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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Comments

  1. Taxes are the price we pay for civilisation.

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

    Coffee Addict
    October 16, 2007
    Reply
  3. “…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.

    Reckoning_Fan
    October 16, 2007
    Reply
  4. Hmm, money coerced at the point of a gun. How civilized. Yes, government always knows best how to spend your money.

    Reply
  5. 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 much more harmful and we could do without it.

    Reply
  6. 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 Australian people.

    I strongly hope that the electorate won’t fall for any such gimmicks.

    VENKAT

    VenkatSanjeevarao Bhaganagarapu
    October 17, 2007
    Reply
  7. 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 like you guys. So I’d be intrigued to read about how the government saving surpluses (S) leads to equal pressure on inflation as (C) consumers spending it. Or are you saying consumers would save it (S)? I’d also be interested to know if there are numbers/estimates for how much of prior tax cuts were saved versus consumed. I just find it hard to understand your point that tax cuts would not be inflationary –despite what Milton says.

    Reply
  8. 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 that government cannot co-ordinate and allocate resources.

    Whether it be Soviet automobiles, Chinese agriculture or any state owned industry in Zimbabwe, Cuba, North Korea, or Venezuela, we have massive shortages, rationing of goods, inferior quality and huge bureaucracies.

    3/ In Australia, the amount states spend on health and education has DOUBLED in the past 8 years. Have things improved ?

    4/We can improve outcomes in these sectors by allowing people to keep more of their taxes, and allowing private enterprise to enter and compete without government coercion and a government monopoly.

    Reply
  9. 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 income ). As other posters here point out, the majority of people don’t earn anything close to enough money to support a basic retirement. With the population getting older, who is going to support these people? Some will come through income tax but the ratio of workers to oldies will be less. Some may come from Company Tax and resource royalties but this is not likely to be enough either. The only other source I can think of is that huge pool of money called super.

    So there you have it! We are putting money into super schemes for the future support of both ourselves and our neighbours. I hope they appeciate us for doiong this kind act.

    Coffee Addict
    October 17, 2007
    Reply
  10. 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 think about the future… they just reach retirement when they can’t go on any longer, and then realise they’ve got no savings to live off ?

    I’m only 29, and I can already figure out roughly how much cash and investments I have to build up before I can retire. If I get there earlier than 50 or 60, why should I be forced to wait many more years till I can access my superannuation ?

    Reply
  11. 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 for what they WILL get and spend. Generally, governments enable their own activities through Acts and constrain others, rightly and wrongly, through Regulations.

    I tender that most of us are complete amateurs when it comes to understanding why an Act or Regulation is written the way it is. And even worse at comprehending its economic impacts. When it comes to complaining about a rule, or attempting to alter it, I fear we do so from a generally self centred or narrow view point, and therefore our efforts are ineffectual.

    A very useful tool for constraining wonton (and occasionally unfair) government legislation writing are regulation making guidelines which can be found here http://www.obpr.gov.au/bestpractice/handbook.pdf and here http://www.obpr.gov.au/publications/external/coag/coag.pdf.

    One problem however is that the States still don’t have as clear and robust guidelines (yet), especially Western Australia. I feel they do that because they know it makes it hard or virtually impossible for Mr John Q Public to demand or even expect government compliance to their own guidelines, so that a few can write what they want.

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

    Reply
  13. (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.

    Who will pay for those poor people who didn’t save? Them or their families, as someone else said. Why should I be supporting the other 10 people who live on my street because they didn’t look after their money?

    I for one am incredibly frustrated that I have money tied up in super that I can’t access for years and years. If I invested that money myself instead I’d have 10 times the final amount by the time I could access it(10 times? Maybe 50, 100…anything’s possible if it’s not rotting in super).

    Pretend I have my super money on hand, and add to it as per normal super…from that I invest in shares, real estate, and start a couple of businesses. Within 10 years that money’s grown to a couple of million. Wow! Now I can live off the interest and work as little as I want…

    Now same scenario, but it’s in super. I do similar things with real estate through an SMSF…maybe 30 years, I manage a couple of million. Yay! I can live off the…oh hang on, I can’t access it for another 20 years…

    Reply
  14. 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.

    Reply
  15. 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.

    Reply

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