Alan RM Jones: Competitiveness struggles under tax weight
On the myth that Peter Costello is a fiscal conservative and economic reformer
13mar06
RONALD Reagan and Margaret Thatcher, the two conservative political leaders of our age,
would rather have had their tongues cut out and fed to the crows than have argued that
"income taxes may have to stay relatively high because we face increased economic
competition". And yet that is the line of reasoning put forward by the Treasurer Peter Costello
who claims he's an economic conservative and tax cutter.
Thanks to his decade-long economic stewardship undoing Labor's past profligacy, the
Treasurer will take satisfaction in announcing that the federal Government is debt free. He
now has a historic opportunity to set Australia on a future course of increased prosperity by
substantially reducing personal and corporate income taxes.
But Costello argues the end is nigh for Australia's resource boom; that Australia's competitors
are getting their export acts together, and that prices inevitably will fall. The salad days are
over. It will be more competitive from now on, and it might not be prudent to give Australia's
relatively high marginal tax rate a good crew cut. In other words, a slowing economy may not
generate enough revenue to meet planned public sector expenditures.
And anyway, as Costello likes to boast, Australia's taxes are the eighth lowest when
compared to the 30-nation Organisation for Economic Co-operation and Development
average. That may be true, but Adam Smith would not agree that Australia's economy bears
an "easy" tax burden when compared to its major trade competitors. On a gross domestic
product-weighted basis, the Treasurer's OECD comparison is less impressive. At more than
31 per cent of GDP, Australia's tax burden is relatively high, especially compared to nonEuropean OECD countries such as Japan and the US, which together account for more than
55 per cent of the organisation's total GDP.
Despite the introduction of the GST in 2000, Treasury still takes disproportionately more in
corporate and individual income tax when compared to other OECD countries -- double when
compared on a GDP-weighted basis. Australia must compete for capital and, increasingly,
skilled labour; higher income taxes reduce Australia's competitiveness by making it a less
attractive place to invest and work.
And why should Australia hew to some arbitrary average? Best practice and Australia's
unique competitive imperatives should drive taxation policy; not running with a sclerotic pack
of bloated Euro-spenders. To succeed in an increasingly competitive trade environment,
Australia must chart its own distinctive fiscal course, suited to the economic challenges and
opportunities it alone faces.
Former US Federal Reserve chairman Alan Greenspan's oft-stated concern about
entrenching the US budget deficit -- that is, lowering taxes without cutting so-called
entitlements, such as medicare and pensions -- has evidently coloured the Treasurer's
thinking. But Greenspan initially backed those cuts, which brought the US out of recession,
creating millions of new jobs and billions of dollars in new tax receipts.
Despite the unprecedented man-made and natural abnormals of September 11 and Hurricane
Katrina, as well as the wars in Afghanistan and Iraq, the US budget deficit, according to the
White House Office of Management and Budget (which generates the president's annual
budget proposal to Congress), has declined in real terms and as a per cent of GDP since
2004. Last year's deficit was just 2.6 per cent of GDP, and is projected to decline to 1.4 per
cent by 2009, well below US historical averages and those of European counterparts.
According to the US federal reserve, the inflation rate averaged over the past five years has
been 2.74 per cent.
Although conservatives may rightly argue that President George W. Bush has been a
domestic spendthrift, the Bush tax cuts have helped grow the US economy (3.6 per cent last
year), reduced unemployment (to 4.9 per cent now) and increased government tax receipts
(by 14.5 per cent or a massive $US274 billion in 2005 alone).
The ability of a nation to compete to create wealth for its citizens compared to other countries
is directly linked to the tax burden its government places upon the economy. Reagan and
Thatcher understood this truth instinctively. They knew that more wealth is created for a
nation (and ultimately for the government's exchequer) when government leaves more money
in the pockets of its citizens and allows them to decide in their interest what best to do with it.
"Commonsense told us", the Gipper liked to say, "that when you put a big tax on something,
people will produce less of it."
If what Costello says is true, that Australia faces increased competition in resources trade,
and there is no reason to doubt him, then we must achieve greater efficiencies in our
economy and we must do so with greater entrepreneurial vigour. A nation cannot tax and
spend its way to competitiveness.
Costello has a simple choice to make: he can substantially cut personal and corporate income
taxes to unleash more of the Australian economy's untapped entrepreneurial energy and
generate more tax revenue later. Or should the political temptation prove too great, Costello
can seek to appease sentiment important he may believe in his leadership calculus in the
shorter term and spend big now. But his argument that more competition demands higher
taxes is not a conservative one. A Treasurer with as impressive fiscal record as Costello can
do better.
Alan RM Jones, an adviser in the second Howard government (1998-2001), is an executive
with Black Isle Communications, a corporate and government communications consultancy.
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