Ideas@TheCentre brings you ammunition for conversations around the table. 3 short articles from CIS researchers emailed every Friday on the issues of the week.
Treasury’s flawed tax model has led to the government’s structural reforms being estimated to cost much more than they actually will, and scheduled much later than they should be.
In Jumpstart Productivity: New modelling pinpoints better tax cut program, the impact of the tax reforms is calculated using a new dynamic model that accounts for behavioural changes, rather than the government’s static model — which assumed people do not respond to incentives.
The modelling shows that the long-term structural tax cuts planned for 2022 and 2024 are much cheaper than expected.
Instead of the expected revenue cost of $235 billion (excluding LMITO), over 10 years, dynamic analysis shows that they will have a much lower revenue cost of $145 billion over 10 years, which is 38% less than the government’s static estimate.
The benefits of these changes are significant, with GDP expected to increase by $36 billion/year and economic efficiency to improve by $13 billion/year, flowing on to higher wages and more jobs — and these benefits are over and above the direct financial benefits received by taxpayers.
The government should bring forward those changes from 2022 and 2024 to start next year, and can do so without threatening the budget surplus.
Three options for bringing the tax reform forward are outlined in the table below, alongside the Treasury’s own budget surplus estimate.
The structural tax cuts would replace the Low-Middle Income Tax Offset (LMITO), which does nothing to improve economic efficiency, and will cost the budget about 10% more than expected.
Further, all future federal governments should follow the lead of the UK Treasury in using dynamic tax analysis to give accurate information on economic efficiency and revenue estimates.
Of all the ways we have tried to organise society in the thousands of years of human existence, nothing has come close to the creating the happiness and abundance of our capitalist meritocracy.
Those on the more socialist side of politics need to do some deep thinking about meritocracy in Australia. It is particularly relevant to both Labor’s recent election loss and subsequent determination of its future direction.
Labor’s election policy manifesto was, in effect, a radical rejection of Australian meritocracy. Labor’s policies were predicated on a belief that the poor and disadvantaged people in society (and those who champion the cause of those people) have a greater moral right to the proceeds of success than the successful.
Of course the left has long been focusing more attention on the ‘egalitarian’ side, than the meritocratic side. As long as they believe the primary function of government is to remedy inequality of outcome, progressives will always be uneasy with rewarding intellectual merit and industriousness.
There are significant problems with this, both in principle and in practical terms.
Rich people are not ‘better’ people or more morally deserving in general, but they should have the first and best claim on the rewards of their success.
Poor people do not, by virtue solely of their poverty, deserve moral condemnation. Yet passive welfare receipt is a personal failing, not a systemic one: the primary stimulus for escape from poverty must come from within.
The Australian people fundamentally disagreed with Labor’s rejection of merit. We are an egalitarian society, but also a fiercely meritocratic one.
And perhaps more important is the possibility that undermining our meritocratic system may actually undercut efforts to remedy inequality. At a basic level, it’s likely that the prosperity generated by efficient markets — by meritocracy — is actually a prerequisite for such an agenda actually succeeding.
A market-based capitalist system is the closest we can come to replicating a true meritocracy. Capitalism doesn’t guarantee that everyone has the same level of opportunity to succeed (the advantages of birth being what they are) but that the largest number of people have at least some opportunity to succeed.
There is no reason why meritocracy can’t be compatible with an agenda focused on reducing poverty. However it may require abandoning the myth that every difference in outcome is the result of government not doing enough, or discrimination of some kind.
This is an edited extract of a piece published in the Canberra Times as Labor should embrace meritocracy ahead of the next election.
In the past 30 years we’ve witnessed the end of the Soviet Union, the third wave of democratisation and extensive levels of globalisation. Mass flows of capital and mobility have become the norm. Francis Fukuyama predicted the ‘End of History’ with liberal democracies spreading around the planet and market capitalism enriching everyone.
To some extent this became a reality. Steven Pinker’s Enlightenment Now shows empirical studies of great benefits brought to the world by globalisation. We live in a richer, healthier and more peaceful era than ever before.
However, drastic changes to the global economy and mass migration resulted in a backlash against cosmopolitanism. 9/11, the global financial crisis of 2008, the Euro crisis of 2011, the failures of the Iraq War and the refugee crisis of 2015 cumulatively left Western liberal democracies politically precarious. The rise in domestic inequality, offshoring of low skilled work, and declining trust in political and financial institutions led to worsening social cohesion.
These unexpected circumstances of events led us to a world of increasing populist sentiment evidenced by Brexit and President Trump’s election — the revival of nationalism.
John Mearsheimer stated that “nationalism is the most powerful ideology on the planet”. Humans are tribal and we are social animals to the core. This explains the zealous dedication people exert towards national causes which seek to advance identity-based policies.
Contemporary populism is a symptom of the problem and not necessarily the solution. We have to defend the liberal world order, but future policy-makers should consider dealing with the side effects of globalisation.
To sustain an interconnected and a peaceful modern world, we must understand the causes of populism and continue to build towards a society where we embrace liberal democratic principles.
Leonard Hong is a final year student at The University of Auckland and a former research intern at the Centre for Independent Studies.