The Liberal Party wants to remain the party of high taxation and high social security, judging by events of the past week.
A group of Coalition backbenchers has called for a reduction in the top marginal rate of tax and an increase in the tax-free threshold. The group argues that this could be done, given the Government will have a majority after July 1.
Finance Minister Nick Minchin immediately rejected the idea. Minchin said it was too easy to call for popular tax cuts without finding the equal (unpopular) spending cuts.
One of the oddities of the past two decades of Australian politics has been the way Labor delivered on the economic rationalist agenda and the Liberals maintained a semi-socialist outlook of higher taxation, higher public-sector spending and higher social welfare.
Labor reduced the top marginal tax rate from 66 per cent to 47 per cent. Labor began the privatisation push with the privatisation of the people’s bank. Labor deregulated the financial system and floated the currency. Labor cut Commonwealth revenue as a percentage of GDP, cut the Commonwealth Public Service and cut social security as a proportion of Commonwealth outlays.
In the Howard years, the Public Service was initially cut, but is now bigger than its 1996 levels. The Liberals have added the GST and the superannuation surcharge, increased Commonwealth revenue as a percentage of GDP (counting the GST) and increased social security as a portion of Commonwealth spending.
Labor did what you would have expected the Liberals to do and the Liberals are doing what you would expect Labor to do. There is an exception. Labor has always had troubled balancing the books. The Liberals have been brilliant at staying on the right side of Micawber’s equation – revenue has always been greater than expenditure, which equals happiness, or at least the wherewithal for electoral success. Hence Minchin’s determination not to give in to back-bench pressure for tax cuts in the way that Labor Finance Ministers so often gave way to back-bench and lobby-group pressure for pet spending projects.
The Liberal Party has been a party of very good book-keepers rather than good economists this past decade. It learnt from the Hewson experiment than ideological flourishes of low-tax neo-classical economics are no substitute for sound house-keeping.
The virtue is self-interested, of course. If the tax dollars are not coming in, how can one bribe voters with social-welfare and other payments?
Minchin was not going to have a bar of any economic modelling so favoured by former Liberal Leader John Hewson.
One of those seeking tax cuts, Queensland MP Steve Ciobo, argued that there was no need to fund tax cuts fully with spending cuts because there was an expected economic benefit flowing from people having more money in their pockets.
“There certainly is a large amount of academic modelling and there certainly is a large amount of think tank modelling which demonstrates that tax cuts do in fact promote economic activity,” he said.
However, Minchin says, “Anyone can come up with very popular tax cutting proposals, the hard part’s finding the expenditure savings to match.”
He estimates the cost of raising the tax-free threshold from $7500 to $12,500 at around $10 billion a year. Eliminating the 47 per cent and 42 per cent tax brackets (to make the top rate 30 per cent), would cost $13 billion.
That is a lot of vote-buying money.
The critical point here is risk. Present tax rates give fairly accurate projections. Cutting the top rates and increasing the tax-free threshold might well stimulate extra economic activity through higher incentives and that would attract some off-setting extra tax. But by what amount is uncertain. Caution is one of the hallmarks of the Howard Government. John Howard is not a risky reformist like Hewson.
Also, tax cuts present a public-relations risk. Say, Kerry Packer makes $100 million a year. You could just see the tabloid headlines: “Kerry’s $17m tax cut!”
A further political point is that people in higher tax brackets are more likely to vote Liberal anyway, so why waste money trying to convert the converted.
A cut in the top marginal rate is a permanent tax cut. It flies in the face of nine years of experience of the Howard Government, despite its endless chatter of being the party of low taxation. Likewise with indexation.
Its preferred method is to allow inflation and increased earnings to push more people into high tax brackets. It then proudly announces a “tax cut”, usually just before an election. This “tax cut” usually does not even recoup the lost ground, but much public-relations mileage is made of it, and most wage-earners think they have had a tax cut because they get a few extra dollars in their wage package.
It has been a proven vote-harvesting technique by the Howard Government. Don’t expect it to change in the interests of a fairer, simpler or more economically efficient tax system or in the interests of a group of populist back-benchers.