John Howard Pledges Income Tax Cut; Government Surplus is Stolen Money

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Well that didn’t take long. Yesterday we quoted H.L. Mencken, who said that elections are, “the advanced auction of stolen goods”. Let the bidding begin.

Hardly one day into the election campaign and the Government is already handing out the goodies, AU$34 billion of them to be exact. Yesterday John Howard and Peter Costello promised tax cuts to be phased in over three years, targeting mostly low and middle-income workers.

If you can’t get them to join you, buy them!

It is interesting to note that several economists are worried that the tax cuts are inflationary and that the government is stimulating demand when the Reserve bank is trying to rein it in. But this seems to confuse the money supply with rising prices.

Tax cuts don’t lead to higher inflation. An expanding money supply leads to higher inflation. “Inflation is always and everywhere a monetary phenomenon,” said Milton Friedman. Tax cuts merely distribute the same quantity of money between three entities: business, government, and the public.

Now, each group spends money differently. And it might be that individuals are more likely to spend a windfall than, say, a business. But that’s a matter of choice and has nothing to do with the money supply. Inflation is already afoot in the Australian economy because of the growth in the money supply – something independent of the interest rate set by the Reserve Bank. If the Reserve Bank is serious about containing inflation, it will cut the 12% annual growth in the money supply.

Besides, let’s be honest: critics of tax cuts are closet elitists hiding behind fancy words. They may say that they’re concerned that lower-income wage earners will spend money instead of saving it. But what they really mean is that the government knows how to spend your money better than you do. It reminds us of our old cagey friend William Jefferson Clinton.

Clinton promised middle-class tax cuts but then back-tracked. He explained why shortly after he was sworn in as President in 1999 during a speech in Buffalo, New York. The question seems kind of quaint now. It was about what to do with projected government surpluses. At the time, the dot.com boom was generating massive capital gains tax revenues for the US government boom.

Clinton explained the danger of letting people keep more of their own money:  “We could give it all back to you and hope you spend it right… But … if you don’t spend it right, here’s what’s going to happen. In 2013 — that’s just 14 years away — taxes people pay on their payroll for Social Security will no longer cover the monthly cheques… I want every parent here to look at the young people here, and ask yourself, ‘Do you really want to run the risk of squandering this surplus?’ ”

Right. Because the government is so much better at managing our money than we are. What a moron. And that was back when the US government’s finances were less than tragic.

We’ve never understood the perverse sense of pride voters take in a government than runs a surplus. This just means you’re being taxed too heavily. It is not sound financial management when the government routinely confiscates more money than it needs to meet its liabilities.

The people who support government keeping money instead of giving it back or lowering taxes are the sort that love creating new government programs. In accounting terms, we call these liabilities. Long-term liabilities are born when you begin thinking the government spends money more responsibly than the people.

Long-term government liabilities are promises that governments make to earn votes, but which they know they can’t fulfill, or intend to fulfill by printing more money and cheating you of your savings. You don’t have to take our word for it, either. Just look at how the Anglo-Saxon model has worked for America.

To meet the absurd list of social benefits promised to Baby Boomers, the American government will have to borrow trillions of dollars. In fact, according to a report we found in the course of our research, US officials estimate that the government would have to borrow nearly US$2 trillion a month to meet is obligations. It would be nearly 450% of GDP. Take a look at the charts and you’ll see what I mean.

Is it any wonder gold – priced in US dollars – is preparing for its moon shot?

What does this all mean for Australia? Parity for the currency, for starters. And as other US-dollar denominated resources rise, it will mean rising commodity prices, even as the falling dollar hurts earnings for producers who generate revenues in US dollars.

We’re not confident that the American experience will prove a cautionary tale for Australian politics. After all, Australia generates its surplus with the help of resource royalties and booming tax revenues. When the money flows, the politicians will make generous promises with other people’s money. That’s something both parties can probably agree on.

The charts below show the US Treasury’s ‘worst-case scenario’ for funding requirements. It’s described as a “High spending – low revenue” scenario in which the Treasury would have to sell over US$2 trillion 2-year and 10-year notes…every single month…just to finance the growing gap between revenues and expenses.

High_Spending_Low_Revenue__Potential_Size_of_Average_Monthly_2_Year_and_Quarterly_10_Year_Note.gif

 

 

 

 

 

 

 

 

 

 Scenario C – High Spending/Low Revenue, Potential Size of Average Monthly 2-Year and Quarterly 10-Year Note

Source: Presentation to the Treasury Borrowing Advisory Committee US Department of the Treasury Office of Debt Management July 31, 2007

http://www.treas.gov/offices/domestic-finance/debt-management/quarterly-refunding/08-01-2007/discussion-charts.pdf

High_Spending_Low_Revenue_Debt_GDP_Implications1.gif

Scenario C – High Spending/Low Revenue Debt/GDP Implications

Source: Presentation to the Treasury Borrowing Advisory Committee US Department of the Treasury Office of Debt Management July 31, 2007

http://www.treas.gov/offices/domestic-finance/debt-management/quarterly-refunding/08-01-2007/discussion-charts.pdf

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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15 Comments on "John Howard Pledges Income Tax Cut; Government Surplus is Stolen Money"

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Market Socialist Dude
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Taxes are the price we pay for civilisation.

Coffee Addict
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The Federal surplus exists because the States did not receive the money they needed to fund things like hospital beds.

Reckoning_Fan
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“…But what they really mean is that the government knows how to spend your money better than you do…”

Though that assumption may be incorrect in your case Dan, what I think that you guys at the daily reckoning seem to forget every now and again is that many and Australian are not too good with handling their finances. Were the government not to ‘force’ people into super, many would not save a dollar through their entire working lives.

kage
Guest

Hmm, money coerced at the point of a gun. How civilized. Yes, government always knows best how to spend your money.

Jono
Guest
Reckoning fan. I wouldn’t doubt that there would be Australians who would have failed to save much if compulsory superannuation wasn’t in place. That doesn’t mean each and every one of those individuals is better off. There may even be a few of them struggling to put clothes on their back and pay for enough food and clothing for their families. If you let them keep 10% of their pay instead of forcing it into super funds, they might be a lot happier. Nonetheless, I don’t think super is the worst government program. The income tax has got to be… Read more »
VenkatSanjeevarao Bhaganagarapu
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VenkatSanjeevarao Bhaganagarapu
Hi, So far we have seen many such Tax cuts and they all have vanished into thin air. The right approach is to invest it in improvement of health,education etc. The money in turn would flow into the economy and the inflation would come down. It’s same as Tax cuts. It will also increase employment participation. Basically Howard’s team are afraid of responsibility. So they are leaving it to the public. It’s like me giving some money to my children and ask hem to look after their needs. Unfortunately Howard over the last 11 years has changed the culture of… Read more »
simon
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Haven’t economies run in cycles for like, well, ever? Holding taxes at a rate over the long term has its benefits. I.e. they have a natural convexity (increasing in absolute terms in good times, and falling in absolute terms in bad) – the ‘shock absorbers’ of the economy. Reacting to peaks or troughs in a tax planning seems stupid to me. Rather one should seek optimal tax outcomes over the longer term. Afterall, its politically easy to cut taxes, much harder to raise them. I would think you run the risk of amplifying the business cycle. I’m not an economist… Read more »
Jono
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I’m surprised to read so many comments in here supportive of tax revenues being increased so that governments can grow big and spend huge amounts on health, education and infrastructure. Don’t any of you appreciate the fact that firstly: 1/ Tax is an evil in itself and a violation of property rights. It strips the rightful owner of their wealth by using violence and coercion. If you don’t pay your taxes, you end up in jail. 2/ Government spending and central planning has an abysmal record. We have the last 100 years to study and come to the overwhelming conclusion… Read more »
Coffee Addict
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Jono Tax is an evil necessary. At best it is applied to ensure that we live in a safe, civil society, public infrastructure and to redress a few market failures here and there. I agree with you that a lot of our taxes are wasted by government ( Iraq war, complex bureaucracy, excessive regulations and most importantly the Doctors Union). There are inevitable compromises associated with living in a community with a lot of other people. Nobody will get their own way on everything. I don’t trust what future governments will do with my super contributions (about 23% of my… Read more »
Jono
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Again, this is all based on the assumption that people don’t know whats best for them, and that government can decided how to spend their money better then they could. “With the population getting older, who is going to support these people?” Err.. they support themselves ? Or their families ? Whatever, its not my business to impose my will on others. Geez, the whole aging population thing is really over dramatized. People are usually healthy and productive enough to put in 40 – 45 years of work before retirement. Are you telling me people are stupid sheep who can’t… Read more »
Cynical
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You and I have 2/5ths of stuff-all chance of affecting the tax take, interest rates, budgets and more through this forum. Although it does make a good read. I really do not know wether more or less tax is better, and I am sure there will be many truthful and fallacious argumemts either way. I naturally ‘feel’ I would want less tax, but then again there are some circumstances where I would hope governments had enough financial clout – if they are truly adding value for me. The real issue to me is to make government more accountable and transparent… Read more »
Cynical
Guest

The above COAG.PDF link failed, Try this one http://www.coag.gov.au/meetings/250604/coagpg04.pdf

Kandy
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(Cynical – true, but it’s nice to vent!) Taxes are important and necessary to keep running all the things no one wants to take responsibility for eg. roads. But they’ve gone too far to cover too much…examples provided already by other people. I have no problems with income taxes, though going up to almost half your income at the top rates is a bit high… Super is another matter. While I see that some people would otherwise spend the money and be left with no retirement money, there’s another whole group of people who are responsible stewards of their finances.… Read more »
Cynical
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Kandy, not ‘venting’ but putting forward some facts and another argument approach that may have addittional value for the question of taxes. By the way, you come across as a little too optimistic for your own good. Take care.

Grant
Guest

The Surplus that the Liberal Govt always brags about was a stolen tax instead of having funds tied up in a federal reserve owned by foreign bankers the surplus should have been working within australia building infrastructure and soforth.

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