All taxes inhibit economic growth and human progress
generally. Some taxes, of course, are necessary. We have to pay for defence
forces, law courts and the maintenance of law and order. As the recent events in
Honiara remind
us, and as Hobbes pointed out 350 years ago, tax is among the essential functions of the
State, without which civilised life is impossible.

But the contemporary State goes far beyond the Hobbesian
framework in its demands on our wealth and income, and the political forces
which might come together to successfully reduce the role of the State in our
lives seem today to be puny and powerless. Nonetheless there are arguments which we must continue
to advance in favour of freedom and in the context of the current budget it is
noteworthy that two important issues have been ignored. Although all taxes are
detrimental to civil society, some are far more detrimental than others, and the
most damaging taxes now in operation are the capital gains tax and the high
marginal tax rates of 40% and 45% (plus Medicare, plus payroll
tax).

Capital Gains Tax is a enormous tax on transactions in
the capital markets, and like all transaction taxes it impedes economic
activity. The role of the capital markets is to ensure, as far as humanly
possible, that our capital resources are employed to yield the best possible
return. To impose a tax of gargantuan proportions
on transactions in this market, as Paul Keating did in 1985, shows the most profound ignorance of economic
life. Peter Costello managed to persuade the Democrats to agree to a halving
of the Keating rate. And in a manifestation of economic understanding that is
all too rare in government circles, capital transactions in the small business
sector were exempted from these punitive imposts. The current budget contains
some additional measures applying to CGT in the small business sector and it is
to be hoped that these measures will be liberalising ones. The only proper
response to the CGT is its abolition. Not one commentator has raised this
matter.

Now that the percentage of taxpayers on the top two rates is according
to the Treasurer, only 2% of employees, it should be simple enough to
abolish them altogether at the next budget. A maximum 30% tax rate
should be high enough for even the most predatory state, and the
offsets from increased real economic activity should more than
compensate for the disappointment the envy class will suffer.

Peter Fray

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