Tony Burke’s belief that taxes are too low is based on a flawed argument: in one (carefully) chosen year, 2002, taxes were higher than they are now. So therefore taxes should increase.
Why choose 2002? There are plenty of other years to choose. We could easily choose 2011. The tax-to-GDP ratio was much lower then.
So I vote for using 2011 as a comparison year. Forget the fact this was the middle of the Global Financial Crisis; if we go with my vote, then we must cut taxes now. Specifically, the tax-to-GDP ratio is currently 2.4 percentage points too high, and we need tax cuts of approximately $40 billion.
This whole absurd discussion shows the flaws in comparing today’s tax levels with another year. So why did Mr Burke choose 2002? Probably for two reasons: it shows taxes are too low; and it was the year used by Dr Ken Henry (former Secretary to the Treasury) in a recent interview.
But this isn’t good enough. Any commentator can compare today’s tax levels with any other year. Mr Burke shouldn’t use a flawed appeal to authority to justify using 2002 as the comparison year. In fact, using 2002 is flawed, as is using 2011 — the GST had just been introduced, and the large Howard tax cuts hadn’t yet happened.
But most significantly, at the time around 2002 the ALP was arguing as much as they could that taxes were too high. It is pretty contradictory for the ALP to argue that taxes are now too low, comparing to a period when taxes were too high.
Instead of this nonsense, it is much better to compare today’s tax levels with an average over many years. This evens out the year-by-year biases, such as when taxes were below average in the middle of the GFC, and when they were above average after the introduction of the GST or during the mining boom.
And guess what? Correctly analysed, our tax levels currently are about equal to historical averages. The tax-to-GDP ratio is currently well above the 10-year average, and about equal to the 20-year, 30-year and 40-year averages (see details here).
This shouldn’t be a revelation to Mr Burke. The historical figures are available for all to see, and it doesn’t take a genius to figure out a comparison to a single year is flawed.
We should expect better of public debate than this.
Michael Potter is Research Fellow in the Economics Program at the Centre for Independent Studies.