Tax: the best form of defence

The Coalition has today adopted a shock-and-awe tactic to kick-start its election campaign: promised income tax cuts to cost $34 billion over three years, accompanied by aspirational talk of an Australia in which 98 per cent pay a marginal tax rate of 35 per cent or less. I won’t presume to discuss the promise’s target market at this point, but it should be noted that tax cuts at the past two budgets produced largely disappointing returns in the opinion polls (although the more recent round can be credited with a slight narrowing in Labor’s lead in August and September). Nonetheless, the announcement will fill the news bulletins with images of Peter Costello in his element, whereas Kevin Rudd will be forced to discuss those tax scales he couldn’t name a few weeks ago.

Centre-left economist John Quiggin makes the following observation on the troubled history of election tax cut promises:

I can recall (perhaps with error) at least two instances of such cuts being promised and then taken back. One was Paul Keating’s L-A-W tax cuts in 1993, which (as implied) were actually legislated in an attempt to increase their credibility. The other was the “Fistful of Dollars” tax cut of 1977 (so named for the ads which showed precisely that) promised by the Fraser-Lynch team going into the election and then (if my fading memory serves) taken back by Lynch’s newly-appointed replacement. Now what was his name again?

Author: William Bowe

William Bowe is a Perth-based election analyst and occasional teacher of political science. His blog, The Poll Bludger, has existed in one form or another since 2004, and is one of the most heavily trafficked websites on Australian politics.

409 comments on “Tax: the best form of defence”

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  1. Howard/Costello is committing political hara kiri. The tax cut announcement will make an interest rate rise on 6 Nov a certainty.

  2. Maybe, if the promise materially affects the likelihood in the near future of inflation falling outside the target band. In this case – no.

  3. The governments tax plan ran behind speculation about the premiers state of the state address (which is due tomorrow) and a report into the activities of the exclusive brethren on the ABC News in Tasmania.

    Is this going to be the extent of the governments tax policy for this election campaign? If so then i don’t think it will have much influence as it will get drowned out as the campaign draws on.

  4. Re Barry at #3

    In this case the treasurer is not telling lies, but is probably using the wrong terminology… the tax free threshold is indeed $6000 but the effective tax free threshold for ‘low income earners’ after the low income offset is applied is $11000 for those eligible. The offset of $750 cancels out the $750 tax payable on the income from $6001 to $11000.

    With a warning that I have not actually seen the proposal, it sounds a lot like they intend to further increase the low income offset from $750 to $1500. The benefit accrues to low and middle income earners, without having the same cost as actually raising the threshold per se, as high income earners miss out as the offset tapers at 4 cents in the dollar when taxable income reaches $30,000.

  5. A risk by the Govt, firing the big gun up front in the hope of jolting some voters over to them. Wouldn’t this be better on a Friday afternoon for the Saturday papers that everyone reads? It was inevitable that a tax policy release would get major attention – so too will Labor’s.

    Not so bad for Labor though as it now knows the hand held by the opponent. AND they will get better effect for theirs much closer to the election if they can hold off that long.

    Depends how it is played out on TV and to a lesser extent the papers.

    The negatives associated with it so far is that it is inflationary, in the never never for many and favors the highest wage earners, in real dollar terms. If they get a play on tv then their effect is lost.

    If Labor release some noise tomorrow then it will be quickly pushed into the background.

  6. Except that the taper would presumably kick in at $34000 instead of $30000 under the proposed rates that I have just seen courtesy of the link kindly supplied by Barry.

  7. 417
    Darn Says:
    October 15th, 2007 at 5:59 pm
    If this big policy announcement simply goes through to the keeper like everything else before it, Howard might just as well start packing his bags now.

    If the tax cuts/policies announced in the budget didn’t get a peep out of the voters (no poll surge for the Libs), why on earth would this be any different? I think people are smart enough to know when they are being “bought”.

  8. 3
    Barry Says:
    October 15th, 2007 at 6:00 pm
    The ABC report says

    Treasurer Peter Costello detailed plans to raise the tax-free threshold over the next three years, from $11,000 to $16,000.

    According to the ATO, the current tax-free threshold is $6,000.

    Is the ABC report wrong? Or is Peter Costello telling porkies?

    No, you aren’t wrong Barry. I just did my taxes last month and the tax free threshhold came into play for me. I just skirted in under it 😉 so I can verify, yes it is $6000. Costello is smoking something 😉

  9. shows how desparate the government are to get some poll movement early in the campaign. Remember the budget tax cuts as well as other sweeteners lauded as policy genius got no bounce at all…

  10. The fistful of dollars (with a Liberals give you tax cuts Labor gives you nothing byline) worked a treat in 1977, but that was of course just two years after 1975.

    With an 11 year old government with some credibility issues and a fairly popular opposition leader the strategy is certainly risky, but what have they got to lose?

    Actually probably this… Rudd and Swan can now promise any combination of tax cuts and expenditure commitments up to the value of this announcement and still claim economic credibility… a promise of a less expensive cut combined with some infrastructure spending and a ‘I won’t get into a bidding war’ response could be just the ticket for Mr Rudd, IMHO.

  11. According to the glossy brouchur I received in the mail with Malcom Turbull’s smiling face on the front cover, the government is taking climate change so seriously, that they are willing to spend$3.5 billion on fixing the problem between now and 2015.

    Certainly puts the coalitions priorities into focus when they promise $34 billion in tax cuts over the next three years.

    Really, getting ridiculous guys. I’m looking forward to November 24th.

  12. A metaphorical Bribe with a capital B.

    The Reserve Bank ought at least factor in any increased consumer confidence and hence spending as a result of both parties inevitable tax cut promises.

    Labor cannot match the cuts for reasons of perceptions. But their early release really suggests desperation from a govt that in the past kept its big promises until AFTER Labor’s.

    Surely the ALP will (a) quickly attack the cuts as irresponsible in size and potential affect on rates; then (b) come in with a more modest set of promises.

  13. ps I note the govt is implicitly claiming it is not yet in caretaker mode, and that this is a ‘govt’ announcement. Would they dare use taxpayer funded ads (eg mailouts) to promote this? (On top of the rort of MP communication allowances being hoarded for campaigning).

  14. [ps I note the govt is implicitly claiming it is not yet in caretaker mode, and that this is a ‘govt’ announcement. Would they dare use taxpayer funded ads (eg mailouts) to promote this? (On top of the rort of MP communication allowances being hoarded for campaigning).]

    They can’t. They went into caretaker mode as of midday today.

  15. ShowsOn it was my understanding that it goes into caretaker on Wednesday. Today was merely the prorogation of the parliament.

  16. This is different to the tax cuts given. A tax cut that is handed out does not get any gratitude because people believe either government would keep the new rates in place.

    This is a potential tax cut that only gets enacted if the Coalition is re-elected. I think it is not a bad idea in political terms. It means that Rudd has to “Me too” or else respond with alternate policy. Any alternate policy will benefit some and disadvantage others. This might be a wedge that Rudd has to answer.

  17. Actually caretaker mode only begins on Wednesday at noon.

    This is a policy done by Treasury NOT the Liberal Party.

    It is another reason why it will be hard for the ALP to win – they have to also defeat the policies thought out and costed by the entire public service.

  18. Has anyone noticed that comedians are constantly using the material that both parties are nearly the same. Like i posted many months ago the only way the ALP could win was to be a newish version of the same model. The ALP cannot win as the ALP. Sad really

  19. If Labor fails to respond quickly (and Wayne Swann’s initial comment they will “study the detail” indicates they will not) then expect the Coalition to go into a full offensive on Labor’s “lack of an economic plan”, “lack of a tax policy”, they will trot out Rudd’s blunder over the tax scales again, they will seize the agenda for as long as Labor allows the question to linger, or finds a way to change the subject.

  20. I agree Flash. Labor is very slow off the ball. Where’s all this vision we’re meant to be seeing? So far I’ve heard nothing from them.

  21. Labour does not have to act hastily, to do so would make them look like they are chasing the Libs and let the Libs set the agenda.

    You dont want the Libs to start setting the agenda, Labour has been setting the agenda alll year and the Libs have been chasing them.

  22. $17 Billion plus surplus last year plus these tax cuts of $34 biliion dollars.

    Surplus equals about $850 for every man, woman child in Australia and tax cuts another $1,700.

    That $850 came out of my family’s pocket, 5 in my family, $4,250 ripped off me. I want my $4,250 back now! Howard and Costello ripped it off through underfunding medicare and hospitals, abolishing the dental scheme and allowing pterol prices to soar so they could get more revenue.

    That surplus and their tax cuts are funded by their lazy, inefficient policies.

  23. In all probability, we’re far too obsessed with the latest policies, gaffes, etc. It is highly probable that the promises, etc, during this campaign will make very little difference to the polls. Howard and Rudd will simply cancel each other out, and unless one of them makes a really major foul-up, nothing much will change. Labor will win easily. Nothing suggests the govt will get any traction with this policy; nothing’s given them much traction before.

  24. I tend to disagree that Labor has been setting the agenda all year.. APEC, Budget, Aborigines.. Johnnie to me has been and has made an absolute hash of it.. APEC collapsed in a heap for him…
    The tax cuts are a bribe.. and guess who likes them- Trevor Hendy and where do his politics lie?
    Labor should not do same and if it does than we will know that a Labor government will just tinker at the edges because it will be hamstrung by tax cuts…

  25. I am sure the Govt would love to force Labor’s hand on tax. 6 weeks to go guys a very long time and a lot of noise to come. Labor is not slow and they should be deliberate. If they want to respond then release some noise on something else tomorrow.

    If pressed they can actually designate a date for the release of their tax policy – that will keep the press happy. They can then surprise everyone be releasing it a few days early.

    This is one of those big one day media events, there will be more of them throughout the campaign from both sides. There is nothing Labor can do about these things – they are orchestrated.

    I think tomorrow’s noise might include something about the Exclusive Bretheren? Or the Australian/Indian plane having to reland after hitting a flock of birds, or both.

  26. Howard looks rather petty explaining why the worm should be banned on ACA.

    Also didn’t he say the current interest rate is 6.25? It is infact 6.5

    I didn’t hear his answer for average weekly earnings, I think he said $50,000 per year.

  27. This whole tax cuts = interest rate rises in a fascinating situation. Yes, it’s true (ish) but the reason why it’s true is that we don’t have the capacity in the economy to deal with the increased spending power of the consumer (us… our money…). Why don’t we have that capacity? Not nearly enough spending on infrastructure, not nearly enough on education (more immigration, particularly skilled would also be handy, but I make no comment on the ‘carrying capacity’ angle of the Oz landmass).

    This is exactly where this government has been asleep at the wheel for the past 11 years. I too am for as much private investment in these things as possible, but if you’re not achieiving it (this is the idea behind Workchoices, making a more conducive environment for business so they invest), then you really need, as government to ensure it happens anyway. There needs to be a base line of investment to ensure the capacity of the economy to grow… Coalition would rather we all just worked harder and paid higher interest rates, it seems….

  28. The government is on 44 percent TTP. They need to gain 1% per week between now and the election. Whether you think the tax cuts announcements were dumb or not, if they get the government a 1% kick they’ll have done their job.

    They are out of the gate and racing. They are not going to roll over and play dead.

  29. Tracy Grimshaw just tripped up JWH on ACA:

    Tracy: What is the current interest rate Mr Howard.

    JWH: 6.25%

    Tracy: Its actually 6.5% Mr Howard

    You should have seen the look on the PM’s face it was priceless.

    He is totally out of touch

    JWH “you live by the sword you die by the sword”.

  30. So Johnnie gets the interest rate wrong??!! Interest rates mean a lot more to the average voter than tax rates, which Rudd messed up with.

  31. [Poor Mr Howard, stuck in the past trying to forget the last interest rate rise.]

    Now Howard has added another demand to the NO WORM policy.

    He will insist that he goes on A Current Affair AFTER Rudd so that he knows what the questions will be for the “pop quiz”.

  32. As I said previously the pressure is on the Libs they are more likely to make mistakes.

    Mr Rudd got the interest rate correct when asked by Tracy on ACA.

  33. Some places, tax cuts don’t swing elections. After all, if the ALP stands up tomorrow and says “that’s $32bn we’ll spend on hospitals and the elderly poor sad orphans with big moist eyes”, will that unclinch the deal? ‘Cause it’s easy for Rudd to fire back with a “cutting programmes” schtick. More than that I think, it’s just an opening salvo. After all, why play your trump card now? Makes you wonder what the trump card is.

  34. AM

    Howard on interest rates is same as when he pretended to understand that high petrol prices were hurting people, he has been getting free petrol for decades, courtesy of the tax payer.

    SMH is runninga poll on the tax cuts, majority prefer they be spent onhealth, education and infrastructure.

    Makes sense, fund Medicare and hospitals properly and people pay less for doctors bills, $110 dollars it cost me to take my daughter to the doctor last time.

    Fund education and we can train our kids up here instead of importing TWA doctors and other specialists.

    Fund the ACCC properly and put in a decent head and we can then stop this rip off in petrol prices.

    Release more federal land and fund a decent scheme and we may see housign become more affordable.

    Fund dental and we may not see pensioners ripping out their own teeth with pliers.

    All these mega surpluses and the ability to fund tax cuts come from Howard and Costello ripping off the serives to be provided and overtaxing to the limit.

  35. That is quite devastating, I reckon.
    Howard doesn’t even know what interest rates are – the most crucial figure in the entire economic equation, for the ordinary punter. And this on the very day when he has arguably taken a step that could bump them higher. I assume this blunder could well overshadow the tax cut announcement since it goes to the very core of much economic pain out there.

  36. you know whose footnotes Kevin Rudd needs to look at? Maybe the leader of the only social democratic government in this region: In 1999, in New Zealand, Helen Clark lead her Labo(u)r party to victory, promising to put taxes up (only the top rate), and they haven’t come down since. And she’s been a big spender on social programmes: like capped doctors visits. I’m saying, if the Coalition wants to win an election on finance, it’s an easy thing to swat, and any polls taken since yesterday won’t show much movement, I think. Maybe the announcement just saved Higgins.

  37. Rudd is right in holding back on his tax policy. The first few weeks of the campaign are more important for the Libs than Rudd, they are the ones that have to make up ground.

    The more Rudd keeps them guessing the more pressure he applies and the more likely they will fall into disarray and desperation after using all they’ve got far too early. What’s important is what’s on voters minds when they actually vote and Rudd needs to capture their attention in those last 2 weeks of the campaign not now.

    Let it wash through and allow voter cynicism to erode it. After all it’s not like the voter can get their hands on it now, it’s over the next 5 years.

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