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Election Week 1: The Tax Break

In opinion on October 22, 2007 by karan Tagged: , , , , ,

The Election certainly kicked off with a bang following the Coalition’s $34 billion dollar tax cut package (over 3 years). Labor held out to the end of the week before unveiling a similar package, for $31 billion, with the bulk of the additional $3 billion going towards education – as a tax rebate for families – and some $600 million promised to reduce waiting lists at hospitals, and finally pocketing some $200 million out of the remainder for the government surplus.

The Liberal move surprised me little – Howard and Costello have a track record of buying votes with tax breaks, and people have come to expect them rather than consider it an exceptional circumstance. The truth is however that these reductions in personal tax rely on some other part of the tax base holding up the fort, and while that is the companies at present, it’s a fragile thing on which to base a long term strategy, which eroding the income tax base certainly seems to be.

Still, it’s a bit of more-of-the-same from the Liberals, and I don’t think anyone was surprised too much by them. Polls on Wednesday suggested it resulted in a 2% swing back to the Liberals, bringing them to within 10 points for the first time in a long while.

Labor held out for a few days, rather than react and be forced to reveal their own policy in whatever state it happened to be in. However, when it was released it by and large mirrored the Coalition policy, up to the point of the richest tax bracket (i.e. completely irrelevant to the majority of voters).

This disappointed a lot of people, I’m sure – when you’ve got Jeff Kennet saying the tax cuts would be better spent on health, education and such like, you know perspectives have changed; now we’re just waiting for the politicians to catch up. The $2.3 billion for education and $600 million for hospitals that Labor skimmed off the Liberals’ policy got buried in the headline that the tax cuts will be largely mirrored.

It seems like both sides took to appealing very cynically to people, effectively saying your vote is linked to your hip pocket; it may be that this turns out to be true, and that is what Labor is betting on by trying to neutralise the issue in mirroring the cuts. What I think a lot of people wanted to see though was for Labor to be different – it might not win so many cynical votes, but by being different Labor could have stolen a march on the Coalition.

Spending on education and health are two things that the Liberals could not attack for being “wasteful” or any of the tag lines that would typically be rolled out in the face of different priorities. If $15 billion had been poured into universities and technical schools, virtually guaranteeing a reduction in HECS and fees, it would play very well to the families. Spending the next $15 billion on hospitals would have made a huge impact and really cemented Labor’s position as the social-services party – it might be an old cliché, but the Liberals would be committed to delivering some $30 per-week-over-three-years worth of tax cuts while Labor would be promising to fix services. That would be the true test of the cynical vote and establish a clear difference.

Instead, we’ve got a race to the bottom. The tax cuts are clearly inflationary, and the Reserve Bank is sure to take this view when considering the next round of interest rate movements.

If I were to draw the analogy to the financial world, this is a company promising to pay out a huge dividend. This pleases the simple investors – it means they get a cheque in the mail that’s money for holding the shares. More sophisticated investors however should take it as a warning – dividends are only paid out when the company has no idea what to do with the profits and cash it’s got sitting on its books. That means the company doesn’t have any useful projects it could invest the money into and potentially generate more money down the track.

Microsoft for years didn’t pay a dividend because it had projects to invest money into. In 2004, they had a lot of money on their books and nothing useful to do with it – so they paid it out. This was a clear indication Microsoft didn’t know where to go next, and these tax cuts are much the same concept, broadly – returning money to shareholders of Australia Inc. Except those shareholders are effectively customers too, and they aren’t necessarily happy with the service they’re getting.

All in all, tax cuts are a cynical way to win government, and indicate a lack of direction. They do have an immediate appeal, however, and we see this played out particularly in Australia where compulsory voting pushes the decision of choosing government to the marginals, where cynicism is far more likely to win for its immediate appeal, rather than any long term plan that might help. Here’s hoping this is one promise that can be reneged in favour of more appropriate spending.

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