Don't Go There, Wayne

I never thought I would reach the point in my life where I could be bothered writing twice in two months about something as tedious as tax. However as St Kilda's season sinks into the toilet, the gardening has been successfully outsourced and the latest instalment of "Angry Birds" is still some weeks away from being released, I am a bit stuck for things to fill my leisure time. Accordingly, thoughts turn once again to the blog, and seeing the question of tax both here and in the USA is quite topical at the moment, it is as good a subject to complain about as any other.

In the USA, after years of profligate spending under Bush, the Republicans are now so hell bent on fiscal restraint that key government social initiatives will need to be either cut entirely or curtailed severely as a condition of Obama securing supply. The only thing seemingly off the table is the reversal of Bush's tax cuts for high income earners. One should of course expect these sorts of double-standards from the Republicans, but more on them later.

Back home, the debate is raging about the government's new carbon tax and how this will affect both industry and individuals alike. Leaving aside the merits of the government's scheme (which could fill pages on its own), there has been a lot of discussion about how the government will compensate those affected. A lot of this was pure waffle that will never see the light of day, but what really piqued my interest was when Wayne Swan went on television and raised the possibility that income tax cuts might be a viable option.

I know most people might punch the air when they hear the words "tax cuts" uttered by any politician, and I used to be the same, especially when I got my group certificates during the last economic boom and saw the prodigious amount of tax I was paying. However, I have come to realise in recent years that tax cuts are a double-edged sword and any government looking to introduce them needs to think very, very carefully about the consequences.

This is because taxes are there for a reason. I know Kerry Packer once famously went on television and launched into a diatribe about how the government didn't spend tax dollars properly and anyone who didn't therefore avoid paying tax needed their head read. However it's of course entirely logical for someone like Packer to take that view because he was wealthy enough to be entirely self-sufficient and didn't therefore require any of the things that government provide. What staggers me however is when you hear about people who earn $50,000 per annum and rely heavily on government services that agree fervently with Kerry and cheer wildly when they receive a $12 a week tax cut like that received in the 2008/9 year. Honestly, do they think having the means to buy a medium-sized pizza for dinner on Friday night is really going to improve their quality of life more than having better roads, hospitals, or schools? Because that's really the trade-off inherent in any debate about tax cuts.

Let's think about this in the context of some hard numbers. According to recent ABS figures, there are approximately 11,000,000 employed Australians and let's assume of these, roughly half earn at least $50,000 per annum. Although it is not realistic given tax cuts are always on a sliding scale, let's assume for the purpose of the exercise everyone in that bracket receives a $12 per week cut. That works out to an annual cut to government revenue of $3.43 billion, more when you consider what relief people in the higher tax brackets got. When you consider the constructive public use that sum of money could be put towards, it seems a very high opportunity cost to pay in exchange for the Friday night pizza. Especially if the pizza comes with anchovies which you didn't order.

It is indisputable that in a capitalist society we need to encourage hard work and entrepeneurialism and therefore need to design a tax system which gives people the incentive to work hard and by doing so achieve a comfortable lifestyle. It is also indisputable in part what Kerry Packer says, namely that governments often don't get their spending priorities right. However, on the flip side, unless you are a loony-right Tea Party follower, it is clear that governments need to play a role in both the economy and broader society to stop them descending into chaos. In order for them to perform that role properly, they need an appropriate amount of funding.

As with many things, the tax debate comes down to a question of balancing the rights of the individual to spend their money as they see fit against the needs of society as whole. If, as an economist friend of mine recently said, taxes are the price we pay for a civilised society then you have to seriously question both here and in the US whether the balance has tipped too far towards the individual. This is particularly when you consider some of the following worrying phenomena:

• The appalling state of the Victorian train network
• The appalling state of the Queensland Health System, where people have ridiculous waiting times for non-urgent surgery and chances are they might get operated on by Dr Death - who due to a major computer system failure, probably hasn't been paid for 6 months
• The appalling state of Sydney - generally
• Bastardisation of and severe funding cuts to important public institutions like the ABC and the CSIRO
• The fact that governments at all levels have effectively thrown in the towel on constructing most forms of major infrastructure. For example, look at major road bypasses in our capital cities, which have typically been left for the private sector to fund through tolls which motorists generally refuse to pay, creating both congestion on the existing road network and financial pain for the investors. In the rare case that governments do pay for these roads, they do a half-assed job like the farcical one way southern expressway in Adelaide
• Unlike those of us lucky enough to go to University in the late 1970s and 1980s, students these days are unable to complete a degree without emerging at the end of it with a crippling HECS debt. This leads to a huge disincentive for young Australians to pursue university studies and leads to places being instead given to affluent, fee-paying foreign students who have little interest in furthering the interests of our country
• Despite going through the biggest mining boom in our history and our economy becoming ever more reliant on exporting our non-renewable resources, we have no national sovereign fund to help ease the pain for when these precious resources run out. Contrast our situation with that of Norway, which has built up a fund worth $525 billion, or $105,000 per person.
• The alarming number of seriously mentally disturbed people wandering around city streets. In years gone by, these people would be housed in government-funded institutions for their own and the public's safety. Now instead they are pushed back out into the community where they are demonstrably unable to cope and already over-stretched charities have to try and clean up the government's mess.

I could go on, but you get the picture. To my mind, there has been more than enough service deterioration and lack of forward planning from governments to warrant the risk of further slippages caused by more income tax cuts. Sure, there's a chance the government might spend the extra money on bad policy initiatives like a baby bonus or on building desalination plants in the middle of a flood, but at the same time if the lack of a tax cut prevents a new McDonalds or KFC being built somewhere through people having slightly lower disposable income, that's a tradeoff I'd take any day of the week.

Still, while we have our challenges here, at least we don't live in America. It simply defies all logic that despite polls saying that over 80% of Americans favour tax hikes for the rich as the best means of digging the country out of the budgetary hole they are in, the same Americans then go and elect a heap of Republicans at the Congressional elections who then go and do what? Rather than doing what the public wants and rescinding Bush's tax cuts for the rich, they force Obama to instead affirm the cuts, and push him to balance the budget by cutting public services instead.

Then again, in a country where Donald Trump can be a semi-serious candidate for President, anything is possible. Let's all pray that he doesn't get in, because if he does, our tax assessments will be the least of our problems.