Taxation: The great distraction

It is disturbing to see the amount of focus tax reform is currently receiving.

A clear picture of what is really wrong with the economy can be demonstrated by comparing The US economy with that which most closely resembles it: Australia

Both countries are major food exporters, have significant mineral production, major domestic oil production but still rely on foreign sources and similar GDP per capita. Economically the difference between the two is much more extreme. The US has 4 times the debt per capita, almost twice the unemployment and the value of the US dollar has halved in comparison over the last ten years (http://www.xe.com/currencycharts/?from=USD&to=AUD&view=10Y). So given a similar agro-industrial economy why is there such an extreme difference in economic performance? Let's look at the traditional explanations.

1. Higher taxation = Less economic growth

Australia has a higher and more progressive income tax with a maximum effective rate of 56.5% (47% tax +9% compulsory 401K + 0.5% Medicare levy). Corporate tax is a flat 30%, technically lower than the US but with essentially no industry tax breaks making it higher than the average ~25% paid by most US corporations. Capital gains is also 30%, double the US. Additionally there is a national consumption tax applied to all retail goods and services (except basic food) at a rate of 10%.

Argument: FALSE - Significantly higher taxes have not negatively impacted Australia's economic growth.

2. Higher minimum wage = Higher unemployment

Average minimum wage in the US is approximately $8 (~$7.50 AUD). In Australia it is $15 AUD.

Argument: FALSE - Double the minimum wage, half the unemployment.

3. Excessive welfare benefits encourage and increase unemployment

US workers typically get 99 weeks of Unemployment benefits at an average of 36% weekly income. Australian workers get unlimited benefits of $260USD per week tax free (plus concessions such as free healthcare).

Argument: FALSE - Significantly greater benefits, half the unemployment.

So, given that all the standard excuses for a stagnant economy are demonstrably false, what are the real
problems? Lets look at what else Australia does, or rather what they are NOT doing.

1. Incarceration

Australia has an incarceration rate 4 times lower per capita than the US (General crime rate and murder rate are also 4 times lower per capita). Those welfare dollars that are typically considered a waste by conservatives actually provide a huge return on investment: It seems every extra dollar of welfare saves $3-$4 on prisons and law enforcement. In terms of actual cost it is approximately ten times more expensive to keep someone in prison than on welfare.

2. Policing the world

Australia has several military deployments including Iraq and Afghanistan but these are small deployments primarily of special forces. Australia has no permanent foreign military bases nor does it have carrier fleets. Per capita military spending is about 40% of US expenditure.

3. Bailouts

Australia has a federal reserve but it operates in a much more limited scope. It certainly does not give bailouts to private banks. In the few cases the Government has given bailouts to private companies the scale has been typically ten times smaller and has never been given to the financial sector. As the Australian federal reserve has not been printing excessive amounts of fiat (though they do print fiat) currency their dollar has not devalued as rapidly.

The basic lesson is obvious: Spending is the problem. The second lesson which those labelled conservatives will have a hard time accepting is that tax cuts are not a panacea for economic problems. Whether those dollars are spent by individuals or the government, the same amount flows back through the economy (with the exception of overseas spending, which the US is doing a lot of lately). The philosophical debate over the merit of welfare entitlements is essentially irrelevant in boosting the US economy.

Actually I'll add a fourth item to this list:

4. Sanctions

Though Australia does engage in UN and sometimes US initiated sanctions, it still trades with most nations with most of its resources e.g Cuba, Iran. Nor does it really get into the whole "sensitive technology" restrictions the way the US does. Despite the US initiating the concept of global free trade, Australia has embraced it much more readily. It is hard to quantify how much difference this makes, but if it was really a negative it would be hard to explain Australia's economic success.

In conclusion this is what needs to be done to fix the US economy:

Majorly cut overseas military spending
End the "war on drugs"
Stop bailouts
Stop printing so much money
Don't cut the minimum wage
Don't cut welfare just yet (its cheaper than prisons)
Don't make tax cuts until after you have balanced the budget
Drop embargos and sanctions, and start trading with all nations

The only thing all these have in common is that the government would acheive more by doing less.

Print Friendly Version of this pagePrint Get a PDF version of this webpagePDF