Tax: Everything on the wrong table

If we’re going to have an election about tax, Mike Dowson suggests we’d better get our facts straight first.

STORIES MATTER. We don’t usually make decisions by engaging in research, weighing evidence and drawing informed conclusions. Most often, we make a decision because of a story we believe.

Advertisers know this about us. Consequently, they don’t spend a lot of precious time on scientific studies and technical data to get us to buy their products. Instead, they associate the products with images and feelings.

If science makes an appearance, which has proven especially effective for backing up preposterous claims, it will usually be a marketing person in costume. “Clinical trials show…” says the voiceover, while we see attractive people in laboratory coats peering into test tubes. All part of the story.

This is as true in politics as it is in advertising.

The government is telling us a story about tax. To its credit, it has invited discussion on the subject. And the opposition, no doubt believing it has nothing to lose, has opened up some cans of worms. But framing the discussion, and supplying its themes, is the government’s story. It goes like this.

Sneak preview of the Libs’ negative gearing scare campaign #auspol pic.twitter.com/qIkQRZxCFO
— Mark David (@mdavidcartoons) February 22, 2016

Australia is going broke because we spend too much on social services. This is the fault of the previous government, now the opposition, who are under the spell of malign forces. Never fear, there is a solution. We need a budget surplus, like the one we had in the golden age. The budget surplus has magical powers. If we cut government programs and lower income and company taxes, the budget surplus will return, bringing growth, jobs and rejoicing throughout the land.

The story has a lot going for it. It is simple, dramatic and redolent of traditional moral maxims. It should have appeal for all ages. In fact, it has only one serious defect which is that absolutely none of it is true.

This is a problem. Even a fairy tale, in which everything is made up, only endures because it carries a message of essential truth. But when a story is used to determine policy settings for the national economy, it seems only sensible it should have some foundation in reality.

Let’s start with the presumption that Australia is going broke. ACCI chief executive Kate Carnell recently opined that Australia is following Greece on the path to bankruptcy. She makes some useful points about how we might spend more wisely, but is the basic proposition true?

In a word, no. It’s practically impossible for the simple reason that, unlike Greece, we make our own currency. We can never run out of it. We could produce too much of it. In that case, it would exceed our productive capacity and we would get inflation. Not the end of the world, and not very likely when we still have spare capacity in the form of underutilised people and other resources.

But what about our debt? It’s true we have a lot of it, but most of it is private debt, not government debt. And much of that is housing related. If we really wanted to deal with Australian debt, we’d put an end to the tax rorts that have fuelled our housing bubble.

Wouldn't it be great to hear what @ScottMorrisonMP thinks about tax reform? Or the economy? The budget? Even the 'debt & deficit disaster'?
— Tanya Plibersek (@tanya_plibersek) February 24, 2016

When it comes to government debt, we are fairly well off. Ours is still low by comparison to the OECD. And in any case, the government is in the fortunate position of being able to control both sides of the budget equation.

Happily, taxation in Australia is not excessive compared to the OECD. If we collected all the tax we should be getting from companies and wealthy citizens, and ended the tax rorts in housing and super, and others such as wasteful and destructive fossil fuel subsidies, it’s hard to see how cutting back on social services spending would be justifiable.

Unless of course that is the real intention, and debt merely provides the justification. Demand for social services like health and education isn’t going to wane. So, in that situation, we’d probably have to start privatising them, wouldn’t we?

Since people seem to like householder analogies, we’d be a bit like a person who squanders his income on rich friends, lives off a credit card, and proposes to remedy the situation by eating less and selling the furniture.

The Treasurer recently described taxation as job-destroying. Imagine all the jobs that would be created if that private sector income wasn’t sucked into a black hole. Who knows what the government does with it?

Well, one of the main things it does with it is employ people. Nurses, doctors, teachers, social workers and military personnel to name a few. So job-destroying taxation is being used to, well, create jobs. And that money flows back into the private sector economy.

Companies, on the other hand, are busy getting rid of well-paid local jobs as fast as they can, by offshoring or replacing them with technology. And that money flows into private bank accounts.

Tax reform: Looks like it's the Government that has been kidnapped (by the Big end of Town) with we the people as... https://t.co/lR169dV7M1
— IndependentAustralia (@independentaus) November 19, 2015

How is the government’s story shaping up so far?

Let’s assume, then, that we have some options when it comes to luring back the hallowed surplus. Surely then we’ll be free of debt? No again.

Our level of debt has little to do with a budget surplus. If the nation as a whole is in debt, while the government is in surplus, it just means that the debt and the interest burden are carried by the private sector. That’s not opinion, it’s accounting.

Few people question the logic of borrowing for a house. But investment in existing housing is unproductive. And if the housing is overvalued, as it is in Australia, market forces make correction inevitable at some point. So capital gains are, at best, deferred. Meanwhile all that investment capital is tied up. And the banks have funded it with risky borrowing overseas.

People, companies, and governments borrow all the time. When money is borrowed for something useful, it allows us to bring forward productivity gains. As long as those gains exceed the cost of borrowing, there is a net benefit to the economy.

Some debt results from foreign investment in local industry. That is debt in the service of productivity. And some of it results from the fact we import more than we export. In the wake of the mining boom, it’s much more.

Encouraging local investment away from unproductive speculation – like real estate, and the banks who profit from it – into local industries, especially those that export, sounds even more like a good idea, doesn’t it?

What’s the big deal about the surplus then?

Let’s not underestimate it. The surplus is vital to the government’s story. Most of the beneficiaries of the tax rorts are in wealthy electorates like Malcolm Turnbull’s. Many of our politicians are property investors.

If we’re not going to boost revenue by fixing those loopholes, how are we going to justify cutting taxes and government spending? Enter the surplus.

Brilliant analysis! What got left off #TurnbullsTable via @vanbadham. Donors & Dodgers + anything that cd hurt rich! https://t.co/1pNVLOv7S8
— Sandi Keane (@Jarrapin) November 7, 2015

Behold its regal splendour. Recall the golden age. A booming global economy. Mountains of overpriced commodities leaving our ports. A time of glorious prosperity.

Of course the surplus had little to do with it, other than wasting a golden opportunity for infrastructure investment. But thankfully, most people don’t know that.

Eulogising the surplus as the hallmark of fiscal competence, Peter Costello famously likened the economy to a household. Old Mother Hubbard must keep something in the cookie jar. It’s another compelling story, with the appeal of the familiar, but again entirely untrue.

If your household has its own currency, and is mostly self-sufficient in food, goods and services, occasionally selling some household produce for something you want from the neighbours, then your household is quite like the national economy. Otherwise, you must be living in the real world.

The surplus was for re-election, not the economy. That was also the time when many of the electorally popular but otherwise horrifically damaging tax concessions were put in place.

The real wicked witch isn’t the deficit but underutilised capacity. If highly skilled people can only find work flipping burgers or there is a demand we could meet if it wasn’t starved of investment, that’s underutilised capacity. It’s a drag on the real economy, whether there’s a surplus or not.

The government has shifted the blame for what happens when capital abandons productive investment and heads for the casino onto ordinary people, using the spurious metaphor of “lifters” and “leaners”. But that’s another story.

Wealthy people don’t much like to pay for schools and hospitals, but they wouldn’t mind owning them to make a profit. Facing an economic downturn with a commitment to surplus and low spending, we would have no choice but to cut or privatise social services.

This is an ideological position, not a fiscally responsible one. It’s like going into a prize fight with both hands tied behind the back. The outcome is inevitable. But of course the fight has been rigged.

There’s another, better story which is much closer to the truth. In this story, we are an open, tolerant, highly educated, technologically advanced economy with vast resources at our disposal. There’s almost nothing we can’t do, with the right kind of leadership, the trust and confidence that come from robust public infrastructure and social services, and good incentives for productive investment.

There are valid reasons, in this age of globalisation, environmental degradation and rapid technological change, to challenge debt as the foundation of the money system. As there are reasons to challenge our assumptions about growth and jobs. These are important subjects worth considering. But the government has no intention of doing that.

Have you noticed how, despite the so-called budget emergency, the rich are getting richer faster than ever? How come they aren’t suffering with the rest of us? Funny about that.

Important questions to ask about any good story are who is really telling it and why.

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License

"Turnbull will squib tax reform." @1petermartin's cut-through column in @theage https://t.co/K7hEZUVegw #auspol #ausecon
— Paul Austin (@Agecommunity) February 24, 2016