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Tax reform in Australia is needed but not because the government needs more of its own currency to spend

The public debate is conditioned by who gets a platform in the mainstream media. Even those publications that purport to be informed and appeal to a more reasoned type of reader are highly selective in who they give a voice to. I see this as a huge constraint in advancing alternative ideas that challenge the mainstream narrative and the vested interests that support it. The problem is that on economic matters these vested interests have not only captured what we might call the conservative voice. They also dominate and craft the so-called progressive agenda such that Green groups and movements, for example, are indistinguishable on macroeconomic matters, which makes it hard to contest ideas that are abroad. The UK Guardian, for example, thinks it presents a progressive angle on issues and is ‘above’ the crudity of the tabloids. But it regularly gives voice to writers who promote macroeconomic fictions and refuse to give space to those who challenge these fictions. Today (September 26, 2022) for example, it published am article – Without radical tax reform, Australia faces an insoluble public finance problem – by one Satyajit Das, who gets regular Op Ed columns in the Guardian and appears regularly on Australian public radio. His analysis distorts the public debate. Selective platforming is a blight in our media.

Background reading

I have written about these fictions before (for example):

1. Intergenerational Report – the past is catching up with the government and the game is up (July 7, 2021).

2. Friday lay day – more Intergenerational Report nonsense (March 6, 2015).

3. Australia – the Fourth Intergenerational Myth Report (March 5, 2015).

4. Intergenerational fairness improved by fiscal deficits (August 6, 2014).

5. Another intergenerational report – another waste of time (February 2, 2010).

6. Democracy, accountability and more intergenerational nonsense (May 22, 2009).

The fictional fiscal crisis in Australia

The theme of the UK Guardian article is that with an ageing population, Australia can no longer ‘afford’ the “significant government services and financial support for citizens” that our post Second World War “social contract” promised and delivered, at least, up until the neoliberal assault began to chip away at these things in the 1980s.

The problem, according to the author is that:

… an ageing population means fewer taxpayers and greater demands on the public purse … Lower tax receipts and higher spending on pensions, health and aged care may cost around $40bn every year (about 8% of the budget).

So Das is just rehearsing the standard intergenerational claims that governments will run out of money providing for the ageing citizens unless they both increase the tax take, cut spending elsewhere and build up a pile of ‘savings’ to ‘pay for’ these increasing future demands.

And like all articles like this, we are induced into believing things and having ‘concerns’ when there is scant evidence that only vested interests are pushing:

Given concerns about debt levels and budget repair, government revenues must better align with outlays if Australians want continuation of expected benefits, cost-of-living relief and expenditure on ameliorating the rising costs of more frequent climate change induced weather events.

I haven’t the slightest concern about the public debt level other than the federal government should just stop issuing debt altogether and cease the ‘corporate welfare’ machine that the public debt markets create.

On the use of terminology like ‘budget repair’, this is one of those loaded terms that the commentariat and politicians bandy around to give the impression that something is not working.

But, a ‘budget’ is not like a car that needs repairs when it wears out.

The fiscal position just reflects the state of the real economy and can only be understood in that context.

If there is a fiscal deficit, for example, the relevant question is whether employment is maximised and the quality and scope of government services and infrastructure is first class.

If the answer is yes – then the deficit is appropriate relative to the spending and saving decisions and actions of the non-government sector.

If the answer is no – then the next questions are, for example, is employment over maximum or is there too much public infrastructure investment, which is pushing nominal spending ahead of the productive capacity to absorb it.

If yes, then the fiscal deficit is to large relative to the spending and saving decisions and actions of the non-government sector and the government has to either reduce its own command on real resources (cut spending) or make more space for its own spending by reducing the non-government sector’s command on real resources (by increasing taxation).

If no, then the fiscal deficit is to small relative to the spending and saving decisions and actions of the non-government sector and the government has to either increase its own command on real resources (increase spending) and/or make increase the non-government sector’s command on real resources (by reducing taxation).

The actual fiscal outcome in dollars is meaningless on its own and notions that a deficit needs ‘repair’ are nonsensical.

The discussion in the article on where increased tax revenue will come from is predictable.

Modern Monetary Theory (MMT) economists note that:

1. Taxation serves several purposes including discouraging certain activities (tobacco, alcohol etc) but most importantly, from a macroeconomic perspective, it serves to create the real resource space for government spending so that such spending is not inflationary.

So if the government sector wants to increase in size (command over real resources) and maintain full employment and price stability, then the overall tax take has to be larger.

The rise in taxes is not, as the article suggests, to fund the extra government spending.

It is not increase the real resource space.

2. Different taxes have consequences for equity and administrative simplicity – so a government can insure that it deprives more purchasing power from those who have more income – a progressive tax structure.

In part, this would reduce the disposable income of the higher income groups and reduce their ‘power’ to influence political outcomes through lobby funding etc.

This is not a ‘tax the rich’ argument that progressives get lulled into promoting because they think the rich should pay for public services when the government cannot ‘afford’ to provide them.

That narrative shows how captured the progressive side of politics has become.

We want to tax the rich to reduce their power not to give the government any more of its own currency.

3. Some taxes increase inequality among citizens.

In Australia, for example, higher income citizens can buy multiple real estate properties and then arrange affairs to write of ‘losses’ (difference between rents received and mortgage interest payments) against other incomes. They then pocket capital gains as the real estate increases in value.

That tax structure bias should be reformed immediately.

But the reform is not to make government spending ‘affordable’.

Rather it is to move towards greater wealth equality across the population.

4. So I agree with the author, that significant reforms to the tax code and structure are needed.

But none of these reforms would be to provide the government with more of its own currency.

How can it be sensible for a government that spends its currency into existence and provide the non-government sector with that currency to then think it relies on taxing that currency back to allow it to spend it.

That is the sort of ridiculous reasoning that Das and the rest of the mainstream media pumps out daily.

Because they get the platform!

So when the commentariat is spinning such yarns, the politicians then have cover to say stupid things.

Today, the Melbourne Age published an article (September 26, 2022) – Skyrocketing interest rates carve new $120 billion hole in budget – and all the fictional framing and language is prominent.

1. “punching a substantial hole in the structural integrity of the federal budget” – what could that possibly mean?.

2. “the national interest bill is likely to be more than $33 billion — a $7 billion jump on what was forecast in the March budget. The increase alone is more than what is spent on the nation’s air force in a single year” – so what?

The fact is that it is only new debt issued that attracts higher yields if they are rising.

What happens in the secondary bond market is irrelevant to the government – they pay the face value of the bond and the coupon rate (yield) on the debt that is defined at the time of issue not the rates that apply once the bond starts being traded among the gamblers.

Further, as yields rise on new debt as a result of central bank interest rate rises, fiscal policy expands – which is stimulatory.

This puts the whole ‘fight inflation with interest rate rises’ mantra into question – if the inflation is being driven by demand (which it mostly isn’t at present).

3. Quoting the Treasurer – “The October budget is the first step, not the last step, in our work on long-term budget repair.”

See above about the loaded term ‘budget repair’ and why it is meaningless.

4. Then the ‘if this, then not that’ argument, quoting one of the worst economists in Australia – “This is why the level of government debt is important — this is a lot of money that can’t be spent on services or infrastructure”.

Refer back to point 3 – there is no an either/or situation in most cases – that trade-off only becomes relevant when a nation is at maximum capacity.

If there is free productive capacity then the government can facilitate increasing spending across the board.

5. The same economist was quoted – “The budget will need to look at ways of improving the bottom line to get back into surplus. If they can do that then the RBA may not have to lift interest rates as high.”

Whether a surplus or deficit is appropriate depends on the state of the external economy and the spending and saving decisions of the private domestic sector (households and firms).

Usually a continuous fiscal deficit will be appropriate for most nations.

For nations running an external deficit, a fiscal deficit will always ensure the private domestic sector can net save and not be continually increasing its debt levels, which would be unsustainable.

The mantra that a fiscal surplus is normal and superior to a fiscal deficit is nonsensical and reflects a lack of understanding of the interplay between the three sectors.

But the point is that the mainstream media chose not to give a platform for any alternative views.

That journalist in question knows the claims made by those he quotes are highly contestable.

But he chose not to balance the analysis.

And so, he chose to be part of the indocrination machine rather than provide information to allow the public to appreciate the debate.

Conclusion

Who gets a platform is important.

The media bias towards the fictions and propaganda that mainstream economists and the related commentariat push make it very difficult for the public to make reasoned assessments of matters that intrinsically influence their own prosperity.

So ‘democracy’ fails.

The real problem of the ageing society is productivity – and I spell that narrative out in the blog posts cited as background reading above.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

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    This Post Has 19 Comments
    1. “Taxation serves several purposes including discouraging certain activities (tobacco, alcohol etc) ”

      I’d suggest that only applies to the USA.

      In Anglo countries, like Australia and the UK, activities are discouraged by Duties and Levies, not Tax. The wording separates the political levy from the operational tax.

      Which then leaves tax for the two, and only two, operational purposes of taxation: Releasing the Resources and Driving the Denomination.

      It’s very arguable that each Duty and Levy to discourage something should result in a matching Grant or Subsidy to make the effects fiscally neutral. So Fuel Duty on Fossil Fuels should perhaps be directly matched with a subsidy on Electric Vehicles and supporting infrastructure. Then as fuel duty declines the matching subsidy declines in tandem.

    2. “Tax cuts have to be funded by government borrowing”

      Is another one doing the rounds recently. From people who have actually worked at the treasury and BOE. The GROUPTHINK is so ingrained in these people, you actually start to wonder what is the point of going to University. As the education system it seems, just churns out a bunch of boot licking clowns.

      It is astonishing the lengths they go to, to protect the GROUPTHINK. Similar behaviour was observed on slave owning cotton farms and in Nazi concentration camps by people who had been institutionalised. As they convinced themselves it was the only way the could survive and get preferential treatment from the environment they found themselves in.

    3. The word is “credible”.
      Robin McAlpine wrote last month about Keir Stramer “He has only one mission – to do as little as it takes to be leader so that he can then do as little as it takes to maintain political stability. To do that he must guarantee the elites that he will not get in their way. That’s what Guardian commentators mean when they trumpet the need for Labour to be ‘credible'” .
      Bingo!
      It’s worth to read the entire article: http://robinmcalpine.org/keir-starmer-failing-britain-in-human-form/.
      By the way, Italians just rejected the “credibles”.
      We can argue about the ones that got the votes and if they will not choose to be “credible” to the elites in the future.
      Probably yes; they have donors too and they will have to repay every cent with high interest.
      The funny thing is that it will probably be over in a year or two. Salvini and Berlusconi won’t make it easy for the Meloni lady.
      It was expectable: the tories won the election to Jeremy Corbyn, because the British were fed up of the EU blob.
      Same as in Italy.
      Looks like the EU is “credible” to the elites, but not credible to the people of Italy and of the UK.
      The tories are taking the oportunity to wreck havok the British economy giving away large sums of money to their buddies, in exchange for NOTHING..
      In the end, they will blame the British people for leaving the blob.
      In the meantime, we’re heading to a major recession, and it looks like worst than the GFC.
      The Nato-Russia war is a matter of time. The Americans want the europeans to do the war for them, but Putin wants the real thing and fast.
      In America, hospitals are advertising treatment for Myocarditis (an life threatning inflamattion of the heart). This seems to be the cause of a surge in the death rate of children between 0 and 14 years old. It remains unexplained, but it may be linked to covid vacines side effects.
      The muteness of the media about it and the fact that China did not go for mass vacination, but instead to zero covid poplicy, adds to the suspiction. I’m not saying that it was on purpose, but many voices stood up against vacinating children, and so we may be dealing with a major crime here.
      Drought, inflation, climate castastrophe, famine. We could go on, but it’s not necessary.
      What’s “credible” about all this?

    4. @Neil Wilson. Re: ‘activities are discouraged by Duties and Levies, not Tax.’ I’ve no doubt you know that, as an example of a duty, UK fuel duty is set per quantity of fuel sold, rather than value added tax, which is on a percentage of the price. But in respect of taking money from citizens/the economy and extinguishing it, it’s a tax. In terms of discouraging activity, it seems to be very ineffective. I’d say the government needs to be much more pro-active in steering spending in the economy towards environment saving infrastructure than connecting it directly with a duty/tax.

    5. @ Neil,

      Taxes / Duties / Levies etc

      Isn’t this just a matter of semantics?

      By the same reasoning we could say the UK’s National Insurance isn’t a tax. However, when we look at our pay slips …….

    6. “Isn’t this just a matter of semantics?”

      It’s a matter of politics vs economics, and cleans up the MMT message.

      Taxes are there to release the resources necessary for the government to fulfil its socioeconomic programme. They reduce the quantity of jobs offered by the private sector and therefore all taxes are taxes on jobs. All political parties will need to tax to stop the private sector hiring the people they need to use in their programme.

      That separates that task from the task of duties, levies and fees which is to alter behaviours – disfavouring one area and favouring another – or hypothecating a particular cost. Those are all fully political choices that can be cancelled completely by one side or the other.

      Which leads to the point I made. Taxes are there to Release the Resources or Drive the Denomination.

    7. @Paolo Rodrigues re: ‘China did not go for a mass vaccination but instead to zero covid policy’. You are misinformed. China instituted both. The reasonably up to date stat seems to be that 87.9% of the 1.4b popn. have had two shots. Ex-colleagues of mine in China, where I worked for 8 years, have had booster jabs. Vaccination was also extended, as in western countries, rightly or wrongly, to children. One could argue that this was overkill. The age group with significant numbers still unvaccinated is the elderly, which, when added to population age profile, city population densities, health service compared to population need, and concern over the efficacy of the Chinese vaccines, explains the lockdowns this year despite citizen grumbles.
      ‘it may be linked to covid vaccines’ side-effects’ – it may be, but wouldn’t it be better to await some scientific evidence before adding to internet babble.
      ‘The Nato – Russian war’. Here we go again. Your persistence with this line, rather than reading up on historical and more recent Russian imperialism, particularly its relationship with Ukraine, and covering eyes and ears to the facts of Russian invasion, is about as mindless as “Tax cuts have to be funded by government borrowing”.

    8. @ Neil,

      I take your point that perhaps we should differentiate between taxes and duties, or other similar terms like charges, as in ‘congestion charge’. However, the line is already blurred, even in the UK.

      There is general agreement that National Insurance is tax in all but name. “Stamp Duty” is applied to house and share purchases. Why would we want to discourage anyone buying these? At one time we paid “Road Tax” on our cars but now we pay “Vehicle Excise Duty”. So what’s changed? The Government still needs to spend to build and maintain roads. So shouldn’t it still be a tax? It is probably a mixture of both a tax and a duty.

      So I think we’re stuck with what might be an imperfect system.

    9. @Peter Martin Hi. I think Neil’s MMT point is that taxes are to take money from the economy so that there is fiscal space for the government’s more socially minded spending, thus taxes need to be on reliable income/spending, subject to economic swings maybe but not behavioural changes (e.g. as distinct from excise duty on quantity of tobacco which aims to reduce smoking, and if successful in this aim, would reduce the tax take, which would be no good from MMT tax perspective). The blurring between taxes and duties is due to fact that largely, duties by themselves are not very effective at changing behaviour, but seen by all as like a tax (wrongly, giving the government funds). National Insurance is quite obviously a regressive tax, though one linked to a future entitlement. Any progressive government would scrap it, raise the state pension and stop feeding the private sector pension industry.

    10. “National Insurance is quite obviously a regressive tax, though one linked to a future entitlement. Any progressive government would scrap it, raise the state pension and stop feeding the private sector pension industry”

      Au contraire. National Insurance is the best tax for the MMT task. It’s even called ‘insurance’ so people don’t object to paying it as much as they do ‘tax’. Even though it is obviously an income tax.

      Employees NI should be scrapped, but Employers NI should retained and made fully progressive – on a cash basis without allowances.

      Why? Because all taxes end up being a tax on jobs. Tax incidence and tax salience literature shows that secondary social insurance is most effective at reducing jobs on offer (as opposed to reducing hours offered or accepted).

      Pretty much all the taxes in the UK are collected and paid over by business – however it is assessed. Taxation may as well be applied directly to employment to have the desired suppression effect. Then you may not need quite as much taxation to obtain the resources required.

    11. @ Neil,

      “Taxation may as well be applied directly to employment to have the desired suppression effect.”

      Yes economically this is true. However, there is a fair bit of psychology involved in any human relationship which shouldn’t be ignored. If Government increases the level of income tax, workers will probably accept a real pay cut in the short term at least. The employer will say that it is the Government that is cutting their pay and not them.

      However, if this is not obvious and it looks like the employer is cutting pay, this is much more politically dangerous. There also needs to be some explanation of why an employer is treating workers differently by paying them different amounts. At present employers don’t have that problem. Everyone has their own tax code which can reflect any entitlement that each workers is due from the Government.

    12. I would argue that there may be some additional taxation required for health services in the current context – there are a lot of nurses that need to be pulled back from the private sector, and we *might* need to create the non-inflationary space to give them (and aged care and education workers) a decent pay rise. But of course, “the budget” has nothing to do with that.

      For what to tax, I’m working on an idea that we should encourage value creation, and tax value extraction (rents, interest, profit extraction, mineral extraction etc.). It is these extractive activities that allow owners of capital to accumulate without creating any new value, driving us toward stagnation. So, less and ultimately no taxes on earned income (wages), which typically are payment for value creation (sort of Marxian but not entirely); and heavy taxes on value extraction – especially rents and activities like share buybacks.

      The Property Council would be apoplectic, but for the provision of accomodation services, spending on buildings etc might be deductible from the rent (i.e. value created deducted from the value extracted). This value theory stuff is about a light-year from what Bill is on about, but it would set us up nicely for ecological economics concepts like natural capital and social capital – whereby we would reward people for contributing to such, and tax people for extracting from it.

      As for the “budget”, well that’s just an accounting construct. The whole focus on money reminds me of lessons learned in my former career as a designer – arguing about money costs money, and saving money costs money. We need to save the planet, not money!

    13. @Neil Wilson re: ‘National Insurance is the best tax for the MMT task. It’s even called ‘insurance’ so people don’t object to paying it as much as they do ‘tax’. Even though it is obviously an income tax.’ I would prefer that people were educated in MMT re. taxation (and also the need and morality of an enlarged public sector) rather than being hoodwinked. Many people still have this idea that NI pays for the NHS as well as their pensions. One of the few positives of the run-down of the NHS is that people are being disabused of this notion.
      ‘Taxation may as well be applied directly to employment to have the desired suppression effect.’ I’d rather say that the government should first target unearned income and anti-social behaviour spending. Though regulation would be better. But failing regulation, if and when these decrease so that the suppression effect is insufficient, then by all means progressively tax employment across the board.

    14. @Neil Wilson,
      IMHO, taxing businesses because they are paying people also requires taxing businesses that use machines that use raw energy instead of people because otherwise the business will have an additional reason to automate where they can. At this time because of ACC we don’t need more automation.

      As for cleaning up the language, IMHO. this is a fools errand because the other side will never agree to it and how will you make them follow your rules? Here in the US we can’t get the Repuds to use “Socialism” correctly and stop using it as an attack word, that they know their base will react negatively to the target no matter if it fits.
      .

    15. Property taxes are not a tax on jobs. I think I understand the distinction you are trying to make Neil, but there are exceptions that won’t fit your definition of tax.

    16. @ Jerry Brown. I guess Neil would prefer to refer to Property/Land Duties (and I’m comfortable with this). The landowner with mansion and grouse moor could alter his environmentally and socially destructive use of land and pay less duty (imagining we lived in a world where he presently pays an appropriate duty).

    17. Thanks Patrick. But from personal experience, property taxes induce a demand for the means to pay them, as in the currency the government demands. It isn’t really brought up in this post about how taxes are responsible for giving the fiat currency value, which is one of my understandings of MMT. And imposing a property tax satisfies that understanding of tax for sure.

      Whatever you wish to call them- taxes, fines, fees, duties, tariffs, sales taxes, income taxes, – they all remove currency from the private sector and provide non-inflationary space for government spending. But it is not as obvious how an income tax gives value to a currency as a property tax does. At least not to me.

    18. @Patrick B, I think we are on the same track. The landowner would pay land tax based on unimproved land value. If they restore forest or something that would be a contribution to natural capital, so deductible from the tax. If they provide public access that would be a contribution to social capital, so also deductible from tax.

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