The Laffer Curve arrives in UK

The new Truss executive in the UK is setting out to restore a little faith in conservative politics economics. First, removal of the fracking ban. Now a tax reduction package described by most commentators as the biggest cut in taxes for decades. That’s excellent news. Yes, it needs to be followed up by expenditure cuts since the real measure of tax in an economy is the level of Government expenditure rather than the tax take. But, a tax cut will help even in the absence of an expenditure cut.

The reasons are well known. Arthur Laffer is the US economist credited with the naming rights of the Laffer Curve. In simple terms, Art’s point was that at a zero rate of tax, the total tax take would be zero. Likewise for a tax rate of 100%. In other words, the tax rate that would maximize the tax take was between 0% and 100%. What’s more, at higher rates of tax, a tax rate reduction would actually increase the tax take. That can only happen if economic growth increases. President Reagan understood the concept and the Reagan tax cuts were a huge success.

Now, 40 years later, the Truss government is following the same path. Well done Liz, this is a great start.

Income tax cuts in Australia

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.

The smell of tax change is in the air

Can you smell it? The prevailing winds at this time of year come from the direction of Canberra as the Government and public servants in the departments of Treasury and Tax work out the policy changes that will form part of the Budget night speech by the Treasurer in early May. When I turn my nose towards Canberra, I can definitely detect the smell of tax changes.

The federal Government executive works feverishly ahead of the Budget in formulating ideas for policy change. Sometimes, the ideas are good, sometimes they are not so good and sometimes they are positively barmy. The work rate is high and the stuffiness in the office air in Canberra gets worse as each day moves into night and the deodorants applied that morning have long ago given up the good fight. At this point, the officials can open the windows or turn up the air conditioners. Usually, it is in the office where the policy idea might be considered by Sir Humphrey as ‘courageous’ that the window is opened. This lets the smell of the idea waft out into voterland and the reaction of voters is a guide to Government as to the acceptability of the idea. In other offices, the windows remain tightly shut and no whiff of the idea gets out until shortly after 7:30pm on the night of the Treasurer’s Budget speech.

Right now, the tax changes under serious consideration, judging by the air wafting from Canberra, include changes to franked dividends, age pension eligibility and negative gearing. Continue reading

Thanks to Art Laffer

Dr Art Laffer is in Australia this week. I enjoyed listening to him deliver a speech to IPA members and guests in Melbourne on Wednesday. When I say ‘deliver a speech’ I mean entertain a large group of people with wit, humour, optimism and humility in a lively discussion full of historical significance and anecdote. He explained his a priori theories and backed them up with evidence. For those of you who have enjoyed the short film of Art having a commemorative lunch with Dick Cheney and Don Rumsfeld, he is just as engaging with an audience of strangers as he is when lunching with his friends of 40 years or more.

Dr Laffer is undoubtedly one of the most influential people of the last 40 years.

Australia’s increasing tax burden

The tax burden in Australia has been on the rise for decades. In particular, the total tax take, expressed as a percentage of GDP, has accelerated from the early 1970s. The chart below has all dollars expressed in the equivalent 2014 values. The total tax burden has risen from around $10bn per quarter in 1960 to $27bn per quarter in mid 2014. Of this, income taxes have been rising, but not at the same rate as total taxes. The total tax burden as a percentage of GDP has risen over this period from 1% to 30%.


This trend is unsustainable. No economy can survive an ever increasing tax burden. Some other countries have already passed a tipping point. Australian political leaders need to take note.

Twisting the language of tax for political gain

George Orwell wrote of the importance of language as a political tool. Language could be used to manipulate the way people think.

Today’s example of manipulative language comes from the world of superannuation tax. Apparently, using the language of the politically motivated, high income earners in Australia receive greater superannuation tax concessions than do low to middle income earners. Consequently, reform is needed to make the system fairer and levy a higher rate of tax on the superannuation contributions of the high income earners.

Continue reading