Less is more leaves ABC stumped

The ABC's Fran Kelly couldn't help herself on Tuesday morning when she interviewed visiting American economist Arthur Laffer on Radio National.  Not happy to simply tell her listeners who Laffer was and let him speak for himself, before he had even said a word, Kelly started the interview by describing what he was going to talk about as "whacky".  And just to make sure ABC listeners got the message Kelly later tweeted:  "Boost growth by cutting taxes to rich.  Huh?  Ex-Reagan adviser Arthur Laffer explains how @rnbreakfast."

Arthur Laffer is the author of the most famous diagram in modern economics — the Laffer curve.  It shows something simple and obvious.  When the tax rate is zero, the government will collect no revenue.  When the tax rate is 100 per cent, the government won't collect any revenue either.  The insight of Laffer and so-called "supply side economics" is that reducing the tax rate can stimulate economic activity and ultimately generate more government revenue.  Which is exactly what happened under Reagan.

Fran Kelly's reaction is not unusual.  Few things are more likely to befuddle an ABC journalist than being told lower taxes are good for economic growth.  But to be fair, given the argument for cutting taxes is made so rarely in Australia these days, it's no surprise Kelly was perplexed.  If the majority of public policy commentators in this country are calling for higher taxes, that's what the ABC will report.

The Labor Party, trade unions, the welfare lobby and government-funded think tanks certainly don't argue for lower taxes.  Nor (sadly) does the Coalition.  Worse, the Coalition raises taxes.

The Coalition's "deficit levy" on high income earners is assumed to raise $3 billion over the next four years.  Over that time Commonwealth government revenue is projected to be a total of $1710 billion.  For the sake of a 0.175 per cent difference in revenue over four years (in the scheme of things, a rounding error) the Coalition gave Australia one of the highest top marginal rates of personal income tax in the world.  The government demonstrated that in the name of "fairness" it would penalise those who already paid more than their fair share of taxes.  The Coalition can now hardly complain about how its first budget is attacked because it's "unfair'", when it was the Coalition itself that decided the budget must be "fair".

THOSE RECOMMENDING SURCHARGES "HYPOCRITICAL POLITICAL HACKS"

It's no wonder that in an interview with Jonathan Shapiro for The Australian Financial Review, Laffer said of the deficit levy:  "I'm not Australian.  I don't know enough about the country, but if that was done in my country, the people that recommended those surcharges would be hypocritical political hacks ... Rich people are different from us.  They can hire lawyers, accountants, deferred income specialists, senators ... we can't.  The one thing we know about US taxes is that whenever you raise tax rates on the rich you collect less money from them and whenever you lower tax rates on the rich, you collect more money from them."

Instead of the Abbott government arguing with the left about "fairness" — a debate the government should never have started in the first place (because "fairness" is only a code word for redistribution) — Tony Abbott and Joe Hockey should been explaining how to grow the economy.

The PM and Treasurer could do worse than study the principles for tax reform set out in Laffer's book The End of Prosperity:  How Higher Taxes Will Doom the Economy — If We Let It Happen.  The first principle is:  "When you tax something you get less of it and when you tax something less, you get more of it."  Another is:  "The higher the tax rate, the more damage to the economy and the greater the economic gain from reducing the tax rate."

Perhaps the most important of Laffer's principles for tax reform is about social justice.

"The best tax system helps make more poor people rich, not rich people poor."

Maybe the question of how tax cuts can help poor people could be the topic of conversation when Laffer is next interviewed on the ABC.  And in the meantime, a copy of The End of Prosperity is on its way to Fran Kelly.

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