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Rates or rebates, credits or cuts? Juggling the taxation dollar

By Nicholas Gruen - posted Tuesday, 1 February 2005


It's official. We’re taxed more than we have ever been. During the last election, remember how Howard kept reminding us how big the economy was - $800 billion? Well, over $200 million of those dollars (25 per cent of them) went to the Federal Treasury. The Commonwealth tax take has been rising steadily through governments of left and right of centre political persuasions. From below 20 per cent under Menzies, to a little over 20 per cent under Whitlam. From nearly 22 per cent under Fraser to nearly 23 per cent per cent under Hawke and Keating. Add another 5 cents in each dollar going to state and local governments and we’re paying around 30 cents in each dollar.

How did we get here?

Part of the answer is that Howard is actually less interested in economics than either Bob Hawke or Paul Keating. They were the great economic rebuilders after Whitlam’s economic vandalism and Fraser’s faux free marketry (ever-present in his speeches - but not his policies).

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Howard’s real passion - and his real success - has been as a culture warrior. His ascendancy first achieved when he managed to use the Tampa incident to give his cultural warfare a touch of street theatre. As an economic manager, Howard has always been eerily free of momentum. He knows that survival depends on avoiding recession so he’s never displayed the economic irresponsibility of a Whitlam. But then he’s enjoyed extraordinarily good economic times.

Remember the great GST adventure? It began amidst a blizzard of criticism, particularly from Howard’s traditional allies in business about his lack of vision. Fighting for his political life, Howard got his economic vision off the shelf - via the GST. It nearly killed him. But it did show that Howard, like Hawke and Keating, and unlike Fraser, was prepared to make tough economic decisions.

But basking in the increasingly dim afterglow of the GST, Howard has reverted to the pattern established early on in his Prime Ministership - economic directionlessness, followed by mid term doldrums from which he’s clawed his way back with lavish giveaways that ratchet up the tax take.

Early on, Howard’s giveaways were often tax cuts - for instance as compensation for the GST. Other giveaways feel just like tax cuts for voters - like the health insurance and childcare rebates but they have the opposite effect on the tax take - tax has to be increased to pay for the subsidies.

Howard seems to have grown increasingly fond of electorally targeted micro-goodies not easily delivered as tax cuts. As you read this, gazillions of gifties are zeroing in on their electoral targets. Annual installments of $100 for pensioners, $200 for self-funded retirees, $600 per child for families and $800 for apprentices. John Howard knows why apprentices are eight times as good as pensioners, and only four times as good as self funded retirees - but he’s not saying. In the meantime the cheques are in the post.

Cynically packaged though these gifts might be, at least some of them may be better policy than tax cuts. The ALP made merry with the Government’s failure to cut taxes for those earning under $52,000. But those with kids got their $600 cheques - which is a more economical way of getting money to lower income families with kids (where it can do more good) than more broadly based tax cuts.

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The news on Howard’s record tax take has strengthened the hand of a growing band within the Liberal Party supporting lower tax. They want to lower the top marginal rate from 48.5 per cent to 30 per cent - a nice windfall for those on incomes like theirs. And they highlight the need to lower taxes to improve incentives to move from welfare to work. But cutting the top marginal tax rate won’t help people get from welfare to work, because they won’t be on the top rate when they make the transition.

What they need is a policy which has helped cut the welfare rolls in the US - tax credits for low income working families. Welfare payments increase - as they should - with family size. But an employer won’t pay you more for each of your kids so after tax paid employment for those with kids doesn’t bring home much more than welfare. In America low income workers with kids receive credits on their tax of several thousand dollars each year per child, greatly increasing their incentive to work. We already do this through our system of family allowances. But we could do more. Howard seems to have opposed tax credits largely because the ALP was the first to propose them. But there are benefits for him in seeing things differently. Tax credits are micro-goodies which lower rather than increase the total tax take! 

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First published in the Courier-Mail as 'Poor helped more by tax breaks' on January 28, 2005.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

Other articles by this Author

All articles by Nicholas Gruen
Related Links
Tame Senate could deliver tax reform - On Line Opinion article
Tax cuts: Rein in the visible hand - On Line Opinion article
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