If there is one thing that most economists agree on it is that people act rationally when responding to incentives.  Economist Thomas Sowell rightly observed that economic policies must be seen not only with regard to the goals they pursue but also in terms of the incentives they create.

There is no shortage of examples of economic policies which while having noble goals, have resulted in harming those they were designed to help.  Rent control laws designed to assist low income earners have destroyed incentives for investment in housing and lead to demoralising housing shortages.  Minimum wage laws nobly put in place to provide a “living wage” have destroyed employers’ incentives to hire low-skilled workers, thus destroying entry level jobs and increasing unemployment.  This has been especially harmful to the young and racial minorities.

In the realm of taxation, there is no disagreement among economists that high tax rates destroy incentives to work, save and invest.  Yet governments of all stripes consistently choose to ignore these fundamental economic realities; no doubt because they face different incentives, such as trying to maintain an expensive welfare / warfare state, subsidies to special interest groups or businesses that need to be “saved” and keeping up with interest payments on perpetual debt obligations.  This list is not exhaustive.

It is not surprising then that the Federal Government’s new proposal to abolish the tax-free threshold for those on working holiday visas and slap them with a 32.5% tax, smacks of a shameless $540 million cash grab with no consideration of the likely results.

Thankfully the National Farmers Federation has considered the results and is proposing a compromise of a rate of 19% in order to avoid a situation which would “erode the agriculture workforce and the prosperity of regional communities”, and discourage working holiday makers from coming to Australia.

As many more of us are coming to realise, the longer term solution is to reduce government spending and the tax / welfare burden.  Maybe we should also prescribe compulsory courses in economics for the political class.

Dylan Walters

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