There has been a lot of chatter in Australia this week about the cuts to income tax rates passed by Parliament. The cuts are phased in with immediate effect for lower income levels and deferred a number of years for the higher income levels.

While I’m in favour of income tax cuts, like anyone else who pays income tax, we ought to remember that the true tax burden is not represented by the rate of income tax, or any other tax, for that matter. The true tax burden is determined by the level of Government expenditure. The tax regime, the rates, the thresholds, the mix between consumption tax, income tax, royalties, stamp duties, corporate tax etc is the outcome of a political process that determines who will pay for the expenditure and in what time period they will pay. Cutting tax without cutting expenditure simply means someone else can pay for it, at some other time.

We are collectively better off when Government expenditure is cut first, and tax reductions can then follow. None of this is to deny the truism of the Laffer Curve.