Bizarre Tax Debate Not About Economics

One of the bizarre aspects of the first six months of the prime ministership of Malcolm Turnbull has been a constant refrain about the need to cut income and company tax rates. It is bizarre not because lower tax rates are necessarily poor economic policy, but rather they are being flagged when the budget is still in substantial de ficit and with no real prospect for a balanced budget until 2020. Bizarre also because if tax cuts for individuals and/or companies were to be delivered in the next few years, they would have to be funded by the government borrowing money to fund them, simply because the budget still is and will be in de ficit. Indeed, such tax cuts would push back any return to surplus by a few more years. It begs the question that if borrowing money to fund income and company tax cuts is an idea good enough to contemplate in the May 2016 budget, are there other parts of the economy that would bene fit from extra government spending, even if the money is borrowed? The answer is obviously yes. Indeed other areas of the economy have a much higher priority than slipping a few dollars a week to those paying personal income tax or to companies that seemingly go nowhere near paying their fair share of tax, whatever the company tax rate might be. Many parts of the country are crying out for infrastructure funding. Fixing the vandalised NBN is a prime candidate for government money along with public transport, airports, ports, hospitals and schools. Then there are the vital macroeconomic issues of educating the population and funding health to ensure workers are fit and healthy and do not take time off work because they are sick or need to care for sick family members. As the state premiers keep reminding us, future education and health facilities are vulnerable to poorer standards unless the Federal Government’s spending cuts in these areas are reversed. A poorly educated workforce when kids become adults in 10 to 15 years is not good for productivity, job creation or economic growth. The demand on government finances is substantial. There are many competing needs and many vital areas where the government could, in good conscience and with foundations in economic e fficiency and fairness, increase spending. The issue of tax cuts versus these other areas will, it seems likely, form one of the important battlegrounds for much of the discussion in the election campaign. Consider a scenario where personal income tax for someone on average earnings is cut by $10 a week. Sure, the lion’s share of that extra take-home pay will be spent and the economy will be stronger for a while, but this will be at the cost of a larger budget de ficit and higher government debt. The impact of economic e fficiency and productivity of such a change in the short and long runs would be close to zero. A similar increase in the budget de ficit could see government spending fund education or some infrastructure which would have lasting bene fits to the productivity of the economy long after the money is spent. It boosts growth in the short term and adds to productivity in the long run. At the current stage of the business cycle and the budget deficit blowing out fiercely under the policies of the Abbott and Turnbull governments, now is not the time to contemplate income and company tax cuts. There is no evidence of people leaving Australia in droves because of Australia’s income tax structure, nor are firms closing down their Australian operations because the company tax rules and rates are so oppressive. On the contrary. Net immigration remains strongly positive – it seems the tax system is not a deterrent for these new Australians. So too with new business start-ups, which according to Dun & Bradstreet data, reached a record high during 2015. All of which shows the bizarre debate about tax cuts from Turnbull and Treasurer Morrison is not about economics, but rather is about a Tea Party ideology that taxes should always be lowered. It is not good policy in the current circumstances. Stephen Koukoulas is the General Manager of Market Economics thekouk.com @Th eKouk