Max Newton, “The ‘irresponsible’ way is the only way,” The Australian, October 3, 1989, p. 13.

FLORIDA: Last week the healing virus of anti-government, anti-tax, pro-growth ideas took over the mental computers of men at the very heart of big-government, high-tax thinking in the United States — the members of the world’s most corrupt parliamentary chamber, the US House of Representatives.

In a quite wondrous display of the strength of this virus, which has been spreading through the American body politic since the early 1970s, large numbers of Democrats deserted the new party leadership of Tom Foley and voted to give President Bush a top-notch victory for his tax policy.

The House voted monumentally to cut the capital gains tax in the US.

Class-war advocates like Republican Gerhardt were sunk. Americans are mostly interested in what is going to happen when they are going to get capital gain and they want the tax on those gains to be small.

One of the central reasons for the fathomless failure of Australian economic policy is the belief, so ingrained in the bureaucracy and the political leaders, that the excruciating marginal tax rates charged in Australia are “responsible”.

These tax rates, along with all the other old baggage of resentment of success, love of failure and “all-round protection”, are one central and persistent reason for the emerging disaster that is engulfing Australia.

The US has long since thrown all that old baggage overboard. The marginal rate of tax here works out to little more than 25 per cent, when you take into account the usual skills in evasion and avoidance that cut the normal 30 per cent marginal rate down a bit.

When Mr Bush said “no more taxes” in the 1988 election campaign, his Democrat opponents called him “irresponsible” — as did the towering majority of foreign media and professional opinion.

But as it turned out, he was appealing to a craving hunger among the American people for less and less taxes.

As taxes have come down — under mighty pressure — something wonderful has happened.

Not only has the US enjoyed the longest period of uninterrupted economic expansion this century, but it is turning into one of the longest periods of declining inflation and declining interest rates.

Three times now — under Carter, Mondale and Dukakis — the “responsible” leaders of thinking in the Democratic Party fought a presidential election on a platform that either directly or inferentially called for higher taxes and more “responsibility” in fiscal policy.

Now their sweeping defeats are undermining the very castle keep of liberal economic philosophy in the US — the corrupt, gerrymandered House of Representatives, whose members have far less chance of being defeated and put out of office than have members of the Supreme Soviet.

Fearful of their lives, the defenders, the Democratic Party’s “responsible” archers, are jumping from the battlements and sneaking out through the side doors to join the attackers, led by King Bush, in his scarlet and ermine on which are written the magic words “read my lips”.

Around his forehead he bears his phylactery wherein are the slips of paper conveying the awful and mysterious charm “proposition 13”.

As tax rates have come down, so have inflation and borrowing. In the latest three months, to July, the growth rate of domestic non-financial debt in the US has fallen to 6.5 per cent — lower than for any year since 1970 and less than one half the growth-rate of debt in the four years to December 1986.

It’s not so profitable to go into debt when the tax advantages have been so undermined. And when you combine the lack of tax incentive with the experience that inflation is falling and will likely go on falling, debt stops being a cop-out and starts becoming a bill.

“It’s a tax for the rich,” said the Democrats, in their standard “responsible” criticism of Mr Bush’s plan to cut the capital gains tax. The reply they heard from the House of Representatives constituency, among the millions of ordinary Americans, was “that’s okay, we want to be rich too some day”.

I have been receiving letters from Australians who dread that they have been lured into a financial bear trap — it’s called “negative gearing”. They have been suckered into over-borrowing, in the expectation of gains on property. There will be no gains, not from here on in. There will be big losses.

In the US, property is out. Years of slow money growth and low marginal tax rates have created a state of affairs where “as soon as you drive your house out of the dealer’s lot it goes down in price 10 per cent”.

Property in Australia will turn into a festering, disease-carrying swamp as the flood waters of over-leveraging inundate borrowers who thought leverage was a “good tax lurk”.

The following alarming numbers underline the problem facing Australians.

Between 1986 and the June quarter of 1989, the ratio of personal taxes paid to the increment of personal income in the US was 14 per cent.

In Australia, the ratio of income taxes paid to the increment in household income between 1985-86 and the March quarter of 1989 was 21 per cent.

Australians are paying 50 per cent more in incremental personal income taxes for every dollar of incremental household income than are Americans.

Yet Americans are fighting to get taxes down still lower.

Work out this difference in terms of interest rates.

The mortgage interest rate in the US for a 30-year loan is about 10 per cent. The after-tax cost of that loan to an American paying about 25 per cent marginal tax rate is 7-8 per cent.

The mortgage rate of new loans in Australia is about 17 per cent. The after-tax cost of that mortgage to an Australian paying 50 per cent marginal tax rate is about 8-9 per cent.

There’s not much difference in the after-tax cost, but there’s a great deal of difference in the effect. In the US, borrowing is less and less a good idea for the ordinary worker. In Australia it still seems to be a “good lurk” if the tax can be deducted somehow.

High marginal tax rates tend to keep interest rates high. High marginal tax rates also encourage high wage demands.

Between 1986 and the second quarter of 1989, average weekly earnings in the US rose 9 per cent. In Australia, they rose 17 per cent between 1986-87 and the second quarter of 1989. The annual increment in earnings in Australia was double that of the US.

Over the period, the American worker’s average earnings rose $30 per week of which he kept about 80 per cent or $24. The average Australian worker’s earnings rose about $70 per week of which he likely kept about $35.

It’s a bad bargain.

If inflation is rising 4.5 per cent a year in the US (the average of the past nine years) the average American worker needs an after-tax increase of about 5.5 per cent a year to maintain constant real after-tax income.

The Aussie worker has needed an average increase of about 10-11 per cent a year to maintain his real earnings.

Under high-tax systems, the worse general economic management is the bigger the wages increases needed by the workers to maintain their after-tax real incomes.

And we know just how bad general economic management in Australia has been. It’s been abysmal particularly in the area of monetary policy.

The American policy has been unusual in another regard.

As federal government revenues have increased, much of the increment has been given back in tax cuts.

The US idea, forced on Congress by former president Ronald Reagan and Mr Bush, has been that lower tax rates are an investment in growth and that growth will eventually solve the Budget problem, in so far as it is a problem (it certainly hasn’t brought the US to ruin).

The British and Australian approach has been different. The first priority has been the “responsible” approach on getting the Budget balanced.

This approach has led, in both examples, to an emphasis on Budget-balancing while monetary policy has somehow been neglected, or broken. So in the “responsible” Budget societies of Australia and Britain you have huge wages blow-outs, sharply rising inflation, balance of payments crises and exorbitant interest rates.

By contrast, in the US, where tax-cutting has been the first priority, you have Budget deficits (which have fallen sharply in relation to national income but still horrify foreigners and “responsible” elements in American politics) — but you have a strong currency, falling inflation, very modest wage increases, booming employment and falling interest rates.

I continue to read perplexed statements by Australian analysts and politicians wondering when “tight money”, meaning high interest rates, are going to “hit”. They are taking a long time to hit and so far they are only hitting house building.

One reason is that when you have marginal tax rates of 50 per cent, it takes a huge rise in nominal interest rates to produce much of a rise in after-tax money costs.

If someone is paying 10 per cent interest and the rate goes up to 14 per cent, he is only paying about another 2 per cent a year after tax when his marginal tax rate is 50 per cent.

The “responsible” thing to do is to cut taxes.