The tax cut impulse

 Low taxes are always better than high taxes, or so we might be tempted to think.

Whereas Andrew Fraser, treasurer in the Queensland state government, needed more revenue, it was not always in the federal government’s interests to give it to them. My mate Cam, on the other hand, simultaneously holds the position that governments need to spend more on health, education and transport, as well as cutting taxes. Jess, who is a liberal, thinks that lower taxes — small government — is better.

There’s one good thing about a politician’s promise of lower taxes, and at least a dozen bad things about one. The good thing is that it’s a simple message that we can all understand and – if desired – be drunkly passionate about. One of the bad things is that even sincere promises to cut taxes, if you think that such a thing could exist in politics, almost never actually materialise.

Politicians try to appear as though they are cutting taxes and spending more money on public services, both at the same time. This creates pressures for politicians to save money that are often counterproductive.

Remember the small-government protagonists Margaret Thatcher and Ronald Regan? I don’t because I was in nappies, but the evidence is available for all to see on the OECD Factbook, on the OECD website.¹³ Government spending and taxes increased slightly during the time they were in office, in both the UK and the US. In Australia, the same is true of the Howard government between 1996 and 2007.

This is more or less true of all governments in the developed countries over the last century. There may have been a few blips along the way, but over the long term government taxing and spending has gone from around a ten per cent share of the economy in these countries in the early 1900s, to about 40 per cent now, on average.⁵

The reason? Probably because, strangely, our system of democracy actually kind of works, in the long term anyway. Over time people pressure for more government services and politicians respond with what wins votes. There’s always pressure to cut taxes, too, but clearly in the long term this is gradually outweighed by the pressure for services and spending.

Have you ever wondered, if governments are continually criticised for being high-spending, why they don't just cut spending? Of course, it is because there are even stronger pressures for spending. Why do governments get into situations where they have record levels of spending or debt? Because the logical outcome of the democratic process is higher pressure for spending than for cutting taxes or avoiding debt.

When I pressed him about his contradiction, Cam agreed that more and better hospitals and schools and infrastructure are worth the sacrifice of paying taxes. Especially if it’s taxes on the rich that increase.

If you’re rich, this may not be the case as often, even if the rate of any tax increase was the same for the rich as for people on lower incomes. Rich people are more easily able to afford to go to hospital if they get sick; they don’t need a free hospital system as much as those who are not wealthy. But when the government raises tax levels to create a free hospital system, you can be sure that the rich will be paying more tax in absolute terms than those on lower incomes (in theory, anyhow).

As far as I am aware, cutting taxes has never provided a good photo opportunity for a politician. Test this theory out by reading a newspaper, or even watching the TV news, and see what politicians are actually saying. Are they trying to promote some new scheme to cut a tax or a levy? Or are they announcing the opening of a new road or new funding for a health care service?

I did my own test. I went onto an online website and searched for news mentioning ‘government’. On the first page, here’s some of the stories that came up that mention either tax or spending. A politician gives assurance that south-eastern New South Wales will have access to the National Broadband Network service. A politician supports jobs. A government didn’t build a planned dingo fence near where a man was attacked by a dingo. A government cost scandal. The Tasmanian state government defends its right to its current level of tax revenue from the federal government. A poll shows that the number of voters against the new carbon tax is falling.

Do your own test. True, I also found a story about voters who were dissatisfied with a new tax, but I didn’t find any story about voters who are overjoyed about a tax being lowered or abolished. Maybe they would be happy if one tax was abolished, but would they still have that on their minds next time they went to vote? In any case, the story was about a new tax, not getting rid of an old one. Why would that be? And the other stories were about the services or infrastructure that governments provide and that people clearly want.

Hold on, though: wasn’t this chapter meant to be about pressure to cut taxes? It is. Of course there are still many groups in society pressuring for lower taxes; big business, for example. In fact everyone likes the thought of lower taxes so much, and the political message is such a simple one, that politicians invariably promise it as much as possible. But even though it is promised, it’s rarely delivered. Some taxes may get cut, but all the pressure to deliver new services or infrastructure inevitably means that politicians make sure they make up the tax gains somewhere else, through other hidden taxes or revenue raising.

I’ve seen politicians like Sam try desperately to do both. If they want to bring in a new costly environmental policy, there’ll be pressure to cut spending on something else to make it happen. They don’t want to raise overall tax levels to do it. It might be a subsidy for a medicine that they cut. It might be a bridge that doesn’t get built. And if that bridge doesn’t get built, all the money that has been spent on designing and planning that bridge is wasted. This is something that happens all the time, but we don’t see it or read about it in newspapers. It’s one of the consequences of political pressures to simultaneously save yet also spend money. 

The other thing that happens is that politicians increasingly try to do things on the cheap. They want to find the cheapest way to get things done. On the face of it, this seems like a good idea, but corners get cut and things are compromised.

Politicians still try all sorts of methods, though. One of the main ones is the fantastical idea that outsourcing and tendering is less costly to taxpayers. I can’t get out of my mind the tunnel built under the Brisbane river, which had an initial estimated cost of $1 billion: costs blew out and the construction company had it built for $3 billion in the end. So that was a cheap method? Of course, the cost was paid for, not all with taxes, but with tolls on motorists. The cost of the tolling system must be huge, and it discouraged people from using the tunnel anyway.

Hold on. Why build infrastructure and then discourage people from using it? Isn’t that against the whole point of the exercise? The government also gave the rights and risks for collecting the tolls to a private company as part of the whole deal, and when less motorists used the tunnel than was optimistically predicted, that company went bankrupt after about two years.

These are some of the classical consequences of governments trying to spend as little money as possible and deliver infrastructure at the same time. Of course, there are also people – mostly businesspeople who make lots of money out of outsourcing – who encourage governments to outsource all of the time. Ironically, it is almost always promoted by politicians and economists as a way to save taxpayers money. A lousy lie.

A third consequence is delivering smaller projects or less services than what is needed, because it’s cheaper. It’s well known that Australia doesn’t spend enough money training as many doctors as are needed. It keeps to a set budget and set amount of tertiary entry places. Sometimes roads are built with two lanes instead of four. Cam has complained about the Centenary Highway near Ipswich, which only has one lane each way. Sometimes schools are built just a little bit slower than the demand for them. Cam reacted negatively when student numbers in eastern Ipswich schools rose quickly, before the state Labor government rushed to build five new schools in the area. Five. Sure, there will never be an unlimited bucket of spending money, but the pressure to cut taxes keeps that bucket a little bit smaller than it should be.

The trouble is, the consequences of  Cam’s incessant demands to cut taxes aren’t obvious and in front of our eyes. We tend to see things that governments provide as freebies, or as if we have a right to them. We don’t often make the connection between taxes and the services that we get. It’s usually presumed that if, for example, the waiting times at a hospital are too long, this is because of some incompetence or bastardry on the part of the politicians or some bureaucrat. In all honesty, sometimes that is the cause, or one of the other nine reasons explored in this book is the cause. But much of the time, at the core, you can trace problems back to penny-pinching or underinvestment somewhere.

Cam constantly blames inefficiencies or mismanagement of politicians for poor bus services. Jess says the state government doesn’t have the political will to invest in public transport properly. The truth may be more complex, perhaps that the state government doesn’t have enough money because the federal government isn’t giving it enough, and both levels of government still try to cut taxes as well as increase spending.

I thought I’d try my online news search again, so I searched ‘public hospital waiting times’. The first article that came up was a very well researched article by the Brisbane Times newspaper.¹⁴ In quite a long article the question of why waiting times could get so long was never asked. The article, by journalist Daniel Hurst, was actually very good, and discussed statistics at great length. But it focused on the ‘spin’ of the government, which was claiming that waiting times had decreased. The article did not ask why the times hadn’t in fact decreased. It therefore implies the answer that the government is innately evil, which isn’t exactly the height of brilliance in analysis. Maybe we should be looking at deeper reasons than that.

We tend to think that, if some service isn’t being delivered properly, it’s because of some evil or incompetent bureaucrat or politician, or because of some inefficiency or incompetency. It’s because someone’s a bastard, basically. And although that probably is the case often enough, it’s not the real answer, and it doesn't empower us to do anything about it. Even where it is the reason, we ought to be asking why we have set up a system which allows people to be incompetent, without having some sort of checks and balances.

In Australia, especially, we think like individuals with a liberal, individualistic worldview. Jess sees the government as something unconnected to us, it’s an ‘other’, or an enemy of sorts, or a necessary evil. If government policy doesn’t work, it is nothing to do with us. We are individuals, we are not part of the society ourselves. We see government as a business, and we want the price to be low.

But government is nothing like a business. The difference is that with a business, when you buy a cheap product from the two dollar shop, you can palpably see that the product is crap, and it is obvious that it is cheap. We see no such connection with government-provided services. Taxes are considered a rip-off or a scandal, and services are viewed as an inalienable right.

Occasionally some politician argues the virtues of higher taxes. It’s usually viewed with outrage, and it doesn’t happen often. Sam would rather die than suggest raising taxes. Even if she thought it was a good idea, she is far too cautious to suggest it. She would be attacked by everyone. If she did, an opposing politician would probably promise that they could provide exactly the same services or benefit without extra taxes. Of course, to say that this is possible is an attractive-sounding lie. But Cam would vote for that politician, not Sam. She’d be dropped faster than a hot chip.

To make both tax cuts and extra services appear to magically happen, Sam and her colleagues often will cut or postpone some other service or infrastructure project, even though millions have probably been spent on the initial design phases. There is usually money wasted on consultants and other things.

When Sam and her government try to save money it often leads to higher costs in the long-term. A piece of infrastructure might not last as long, have high maintenance costs, be inadequate, or be too costly or inefficient for people to use.

One of the clearest examples of trying to save money is privatisation. In the back of our minds we will know that there are always business people, lawyers, accountants or others who stand to benefit when there is a privatisation. Politicians do it because they see a quick few million that they can make, and use for spending on other things.

On the train line from Sydney to Melbourne, privatisation has meant that the private company responsible for maintaining the line cut maintenance spending to increase profit. In the end it required the state government to pay a large sum to re-invest to bring the line back up to standard.

In Queensland, privatisation of electricity power lines and other aspects of power generation, with some other influences, have meant that there was an underinvestment in electricity infrastructure. There has also been increasing administration and sales costs for the new retail electricity companies that formed. There have been similar under-investments for similar reasons all around Australia, and electricity prices increased dramatically between 2000 and 2010, to pay for the extra re-investment and maintenance costs.

These are examples of the desperation to save money that actually cost money in the long run.

Sam can easily be duped by the glittering phrase ‘save money’. I have seen her perk up quite quickly. It’s a good thing to say if you ever get the sense that she’s having a bad day and starting to get grumpy.

But the desire to save money can have perverse consequences. It can be disheartening because, so often, millions can be spent on a project before it is cut to save money, meaning that this money becomes wasted. The truth is, a lot of money gets wasted on administration, marketing, consultancy or other costs.

The desire to cut costs even works its way into projects that politicians agree to proceed with. Sam personally favours project funding models that are outsourced or which are recommended by consultancies because she has been told it is the most cost efficient way.

That’s why politicians favour outsourcing so much. Of course, it’s the most cost-efficient project model for the people who are going to make money out of tendering for the project! Sometimes this might even be the politicians themselves – which is another whole book besides this one.

Here’s another great way that politicians try to save costs: by shifting costs onto the private sector. Or sometimes they’ll push it onto another government, or another level of government. Taking the second way first, it’s easy to see how a tendency for pushing costs onto other governments increases the overall costs for the end taxpayers in the long run. This is also related to Australia’s vertical fiscal imbalance problem. A different level of government or council ends up paying for the extra costs and  therefore is pressured into even more desperate attempts to, again, save money. The cost-shifting also creates accountability problems because it becomes confusing just which government is responsible for what cost, and which is to blame when it isn’t funded. But, most of all, cost shifting most likely increases the overhead costs of providing services.

Pushing costs onto the private sector also occurs. Here’s an example: the government or public decides that security needs to be improved on public trains.  To make matters worse, the trains are, of course, privately operated. Instead of the government paying for extra security guards or other measures out of taxpayers’ funds, they decide that the private company is responsible for it, and they force them to do it. A few public servants spend three years ginning around and they write a piece of legislation saying the company must meet a regulated security standard.

Lawyers and parliament get involved in making it a law. The government then sets up an enforcement area in the public service, at great cost, to make sure that the business does it. If they don’t do it, it becomes a Court matter, which results in more lawyers’ costs. If they do it, the train company will probably hire consultants to make a recommendation about what exactly to do to increase security. Of course, they take a profit for this. Then, of course, being consultants, they recommend that the ‘cheapest way of doing it’ would be to hire a private security company. The people who run this company end up taking a rent-seeking profit, and it’s a great little earner for them.

These extra costs are recovered in one of two ways. Sometimes the public pays for them with higher ticket costs. Bear in mind that these same people who pay the taxes; we, as taxpayers and commuters, are paying the increased costs either way. The second option is that the train company will try to cut costs somewhere else, for example by cutting back on services, or delaying maintenance, or making staff work harder. There is no magic pudding. Costs are pushed around some other way. Something or someone is compromised or affected. This is not an efficient funding model, it’s a wasteful one, where additional layers of corporate services businesses are involved and rent-seekers profit along the way.

Sometimes costs are pushed onto small or marginal private sector businesses. These business owners sometimes have to either work longer hours to cope, or push up their prices. If they can’t push up their prices, they’ll often go broke. If they go broke, some politician or big business commentator will shrug and say ‘that’s the free market economy’, which is not just shifting the costs, but now also shifting the blame, as well.

If you’re rich, you prefer lower taxes. For the other 90 per cent of us, higher taxes, if spent reasonably well, are certainly in our favour. And it’s often much more efficient if the government pays for things. If the government just paid for public transport, which in Australia is already very heavily subsidised, think of the money that would be saved on ticket machines, ticket sellers, ticket inspectors and enforcement costs, printing tickets, the consultants who recommended them, or the costs of servicing ticket machines. It’s hard to know how much money would be saved by the economy on petrol costs, road maintenance costs, and savings because of not having to build infrastructure. But if this were to happen, imagine all the companies involved in providing all of these things and all of the profits they wouldn’t be making from it.

Of course, the government’s ‘user pays’ system is another way of pushing costs onto someone else, but it’s an expensive way of doing it. It’s still taxpayers that pay, and we just end up paying more.

Yet we would quickly oust any government that introduced a new levy to cover free transport. Or would we? Cam seems like he is able to vacillate on the question, depending on his mood. This just encourages Sam and other politicians to try to pull tricks, so that they look like they are simultaneously cutting taxes and increasing spending.

This is a hard thing to do, and Sam is always desperate to achieve the impossible. In fact, she’s so desperate that she frequently gets seduced into things like privatisation, outsourcing, reducing maintenance spending, cutting investment in important areas, or other desperate money-saving schemes. Although these are not always bad options for government in all situations, often they cause more spending pressures in the longer term.

 

Key points: ·        Politicians always promise to cut taxes because it is a simple message that sounds good, but they rarely follow through with it, and the overall level of taxes usually rises over time. ·        Most of us value the services that governments provide, so it is important to make sure government has a strong revenue base. ·        Politicians try to both cut taxes and increase spending. It forces them to try desperate measures to cut costs, such as outsourcing and privatisation, which often increase costs in the long-term. ·        Tax-cutting pressures mean that politicians try to do things on the cheap. This leads to lower levels of investment and can have a negative impact on overall economic productivity. ·        Politicians aren’t to blame  every time there’s a bad government service or project delivery: this is an inevitable consequence of pressures to cut taxes and deliver projects cheaply.

Possible reforms or ideas: ·        Allow a more informed public discussion about government revenue-raising. ·        Public servants need to contribute more to achieving efficiencies, rather than this being driven at the ministerial or political level.