Daniel Wild on Why and How to Cut Taxes – Address to Friedman Conference

Before the Whitlam government got its hands on the nation’s coffers, in 1972, tax as a percentage of GDP was just 16.9 per cent. Real taxes per capita were under $6000 a year. The Budget was in surplus. Net debt was negative.

Just four years later taxes had climbed close to 21 per cent of GDP. Spending grew by an astonishing 20 per cent in 1974 and 16 per cent the following year, in real terms. The Budget went into deficit, and debt blew out.

Ever since then, the size of government, the extent of taxation, and the level of spending has continued to grow almost without exception.

By 2021 taxes are expected to reach 24 per cent of GDP: Yes, this is slightly lower than during the Howard years where the commodity boom led to record revenue. But it is a long way from the pre-Whitlam excesses.

And when we look at the state and local government taxes and charges, plus superannuation – which is a tax on wages – over 40 per cent of income is going to taxes.

All of this under a Coalition government. Imagine what will have happened when Labor gets back in power.

When we talk about tax reform, we usually talk about it in technical terms.

We know that all taxes destroy wealth. But that some taxes are more destructive than others.

Australia has a very high reliance on the corporate tax – the most destructive of all taxes. Even the Gillard governments review of tax found that the so-called marginal excess burden of corporate tax is 40 per cent. Meaning every dollar that is raised by the corporate tax – 40 cents of economic value is destroyed.

Yet in 2015, the Australian government take of the business tax was 4.3 per cent of GDP. This is substantially higher than the OECD average of 2.7 per cent.

And corporate tax as a percentage of total tax is the highest in the OECD – at 15.3 per cent in Australia compared with just 8 per cent for the OECD average.

The left talk about corporates not paying their fair share. But businesses are just a composition of the workers, consumers, and shareholders of which they are comprised. Businesses don’t pay tax. People pay tax!

We also have a reliance on the so-called progressive income tax – the second most destructive federal tax.

But we have a low reliance on the GST – one of the least bad taxes. Although the butchered implementation means it is far worse than it should be.

Making compositional changes to the tax system – increasing reliance on GST, and reducing reliance on corporate and personal income taxes – are an important part of the conversation.

So too is restructuring the broken GST system. Under current arrangements, the GST is a mechanism for low performing states with bad economic policy to be bailed out by high perfuming states with good economic policy.

Western Australia is paying south Australia to blow up its coal plants and expose itself to whims of the sun and the wind.

Instead, states should be able to implement their own GST and keep whatever they raise. Rather than this being decided by some opaque bureaucratic modelling. If the GST really is a “state tax” then let the states deal with it.

But it is also important to have a goal.

That goal should be to reduce taxes as percentage of GDP at least back to pre-Whitlam rate of 16.9 per cent. A fairly modest proposal, I think. And much better than the Treasurer’s much vaunted 24.9 per cent tax speed limit, which will never be implemented and no one believes.

How do we get there?

The only way is to reduce spending.

Spending is tax. Every dollar of spending is a dollar of tax. That tax can be paid today or deferred into the future via the accumulation of debt.

Really, cutting taxes without cutting spending is not really cutting taxes at all. It is deferring taxes into the future – that is for today’s young Australians to foot the bill.

Tax is the equivalent to debt (plus interest). Debt today is $560 billion. The interest bill on debt alone is $18 billion a year, $1.5 billion a month, $375 million a week, $50 million every single day.

All up it means there will be $560 billion in extra taxes sometime in the future.

And the government claims it is cutting taxes.

Well, at least they are trying to reduce the corporate rate.

They also want to abolish the 37 income per cent tax threshold.

These are good ideas. But deferred way into the future. The corporate tax cuts weren’t slated to come in until 2026-27. And the income tax cuts not until 2024-25.

Either you believe in lower taxes or you don’t.

And the reason taxes are growing is because spending is growing. Every year over the forward estimate spending grows.

So how do we reduce spending?

I am a fan of simple rules.

Every government department should reduce spending by 1 per cent per year for the next four years.

If we did this, the Budget would be in Surplus within in one year. By 2021-22, debt would $326 billion instead of $580 billion. Too high, but getting better.

This would then start to provide room for the government to implement permanent, and sustainable cuts to taxes and move us toward the pre-Whitlam 16.9 per cent tax to GDP ratio.

I see no reason why each department cannot tighten its belt by just one per cent. Start with the pay and the generous superannuation entitlements and the number to bureaucrats, sell off the ABC, devolved education to the states.

This raises an even more important question which is why should we cut taxes?

Yes, lower taxes will encourage more business investment, which will create more job opportunities.

Yes, lower taxes will increase economic growth.

And, yes, lower taxes will increase take home pay.

But lower taxes are good for a much more important reason: they encourage earned success.

This is something I think we could get a little better at communicating.

We know that people flourish when they earn their own success. It’s not the money per se, which is merely a measure–not a source–of this earned success.

Getting more money – after a certain point – isn’t what makes people happier – it is earning more money that makes them happier.

That’s why a pay check and welfare check are not equivalent. A pay check is earned success. While a welfare check is the opposite – learned helplessness. It teaches people that good things or bad things aren’t a product of their own action or their own agency, but things randomly bestowed upon them.

This is why the goal of our political system should to give all Australians the greatest opportunities possible to succeed based on their hard work and merit.

Allowing people to keep as much of the fruits of their labour as possible isn’t just an economic necessity. It’s a moral imperative.

High taxes actively discourage earned success.

This is particularly pernicious for those on a low income who lose more of their money as well as their government benefits as they move up the income scale. Known as high effective marginal tax rates.

The effective marginal tax rate is as high as 80 per cent for those on around $10-15 thousand.

It’s almost as if there is a government plot to deny low income people the dignity of work and to keep poor people poor.

Of course, the same people who call for these high tax rates then blame capitalism for exploitation and keeping these poor people poor.

Low and flat income taxes encourage upward economic mobility.

Low business taxes encourage business investment, which allows more people to experience the dignity of work and to opportunity to earn their own success.

It is time to aim high and look to get the tax burden back to the pre-Whitlam levels of 16.9 per cent of GDP.

Speech by Daniel Wild to the annual Friedman Conference in Sydney.