Tax cuts in The Age

A few economists were asked to react to the Coalition’s $34 billion tax cut policy. My response is over the fold:

What to spend $34 billion on?

Joshua Gans: Economics Professor at Melbourne Business School

The Age, 18th October, 2007

The promises of tax cuts from the Coalition announced this week appear to represent a return of windfall gains to our revenue take in these ‘resource boom’ driven economic times. Election cycles make poor cousins of such situations; although in this case, it seems to be resetting the Coalition away from its big government record. But how significant is the opportunity cost of such politics?

Large sums of money can be used for lots of things. Infrastructure would be one but one would hope that such projects could justify themselves economically and so a wad of free cash shouldn’t change our views.

Instead, we should turn our attention to the difficult economic reforms that have yet to be done. These are reforms where there are long-term benefits but clear short-term losers. Take as examples: integrating the tax and social security systems to get rid of welfare traps. Moving towards a education system that mixes private and public investment and enables parental choice. Getting rid of the array of band aids in our health insurance system by enabling patient choice (both within the public and between the public and private system). Setting our environmental prices right, especially on water and on transportation congestion. And getting rid of regulations that impede the increased supply of housing.

For each of these things, the impediment is not a lack of common sense but, instead, an unequal initial share of the costs of the reforms. There are just too many people who would feel or actually be worse off if we did these things. $34 billion can go along way towards the greasing the wheels and paying the losers off. The problem is that it is not as transparent as a wad of potential cash in the hands. That makes election sound bites to sell real reform just impossible.

2 thoughts on “Tax cuts in The Age”

  1. Sounds like the sort of program you implement once you’re in government with a handsome majority, not the sort of thing you promise to do during a campaign. For labor, proposing a program of crazy big reforms would sound like a return to Whitlam.

    That said, using this cash to improve Australia’s economy in the long term sounds like a good to me.


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