The Joke is on Costello
Treasurer Costello has ridiculed fellow Liberal MHR Malcolm Turnbull’s discussion paper on tax reform, but the joke is actually on Costello. Turnbull’s paper has effectively exposed the fact that Costello is a policy-free zone. Costello is the most conservative senior politician in Australia, in the non-political sense of the term. He is uninterested in reform, because he sees it as potentially disrupting his path to the leadership. What Costello brings to the leadership is nothing more than a well developed sense of entitlement. Even as a political strategy, this is deeply flawed, as Paul Kelly argues:
Peter Costello’s reform was far too cautious. By changing the thresholds and keeping the rates, he doomed his package to eclipse before a more reformist push. Costello was too cautious - and caution is not the quality needed to replace Howard in the Lodge…
On the ABC’s 7.30 Report on Monday, Costello was the opposite of a can-do leader. He was, instead, Mr If. The Treasurer believes in lower tax but only “if” it is possible in political terms; his distaste for cutting the top rate was obvious. The Coalition, of course, has just won the Senate.
This is a bizarre and risky situation. Shadow finance minister Lindsay Tanner sees a lower top rate as part of tax reform with equity. So does trade union leader Bill Shorten, en route to the ALP caucus. They share much of the terrain sketched out by Liberal MP Malcolm Turnbull…
Politics is driving Costello’s position and he admits this. He told the 7:30 Report that he wanted to focus on the 97 per cent of taxpayers not the 3 per cent. So Costello is the champion of the mainstream against a more ambitious tax reform agenda. He debunked Turnbull’s base broadening, pointing out that it meant increasing some taxes.
The problem for Costello, however, is that this debate will only intensify. It doesn’t matter that his May reforms aren’t completed until next year. Nor does his populist 97 per cent-3 per cent paradigm to debunk Turnbull have much traction.
Costello’s worst mistake would be to fall into defensive mode and champion the status quo, a blunder Howard will never make…
The irony is that Tanner is more aggressive about tax reform than Costello. Tanner sees cutting the top rate as slotting into a bigger reform, and he’s right. There is a beautiful political position opening up for Labor with the Coalition assuming that Labor lacks either the brains or the guts to seize it.
posted on 31 August 2005 by skirchner
in Economics, Politics
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Comments
Why are the punditocracy now exclusively and exhaustively identifying the word “reform” with the practice of cutting the top marginal rate of taxation? Costello drew up and bedded down the GST - a real tax reform that dwarfs fiddling about with the MRT.
The broader question is why are we suddenly so interested in cutting taxes for High Income Earners (HIE)? There is little evidence that a new round of tax cuts will lead to signficant improvement in economic performance.
Is IE suggesting that lower MRTs on HIE’s will lead them to extend their paid work time to 50-60 hrs a week? Whatever happened to striking the right balance between family and work?
Is IE suggesting that lower MRTs on HIEs will induce Australia’s large diaspora of high fliers to return to their native land? The New Zealand experience is indicative here. They slashed MRTs on high earners in the eighties, yet they experienced an increase in the rate of brain drain outflow.
Most high fliers leave for the oceanic metropolises of the North Atlantic and North Pacific in order to make it in the Big League and enjoy the pleasures of Bright Lights Big Cities. A province of the Anglo-American empire, such as Australia or New Zealand, cannot compete with those attractions, no matter how low our MRT is.
The so-called tax debate is yet another detour into distributive politics rather than productive economics. Economic reform should concentrate on accumulating a better quality, and greater quantity, of individual, institutional and industrial capital.
This means that families (a factory for producing good citizens), firms and states should focus on technologising the production of economic output. Society will not get richer by engaging in class warfare of either Left or Right wing varieties.
It is demoralizing to see someone with a superior economic mind, like I-E, chasing the mirage of cake slicing (in fiscal and financial areas) rather than cake baking (in technological and industrial areas).
Posted by Jack Strocchi on 08/31 at 10:59 AM
what drugs are you on these days strocchi?
sydney is the greatest and one of the most cosmopolitan cities in the world. the only thing keeping it from being the pre-emininent city for high fliers is high taxation. income tax rates are lower in the US and UK.
GST reform? its just a new tax and bungled at that. go to the ATO website and look at how much documentation exists on what types of bread products attract GST. why does the government have to be a baker? its almost like centralised price controls.
they stuffed the GST by giving in to those idiots the democrats.
why are marginal tax rates “fiddling”? they are the most direct incentive on working an extra hour.
the government should cut the marginal rate for everyone, especially the poor who face high rates, and also for the rich. why should we punish hard work…at any point on the income scale.
you want good technological improvement in australia…stop punishing hard work and risk taking.
Posted by .(JavaScript must be enabled to view this email address) on 08/31 at 11:54 AM
I dont rate Sydney’s culture, as opposed to its nature, all that highly. One only has to look at the high status accorded to real estate agents and chefs to know that the place is suffering from mental under-development. The deplorable mentality of its most prominent businessmen and politicians is an obvious trailing indicator of this state of affairs. Melbourne’s culture is far superior in most important respects - arts and sciences.
High fliers leave Sydney for higher salaries, not lower taxes. In consumer theory this is known as an income, as opposed to a price, effect.
The GST seems to be working fine. No one wants to punish hard work. I would be happiest if we rewarded useful work and penalised useless work.
Posted by Jack Strocchi on 08/31 at 12:24 PM
ah you old communist dog.
im glad you want to reward useful work and punish useless work. what do you think is useless? would you like to be on the council of useful and useless work?
youre flat wrong strocchi. people change jobs for higher disposable incomes, not salaries. disposable income is salary (gross income) net of taxes.
but i know what you meant, you just didnt say it right. but what you meant was wrong as well. you might like to consider why those salaries are higher in the lower taxing countries.
higher taxes equal lower net salaries. so you cant say people leave for higher net salaries but wouldnt stay for lower tax (resulting in higher net salaries) - its logically false.
Posted by .(JavaScript must be enabled to view this email address) on 08/31 at 12:50 PM
Useless work could be defined physically, in ergonomic-entropic terms, as increasing the input of energy without correspondent improvement in the output of information. Maxwell’s Demon gone berserk - not a bad description of c8to, actually.
Posted by Jack Strocchi on 08/31 at 02:29 PM
Getting back on topic (Costello’s gutless attitude to tax reform) I have to admit that I agree completely and wholeheartedly with Stephen Kirchner. A first I think!
This isn’t about removing 47% rate to encourage high income earners to work harder, its about fixing the distortions in the tax system and reducing complexity. Frankly, I don’t care what the company and personal rates are, but whatever they are PLEASE MAKE THEM THE SAME. While there’s a yawning 18.5% gap between the two rates any moderately wealthy person is going spend a few dollars on accountants+lawyers to corporatise their income.
Big reductions in personal income rates could be afforded by removing rorts like negative gearing, the CGT concession, work-related tax deductions etc. And here’s a radical idea; instead of taxing us more and then handing the money back in ever more complex ways (in the form of family tax benefits) how about not taxing us in the first place?
Of course high EMTRs for people moving from welfare to work needs to be tackled as part of a reform package, but that doesn’t mean tax reform at the top end of the scale is not worthwhile as well.
Posted by .(JavaScript must be enabled to view this email address) on 08/31 at 06:24 PM
Those like Gittins who argue that the CGT concession is distortionary are implicitly conceding the point that marginal rates have big impacts on behaviour.
As David points out, most high income earners incorporate, so the implications for their labour supply are not the main issue.
Posted by skirchner on 09/01 at 08:50 AM
The CGT concession is distortionary because it is unequally incident on different asset factors (capital and labour) which have equal income power. It specially privileges capitalised, over
“labourised” income earners with the same income earning power and therefore encourages super-allocations in capitalised activity and sub-allocations in labourised activity. It also encourages the plague of distributivism in the realty, financial and legal industries.
The CGT concession is not analogous to the progressively scaled income tax regime. Under PAYG all labour factors, within a given range of income, are taxed equally. There is no disincentive to earn more, provided that disposable income at the higher rates is greater disposable income at the lower rates.
The real distortion is not the height of top rates of income tax, it is (as davidm says) the disparity between the capital and labour taxation regimes. This could be solved by returning the CGT to its pre-2000 level (where capital tax rates were on a level playing field with labour) or constraining incorporated tax avoidance schemes (to prevent indvidual agents from becoming phony institutional agencies).
Reducing fiscal complexity (loop holed tax deductions) and churning (pork barrelled benefit hand-backs) are basically good policy ideas. Although I would be wary about their political implementation in the current climate.
I agree that Costello is an overly political animal. But he is simply more transparently so (that confounded smirk) than the other political harlots in the LP front bench, such as Nelson, Downer, Turnbull and the Queen of Harlots - Howard.
Posted by Jack Strocchi on 09/01 at 12:43 PM
Jack, I’m all for returning the CGT to the pre-Ralph scheme; taxing real captial gains at the income rate, especially if the income rate was less than 47%
As for “constraining incorporated tax avoidance schemes” the best way to do that is to remove the incentive to avoid in the first place by taxing capital gains, personal income and corporate profits at the same rate. How about 30-30-30? or if that is unaffordable 35-35-35? The company tax rate in the US is 35% so its hardly “uncompetitive” as I’m sure the business lobby groups will claim.
I don’t agree that Turnbull is a “political harlot”. In fact, if he was a candidate in my electorate I’d probably vote for him ... and I’ve never voted Liberal in my life. The people talking sense about tax at the moment are Turnbull, Tanner, Emerson and Bill Shorten. Who’d have though that lot would all be arguing for (roughly) the same thing?! Shorten is trade unionist and Tanner is from the left of the ALP! On the other hand, Costello, Beazley, Swan and Howard have just been scoring political points and making very little contribution to the debate.
Posted by .(JavaScript must be enabled to view this email address) on 09/01 at 02:57 PM
Tax reform is now a second order issue in Australia. We have been through the ordeal of GST reforms, now we are in line for another ordeal of the MRT reforms - all, so far as I am aware, in order to bring all taxation regimes into line.
What both reforms have in common is that they are regressive in incidence. Is this the equity direction we should be heading in if the efficiency gains from such a move are so derisive?
I would accept a revenue neutral taxation equalisation scheme to bring all taxes into line by dropping the top rate of PAYG to 35% and cranking up both the CGT and the CT to 35%. No pork-barelling deductions or loopholes.
My political antenna tells me that there would not be much enthusiasm for this high-minded reform amongst the HVI community.
Posted by Jack Strocchi on 09/01 at 03:50 PM
Bullsh*t! Tax reform is a first order issue, if not *the* first order economic reform issue in this country. Our tax system is a joke, all 9600 pages of it. I don’t care if you’re a bleeding-heart leftie who wants to fix the high EMTRs at the bottom end of the scale, or an economic rationalist who wants to fix the distortions at the high end. It needs fixing, far more IMHO than the industrial relations system needs fixing, or Telstra needs selling.
Posted by .(JavaScript must be enabled to view this email address) on 09/01 at 05:17 PM
Well davidm can wail and beat his chest all he likes. He can join the chorus of some, equity-mindful, economic rationalists who are also enthusiastic about the economic value of a further round of tax rate schedule flattening. The Melbourne Institute’s John Freebairn suggested that the
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But count me under-impressed. All this fiddling about with fiscal and financial settings is essentially falling into the trap of believing in distributive fixes. But our main economic problem are grounded in our productive inabilities and disabilities - our primary industry is not properly geared to drought conditions and our tertiary industy is still tardy in making the transition to high-tech service provision.
These sectoral problems are somewhat impervious to fiscal and financial fiddles.
Posted by Jack Strocchi on 09/02 at 01:47 PM
Well, being in the “high-tech service provision” business myslef I couldn’t agree more. It hasn’t been much fun being a software developer with 80% of your customers in the USA recently. Plot yourself a 3 year chart of the AUD vs USD and you’ll understand why. Bloody commodity prices!
Sure, there are bigger problems in the world (climate change, terrorism, poverty, AIDs ...) but that doesn’t mean tax reform doesn’t need doing. Personally, I would gladly get rid of my work-related deductions in return for a lower tax rates.
P.S. Funny how accountants are campaigning for this, when it would probably put a lot of them out of work.
Posted by .(JavaScript must be enabled to view this email address) on 09/02 at 02:13 PM
Jack, freeing up the enormous resources currently consumed in tax planning, collection and compliance would facilitate the sort of investment you are talking about.
Posted by skirchner on 09/02 at 05:10 PM