James Morrow: Tax cuts the best way to fight the rising cost of living

If the government really wants us to be able to fight higher prices, the best thing to do is to let us keep more of what we earn. So pull the lever, Treasurer.

As Australians wait to find out what goodies are in store for them in the coming pre-election Budget, it’s worth remembering that governments have two basic levers they can pull to increase the number of dollars in the average person’s pocket.

They can print (or borrow) more money, which means that taxpayers eventually pay for that little extra in their wallet through higher prices or more long term debt.

For a great example of where that leads, just have a look at the United States.

There, Joe Biden has stimulated the economy to the tune of trillions of dollars and left consumers suffering the worst inflation in at least 40 years.

A person shops for groceries at Lincoln Market in Brooklyn. The Labor Department reported that consumer inflation rose 7.9% over the past year, the largest rise since 1982. Picture: Michael M. Santiago/Getty Images/AFP

Alternatively, the government can leave voters with more money in their pockets – simply by not taking as much off them in tax in the first place.

Here the danger is more political than economic, with the worry being that whatever good will is generated will be blown away by scary headlines about the “cost” of giving people back their own money and class warfare-laced commentary suggesting that someone on $130,000 a year is a suburban Bill Gates.

For a government whose poll numbers are still luffing a few weeks before calling an election, choosing which lever to pull is a harder problem than it looks.

All that said, given the way Scott Morrison’s government is struggling to get airborne in the polls, it is both disappointing and a bit bizarre that Treasurer Josh Frydenberg is reportedly not going to go through with plans to pull forward promised Stage 3 tax cuts when he hands down his Budget in two Tuesdays’ time.

Treasurer Josh Frydenberg is reportedly not going to pull the tax cut lever come Budget night. Picture: AAP Image/Mick Tsikas

Disappointing because Australians are some of the most overtaxed people in the world.

And bizarre because the delay both hurts aspirational voters in crucial western Sydney seats and gives wavering residents of high-income electorates like Wentworth and North Sydney one less reason to stick with the Coalition rather than defect to a so-called “independent”. Let’s start with the basics.

When it comes to income tax, Australians’ pay packets are lightened every fortnight more than almost anyone else’s, anywhere.

Last year the OECD revealed we pay more personal income tax as a share of government revenue than any other modern economy this side of welfare-addicted Denmark.

And that’s before factoring in all the other sin and excise taxes Australians encounter from the bowser to the bottle shop.

Australians pay more tax than any other modern economy this side of Denmark. Picture: AAP Image/Tom Compagnoni

A report by the Tax Foundation likewise found that two-thirds of Australian government revenue came from individual and consumption taxes – versus an average of about 55 per cent across all OECD countries.

Why can’t we have both, Treasurer?

Brian Marlow, executive director of the Australian Taxpayers’ Alliance, told me: “When you look at how Australia taxes its citizens, you can see the bulk of revenue drawn from taxing individuals, taxing their property and taxing their lifestyle choices is far higher than that of the OECD average.”

So the idea that some sort of relief is out of order is, well, out of order.

More worrisome for the government, however, are the politics.

There is no doubt that cost of living is a massive issue running into the election well beyond fuel prices and senior government sources say that relief will be a big part of the coming pre-election budget.

But in the words of the girl on the taco ads: “Why can’t we have both?”

The Stage 3 tax cuts, which would put a top tax rate of 30 per cent on everything earned up to $200,000 a year, might “cost” $17 billion.

Of course that’s a fraction of the hundreds of billions spent on pandemic stimulus and relief and the term “costs” assumes none of that money will come back in greater economic activity – once an article of faith on the centre-right.

At the same time, while cost of living relief sounds great, heading into an election it is just putting down a marker for Labor to meet and exceed.

Petrol prices across Sydney are up over 2 dollars a litre, increasing already exorbitant cost of living pressures. Picture: David Swift

Purists will argue otherwise but the government was in the main right to throw out the rule book during the pandemic, pump up the economy, and avoid doing a decade’s worth of structural damage to the economy.

But that has also resulted in voters expecting the government to cushion them from whatever blows come down, be they from a pandemic or a war in eastern Europe, or whatever crisis hits next (space aliens?).

And it has seen the government drift even further from conservative economic principles, leaving dry voters wondering what’s in it for them.