Promoting neo-liberal nonsense
I see that well-connected Liberal backbencher Julie Bishop
had an article in the op-ed pages of yesterday's Australian
, where she promoted the alleged benefits of the International Monetary Fund's favoured prescription for Australian economic development: cutting the top marginal income tax rate to 30%. Personally, I think we should just tell the IMF to mind its own business and stick its economic ideas where the sun don't shine. That's what the Russians did 3 or 4 years ago, and their economy instantly turned around from basket case to strong-ish growth.
I suspect that Ms Bishop is not promoting these ideas solely on her own initiative. Some financial journalists well-connected with the Libs have also been pushing the IMF tax cut agenda in recent weeks. It all looks suspiciously like a kite-flying exercise for a forthcoming Coalition election campaign. I would be very interested in any "back of the envelope" calculations John Quiggin might be able to provide on the cost to revenue of cutting the top marginal rate from 48.5% to 30% (of course, it also involves cutting the second highest rate from 42% to 30%). At present, the top marginal rate cuts in at $60,000 per year and the 42% rate cuts in at $50,000. Since average annual earnings are around $36,000, the great majority of Australians would get no tax cut at all under the Bishop/IMF plan, while high income earners (who also benefited disproportionately from the GST changes) would do very nicely.
Once we know the cost to revenue of such a tax cut, we can then ask Ms Bishop (and Peter Costello, who one suspects is really running this agenda) just exactly which government programs the Libs will be abolishing to give this generous tax cut to the wealthy. Of course, Ms Bishop doesn't look at that side of it at all. She thinks it "would increase the incentive to work, to save, to invest and, I say, to take risks. It would boost economic growth and create more jobs
." Ms Bishop then makes the following superbly misleading statement:
"It would at least put us in the race for skilled workers in a region where Australia has the highest personal income tax rates among our competitors ...
Funny, I thought we were quite a low-taxing country. In fact, the most recent figures I saw said that Australia was either the second or third lowest-taxing country of all the 48 OECD nations (i.e. the developed world) as a proportion of GDP. From memory, Australia had a total tax take of 30.2% of GDP, just behind the US with 28.6%. Moreover, the World Economic Forum
(hardly a socialist body) recently ranked Australia the fifth most competitive economy in the world (up from 11th last time the survey was done).
So what is Ms Bishop talking about? Well, the weasel word in the Bishop quote is "region
". She's talking about the Australian tax burden compared with third world countries like Indonesia, Malaysia, the Philippines etc. These countries typically have much
lower total tax takes as a proportion of GDP (around 15-16%) than any first world country, for the simple reason that the vast majority of their population earn bugger-all, and therefore pay bugger-all tax. Moreover, these countries in general have very poor public infrastructure, almost non-existent social welfare systems, and poor public education and health systems. This is precisely the reason why they are
poor third world countries. Is Ms Bishop advocating that we should aspire to third world economic status, or is she just plain stupid? I'll let you be the judge.
Nevertheless, just to completely debunk Bishop's idiotic neo-liberal nonsense, I thought I'd do a hypothetical "back-of-the-envelope" tax comparative calculation exercise on an expatriate employee working in Indonesia and earning (say) $80,000 per year (or its Indonesian equivalent). These are the people Bishop appaently believes would be "incentivised" by a 30% top marginal rate. She says that "in a world where human capital is as mobile as financial capital, bright young things would be more likely to work in Australia if they didn't have to pay nearly half their income in tax
Well, leaving aside the fact that Australia has actually been experiencing a significant net influx
of highly skilled employees in most categories over the last few years (consistent with being one of the world's faster-growing economies), and that the typical "bright young thing" (BYT) doesn't
pay half their income in tax (Julie doesn't seem to understand the difference between marginal and average tax rates), how does
the current Australian tax system compare with Indonesia for our hypothetical BYT on 80 grand a year? A BYT working in Australia would pay $25,280 in tax, while the same BYT in Indonesia would pay $21,250. A bit more, certainly, but I wonder how many BYTs would happily choose to work in a corrupt cesspit like Jakarta, in preference to Sydney or Melbourne, for a measly $4000 net tax benefit. I should be fair and observe that most fringe benefits are apparently tax-exempt in Indonesia, so the smart BYT with a co-operative employer can probably gain a bit extra there. However, it's hardly yuppie nirvana. Any notion that Australia is missing out on jobs or investment because we have an uncompetitive tax system is simply unsustainable.
Lastly, that World Economic Forum
global competitiveness study I mentioned earlier makes some fascinating observations about what is needed for a first world country like Australia to make further economic progress. Does it advocate huge tax cuts for the wealthy and corresponding reductions in government spending programs (the Julie Bishop/IMF prescription)? Well, no, actually. In fact it advocates almost the opposite:
"Perhaps the hardest transition is from technology-importing, efficiency-based development to innovation-based development. This requires a direct government role in fostering a high rate of innovation, through public as well as private investments in research and development, higher education, and improved capital markets and regulatory systems that support the start-up of high technology enterprises...
That is, almost exactly what Barry Jones was talking about in his Knowledge Nation document, that sank without trace amidst howls of derisory half-witted laughter orchestrated by the same Peter Costello who I suspect is now pulling Julie Bishop's strings. You have to laugh, otherwise you'd cry.
Stephen Hill points out in the comments section that Ross Gittins
wrote a piece in last Saturday's SMH which made some similar points about the IMF. Recommended reading. Gittins seems to think that Australia will simply ignore the IMF prescriptions. I wouldn't be so sure. I think the Coalition is softening us up for some more tax cuts for the rich and targeting of "dole bludgers". It won't be as extreme as adoption of a top rate of 30% (at least not immediately), because of the program cuts that would have to accompany such a large tax cut. However, the trend is the worrying thing: deliberately increasing inequality in the name of "incentivation" (I notice Gittins also adopted little Johnnie's unsuccessful election slogan of the 1980s), while spending less on things like education, R & D and health, when we really should be spending more.