Australian Tax Reform

Debt, Death & Taxes

16th October 2002 Robert Camilleri

The Conservative government doctrine is essentially defined as the party of tax relief. But now conservatives have converted themselves into the party of debt retirement. The conservative government has lost interest in tax cutting and instead wants to devote the surplus tax payments and asset sales over the next 3 years to paying down the national debt. The Howard-Costello government, seen as militant debt hawks, has announced their goal is to retire the entire national debt by 2005.

Has this government forgotten all of the economic and political lessons of the past 20 years? Take the American experience of the Reagan Government, they used surpluses to cut marginal tax rates, which is the most economically productive use of tax surpluses. Moreover, financing Social Security privatization, and tax reform, as much of the rest of the world is now doing, would enhance the long-term growth potential of the Australian economy substantially more than retiring Government Bonds.

This country is on the brink of economic utopia, and the real worry is that this government is squandering a once-in-a-lifetime opportunity to position Australia to have a positively funded balance sheet with continual reduction in taxation. Our leaders need to address the inequality of our federal tax system, the individualist and non nationalist State tax systems and ever increasing burden local governments are facing to fund their own budgets. This is not to mention the inadequately funded retirement programs and bracket creep, that nearly all Australians recognise as economically dysfunctional.

The Federal Government has nearly $15 billion sitting with the Reserve Bank in cash, add to this the sale of Telstra, which would net around $30 billion and based on current government projections the government will have more than $60 billion in cash by 2005. Just looking at the cash surpluses not including asset sales, if the economy continues its current growth path - and it should - the federal government will collect nearly $18 billion more in tax receipts than it will spend over the next three years.

Infatuation with the debt is contributing to the political meltdown. Paying down the government's credit card only allows a future government to run it up again. Saving Social Security means transforming it into a true individual investment system, not pouring more funds into it to delay the system's financial collapse by a few more years

If they simply restructure the taxation system, index the tax brackets and deliver short and long-term real tax cuts to the economy, the compounded future economic growth would be phenomenal. This does not necessarily means using the $60 odd billion it will have in the next 3 years to deliver this, but keep it on balance sheet to mismatch fund the debt, and add to the surplus.

Tax cuts are good politically in the short term but governments face political death when trying to raise them. If the balance sheet is positively funded and there is surpluses ongoing, the government should prudently reserve some surpluses for future down turns in economic activity and then give back to the people a dividend like a corporate does with its profits. This would mean that the taxation rates would essentially stay the same however tax cuts can be delivered via a surplus funded dividends back to the people. In this way when revenues fall, the government only needs to cut its dividend and not raise taxes to maintain a balanced budget. This would also have wider implications on the employment, tax shelters etc as the unemployed, corporate & trust entities would be excluded from this dividend. This essentially rewards the individual taxpayer that has made a contribution to Australia's economic prosperity and gets some return for that contribution.

There are two problems with diverting $63 billion of surplus tax collections to debt reduction. First, it will never, ever happen. Leaving parliament with $63 billion of extra cash and not expecting members to spend it is like serving whipped cream and chocolate cream puffs at a dieters' convention. Parliament will spend the money, because it is in their nature. The debt hawks say, stash the surplus money away so it's available for a rainy day. The truth is, for parliament; every day is a rainy day. The Howard government real concern is that if they are sitting on this cash the public will be screaming out for tax cuts, so repaying debt is a quick an easy way to take the focus off this get rid of the cash.

Tax reform is the smarter strategy rather than reducing the debt burden and it will grow the GDP faster. A dollar devoted to reducing marginal tax rates or to reducing the tax penalty against saving and investment will yield a higher return to the Australian economy, and thus to future generations, than a dollar used for retiring debt

But even if we suspend our disbelief and assume that every surplus penny was used to buy down debt, the economic benefit would be trivial. The primary argument in favour of debt reduction is that it will relieve the burden from our children of having to