22/04/2010 - 00:00

We all benefit when business is booming

22/04/2010 - 00:00

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It seems a lot of people are missing the point about tax.

I WAS bemused to see the results of a study by Australian National University economist Andrew Leigh from the Research School of Economics, which showed Australia’s top earners have increased their share of income more than three-fold during the past three decades.

The focus was all about the rich getting richer.

This would be understandable but for a key point that seems to get overlooked every time the ‘wealthometer’ is pulled out – we all benefit when wealth is created.

As this study shows, Australia’s rich are simply recovering some of the ground they lost since the 1920s, the earliest period recorded in the ANU study. The records also show the rich were, relatively, richer than they are now until the mid 1940s, or even 1950 in the case of the nation’s top 1 per cent of earners.

It must be remembered that around the turn of the 19th century Australia was, per capita, the richest nation on earth with a standard of living envied by the rest of the world, including the old cultures of Europe.

By 1920, after the shock of World War I, that comparative wealth was in decline; but it is likely that the position of Australia’s wealthy would have reflected that period.

So, when Australia’s rich were historically at their richest, the nation as a whole was rich and its citizens enjoyed the highest standard of living possible at that time.

This is not some banana republic where the wealthy and powerful squander their riches while the majority of citizens live in poverty.

The figures in the graphic above show that the rich are getting relatively richer again after decades of pseudo socialism, which heavily taxed wealth creators and tried to equalise earnings. The worst of this occurred in the 1970s and mid-1980s until the Hawke-Keating era.

Does anyone feel that the rising relative wealth of the richest few today is driving the rest of the population backwards?

Clearly it isn’t, which brings to my second point: the rich are a pointer to the health of our economy, not just in monetary terms, but in the overall standard of living. And measuring wealth in monetary terms is missing the point entirely if it is done just out of envy.

I would bet that measuring other important factors in a society, such as infant mortality, longevity and a bunch of far more subjective factors (such as the overall happiness of the population) would find a general correlation with the rich getting richer.

Yes, they have got more helicopters and fancy yachts, but the rest of us are better off too – in much more important ways. We can get a kidney transplant almost as easily as someone with their own pilot, our children can go to university without being born into the right family, and we can expect to live through a natural disaster.

Of course, Australia is not perfect. The indigenous community has missed out on many of the benefits the rest of us have enjoyed; but even there the story is interesting.

Wealthy Australia is producing Aboriginal thinkers and leaders who are helping their people to rise out of poverty. I have recently written about the issue of Aboriginal businesses. There are several indigenous business leaders who would, no doubt, be staggeringly rich compared to most of their community. Is this bad? No it isn’t. They are the ones most likely to employ Aboriginal people and educate their own – because they have the means to do so, coupled with the strongest desire.

Of course, this must all be put in context.

Wealth is not made on its own. It is a combination of the fortitude of the individual, luck and circumstance and, importantly, the conditions of the society in which that wealth is made.

There are more super-rich individuals in democracies than in totalitarian states or developing nations because it is easier to get rich in places where roads exist, communications are easy, sovereign risks are minimised and the corrupt are rooted out of bureaucracy.

Ethical environment

THE news that US regulators filed civil fraud charges against investment bank giant Goldman Sachs over its dealings in subprime mortgages will make lots of people feel better.

The tragedy of this is that while legal action of this nature is necessary, it is very much closing the stable door after the horse has bolted.

The lesson is that markets will always move ahead of regulators when they have the incentive to do so. Regrettably, this creates an atmosphere where the unethical can succeed.

Another example, closer to home, is that of the Building the Education Revolution stimulus program, which appears to have been rorted beyond belief.

It is staggering to me that, from what I read, so many people are prepared to rip off the state. While a free market dictates that prices reflect demand, I actually find it offensive that certain businesses sought to line their pockets at a time when the government was purportedly spending money to keep the economy alive and them in business.

While I would argue the stimulus package was way too much, and maybe even unnecessary, it was at least well intentioned. If there had to be a stimulus package there was merit in spending it on education.

If only it had been better managed.

Why did this government forget to encourage the behaviour it wanted – beyond flushing cash into the economy? Clearly, handing out buckets of money sent the wrong message.

Former prime minister John Howard had the right idea when he introduced the GST. His government was aware that business would be tempted to add 10 per cent across the board to their prices, despite a reduction in many state taxes.

Such rorting would have been damaging to his government. To reduce the risk of such behaviour, Mr Howard and his treasurer Peter Costello warned business to do their sums right or face the wrath of the taxman.

It was a good strategy. Most business want to do the right thing but they lose in an environment where the unethical are allowed to freely operate.

Deputy Prime Minister Julia Gillard would have done well to have learned from her predecessors when opening Treasury coffers to build new classrooms, just as US banking regulators would have done well to learn that there was a risk in allowing centuries of banking good practice to be jettisoned.

Creating the right environment allows ethical businesses to flourish.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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