Why don't governments put up taxes instead of interest rates?

[Duffa]

So, I'm on holiday and relaxing in UK. Been to Lord's.
Watching tennis and Tour de France on the tele without getting/staying up in the middle of the night.
I have time to reflect.
Ms Duffa is a mortgage holder. I paid mine off a long time ago.
Her repayments have gone up by the 10's of thousands per annum as they have for many young people.
Her bank is posting record profits (of which, I am a beneficiary in dividend, saving rates and occasionally share price?)
Taxes would take her money from the banks and could fund hospitals etc etc (so I still win..)

THIS IS NOT A POLITICAL DIATRIBE

I would like an economist, an accountant, or even someone from PwC, to reply.
Even if the first answer is "you d"""****"", that won't work because of A, B, C, supply side, reverse economic demand infrastructure....... yada yada.

I will be happy and informed.

I just want to know. Is this a dumb light-bulb moment?

D

p.s. - I am really pïssed off with Amex and BOM, SQ devaluation - just in case you thought I had forgotten the primary focus of this forum.....

 

[MARTINE]

Because they want to get re elected.

Selling a policy of paying more tax is akin to going to a dinner party having stepped into the proverbial outside and its still on your shoe.

 

[jakeseven7]

Because our relative tax rates are already too high by international standards and actually should be coming down (as planned thankfully) not going up to attract people with brains to Australia

 

[747sp]

It is called fiscal policy and governments of all persuasions will tell you that the central bank is independent and that they can do nothing about monetary policy.

 

[downgraded]

Because that would require the government of the day to act. Interest rates rises are the RBA's only tool in the absence of government action.

 

[downgraded]

Because our relative tax rates are already too high by international standards and actually should be coming down (as planned thankfully) not going up to attract people with brains to Australia

Income taxes may be high, sales tax (GST) is actually quite low.

 

[downgraded]

I'd also argue that whilst headline tax rates may be considered high, all the new utes on the road only come from everyone else paying more tax or higher service fees.

 

[sqrt()]

Taxes would take her money from the banks and could fund hospitals etc etc (so I still win..)

I don't think most people think they're winning without cash in hand (I'd like to exlude myself though )

 

[RooFlyer]

Because our relative tax rates are already too high by international standards and actually should be coming down (as planned thankfully) not going up to attract people with brains to Australia

People with brains overseas already don't any tax.

 

[justinbrett]

I would like an economist, an accountant, or even someone from PwC, to reply.

I wouldn't be asking PwC for tax advice

 

[MELso]

As a means of reducing demand, it's fairer to put up taxes because the burden should be spread more broadly depending on how the increases are structured (interest rate rises are targeted at debt-financed consumption and investment including, in Australia at least, home purchases - most countries have a much higher proportion of fixed interest rates for residential property).

As astutely noted up thread though, governments want to be reelected. Also, legislation takes time to draft and pass and don't have the instantaneousness of interest rate rises.

 

[Gremlin]

It's partly political. But there's also a timeliness to it. In order to try and take heat out of the economy (or stimulate it in other contexts), interest rates can adjust almost monthly. In contrast, even if the political will is there, it's very difficult to change taxation rules partway through a tax year. Realistically if a Government wanted to adjust the tax rules today, the earliest they would likely see an impact in market is July 2024. Not so useful for stifling demand in the interim.

Also, Australia does NOT have high taxation by international standards. OECD data below shows that Australia's tax levels are now, and have been for an extended period of time, substantially below the OECD average. OECD Data What is true is that we have a disproportionately high amount of tax taken through income tax and a disproportionately low amount of tax taken through consumption taxes (eg GST) in comparison to most OECD countries. But still much, much lower overall than most.

 

[UP4014]

Because our relative tax rates are already too high by international standards and actually should be coming down (as planned thankfully) not going up to attract people with brains to Australia

Sure, they are higher than Cameroon and Congo but lower than a number of developed nations we like to reference when we want better education, transport and health care, Europeans and Scandinavians. I'm more than happy to pay my tax to avoid Yemen standards of health care.

 

[Lynda2475]

Raising taxes wont solve inflation, because the people who spend majority of their income are lower income earners who don't pay very much tax. Those people still need to eat, pay utilities etc. If you push taxes too high, then the talent and business investors leave for markets where they pay less tax.

Higher interest rates can be a good thing (not that the current interest rates are high by historical standards); because those saving actually have a chance to earn a return.

We have had ~15 years of ultra low interest rates which has inflated the property prices because finance was too cheap and easy to get and saw lots of people borrow well beyond their means. Meanwhile those trying to save for retirement or deposit have earnt basically no interest.

At high-school we were given the below advice and it has served me well:
1. never borrow money for anything except property
2. never borrow more than 80% of the banks value of a property, equity protects you from market fluctuations and avoids mortgage insurance which helps the bank not you
3. if you cant afford your mortgage repayments at 10% for the life of the loan you cant afford to have a mortgage.
4. never reduce your repayments when interest rates fall, better to build more equity and you can already afford the higher payments
5. always pay extra above the minimum repayment (even if just $1) to reduce your interest burden.

Im chuffed that interest rates are finally climbing and hope they get back to at least 10%.

If you want tax policy to help with housing you could get rid of negative gearing for investment properties (but have to accept there will be less private rental stock) and flip to US model where the interest on one owner occupier is tax deductible rather than investment properties. But suddenly making owner occupier loans effectively interest free could backfire and drive prices higher. Of course we could actually lower income tax if they increased GST to 15-20%; as GST is harder to avoid than income tax.

 

[albyd]

I think political will is key here:

• Putting up GST is akin to heresy - we felt we had to implement it AFTER an election. This is preferable to keeping income tax rates sky high - that scares away bright people and investment but we need stuff to get paid for if we have all these wants from govt.
• I watched ABC News last night & they suggested we don't have 30yr fixed mortgages in AU vs US as there was political will to create Fannie Mae & Freddie Mac to give banks a backstop to offer 30 yr mortgages. There was no political will in AU to do the same.
• Transaction duty (esp Stamp Duty) is a sky-high barrier to trading property. Moving to an annual land tax like NSW started to try to do before the Libs lost the election might address this problem. The States are addicted to this tax which is why it didn't disappear when the GST was introduced. We'd have been 20 years down the path if it had with the GST. It's a terrible band aid to rip off but it must be done.

Having grown up with variable interest rates, I don't know anything else but would like to certainty our US "cousins" have in knowing their interest rate for the whole life of their loan.

I'm on the side of higher GST, lower income taxes and creating institutions which can give us certainty about mortgage pricing.

 

[Lynda2475]

Im not a fan of fixed rate mortgages, as you generally end up paying more over 20 year period, dont get offsets, get penalised for paying off early etc.

FYI Aussie banks did indeed used to offer fixed rate for the life of the loan my parents bought their first house in 1970 and was fixed rate for 25 years.

Had I fixed my loan, the lack of offset and inability to pay off early would have meant paying 100k or more in extra interest which is crazy.

 

[albyd]

I agree the lack of offset means you pay more interest over the life of the loan. There are some loans from smaller lenders which allow you to fix and have an offset where you can pay >$10K pa into. My lender has an offset and I'm on variable but don't think they're one which would allow extra payments on a fixed rate.

I'm not sure how the Americans handle this. My impression is that you can't have your cake and eat it too.

 

[downgraded]

Had I fixed my loan, the lack of offset and inability to pay off early would have meant paying 100k or more in extra interest which is crazy.

But that's why when rates are rising you might fix the bit you know you don't have any hope of paying off and maintain a variable proportion with offset and early repayment opportunity to get ahead as far as you can

 

[Lynda2475]

No I like 100% variable, but then I would not borrow any amount I couldn't afford to service at 10% for life of theloan, anyone who is struggling to pay at 5% probably should not have been approved for finance in the first place. Assuming rates would stay crazy low is just naive.

 

[Seat0B]

The fixation on increasing interest rates to address inflation is because that is all the reserve bank can do. The resulting increases fall hard on a single sector of the economy - mortgage holders, and have little impact on other sectors of the economy, which makes it a pretty unfair/uneven impact.

For example, as a self funded retiree, with no mortgage (paid off years ago despite several of those years being at 18% interest back in the late 1980s, then the recession we had to have in the 1990s) , I'm delighted to see a bit more interest on my savings. The interest rate rises are having no impact on my ability to spend on discretionary items - like travel - and although I feel guilty that those with mortgages are doing it hard, I don't feel guilty enough to stop my spending. After all my travelling life has time limits and there are things I want to do now my "hard yards" years are done. I'm the classic self-interested boomer in that regard, bless me!

So yes, I agree with you that mortgage increases don't really make sense - and probably don't really address the problem very effectively either. And yes I do feel guilty. I just don't really know the answer to the problem.