The Political Economy of Tax Reform
There is growing impetus for a new round of tax reform, thanks in no small part to Malcolm Turnbull, who has released an important paper on Taxation Reform in Australia: Some Alternatives and Indicative Costings. It deserves to be widely discussed. The Prime Minister has acknowledged the desirability of further reform. Even opposition finance spokesman Lindsay Tanner has come out in favour of a reduction in the top marginal rate, an important policy shift for the Labor Party.
The only politician seemingly lacking enthusiasm for further reform is Treasurer Costello. Any mention of the need for tax reform is an implicit criticism of his nearly ten years as Treasurer, so his lack of enthusiasm is understandable. Costello has recently sought to enhance his leadership credentials by diversifying the range of issues in which he takes an interest. Yet it is fairly clear that he has nothing new or interesting to say on any of these issues either. Costello would be better served tackling the important issues within his own portfolio if he wants to establish his leadership credentials. At the moment, he shows every sign of being devoid of new policy ideas.
posted on 29 August 2005 by skirchner
in Economics
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Costello did draw up and bed down the GST which was no mean tax-adjusting feat.
These have not been good times for supply side ideologues. It is difficult to see a direct link between cutting taxes and increasing production or productivity in recent times and familiar places. The direct supply side economics effect of tax cuts on economic performance looks pretty weak.
Tax cutting was not high on the politico-economic agenda in the US during the nineties - taxes were actually raised in 1986 (Reagan I), 1991 (Bush I) and 1993 (Clinton I). Yet the US underwent a distinctly un-supply side economic boom.
The Australian fiscal income tax take has crept up over the nineties whilst industrial productivity leapt. Meanwhile the participation rate and hours worked climbed steadily, again contra supply side predictions.
Can I-E provide empirical evidence of an indirect linkage between tax rates and growth rates ie the loss, or distortion, to output caused by high income economic agentes converting from an individual to an institutional form of incorporation? Or evidence of a much higher rate of tax-exiled Australian brain drain to lower-taxed foreign fiscal domains?
Its nice to know that I-E prefers lower taxes (so do I) but a fact-free argument is not going to convince anyone.
Posted by Jack Strocchi on 08/30 at 03:02 PM
Look at the section on behavioural responses in Turnbull’s paper.
Posted by skirchner on 08/31 at 10:16 AM
I will have a look at the paper. Turnbull deserves credit for at least getting serious about policy. But his concentration on cutting the top rate - which applies to three per cent of income earners - seems counter intuitive and ideological.
It is low income earners - those on part time and income supplements - who face the highest Effective Marginal Rates of Taxation (EMRT). These would comprise a fair slice of AUS households (at least 10% possibly 20% depending on how you count households and income).
So economic logic would suggest that the greatest gains to economic performance would come from lowering the EMRTs of the bogans, rather than the silvertails.
Posted by Jack Strocchi on 08/31 at 10:35 AM