Morrison tax cuts will hurt economy and leave most worse off

Illustration by John Shakespear

Contributed by Joe Montero

Scott Morrison and his government are persisting with their plan to cut income tax. They are even talking about bringing the next stage forward.

There is an argument for an income tax cut, so long as it is those at the lower income range. it would increase the effective demand for the goods and services Australia makes. The reason? Wages earners and those on benefits because spend a most higher proportion of their income on consumption.

But this is not what the Morrison tax cut policy is about. The beneficiaries are meant to be those on the highest incomes. This is based on the assumption that if they get the benefit, much of it will go into investment, and it is this investment, that will drive the economy forward.

Australia Institute modelling has shown that in the next stage of the intended tax cuts, half will go to those in the top 10 percent income range, and 90 percent to the top 20 percent. The bottom 20 percent get nothing at all.

Contrary to the government’s claim, this will not result in the creation of new jobs, for a number of reasons. Persistence with the myth that claims otherwise is covered by certain fallacies.

One is that if major investors have more money, they will put it towards expanding existing enterprises or creating new ones, and the increased activity will create new jobs.

Investment is important. but this is conditioned by what type of investment it is. The recent rack record of providing more for the big investors has shown that they will squirreled it into tax havens, or invest much less in the real economy, than it has in profiting form the creation of credit, the buying of already existing shares, currency and other forms of speculation, and the property bubble.

Investment of this type creates few jobs and destroys many more, in those parts of the economy where investment doesn’t go. The decline of manufacturing is the bast example of this.

This happens because the average rate of return on investment is lower in the real economy than it is in the world of finance. The economy is not well.

Morrison’s tax policy ignored this, and the underlying problem that the economy is locked into a structure of decreasing creation of new value. The purpose here is not to explain how this has come about. But it if this is true, the governments economic policies, including its taxation policy, are dead wrong.

It walks away from the reality that inherent decline in the rate of return has fed a growing monopolisation of the economy, and rising output, relative to the existing domestic market. This is why Australia is so dependent on exports.

Stagnant wages and a decline in the wages share of income, have brought in the secondary effect, of shrinking consumption spending over the longer run, which has only partially checked and temporarily, by the rise in household debt.

Source the ABS

The current government taxation policy will only make mean a further fall in the wages share and increase the negative of the effects this has already imposed on the economy.

The idea that the key to economic health is merely increasing productivity is wrong. This is conditional on the economy being otherwise sound. If the underlying problems just mentioned exist, increasing productivity alone will not be an engine for economic growth.

Dig further and the real intention turns out to be that the agenda is to do something that would create a political scandal if it was publicly admitted.

This is to keep the wages share down as far as possible, because then, workers would become less less choosy and accept changes to the conditions of employment, which would make them work harder and longer for less reward, and fewer jobs would mean more unemployed and underemployed, to pressure the market to enforce this.

Increasing productivity of this kind has not created an economic rebound and more real jobs.

According to the government’s own figures, Australia has more a tad over a million of the unemployed and one and a half million of underemployed. In reality, the number of unemployed is at least twice as many, and the stated underemployed, doesn’t take into account the many put down in the books as independent ‘contractors.’

The close association between tax policy, income redistribution, and labour market policy, marks the real nature of increasing productivity policy in the current circumstances.

Continuing with the same approach is being sold on the insistence that the economy has really been doing well all along, and that there is only a temporary glitch caused by the Covid outbreak.

This has not prevented the claim that there will be a  quick “snap back,” after the pandemic is over. It’s saying that the economy is like a revving car engine, just waiting for the brake to be lifted. Lifting the brake does not work so well when the engine is stalling. The engine needs attention.

This has been the nature of government economic policy for most of the last 35 years. If hasn’t solved the problems so far and it won’t solve them now.

Insisting that everything is going well, deflects attention from looking at the reality.

If Jobkeeper and JobSeeker were maintained at the level they are now, this would provide a much better engine for economic growth. Demand would be at a higher level, and this could lead to more business activity.

Taxation reform that makes the system fairer, in the sense that those who are best healed shoulder an extra burden, would provide the government with some extra revenue for projects that ensure the creation of new jobs. Closing corporate tax evasion loopholes would raise billions of dollars, for both, redistribution downwards and the creation of jobs.

Neither are going to be taken up by this government.

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