RICHARD DENNISS. Trump’s tax cuts will increase inequality. Australia shouldn’t follow his lead.

The fiscal policies of conservatives like Trump and Scott Morrison are eating away at the fabric of society. 

If running a budget surplus is a “conservative value’ then Donald Trump is one of the most progressive presidents in US history. The US federal budget deficit is already more than $US779bn this year (more than $AUS 1tn) with the Congressional Budget Office forecasting deficits of more than $US 1tn per year for the foreseeable future.

Of course, Trump is no progressive and there is no link between conservative politics and conservative fiscal policy. None. But, just like Trump, John Howard, Tony Abbott, Malcolm Turnbull and Scott Morrison have prioritised permanent tax cuts over long run fiscal stability whenever they have had the chance.

Trump’s newfound interest in Keynesian stimulus has nothing to do with progressive fiscal values and everything to do with redistributing money to his friends. Conservatives simply pretend to care about budget deficits when progressives are in power as it gives them what seems like a “principled” position from which to oppose increased spending on public health, public education and public infrastructure. But the minute they can cut taxes for their friends, all interest in budget repair is lost and they instead start talking up the economic benefits of stimulating the economy.

Trump’s tax cuts will pump about $US 200bn into the US economy in 2018and there is little doubt that this fiscal stimulus is having a positive impact on economic growth and employment. Keynesian economic stimulus policies work regardless of what politicians call them. It’s also important to acknowledge that they work regardless of whether they come in the form of big new tax cuts or big new spending increases.

But the fact that tax cuts and public spending can stimulate “jobs and growth” in the short term doesn’t mean they have the same economic or social benefits in the long run. On the contrary.

Back in 2008 when the enormity of the GFC was just beginning to dawn on policy makers here in Australia and around the world, the advice from the commonwealth treasury to the then treasurer Wayne Swan was to “go hard, go early and go households” and in turn, the Labor government’s stimulus package included posting cheques for $950 to most households along with a big boost in public housing construction and infrastructure spending.

While Swan could have taken a leaf out of the conservative play book and announce big cuts in personal or company tax rates, there is little doubt that our society and economy are both stronger today because he didn’t. And there are three main reasons why.

First, because it is hard to give big tax cuts to people on low and middle incomes. Relying on big tax cuts to stimulate economic activity inevitably delivers the biggest benefits to those that earn the most money and own the most shares. While Trump’s stimulus will increase inequality, Swan’s stimulus helped reduce it.

Second, low and middle income earners have what economists call a “higher propensity to consume” while high income earners have a “higher propensity to save”. What this econobabble means is simply that if you put $100 into the pocket of a low income earner they are likely to spend all of it and do so quickly whereas if you give $100 to a high income earner they are more able (and in turn more likely) to save some of it. In turn, putting $100 of stimulus spending in the pockets of low and average income earners creates more “jobs and growth” than putting $100 into the retirement saving accounts of the wealthy.

Third, it is easier to stop spending than it is to reverse tax cuts. Back in the early 2000s Peter Costello responded to a temporary boost in mining profits with permanent changes to our tax system that are still costing Australia tens of billions in taxpayer dollars per year. But in 2008 and 2009 the stimulus package consisted almost entirely of one-off spending measures that had no permanent impact on the budget.

There is no doubt that Trump’s tax cuts, or indeed $100bn worth of Australian company tax cuts, would provide some boost to GDP. But there is also no doubt that at some point in the near future the deficits caused by those tax cuts would be used to justify big cuts in spending on public services, simply increasing inequality and reducing economic activity.

It’s good that the heated debate about “budget emergencies” has abated in Australia but it is appalling that we ever had one. Like Trump, the IMF and the World Bank, even Turnbull once admitted that stimulus spending is at times necessary and effective.

But while the debate about the size of the deficit has abated in Australia, the fight about the shape of fiscal policy is only just beginning. While the Coalition is determined to push for big tax cuts funded by further cuts in public spending, opposition leader Bill Shorten is proposing to collect a lot more revenue and spend a lot more money on services. Australian voters haven’t been offered such a significant choice since Whitlam vs McMahon.

On Wednesday in Canberra the former RBA governor Bernie Fraser, shadow treasurer Chris Bowen and a wide range of academics, business people and NGOs discuss the most efficient and equitable ways to collect the revenue needed to reshape Australia’s economy and society in the way that the overwhelming majority of voters say they prefer.

But regardless of whether voters at next year’s election opt for a more equal society that spends more on services or a less equal society with further cuts to health, education and welfare, what is clear is that there will be no phoney fight about the need to tackle an imaginary budget emergency or rush to pay down public debt. The Coalition’s profligacy has killed off the neoliberal obsession with debt and deficits and our democracy is better off for it.

Conservatives like Trump and Morrison have a much bigger appetite for redistributing wealth than they do for sustainably managing the budget. Unfortunately, the resulting fiscal policies are eating away not just at the future of the budget but the fabric of society.

Richard Denniss is the chief economist for the Australia Institute. 

This article was published by The Guardian on the 17th of October 2018. 

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One Response to RICHARD DENNISS. Trump’s tax cuts will increase inequality. Australia shouldn’t follow his lead.

  1. Ben Morris says:

    A broad-based consumption tax would catch all firms, partnership and individuals operating in Australia and who can shift taxable profit out of Australia. The current tax legislation allows costs to be shifted into Australia and amount of funds left after deducting all expenses including the imported outlays to be greatly reduced.

    The current debate seems to miss the point that the current tax system is largely voluntary. Those with tax knowledge can avoid paying large amounts of tax if not receive total exemption from any contribution to the common good.

    It is no good rejecting tax if it is going to effect on lower income earners. If may have a greater effect on the tax avoiders. Tax reform may have to consider other means of compensation to level the tax paying field.

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