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Puppet masters or conspirators: the tax debate and an interesting proposition

Stuart Lord

Stuart Lord is a Webdiary columnist. Self described as a young Anglo Christian uni student from the North Shore, that wonderful Vegas of the South, Stuart continues to almost fail his entire university career by neglecting it in favour of having wide ranging discussions with friends and working to try and earn a living. Teaching the evils of godless communism and progressive politics to his Sunday school class, he hopes to build a better future with the children of tomorrow.

Stuart Lord's last piece for Webdiary was When will Aussies realise the party's over in Asia. His Webdiary archive is here.

Puppet masters or conspirators: the tax debate and an interesting proposition

by Stuart Lord

Firstly, I am going to apologise in advance for the number of bracketed statements made in the following article. Since many of the ideas and much of the commentary came in the form of a conversation, and I am a person easily sidetracked, there are many asides and slightly off tangent points and comments throughout my memory, and this has translated into the article. Hopefully it maintains enough cohesion for comprehension, however.

My story starts with a conversation I recently had with a colleague of mine who has worked in the financial services and taxation industry for over 25 years, who put forward a theory regarding the tax debate that I found rather interesting and worthy of further observation and comment. He then subsequently asked me (knowing that I was somewhat involved in online debate) to put this forward to see what people think of it.

The theory my colleague put forward was regarding who is driving a large segment of the tax debate, and why. The theory went along these lines - that the tax proposals being put forward by Malcolm Turnbull MP were not only the by work of a single MP or small focus group interested in taxation reform, rather the reforms put forward, specifically the proposition to reduce the top tax rates to a 30% level, were driven by an agenda by the Liberal party itself. The reasons put forward for this theory as to the reason why there was a desire to reduce the top tax rate was as follows.

First is the idea that any reduction in the tax rate to a 30% rate would lock in small government or at least smaller government with a reduced tax base for the conceivable future. How? Because if and when at some future time the Coalition is voted out of government, any other party (most likely Labor or a left alliance) would find it extremely hard politically to then raise taxes again. Why? Because while there are only going to be around 3% of the population on the top tax bracket (47% + 1.5% Medicare levy) after the new taxation brackets come into place in the 2005/6 financial year, there is a much larger percentage in the second top bracket level (42% + 1.5% Medicare levy), and any moves to revise tax levels towards previous levels would in all probability bring about severe voter dissatisfaction with these groups.

For an example of what voter dissatisfaction regarding taxation can do to individuals or parties in politics, you would only have to look towards the removal of George Bush in favour of William Clinton in 1992 (Bush raising taxes after promising he wouldn't), the 'unlosable' election being lost by the Coalition under Hewson with the GST in 1993 (trying to be elected on a new taxation policy which was moderately well received, only to suffer in the polls on election after being unable to give a definite answer regarding GST on a cake), public dissatisfaction with the Labor government between 1985 and 1987 (after the negative gearing provisions were limited under a tax policy) and the loss of seats under the Coalition government in the 1998 election (Howard trying to and succeeding to implement the GST that cost Hewson). Now I can't claim that it was only the tax policies which caused failures at these elections, but most would agree that they played a significant part. And so we have the idea that any new government changing taxes, especially raising them after they had been so recently dropped, would most likely find themselves in the opposition benches at the next election.

This would severely impinge upon any increase in spending by any future government, Coalition or Labor, as government debt is also seen in a negative light among many voters (or would at least seem to be by the emphasis that both State and Federal governments seem to place upon a yearly fiscal surplus) and would in the opinion of the theorist (and my own) ruin or at least impinge upon many of the policies of any future alternative government, especially if a 'left' coalition had to be created in the House of Representatives (with Labor joining forces with the Greens/Democrats/Independents/any future party). This would make sense to myself, as a coalition government of any stripe would most likely find itself hostage to the special interests of the minority partners, resulting in additional spending in those special interest areas (as can be seen with the Senate deals done by the Coalition government over GST, the first and second tranche of Telstra, etc, and in general with Liberal's and their partnership with the National's).

So in a political sense, a move to reduce the top tax rates, possibly with a reduction in the lower tax rates (to keep voters across the spectrum happy, or at least not unhappy) would be a large bonus to any government willing and able to do it, and a large impediment to any party trying to either stand in the way of tax cuts (see Labor's slide in the polls when it attempted to block tax cuts earlier this year) or reverse them afterwards ( think 'Rollback' writ large, most likely).

And that is where the second part of my colleague's theory came into play. Under the Coalition government, we have the means of actually paying for reasonably large tax cuts without either going into debt or significantly cutting any services or funding provisions either. With successive years of budgets in surplus under the Coalition government, apart from a minor aberration at the beginning of 2000, there is a large pool of unmarked funds available at the end of each financial year. The method for having such a consistent run of surplus budgets comes from the Treasury estimating and planning for a moderately bad outcome, the Government spending to treasury projections, with the surplus often being the difference between the economy's reasonably good result and Treasury's dismal predictions. So almost every year a small surplus is expected, causing spending to be kept moderately low, and each year a larger surplus has occurred, due to Australia's incredible good economic run.

These 'unrelied upon' surplus would be the funds used to pay for the tax cuts being proposed, serving both a political purpose (to leave future opposition governments unable to use this pool of funds for their own purposes, therefore forcing them to either be politically unpopular and raise taxes or going into debt, or to not carry out their policies (for better or worse) due to lack of funds and political courage) and an ideological one (linking Australia to a lower tax, lower intervention model than we have at the moment). The economic consequences of such a move are much debated, with mostly traditional lines being drawn on tax cuts in general - with one side talking about cutting the rates of the rich while leaving the poor behind, with the other talking about better economic growth and a raise in the general pool of funds in the long term as economic success increases the total tax base even with a reduced percentage being taken.

Overall, there are three main questions which arise from this theory which I would think pertinent to the type of debate we have here -

Firstly, is it likely that there is a deep seated agenda to lower the top tax rates among the Coalition?

Secondly, is there a real chance that this proposal, or one like it, could be bought forward and succeed getting through parliament?

Thirdly, if some form of this proposal is bought forward, what would be the likely political, economic and social effects of this change?

I won't be asking for major proof of assertions, unless items are asserted as definite fact (the difference between 'Howard is probably behind it all' and 'this is all part of the Lying rodent's 1984 fascist police state agenda'. The first is really stated as opinion, the second as fact. In any case, rational argument is always appreciated.


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re: Puppet masters or conspirators: the tax debate and an inter

A reduction in the higher tax bracket, although always welcome, will put more pressure on the States, as the 10% GST becomes not enough to run Health, Education and other infrastructure. Howey was very smart in making the GST a State tax, as everytime they complain they are told that they are getting more money then ever before, and he washes his hands.

re: Puppet masters or conspirators: the tax debate and an inter

Stuart, nice piece, but your colleague has in my view ovelooked recent social trends. I'm aware of several polls over the last year or two in this country where voters have indicated that they would prefer more to be spent on the emotionally attractive services like Health and Education rather than accept another tax cut. So, in that case I don't believe the electoral unpalatability of subsequently creeping taxes up is as strong as your colleague suggests.

Is there such an agenda? No I don't believe there is. This government is the highest taxing in our national history, and shows little sign of substantive reform. Why? in my view big taxes = big surpluses as slong as spendin's more or less under control = re-election via strategic barrels of pork and the electoral "feelgood" factor that surpluses and debt repayment bring.

Will it get up? I doubt it, unless there is some form of revolution in eth ranks on teh conservative side. True that the Right in the USA has disaffected its intelligensia, and that ours is pursuing similar policies, but I doubt the revolution will happen soon.

What would be the impact? I can't really answer this without anaysing the numbers. Intuitively like small government for no other reason than I distrust public sector bureaucracy completely. And, in recent years I believe my fears have been shown to be well founded...Tampa, Solon, Rau, Children Overboard etc etc etc. Less government = less incompetence, waste and corruption.

I know there is massive waste in Health, likely no small amount in Education and who knows what's going on in Social Security?

But, globalisation is here to stay and the dislocations it causes will require the state to step in more and more to protect the disenfranchised, and that's going to be costly going forward. We have the so-called demographic time bomb, and a whole range of defence related uncertainties to come that wll require a big chunk of public money to deal with.

What I'd really like is a clear, apolitical analysis of how much tax is collected in this country and where it's spent. Then we could answer this sensibly.
Margo: Hi David. Any takers? BTW, I'll be in Sydney on November 22. Feel like a coffee?

re: Puppet masters or conspirators: the tax debate and an inter

Sorry to torpedo your thesis at the first bouy boy, but you need to research your topic up till the last minute before publication if you don't want subsequent events to make you seem like a goose.

By subsequent events I mean Peter Costello's opinion on just this very subject in the paper[smage I think-correct me if I'm wrong] this weekend. His analysis of the topic was fairly detailed in its rebuttal.

Secondly, polling going back over many years, and as recently as the last election has overwhelmingly shown that people would actually prefer to pay more tax if they could be guaranteed of getting better services and to make sure that the indigent in our society are looked after. Strange, I know, to think people still harbour such antiquated and anachronistic thoughts for their fellow man. Also, no doubt,many of these same people voted Liberal or National in the last election, at the same time as being not entirely happy with the complete agenda of the Howard government and many also as a reaction against Mark Latham.

Of course, the Liberal Party will always vote for self-interest, so ultimately your theory may have some validity.

re: Puppet masters or conspirators: the tax debate and an inter

Stuart Lord: "Thirdly, if some form of this proposal is bought forward, what would be the likely political, economic and social effects of this change?"

First, picking up David Eastwood's comments, we have no idea how much tax is actually collected (rather than budgeted for) or what it is spent on at either State or Federal level and it is in no-one's interest to tell us. The best we get are global expenditures at departmental level. I suspect most of it is wasted either on propping up the machinery of govenment (massive wastage on consultants, overpaid Departmental heads as a trade off for no security of tenure and the destruction of a truly independent Public Service, redundancies, unfunded super etc) and propping up infrastructure with band-aid solutions rather than biting the bullet and rebuilding it.

Now, Stuart Lord, the answer to your question really depends on whether we are going to be wedded to no deficit budgeting. If we are, and it looks like both sides are unlikely to change without some significant impetus, the effect will be that there will be no replacement of infrastructure, no visionary solutions (like the remediation of the Murray Darling System) no Space programme, and the place will fall apart just like NSW is doing with its 100+ year old infrastructure administered by dribbling idiots.

If the no deficit, no infrastructure replacement, no massive public works approach is coupled with a significant reduction in income tax collections, we can expect the underemployed to become poorer (placing more pressure on outmoded infrastructure and welfare) and the working poor becaome poorer. Add increases in petrol prices in over the next 5 years or so, and you are breeding disaster my boy.

If, on the other hand we took a sensible approach and rebuilt infrastructure from scratch in order to reduce long-term recurrent expenditure, we could then use recurrent expenditure savings to abolish a range of taxes at State and Federal level.

I suspect Malcolm Turnbull's floating of the idea is a lot more personally politically motivated than you seem to. The Field Marshal's baton still needs a power base. At the moment he is not proposaing any sort of global package and, until he does, it is just populist kite flying.

On a personal level I should add that I do not have any personal financial axe to grind because I don't earn enough to be fussed by his proposals.

re: Puppet masters or conspirators: the tax debate and an inter

Well done Stuart ,it is very brave of you to write here amongst such talented word smiths like JHC.

A bit more substance about Malcolm's colourful past may have been in order if you think he may be involved in a Liberal Conspiracy and there is so much to write about there.

Not a mention of Hugh Morgan, surprisingly.

Nice as it is to leave all the blanks to the audience to fill in, one usually expects some more data/expertise from the author, but I understand you were time challenged as we all are.

I bet you are very popular with the Sunday School and telling Bible stories to kids, do you use the guy who brings the American style puppets? I hope not, our school had him at Easter, repugnant -"can he fix it? Je-sus can." chanted to Bob the Builder, I kid you not. I think Bob is English anyway. Fourway culture clash.

Bravely done, Stuart. I mean it. Really. You always give a perspective on life that nowadays I don't see much of. That in itself is valuable.

Love to read the same title by Victoria Collins or Dee.

re: Puppet masters or conspirators: the tax debate and an inter

Stuart it's an interesting idea. In fact, I actually hope that the public reason tax reform is being pushed - ie to encourage hard work - is not the real reason.

If we need new tax rates and IR laws to encourage hard work then clearly the government proposing such things thinks we aren't working hard enough. However, a statistic thrown around a bit lately is that Australians work more hours than our OECD counterparts, including people in the USA and Japan. If the government thinks Australians aren't working hard enough they're more out of touch with reality than I thought.

re: Puppet masters or conspirators: the tax debate and an inter

David Messiter, negative gearing will never go. Why? Well, apart from the disasterous results of the last time it was limited (85 - 87 from memory under the Hawke govt) it would pull the plug from under much of the housing and construction industry. Why? Because buying a property is a long term investment. And it would be out of the reach of most people if during the time it took to repay the lenders for the capital/interest for the property they would have to undergo a straight, non-adjustable loss. So you wouldn't even have the middle class owning properties, rather concentrating more wealth at the top end.

And as for JHC's article, I see it as simple vitriol poured out against Howard, little else.

re: Puppet masters or conspirators: the tax debate and an inter

Malcoln Turnbull's taxation reform exercise is much more comprehensive than is realised. What he is talking of in reducing taxtion levels, involves a more holistic approach to address the crazy churning of taxation revenue and rebates. It makes sense to cut welfare payments to higher income families in return for reductions in income tax. Similarly business cost deductions would go in return for lower taxation. These measures go some way to improving efficiency, but he has a long way to go yet before he can integrate the taxation and welfare systems more closely.

Marginal tax rates at the top end of 47% pale into insignificance when compared to the 60% plus rates faced by those moving from welfare to work. This will be exacerbated by the cruel practices of the proposed IR reforms and their integration with the welfare system - ie lower minimum wages, more coercion. The taxation debate has a long way to go, but must not be seen in isolation from proposed welfare and IR reform.

When Malcolm is prepared to align capital gains tax with the company tax rate and abolish negative gearing as well as address the welfare/tax/IR interface we may truly see reform. He is headed in the right direction but for arguably the wrong reasons.

As far as a liberal conspiracy goes, I would be inclined to believe that one. Typical Howard tactics - hold out the hope of a payoff for the
loyal aspirationals in reduced taxation, whilst comprehensively undermining working conditions, pay rates and stability for the "others" (including their own children). See John Henry Calvinist's piece for an explanation of the modus operandi.

re: Puppet masters or conspirators: the tax debate and an inter

Angela Ryan, it's not my theory, not my story, really, I'm just the person who wrote it. And since I wanted to be true to the story, I didn't really imbellish it with my own ideas or own theories, rather I left questions at the end to be answered that may lead people down their own paths of thought, rather than laying down my own specific one.

re: Puppet masters or conspirators: the tax debate and an inter

Guy Curtis: "Stuart it's an interesting idea. In fact, I actually hope that the public reason tax reform is being pushed - ie to encourage hard work - is not the real reason."

Of course it isn't. Most people who pay any tax in the higher marginal brackets are in managerial/executive jobs on fixed salaries, are not paid by the hour, and do not get penalty rates. They are probably paid for a notional 38-40 hours a week, work something between 50-70 or more, and reducing tax rates just provides a small extra lump sum in pocket, not an incentive to work even longer.

And as Guy says, we're already working longer than most other folks, and longer than is physically or mentally good for us.

I presume the government promulgate this lie because they think that way, they can bamboozle the hourly-paid working poor into supporting rewards for the rich.

Better productivity cannot be achieved by lowered taxes (with the resulting damage to infrastructure/health/education) or by reducing the condition of workers to that of serfs. In general terms, it needs a change of corporate culture that includes:

1. Adequate staffing at all levels rather than critical under-manning. Overworked, overtired, stressed staff are not efficient or accurate.

2. Adequate pay, good work conditions and job security, giving staff a sense of belonging, motivation and loyalty. Alienated casuals don't give a damn, and why should they?

3. Adequate in-house training of staff, to ensure knowledge of procedures and products and quality of products/customer service. Customers get sick of crap goods, inaccessible helpdesks and staff who don't know what goods or services their business provides.

4. Enough up- and down-communication of information within the company that decisions can be made using knowledge from the factory floor and shop front, rather than just airy-fairy theory from the top.

5. Retention of staff long-term to maintain corporate memory and relationships with customers. Long-term customers do not like explaining their needs to a fresh ignoramus every few months. Lose your customers and the competition has won.

Of course, such policies eat into precious profit margins, and run contrary to the fad for "cost minimisation" at all costs. But a great team of employees is actually an investment in the company's long-term prosperity. If we need changes to Corporate Law to force people to recognise that, then so be it.

Ways of increasing staffing could include:

1. Chopping bloody silly payroll taxes.

2. Serious attention to the tradeoff between income and benefits for very low/zero income earners. The high effective marginal rates there are a serious disincentive for people to get self-sufficient. It is the people at the bottom of the heap who should be well rewarded, not penalised, for every extra hour that they do work.

re: Puppet masters or conspirators: the tax debate and an inter

Hi Stuart, fair enough.

Hey I heard an interesting story at the supermarket checkout yesterday, and at the soccer, and at the rugby and at the races and at the tennis and at the lucheon and at the meeting and at the car garage, and at the tuckshop and at the chemist and at the hairdressers, and at the P & C, twice, and at the dinner, and at the surf-club fundraiser, and at the chess tournament, and at the real estate office, and at the accountants, and at lunch again.

That was last week.

Thanks for sharing with us Stuart.


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