Thoughts of a couple of suspects

The Age asked me for 200 words on whether the Government should renege on the tax cuts. I said they shouldn’t. They also asked Joshua Gans what he thought – though they don’t seem to have asked him for a direct opinion on the tax cuts. I wasn’t going to bother posting my piece, as it’s just a bit of a rehash – but Joshua has suggested some quite different ideas that are well worth mentioning (though they’re all pretty much unimplementable I suspect – at least in the short term). But who knows? So both pieces are below the fold.

My piece

Because inflation has reared its head so virulently and so quickly, the tax cuts are much worse policy than they were even a few months ago when announced

But the government should not debase democracy to avoid debasing our currency. And it doesnt have to. Because the election campaign against the ALP was focused on generalized bogies like the unions, Labor wasnt forced into a long list of denials about what it wouldnt do. It has surprisingly clear air.

Many measures large and small can be pursued on both revenue and spending. The bureaucracy is now around 50 percent larger than when Howard took office. Even in no go zones like negative gearing is it asking too much to cap personal tax deductions at (say) 120 percent of revenue or even 150 percent?

And although the government needs to work hard to extract itself from the quicksand of inflation, it should also work smarter by collaborating with (or requiring) business to maximise the extent to which tax cuts are paid to employees as super using default schemes like New Zealands KiwiSaver.

My final word to the Cabinet: Dont die wondering if you should have done more in your first year.

Joshua’s piece

The prospect of lower income taxes can fuel inflation especially when they are expected to stay that way. In this environment, to shift the weight off monetary policy in fighting inflation, the government does have other fiscal levers it can pull. It can reduce expenditures but this may disproportionately hurt the poor. More alluringly it could have a temporary rise in the GST. This would impact on consumption immediately as consumers delayed unnecessary expenditures. By doing this, the government can potentially offset income tax reductions whose impact is muted by savings behaviour. Thus, the pain of higher taxes is short and widespread but the impact in reigning in aggregate demand is stronger.

Even beyond the traditional macroeconomic instruments, consider the opportunities here to enact environmental policies that raise costs of dirty consumption goods. Right at this moment these would have a dual impact of fighting over-heating wherever it is occurring the economy and the environment.

This entry was posted in Climate Change, Economics and public policy, Environment. Bookmark the permalink.

11 Responses to Thoughts of a couple of suspects

  1. James Farrell says:

    Joshua’s GST idea is interesting. It won’t work if the states spend the money straight away, but they could put in a fund for capital works in hospitals and schools, to be used when the recession hits.

  2. Fleeced says:

    In other words, Joshua’s saying “Yes, keep the income tax cuts, but increase other taxes” – what a douche!

    There’s were HUGE increase in wasteful spending under Howard – and not on the poor either – so cutting spending shouldn’t be that hard at all… there’s plenty of fat to cut.

  3. SJ says:

    James Farrell Says:

    Joshuas GST idea is interesting.

    This would be something that would undercut the whole legitimacy of the the Rudd government. Just like how Howard didn’t mention Workchoices prior to the 2004 election, Rudd hasn’t said anything about raising GST. Costello ran a scare campaign a while back about Labor increasing GST if it won office.

    At this point, trust in the government is very important, as Nick says:

    … the government should not debase democracy to avoid debasing our currency

  4. I think both of Joshua’s main ideas – GST and green taxes and charges aren’t really goers here. The former is completely out for any number of reasons. Economically its main benefit over doing the same on the income tax side is encouraging delayed consumption. But you’d be talking about changes in tax rates of 1% odd, so I can’t see much of that effect happening.

    I think it’s great to get the latter (green taxes and charges) on the agenda, but I suspect decent measures can’t be designed and implemented quickly.

  5. Pingback: CoreEcon » Blog Archive » Taxation options

  6. Gianna says:

    They definitely shouldn’t go springing things on people that weren’t mentioned before the election, but there’s no reason they can’t start to gently introduce debate on other options ‘going forward’. They’re not going to be able to swing anything very radical this year but maybe, post-Summit, they might have an audience slightly more receptive to new ideas?

  7. wilful says:

    The negative political reaction to a GST raise would be massive, far beyond rationality. They would be a one term government. No chance in hell.

    And a lot of States would be hit for popularity too.

  8. Jacques Chester says:

    Theres were HUGE increase in wasteful spending under Howard – and not on the poor either – so cutting spending shouldnt be that hard at all theres plenty of fat to cut.

    That’s been my thinking too. Ditto Nick’s observation in the growth of actual staff. There’s a massive labour shortage across the nation and the Commonwealth is hogging a huge number of people. It could cut spending and ease some of that shortage at the same time.

  9. Fleeced says:

    There’s a more fun exercise… what spending should we cut?

    Despite huge decreases in unemployment, and tougher rules on receiving benefits, social security and welfare expenses in last budget were over $96b! It’s actually been increasing in real terms… how is this possible?

    Baby bonuses and first home-buyer’s grants are certainly inefficient, but it would prob be unpopular to remove them…

  10. David says:

    Joshua says “consider the opportunities here to enact environmental policies that raise costs of dirty consumption goods” and Nicholas says that’s not a goer.

    But what’s a national emissions trading scheme, which the government – beyond considering – has committed to implementing by 2010 if it’s not an example of “environmental policies that raise costs of dirty consumption goods”? More than a goer, it’s a near certainty.

    Someone should have a good think about the macro implications of emissions trading (hopefully someone already has) and whether it can (or should) be used as an anti-inflation tool, because it is coming – and pretty soon. OK, it’s still 2 years away so it won’t help in the short term but the Reserve is forecasting that inflation will still be above 3% in 2010 aren’t they?

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