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"Fightback" - setting the record straight business economists wrong



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26 November 1991 Bulletin No 11

"FIGHTBACK" - SETTING THE RECORD STRAIGHT BUSINESS ECONOMIST WRONG

A statement released by Bankers Trust Chief Economist, Chris Caton, is packed with false and misleading information about the Coalition's "Fightback" package.

Mr Caton has clearly either not bothered to read the documents released by the Coalition before offering his opinions or just doesn't understand them.

He implies that the Coalition has argued that the introduction of a GST per se will encourage saving by shifting the tax burden from income to spending.

"Fightback" does not argue that the introduction of a GST by itself will encourage saving. Indeed, we have made it clear that an increased savings effort depends crucially on other factors such as lower inflation and lower effective marginal tax rates on savings.

The Coalition's "Fightback" package, which features a national savings program to encourage new savings, in addition to the necessary policies to restore price stability and lower marginal tax rates, will encourage additional private savings.

On the issue of raising additional revenue from the black economy due to the introduction of a GST and a reduction in income taxes, Mr Caton is just plain w r o n g . He claims that arguments that a GST would raise more revenue because it's harder for the black

economy to evade tax is "probably not true".

Surely Mr Caton understands that, to the extent that the indirect tax base is increased and the direct (or income) tax base is reduced, people living in the black economy will pay more tax due to the greater reliance on indirect taxes.

Mr Caton's argument that "since all taxes distort, it is best to tax as much as possible at as low a rate as possible" is

consistent with the Coalition's "Fightback" package which sets the GST at a rate of 15 per cent and abolishes seven taxes:

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- wholesales sales tax - payroll tax

- petroleum products excise - superannuation lump sum tax - customs duties

- training guarantee levy - coal export duty

Arguing that the GST is inflationary (and neglecting to mention the fact that its effect on inflation is one-off), Mr Caton goes on to say that our estimate of the CPI impact for compensation purposes ignores the effect of the health measures.

It is most surprising that Mr Caton fails to understand that the health policy announced by the Coalition as part of "Fightback" is a micro-economic reform measure in itself and therefore should not be included in the CPI estimate discussed above.

Mr Caton then argues that some of the reduction in the WST will be absorbed by businesses increasing their profit share. Again, Mr Caton reveals his lack of understanding of the Coalition's "Fightback" program which has two clear safeguards to ensure that

businesses pass on benefits to consumers. First, we are

providing the Trade Practices Commission with additional resources so that it can beef up its role as the watchdog of

competition. Secondly, we are retaining and boosting the resources of the Prices Surveillance Authority.

Mr Caton also floats the mistaken notion of wage indexation to compensate for the effects of the GST. Low and middle income earners will be more than adequately compensated through the tax and expenditure system.

It seems that he has not even bothered to come down from the top end of town to read the documents that he is so willing to

attempt to criticise. He claims that the Coalition's GST

proposal "diverts attention from the real economic problems holding down Australia's productivity growth".

Any cursory reading of the Coalition's "Fightback" package makes it abundantly clear that the GST is but one element of a

comprehensive economic strategy designed to raise productivity and efficiency in this country.

Once again, Mr Caton is wrong.

In short, Mr Caton's analysis of the Coalition's "Fightback" program is, at best, short-sighted and mostly completely" misleading, false and wrong.

His ignorance indicates a complete lack of knowledge of the Australian tax reform debate. Canberra D139/91 „

Contact: David Turnbull 06 277 4277