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Friday, 20 March 1987
Page: 1092


Senator ROBERTSON —My question is directed to the Minister for Finance. I draw his attention to the editorial in the Australian of 26 February, which states:

. . . a big cut in the top income tax rates would actually increase Commonwealth revenues and help close the Budget deficit.

Is it the case that income tax cuts of the dimensions currently being bandied about by Opposition parties could be expected to pay for themselves, thus absolving the proponents of those tax cuts from the need to specify expenditure cuts to pay the bill?


Senator WALSH —A motley collection of feeble-minded scribblers and political charlatans have been running around for some time peddling that theory. It used to be known as the Laffer curve, or supply-side theory and ultimately became known as Reaganomics. The theory was that if tax rates were cut the revenue would increase because the tax base would expand by an amount which more than offset the decline in tax rates. It was always implausible, but it has been empirically tested by the President of the United States of America, whose name is now most closely associated with it, when it became known as Reaganomics. What happened as a result of this experiment with Reaganomics was that within two years the United States budget deficit blew out by about 250 per cent and its current account deficit blew out by something like the same amount-I do not remember precisely. Within about five years the United States was transformed from having been the largest creditor nation in the world to the largest debtor nation.

There are two legs to the demonstrably false argument. The first is that tax cuts will eliminate the tax evasion industry and the second is the one to which I have already referred; that it will bring about an expansion of the tax base so great that it will more than offset the revenue loss from the reduced rates. Those arguments have been peddled by that motley collection of feeble-minded scribblers, which includes whoever wrote that Australian editorial-I notice that Katharine West was reported as saying the same thing today-and Sir Robert Sparkes, among others. Let me test the theory that tax evasion would disappear if the rate were lower. There has been in recent years a very large fall in the price of colour television sets but there is no evidence to suggest that the rate of theft of colour television sets has declined in accordance with their price. The simple reason is that people who have a disregard for the law and believe that the risk of being caught if they break it is acceptably low, will continue to do it even if the price of colour television sets has been reduced, or the rate of tax has been reduced.

The ratbag Right in general-a classification which includes the Federal Opposition-has, with varying degrees of enthusiasm, also been peddling this Laffer curve, supply-side theory of Reaganomics. It has also said, in association with the argument, that because of high marginal tax rates nobody will work an extra hour of overtime. In most awards there is a 50 per cent penalty rate for overtime-the same penalty rate as the doctors union in New South Wales is trying to get for what is the equivalent of shift work. If one looks at the 40c tax rate, the after tax return in ordinary time is 60c and the after tax return for overtime is 90c, yet it is argued that the high marginal tax rates prevent people from working overtime. Even if the bracket were crossed between the 40c and 49c rates, the average rate per hour in ordinary time earnings retained is 60c and the overtime rate is 76c even if simultaneously a worker's income moves into a higher tax bracket. That is one of the many demonstrations which show how shoddy, both numerically and intellectually, are the nostrums of the ratbag Right.