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Thursday, 19 May 2016

Inconvenient truth on Fairness

In what has become an unplanned serial I have explored some 'inconvenient truths' behind central policy differences between the ALP and the LNP. Previous posts have covered Education and Superannuation. In this post I want to look at Fairness. While Fairness is not really a policy, it has certainly been a principal war-cry of the ALP and the Greens. It was used very successfully against the first Hockey Budget of 2014 and indeed by the senate cross-benchers to justify their stance against government legislation. So it is not surprising that it has been brought into action in this election battle.

What is the Fairness argument?

The Fairness argument is rarely stated clearly. It is usually purveyed by implication or innuendo and takes many forms.

Some of the ways include;-
  • The distribution of wealth in Australia is inequitable,
  • a small proportion of very wealthy individuals control a disproportionately large share of the country's wealth. 
  • The very wealthy get a disproportionate share of services yet they do not pay their fair share of taxes.
  • Negative gearing is used by the wealthy to avoid paying their fair share of tax 
  • You can always increase taxes on the rich they can afford it.
  • The best private schools have plenty of money so should not receive any government funding
The argument is often dressed in softer terms of  "'equity", "fairness" or "justice", but in essence it appeals to the most base element of human nature, envy.  It appeals both to low income earners and welfare recipients who feel they are victims of an unfair system and also to some extent to the struggling middle income group who see real wealth as unattainable. This is a sizable proportion of the community. As a political tool it serves its purpose well. However there are some inconvenient truths.

Inconvenient truth 1; Incentive drives prosperity for everyone

The idea of raising taxes on the rich to bring "social equity" is not new. It has been tried in small and large measure in many countries over the years. At its extreme the communist doctrine "From each according to his ability to each according to his needs "  embodies the redistribution of wealth from rich to poor to create an "ideal" society. While communism actively supported the poor and weak and resulted in a somewhat more uniform standard of living, it did so by punishing the successful, the aspiring, the gifted, the hard workers. The consequences in all countries where it was instituted, in full or in part, was a stultifying lack of incentive to strive, resulting in lower production and leading to universal poverty. Everyone loses. Recall the sheer poverty of the Soviet Union and its iron curtain vassals at its collapse, or the impact of the 'Cultural Revolution' in China with millions dead through starvation.

Any tax that places a disproportionate burden on 'the rich' reduces incentives for all workers and ends up diminishing the wealth of the society as a whole. On the other hand societies that reward hard work inspire the whole workforce and generate prosperity for all. Consider the miracle economy of Singapore for example.

Inconvenient truth 2: Money has no borders

Today with the globalization of commerce money has no borders. Corporations and individuals can readily re-locate to lower tax countries. High taxes on Australian companies and individuals will simply lead to emigration. Indeed with higher personal income tax rates and higher company tax rates than the average around the globe, this has already been happening. For example a high income earner in a global business can readily relocate to Singapore with a maximum personal income tax rate of 20%. Similarly corporations can pick many competing low tax regions for branch or even their head offices.(BHP, James Hardie, etc.)

The bottom line is that Australian personal and corporate tax rates must compete in the global market and failure to compete will accelerate the emigration of the best most productive individuals and companies and diminish the prosperity of all.

Inconvenient truth 3: The politics of envy generates social unrest
Finally the real downside of the "Fairness", or really "class warfare", argument is the impact it has on society as a whole. The more frequent, widespread, and shrill the calls for social equity, the greater the general dissatisfaction of everyone in a society. By constantly repeating class warfare arguments our politicians engender distrust and resentment against each other. This can, if not managed, lead to social unrest. This is a by-product of the "fairness" argument that is too often ignored by our pollies and the media.

So what does this mean for our election campaign?

Evidently the Fairness argument can be aimed at virtually any policy that the LNP proposes. If it proposes to remove the 'temporary' Deficit levy paid by high income earners then it is pandering to the rich. It does not matter that if the LNP had not removed the temporary levy it would have been breaking its own and the ALP's commitments to the electorate.

If the LNP proposes to reduce Company taxes over a decade, then the ALP declares it is pandering to business interests notwithstanding that reductions in corporate taxes lead to greater employment, high wages and growth in the economy.

Even with the proposed Super changes that have caused widespread resentment among many LNP supporters, the ALP says "its not enough, the rich can pay more".

So the ALP/Greens have plenty to go on about. Australia has many successful, rich people who live in expensive homes and drive expensive cars. They serve as obvious targets to stoke the envy in all of us.

At the same time it must be said the LNP has failed to address these arguments head on. This is not entirely surprising. With half the electorate already paying no net tax, there are many voters with a vested interest in the current state of affairs. They may see any lowering of taxes for "the rich" as a potential extra cost to themselves. Consider the recent QandA 'hero' who by his question concisely embodied this attitude.
"Why are 'the rich' getting a tax cut and I don't get anything"
Forgetting of course that he has not been paying any tax and has been the recipient of welfare that was paid for, at least in part, by those 'rich' he envies. Australia's problem is that this 'entitlement' mentality is becoming increasingly pervasive.

Countering the 'Fairness' argument

Convincing the electorate that by reducing taxes on companies and high income earners will generate incentives that will work to produce growth and "raise all boats", is not an easy task. But there are some non-confrontational approaches to sell the message. Consider these 2 ; -

1. Set an INCLUSIVE vision to which we can ALL aspire

Our PM, Mr T, has tried to sell a vision for Australia with 'Innovation' as the key to 'jobs and growth' in an 'agile' economy.
The problem with this vision is that most older and less educated voters will not feel they are part of this vision. For many it is a warning of potential redundancy in a new, modern world in which they have no part.

The LNP, or Mr T, should carefully phrase his statements to include all Australians. When he talks about aspiration it has to apply to everyone.

Perhaps something like; 
"Australia is a lucky country, with plentiful natural resources and an inclusive culture that takes care of the needy and provides equal opportunity to all to achieve their maximum potential. We want to build on past success in developing not only our resources and agriculture but to develop new industries that employ all our people.  We will aspire to do this through incentives for investment in education, research and development and new industries. At the same time no one will be left behind.  We will strive to provide equal opportunity to everyone to access social services, education healthcare and employment. We will ensure our welfare safety net provides for the needy. While we approach the future with enthusiasm we will not abandon the industries that provide work for the much of our workforce. We will move gradually to create an Australia in which every Australian can participate productively."
Perhaps a bit wordy but then again it may suit Mr T to a T.

2. Repudiate EVERY claim by the ALP/Greens about 'unfairness'

Do not allow any claim of "unfairness" without repudiation. Left without a response gives the impression that the claims are justified and sets long-term perceptions.

There are always good arguments to counter claims of 'unfairness'; -
  • Company taxes are lower in countries that have high growth economies. This leads to more jobs. We want to grow our economy to make everyone prosper
  • Negative gearing is used extensively by low and middle income earners and contrary to ALP arguments they get a higher proportionate tax saving than high income earners. 
  • Lowering the tax rate for middle and high income earners can be addressed with two points; -
    • bracket creep has been eliminating the progressive nature of tax, the tax cut is therefore required to ensure the progressive nature is maintained
    • Super measures in the budget provide benefits to lower income earners and make significant imposts on high income earners
  • and so on
It is important to avoid the technicalities of these arguments, indeed the economists can handle that. The point is be willing to face the claims head-on, present the other side of the argument and not to leave any claims unchallenged.

Time to face Fairness head on

The election is still many weeks away yet the Fairness argument is being actively used as a weapon of choice.

If the LNP fails to speak up and quietly acquiesces to this false narrative, no matter which party wins the election, incentive will continue to be squeezed out of the system and over time our prosperity will dwindle.

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