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Financing a UBI/GMI

November 23rd, 2017 17 comments

A couple of months ago, I wrote a post making some observations on the closely related ideas of a Universal Basic Income or Guaranteed Minimum Income. The most important was

Observation 1: Any UBI scheme can be replicated by a GBI with the same effective marginal tax rates, and vice versa

I meant to follow up with a more detailed exploration of financing issues, but all sorts of other things intervened. However, I’ve now prepared a draft, which is over the fold.

Comments and criticism much appreciated

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Three observations on guaranteed and universal basic income

October 3rd, 2017 27 comments

I’ve been working for a while on the idea of Universal Basic Income (UBI), and the closely related alternative of a Guaranteed Basic Income (GBI), in which the payment is phased out as income increases. I’ve now developed a very simple model to illustrate some of the crucial points. Here are three observations. Only Observation 2 requires the model, and the assumption that the distribution of income is broadly similar to that prevailing in Australia today.

Observation 1: Any UBI scheme can be replicated by a GBI with the same effective marginal tax rates, and vice versa

Observation 2: A GBI equal to 40 per cent of average income, with a phaseout rate of 40 per cent, would require additional transfer payments equal to between 8 and 10 per cent of national income.

Observation 3: A UBI equal to 40 per cent of average income, with no phaseout, would require additional transfer payments equal around 30 per cent of national income, but would have the same effective marginal tax rates as a GBI.

Restating the case against trickle down (updated)

September 2nd, 2017 16 comments

I’ve just given a couple of talks focusing on inequality, one for the Global Change Institute at UQ, following a presentation by Wayne Swan and the second at a conference organized by the TJ Ryan Foundation (including great talks by Peter Saunders, Sally McManus, and others), where I was responding to a paper by Jim Stanford from the Centre for Future Work. Because I was speaking second in both cases, I didn’t prepare a paper or slides, but tailored my talk to complement the one before. That can be a high risk strategy, but in this case, I think it worked very well.

It led me to a new, and I hope improved, statement of the case against ‘trickle down’ theory. As always, the most important part of a refutation is a clear statement of the theory you propose to refute, so that it can be shown where it falls down. After the talks I wrote this up, and it’s over the fold. Comments and constructive criticism much appreciated.

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Simple, but not easy

May 24th, 2017 10 comments

I’ll be debating John Rivett at lunchtime today on the subject of Easytax. Rivett is a lawyer who works with John McRobert, the main proponent of the tax (three Johns have got a bit confusing at times). Details are here

I’d have preferred a free event, but I left it to the proponents to organise, so I can’t complain I guess. I’ve attached my presentation, which gives a fair idea of what I’m going to say, and I believe a video of the event will be made available.

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Debt and taxes

May 4th, 2017 4 comments

To misquote Benjamin Franklin and others, the only certainties in economic life are debt and taxes. Among the themes of political struggle, fights over debt (demands from creditors to be paid in the terms they expect, and from debtors to be relieved from unfair burdens) and taxes (who should pay them and how should the resulting revenue be spent) have always been central.

I mentioned in a comment at Crooked Timber recently, that Pro-debtor politics is always in competition with social democracy, and a couple of people asked for more explanation.
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Time to kill the debt bogeyman once and for all

May 3rd, 2017 35 comments

Here’s a piece I wrote in the Guardian responding to Scott Morrison’s distinction between “good” and “bad” debt. Unfortunately, the comments included plenty of people who are under the impression that, thanks to Modern Monetary Theory, there’s no need for taxes and therefore no need to think about budget balance. That’s wrong, as I explain here, with an endorsement in comments from leading MMT economist, Warren Mosler.

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Easytax redux redux

February 13th, 2017 29 comments

I got a brief run in the Murdoch press regarding Pauline Hanson’s revived proposal for a 2 per cent tax on all transactions (floated 20 years ago as “Easytax“). I was reported as follows: “University of Queensland school of economics professor John Quiggin said a 2 per cent tax would destroy small business and see a collapse in government ­revenue.” and the story was headlined “One Nation policy would ‘collapse the economy’” The headline is an exaggeration, but the quoted passage gets my opinion right.

Easytax is an example of a “cascade” tax, common in Europe a century or so ago. The point is that the tax rate is applied to the whole value of each transaction along the chain from primary producer to consumer. For a big firm, like Woolworths, the answer is simple: integrate backwards along the chain by taking over your suppliers. Then you pay the tax only once at 2 per cent. Small businesses, who can’t do this, end up paying the tax themselves, on goods that have already been taxed many times. So, they go out of business, and the total value of transactions falls far below the level used in the original calculation that a 2 per cent tax would be sufficient. Hence, government revenue collapses.

It was precisely because this process was happening that the French (the innovators in this field) dumped the cascade tax in favor of a value-added tax (VAT), the same model used in the GST. They were followed by the rest of the EU and then most of the world, except the US, which still relies on retail sales tax (levied only once, but still messy and narrowly-based).

The story also says “A spokesman for Senator Hanson said she had only advocated investigating the policy.” But the fact that such a nonsense idea is still part of One Nation thinking gives the lie to the suggestion of Hanson’s coalition partners in the LNP that this iteration of One Nation is different from the last. It’s just as racist and ignorant as ever. It’s not Hanson that has changed, but the LNP which is now indistinguishable from One Nation.

Why we should put ‘basic’ before ‘universal’ in the pursuit of income equality

February 8th, 2017 30 comments

That’s the title of my latest piece in The Guardian. There are two key points

First, in terms of effective tax rates and tax paid, any means-tested Guaranteed Minimum Income can be replicated by a non-tested Universal Basic Income, and vice versa

Second, for a number of reasons, it would be better to begin by expanding access to an adequate Basic income (in Australia, the Age Pension is an obvious benchmark) rather than starting with a small universal payment and then increasing it to a level sufficient to live on.

Identity crisis (repost from 2014)

May 13th, 2016 17 comments

When I posted the following piece two years ago, I didn’t suppose it would be enough to kill the absurd idea that “most Australians pay no net tax”. But, given its obvious kinship with Mitt Romney’s disastrous “47 per cent” catchphrase, I felt sure that hardheads on the political right would kill it off before it lined them up on the losing side of a class war.[1] Not for the first time, I was wrong. So, here’s a reprint.

In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.

To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue[2], it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.

Next up: Why there is no net travel into the CBD

fn1. Romney wasn’t silly enough to push this line in public. He got caught using it at a donors meeting, when someone secretly filmed him.

fn2. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.

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The Oz makes the case for higher taxes

April 14th, 2016 13 comments

A couple of days ago, I was one of fifty signatories to a letter opposing the proposed cut in company tax rate and rejecting the general idea that Australia needs lower taxes. We got excellent coverage from the ABC, Fairfax papers and so on. But by far the most extensive was from The Australian. I counted at least four stories all with a prominent run on the website

* A straight new story, though of course replete with phrases like “the left wing establishment”
* The IPA attacking the signatories as the “fatuous fifty”
* Shorten also attacking the company tax cut as a recipe for “mayhem”
* A front page piece saying a tax increase is a lazy way of solving our problems

Not so long ago, the Oz would have ignored a statement like this (or stuck it in a short story on the inside pages) with the plausible justification that it’s just a bunch of lefties saying what lefties usually say. The fact that they felt the need to reply over and over is revealing, in two ways.

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Proof by exhaustion that we need a higher top rate of income tax

April 4th, 2016 79 comments

Watching the flailing of the Abbott-Hockey-Turnbull-Morrison government on budget policy has been grimly amusing, for those who enjoy politics as theatre. But it has also provided a nice lesson in the policy process, related to an apocryphal[1] story about (IIRC) Thomas Edison. After a thousand or so failed attempts to design a workable filament and design for a lightbulb, Edison was supposedly reproached with discovering nothing, and answered “On the contrary, I’ve discovered 1000 ways that don’t work”.

The AHTM government came to power with the twin slogans “axe the tax” and “fix the debt”, along with a commitment not to cut any public spending that people cared about, and to spend even more on the military than before. That created an obvious problem: how can we bring the budget back into something like balance, given that we have taken on substantial expenditure commitments, and that we can’t rely on bracket creep. To give them credit, they’ve tried just about every answer but one

* First, they tried the standard LNP approach of setting up a Commission of Audit, discovering a budget emergency and breaking promises on spending. That produced the disastrous 2014 Budget, which ended the careers of Abbott and Hockey in due course. Thanks to the backloading of the big cuts, it’s now destroying Turnbull and Morrison. Turnbull has backed off a little way on health, and is still stalling on education. But his disastrous floating of the idea of completely endingFederal funding for state schools means he’ll be in a politically untenable position when he tries to sell smaller cuts, while claiming not to want to kill the sector.

* Second, having killed the carbon and mining taxes, thereby making the deficit even worse, Abbott realised that it would be impossible to claw back the compensating tax cuts given to low income earners.

* Next Abbott called for a tax debate, but ruled out just about everything in advance. Turnbull and Morrison went one better, putting everything on the table, and then killing off each possible option as it ran into trouble. That included the GST, superannuation concessions, the tangle of negative gearing and concessional capital gains taxes, changes to dividend imputation and so on.

* Finally, long after the “all options” discussion was over, Turnbull popped up with the idea of giving income tax back to the states, which lasted all of two days. He is now trying the ludicrous spin that, having rejected his half-baked idea, the states are on their own financially.

So, the government has succeeded in finding lots of approaches that don’t work. The only one left is higher income tax for those who can afford to pay it. The first step would be to maintain the Temporary Budget Repair Levy until the budget is actually repaired. But the real answer is to recognise that the big gainers from the changes in the economy over the past decade or more have been high income earners, and this is the group who need to pay more.

I’m planning to do some proper calculations on this, when I get a little free time.

fn1. Retailing apocryphal stories is anachronistic, now that they can be falsified (or occasionally verified) with a quick Google search. But it’s habitual for old academics, and I regard it as a kind of performance art, like doing a high wire act without a net. In any case, Google is getting less and less useful for anything except selling stuff, so we may have to rely on old skills like memory again.

Refighting World War II

February 26th, 2016 64 comments

In keeping with his commitment to do exactly what Tony Abbott would have done, but with more style, Malcolm Turnbull has just announced that we are to spend a trillion dollars on fighter plans and submarines. Apparently, there are lots of problems with the hugely expensive F-35 Joint Strike Fighter, which Australia has on order. Rather than look at the details, it’s worth asking we are, yet again, arming ourselves to refight World War II.

World War II was fought on land, sea and air. Submarines and fighter planes played a crucial role. But since 1945, things have changed. The 70 years since 1945 have been marked by near-continuous land warfare in various parts of the world [1]. On the other hand, there has been essentially no naval warfare, in the sense of battles between ships or carrier based aircraft, with the exception of the absurd and unnecessary Falklands conflict. Air combat between fighter planes lasted a bit longer after 1945, playing a big role in the Korean War, but has been pretty much non-existent since the 1980s. All warplanes, these days, are effectively bombers, usually hitting targets that have previously been rendered defenceless by missile attack. Yet the problems of the F-35 stem, in large measure, from its capacity to engage in hypothetical dogfights.

Fighter planes and their pilots still attract most of the attention, and nearly all the glory, in air warfare. But the real work is increasingly done by drone operators, commuting from the suburbs to undertake their task of destruction in air conditioned offices: since they see exactly what they have done, the job is apparently much more stressful than that of a fighter pilot. So far, only the US is using military drones on a large scale, but it’s obvious that this is the way of future wars. The specific problems of the F-35 are irrelevant in this context: it will in any case be obsolete by the time it’s delivered.

As for submarines, Wikipedia gives a list of submarine actions since 1945. There have been six of them, three involving the sinking of surface ships, and three involving the firing of cruise missiles, something that can be done from craft as small as corvettes.

Submarines have been much more notable for sinking themselves. Wikipedia lists four US submarines sunk at sea since 1945, two with all hands. The Russians have done far worse, losing 18 subs, most notably the Kursk, lost with all hands in 2000.

Submarines aren’t obsolete in all their possible uses. If the world ends in a nuclear holocaust, the final missiles will probably be fired from nuclear-armed submarines. But the revival of old-style submarine warfare, using our subs to sink (say) Chinese naval vessels seems remote: the increasing power and range land based anti-ship missiles will soon make naval power obsolete. Even more remote (thankfully) is the use of submarines to attack merchant ships without warning, as was done in both World Wars.

Of course, no one can be certain that seemingly obsolete modes of warfare won’t be revived: For example, there was a cavalry charge during the Afghan war. But spending a trillion dollars on weapons systems that haven’t been used anywhere in the world for decades does not seem like a sensible use of public money.

Having posted this, I’m fully prepared to get a hammering from military buffs who will point out that I have got this or that detail of air and naval warfare wrong. But the idea that detailed knowledge of tech specs or the minor points of military history constitutes expertise is, in this context, quite wrong. In the absence of any significant air or naval warfare within living memory, supposed expertise is about as useful as Scott Morrison’s knowledge of unicorns. The only important thing to know is that, like nearly all military expenditure and nearly all wars, these proposed purchases haven’t been subject to a cost-benefit test and would fail it if they were.

fn1. There’s a case that land warfare has become less frequent, or at least less bloody over time. But it’s hard to tell.

The patrimonial society comes to Australia

February 7th, 2016 80 comments

Forbes just released its annual list of the ten richest Australians. Of the top eight, four inherited their wealth. The other four range in age from 75 to 85, suggesting that new heirs are likely to be joining the rich list before too long.

This pattern isn’t yet representative of the Australian wealth distribution as a whole, but it is becoming more so. Piketty’s patrimonial society is not far away.

There are a lot of things we can do to promote a more equal distribution of opportunity and outcomes, but a return to taxes on inheritance (preferably levied on the recipient rather than the estate) would be a good start.

Increasing GST: not worth the effort. How about inheritance taxes?

February 5th, 2016 104 comments

I posted this analysis in December, suggesting that, once the necessary compensation is paid for, an increase in GST wouldn’t be worth the effort. Apparently Treasury modelling (which I haven’t yet located) produces the same conclusion. Given that everything is supposedly on the table, maybe it’s time to look at some new options. An obvious example is inheritance taxes, which raised a fair bit of money before being scrapped in the late 20th century. As the inequality of wealth increases, the case for such taxes becomes every stronger.

Repost

The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.

Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:

Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.

(emphasis added).

Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.

As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)

That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.

So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.

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More reform threatened

January 10th, 2016 56 comments

The Turnbull government is apparently keen to undertake more reform, in this case applying to the welfare system. This weekend I saw a couple of media reports, unsourced but apparently based on material supplied by Social Services Minister Christian Porter, based on the “alarming” projection that welfare payments will rise from $154 billion to $270 billion in a decade, more than can be accounted for by inflation and population growth.

A huge dollar figure makes for a scary headline but not for sensible analysis. The prosaic facts underlying this projection are
(a) Welfare payments are dominated by the old age pension
(b) The value age pension increases in real terms over time, since it is linked to earnings
(c) Even allowing for an increased age of eligibility, and more reliance superannuation, the proportion of the population eligible for the old age pension is unlikely to fall

Put these facts together, and it’s virtually certain that the welfare bill will grow broadly in line with national income (usually measured by GDP), and therefore will outstrip growth in population and inflation. Indeed, a quick check suggests a compound rate of growth of about 6 per cent*, almost exactly in line with nominal GDP (assuming 3.5 per cent real growth and 2.5 per cent inflation).

The government’s proposed reforms appear to involve attacks on recipients of welfare in the popular media sense of the term (Jobstart, disability benefits and so on). But the only ways in which the growth rate of the welfare bill can be held much below that of GDP are
(i) Freeze the real value of age pensions, as has been done to Jobstart since the 1990s; or
(ii) Reduce access to the age pension, either by further raising the access age or by tigntening means and assets tests.

* Porter’s briefing apparently suggested 7 per cent, which I can’t replicate. Feel free to check.

Do we need a global tax to stop rising inequality (crosspost from Crooked Timber seminar on Piketty)

December 30th, 2015 33 comments

One of the more depressing features of Capital in the 21st Century is the air of inevitability attached to the much-discussed r > g inequality. This is exacerbated, on the whole, by the fact that Piketty’s proposed policy response, a progressive global tax on wealth, seems obviously utopian.

What about a much simpler alternative: increasing the rate of income tax applied to the very rich, and removing preferential treatment of capital income? Piketty’s own work with Saez yields the conclusion that the socially optimal top marginal rate of taxation, after taking account of incentive effects, would be 70 per cent or more. Such rates prevailed, at least nominally, in the mid-20th century, without obvious ill effects. Again, Piketty provides the relevant evidence.

So, is there something about a globalised world economy that renders a return to high marginal rates of taxation impossible?

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Bracket creep: How to get the answer you want

December 23rd, 2015 18 comments

NATSEM recently released modelling showing that discretionary tax cuts have more than offset bracket creep since 2005 (that is, taxes are lower than if the income tax scales had been indexed to the CPI or a wage index). The Centre for Independent Studies replied with a study pointing out that you get the opposite conclusion by looking at the period since 2013. Why 2013?

We chose 2013 as the starting year because this is when the last change to tax thresholds occurred

Well, yes. If you pick a period in which there have been no discretionary tax cuts, you will certainly find that discretionary tax cuts have not outweighed bracket creep. As author Michael Potter observes

This shows the importance of the starting year.

There’s no need to check the CIS numbers: given the setup, only one answer is possible.

Correction Michael Potter advises that the CIS study includes the impact of the tax changes in 2012-13, making it possible in principle that these could have offset bracket creep. But the 2012-13 changes weren’t a general tax cut aimed at offsetting bracket creep. They offered small tax cuts for low income earners to offset the very modest impact of the carbon price/tax. These were clawed back by higher marginal rates so that upper income earners (appropriately) bore the full cost of the carbon price. The key point, stated below, is that the Howard-Rudd tax cuts introduced after the 2007 election were so large that they have more than cancelled out all the subsequent bracket creep.

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Increasing GST: not worth the effort?

December 7th, 2015 30 comments

The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.

Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:

Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.

(emphasis added).

Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.

As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)

That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.

So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.

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Populism, Patrimonialism and US politics (crosspost from Crooked Timber)

October 17th, 2015 22 comments

Nuance is nearly always appealing to academics. For a long time, that was true of my approach to economic issues, particularly including income distribution. When presented with simplistic populist solutions to inequality like “Make the rich pay!”, I was inclined to responses along the lines of “It’s more complicated than that”.

A big problem with “Make the rich pay!” is that with the kind of income distribution that prevailed in the mid-to-late 20th century, any change to income tax that would raise significant revenue would have to apply to the top quintile (20 per cent) of the income distribution. People in the top quintile of the income distribution mostly derive their income from (typically professional or para-professional) employment, don’t think of themselves as rich, and aren’t, in general, seen this way by others. So, the slogan didn’t match the implied policy.

But with the rise of the patrimonial society that’s largely ceased to be the case. The top 1 per cent of the US population now get more than 20 per cent of all pre-tax income, considerably more than the total revenue of the Federal government. Within that group, the top 0.1 per cent have done better than everyone else, and the top 0.01 per cent even better.

So, taxing the 1 per cent more makes sense. I responded a little while ago to a piece trying to argue increasing the top marginal tax rate would make no difference to inequality. And while I was drafting this post, the NY Times came out with an article that reached broadly the same conclusion as mine.

There’s nothing inherently ludicrous in the suggestion that the very rich should pay most or all of the costs of sustaining a system that benefits them so greatly[^1]. And, as in the 1920s, the very rich are different from everyone else. Their wealth is derived primarily from capital, or from control over capital (as business owners or from the financial sector). And, while most of the current cohort of ultra-wealthy did not inherit large fortunes, that’s an inevitable consequence of the fact that there weren’t many large fortunes to inherit until recently. As Piketty demonstrates, a society dominated by large accumulations of wealth will inevitably one in which inheritance, rather than effort, education or talent, determines life outcomes.

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Would a significant increase in the top (US) marginal income tax rate substantially alter income inequality?

October 5th, 2015 38 comments

Yes.

This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion. (Hat tip: Harry Clarke).

The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.

The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.

What does this mean? Two things:

(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

Three word slogans

August 22nd, 2015 18 comments

I have a piece up at the Drum, looking at how the three-word slogan approach of the Abbott government helps to explain their budget problems. Text is over the fold

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Is an emissions trading scheme a carbon tax?

August 4th, 2015 23 comments

I was recently asked this question by ABC Fact Check. Here’s my answer:

The core idea of an ETS is to limit the volume of emissions (of carbon dioxide) by creating a set of permits that must be used by emitters. The permits may initially be auctioned or given away. Since the permits are tradeable a market price will be determined by the demand for permits and the willingness of permit holders to sell their permits. By contrast, a carbon tax sets a price on carbon emissions and allows the market to determine the volume of emissions.

There are a large variety of schemes that resemble the ETS in general structure. Within the environmental area, both the Renewable Energy Target and the government’s Emissions Reduction Fund (if augmented with a baseline allocation and penalty structure) fall into this class. Other examples include taxi licenses, electronic spectrum auctions, and tradeable catch quotas in fisheries. None of these policies is normally described as a tax.

Sea change

July 27th, 2015 25 comments

Maybe it’s my chronic over-optimism, but it seems to me as if there has been a sudden change in the long-sputtering debate about taxation in Australia. Until a few weeks ago, “tax reform” was, as it had long been, code a “tax mix switch” which in turn was code for “tax food and use the proceeds to cut the company tax rate or the top marginal rate of taxation”. Joe Hockey was still pushing the second part of this package only a week ago.

But the reports coming out of the recent COAG summit seemed to convey a general acceptance that more tax revenue is needed to fund health expenditure in particular. The two top options were an increase in the rate of GST or an increase in the Medicare levy, with little mention of “base broadening” (more code for taxing food).

Meanwhile, Labor has been talking about a Buffett tax, that is, a minimum rate of tax levied on gross incomes, regardless of deductions. And, while the LNP still assumes that it can win by running against a “carbon tax”, that belief seems to have come unmoored from any general theoretical viewpoint. How can Abbott run against a “great big new tax on everything”, if he is happy to discuss a 50 per cent increase in our existing “great big tax on everything”, the GST?

I’m not clear what has happened to bring this about, or whether I’m misreading the signals. But it certainly looks to me as if the great political taboo against even mentioning higher taxes has been broken.

Balancing the books

July 10th, 2015 43 comments

I’ve been at the Australian Conference of Economists for the last few days. Today we had presentations from the Queensland Treasurer, Curtis Pitt, who is about to bring down his first budget, and from Commonwealth Treasury Secretary, John Fraser.

Curtis Pitt’s big announcement was a rearrangement of debt and equity in Government Owned Corporations, increasing their borrowing and transferring the resulting equity to the general government balance sheet. The result is a $4 billion reduction in general government debt, part of a program to bring the debt/revenue ratio down to around 70 per cent.

A transfer like this doesn’t make any difference to the state’s net financial position. Bu it makes the point that publicly owned assets are assets, not liabilities, and the fact that we own them makes the state’s position stronger. As long as the higher gearing ratio is commercially sensible and the debt can be serviced out of GOC earnings, there’s no reason not to use this to improve measures of general government debt.

Privatisation also makes no difference to the net position, assuming assets are sold at their value in continued public ownership, and the proceeds are used to pay down debt. However, the StrongChoices plan put by the LNP at the last election, would have dissipated around half of the sale proceeds on pork-barrel projects (to be delivered only if the LNP won the seat in question). So, compared to the alternative, Labor’s management is fiscally responsible.

The only measure that is unaffected by balance sheet reshuffles (at least if it is correctly measured) is net worth, and the only way to increase net worth is for income (revenue and asset earnings) to exceed expenditure.

John Fraser’s performance was as expected, which is to say, deeply disappointing. As a colleague sitting at our table remarked, he came across as a politician not a Treasury secretary. Fraser repeated the Henry Review’s criticism of stamp duties and the case for not taxing mobile capital. But when I asked if that meant he supported land taxes, he squibbed the question, waffling on about what a great group of officials he was working with in the states.

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The Laffer hypothesis in Australia

May 16th, 2015 34 comments

I didn’t have time to respond, but the IPA brought Arthur Laffer out to Australia a month or two ago. For those interested, over the fold is a relevant extract from Zombie Economics.

Of rather more concern is the evidence that both the Secretary of the Treasury, John Fraser, and his Deputy for Revenue, Rob Heferen are adherents of the Laffer hypothesis or something very close to it. Fraser gave evidence to the Senate endorsing the Reagan tax cuts (based on Laffer’s hypothesis), while Heferen has claimed that something like 50 per cent of the revenue lost through a company tax cut will be returned through dynamic effects.

Although no issues are ever truly resolved in economics, this informal survey published by Ezra Klein is revealing. Klein asked various people about the tax rate at which revenue would be maximized. His respondents fell into three groups: left/liberal economists, who mostly gave answers around 70 per cent, rightwing pundits with zero credibility who gave answers around 20 per cent, and serious right/centre-right economists, who declined to give a direct answer to the question.

This suggests to me that the debate over the Laffer hypothesis has been won fairly conclusively by the left, and that those on the right would prefer to frame the question in the more defensible (though still, in my opinion, incorrect) claim that we face a long-run trade-off between equality and growth.

Read more…

Rethinking tax policy for Australia

April 24th, 2015 96 comments

The title of this post is taken from that of the recent Treasury Discussions Paper on Tax, entitled Re:Think. Sadly, as I point out in this Guardian piece, there’s very little evidence of rethinking from Treasury. Most of the paper could have been lifted straight from the Asprey Review of 1975, and the sensitivities of the current government have ensured a step backwards from the Henry Review, with carbon taxes and resource rent taxes now off limits.

Undeterred, I’m going to start on my own review. I’m going to try something a little different in blog terms. This post will be updated whenever I get a chance, both with new material and in terms of publication date so that each new version will appear at the top of the homepage, hopefully with the comments being carried with it. I’m putting in some headings, and starting off with an idea I mentioned recently, that of a tax on bank profits

Aggregates: Revenue, expenditure, budget balance, debt and net worth

Revenue options

* A tax on the super-profits of banks, reflecting their privileged position. Tax base $29 billion. Possible revenue $5-10 billion, or 0.3-0.6 per cent of national income/GDP.

* Reforming the treatment of negative gearing “Quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains. Revenue estimate: rising over time to $5 billion a year, or 0.3 per cent of national income/GDP.

Expenditure requirements

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Negative gearing

April 24th, 2015 17 comments

As I mentioned a while back, I’m planning a series of posts on tax policy. Since debate about “negative gearing” has been spurred by the suggestion that Labor might restrict it, this seems like a good time to cover the topic.

I’ll give my summary upfront, then go on. The problem is not negative gearing in itself but its interaction with the concessional treatment of capital gains. There are a variety of solutions, but the best is probably to “quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains.

Read more…

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Goodbye to CPD

April 17th, 2015 30 comments

Like Mark Bahnisch, Eva Cox and a number of others, I’ve resigned as a Fellow of the Centre for Policy Development. It’s a sad day, since CPD has done a lot of great work, and I’ve enjoyed being involved in it. But the leadership of the Centre has taken a decision to move to the right in the hope of being more relevant to the policy process. The most recent outcome has been a paper on tax policy that broadly accepts the Treasury view of the issue, and pushes for a broadening of the GST base, which means taxation of fresh food. This isn’t a new or innovative idea. Rather, it has been part of rightwing orthodoxy for decades. CPDs endorsement allows its advocates to claim some “left” support. That claim obviously gained credibility from having Fellows like Mark, Eva and me. So, we had no alternative but to resign.

I should clarify that, apart from a nice title and a publishing outlet, I wasn’t getting any direct benefit from being part of CPD. So, I’m making a statement rather than a sacrifice.

Identity Crisis

March 5th, 2014 32 comments

In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.

To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue[1], it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.

Next up: Why there is no net travel into the CBD

fn1. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.

Categories: #Ozfail, Tax and public expenditure Tags: