Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Hansard source

Thank you. Why does the Treasurer believe that the government is entitled to hoard people’s tax revenues indefinitely? How is that morally justifiable? The federal government has no net debt; many Australian households are burdened with many debts. If they were to get tax relief, as they will from this bill, they could use that to reduce their own indebtedness. At some point the government has to tell us why, after Australian taxpayers have paid off all of Labor’s debt, taxpayers cannot be trusted to wisely spend the money that they have earned.

The Treasurer says that this bill will provide more than $30 billion of benefits to taxpayers over the period to 2010-11, but this number significantly underestimates the true economic benefits that income tax cuts will provide, because there are additional supply-side effects that will benefit the entire economy. The Treasurer mentioned some of these, but he does not appear to understand them. Taxes should be designed so as to minimise economic waste. Even if the tax system is simple, easy to comply with and easy to administer, it still has economic costs. The dead-weight cost of taxation is the wealth that is destroyed when high taxes create disincentives and force economic resources to flow to lower valued uses. It does not include administrative costs or compliance costs.

The great philosopher and economist Adam Smith understood this very well hundreds of years ago. He wrote that a tax:

… may obstruct the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and unemployment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so.

The Treasurer hinted at these costs when he talked of the effect of tax cuts on participation rates and working hours, but these things are not desirable ends in and of themselves. They are desirable only because individuals will now choose to do those things as a result of lower taxes, because they judge the costs of working longer to be less than the benefits of higher wages. In other words, lowering marginal tax rates induces individuals to use their freedom to make better choices according to their own assessment of costs and benefits, not because the Treasurer says so. This is what we mean by a more efficient allocation of economic resources. Individuals acting as free men and women make better choices. It is the key to understanding the economic and moral desirability of lower taxes.

If the Treasurer really understood this, he would have realised that lowering taxes has other positive effects. High tax rates encourage workers to lower their work intensity, to pursue do-it-yourself employment, to engage in home production for barter exchange, to devote more time to on-the-job leisure and to substitute activities or occupations with significant non-wage benefits. High tax rates discourage overtime work. In other words, high personal tax rates reduce the incentive to do anything that earns taxable income. That is another reason why the coalition supports tax cuts: cutting taxes improves individual incentives.

Nobel laureate Professor Ed Prescott illustrates this principle perfectly when he asks in a recent paper: ‘Why do Americans work so much harder than Europeans?’ Professor Prescott finds that Americans now work 50 per cent more than do the Germans, French and Italians, but this was not the case in the early 1970s. He shows that Europe’s high marginal tax rates account for almost all of the differences in labour supply over this period. There are literally dozens of studies that show that lower marginal income tax rates have positive supply-side effects. The Treasurer even cited similar research from his own department. So, if the Treasurer is so sure that tax cuts have such positive effects on individual incentives, why would he rule out additional tax cuts in the future if tax revenues are higher than expected? Doesn’t he trust his own department’s analysis?

Going forward, flattening the tax structure, lowering rates and having a broader base are a highly desirable goal for tax policy. It means that Australians will keep more of their own earnings and it will improve individual incentives. That improves our prospects for further sustained economic growth. So of course the coalition supports these tax cuts. This bill, as I said earlier, comprises 92 per cent of our tax policy for the last election. The question for Labor is: where to from here? Labor implicitly acknowledged that rates were too high when they plagiarised the coalition’s election tax plan. Mr Swan also explicitly stated that flattening the income tax structure is a good idea. If the tax cuts in this bill will not, as the Treasurer says, put upward pressure on inflation, why is it not the case that future tax cuts will not put upward pressure on inflation? The government’s tax policy has no coherence. When will the government present a coherent tax policy? Will they wait once again until just before the next election, and copy the coalition’s tax policy?

(Quorum formed)

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