Rent-seeking rampant

July 19th, 2013

The Rudd government’s proposal to tighten up documentation requirements for the very generous tax concessions provided for people who receive motor cars as a fringe benefit has produced some striking examples of rent-seeking from the Australian right, notably including Catallaxy and the Australian Financial Review. Catallaxy has a string of posts defending this rort.

The Fin gives lots of space to bleating rent-seekers, while imputing to “academics” the opinion that this is a subsidy. I guess that’s fair enough, given that the Fin regards basic science as a matter of academic opinion, while treating the failed dogmas of the 1980s as proven facts. And, of course, the Opposition has promised to oppose the measure, while weaselling out on the question of whether it would reverse the changes if elected.

This really is a test for Rudd. If he wants to refute the oft-repeated claim that he is all spin and no substance, this is his first chance, and one of the best he is going to get.

  1. wilful
    July 19th, 2013 at 14:08 | #1

    I think it was Bernard Keane on twitter who suggested that if your business model is fundamentally based on tax rorts, there’s little to distinguish you from organised crime.

  2. kevin1
    July 19th, 2013 at 14:31 | #2

    If requiring documentation of a tax exemption leads to an impact on car sales and job losses in the leasing sector, it either means rorting is happening, or the transaction costs make it not worth the benefit. If completing a log book for 12 weeks is too onerous to make a claim, the benefits to claimants must be pretty minor. Either way there shouldn’t be a fuss.

    I can’t see a case against the change – have I missed something? I can’t see any room for manoeuvre -it will be a litmus test of truth-telling for every politician and commentator who opines on this.

  3. wilful
    July 19th, 2013 at 14:36 | #3

    There is a relevant though subsidiary issue – I do think that a government has a responsibility to manage the closure of the loophole in a way that doesn’t totally destroy the livelihood of a lot of people. I don’t have sympathy for the business owners of these small companies that were facilitating this rort, but I do have sympathy for their employees, who are pitched out on their ear without warning.

  4. John Quiggin
    July 19th, 2013 at 14:49 | #4


    Bear in mind that the change hasn’t even happened yet, and may not do so for some time to come. The publicly announced mass sackings look more like a media stunt than a business decision.

  5. kevin1
    July 19th, 2013 at 15:27 | #5

    Not sure how you would do that. I don’t know when the starting date will happen, but I suppose the opposition is after some sort of public inquiry to muddy the waters and allow the rent-seekers time to organise, but a few months delay doesn’t give certainty to employees.

  6. Ikonoclast
    July 19th, 2013 at 15:51 | #6

    While he’s at it Rudd can remove all fossil fuel subsidies, negative gearing and trust loopholes. I’d better not hold my breath though.

  7. wilful
    July 19th, 2013 at 15:54 | #7

    @kevin1 How would you do it? I guess the winding down for the home insulation scheme would be a model – I understand that there was support given for employees of companies that set up and then went belly-up. In the scale of a $1.8bn claw back, it wouldn’t be much to ask.

    Moving on… I was heartened and surprised that the letters page of the Herald Sun today was surprisingly in favour of the move. Considering how the page editor chooses his or her sample of contributions, I was a little shocked.

  8. Ken Miles
    July 19th, 2013 at 16:00 | #8

    I think that the free market is dead – killed by its alleged advocates.

  9. Fran Barlow
    July 19th, 2013 at 16:05 | #9

    It seems like a straightforward rort. Apparently, when far more new vehicles purchased were from local manufacturers, it was seen as underpinning the local car industry. These days though, the bulk of cars bought through this means are much smaller than the vehicles made here.

    It seems to me that there is always a risk that salary packaging will amount to a rort of the tax system. One can make a case for work-based childcare to be part of a package. Actual expenses are incurred. Childcare facilitates inclusion. And of course, it’s easy to document the connection between the childcare and the work. In some jobs, a motor vehicle might well be critical to doing the job effectively, and if the person also gets to take the car home the ‘perk’ is fairly minor. If the vehicle had to be secured at the premises the costs might be higher.

    These days, there are phone apps you can get — some even record your location using GPS — that can facilitate documentation. It’s not going to be onerous. Let those who need vehicles document 100% of their usage. If 90% of use is business-related and 10% is driving home and the shopping or similar — I’d say no problem. If not, let them or their employer pay out of after tax income.

  10. kevin1
    July 19th, 2013 at 16:40 | #10

    @Fran Barlow
    A political danger sign here is if the change affects adversely workers in FBT exempt hospital/charity/NGO/aged care/disability businesses.

    Over a long standing period they have been able to salary package up to 30% of their gross income for all sorts of things (credit card, rent etc.), on the grounds that much of the non-profit sector is cashstrapped and disadvantaged in competing against profit sector enterprises in the labour market. These benefits are not required to be work-related and FBT is not paid by the employer as I understand it, so I’m probably going off at a tangent, but worth knowing it exists for large numbers of workers. I presume the packaging of cars is included.

    Ken Henry said in his tax review it was a complicated scheme and should be abolished, but “The case for retaining the FBT concession for not for profit Hospitals” is made by Nick Gruen at his lateraleconomics website.

  11. Sinclair Davidson
  12. rog
    July 19th, 2013 at 17:14 | #12

    @Sinclair Davidson What’s your point Sinclair? State your argument.

  13. Jim Rose
    July 19th, 2013 at 17:53 | #13

    efficient taxes lead to higher taxes; inefficient taxes lead to a smaller public sector.

  14. rog
    July 19th, 2013 at 18:30 | #14

    In light of the twaddle that Catallaxey routinely generates it’s no surprise that Sinclair is either unable or unwilling to construct a reasonable argument in his favour.

    “Time to bring back Turnbull”

    Back from where?

  15. Luke Elford
    July 19th, 2013 at 18:30 | #15

    @Jim Rose

    Thanks for highlighting the difference between libertarians who are wary of government because they genuinely care about people’s welfare, and libertarians who dislike government as a personal preference and oppose measures to make government more efficient because they know that this makes the optimal size of the government larger.

    You do realise that this measure is designed to offset a reduction in revenue from another tax, right?

  16. July 19th, 2013 at 18:55 | #16


    From his link:

    The rules are
    (1) No personal references to Catallaxy bloggers, except identifying them as the author of some piece I (or commenters) might want to respond to
    (2) No general statements about Catallaxy as a blog.

    Rather than making a point or argument, I imagine he’s invoking the “treaty”.

    Just my guess.

  17. July 19th, 2013 at 18:56 | #17

    The only rorts Sinclair supports are those which are acted on by the ALP government

  18. John Quiggin
    July 19th, 2013 at 19:03 | #18

    @Sinclair Davidson

    I don’t think I have gone against my word here. I’m critical of posts on a particular topic, which I regard as being totally inconsistent with the supposed free-market position claimed by Catallaxy (not to mention the Fin and others). I’m not making personal attacks on anyone. However, it was possible to read the original version as an a statement about Catallaxy as a blog (though this wasn’t the kind of thing I was thinking about when I proposed the treaty), so I’ve rewritten it to make it clear that I’m objecting to these particular posts.

    While we are discussing treaty violatons, this post pretty clearly implies that, if I’ve endorsed a book, it must be bad – an implication taken up in comments

  19. John Quiggin
    July 19th, 2013 at 19:16 | #19

    Having said that, I must say I was surprised to see this posts. I was expecting silence, or just possibly some criticism of the Libs, but not endorsement of the rort.

  20. July 19th, 2013 at 19:22 | #20

    I have a friend who has taken advantage of salary packaging at his university. He considers it his duty, because it is such a rort, and the more people exploit it, the quicker it will be repealed. Looks like he got his way – although he never salary packaged a car.

    But this is a seriously good move by Rudd. The people defending the rort don’t have much of a leg to stand on, and the vast majority of them vote Liberal anyway. Even more beautiful is that it is the cost of watering down the carbon tax, which is another thing the right wanted. So Kevin gives them what they ask for, and then tells them that they will be paying for it. Nice.

  21. kevin1
    July 19th, 2013 at 19:24 | #21

    Well put. Is this Clinton’s triangulation?

  22. sunshine
    July 19th, 2013 at 21:21 | #22

    Rudds PNG boat plan is his Righter than Right lurch to the Right .There is nowhere to the right of that for Tony to shout from . Now there is talk of Malcolm leading the Libs . Is this the two big parties coming together on the middle ground under the force of polling numbers ? Seems like a paranoid, uncaring (racist) middle ground . I would like to think the middle ground has not always been like that and that politics (Howard) actively moved it to the right .

  23. NathanA
    July 20th, 2013 at 00:20 | #23


    I haven’t heard yet that this is affecting hospital/medical/charity workers where the employer can pay for around $9000 for a variety of things, including credit card bills if I remember correctly. It certainly has been conflated with it by one or two in the media, but to my knowledge they are separate issues.

    I have been surprised that there has been such a backlash at this measure from the Government. I must say, I think a lot of the public are broadly supportive of it.

  24. TerjeP
    July 20th, 2013 at 06:42 | #24

    There are some here that insist that the carbon tax is not a tax but merely a price on carbon. If you take this line then switching to an ETS is an administrative adjustment to carbon pricing not a “tax cut”. So why would something that is not a tax cut need to be offset by something that is a tax increase?

    Further to this point will later increases in the carbon price under the ETS be offset by reductions in other taxes. And then subsequent increases in carbon price be offset by tax increases. Doesn’t it become a rather ridiculous tail chasing exercise?

  25. Ikonoclast
    July 20th, 2013 at 06:59 | #25


    Taxes are a necessary evil in a sense. They pay for government operations though not in the direct, simplistic sense posited by naive neoclassical economics.

    It is very common for persons to be in favour of strict overall government budgeting but also in favour special government spending on them and their interests. They should remember they can’t have it both ways.

    Given that taxes are a “necessary evil” it makes sense to levy straightforward, easy to administer pigovian taxes wherever possible. So at least you are taxing a “bad” not a “good”.

  26. Sinclair Davidson
    July 20th, 2013 at 08:57 | #26

    I was surprised to see this posts. I was expecting silence, or just possibly some criticism of the Libs, but not endorsement of the rort.

    I’m surprised you see ‘endorsement’ of the rort too. I see a series of posts drawing attention to incompetent implementation and announcing policy on the run. The ALP, including Rudd, have form in this area. I haven’t noticed support for salary sacrificing at all. Indeed both Judith and Samuel have blogged in the past about salary sacrifice rorts. My own policy preference in this area would be to abolish the FBT in total.

  27. TerjeP
    July 20th, 2013 at 09:16 | #27

    It is very common for persons to be in favour of strict overall government budgeting but also in favour special government spending on them and their interests. They should remember they can’t have it both ways.

    Are you saying that ALP critics on this reform are people with novated leases. Let me declare that I do not now, nor have I ever had a novated lease.

  28. Luke Elford
    July 20th, 2013 at 09:56 | #28


    “So why would something that is not a tax cut need to be offset by something that is a tax increase?”

    Um, because they’re both forms of government revenue? Although I personally have no problem using the word “tax”, the price/tax can legitimately be viewed as a charge for use of an environmental resource. Either way, it provides revenue for the government, a reduction in which is being made up for elsewhere.

    “Further to this point will later increases in the carbon price under the ETS be offset by reductions in other taxes.”

    Well, assuming those price increases translate to increased government revenue (in other words, if you’re talking about the re-auctioning of permits), it depends on whether the government at the time wants to increase spending or increase government saving/reduce government borrowing instead.

    “Doesn’t it become a rather ridiculous tail chasing exercise?”

    It’d be the same if the government was adjusting a carbon tax to target emissions levels. You’d prefer the government not to bother trying to coordinate its taxes and spending programs?

  29. Ikonoclast
    July 20th, 2013 at 10:18 | #29


    Not you TerjeP but there are many well-off hypocritical conservatives who love their big rorts but hate seeing poor, unemployed people getting a basic benefit. The conservatives don’t mind welfare for the upper middle class, the rich and the corporations ie. for them. There’s more corporate welfare paid in this country then unemployment welfare. I was drawing attention to this general phenomenon which distorts our economy and makes it the hostage of the monied classes.

  30. Jim Rose
    July 20th, 2013 at 11:32 | #30

    @Luke Elford the case against tax reforms are they lead to a larger public sector. the tax reforms so hated by the Left saved the modern welfare state.

    studies starting from Sam Peltzman showed that government grew in line with the growth in the size and homogeneity of the middle class that was organised and politically articulate enough to implementing a version of Director’s law.

    Director’s law is the bulk of public programs are designed primarily to benefit the middle classes but are financed by taxes paid primarily by the upper and lower classes. Based on the size of its population and its aggregate wealth, the middle class will always be the dominant interest group in a modern democracy.

    After the 1970s stagnation, the taxed, regulated and subsidised groups had an increasing incentive to converge on new lower cost modes of redistribution.

    Reforms ensued led by parties on the left and right, with some members of existing political and special interest groupings benefiting from joining new coalitions.

    More efficient taxes, more efficient spending, more efficient regulation and a more efficient state sector reduced the burden on the taxed groups. Most subsidised groups benefited as well because their needs were met in ways that provoked less opposition.

    Sweden and Denmark could be examples of Gary Becker’s idea that political systems converge on efficient modes of both regulation and income redistribution as their deadweight losses grow.

    Unlike some of their brethren abroad, more of the Nordic Left and, more importantly, the Nordic median voter were more alive to the power of incentives and to not killing the goose that laid the golden egg.

    The deadweight losses of taxes, transfers and regulation limit inefficient policies.

    Policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution.

    An improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending.

  31. may
    July 20th, 2013 at 11:40 | #31

    John Quiggin :@wilful
    Bear in mind that the change hasn’t even happened yet, and may not do so for some time to come. The publicly announced mass sackings look more like a media stunt than a business decision.

    reporting things that haven’t happened and quite possibly won’t happen as an unquestioned fact, is standard practice.

    the person i spoke of recently, who believed labor was taking peoples’ super, had that info from public broadcasters.

  32. Luke Elford
    July 20th, 2013 at 12:38 | #32

    @Jim Rose

    For the life of me, I can’t understand what your point is. Economic theory says that the optimal size of government (provision of public goods, redistribution) increases as the efficiency with which the government operates increases. You seem to be saying that this desirable relationship is reflected in outcomes in the real world. Well, that’s great.

  33. Ikonoclast
    July 20th, 2013 at 13:01 | #33

    @Jim Rose

    I’d like to see these assertions subjected to scrutiny and empirical data.

    Assertion 1 – “Tax reforms … lead to a larger public sector.”

    Response 1 – The Australian and US experience in the last 2 decades or so would seem call into question that assertion. Howard “reformed” taxes with the GST and cut the Australian Public Service. In the US taxes for the rich were cut and a large budget deficit ensued. I am not sure what happened to the US public service at the time though. Now, states and boroughs are seeing their revenue base collapse and many are going bankrupt, like Detroit with an $18 billion default. State and local civil servants are being laid off now.

    I guess the assertion turns on what is meant by tax “reform”. More regressive and smaller taxes equal smaller government. Progressive and larger taxes mean bigger government. Jim refers to reforms hated by the left so he must mean regressive reforms. These lead, almost axiomatically, to small government.

    Assertion 2. The link between the size of government and the middle class.

    Respone 2. This might hold true. One would have to see the numbers. Since the middle class is collapsing in the US and shrinking in Australia (as more and more people are moved to unemployment, under-employment, part-time and low paid work) then government might well shrink too. The richest 1% see the job of government as solely looking after ther richest 1%. You don’t need a big government for that just a bribed and corrupt government.

    Assertion 3: The middle class will always be the dominant interest group in a modern democracy.

    Response 3: This might be true in most but not all cases. It would also depend on our definition of democracy. The middle classe is no longer the dominant class in the formulation of domestic and foreign policy in the US, if they ever were. The rich 1% are the dominant class. Of course, the way the US runs in practice calls into serious question the issue of whether it is a democracy or not. Much of the right wing in the US are adamant that the US is a republic not a democracy. I agree that it’s a plutocratic republic.

    Also, if current trends continue the middle class will become a minor class soon in the US, dwarfed by the lower class. What will that do to US politics one wonders?

    Assertion 4: “Policies that are found to significantly cut the total wealth available for redistribution by governments are avoided relative to the germane counter-factual, which are other even costlier modes of redistribution. ”

    Response 4: This is not true, since the EU is pursuing policies (austerity or pro-cyclical budgeting) which are cutting the economy and the government take of the economy. These policies suit the richest 1% but cut the total production of the economy. Witness the increasing recession in Europe.

    My Conclusion.

    Western economies are now being dominated by financial capital not industrial or productive capital. The financial sector is not primarily interested in production only in transferring and appropriating existing wealth and new wealth so far as it is still produced. True production of real goods is being slowly but steadily transferred to the developing economies. Western economies are becoming hollowed out financial shell. Once the financial economy has no real productive economy to feed off, it will collapse spectacularly. Unless we do something to avert this process.

  34. john
    July 20th, 2013 at 14:36 | #34

    re – the tax break for packaged cars:

    In fairness, most of the Catallaxy comments seemed to be about the sudden, unconsultative implementation, not the concept.

    To soften the landing for the losers, surely a reasonable way to go would be to legislate an annual change to the statutory fraction over the next few years, ending up at a point where the statutory formula gives no advantage over a logbook.

  35. TerjeP
    July 20th, 2013 at 19:46 | #35

    The reason that people are getting sacked over this even though it isn’t legislated ought to be bleeding obvious but perhaps it needs to be spelt out. The first I heard of this announcement was via a friend in the leasing business making comment on social media. The comment was to the effect that the phones were running hot with people cancelling orders. It is natural that demand should drop if a policy announcement alters the likely benefit of entering such an arrangement. And it is natural that businesses would beginning reducing capacity if demand for their services was collapsing all around them.

    In terms of the actual reform I think if you are going to do this sort of thing then there probably is no nice way. Stringing it out over time just prolongs the adjustment process. People still lose their jobs.

    Was it a good change of policy? On one level I hate anything that involves the government getting it’s mits on more of our money. But in administrative terms the reform may have some merit. If I was a treasurer axing a carbon tax then I would have sought savings rather than a tax increase. Axing the climate commission would be a nice place to start symbolically but there are plenty of other government program’s that are ripe for abolition.

    My main concern though is that future governments will go on tax grabs like this every time the carbon price slumps. A floating carbon price is bad for business but also bad for government. It just introduces volatility needlessly. CO2 emission should fluctuate not the price. After all it is the stock of CO2 in the atmosphere we care about not the flow rate from month to month.

  36. kevin1
    July 20th, 2013 at 21:54 | #36


    I saw a TV interview with the boss of Selectus, who claimed he would sack 100 of his 200 employees as a result of FBT changes, which I think are purely enforcement rather than legislative changes.A m I wrong? Can someone correct me?

    Perhaps the flow (of sal pack applications) is where they get their income, not the stock of existing arrangements. Inferring new applications cut by half (based on TerjeP’s post), this suggests a 50% marginal incidence of rorting.

  37. TerjeP
    July 20th, 2013 at 23:26 | #37

    Kevin1 – it could also be that people don’t like the hassle of keeping log books. The technical term for this is “compliance cost”.

  38. kevin1
    July 20th, 2013 at 23:29 | #38

    Poor diddums! As a low tax advocate you will defend casual theft from the rest of us?

  39. kevin1
    July 20th, 2013 at 23:35 | #39

    Compliance cost here being fines payable, calculated just like any other criminal. Gimme a break.

  40. TerjeP
    July 21st, 2013 at 00:05 | #40


    Minimising tax is not theft.

  41. kevin1
    July 21st, 2013 at 00:10 | #41

    By definition breaking the law is theft. Do you defend deceitful claims?

  42. July 21st, 2013 at 01:33 | #42

    In the long term, its good to lose jobs like this. I’m sorry for the individuals, but quite frankly someone who helps you minimise your tax is less useful than the person who makes your macchiato.

  43. John Quiggin
    July 21st, 2013 at 06:52 | #43

    Terje, so you have no problem with targeted tax exemptions as an instrument of policy?

  44. John Quiggin
    July 21st, 2013 at 06:53 | #44

    John Brookes :
    In the long term, its good to lose jobs like this. I’m sorry for the individuals, but quite frankly someone who helps you minimise your tax is less useful than the person who makes your macchiato.

    Absolutely right, though the latter is even more useful if s/he doesn’t add milk to perfectly good coffee!

  45. Ikonoclast
    July 21st, 2013 at 07:22 | #45

    Perhaps we should agree on terminology.

    Tax minimisation comprises the legal, accepted and generally expected practices for paying the minimum legal tax. Salary packaging (lamentable law and practice though it is IMO) is currently a legal tax minimisation strategy.

    Tax avoidance is the practice of seeking loopholes to avoid tax. Whilst not strictly illegal, tax avoidance avoids the spirit and intent of the law.

    Tax evasion occurs when taxes are evaded by illegal means.

    So TerjeP is legally and even morally correct in the assertion that minimising tax is not theft. It would be over-moralistic to assert that a person is a moral thief for merely minimising tax by legal, common and accepted practice. On the other hand, with regard to tax avoiders, whilst they might escape legal sanction, it is arguable that they are thieves morally speaking. Tax evaders are thieves, legally speaking, once they are convicted.

  46. Fran Barlow
    July 21st, 2013 at 07:55 | #46


    Fair enough, though I’m not sure I understand your distinction between ‘minimisation’ and avoidance. I believe the Tax Act allows some discretion to rule that some practices are indeed mere contrivances, so perhaps that is what you mean.

    As things stand, according to Laura Tingle, the changes merely require documentation once every five years. That doesn’t sound that onerous.

  47. Ikonoclast
    July 21st, 2013 at 07:58 | #47

    Socialism, or labour activism and unrest, used to called “The British Disease”. The real, underlying cause of that disease was capitalist exploitation of the workers.

    Now we have the “American Disease”. This is the disease that promotes low taxes and small government so that the capitalist 1% can get even richer whilst a large proportion of the 99% sink into poverty. This is the contemporary experience of the USA. If we import the American Disease we will crumble as America is crumbling.

    Take a look at Detroit. That is where low taxes get you. Society and its infrastructure crumble and decay away. Here are some facts lifted from the internet (Washington Post).

    1. The number of people living in Detroit in December 2012 was 684,799. In June 2000, the population was 951,270. The population was 1.8 million in June 1950.

    2. In 2011, more than 136,000 crimes were reported in Detroit, according to a recent report.

    3. Detriot had an 18.6 percent unemployment rate in 2012.

    4. The city has 26 fire engines. It has 35 fire stations that are about 80 years old.

    5. Detroit is home to about 80,000 abandoned and blighted structures.

    6. Roughly 40 percent of Detroit’s street lights do not work.

    7. 47% of Detriot’s adults are functionally illiterate.

    8. Detriot has become the largest city in the US to file for bankruptcy. The long term debt is more than $US14 billion and could be between $US17 billion and $US20 billion.

    Cities like Baltimore and Chicago appear to be, not next in line, but in line eventually for the same collapse. A number of things are happening here. Yes, changing economic and demographic patterns can lead to declines like that of Detriot but the poor management of it (an unstructured collapse rather than a managed decline and transition) is symptomatic of the American Disease; low taxes, low government spending, low government intervention and permitting the burgeoning poor to become a completely lost underclass. The US is simply breeding future problems for itself. Problems which left to fester only become more costly. I won’t say “to fix” because the US won’t fix these problems now. It will pay the costs in other ways; forgone production, crime, decay and collapse.

    Watch the US. That is where low taxes and small government get you. The American success story from the end of the Great Depression was built on high taxes relative to today and big government relative to today.

    Something else is also happening of course. The US collapse is also based on corruption, the financialisation of the economy, the export of industries and jobs overseas and on contracting energy and resource supplies. Only large, dirigist government programs could address and correct these issues. While the US avoids that path it has 0% chance of a recovery.

  48. J-D
    July 21st, 2013 at 08:55 | #48

    @Luke Elford
    I too am having some difficulty grasping Jim Rose’s point, but the general impression I get (perhaps wrongly) is that there is an unstated postulate that in every circumstance it remains true that the government should be smaller than it is. From that postulate it is straightforward to conclude that anything that tends to make government bigger must be bad, but I am not inclined to adopt that postulate.

  49. Fran Barlow
    July 21st, 2013 at 09:05 | #49


    there is an unstated postulate that in every circumstance it remains true that the government should be smaller than it is

    Which would be evidently paradoxical, since you can’t advocate one size/scope of government and then immediately claim that that size is too great. What happens when there is no government at all? Is it still too big?

    Perhaps he’s a nihilist.

  50. Jim Rose
    July 21st, 2013 at 10:03 | #50

    Fran Barlow, the reforms of Reagan, Thatcher, Blair, Clinton, Hawke and Keating saved the welfare state from bankruptcy.

    Improvements in the efficiency of taxes, regulation and spending reduce political pressure to suppress the growth of government and thus increased or prevented cuts to the welfare state.

    countries must be rich to have a welfare state. for example, Assar Lindbeck has shown time and again that ‘Sweden became a rich country before its highly generous welfare-state arrangements were created’. See

    Swedes had the third-highest OECD per capita income, almost equal to the USA in the late 1960s, but higher levels of income inequality.

    Sweden moved toward a welfare state in the 1960s, when its government sector was then about equal to that in the United States in size. Sweden was one of the fastest growing countries between 1870 and 1960.

    By the late 1980s, government spending grew from 30 percent of gross domestic product to more than 60 percent of GDP. Swedish marginal income tax rates hit 65-75% for most full-time employees as compared to about 40% in 1960.

    Swedish economists encountered a new phenomenon they named Swedosclerosis:
    1. Economic growth slowed to a crawl in the 1970s and 1980s.
    2. Sweden dropped from near the top spot in the OECD rankings to 18th by 1998 – a drop from 120% to 90% of the OECD average inside three decades.
    3. about 65 per cent of the electorate receive (nearly) all their income from the public sector—either as employees of government agencies (excluding government corporations and public utilities) or live off transfer payments.

    Sweden is a classic example of Director’s Law. Once a country becomes rich because of capitalism, politicians look for ways to redistribute more of this new found wealth to the middle class.

  51. Fran Barlow
    July 21st, 2013 at 10:07 | #51

    @Jim Rose

    Spare me the boilerplate.

    What’s your formula for achieiving and maintaining the optimal size and scope of state provision Jim? What’s the optimal proportion of expenditure by the state in OECD/G20 countries, or even just the top 10?

  52. Fran Barlow
    July 21st, 2013 at 10:08 | #52

    oops … achieving …

  53. Sancho
    July 21st, 2013 at 10:55 | #53

    I’m surprised at the surprise. The Right has never prized the free market or rejected state power as matters of principle, but chooses the systems that best defend the interests of the powerful.

    It’s entirely consistent for conservatives to rail at government distortions of the free market when it curbs the profits of the wealthy, then turn around and complain that the rich are being thrown into a Darwinian free market by a state which should be protecting their perks.

    First an ETS, now company cars…if no one stops this it will all end in social democracy!

  54. July 21st, 2013 at 11:51 | #54

    I know a number of people with novated leases. They have relatively high incomes (as I do) but, unlike me, they want to drive flash foreign cars. (My car is also foreign-built, but that’s only because no-one in Australia builds diesel-powered utes. I digress.)

    While there may be lower income earners who benefit from similar schemes, I’m not convinced that, even if they were to be subject to the same regime (justifying the leased vehicle as a requirement of their employment), it would substantially effect local car manufacturers. After all, it’s not like they’re building cars anyone in their right mind would want to buy.

  55. m0nty
    July 21st, 2013 at 12:23 | #55

    It is a pity that treaty (treaty yeah!) prevents discussion on this site of Catallaxy’s multiple recent posts exploring the Turnbull option.

  56. TerjeP
    July 21st, 2013 at 14:15 | #56

    John Quiggin :
    Terje, so you have no problem with targeted tax exemptions as an instrument of policy?

    In general I’d say the opposite. But there are multiple considerations. One is whether the exemption is about promoting some policy in order to distort the market and another is about the administrative burden created or avoided.

    So for example I don’t agree with the GST exemption for fresh food because it both distorts the market and complicates compliance. But I do agree with companies being able to expense 100% of a mobile phone service provided to an employee because whilst some percentage of usage is in reality for private benefit the compliance cost of working this out correctly isn’t really worth the headache.

    When it comes to the rules for car leases I’m not strongly committed either way. I really don’t know how much these cars are used for private benefit versus personal benefit. But I do think that keeping log books to prove one way or the other is a major pain for honest people and an easy thing to falsify for dishonest people. It may well be that the Rudd reforms in this area make good sense overall in terms of removing a market distortion, in which case congratulations are in order. Some honest analysis by an independent expert looking at the numbers would be helpful.

    My criticism on this matter is simply reserved for the fact that the government is both promoting a floating carbon price and seeking new tax revenue when the price drops. Will we be getting tax cuts the moment the carbon price rises again? Excuse me if I’m cynical about such a prospect.

  57. Ernestine Gross
    July 21st, 2013 at 16:16 | #57

    The latest example of an attempt to ‘distort the energy market’ in the EU comes from the nuclear power industry (UK) who is lobbing the EU in Brussel to provide subsidies for nuclear power because, despite the low carbon price, nuclear is not competitive with renewables. (Source: “Der naechste Unsinn” (the next boneheaded stupidity), Sueddeutsche Zeitung, 20 July 2013).

  58. Ernestine Gross
    July 21st, 2013 at 16:55 | #58

    I have to correct the title of the newspaper article I referenced @7,p2. “Der ….. Irrsinn”, rather than Unsinn. Irrsinn translate to insanity. Unsinn is nonsense. So boneheaded stupidity seems about right to convey the idea.

  59. J-D
    July 21st, 2013 at 19:11 | #59

    @Jim Rose
    If you think there’s something bad about this, it’s obfuscatory not to explain what it is that you think is so bad about it; and if you don’t think there’s anything bad about this, it’s obfuscatory not to acknowledge that fact; so either way you’re obfuscating, and I wish you’d stop.

  60. kevin1
    July 21st, 2013 at 22:38 | #60

    @John Brookes

    I have a friend who has taken advantage of salary packaging at his university. He considers it his duty, because it is such a rort, and the more people exploit it, the quicker it will be repealed.

    Hey I liked this rationalisation – “I was taking advantage of it to highlight its contradictions.”

    Since he gets a fin advantage from this reasong, is he a Sophist? “a specious argument used for deceiving someone..The practice of charging money for education and providing wisdom only to those who could pay led to the condemnations made by Socrates, through Plato in his dialogues, as well as Xenophon’s Memorabilia.”

  61. kevin1
    July 21st, 2013 at 22:47 | #61

    @Fran Barlow
    A pedant is a noble occupation because Precise English Disposition Aids Nuanced Talking.

  62. Sancho
    July 21st, 2013 at 22:53 | #62

    Fair questions, but we’ll also see if energy companies drop the rate increases they attributed to the carbon price.

    Something tells me the market’s response will be to laugh heartily and cut another line of cocaine.

  63. kevin1
    July 21st, 2013 at 23:15 | #63

    @TerjeP #6

    But I do agree with companies being able to expense 100% of a mobile phone service provided to an employee because whilst some percentage of usage is in reality for private benefit the compliance cost of working this out correctly isn’t really worth the headache.

    Headache for who? Thanks for your crocodile tears but as an enthusiastic tax avoider you have a conflict of interest here! So let the experts deal with compliance issues.

    You may recall that a reason in favour of a consumption tax was that it minimised avoidance opportunies. And the marginal cost of high-end tax investigation in the 1980s – “deadweight losses” – was estimated as 30% of the amounts recovered. (I recall Peter Groenewegen wrote about this.) There is a history here of ATO learnings and remedies, and taxpayers should have *some* confidence that their interests are being prosecuted. Better enforcement of FBT rules only threatens the cheats and rent-seekers.

  64. TerjeP
    July 22nd, 2013 at 06:51 | #64

    Headache for who?

    The business and the employee obviously. They are the ones that would have to keep records and calculate the breakdown. Plus give the nature of many mobile plans you might need an actuary.

  65. Gaz
    July 22nd, 2013 at 12:11 | #65

    So, Terje, the businesses and employees are saved the trouble of keeping records and non-avoiding taxpayers get to pay more tax. Please tell me you running in Bennelong again this year so I can vote against you again.

  66. Jim Rose
    July 22nd, 2013 at 14:20 | #66

    Fran Barlow :
    Jim Rose
    Spare me the boilerplate.
    What’s your formula for achieiving and maintaining the optimal size and scope of state provision Jim? What’s the optimal proportion of expenditure by the state in OECD/G20 countries, or even just the top 10?

    Milton Friedman used to say

    “If you want to see capitalism in action, go to Hong Kong.

    between 1960 to 1996, Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger than Britain’s.

    Brad Delong has a great quote on Friedman in a review of a biography of him:

    we are interested in Friedman as intellectual adversary—where his arguments are strong enough to make the reality-based among us rethink our positions and change our minds, and where his arguments lead us to strengthen and better understand our own.

    As John Stuart Mill wrote in his “Essay on Coleridge,” every liberal should pray for an intelligent conservative intellectual adversary: “Lord, enlighten thou our enemies. Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength.”

    Milton Friedman was the answer to our prayers.

  67. TerjeP
    July 22nd, 2013 at 15:09 | #67

    So, Terje, the businesses and employees are saved the trouble of keeping records and non-avoiding taxpayers get to pay more tax.

    Basically yes. Although those other taxpayers are probably the same taxpayers anyway. But I take it you have never run a business and have some batshit crazy ideas about what it entails anyway.

  68. TerjeP
    July 22nd, 2013 at 15:13 | #68

    p.s. you’re basically implying that policy makers should not give any weight to concerns about productivity. That you should spend private dollars chasing public cents.

  69. J-D
    July 22nd, 2013 at 19:22 | #69

    @Jim Rose
    That’s not an answer to the question you were asked, so why are you pretending that it is?

  70. Sancho
    July 22nd, 2013 at 22:49 | #70

    That’s nonsensical, but who cares, since it boils down to the classic Too Much Red Tape argument.

    To recap: government regulation of trade practices places an unreasonable administration burden on entrepreneurs trying to compete in the free market, but so does requiring businesses to detail their eligibility for subsidies from the government.

    The elected government must hand out taxpayer money to private interests with no strings attached, and let them spend that money any way they please.

    What could possibly go wrong with that setup?

  71. TerjeP
    July 22nd, 2013 at 22:52 | #71

    Abolish the subsidies and the red tape.

  72. Sancho
    July 22nd, 2013 at 23:20 | #72

    By itself that’s a reasonable statement, Terje, but this thread began with JQ observing that your allies want the red tape abolished and the subsidies kept very much in place, but without any regulation.

    Declare yourself a pariah if need be, but don’t argue as though your views are shared by the editors of the AFR or anyone at the IPA.

  73. Ernestine Gross
    July 23rd, 2013 at 00:29 | #73

    TerjeP, you seem to be taking your alleged aim of testing your ideas on this blog-site to extremes because:

    1. Your argument that the record keeping requirements for tax deductions for mobile phones requires an actuary, given the nature of the plans, is either silly or shows your believe that anything which is produced ‘privately’ must be good. (a) It is a silly argument because an employee, who is issued with a mobile by his or her employer, can get a private mobile phone for private use, colour coded if necessary. (b) It is a biased argument because, if you consider the billing methods of privately produced mobile telephone services require an actuary (which you imply is too expensive) to fulfil the record keeping requirements, then the problem lies with the private mobile telephone service provider.

    2. In comparison to the task faced by a cost minimising [1] householder, the record keeping requirements in question on ‘business’ are trivial. The major supermarket chains, Woolies and Coles, have complex marketing strategies in place which require a cost minimising shopper to keep a mental or physical record of price series for a huge array of goods and an inventory system in the household. The complex marketing strategies involve ‘specials’ and, for quite some time now, two sets of specials. One set is available to everybody and another one for ‘reward card’ holders (some membership scheme where the data may end up in some surveillance system on buying behaviour – who knows where). The introduction of the second set of specials multiplies the computation and record keeping requirements by a positive factor, although I can’t tell you now the numerical value of the factor – it might change tomorrow anyway. Furthermore, pattern recognition abilities – a higher order mental ability – on part of the shoppers are required to minimise costs. All this is to be done without the tax deductible expense of an accountant or a book keeper, or even an electronic device that is small enough to keep in the pocket. On the other hand, the income of those who device these complex marketing strategies are a tax deductable expense for ‘business’.

    Your story about red tape and loss of productivity due to government requirements is a bleeding heart story for some abstract notion of ‘business’ in the eyes of ‘householders’.

    The distinction between ‘business’ and ‘householders’ is to a large extent artificial, serving analytical purposes and these categories should be used only by people who are familiar with the relevant methodologies.

    [1] Under some conditions, cost minimisation implies profit maximisation. Note, some but not all conditions. To the best of my knowledge the required conditions are not fulfilled in our real life economies.

  74. TerjeP
    July 23rd, 2013 at 05:43 | #74

    So you think the tax law should require employees with company mobile phones to keep a log books to track which calls are personal and which are business related? Should they do the same for their desk phone in the office? How about if they access websites for private benefit whilst at work? If they use a company pen to write down a personal memo on company stationary should they make a record of it so that the ATO is not short changed due to a personal benefit being expensed. Don’t you think at some point such record keeping gets ridiculous? I mean you may think ridiculous occurs at a later point than me but do you at least concede that at some stage trying to separate private benefits from business benefits becomes a futile and petty exercise.

  75. TerjeP
    July 23rd, 2013 at 05:44 | #75

    Sancho – I’m not arguing on behalf of the AFR or the IPA.

  76. Julie Thomas
    July 23rd, 2013 at 07:06 | #76


    “But I take it you have never run a business and have some *** crazy ideas about what it entails anyway.”

    Perhaps you have some *** crazy ideas about how ‘special’ people who run a business are? You seem quite sure that you deserve special treatment because you do run a business. I have seen this attitude from my own business owning relatives and from those small – and I mean small in mind and character – business people who have been my ‘bosses’.

    Sancho, Terje only argues for his own self-interest. That is his religion.

  77. Moz of Yaramulla
    July 24th, 2013 at 11:08 | #77

    I’m with TerjeP on the subsidies and red tape. You could clean the whole system up a lot by not using the tax system for micro-redistribution. Keep it progressive, but that’s it, no “family tax benefit part B” nonsense. Personal tax: “how much do you earn? Give us 10% of everything over $20k, 20% up to $80k, 30% after that. The end”. Company tax: “net earnings? Give us 30%. The end”. Want an R&D subsidy? Apply for it as a grant. Want the government to donate money to Ford? Campaign accordingly. Want a tax-deductable phone? Great. Use it for personal calls? Split the bill. Show your working, the tax department will want to see it.

    One side benefit would be the nudge effect that people are less inclined to take the second step of applying for a grant, and again that explicitly applying for a subsidy would be hard for some “self-sufficient” people. So fewer people would apply.

    I was thinking that with international “earnings redistribution” or whatever the approved circumlocution for tax evasion by multinationals is, would a Tobin tax help with that? Maybe not the whole answer, but could it be part of the solution?

  78. David Irving (no relation)
    July 24th, 2013 at 11:34 | #78

    That’s not what Terje meant, Moz, and you know it. I agree with you, btw – we should also remove all the direct and indirect subsidies to fossil fuel industries, miners generally, etc.

  79. July 24th, 2013 at 12:10 | #79

    Log books seem so quaint in this day and age, anyway. I have an ancient car but I understand the up to date ones are chock full of smart electronics, so can’t a car help with tracking its use with the aid of some kind of downloadable smartphone app? Surely that would not be too taxing for the executive class, most of whom are welded to their devices anyway?

  80. July 24th, 2013 at 12:10 | #80

    *taxing* heh, heh. Pun was not intended.

  81. Moz of Yaramulla
    July 24th, 2013 at 14:10 | #81

    @David Irving (no relation)

    I know nothing. And deny everything. Or is it that I can’t recall? I’m not sure any more, it was so long ago. But I know I’m opposed to hiding subsidies in the tax system or anywhere else, I want them out there in public where we can all discuss them rather than spending our lives ferreting out the rorts.

    Helen, the objections are not based on the practical issues, they’re based on the principle of the thing – no tax rort shall ever be repealed without a fight.

  82. alfred venison
    July 24th, 2013 at 19:19 | #82

    Helen, i heard on the first day there’s an app for it. i don’t know what all the complaining is about. if you can’t be bothered honestly accounting for your supposedly justifiable perk you shouldn’t have it. -a.v.

  83. July 25th, 2013 at 07:38 | #83

    One of the interesting things about salary packaging for cars, from my observation of people I’ve known and worked closely with, is that it encourages people to drive rather than use public transport. Rorting (using for private use) of course makes this more so. Also salary packaging is particularly attractive to people who live a long way from their work (it saves you more the further you have to drive). So all in all I think there could be major environmental benefits from ending salary packaging for cars. However offering it for public transport (which one of my former employers was starting to look at) could be beneficial for the environment.

  84. TerjeP
    July 25th, 2013 at 14:48 | #84

    Perhaps you have some *** crazy ideas about how ‘special’ people who run a business are? You seem quite sure that you deserve special treatment because you do run a business.

    Julie – ahhh no. You seem to have misunderstood what I said but at the risk of being misunderstood let me reiterate.

    Sometimes at work as an employee I will use a pen to write on a post-it-note some reminder that is of personal benefit. Perhaps my wife rang to say I should pick up milk. Now the use of the ink and paper was a personal benefit not a business activity. If you want a corporate tax system with absolutely zero leakage then all personal benefits must be separated and excluded from business expenses. So some leak proof system would require that a record is made of all the post-it-note and ink that is used for personal benefit. The accounts department would then tally up all the post-it-notes and drops of ink used each month for personal benefit and having done so they would calculate FBT and remit the associated revenue to the ATO.

    If you did this the tax man would collect a few extra cents of FBT each month. The company would however incur $100’s of dollars in extra labour costs doing the accounting. And of course they would claim this labour as a business expense. Which would reduce their regular company tax by a lot more than a few cents.

    This is an extreme example. But it shows that at some point extra compliance creates a lose / lose situation. The ATO loses. The shareholder loses. And the staff do mindless bean counting.

    So any pragmatic policy maker will create exemptions. The ATO does not expect companies to pay FBT on personal benefits given to employees such as the use of post-it-notes and pens. And the ATO has decided that personal calls made on company mobile phones are also not worth accounting for.

    Now you can argue that the ATO and FBT tax policy should be more aggressively demanding compliance. Maybe it should go after personal calls on company phones. But if you think compliance comes at zero cost, or that there is absolutely no limit to how aggressive they should be, then you’re batshit crazy.

  85. July 27th, 2013 at 08:52 | #85

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  86. TerjeP
    July 27th, 2013 at 09:12 | #86

    My long comment above for Julie seems to be stuck in moderation.

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