Angels and demons

The Government's better angels are losing.

In last year's election campaign, the better angels encouraged the Coalition to offer some positive assurances about small government, with commitments to abolish the untargeted Schoolkids Bonus, cut corporate welfare for car manufacturers, slow the growth in taxpayer-funded foreign aid, reduce the company tax rate, and abolish the carbon and mining taxes.

But since the election, the Coalition's tax-and-spend demons have been winning. They've got the government to commit to some big spending projects like Direct Action, and to various tax increases. They want a levy to fund paid parental leave. They want to withdraw personal tax cuts scheduled for July 2015. (I managed to thwart their first attempt to withdraw these tax cuts, but they will surely try again.) And they have already succeeded in increasing taxes on businesses and superannuation as part of the mining tax repeal. As a result, they will gather billions more in revenue than the mining tax would ever have raised.

The angels did manage to inject plans into the Budget to reduce subsidies for GP visits, subsidies for university degrees, and middle-class welfare. But these savings have not made it into law. While this is mostly due to the tax-and-spend demons that dominate Labor, Greens and Palmer United, it is also a result of half-hearted support from within the Coalition.

The Coalition could have stood up for its plan to cut subsidies for GP visits, for example, by explaining that continuing to borrow money to pay for 'free' universal healthcare is a Ponzi scheme that will surely end in tears. But instead it was cast as a necessary evil to fund ever more government spending on medical research.

Meanwhile, the tax and spend demons are continuing to remodel the government in their own image.

They killed the election commitment to cut the public service headcount by an additional 12,000, they devised a plan to throw billions of dollars at medical research, and they snuck tax increases for banks, mature age workers and people with dependent spouses into the Budget.

The same demons also managed to increase the top marginal tax rate to 49 cents in the dollar. This discourages our most talented people from taking risks and pursuing more money-making opportunities. With top marginal tax rates of 17 per cent in Hong Kong, 20 per cent in Singapore and 34½ per cent in New Zealand, it also prompts talented people to leave and stay away. The government claims the 49 per cent top tax rate is temporary, but there is nothing so permanent as a temporary tax increase.

Finally, the tax-and-spend demons have increased the tax on fuel, revealing the government's far greater commitment to raising taxes than to cutting spending. When it looked like legislation to increase fuel tax would be blocked, it simply increased the tax with a tariff that allows the tax to rise first and parliamentary approval to come later.

The Coalition views this as a cunning stunt - it thinks parliament won't invalidate the tax increase if it means giving money back to fuel companies rather than drivers. But I cannot think of any reasonable objections to refunding ill‑gotten tax revenue to fuel companies.

It is true the Coalition is increasing the fuel tax in line with inflation, so the real level of the tax is maintained. But the fuel tax is damaging and it should be eroded. It hits businesses with vehicles under 4½ tonnes, like utes and vans - making deliveries and the services of tradies more expensive. The fuel tax also affects consumers in arbitrary ways, hitting the bush more than the city, outer suburbs more than the inner suburbs, and the owners of old cars more than the owners of new cars.

The dirty secret about the fuel tax is that it extracts more revenue than the combined spending of all levels of government on road construction and maintenance. Moreover, the Commonwealth Government doesn't even forward the revenue to the states – the entities responsible for road building.

The fuel tax cannot even be thought of as a reasonable proxy for a carbon price – it's equivalent to a price of more than $160 per tonne of carbon dioxide. The current carbon price in Europe is around $10.

There are small government angels in the Coalition, but they are overruled by its tax-and-spend demons, intent on keeping government at the centre of our lives.

It's not a fair fight.