Slash tax to secure prosperity is the cry of a few hardy “supply side economists”. A reader passed on the following quote from “well regarded research firm Gavekal”:

As religious readers of Paul Krugman (the New York Times columnist), we had expected the Bush tax cuts to be an unmitigated disaster. Because of President Bush’s “fiscal recklessness” we thought, in 2003, that the US would stay in a recession.

Then we felt that the recovery would be a profitless recovery. When the profits hit record highs, we then feared that the recovery would be jobless. When the US economy ended up creating more jobs than anyone had thought possible, we fell back on our default position, namely that the Bush tax cuts had endangered the US fiscal position and that we were set to leave mountains of debt to grandkids etc… (at least the US, unlike Japan or ever larger parts of Europe, has grandkids to leave debt to!).

And today, here we are, with our back against the wall as tax receipts in the US are absolutely booming. Maybe, instead of reading Mr Krugman, we should have remembered what Milton Friedman once told us: “I’ve never met a tax cut I did not like”. If so, we may have been able to foresee that, over the past six quarters, tax receipts have been growing at 2.5x the growth rate of US nominal GDP?

One hopes that the Australian Treasury might check out these facts and draw the appropriate conclusion for the mighty energy superpower called Australia. Certainly Australia’s tax receipts have been growing fast, faster than Treasury’s models have predicted. It is just possible this is due to the “Laffer effect” as a result of the relatively modest tax cuts companies and individuals have received. If this is the case, serious tax reform might entrench whichever party implements it for the next decade.

As Henry’s editor argued some time ago:

We should not ignore the logical point used as the basis of the so-called “Laffer curve” in this debate. This is that when the marginal rate of income tax is 50% (or more) a taxpayer earns as much (or more) from evading or avoiding tax as he does from earning more. It is no coincidence that Australia’s richest people pay relatively little tax, which does nothing to maintain the confidence in the overall fairness of Australia’s tax system. But there is another point to be made – ability to take measured risks and to work hard, when combined with a relatively low personal burden of tax, is a recipe for building great wealth. The aim of policy should be to offer the possibility of such a combination to all Australians, not just the already wealthy, who have used tax minimisation within our complex system so well.

The Oz today reports that Labor seems to be making up ground on the key issues of economic management and national security. There is nothing like competition to spark outcomes, and Australia may soon be in a situation where there might again be real competition at the ballot box.

Read more at Henry Thornton.

Peter Fray

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