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Monday message board

January 9th, 2006

It’s time, once again for the Monday Message Board. As usual, civilised discussion and no coarse language, please.

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  1. Terje Petersen
    January 9th, 2006 at 16:13 | #1

    Peter Costello has said that he wants to give tax cuts to average families in the next Budget. The ALP has attached him for hypocrisy saying he had the chance to do that at the last budget.

    http://www.theadvertiser.news.com.au/common/story_page/0,5936,17764604%255E421,00.html

    However the ALP opposed tax relief at the top at the time of the last budget. Now they say that more tax cuts at the top are essential. So maybe they are also a little guilty of hypocrisy.

    http://www.thesundaymail.news.com.au/common/story_page/0,5936,17662476%255E421,00.html

    At least the debate has improved. At least they are arguing over the form of tax cuts rather than whether there should be tax cuts.

    Both parties still need to do more to look at EMTRs with relation to welfare and tax.

    My prefered approach to reform is to have a flat tax rate with no tax free threshold. Married with a social wage that is taxable but not means tested.

    Libertarian John Humphreys has a reform plan called 30/30 that is not so different.

    http://www.cis.org.au/publications/policymonographs/pm70.pdf

    A non means tested social wage would also allow for the abolition of the minimum wage, ensuring that the cost of supporting the low skilled was shared by everybody rather than by specific industries.

    Once that is in place I would argue that tax increases or social wage increases should be actively avoided when unemployment is above 2%.

  2. Bring back EP at LP
    January 9th, 2006 at 16:15 | #2

    Humpo for Treasurer!

  3. January 9th, 2006 at 21:10 | #3

    Terje, there is always a problem with taxes that are linear all the way down to zero: the sheer amount of bureaucracy and compliance needed at the low end with little return. It does end up simpler with a start point significantly above zero.

    That apart, I’d like to take this opportunity to remind people to look here and at the other stuff on that page for how to shift the burden away from direct personla taxes while still being progressive, and indeed promoting employment.

    One of the articles on that page shows how to phase out income tax and government provision for old people over time, using a grandfathering approach involving a widening wedge of age related tax cuts. Frankly, I’d like to see income tax whittled away that way until it became minor enough to be mopped up without disruption. Transitions are always a big deal.

  4. Ian Gould
    January 9th, 2006 at 22:43 | #4

    I know a number of peopel who read this blog are located in Brisbane, what do people think of the building being erected by BCC opposite the Treasury Casino?

    I sincerely hope they’re planning ot put soem sort of facing or cladding over the sheet metal exterior or else we’ll have a new building even uglier than Macarthur Central and a worthy competitor to the Cultural Centre as the all-time ugly champ.

  5. Andrew
    January 10th, 2006 at 06:09 | #5

    Ian

    That’s the new Suncorp building with the major tenant being the BCC.

    You’re quite right — it does look weird with that shiny paper stick-on ripped boxes effect which appears to surround a lower floors car park. I’m sure it’ll all be excitingly active an’ challenging an’ reflective of Brisbane’s role as a world-class city (though more truthfully a world class large country town) an’ that sort of stuff.

    As I walk past it each day I do find the seedy acquisitiveness of the casino more skin-crawling.

  6. jquiggin
    January 10th, 2006 at 06:12 | #6

    I’ve been watching it too, and I think that is the intended final product. Perhaps the cladding can be ripped off when BCC comes to its senses.

  7. Terje Petersen
    January 10th, 2006 at 07:00 | #7

    PML,

    I think that the GST as well as a flat income tax would be un-necessarily complex. You could readily collapse it into a single tax (eg GST).

    A GST is better than a flat income tax in several ways. Firstly because you don’t tax exports and you do tax imports. Secondly because you only need tax returns from businesses and not the average worker. So less beaurocracy.

    I would be happy with nothing but a GST plus a social wage (non means tested).

    Of course a flat income tax of 30% is roughly equal to a GST of 50%. So if it was revenue neutral you would probably end up with a GST of 60%.

    I would envisage that with a flat income tax of 30% you would need a social wage (not meanst tested) of about $10000-$20000 dollars per annum per adult. Of course you would abolish or adjust downward all other welfare and scrap the minimum wage.

    Overall I think the tax burden needs to be lower. I think abolition of income tax needs to be a goal. If Mr Howard had frozen tax revenues in 1996 by trimming personal income tax each year then it would be nearly abolished by now.

    Regards,
    Terje.

    P.S. I am not sure why John Quiggin thinks payroll tax is so much worse than income tax. Both ultimately raise the cost of labour.

  8. Ian Gould
    January 10th, 2006 at 09:03 | #8

    John – there are some holes around the edges of the metal panels which look like they might be designed to take supports for a covering of some sort.

    As it stands, the new building is violently inappropriate for the area – with two sandstone buildings opposite (the Treasury and the Bank of NSW building) and the City hall a block away in Adelaide street.

  9. January 11th, 2006 at 02:06 | #9

    Terje, the GST+social wage combination is the same as the GST+negative payroll tax combination in the long run, but it has far more transitional problems (see my letter to the AFR on the subject here).

    If implemented via a voucher system, say quarterly, it would not be complex – though it would be if the bureaucrats used their typical approach of identifying each employee and linking him or her to a specific employers’ complete BAS returns. Ideally vouchers would gradually become anonymous and transferrable, and so become monetised – which is what you are after, although going through a transition to get there.

    Further off still, the whole thing should be detached from the tax system, going first to social wages from a revenue yielding pool of assets and ultimately being separated from that managed fund approach and becoming revenues maintained by individual household’s investments (once the fund entitlements became transferrable bonds in their turn). Of course, that would need inheritance and corporation rules that favoured rebalancing and no growth of a new dispossessed group – but that’s generations away.

  10. Terje Petersen
    January 11th, 2006 at 07:45 | #10

    PML,

    Sounds interesting. I am going offline for most of today. I will try and review your material in more detail over the next day or so.

    Regards,
    Terje.

  11. Andrew Reynolds
    January 11th, 2006 at 14:05 | #11

    I would be interested to hear what people believe should be done, if anything, about the situation in Iran. Is the general opinion that nothing need be done, will sanctions be effective and does the experience in Iraq rule out a military response?
    The silence on this blog about this issue seems to be unusual.

  12. Terje Petersen
    January 12th, 2006 at 14:28 | #12

    PML,

    I read your article. All it seems to say is:-

    “The practical difficulties are blindingly obvious – there’s many a slip between cup and lip, so what if other factors interfered and we got the worst combination of the intended and current situations?”

    Perhaps I read the wrong letter? Otherwise I am not convinced that the transitional problems are more significant than the problems associated with any other form of tax/welfare reform.

    Regards,
    Terje.

  13. January 12th, 2006 at 22:31 | #13

    Terje, I’ll get back to you more fully later.

    For now, I’ll just point out that that letter was comparing negative payroll tax with negative income tax. That’s the relevant comparison with your proposal too – that there would have to be a downward adjustment in wages before anything happened, during which it would all cost money and compliance costs. But negative payroll tax doesn’t require any adjustment in wages paid, and it has more automatic stabilising in it from being matched to Social Security. Some of the other articles on that page do go into more detail, but I’ll try to pull together something that addresses your specific proposal to post here.

  14. Ian Gould
    January 12th, 2006 at 22:47 | #14

    >I would be interested to hear what people believe should be done, if anything, about the situation in Iran. Is the general opinion that nothing need be done, will sanctions be effective and does the experience in Iraq rule out a military response?

    A military response would probably precipitate a full-scale Shia uprising in Iraq which would make the situation there far, far worse.

    I think the West has to pursue every possible non-military option to deter Iran from getting nuclear weapons. However Iran’s energy reserves and its growing relations with India and China will make that very difficult.

    The world survived 40-odd years of US/Soviet nuclear brinksmanship.

    I don’t think anyone WANTS a return to those days but the message of the cold war is simple – deterrence works.

    Yeah, yeah, Ahmedinejad…Israel…crazed loon…history’s greatest monster…

    Two answers:

    1. Stalin
    2. Mao

    As I said, deterrence works – even when one side has a total nut-job in overall charge.

    So we have to ask ourselves if some of the possible responses to an attempt by Iran to develop nukes (like a full-scale ground invasion) might have even worse consequences than accepting a nuclear-armed Iran.

  15. January 12th, 2006 at 23:09 | #15

    Ah, Terje – it would probably have been better if I had referred you to my next letter to the AFR, and also to some of my articles in News Weekly (further down on that same page, or via the links at the top).

  16. January 12th, 2006 at 23:10 | #16

    As I said, deterrence works – even when one side has a total nut-job in overall charge.

    Which is a lesson that could equally as well have been applied to a country that came nowhere near as close to getting nukes.

    Of course, as North Korea demonstrates, it’s a rational response to US threats to try to get nuclear weapons. I’m not saying desirable, but clearly rational.

  17. Will De Vere
    January 13th, 2006 at 08:49 | #17

    Ian Gould has said: ‘As I said, deterrence works – even when one side has a total nut-job in overall charge.’

    Yes, I agree. There’s a widespread notion that if Iran were to develop nuclear weapons they would quickly pass them them on to ‘sub-national’ groups like Hamas. This is very debatable. Nukes are a subject of national prestige (especially in Pakistan) and are so expensive and dangerous that it is more likely that Iran would keep them very close to home and very closely guarded. To give them away to international groups (and groups that might be infiltrated by who knows who) could be too ‘infra dig’.

    So, such weapons, if ever developed, would likely remain Iranian.

  18. Terje Petersen
    January 13th, 2006 at 09:14 | #18

    That’s the relevant comparison with your proposal too – that there would have to be a downward adjustment in wages before anything happened, during which it would all cost money and compliance costs. But negative payroll tax doesn’t require any adjustment in wages paid, and it has more automatic stabilising in it from being matched to Social Security.

    Okay that makes some sence.

    Some proporation of the cost of income tax is passed on from the supplier (ie worker) to the consumer (ie employer). If you cut income tax then you would expect some of the savings to flow through to the consumer (ie employer and then to retail consumers). However there are institutional price rigidities in the price of organised labour. Salaries contracts (like other contracts) can not be readily renogotiated downwards without severe adjustment pain.

    Of course the flip side is that an increase in income tax is more easily passed through (although still painful during the shorter adjustment phase).

    I appreciate all this, which is in part why I would much prefer a GST over Income tax as a vehicle for raising revenue. Not withstanding the barriers outlined above in moving towards this state of affairs.

    One way around this would be to replace income tax (or a proportion of it) with a GST on labour. The worker (ie supplier) would be the liable party (as is generally true with GST in Australia). The employer could claim the GST cost passed on as an GST input credit.

    For example lets assume that a worker earns $50000 and pays $15000 in income tax at present. We could change the system such that the worker is liable for GST on these wages of $4545. We could compenasate them by reducing the income tax liability by a corresponding amount (ie reduce to $10455). The worker is no worse off. The empoyer still pays $50000 in salary. However the employer can now claim a GST input credit of $4545. This would be great for exporters who could in effect claim the whole lot as a rebate.

    Of course you would probably need a campaign run by the ACCC to ensure that the savings were passed on to consumers.

    A GST on labour as outlined would probably not be so different to a payroll tax (or flat income tax) in administrative terms (ie employers remit). However given businesses can claim this as an input credit they are able to pass savings on to consumers (although I would still expect some lag).

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