We’re all familiar with the dictum, “In this world nothing is certain but death and taxes.” But Will Rogers also astutely observed, “Yes, and the only difference between death and taxes is that death doesn’t get worse every time parliament sits!”

The first thing to say about taxation is that we need less of it, not more.

Last week’s budget made it clear the government does not have a revenue problem – soaring iron ore, coal and natural gas prices are set to add $58 billion to tax revenue over the next four years. However, it does have a spending problem, with deficits predicted from here to eternity.

To address this, economists, businesspeople and, of course, State treasurers, kicked off the debate by proposing to raise and/or broaden the GST. Economic considerations aside, why the Commonwealth would even consider such a proposal is laughable. The Federal Government would bear all the pain and the States would enjoy all the gain – which they would no doubt spend as extravagantly as they do with existing GST proceeds.

Aside from the political reason, there is the simple economic reason:  a lift in the GST rate, or a base-broadening change, would simply give State governments more of our money.

Treasury officials, economists and business people will of course respond by saying they are not looking to raise more revenue, they just want to raise more from the GST and then offset that by reducing other taxes. But as occurred when the GST was originally introduced, by the time you have compensated everybody who says they will be worse off, you are left with only a portion of what the GST increase will raise. The result, as it was in 2001, would be a higher level of expenditure, a higher level of taxation, and no reduction in other taxes. This has been the experience with consumption taxes around the world.

It goes without saying that attempts at tax reform in Australia in the past have been disappointing.  The introduction of the Goods and Services Tax in 2000 resulted in a big increase in tax revenue – it will generate $80bn this year – a sum that was beyond the wildest imagination of even its most enthusiastic proponents back then. Getting the States to abolish many of their taxes, as they had promised to do as part of the GST introduction package, has, to say the very least, been problematic.  

One of the main problems is the fact that 70% of local, State and Federal taxes are spent on salaries.  It’s no wonder we haven’t seen a new reservoir built in 50 years.  And of that 70%, less than half is spent on essential services like nurses, teachers and police. As we know, whenever cuts in government spending are called for, politicians respond with “well how many nurses, teachers and police would you like us to cut?” They rarely ask how many media advisers you would like them to cut.

Presently, the Commonwealth raises around 80% of all taxation revenue in Australia, leaving the States with just 20% to fund their responsibilities. That 20% is less than half the revenue needed to fund State Government services. The balance comes from Commonwealth grants, many of which have conditions attached.

Fairly obviously, federal fiscal arrangements are dysfunctional.

As for tax law, the sheer quantity and ever-changing content of tax legislation has undermined its credibility.

One leading tax barrister described Australia’s tax laws as ‘unintelligible’.

It is practically impossible to know what the law is and what it means., and the High Court now seldom grants leave to appeal in federal tax cases, virtually giving up hope of ensuring the tax system remains subject to legal principles and normal adjudication methods.

Before the First Uniform Tax Case in 1942 the legislation occupied just 81 pages. It is now over 10,000 pages, (20,000 if you include fringe benefits tax, capital gains tax and superannuation provisions). If that’s not a recipe for dysfunction, it’s hard to know what is.

According to the market research company Roy Morgan, there are almost 2.8 million Australians who either want a job or would like more paid work.

Those 2.8 million people are all missing out on a better standard of living, and those who are unemployed are also missing out on the well-known benefits of having a job: self-esteem, purpose and support.

This is at a time of historically low unemployment. Employers are desperate for workers and many businesses have restricted their activities due to a lack of staff.

Two of the main contributors to this high number are the minimum wage and pension rules. Both are government policies and neither side of politics has any interest in changing them.

The minimum wage issue strikes hardest at those with low employment skills. People just out of school, just out of jail, low literacy, sole parents and refugees, for example. No matter how poor their resume or how willing they are to accept a job, they can only be employed if they are paid the minimum wage, currently $21.38 per hour (but considerably higher for irregular hours and casual positions).

It is against the law to offer them a job that pays less than the minimum wage, even if it is well above the $5 to $10 an hour they receive on welfare.  Yet paying them the minimum wage plus various on-costs makes no economic sense for most employers.

Before he entered Parliament and became a Minister in the Labor government, Dr Andrew Leigh was a professor specialising in labour economics. He found that reducing the minimum wage in Western Australia by ten percent would increase employment by around three percent within three months. 

In a separate study, Dr Leigh found that most people on the minimum wage are in middle income households.  By contrast, low-income households are typically in that position due to unemployment. A reduction in the minimum wage, by creating employment, would help them the most.

Other studies have shown that most people on low wages move on to higher wages after about a year.  In other words, low wage jobs are an opportunity for people to start at a bottom rung and work up. But with the minimum wage so high, many cannot even reach the bottom rung and begin to climb.

It is a peculiarly Australian problem: Australia’s minimum wage is now the second highest in the world. Australians start paying income tax once their annual income exceeds $18,200, but they are not allowed to get a full-time job unless it pays more than $39,000 a year. 

Another major barrier to both getting a job and working longer hours is the limit on earnings of those receiving age and disability support pensions or carer payments. The Institute of Public Affairs has recently done some research on this.

It found that whereas only 3 per cent of pensioners work in Australia, 25 per cent work in New Zealand. The reason for the difference is that in New Zealand, all income including the pension is taxed at normal income tax rates. There is no reduction in the pension.

In Australia, pensioners are only permitted to earn up to $190 a fortnight ($336 for couples) before their pensions are reduced by 50 cents for every dollar earned above that.  A pensioner with a job would not only pay income tax on their wages, but also lose a major chunk of their pension.

The effective tax rate can easily reach two-thirds.
Not surprisingly, most consider it not worth the effort.

And yet, pensioners who work would not only top up their income but also remain engaged in the community and pay tax on their wages.

At a time when the country is desperate for workers, this is a genuine tragedy. Instead of making it easier for those 2.8 million Australians to fill the vacancies, the government is opening the immigration floodgates. For some people, low incomes are compulsory.

Reform of the Reserve Bank of Australia (RBA) has been in the headlines. The problem with the RBA however is not structural.  It is a failure by the members of the board to be able to adequately define “inflation”.

At the heart of all the angst is the statement made by the RBA Governor, Philip Lowe, in 2020 that he did not think interest rates would rise until 2024.  Interest rates have risen, of course, and mortgage payments have exploded as a consequence. It’s therefore not hard to see how this stokes anger in voter land.

The Governor was not alone in making such forecasts. Most of the chief economists at Australia’s big four banks were making the same predictions. However, anyone with a basic understanding of what the word “inflation” really means knew these predictions were nonsense.

Inflation is simply the expansion of the money supply as a consequence of government debt and money-printing deficit-spending.

Think of the money supply as a balloon. When you fill it with hot air, the balloon expands. That’s inflation.

The result for you and I? Higher prices! 

For example, interest rates – which is a fancy way of saying ‘the price of money’ – go up. So it becomes necessary for lenders to ensure the money they lend today and receive in the future does not lose its spending power along the way.

Why are higher prices an inevitable consequence of the expansion of the money supply? Because the money fabricated by the government bids-up prices by competing with the money earned through wages and profits in the private sector.

When there is more money in the system,
but not more goods and services,
prices inevitably go up. 

Consider the fish market for example. There is only so much fish at the market on any given day. If the government stands at the gate and hands $100 to everyone who enters the market, demand goes up, as people are willing to pay more with that extra cash in their hands.

During covid, the government stood at the gate dispensing money freshly minted for it by the RBA in exchange for government bonds. We’ll get to government bonds in a moment. 

So did the RBA board not know about the nexus between the expansion of the money supply, price inflation and higher interest rates?  Or did they simply lie about the future of interest rates?

Inflation is toxic because it distorts price signals in the otherwise free market, creates malinvestment, enables “crowding out” (a topic for another day) and destabilises the economy.

It’s a favourite party trick of mine to show people the graph below from the RBA’s monthly chart pack. Note the alarming expansion in government bonds (see the grey area on the graph) the RBA accumulated on its balance sheet when the government issued bonds like crazy to fund its reckless spending during covid. There’s your inflation right there, Governor. It’s in your own data!

Anyone with a simple grasp of basic economics takes one look at that chart and draws the obvious conclusion that higher prices were coming soon.

“Global supply chains”, “the war in the Ukraine”, “yadda yadda”.  No! It was all the reckless debt-funded spending. They inflated the money supply and should have known that higher prices (and by extension higher interest rates) were inevitable in the short term, not way off in the future.

And just by the way, unions demanding wage rises are no more to blame for inflation as “greedy companies price gouging”. Pinning inflation on unions or businesses misses the point entirely.

Restructuring the RBA board will not solve the problem of economic ignorance. De-program aspiring board members of ‘Modern Monetary Theory’, ‘Keynesian Economics’ and other such nonsense. School them in microeconomics and Austrian school economics. Then RBA governance would not be in the news at all.