The political debate over tax would improve if the participants did two things. First, look at the amazing stories of the successful people on the BRW Young Rich list and recognise that they are the foundation of the country's future wealth. And second, remember the cautionary words of Abraham Lincoln 150 years ago, when he said: "You cannot make a poor man rich by making a rich man poor."
In some quarters it is a reflex action - the people with vast wealth must be taxed in a punitive manner in the name of redistribution. The problem with this approach is that it does not work. Rich and poor are better off if entrepreneurs' wealth creation is not hindered.
Those on the Young Rich list, whose fortunes range between $10 million and $300 million, have achieved their wealth by overcoming two big obstacles. They have done it relatively quickly (all are 40 years of age or younger) and they have done it with no inheritance from a wealthy family. They have been successful because they have come up with good ideas, taken risks and had courage. In return they have become rich: deservedly.
What the Young Rich list does not document is the thousands of people who also have had courage and brains but have not succeeded in their entrepreneurial endeavours. These are the majority. The successful ones have beaten the odds and made money, only to be penalised by high tax rates. This is sending a wrong signal: that our tax system is skewed towards imposing a financial burden on the successful - those who make wealth for the rest of us.
Something missing in the current tax debate is recognition that wealth is created on the supply side by entrepreneurs who are involved in the production process, as opposed to the demand side, which is based on consumption.
This notion leads to the conclusion that if taxes are reduced, thereby providing more incentive to make money, government revenue will actually increase, due to a rise in production. This is represented in economics by the Laffer curve, named after the economist Arthur Laffer who developed it in the 1980s.
Politicians make tax policy more complicated than it should be. As Laffer said: "People do not work, consume or invest to pay taxes. They work and invest to earn after-tax income, and they consume to get the best buys after tax."
If workers can be assured that their efforts will be rewarded, they will be inclined to work more productively and entrepreneurs will have an incentive to take higher risks. Therefore, reducing taxation will not only increase the supply of labour but enhance the supply of skilled labour. If our tax arrangements are attractive enough, the inflow of international capital will also improve. All of these elements will improve productivity and increase wages. Tax revenue will go along for the ride.
The Liberal backbencher Malcolm Turnbull, a rare politician in that in his previous life as a successful investment banker he has written big cheques to the Australian Taxation Office, has proposed reducing tax exemptions so that any tax cuts are revenue-neutral. This can be taken much further. Reducing taxation will improve economy-wide efficiency and thereby increase government revenue.
Taking a supply-side approach to the economy involves asking the Government to invest in the productive capacity of those on the Young Rich list by reducing taxes and waiting for a return on that investment. Governments have been reluctant to do this, instead opting for lame industry programmes that attempt to encourage innovation and entrepreneurship.
Even a cursory examination of the cost implications of the ageing population is alarming. It should scare people under 40 the most, as they will be required to pay for it. If the generation in the Young Rich list is able to keep more of the money they make, government revenue will increase to cope with increasing expenditure on the ageing population.
The Treasurer, Peter Costello, says it is politically unpalatable to give tax cuts to the rich. The problem is that failure to do so will send talented young people to other countries that do. The price will be that we will not get the economic stimulus that young entrepreneurs provide and the Australian Government will not get the additional tax revenue.
One reason for opposition to tax cuts is that they may widen the gap between rich and poor. Surely, if everyone is getting wealthier, it is not important that the rich are getting richer at a faster pace.
To change Australia's tax laws requires good ideas, the capacity to take risks, and courage. In short, politicians are being asked to embrace the characteristics of those on the Young Rich list.
© Copyright; Foundation for Economic Growth and various authors. Individual authors retain their own copyright.
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