August 07, 2013

Horse 1523 - Where Is The Surplus?

One of the great lies of economic rightist politics is the perpetuation of the myth that the Government sector is only a consumer and somehow produces nothing (see Horse 1458). In consequence, rightist politics likes to peddle the desire for government surpluses which are achieved through reducing the size and scope of government sector budgets.
The buzz word which is almost always used is "waste", as though there's loads of money just being bandied about like its going out of style or something. I can tell you through personal experience in working in the government sector, that many many many hours of overtime are put in and are never ever paid and the threat your job being axed unless you reach upper management is always looming large. If there was wholesale "waste" going on, I personally never saw it. That's just inconvenient though and doesn't fill up column inches in newspapers.

The basic motivation is that in essence, people don't want to pay for anything, or if they do have to pay, they want to pay as little as possible. That same motivation in principle is why slaves were transported across the Atlantic, why clothing is now made in countries like Bangladesh where workers are paid less than $4 a week and why rightist political parties who are funded by interested parties with very strong motives, like to tout policy where people and companies should pay less in taxation. They like to pitch to our emotions and especially our desires not to pay for anything. On a grander scale, the American Revolution was famous for the slogan "No taxation without Representation"; across the world that has somehow morphed into a much simpler two word slogan "No Taxation"; that is "we don't want to pay for anything".

So why do I mention all of this with respect to proposed government surpluses which are currently being touted by the Liberal Party and to a lessee extent Labor? Because it should come as no shock that a government surplus, runs almost counter to the ideal of not paying for things.
By definition a government surplus is when the government collects more in receipts than it spends. The problem is that for a government to collect more than it spends, it first has to collect taxation receipts. Quite literally a government surplus is when people pay more to the government sector than the cost of running the government sector. Already, people don't like paying for things but to create a government surplus, people must quite literally pay for nothing (or in the case of drawing down debt, paying for things which they've already got for "free").

It's weird because taxation and government spending in an ideal economy should be designed to run counter cyclical. That is, when the economy shrinks, government spending should increase by and equal and opposite amount to flatten the trough; and when the economy is growing, taxation receipts should also increase so as flatten the peak.
The problem is that if you do an analysis of real world figures, we find that this is simply not the case.

This link illustrates the point perfectly:
Firstly, the top marginal tax rate over the past 30 years has dropped from 60%, to 49%, then 48%, 47% and now finally 45%. Also, in the name of countering "bracket creep" the tax-free threshold has been progressively extended further and further.

Granted that countering bracket creep is probably a good idea because over time and people will ask for more dollars in a cycle of cost-push and wage-push inflation as a counter to lost buying power.  However, if we just look over the past 10 years which includes the scope of the mining boom, we find the following figures:
Average Weekly Ordinary Time Earnings:
Year - AWOTE - Adj for 52.178 wks:
2003 - $0878.80 - $45,854.03
2004 - $0931.40 - $48,598.59
2005 - $0960.00 - $50,090.88
2006 - $1022.60 - $53,357.22
2007 - $1051.30 - $54,854.73
2008 - $1103.60 - $57,583.64
2009 - $1145.10 - $59,749.03
2010 - $1201.90 - $62,712.74
2011 - $1259.40 - $65,712.97
2012 - $1322.60 - $69,010.62
2013 - $1393.00 - $72,683.95

If we then use AWOTE for the basis of Assessable Income because it makes sense to compare an "average" set of ordinary earnings with an assessment based on same, then we find that the tax assessed is thus:

Year  - Wage - Assessed - Effective Tax Rate
2003 - $45,854.03 - $09,928.00 - 21.65%
2004 - $48,598.59 - $10,751.00 - 22.12%
2005 - $50,090.88 - $10,887.00 - 21.73%
2006 - $53,357.22 - $11,357.00 - 21.28%
2007 - $54,854.73 - $11,056.00 - 20.16%
2008 - $57,583.64 - $11,274.00 - 19.58%
2009 - $59,749.03 - $11,774.00 - 19.71%
2010 - $62,712.74 - $12,363.00 - 19.71%
2011 - $65,712.97 - $13,263.60 - 20.18%
2012 - $69,010.62 - $13,975.25 - 20.25%
2013 - $72,683.95 - $15,168.97 - 20.87%

Okay, so the raw numbers don't suggest much other than a general 4.72% increase in AWOTE but further analysis of the last set of figures yields this:

If the mining boom started in 2005, we should have expected that taxation rates would have increased as people's wages were subject to bracket creep; in fact the biggest single yearly jump of AWOTE was of 6.52% from 2005 to 2006. In contrast though, we saw not an increase in average tax assessment due to bracket creep but a deep cut in taxation rates because of governmental policy.
Already we find a major problem. Government surpluses were achieved under the last few years of the Howard Government which should have been expected with a mining boom but due to the fact that future taxation cuts had already been slated all the way to 2011-12, it would have been exceptionally churlish and economically stupid for the newly appointed Rudd Government to wind them back in a shrinking economy; post GFC. Even with bracket creep, the effective taxation rates under both the Rudd, Gillard and second Rudd Governments were still lower than before the boom under the Howard Government.
Furthermore, in order to have actually reaped the benefit of the mining boom, appropriate mining taxes should have been put in place in 2004 and not years after the event. Personal Income Tax rates would have been more effective had they not been dropped 10 successive times in 10 successive years.

I suspect that had taxation rates been fixed at 2003 levels, there probably would have been a surplus in 2012/13 as Mr Swan promised. What's never ever mentioned in the media is that if there isn't a government surplus due to taxation cuts, then the money simply hasn't disappeared but must have remained in the pockets of taxpayers. Especially during the months of July and August, I can tell you that in addition to peoples' motivation that they don't want to pay for anything, they also want to thrust their hands out for as many deductions and handouts as they can possibly get. This motivation also translates into votes; people will tend to vote for the party which they think will return the greatest amount of money to their pockets and naturally the promise of tax cuts is held out quite a lot.

So then, where is the surplus that was promised? Open your wallet, it's still there; it's just that you haven't paid it to the government yet. It didn't magically disappear. Collectively Australia, it's still in your wallets because you don't want to pay for anything.

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