pencil as he must – and forgets about any revenue raising nonsense.

    Actually, if spending could be reduced to such a level that fuel and alcohol taxes were eliminated, imagine how productivity would improve? Tourism is just one area that would benefit.

    Of course a de-regulated labour market would of course be required for REAL productivity gains, but zero fuel taxes would be a wonderful boost to our economy.

  31. Roger

    IPA has previously identified $22 billion in annual on-going savings. These have ranged from eliminating all but emergency foreign aid, through to privatising the ABC and SBS, and to making massive savings in environmental expenditures and industry hand-outs. In addition to these are one-off savings from the negative value-added that is the $10 billion Clean Energy Finance Corporation.
    If only the IPA was a political party I’d have someone to heartily support come the next general election.

  32. DrBeauGan

    “The business of government is Law&Order and Defence. Nothing more.”

    Unfortunately, that isn’t how politicians see it. The business of government is extorting money from the mugs to spend it on bribing your enemies and rewarding your self and your mates. That’s the core business of government since marauding horse barbarians decided to settle down with the peasant. The only known way of getting them to change is to chop the leader’s head off every so often.

  33. Roger

    “The business of government is Law&Order and Defence. Nothing more.”
    That was one of the pillars of American Republicanism – (the 18th C movement, not the modern political party). Unfortunately for us Australian politics has never been so modestly idealistic and thoughtful.

  34. Greg

    Great article in the Wall Street Journal on the big fizzle of stimulus spending. I can post the whole article if you like.

    To find out if fiscal stimulus worked as advertised, we first need to separate deliberate increases in budget deficits from the portion caused by lost incomes and jobs. Once that separation is taken into account, we see that-according to Congressional Budget Office estimates of cyclically-adjusted budget deficits–the average increases were an unprecedented 5.7% of potential GDP from 2009 to 2012. No fiscal stimulus that large ever happened before in peacetime, and certainly not for four full years. What happened? After such energetic demand-side stimulus, nominal GDP rose by only 3.8% a year from 2010 to 2013, and by 4% in the first quarter of 2014, compared with average GDP growth of 6.1% from 1983 to 2007. Ironically, the Economic Report of the President predicts faster growth of demand from now on–5% or more-but only after deep cuts in federal spending and euthanasia of quantitative easing. The promised stimulus from the previous fiscal and monetary binge remains undetectable–a big fizzle. Demand grew much faster (at a 6.1% pace) from 1998 to 2000,when the budget wasinsurplus and the Fedhiked the fed-funds rate to 6.5%.

  35. stackja

    But more is required and this means focussing saving measures on the sixty per cent of Commonwealth spending allocated to health, education and welfare.

    How many voters want these saving measures?

  36. Greg

    That article also available at Cato

  37. LordAzrael

    Way I see it Abbott has to break one of two commitments. He either needs to raise new taxes, or make cuts he promised to make. Raising new taxes will alienate his base – the people who vote for him. Making cuts will alienate those who don’t for him.

    It seems politically stupid to raise new taxes in addition to being economically bad as it does not address the underlying structural problems creating the deficit in the first place.

  38. LordAzrael

    Gab

    #1284575, posted on April 29, 2014 at 8:28 am

    “Taxes are no substitute for savings” excellent headline and Abbott would agree – in theory. Abbott last night:

    Every dollar that government spends is a dollar taken from the people in taxes or in borrowings.

    Clearly, Hockey has not cut enough out of the budget. Labor Greens voters should be pleased though as they love new taxes.

    Technically its not from borrowings – borrowings just represent money coming from future taxpayers who have to pay back the borrowings. So government money always comes from taxpayers – either present or future.

  39. Helen

    I guess big Government, Big Tax Abbott has broken, Hulk like, through his small government small taxing skin.

  40. stackja

    How many voters want to forget Australia and support the ALP? The choice TA or ALP!

  41. Dave Wane

    Surely the overpaid, underworked, feather-bedded, protected – and mostly unnecessary federal public servants should be the first cab-off-the-rank as the Abbott Government struggles to repair the financial wreckage of the Rudd-Gillard-Rudd Labor government. Simply put, and as most of us know : Abbott should practice what he preached during the election, and not just talk about small government, but make it happen. Massive savings are available everywhere, but has anyone got the guts to seriously and surgically wind back the number of bureaucracies and the enormous armies of very expensive, taxpayer-funded people employed within? Judging by the Debt Tax, it appears not!

  42. Combine_Dave

    How many voters want to forget Australia and support the ALP? The choice TA or ALP!

    If they don’t change the course they’ve set it will be a majority of voters at the next election.

    How many voters want these saving measures?

    Based on how a big spending big taxing government was ousted by the voting public in exchange for an alleged small government, fiscally conservative LNP, I’d imagine many would.

    Topic at the water cooler today; Abbott no better than TLS due to his great big new tax (following his promises not to introduce any new taxes).

    An issue like this broke the TLS Government. I am sorry to see Abbott, after such a great start IMO (think boat people & FTAs), start to go down the same way.

    At the next election people will remember the buring hole in their wallet not these early successes.

  43. Turtle of WA

    $80 000 was the cut-off for Rudd’s $900 flat screen bonus, and the cut- off for the proposed %1 debt levy. So someone on above $80k, let’s say $90 000, would pay $900 tax to pay back a bonus someone else — possibly themselves if they’d had a pay rise — got as a hand out in 2009.

    Someone on 79k in 2009 who now earns $90k would have effectively taken from the government an interest free loan of $900 for five years.

  44. Notafan

    Haven’t the Federal public service redundancies already started?
    Climate Commission gone, AusAid, ATO down 500 and some elsewhere?
    There should be more
    DSP and newstart should be the same payment and taxable if the recipient ever gets over the tax free threshold.
    NDIS has great potential to be a black hole
    Gonski should go, I have no idea what it even proposes to deliver.
    More working more taxes Mr Hockey.

  45. Des Deskperson

    ‘Haven’t the Federal public service redundancies already started?
    Climate Commission gone, AusAid, ATO down 500 and some elsewhere?’

    We won’t know the full extent of separations until consolidated annual statistical report on the Australian Public Service (APS) is released in October.

    In the meantime, I’ve trolled briefly through the APS job advertisements in the on-line gazette:

    https://www.apsjobs.gov.au/

    And there still seems to be plenty of vacancies going, although one would need to do a study over time to track any trends. My impression is that the ads include a more than usually large number of temporary and part time jobs.

  46. Crossie

    I should support a proposed “one-off income tax surcharge” on one condition: it apply only to public servants, employees of their ABC and SBS, and present and former MPs.

    Exactly. TA has nothing to lose, these people would not vote Liberal in a pink fit.

  47. Crossie

    Clearly, Hockey has not cut enough out of the budget. Labor Greens voters should be pleased though as they love new taxes.

    They do, as long as it’s you who pays. When they have to pay then it’s punitive.

  48. Crossie

    The Liberals want to attack their own voter base, with a levy, to pay for Labor/Greenfilth deficits, because they’re not serious about cuts to guvmint spending. Brilliant … NOT!

    Quite plainly, that’s where the money is.

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