Why Growing the Pie Beats Dividing It

A note to young leaders.

Every government faces the same policy dilemma: growing the economy versus redistributing its wealth. Growing the pie versus dividing it more equally.

Both are essential. But if you must err on one side, you should err on the side of growth. Prosperity is the best anti-poverty program ever invented.

The latest federal budget focuses on the latter. But sadly it fails on both counts:

• It takes from the “haves” but delivers almost nothing to the “have nots”.
• ⁠It raises taxes on asset owners and gives back an annual tax rebate of $250 to wage earners. That’s not so much a transfer of wealth from asset owners to wage earners – as it is a transfer of wealth from the private to the public sector, with a token gesture attached.
• House prices for existing dwellings are expected to fall by 3% but rents are likely to rise by 10%+ as a result of the budget measures. To argue that this improves access to housing for the young is disingenuous.
• It’s unfair and bad policy to tax the value created by entrepreneurs and small business owners at circa 45%. Entrepreneurial talent and capital are mobile, and they will simply move to more friendly jurisdictions.

The real problem with the Australian tax system is its punitive over-reliance on personal income tax.

The 30% tax rate kicks in way too early at $45,000 (it should be closer to $100,000) and the top marginal tax rate is too high at 47% and kicks in way too early at $190,000.

And this is not a just a rallying cry from the right. Here’s what Paul Keating had to say about this as recently as February 2024:

“There’s an issue that all societies should have, of how much a person’s conscientious efforts and wealth should be delivered to the state. Once you start getting the top rate over, in my opinion 39%, it becomes confiscatory – and when they become confiscatory you just lose all that impetus to make a dollar and do clever things.”

Keating also warned that without controlling spending, there’s no room for tax relief.

Beggar-thy-neighbour “envy politics” is a poor substitute for doing the hard work of reforming our tax system.

Young leaders, take heed: the easy path is to divide the pie. The better path is to multiply.