• Hannah Phillips

Labor's Taxes Are Bad For The Economy

Scott Morrison is fond of metaphors: he often says that Labor’s $387 billion of new taxes will act as ‘a handbrake on the economy’. The problem with metaphorical debating points is that they usually lack specificity. It is as if Mr Morrison is saying ‘trust me: I know what I am talking about’. In the end the likelihood is that the voters are sceptical about what politicians on both sides are saying. The fact is that basic economics confirms that Labor’s tax policy is bad for the economy but for some reason mainstream economists are reluctant to say so. Now two reputable economists have spelled out the downside risks to the economy, former Professor of Economics, Henry Ergas and Professor Emeritus Jonathon Pincus wrote an op-ed for the Australian on Monday which makes the point that Labor is proposing the biggest tax increases by a government since federation. The article argues that Labor’s new taxes are taxes on savings which do more damage to the economy than taxes on income or consumption. Moreover the higher taxes are to start with, the bigger the damage is likely to be. This can result in very high effective tax rates even though nominal tax rates are very low. Moreover by treating savings as income, there is no compensation for inflation. How does this work? If an ordinary taxpayer decides to save, then they do it out of taxed income. When they acquire shares and receive divudends these are taxed at their marginal tax rate. If they sell the shares then under Labor’s tax laws, they would be taxed on 75% of any increase in value at their marginal rate. To give an example, take a nurse who earns $1,000 that she wants to save. Once she pays tax (19%) she is left with $810. If she invests this in an investment account at an interest rate of 2.2% compounded then in 20 years she will receive $1150. However if inflation runs at 2% over the same period then she will receive $740 in today’s dollars. If she decides to spend that money then she will lose $40 to GST. When you add it up the nurse pays tax of more than 100% of what she earns. If she put the money into shares she would be even worse off because she would have paid capital gains tax. Under Labor she would pay a marginal rate of 63% on the increase in the value of the shares. In the circumstances people will be mad to save, however if they don’t save then there will be no money for private investment. This has to mean much lower economic growth because of a decline in business investment by the private sector which generates 60% of the economic activity in Australia. It follows that the growth assumptions that underpin Labor’s very high levels of expenditure will collapse. The consequence will be that a Labor Government will have to either sacrifice most of its programmes or eat its surpluses. In the meantime a lot of people will suffer for nothing.