Thursday, 8 August 2013

Abbott's company tax cut is disingenous

First, let me make this clear, I am in favour of the lowest appropriate taxes for individuals and businesses. BUT, Tony Abbott's decision to cut company taxes in Australia by 1.5% is simply bad policy and worse, it wrongly appropriates the Henry Tax Review to justify it.

Why Abbott's use of the Henry Tax Review is wrong

The first of the key directions read:

Maintain the company income tax rate towards the lower end of the small to medium OECD economy average, with a reduction to 25 per cent over the medium term. This aims particularly to increase the level of business investment in Australia across all sectors, including foreign direct investment; promote more entrepreneurial activity; and reduce incentives for profit-shifting offshore.

So this would seem to support Tony Abbott...but wait, there's more.

Ken Henry also recommends sweeping changes to the tax system, including a land tax (and resources tax) and many other sweeping changes. So, Abbott's plan is to remove the resources tax, not add a land tax and cut the company tax rate.  That just doesn't stack up.

Abbott-nomics, Reaganomics and the Laffer curve

While he explicitly named the Henry review to support this cut, I'm more concerned about the implied throwback to the 1980s and Ronald Reagan's economic policies described by the great catchphrase "a rising tide lifts all boats". It didn't.

One of the big theories that Reagan used to support his policy was the Laffer curve.  This theory suggested that in some circumstances that a cut in tax rates would result in increased government revenues. Legend has it that one of his economics advisors, Arthur Laffer sketched this curve on a restaurant napkin.

Laffer Curve: suggests that revenue increases if high tax rates are cut

However, Laffer also pointed out that spending discipline is required in the short term, to increase government tax revenue in the long term.
The Laffer curve has been discredited for a long time. There are many papers that have been written to debunk the Reagan and Bush supply-side policies...yet Abbott thinks he can roll out the same discredited theories.

Spending cuts will be required

So, even if we put aside all of our misgivings about the Laffer curve, supply-side economics and Abbott's plan, there is one thing that can't be denied.

Spending cuts will be required. Even Arthur Laffer said so.

Tony Abbott. Be accurate. Treat us like adults. If you are going to cut revenue through company tax cuts, tell us what other revenue you will raise, or what spending you will cut. Reagan or Bush would.

Let me know what you think.

Mark S

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