Articles – The Centre for Independent Studies

It's time to let individuals take control of their lives

Simon Cowan

24 April 2021 | Canberra Times

If only that were true for the size of government!

Left or right, conservative or liberal, the inexorable rise of government across the world continues unabated. There are no longer any genuinely ‘small government’ major parties: the debate is now only about which levers will be pulled by the party in power.

Several recent developments show this quite clearly. In particular, the new push for a global minimum company tax and the government’s anticipated capitulation on increases in the superannuation guarantee rate.

Biden’s Treasury Secretary, Janet Yellen, in addition to her efforts to raise the US corporate tax rate from 21 per cent to 28 per cent, is calling for an unspecified global minimum rate to “make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations”.

It bears repeating that company tax is a particularly bad tax. Although the legal requirement to pay company tax is on the company, that money largely comes from the pockets of workers.

Treasury estimates in 2014 found that for a 1 per cent cut in company tax, two-thirds of the benefit flows through to workers. For an open and competitive economy like Australia, even more of the benefit may go to workers.

The rest is paid by company owners. Perhaps there remains a lingering perception that “company owner” is synonymous with “19th-century railway baron”. Yet large public companies contribute the bulk of tax revenue – just 12 companies paid one-third of all company tax in 2013-14, for example.

And as the name implies, public companies have many ordinary, small, shareholders (even more when superannuation is included).

This says nothing about the continued – and baffling – outrage over companies not paying tax when they make a loss.

In reality, this is only partly a problem of misunderstanding economic cause and effect, and it isn’t really about companies shirking their supposed duty to pay “their fair share”. The real need here is for everyone to pay more tax.

The Liberal government in Australia had already effectively lost this fight years ago. The alleged unfairness of cutting company tax had already given way to consideration of how to minimise legal tax minimisation.

Not that the broader push is exactly new: some politicians have been spuriously misusing ‘fairness’ and the need to create a ‘level playing field’ for decades. However, Yellen’s claim has a further troubling aspect: she apparently believes this global tax increase will drive “innovation, growth and prosperity”.

The unavoidable implication of this is that government would do a better job of driving innovation and growth than the private sector. Therefore, some might argue that government confiscating funds that businesses would have used for wages and investment would somehow create better outcomes for those businesses – although no mechanism for this is specified.

In some respects, this reflects a more pernicious problem than the increasing level of government spending as a percentage of GDP: the repositioning of government at the centre of society.

The attitude engendered by the pandemic – that government is best placed to solve all society’s problems (be they economic, cultural or health related) – will erode far more than just income.

Of course the pandemic was always going to lead to an increase in government spending. We can question the amount and lack of targeting of many measures, but the public was clearly demanding action.

History has repeatedly shown us that increases in government spending during crisis periods will never be completely unwound when things return to normal. Spending announced during the response to the Global Financial Crisis (for example, increases in the age pension) remain on the books.

The effect is a continual ratchet upwards. If there is an upper limit, and not everyone agrees there is, it is well past the point where government spending exceeds 50 per cent of GDP.

But the attitude engendered by the pandemic – that government is best placed to solve all society’s problems (be they economic, cultural or health related) – will erode far more than just income.

Indeed, even government policies ostensibly designed to reduce the cost of government, such as increasing the rate of compulsory superannuation, can reduce individual choice and freedom.

The compulsory rate of superannuation saving is scheduled to increase from 9.5 per cent to 10 per cent on July 1. Almost all the policy experts not in the orbit of vested interests accept this increase will be paid for by reduced workers’ wages.

Both empirical and theoretical evidence support this idea. It used to be accepted even by defenders of compulsory super like Paul Keating. This widespread support has been jettisoned to make the implausible assertion that super is effectively a bonus on top of wages.

As a result, almost no attempt has been made to defend the claim that workers would be better off sacrificing more wages now for a slightly higher superannuation balance in retirement. Arguably, this is because such a claim is not true.

In fact, many workers – especially lower income workers – will be worse off as a result of this trade. They will have less income now to be able to afford important priorities like saving for a home or supporting their family. And in retirement, they will trade off their higher superannuation against a reduced pension entitlement.

Of course, those in favour will tell you that anyone who believes they need more super can always put extra in voluntarily.

A cynic might suggest this is merely about ensuring an ever increasing flow of fees and influence for super funds, but it is not just about that.

The super system is predicated on the idea that individuals will so badly misunderstand their own interests that government must take intrusive, coercive action to correct them.

It is no longer limited to correcting workers understandable, but incorrect, under-appreciation of future needs compared to current spending: now they are being compelled to prioritise higher living standards in retirement than they have right now.

Government is presumed to know your life priorities better than you ever could.

It is now clear that this presumption is prevalent on both sides of politics, and intensified by a pandemic that allowed politicians at the state and federal level to assume power over our day-to-day lives unprecedented in our lifetimes.

Reclaiming the right to make our own decisions about our lives – income, education, family life and many more areas – is a more important challenge than chiselling the percentage of government spending down against GDP.

And we are learning just how few political allies we have left in this in fight.

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