44 thoughts on “Monday message board

  1. If Rudd was opposed to tax cuts then we would have had one party running on a platform of tax cuts and another running on a platform of no tax cuts. The people would then have had a clear choice. Changing policy immediately after an election would seem quite dishonest.

    Howard gave us a GST after promising he wouldn’t but at least he provided the voters a chance to decide the fate of him and the GST. He put his changed position to the people.

    And what economic misjudgement are you on about? They are racking in revenue by the bucket load. Not cutting taxes would be rude.

  2. Tax cuts will stimulate the economy further and make it more likely that the Reserve Bank will need to raise interest rates.

    Ask Centro shareholders what they think of that idea.

    Currently, I’d only support tax cuts if they were accompanied by offsetting spending cuts to limit the impact on aggregate demand.

    Personally, I’d prefer it if Rudd indexed the tax thresholds to prevent real tax rates rising over time and taking away the capacity of governments to offer “tax cuts” which merely hand back the impact of bracket creep.

  3. Now tell me that isn’t a bunch of taxeaters building empires, given the Govt’s reflexive, yet pre-ordained response at the end of it all. And this is the Govt that said it would find $10bill worth of savings over 10 years, when Richardson from Access Economics reckons they’ll need to find that much in a year to prevent interest rate rises, given those tax cuts. Labor is simply making a long term rod for its back on another front too. It keeps playing the bogeyman that the battlers are being ripped off by business, rather than general inflation, due to previous lax monetary policy, but those chickens will come home to roost when it tries to introduce higher carbon pricing.

  4. Centro shareholders? Bwahahahahaaaa…. Couldn’t happen to nicer people.

    That aside, I don’t see how interest rates will matter in the slightest. When a debt cannot be refinanced and current obligations are unable to be met, the interest rate is purely academic!

  5. Currently, I’d only support tax cuts if they were accompanied by offsetting spending cuts to limit the impact on aggregate demand.

    How about cuts in the tax rate that are offset by not increasing spending. Spending in real per capita terms could sit static for a decade and we could come close to abolishing income tax in the process. What you really seem to be on about is balanced budgets. However there is little problem in delivering the promised tax cuts and continuing to balance the budget. What seems to be going on here is some sort of high tax fetish. Some form of self flagellation guilt trip perhaps. Maybe you all earn too much and the shame is unbearable.

    And why is an increase in the cost of government wonderful and an increase in the cost of credit dire?

  6. I like how Barry Maley describes himself in his Oz article as “a former academic”, implying he has scholarly expertise in climatology, the subject of the article.

    Maley’s field of expertise is organisational behaviour.

  7. I don’t think Adam Smith is saying profits cause inflation. That would be a new and novel theory. I suspect he is saying that business bleats a lot about costs, when – of course – normal profit is itelf also a cost of business. Our business people should complain less – if sales aren’t as high as business would like, they can always lowr their prices. That is my interpretation of what Smith is suggesting, and, indeed, what I say to my relatives who work in retail.

    From page 109 – 110 of An Inquiry into the Nature and Causes of the Wealth of Nations (my copy is the 1976 University of Chicago edition).

    In countries which are fast advancing to riches, the low rate of profit may, in the price of many commodities, compensate the high wages of labour, and enable those countries to sell as cheap as their less thriving neighbours, among whom the wages of labour may be lower.
    In reality high profits tend much more to raise the price of work than high wages. If in the linen manufacture, for example, the wages of the different working people; the flax-dressers, the spinners, the weavers, &c. should, all of them, be advanced two pence a day: it would be necessary to heighten the price of a piece of linen only by a number of two pences equal to the number of people that had been employed about it, multiplied by the number of days during which they had been so employed. That part of the price of the commodity which resolved itself into wages would, through all the different stages of the manufacture, rise only in arithmetical proportion to this rise of wages. But if the profits of all the different employers of those working people should be raised five per cent. that part of the price of the commodity which resolved itself into profit, would, through all the different stages of the manufacture, rise in geometrical proportion to this rise of profit. The employer of the flax-dressers would in selling his flax require an additional five per cent. upon the whole value of the materials and wages which he advanced to his workmen. The employer of the spinners would require an additional five per cent. both upon the advanced price of the flax and upon the wages of the spinners. And the employer of the weavers would require a like five per cent. both upon the advanced price of the linen yarn and upon the wages of the weavers. In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad.
    They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.

  8. “How about cuts in the tax rate that are offset by not increasing spending.”

    So instead of unsustainably increasing demand by increasing government consumption we unsustainably increase demand by increasing consumer consumption.

    How about we keep the tax rates where they are now, invest some of the money offshore (where it’s less to result in increased domestic consumption) and spend the next couple of years getting rid of bottlenecks in the supply side of the economy like excessive bureaucracy and inadequate transport infrastructure.

    Of course, if we do invest the surpluses and do a decent job of it, they’ll result in an ongoing revenue stream that’ll let us sustainably cut taxes in future (instead of giving tax cuts that are eroded away in a year or so via higher inflation.)

  9. Terje

    Actually you are right. There is no way he could do that with any credibility, especially with budget surpluses raining like cats and dogs.

  10. Ian,

    GDP is a measure of production. If production is increasing but government consumption remains the same then please explain how private consumption of the remainder is “unsustainable”.

    Inflation is a monetary phenomena. All things being equal (eg fixed money supply) tax cuts are deflationary. As such we can choose our inflation rate using monetary policy irrespective of tax cuts.

    For a given inflation target (eg 2-3%) the government can determine the interest rate (price of credit) by being a net lender or a net borrower. Although of course they are not the only player in the credit markets.

    Tax cuts do not cause inflation. They never have and never will. At most they will cause increased interest rates if they move the government budget further towards deficit. Whether you like higher interest rates will depend on where you are in life. If you’re saving to buy a home higher interest rates mean an easier time saving and cheaper houses. If you’re paying off a morgage the perspective is different. If your a self funded retiree then high interest rates are great.

    However in a growing economy with stable government spending (ie fixed price of government) then cuts in the tax rate should be a regular event. There is no macroeconomic justification for an ever high price of government. The only argument for a higher price of government is if we want government to do more.

    We have lots of pretty charts and graphs all over the place that show movements in the price of everything from pork bellies to passionfruit. We have too few that map the unstoppable inflation in the price of government. Why can’t we have an ACCC enquiry into this price? Shouldn’t we care that we are paying ever more for the privaledge of being pushed around?


  11. Surely now is the time to be counter-cyclical, to invest and bank away our surpluses, allowing us to spend in the next down turn. Surely we should be putting surpluses mostly into infrastructure and compulsory savings plans (like super), and only a little bit into inflationary tax cuts.

    Cut middle class welfare now, raise the compulsory super levy, build major infrastructure, introduce carbon taxes, simplify the tax system, put $$ into skills and education, these are what Australia needs for responsible economic management.

  12. remainder is “unsustainable�.

    “Inflation is a monetary phenomena. All things being equal (eg fixed money supply) tax cuts are deflationary. As such we can choose our inflation rate using monetary policy irrespective of tax cuts.

    Tax cuts do not cause inflation. ‘

    Write that up, submit it to a peer-reviewed economics journal and wait for the call from Stockholm because you will have overturned about fifty years of economic theory.

  13. Ian,

    So the RBA doesn’t control inflation then? In essence you’re implying that Central Bank independence with an inflation target can’t work unless they control the tax code? Which is rubbish.

    Tax cuts are well known to be economically stimulatory (ie increase output). If you have more goods chasing money (ie more economic transactions) and the supply of money is unchanged then its basic logic that the value of money will rise. The logic of this won Friedman a Nobel Prize nearly 40 years ago although even then it was not original. We see the effect readily in the external measure of money (exchange rates) all the time. Growing economies frequently have currencies with increasing buying power. Australia being a current case.

    Ronald Reagan cut taxes to get the US economy going but also to fight inflation. Bob Hawke used tax cuts in the way of the Accord to fight inflation. Margaret Thatcher cut taxes whilst working to get inflation under control. And all the time other taxes in the form of international tariffs were being slashed to fight inflation. When John Howard introduced the GST (ie a new tax) lots of commentators worried that this would lead to an increase in taxation and would thus cause inflation.

    Last time I checked the Philips curve was on the nose and out of favour. And Robert Mundell already had a Nobel prize in economics. I could write such a paper as you suggest but generally speaking publication requires some element of novelty.

    Tax cuts do not cause inflation. Inflation is caused by one of two basic events:-

    1. An increase in the supply for money.
    2. A decline in the demand for money.

    Thus the black plague of the middle ages was inflationary for reason two. The inflation in Zimbabwe today is due to both. The very mild inflation during the gold rushes of the 1800s was due to reason one. However the overall deflation in Britian across that century was due to an overall increasing demand for money brought on by strong economic growth (ie industrial revolution).

    Inflation is a monetary phenomena. In so far as tax cuts have any effect it is deflationary because it stimulates more output and trade that then needs to chase money. Tax cuts increase the demand for money and thus all else being equal (which it rarely is) the value of money increases.


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