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The turn of the cycle

November 28th, 2007

Reader Stephen Ziguras has sent me this interesting graph on public preferences regarding the choice between lower taxes and more services.

It illustrates what Andrew Norton has called the issue cycle. Although our preferences differ quite a bit on this, I think Andrew and i share much the same political analysis. Voters are broadly satisfied with the moderate social democratic settlement that’s been in place for the last twenty-five years or so. When taxes go up a lot, as they did, thanks to bracket creep in the 1970s, they want tax cuts. When the quality of services like health and education gets squeezed, they want more public money spent on those things.

Those who want to argue for either a substantial enhancement or a substantial cutback in the role of the state have their work cut out for them. In this context, much of the me-tooism we saw in the recent election campaign is not that surprising, and nor is the defeat of the Liberals. There’s not much risk that the state will expand far beyond its current role, and a pretty strong feeling that lots of public services are in need of expensive repairs.

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  1. melanie
    November 28th, 2007 at 20:10 | #1

    Circa 1973 James O’Connor called it the ‘fiscal crisis of the state’ (in a book of the same name). The people who need the services are not the same as the ones who pay the bulk of the tax bill either.

  2. jquiggin
    November 28th, 2007 at 20:16 | #2

    I cite that paper a lot, melanie. It’s very helpful in understanding the political history of the past few decades.

  3. Ikonoclast
    November 28th, 2007 at 20:49 | #3

    After more than 10 years of good economic times presided over Mr “I’m the only one who can manage a trillion dollar economy”, all of our national infrastructure is in a sad state of disrepair. The previous government’s boasting about their big surpluses and generous tax cuts was galling in the extreme.

    In formal economic terms a nation’s budget is not like a household’s budget due to the power of the state to create money by fiat and to levy taxes. However, I still felt that the Coalition’s boasting was much akin to a rich couple skiting about the size of their bank balance while their kids were half starved and went to school barefoot thru the snow.

    I enjoyed a joke that went around my workplace when Kevin Rudd promised to use some of the Future Fund to fund broadband. The joke ran “Hey you can’t touch that to fund a project for the future! That’s the Future Fund!”

    Indeed, I hold that the putting aside of money for the future by a Government is almost meaningless and quite probably even counter-productive. The thing to do is use the money now to build a hospital or other infrastructure that you will need in the future. Keeping money in isolation as mere money, as mere representation of value hoarded up by the state which can create money and levy taxes is quite clearly an absurdity.

  4. John Bignucolo
    November 28th, 2007 at 21:08 | #4

    Back in September I came across a reflective opinion piece by Brad DeLong, written in 1995, entitled First Lessons from Kindergarten. It’s not that long and is worth reading.

    I thought it directly applicable to what has been occurring in Australia in recent years, and I wrote to my local MP (John Murphy) suggesting that there was a message in there for the ALP. Based on the ALP’s election policies I’m guessing it had already shown up strongly in its internal polling.

    Brad Delong makes a philosophical point about the need for government to adequately fund societal and communal institutions such as public education and public hospitals. It also reflects on what happens when that funding diminishes over time, whether by being deliberately suppressed or misallocated based on reactionary ideology.

    The piece ends with a sentiment that for its time in the U.S. wasn’t widely held. You’ll recall that Gingrichism and his “Contract with America” was at its height, and the effects of the narrowing of the Californian tax base via ballot initiatives, like Proposition 13 fifteen years earlier were only just becoming evident to the middle-class.

    However, it’s a sentiment that, going by the graph included by Prof. Quiggin, many Australians were willing to act upon when they marked their ballots in last week’s election:

    “So we are looking for a political movement that will dare to say that it is in each of our self-interest to pay a little bit more in taxes, and have us all invest in everything that the next generation now growing up will need–in science, in infrastructure, in health and education, and most urgently in the one-quarter of the nation’s children whose households fall below the poverty line.

    Why is it so hard to find one?”

    The message is there for the Liberals as well, provided that they look beyond the screechings of Howard’s Heathers.

  5. melanie
    November 28th, 2007 at 22:49 | #5

    Yr spam filter has totally collapsed on the monday message board.

  6. conrad
    November 29th, 2007 at 05:58 | #6

    I think a long term problem for this model is that its underpinned by the idea that by increasing taxes you can increase spending. Given labor shortages of professionals all over the world that are or are likely to occur (and high housing prices in Australia particularly), it would be interesting to know how true that is likely to be in the future, since the people who pay a positive amount of tax here (young professionals without children) have an option not to pay it somewhere else and actually be able to afford decent accomodation too (especially if the US economy starts going well again). Thus increasing taxes also means reducing the take home pay of these people. I imagine NZ already suffers from this problem, and hasn’t had the joy of being gifted as much as Australia in free revenue thanks to the mining boom — thus increasing revenue means taking it more off individuals rather than companies. Is the shape of the parabolas similar there or is it different when the money has to come more directly from individuals?

  7. November 29th, 2007 at 07:38 | #7

    john b: “why is it so hard to find one?”

    could it be because we don’t have citizen initiative? or direct elections?

  8. November 29th, 2007 at 07:41 | #8

    The simple fact is that since 1996 there has been a massive real increase in the cost of federal government. Using 2007 dollars and respective population sizes the respective costs were:-

    1996 $8500 per capita
    2007 $11500 per capita

    This is in spite of welfare being a major component of federal government spending and unemployment declining over that period. Tax rate cuts may (and I do say may) harm the governments capacity to spend more and more and more on services but we could have had quite massive tax rate cuts and still spent the same on government services. In fact a significant proportion of income tax could have been abolished over the last 11 years with negligible impact on real per capita spending.

    One of the myths propogated during the Howard years was the notion that they were being tight with spending on things like health. They were not and the last 11 years saw a massive real increase in per capita federal government spending on health.

  9. November 29th, 2007 at 07:42 | #9

    p.s. The above 2007 figure excludes GST.

  10. November 29th, 2007 at 07:47 | #10

    One of the ironies regarding public opinion on tax is the following paraphrased outlook:-

    Company tax = good
    GST = bad

    This in spite of the fact that the legal liability in both cases falls on businesses and the cost in both cases gets passed on to consumers.

  11. November 29th, 2007 at 07:56 | #11

    Melanie,

    Today the people who receive government handouts and services are quite frequently the same people that pay the taxes. I personally pay a lot of tax and receive a lot of benefits but lose a lot of incentives, flexibility and freedom in the process.

    If tax was simply a modest transfer from the top end to the bottom end it would be far less offensive. However that is not what our tax system is today.

    Regards,
    Terje.

  12. Katz
    November 29th, 2007 at 08:21 | #12

    Terje’s points about the actual size of government revenues during the Howard ascendancy and the actual sources of that revenue during the Howard ascendancy are important.

    Historically, in Australia, direct taxation was a more important source of revenue than in most other economies, especially in the 1970s. It still is, but less so.

    Progressive direct taxation was/is irritating in at least two ways: bracket creep and as a disincentive to work overtime. Taxation became unpopular not because of any economic theoretical argument but because of arguments about equity.

    GST has the qualities of being both regressive and invisible. The cost of funding government appears to be relatively painless.

    Absent any compelling arguments against government involvement in the provision of goods and services and in the building of infrastructure, taxpayers perceive they they have a fighting chance of getting bang for their tax buck.

    The consensus appears to be that a measure of social equity is important and that private entrepreneurialism cannot provide an adequate level of social equity.

    Howard recognised the political power of this consensus. In his conniving, wedging, bribing way he attempted to construct a political clientege built on middle class welfare.

  13. John Bignucolo
    November 29th, 2007 at 10:17 | #13

    # al loomis Says:

    john b: “why is it so hard to find one?�

    could it be because we don’t have citizen initiative? or direct elections?

    I don’t think so Al. Given that Brad De Long lives in California, teaches at Berkeley, directly elects his Senator, Governor and (modulo the weirdness of the Electoral College) his President he’s had a lot of experience with direct elections and citizen initiatives and he wasn’t calling for more of them.

    If you read Prof De Long’s piece you’ll see that what he was really asking for was a retreat from the “I’ve got mine – screw you” mindset which, along with Reagan’s credo — “Government isn’t the answer, it’s the problem” — was the defacto policy consensus in American politics right up until the aftermath of Hurricane Katrina, in favour of what today could be called communitarian principles.

    As the 2006 mid-terms in the US, and the Federal election here demonstrated, the electorate has tuned back in to the policy prescriptions of the progressive parties which favour developing our social capital, or put another way, enlightened self interest. More from Prof. De Long:

    Yet look beyond the valley in which we live, and this spirit–that Tocqueville so admired, and that he thought in 1835 would make America the greatest country on earth–is hard to find. For why is it that a town’s parents must band together and contribute to the Educational Foundation to top off an inadequate elementary school budget? In 1969 California was perhaps tenth among states in dollars spent per pupil; today it is perhaps fortieth.

    The per-worker wealth of the nation has grown by twenty-two percent since 1969; in 1969 there were more than twelve children in primary and secondary school for every twenty workers, while today there are barely seven children at school for every twenty workers. If we spent the same share of our economic resources on primary and secondary education today as we as a nation spent in 1969, we would be spending some $7,100 a year per pupil on education. Instead, in California we spend what? $4,840–a rich state spending sixteen percent below the national average, and only two-thirds of what we “should” be spending if primary and secondary education got the same share of our national resources now as they did then.

    So what happens in communities where the average household annual income is not in six figures, where parents can afford to do less, and where the bonds of community lack the strength that makes five out of six voluntarily contribute their time and money to the school system? The hope would be that the government acts to reinforce public spirit and public concern in communities where it is weak, and in communities that are poor. The reality is that we as a country no longer care enough about one another’s children, and that politics in the United States has taken a course that turns the stomach of even a George
    Will–who denounces current plans for welfare reform on the grounds that “no child [benefits]… from becoming collateral damage in a bombardment of severities targeted at adults who may or may not deserve more severe treatment.”

    We wish that we lived in a United States that recognized that the welfare of each of our children depends on the welfare of one another’s children. In 2030 our now five-year-old will be forty, our now two-year-old will be thirty-seven. We will spare no expense of energy or money to give them the best upbringing we can. But there is one thing that we wish we could give them, but that we cannot buy or do by ourselves: we wish that the others who will be forty or thirty-seven in 2030, and who will make up the America in which our children will live next century, have schools to teach them to read and parents with the financial resources to raise them to adulthood. Our children will be richer and happier if they live in an America where others are rich, happy, and highly-skilled than if they live in an America where others are poor, frustrated, and semi-literate.

    It is not that we are unusually public spirited. It is just that when we look at our children we understand where our self-interest truly lies.

  14. rog
    November 29th, 2007 at 11:46 | #14

    The NSW Libs campaign promise was to slash 20,000 public service jobs – at a time when police, hospital and teacher numbers were down it was suicidal tactic for Debnam which guaranteed the hapless and inept Iemma victory.

  15. Bingo Bango Boingo
    November 29th, 2007 at 14:24 | #15

    al loomis, you never quite got past those lessons on the Athenian assembly, or that ‘Power to the People’ episode of Yes, Prime Minister, did you?

    BBB

  16. Peter Pan
    November 29th, 2007 at 15:02 | #16

    Isn’t this tax verses services debate w.r.t. to welfare verses taxation.. I might be off with the fairies but isn’t this just a variation of the Information Asymmetry problem in markets for risk.

    I think Australians can see they get a much better system if they pool their funds for services such as education and health through taxation and avoid the problem of having to acquire these services as individuals in a risky market.

  17. Ian Gould
    November 29th, 2007 at 18:25 | #17

    “The simple fact is that since 1996 there has been a massive real increase in the cost of federal government. Using 2007 dollars and respective population sizes the respective costs were:-

    1996 $8500 per capita
    2007 $11500 per capita”

    Yet somehow mysteriously, life expectancy and average incomes have gone up and unemployment and real interests have gone down.

    Maybe it’s because are more affluent and expect more of their government?

  18. Ian Gould
    November 29th, 2007 at 18:27 | #18

    “…but we could have had quite massive tax rate cuts and still spent the same on government services.”

    Yes and the Australian military and Australian hospitals could continue to buy the best technology (and pharmaceuticals) 1997 had to offer.

  19. November 29th, 2007 at 22:46 | #19

    “There’s not much risk that the state will expand far beyond its current role, and a pretty strong feeling that lots of public services are in need of expensive repairs.”

    The catch here is that state expansion starts by ringbarking and/or crowding out alternatives, making each need bigger than it was or sometimes even creating one from scratch. Result: either you get the state expansion, or you get a shortfall of services. This makes it impractical to wind things back by simplistically cutting taxes, and it also means that the middle position shifts statewards over time. Leave it too long to address the underlying ringbarking/crowding out problem and the vicious circle becomes a death spiral.

    Terje, GST doesn’t get “passed on” to consumers in any direct sense. The apparently small gap in the middle means that it is a production tax that hits not only consumption but also investment. It’s particularly burdensome on working capital in countries that have a provisional tax approach, pulling funds out of businesses long before consumers have paid the end burden. To the extent that company tax hits profits paid, i.e. that it spares costs of capital, it’s actually better – or would be if it weren’t such a botch to begin with.

  20. Ian Gould
    November 29th, 2007 at 23:05 | #20

    Another question for Terje- what happened to the number of people in receipt of the aged pension over the past decade?

  21. November 30th, 2007 at 05:13 | #21

    Maybe it’s because are more affluent and expect more of their government?

    Maybe thats true. If so we would expect rich people to be the ones most in favour of high taxes and most keen to receive government welfare. Maybe somebody should do a study to see if poor people hate taxes more than rich people. I’d personally be happy to see poor people pay a whole lot less income tax. I just got off the campaign trail promoting a tax free theshold of $30k.

    However even if you are right it does not change the fact that we could have significantly reduced the income tax rate over the last 11 years without cutting real spending in per capita terms. Maybe we didn’t want to but lets be honest and clear and accept that is simple arithmetic terms we could have.

    what happened to the number of people in receipt of the aged pension over the past decade?

    Compulsory superannuation and rising personal affluence should be putting downward pressure on the numbers because the aged pension is means tested and assets tested. However I accept that demographic factors are creating upward pressure.

    From the 2007 budget papers current spending on the aged pension is $32722 million. Compared with $28522 for spending on families with children.

    Table 9 on the following page has the details:-

    http://www.budget.gov.au/2007-08/bp1/html/bp1_bst6-02.htm#TopOfPage

    As the proportion of people over 65 increases I would expect the proportion of people with children to decline. However if you have some more detailed numbers across the period then please share them.

    To reiterate my main point. Contrary to the implication in Johns article, spending on things such as health and education has NOT been squeezed over the last 11 years. Clearly some people here think government spending should have increased quicker and that richer people want or need more government funded programs and that spending should have increases at an even faster rate than what it has done. However implying that spending in these areas has been cut (squeezed) is quite inaccurate. Even after adjusting for inflation and population federal government spending has still clearly increased.

  22. November 30th, 2007 at 05:17 | #22

    Terje, GST doesn’t get “passed on� to consumers in any direct sense.

    In my business I pass the cost on. I suspect that this is the perspective in most businesses.

    However from a macro perspective all taxes are paid for by producers because you can’t take product from anybody else. Of course when I say this I include workers as producers.

    I disagree with the notion that company tax is better than GST but I don’t wish to digress at this point.

  23. Katz
    November 30th, 2007 at 08:14 | #23

    Terje, JQ did say:

    When the quality of services like health and education gets squeezed, they want more public money spent on those things.

    I don’t wish to put words into JQ’s mouth, but perhaps he meant this:

    When the quality of services like health and education is perceived to be squeezed, they want more public money spent on those things.

    Boomer-vintage middle class professionals well remember, for example, that they did not pay for their university education, whereas their children do. It would be difficult to convince these people that more public funds are being spent on university education (after appropriate adjustments are made for inflation and population growth).

    I believe that it is a defensible hypothesis that such middle class boomers and their children would be happy to see less money spent on defence and more money spent on university education.

    Thus, conceptually, it is necessary to be more nuanced than you have been thusfar on the attitudes of people to public expenditure.

    Even those who are in favour of increasing public expenditure as a proportion of GDP are not necessarily in favour of increasing public expenditure in all categories of public expenditure.

    Indeed, such folks may like to see large cuts in some categories of public expenditure.

  24. Ian Gould
    November 30th, 2007 at 08:18 | #24

    “However even if you are right it does not change the fact that we could have significantly reduced the income tax rate over the last 11 years without cutting real spending in per capita terms. Maybe we didn’t want to but lets be honest and clear and accept that is simple arithmetic terms we could have.”

    Well yes – if we were prepared to cut pensions, refuse the ill access to new drugs, treatments and diagnostic technologies and give up any pretence of a serious national defence capability.

  25. conrad
    November 30th, 2007 at 14:02 | #25

    “if we were prepared to cut pensions, refuse the ill access to new drugs, treatments and diagnostic technologies and give up any pretence of a serious national defence capability”

    Perhaps we should be prepared to do some of these. A different way to look at this is whether people should pay pensions etc. for others with more money than they themselves can ever hope to have. If i’m sitting on a 1 million dollar house, should you pay for my pension?

  26. November 30th, 2007 at 16:04 | #26

    Terje, you missed a couple of things. They are subtle, deliberately so in order that people don’t spot them.

    Yes, you do pass GST on to customers – but not a direct sense, i.e. you do not pass the GST bill you get straight on to the customer just like that, or the embedded GST in the cost of the goods you had as inputs. On each cycle, funds go to the government early on, perhaps via your own suppliers, and get paid back by the end consumer later, at the point of final sale and payment. That’s not direct, there’s a gap in the middle which actually makes a lot of difference.

    And I did not say that company tax was actually better than GST, only that it has the potential to be better, not that either is much cop in principle. I made it clear (I thought) that the way it actually works out is so botched that in practice it actually works out worse. (I’m using “actual” in the old sense that Marxists use when they speak of something or other “actually existing”.)

  27. Ian Gould
    November 30th, 2007 at 18:09 | #27

    “Perhaps we should be prepared to do some of these. A different way to look at this is whether people should pay pensions etc. for others with more money than they themselves can ever hope to have. If i’m sitting on a 1 million dollar house, should you pay for my pension?”

    The Australian pension is both means-tested and asset tested. Very few people “sitting on a million dollar house” would be eligible.

    Most of them would probably be bright enough to sell the house, move to a $500,000 unit and invest the rest of the money.

  28. conrad
    December 1st, 2007 at 05:10 | #28

    Ian,

    As far as I’m aware, your home is not included in the asset test for the pension (nor unemployment benefits — I’m sure about that one — all it does is reduce the amount you get slightly), so my point still stands. Feel free to substitute “1 million” for “500,000″, and also feel free to ask someone that doesn’t own their own place, lives in outer suburbia and spends all their time driving to work if it is fair. Thats the situation we have now. Its like Robinhood in reverse.
    Its easy for me to think of other unfair examlples if you like (FTA and B, for example, vs. a 25 year that wants to have kids, but wants to buy a place before doing so such that they can live a stable life.).

  29. John Greenfield
    December 1st, 2007 at 13:26 | #29

    Katz

    The only people who pay for their university educations are those who who end up earning over a certain level of income. Even then, they pay it off very slowly and with no interest. And even then, they only pay about 25% of that cost.

    In the baby-boomer days, access to university was very restricted, and if the elite university graduates did not pay for their education, who did?

  30. Ian Gould
    December 1st, 2007 at 14:01 | #30

    “The only people who pay for their university educations are those who who end up earning over a certain level of income. Even then, they pay it off very slowly and with no interest. And even then, they only pay about 25% of that cost.”

    Last time I checked, HECS debts did attract interest – and debt repayments kicked in at well-below the average wage.

    In the days before the Whitlam reforms to tertiary education, fees only covered a portion of costs, the rest were paid for by the Commonwealth. In the case of merit scholars (who passed the competitive exams for university entry) they paid no fees and got a stipend – also at the expense of the taxpayer.

  31. Katz
    December 1st, 2007 at 15:41 | #31

    JG you insist on persisting in being both captious and incorrect.

    1. My comments on university education were not prescriptive. They were descriptive of what I believe an important sector of the Australian voting population thinks about the marginal utility of certain kinds of public expenditure, notably funding of university education.

    2. IG has indicated your ignorance about HECS, which appears to be considerable.

  32. John Greenfield
    December 2nd, 2007 at 13:00 | #32

    Katz

    On the contrary, it is both you and IG who flaunt your “ignorance about HECS.”

    1.HECS loans do not attract interest

    2. The difference between Whitlam/Fraser/Hawke years and today is that today students borrow only about 25% of the cost of a degree. In the “free” years, this figure was obviously zero.

    3. You have avoided your claim about “free.” It was not free as those students then went on to pay top marginal tax rates of 60%; the bloated welfare state resulted in double-digit unemployment.

  33. Katz
    December 2nd, 2007 at 13:30 | #33

    JG,

    1. HECS loan repayments increase with the cost of living. Not interest-bearing per se, but a potentially uncapped impost on the debtor. Therefore it is incorrect to say that HECS covers 25% of education costs, or indeed any specific proportion of education costs.

    2. I never used the word “free” in relation to university fees. You have interpolated that word into your misconstruction of what I did say.

    For the record, I regard the state footing the bill for the education of individuals under the Whitlam regime as a prime example of middle class welfare. But that perception had nothing to do with my argument, which was that boomer parents today probably quite like the idea of the return of this form of middle-class welfare.

  34. jack Strocchi
    December 2nd, 2007 at 13:33 | #34

    jquiggin Says: November 28th, 2007 at 8:16 pm

    I cite that paper a lot, melanie. It’s very helpful in understanding the political history of the past few decades.

    In fact O’connor cribbed a fair bit of it from Schumpeter’s “Crisis of the Tax State”. This paper described how the original Old Left welfare state would hamper the economic development of capitalism, thereby hastening the much predicted demise of that system. It was Schumpeter’s take on the self-fulfilling aspect of Marxian social policy.

    O’Connor updated the analysis to deal with the fiscal problems for OECD states experienced in the seventies. These emerged when the New Left superimposed the benefit claims and tax shortfalls of minorities onto the Old Left’s welfare state, designed for majority-run households.

    Thats when we started to experience program “overload” and political “backlash”. This strengthened the hands of right wingers who wanted a more selective welfare system.

    The restoration of non-inflationary high growth (due to PRC and IT) and the reformation of the welfare state along more selective lines has lessened the pressure on state fisc.

  35. John Greenfield
    December 2nd, 2007 at 13:47 | #35

    JQ

    Fiscal Crisis of the State was one of the best books I read at uni. I was very interested in the sociopolitical implications of the rupture between national monopoly capitalism and globalisation. I was a marxist in those days, but found Connor’s book to be the most insightful and useful. In fact it was pivotal in convincing me that we had beyond the stage where Marxist economics and historiography were useful analytical tools.

  36. jack Strocchi
    December 2nd, 2007 at 13:57 | #36

    I am not, nor have ever been, either a Marxist or Monetarist. I have always been a somewhat re-constructed conservative social democrat.

    Bill Hayden is about as good as it gets for people like me. I find partisanship – either ideological or psephological – difficult to understand.

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