The tax cuts we have to have

One question we will perhaps never truly know the answer to is how much Federal Labor really believes that the tax cut package it took the last election is truly the right way forward in a policy sense. Most readers will likely recall that Labor more or less just “stole” the lion’s share of the Howard Government’s proposed tax cuts for their own package, reducing the cuts slightly for those on high incomes to claim the “economic conservatism” high ground, and proposing some actual reform of the tax brackets for the nebulous future. The rationale for Labor’s approach would seem (at least for cynics like me) to have been born out of three brutally pragmatic political principles:

1) Beat or at least draw level with Howard in a contest of tax cuts. Despite the inflationary risk, people over the last decade have shown a keen desire to vote with their hip pocket.

2) Win the economic conservatism high ground. The Coalition’s merciless pursuit of Labor over the interest rates experienced during the Keating years was intellectually dubious but incredibly effective, so this was a must.

3) Don’t stuff it up – minimise risk. Going into the campaign proper, the Opposition had a sizable lead in the polls. The danger with proposing to do something daring and bold from Opposition on tax was that the Coalition would take the opportunity to do even better, or else find a flaw with Labor’s proposals. It’s hard for the Coalition to attack Labor’s tax policy if it is 90% theirs as well.

Thus far the Prime Minister and Treasurer Wayne Swan have repeated ad nauseam in the media that the tax package that they took to the election was the tax package they were going to deliver. This ensures that the government does not suffer the inevitable backlash should they deliver something different to what was promised, and also provides a degree of political cover should inflation continue to escalate. Sure, Labor may well be delivering an inflationary package of tax cuts to the electorate, but the majority of the electorate voted for it, so the average punter has some piecemeal responsibility for the state of the economy.

George Megalogenis takes a different critical tack in today’s The Australian, having a go at Wayne Swan over the Treasurer’s fairly muddled attempts to explain away why Labor thinks that its promised tax cuts amount to tax reform. The point he makes is technically correct, although in truth I think this column is somewhat on the pointless side, coming as it does after the government has already committed to the electorate that it will deliver the particular package of tax cuts that have already been outlined. Make no mistake, I don’t think Wayne Swan, Lindsay Tanner or indeed Kevin Rudd truly believe that the tax package they are planning to deliver to the electorate in May really amounts to tax reform; but when it comes to reform in the short-term, they are stuck between a rock and hard place. Their commitment to the tax cuts laid out during the election campaign has been mercilessly re-iterated. The implications of backing down now are all too clear and would give an almighty free kick to the Federal Opposition.

In short, Federal Labor is politically bound to the package that it proposed during the election campaign, and I don’t think Megalogenis or anyone else should be particularly surprised that the likes of Swan and Rudd talk up the package in the media. For the short-term, Labor have promised window dressing. That is what they are now politically obliged to deliver, regardless of the innumerable structural reforms that will go begging in the interim.