Hockey’s tax plan receives poor reception

By Leith van Onselen

Joe Hockey’s speech yesterday to the Tax Institute and Chartered Accountants Australia and New Zealand entitled “The economic case for personal income tax cuts” has been pilloried today by various commentators and experts.

Business Spectator’s Alan Kohler has labelled the speech “truly awful”, highlighting “a mess of muddled thoughts and contradictions” from the Treasurer.

Kohler, in particular, has taken aim at the Treasurer’s confused claim that bracket creep is a disincentive for hard work:

“Why should the reward for hard work and endeavour be swallowed up by higher taxes?”, [Hockey] asked, looking searchingly around the room.

The issue is precisely the opposite. Bracket creep excessively penalises lower income earners for the effects of inflation. It means that a pre-tax wage rise equal to the inflation rate can result in workers going into a higher tax bracket and thus going severely backwards in real terms.

If an individual moves into a higher tax bracket because they get a promotion or because they work longer hours or work harder, that is NOT bracket creep.

Kohler’s colleague, Callam Pickering, meanwhile has called on Hockey to “stop pretending” that he can simultaneously deliver tax cuts and balance the Budget:

Hockey’s rhetoric on bracket creep is somewhat absurd given the extent to which his current budget relies on bracket creep to get the budget close to surplus. Treasury secretary John Fraser estimates that bracket creep will improve the budget bottom line by around $25 billion over the next four years.

To put this into perspective, the federal budget estimated that the deficit would improve from $41bn in 2014-15 to $6.9 billion in 2018-19. In other words, around 30 per cent of the budget repair through to 2018-19 is due to bracket creep.

If the federal government wants to remove the effects of bracket creep and leave the overall budget unaffected then they need to find an additional $25bn in savings or revenue…

Unfortunately for the Coalition, spending cuts aren’t viable due to a hostile Senate, which is likely to become more partisan and fractured after the next election. Regardless, a deeply unpopular government is never going to win re-election on a platform of cuts to education and health care.

Fairfax’s Peter Martin has raised similar concerns:

…bracket creep isn’t covering rising government spending. [Hockey’s] own May budget booked $25 billion of bracket creep over the next four years, all of it to be directed to bringing down the deficit.

By saying he can do both, when the deficit isn’t projected to return to balance until 2020, he is saying he no longer regards the “budget emergency” as urgent.

Meanwhile, Certified Practicing Accountants (CPA) has slammed Hockey’s speech, accusing him of repeating rhetoric instead of fixing Australia’s “broken down tax system”:

“The Treasurer appears to be caught in a cycle of restating the problems rather than rethinking the solutions,” Mr [Alex] Malley said.

“The issue of income tax, GST, super [annuation], company tax, land tax is yet to be discussed … it really is being deferred and deferred and deferred.

“To actually start forcing a conversation around just personal income tax says to me that we’re in a downhill slide to an election and that’s not good for Australia, we need to make some tough decisions.

“To defer and distract again in relation to tax and tell us what we already knew at a five-star hotel in Sydney is not my idea of leadership.”

My views on Hockey’s speech were articulated in detail yesterday.

In short, Hockey should seek to lower the income tax burden by broadening the tax base and unwinding spurious concessions, rather than seeking to fund income tax cuts via slashing government expenditure.

Tax revenue is required to fund important public services that the community both expects and needs. And the size of tax revenue is a distant, secondary issue, to that of ensuring that important social programs are retained, well-targeted infrastructure is provided, and the tax base is broadened and based on the most efficient and equitable sources possible.

What Hockey is proposing: income tax cuts funded through lower expenditure is not a recipe for genuine tax reform, but rather a recipe for greater inequality. It is also unrealistic, given the pressures on the Budget from an ageing population.

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Comments

  1. “Why should the reward for hard work and endeavour be swallowed up by higher taxes?”, [Hockey] asked, looking searchingly around the room”
    His microphone must have been faulty. This is the translation.
    “Why should myself, my family, my mates, corporate doners, wealthy illegal Chinese buyers and my fellow political leaches be penalized by having to pay their fair share and making the whole tax system equitable instead of gerry mandering it to our benefit and making the poor and average workers who have no political leverage suffer instead, [Hockey] asked, looking searchingly around the room

  2. Good to see this rubbish from Johobo get the contempt it deserves
    His entire plan for the allegedly urgent task of budget recovery is bracket creep – he wanted to come out and announce income tax cuts, which are indefensible in the absence of any real savings measures, which he and Abbott are too gutless/stupid to make.
    The fact that this First Dog cartoon is so accurate is depressing – when a cartoonist can make hay with a dry topic like economic policy, it must be truly dire
    http://www.theguardian.com/commentisfree/picture/2015/aug/24/joe-hockeys-budget-emergency-brought-to-you-by-playdough-and-an-old-shoe-box

  3. Crazy speech – do we want to run deficits for eternity! One of the whole reasons why we elect Liberal governments is for fiscal consolidation. Compare that speech to what Labour achieved in the 1980’s – utterly, utterly shameful. 1980’s Labour actively went against their own constituents interests for the best of the country – because they perceived the necessity. The voting public will throw the Liberals out if they don’t have a narrative that provides (at least) a path of least resistance economically, even if its a long term vision.

    Just to use the argument – that we are better than Labour doesn’t wash. Mind you in saying that, I have no idea what Labour stand for (other than Gay marriage), its a policy vacuum out there…

    When Labour win the next election – I will bet any amount of money there will be three issues (a) gay marriage; (b) Republic; and (c) the Flag, the Flag, the Flag…

    Should keep us all amused while Rome burns. Circuses and all !!!

    • If this is a repeat of the early part of Australian History and numerous vacuous leaders with absolutely no idea… we have another decade for this to play out yet. Then we may get a real leader. Until then…

      • Ronin8317MEMBER

        Trade and current account deficit DOES matter. When our fiscal deficit is funded by foreign borrowing, it matters a great deal.

      • Yes it is – if you don’t raise enough taxes you borrow…

        Deficits always matter. Its just a matter of when. For Greece debt at 125% matters, for Japanese debt at <250% does not… but it will eventually. Thats the whole point.

        Its akin to the laws of physics, you can escape via velocity for only so long.

      • Nah, that’s just a policy choice and absolutely unnecessary. Australia is a currency issuer and doesn’t need to borrow to spend. Read the links. That’s been said about Japan for decades and it hasn’t happened yet despite much hyperventilating from pundits.
        The problem we have is that we are told deficits or surpluses are bad or good, but that just a superficial observation which doesn’t explain the movement in underlying sectoral balances. It’s entirely situational. Deficits can occur when governments are saving and vice versa. Remember GDP = C+G+I+(X-M)
        I don’t understand what physics has to do with it. One is a physical science the other a social science. Physics is “what is” and economics is a human construct.

      • Thats just crazy talk – if you didn’t understand my physics analogy – then we cannot communicate on a similar basis.

        I am not a gold bug, but gold does have certain valuable physical attributes which makes it essentially unique, thereby having some value (exactly how much is in often dispute). Sure as an issuer, yu can print as much as you want. It worked well in Zimbabwe – in fact on a notional basis Zimbabwe had the best performing stock index globally for a number of years. Shame people didn’t have enough to eat.

        Your argument is a fiction.

      • Researchtime,

        You need to spend a bit more time studying, it might be, you have been too narrow in scope i.e. seems you don’t understand hyperinflation, as you definitely exhibit commodity optics wrt to the condition.

        Edward Harrison here. Yves is away at the INET conference I was unable to attend. So I will post a few articles in her absence. This is one I wrote yesterday at Credit Writedowns. I look forward to your comments. If you want to post comments on twitter instead of down below, you can reach me here.

        I don’t like talking about hyperinflation because it veers into the fringe element of discussion. But, in the blogosphere you often hear vague references to it. So I thought I would take this on. This post came together in response to an appearance I had on the Max Keiser show. I was talking to Max about precious metals, currency debasement and hyperinflation. Max was pushing the view that the U.S. was on its way to hyperinflation due to its reckless monetary policy. I argued against this view. The video is in the original post at Credit Writedowns, but let me argue my case here.

        People arguing that hyperinflation is around the corner usually are pushing this view because of an ideological bias against fiat money. This is a bias I share because I believe that fiat money allows excessive money creation that winds up as a credit super bubble – and our experience over the past 40 years demonstrates this. However, I don’t let this bias get in the way of my analysis of the economics of the situation. I have a better understanding of the fiat money system because I am not anchored in a gold-standard mentality when looking at the constraints on government in the fiat money system and the types of events that lead to hyperinflation. The hyperinflation talk is a gimmick used to push a particular ideological viewpoint. While I share that viewpoint and don’t like fiat money, I am not a fear monger, so you won’t see pushing an ideological agenda which has the economics wrong.

        Here are a few bullet points that are salient for understanding fiat money and hyperinflation.

        The Gold Standard is based on a fixed exchange rate of currency to the price of gold. This is crucial to understanding the difference to a fiat money system. I would argue that fixed exchange rates, while less volatile than floating rates, are an example of central planning, meaning government rather than market forces decides how much the currency is worth vis-a-vis other currencies and gold.
        Gold is thought by many to have intrinsic value such that tethering money to it creates an arbitrage opportunity which limits money creation. If too much money is created, debasing the currency, arbitrageurs would redeem their money in gold instead of in currency causing a depletion of gold reserves. If government had enough gold to back its money, then that would not be a problem. However, if they had inflated the money supply, government would run out of gold as arbitrageurs converted currency into gold. In a gold standard money system, currency has value because of its government-decreed convertibility into gold, an asset which has a value independent of the currency. Money loses its value when users of currency opt to convert that money into gold and government is unable to meet that convertibility due to the excessive creation of money not backed by gold. Note, that the reason this arrangement works without creating inflation is because there are limited supplies of gold. If you discover boat loads of gold (or silver) in Peru and ship it back to Spain, you get inflation and currency debasement as government increases the supply of money in concert with the availability of gold.
        Fiat money has no intrinsic value. It simply represents a liability of government, an IOU. The only promise government makes is to repay the holder of that liability with another IOU of equivalent nominal amount in whatever money form the government decides: it could be coins, bonds, paper currency or electronic credits. Because money is created by government, this means government faces no solvency constraints in its own currency since it could always fulfill its IOU liability by creating more money. There may be political motives in defaulting on those liabilities, however. I call this the Ecuador risk factor. See “Bill Gross: Deficit Hawk, Bond Vigilante”.
        Why accept fiat money, if it has no intrinsic value? There are two reasons. The first is a derivative of the second. Most people understand that since money operates as a medium of exchange, one accepts it because it is universally accepted. Legal tender laws give government monopoly as national money creators eliminating any competition in the medium of exchange. But of course, this is a circular infinite regress argument for why people accept money. Certainly, it is true that U.S. dollars were already established as a medium of exchange and legal tender when the U.S. went off the gold standard. But the Reichsmarks created after the Weimar inflation had no installed base of users. Given the previous hyperinflation, clearly there was ample reason for currency revulsion. So you can consider this argument a necessary but not sufficient precondition. What makes the universal acceptance stick is that government accepts its own money to expunge liabilities to it. In plain English, fiat money has value because it is the only money you can use to pay taxes. Remember, government is the only entity in society that can coerce any and everyone in its jurisdiction to accept a liability. Taxes are coercive, meaning they are not a voluntary arrangement between two parties like a mortgage. Government tells you that you must pay. If you don’t, you suffer the consequences. This means you need government’s money to expunge your tax liability. The fact that this money is also the medium of exchange only entrenches its use. So the tax liability is a necessary pre-condition for fiat currency to work, something I will return to.

        http://www.nakedcapitalism.com/2011/04/what-are-the-preconditions-for-hyperinflation.html

        An article by Edward Harrison originally posted at Credit Writedowns.

        I am 100% sure that the U.S. will go into hyperinflation. Not tomorrow, but the problem with the government debt growing so much is that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.

        –Marc Faber, Bloomberg, May 2009

        During the world’s last inflationary period in the 1970s, the West witnessed social unrest of the most acute kind, bordering at times on anarchy. If stagflation can lead to anarchy, hyperinflation can lead to and has led to much worse. Hyperinflation is the economic apocalypse many doomsdayers pose as the logical end to the world’s experiment with fiat money.

        In a letter to clients last June, Rob Parenteau of the Richebacher Letter wrote about Weimar, one of the worst episodes of hyperinflation:

        “The Weimar Republic, born of a revolution in 1918, played host to a hyperinflationary breakdown of the German monetary system by 1923. Austria faced a similar episode of hyperinflation in 1921–2, and no doubt, the searing scars of these experiences deeply informed the thinking of Mises, Hayek, Haberler, Machlup and other leading contributors to the Austrian School in the 20th century.

        “Hyperinflation episodes are characterized by rapidly accelerating inflation, a collapsing foreign exchange rate and, eventually, a widespread disorientation and disruption of productive activity. Keynes, writing in 1919, well before the terminal stages of the Weimar hyperinflation had been revealed, characterized the nature of the mayhem involved in such episodes as follows:

        “As the inflation proceeds, and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.”

        Is this what awaits the US or the UK? Marc Faber’s quote to open this post is symptomatic of the kind of rhetoric which says yes. I love Marc Faber. I consider his interviews first-class economic entertainment. You will continue to see him featured in my posts on a regular basis. And I certainly share some of his concerns about inflation, bailouts, moral hazard (and so forth and so on, as he would say).

        But, is Marc Faber an ideologue pushing a rhetorical line of argument to the point of hyperbole or should we take his warnings very seriously?

        Let’s attack this question using Zimbabwe and Weimar Germany as examples. These are the two most extreme cases of hyperinflation that economic historians have ever witnessed. They are instructive in regards to what causes hyperinflation and what does not.

        Weimar Germany 1919-1923

        After World War I, every nation which fought was broke because of the war’s cost. No country had enough gold assets to repay the billions of dollars they owed. And this was a multilateral problem. For example, Britain could not repay its debts to the US until the other Allies repaid their debts to Britain. The Americans were not sympathetic. The prevailing desire was recovering the over $25.5 billion the US had loaned to other nations during the war.

        As a result of these debts, the war’s victors laid out draconian terms to punish the Germans in the Treaty of Versailles in 1919. War reparations were one third of Germany’s spending. Therefore, Germany’s budget deficit was half of GDP. (The situation in Iceland due to Icesave’s collapse comes to mind here). And to make things even worse, reparations were in a foreign currency.

        It’s not as if the Germans could print off a bunch of Reichmarks to make good on their reparations. When the Germans defaulted on their obligations, the Belgians and the French moved in and occupied the Ruhr region, Germany’s industrial heartland. The result was widespread strikes and idled productive capacity. Afterwards, demand for goods in Germany far outstripped the productive supply.

        So, with a huge portion of tax revenue going to pay reparations in foreign currency, the German government turned to the printing presses to make good on its domestic obligations. The surge in money supply and the lack of productive resources led to hyperinflation and collapse.

        The key to Weimar’s hyperinflation was two-fold.

        The German government had a large foreign currency debt obligation.
        The German economy lost huge amounts of productive capacity causing prices to soar as demand outstripped supply.

        That’s Weimar.

        Zimbabwe

        While the facts in Zimbabwe are different, the underlying causes for hyperinflation were the same: foreign currency obligations and a loss of productive capacity.

        Zimbabwe had established Independence from Britain in 1980. Yet, by the late 1990s 70% of productive arable land was still held by the small minority 1% of white farmers in the country. After years of talk about redistribution, in 2000, the President Robert Mugabe began to redistribute this land.

        The redistribution process was a disaster, both legally and economically. Many whites fled as violence escalated. The result was an enormous decline in Zimbabwe’s agricultural production. With agricultural production having plummeted, Zimbabwe was forced to pay to import food in hard currency.

        Meanwhile, the government turned to the printing presses to fulfil its domestic obligations. as in Germany, the foreign currency obligations, the loss of productive capacity and the money printing was a toxic brew which ended in hyperinflation.

        Hyperinflation in the UK or USA?

        So, that’s a brief outline of what happened in the two most notorious cases of hyperinflation. Notice that in each case you had an enormous foreign currency obligation and a massive loss in productive capacity. The U.S. has not suffered this kind of loss. In fact, productive capacity swamps demand for goods in the U.S. And, as the embedded presentation on hyperinflation from Marshall Auerback shows, the fiscal deficits in the U.S. are a far cry from the 50% of Weimar.

        http://www.nakedcapitalism.com/2010/05/mmt-fear-of-hyperinflation.html

        Skippy… as an analogy its like talking to someone from the stone age… about how life works in the industrial age…. completely different set of optics. Economics in itself is an pseudo science, which if a person only uses one schools – thoughts – will observe – reality – through_its_conditioning.

      • RT – my point regarding physics is obvious. You want to discuss macroeconomics using unrelated analogies which is a vacuous and pointless debate. By all means don’t lets talk because it’s pointless. I don’t have time to waste listening to your shrieking when a fundamental economic principle is beyond your intellect. Read a little of the evidence I have placed before you from two eminent economists before launching yourself into incoherent jabbering.

        Your commentary on gold is irrelevant to the topic under discussion.

        Unless you are capable of presenting some evidence to reject the propositions I have put forward don’t respond to my posts with hysterical ranting. I won’t be as kind in future.

        Thanks for the post Skippy. It adds to the topic and is very informative.

  4. Huh? I think I woke up this morning to a parallel neoliberal universe. Federal taxation doesn’t “pay” for anything………from the brown couch…… ” the Australian Government, as the sovereign issuer of a fiat currency, does not spend money raised by taxes. The Australian Government spends by crediting the bank accounts of recipients of payments. This is effected by crediting the relevant banks’ reserve accounts at the Reserve Bank by the same amount. These credits are accounting entries, created by keystroke. See http://tunswblog.blogspot.com.au/2014/06/what-do-taxes-pay-for.html

    We need the Government’s issuance of currency into the payments system before we can make the payments that discharge our tax liabilities, not the other way around. Taxes are important for the Australian Government and other agents in the economy, because…..
    1.Taxes ensure that the Government’s money will be used,
    2.Taxation redistributes the spending power of economic agents, and
    3. Taxes affect behaviour.
    Mitchell nails it precisely “when you hear commentators and politicians and the like use terms like “taxpayers’ funds are being mis-spent” you can immediately conclude they do not understand how the monetary system functions. For a complete discussion see http://bilbo.economicoutlook.net/blog/?p=9281

    A discussion on taxation is irrelevant unless it is understood what purpose taxes in a sovereign power actually perform.

  5. There is no plan.
    Of all the necessary reform identified, he dishes up the “GST on online purchases <$1000" nonsense.
    That is not a plan.
    It is a proven waste of time and money designed to protect his corporate sponsors.

  6. Hockey’s sentiment for lower taxes has not been reflected by action – the high income deficit levy should be immediately repealed. As good a place to start as any. As it is, too great a tax burden falls on too few.

  7. Many western countries by law have annually indexed tax brackets, so that the effective tax burden remains constant regardless the inflation rate.

    This way it is ensured that inflation cannot be subtlly used as a hidden way of raising taxes through bracket creep. I think that’s most fair and transparent to the taxpayer.

    Don’t try to sell bracket indexation as a tax cut – it’s not; it’s preventing a tax rise 🙂

    Automatic indexation of the brackets will at least rid us from the ritual rain dance of some politicians trying to make a show out of this common and fair procedure.

  8. What Leith van Onselen says is exactly right but Land Tax, which becomes a tax on the poor through rent and living expense increases, is not a solution and should be repealed where it is currently applied by State Governments. Further, to add a Federal Government Land Tax to the state land taxes is inhumane. Tax revenue is required to fund important public services that the community both expects and needs. And the size of tax revenue is a distant, secondary issue, to that of ensuring that important social programs are retained, well-targeted infrastructure is provided, and the tax base is broadened and based on the most efficient and equitable sources possible

    • “What Leith van Onselen says is exactly right but Land Tax, which becomes a tax on the poor through rent and living expense increases”

      You still dumbing this place up with this tosh? You really aren’t aware of your limitations are you?

      If an implementation of a land tax is implemented along side an income tax cut, say tax free threshold to $45k, the tax burden shifts, it’s not an extra tax via rent.

      It’s a preferred method because it can’t be avoided, nor would there be any ‘land tax deductions’. If applied on the unimproved land value, it’s clean, concise, simple, unavoidable.

      • Your ad hominem attacks are not sufficiently elegant or dignified for these pages. Nevertheless I will attempt to answer the inaccurate statement that Land Tax is paid by the occupier of the property, whether an owner or a renter it is in effect a GST for land. Unfair to the poor and low income earners! There are also other reasons why Land Tax is socially and economically unsuitable but I am only answering your inaccurate statement here.

      • Your ad hominem attacks are not sufficiently elegant or dignified for these pages. Nevertheless I will attempt to answer the inaccurate implication that Land Tax is not paid by the occupier of the property, whether an owner or a renter, Land Tax is in effect a GST for land. Unfair to the poor and low income earners! GST is regressive and so is Land Tax. There are also other reasons why Land Tax is socially and economically unsuitable but I am only answering your inaccurate implication here.

        A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.

      • OK, I’ll get out the finger puppets so you can understand.

        A person who derives an income and earns $45,000 p.a. will incur a $6,172 income tax liability, and a further $900 medicare levy. Then there will be a LITO offset of $325.

        That nets out to $6,747. That’s the tax that goes to the government.

        Are you with me?

        Money go to tax man.

        No, instill a tax free threshold of $45,000, and the liability can iehter go to $0, or $900 if you maintain a medicare levy.

        Now, if this person was to occupy a property with an unimproved land value of $500,000, either rent or owner-occupier, and applied was an LVT of 1%, they would now have a liability of $5,000.

        A renter can afford this due to having their income tax liability reduced.

        This means their burden has shifted from income to LVT, but they are discharging a liability none the less. They also have the means to reduce this by occupying less valuable land, by sharing with other occupants of the land.

        As far as extracting a tax receipt from a tax payer, which we all have to do, an LVT is simpler, fairer, unavoidable.

        When we collect taxes from unavoidable sources, we can apply a lower rate. We you have taxes that are avoidable or full of deductions, other tax payers have to pay at a greater rate to make up the short fall.

        Comprende?

    • No and yes, but I agree with the comment the objective needs to be about society and not the numbers trap.

    • Guess what. I rent and I would rather pay for a higher land tax than that the money goes to my landlord. When I owned my house I was also happier to pay more for community services through land taxes than paying the bank extra in my mortgage. I believe land tax is not additional to the current costs but will substitute them. That is more equitable and fair and will be more of a benefit to the poor who you pretend to care about. All you are asking for is that the maximum be redirected from supporting the poor to the pockets of speculators.

      • And you trust the Government to be reasonable with how much they charge for Land tax? And if a person does not have an income you expect them to sell their home to pay land tax? Here is a brief reminder for you of how much you can trust governments to do what they say about Land Tax. (There are also other flaws in your support for Land Tax that I choose not to address at this time). The federal government counteracted with its own advertising campaign which claimed that New South Wales had breached its contractual obligations under the 1999 GST Agreement by continuing to charge unfair stamp duties and land taxes, which were supposed to have been abolished. After weeks of intense media and public pressure, the New South Wales State Government announced in its budget that it would reduce stamp duty and land tax, but critics argued that the State Government did not go far enough with much broader tax reform in New South Wales required to help encourage investment and business that had been forced elsewhere due to an unfavourable New South Wales business environment. This was in response to the Commonwealth allowing another A$72 million in grants to New South Wales, in addition to existing annual increases. P.S. If you owned your home and it was your primary residence you did not pay Land Tax.

  9. And you trust the Government to be reasonable with how much they charge for Land tax? And if a person does not have an income you expect them to sell their home to pay land tax? Here is a brief reminder for you of how much you can trust governments to do what they say about Land Tax. (There are also other flaws in your support for Land Tax that I choose not to address at this time). The federal government counteracted with its own advertising campaign which claimed that New South Wales had breached its contractual obligations under the 1999 GST Agreement by continuing to charge unfair stamp duties and land taxes, which were supposed to have been abolished. After weeks of intense media and public pressure, the New South Wales State Government announced in its budget that it would reduce stamp duty and land tax, but critics argued that the State Government did not go far enough with much broader tax reform in New South Wales required to help encourage investment and business that had been forced elsewhere due to an unfavourable New South Wales business environment. This was in response to the Commonwealth allowing another A$72 million in grants to New South Wales, in addition to existing annual increases