I was having a wine over the New Year break with a Sydney friend who berated me for the failings of Australia’s media. In particular, he wanted to know why hadn’t anyone written the story about where the Australian economy would be if Hewson had won the 1993 election. He said we were facing taxes and interest rates far worse than the GST.
“”You’re from Canberra you must have the inside knowledge. What will the government do?” he asked. I told him he was inconsistent in blaming the media for not running the full story, but seeking some inside knowledge from someone in the Canberra media as if that was a fountain of wisdom. None the less, he should not rely on the predictions of Canberra-based journalists, nor rely on the predictions of market economists _ you know those guys who said the All Ordinaries would hit 2500 last year. As this was not very helpful, I also suggested the following rule of thumb: Governments say they are in the business of smoothing out the economic boom-bust cycle. It is in their interest, therefore, to predict things will be smoother than they are likely to be. They want to look good. It is also true that governments invariably are not as good as they would like to make themselves out to be. Therefore you could safely add one or two percentage points to any prediction made by government. This is for both boom and bust statistics. So coming out of the cycle, as we are now, you could add a couple of percent to Budget forecasts for growth, business investments, inflation and interest rates. “”But what about tax rises?” he asked. They are baying for them in Canberra, I told him. And they may have to happen because _ short of a Maciavellian rope trick _ because the government has given itself no out. My friend glumly took another sip of his wine: “Why?” he asked. “”Because of that,” I said, pointing to the wine. “”I don’t follow.” I explained that tax changes people’s conduct.
He was drinking wine because beer has been so heavily taxed in past decades. Just as people in the past couple of decades had moved out of “”income” as a means of wealth creation because governments were taxing it so heavily. In the past, governments had been able to counter these with changes in the tax base such as fringe-benefits, capital-gains and superannuation. But now the ultimate tax weapon in raking in at least some tax no matter how people changed their wealth-creation strategies was permanently off the agenda _ largely because of his mate Dr Hewson. My friend looked wounded. Yes; Dr Hewson made such a complete hash of selling the GST that it was suicide for any politician to mention it ever again. But the GST was one way to make the very rich pay tax. Paul Keating mentioned tax on bread and shoes, but what about luxury hotel rooms and skis. Now it is back to raising existing taxes and interest rate rises in order to prevent the economy from steaming ahead too fast, causing higher consumption, more imports, inflation and wages blow-outs. But our present tax mix means that if we increase present taxes we add to other problems. At present we tax income, income from savings, capital gains and exports. We do not tax consumption, the principal residence or net wealth and we are reducing taxes on imports. This is why we have a balance of payments problem, low savings, more consumption than we can afford, over investment in the unproductive home, increasing inequalities in wealth and inefficient uses of capital. But a truly Machiavellian government could overcome this.
Machiavelli while giving advice in order that his Prince could stay in power was never a proponent of bad or evil government. It was just that the people were so stupid that rulers had to be a bit manipulative to do what was best. So the Government would have to have a GST while not having a GST. It could tax consumption and imports more and tax saving and exports less simply by adding services to the wholesale tax, exempting exports from it, reforming its rates and exempting some savings from income tax. “”Would the Government do this, though?” my friend asked. I could only say: “”There is no point asking a Canberra journalist.”