Among the many nice things about being a Federation Fellow, one of the nicest is the way it infuriates some of my opponents[1]. I mentioned the IPA a while back and now Peter Saunders of the Centre for Independent Studies has had a go in today’s Fin. He’s responding to a piece of mine developed out of this post on bracket creep, though the article switched the focus from Saunders to an earlier presentation of the same argument by Peter Costello. The same piece produced a somewhat incoherent letter from Sinclair Davidson of RMIT, who couldn’t come up with anything better than to say that my article was “drivel”.
Anyway, Saunders wants to argue that tax rates and economic incentives influence location decisions[2] and decides to use me as an example, saying that I moved to Queensland to take up the Fellowship[3] (he even quotes from this blog). In fact, as my handful of long-term readers may recall, I moved to Brisbane in late 2002 and didn’t get the Fellowship until March 2003. My reasons for moving were much the same as those of the other 50 000 people who made the same move that year, and are summed up here.
The Fin is subscription only, but I’ve added some relevant extracts over the fold
fn1. It’s not very noble of me to take pleasure in annoying my opponents, but I can’t deny that I do.
fn2. To be boringly serious, I don’t, of course, deny that incentives affect decisions, but I think there are many more significant incentives in our system than the top marginal tax rate.
fn3. Saunders is open to a tu quoque here, having recently moved to this high-tax hell from the dynamic UK.
Here’s Davidson’s letter
Taking John Quiggin (“Creep claque’s silly figures”, Opinion, May 20) at face value the federal government should immediately raise taxes to 100 per cent of all income.
By selfishly demanding the government restrain their tax-and-spend policies, high-income earners are impoverishing us all. What drivel. It is not true that any society has been taxed to prosperity. What drivel!
In fact, Charles Adams in his excellent book For good and evil: The impact of taxes on civilization has shown that high taxes have detrimental impacts on society.
Sinclair Davidson,
I hadn’t heard of Adams, but Google reveals him to have some equally interesting views on slavery and the American Civil War
The next day there was a letter in response from Brent Howard, under the heading “What Drivel! Quiggin Was Misquoted”, making the point that
Other readers might turn to the work of leading tax academic Joel Slemrod, who observed in 1995 that the existing cross-country literature provides “no persuasive evidence that the extent of government has either a positive or a negative impact on either the level or the growth rate of per capita income”.
If you happen to read this, thanks Brent!
Here’s the relevant extract from Saunders
It is odd to hear an economist arguing that monetary incentives and disincentives do not affect people’s work-life behaviour. In Quiggin’s case, this is particularly ironic, for he owes his present position to the theory that incentives can and do influence how and where people work.
Worried about retaining the best brains in our universities, the Australian Research Council last year introduced “Federation Fellowships” aimed at encouraging “outstanding Australian researchers to return to, or remain in key positions in Australia”. The principal inducement was an “internationally competitive salary” of $235,000 more than double what most professors in Australia get paid.
Notwithstanding his insistence that incentives don’t matter, Quiggin successfully applied for one of these Federation Fellowships, announcing on his weblog that he had been given “one of the biggest awards going for Australian academics”. He moved from Canberra to Queensland as a result.
It seems that not even left-wing intellectuals are immune from monetary inducements.
I must say I like the bit about ” the best brains in our universities”.
John Quiggin 
Your footnote 3 is right on the money.
Saunders says in his piece “we cannot know, for example, how many bright, innovative and entrepreneurial people overseas have been put off coming to work here by our punitive tax rates”
Well, not him, obviously. Also not the other 100,000+ immigrants who arrive here every year, and the many more who are waiting in the queue.
He also says “It seems not even left-wing intellectuals are immune from monetary inducements”.
Unlike right wing intellectuals, who are obviously are so immune.
If all these bright and innovative people want ot go and live in Hong Kongand pay buggar all income tax, they can. But there’s a catch. You’ve got to actually live in Hong Kong.
I’d rather live here. So would Peter Saunders.
I also like living here, but I’d also like to pay less tax…and I vote.
I once came across a quotation from Confucius that went something like “there are few better pleasures than watching an old friend falling off a roof”.
Dunno – I moved to QLD from Coffs Harbour because of the pervasive poverty and defeatism of the town and the shining opportunities in Brisbane. I didn’t want to live in Sydney because it is a hole (obviously that only applies when you can’t pay north of a million dollars for a house).
Tax rates are pretty meaningless really. I never base my decisions on them.
Also, as an ex-rem analyst in a bank, I can assure that I have seen many people offered roles that put them well (very well) into the top tax bracket, and I’ve never heard of anyone knocking one back because of the tax load. As for as I can tell, this going overseas to avoid tax meme is a furphy. I know people who go overseas for many reasons – better pay, more exciting roles, a more exciting life. Never heard anyone mention tax.
As far as I can tell, this elite group is well able to draw the link between the tax in Australia and the public good it provides.
Besides which, people are always complaining of how expensive it is to live in the UK, Europe or the US. Seems to be not so wonderful as it is painted.
..Just following on from Dave Ricardo’s point: You can move to a low taxing country, but then if you get sick, or have a child, or have an elderly relative, or need any other form of social benefit…
It’s OK for a few suits, not for the rest of us.
No, tax wouldn’t be great determinant on where I live but as a matter of principle I think there are more rational ways of collecting even existing levels of revenue than we do now that may yield non-trivial marginal improvements in incentives. I would like to see more imaginative disucssion of tax reform. Why not transfer more of the taz burden to polluters, rentiers and rich heirs- introduce carbon taxes, greater reliance on land tax and bring back exorbitant death duties to encourage a culture of philantrophy(for instance, either leave 80% of your inheritance to the tax man or direct it at your favourite recognised charity).
Yes Jason I agree.
It is a remarkable fact that we recently had a huge national debate about tax reform in which the government voluntarily spent more political capital this issue than I’ve ever seen any Government do in any democratic country and none of these issues ever made their way into the debate. Instead we got a switch to a broader indirect tax base at the expense of a large increase in compliance costs. All of the things you mention are straight out of Eco 101 – they go back around a century at least to Henry George and Arthur Pigou but we didn’t discuss any of them in the ‘great tax adventure’ we had a few years ago.
Sad.
Why are we so unimaginiative about how we use the economic textbook?
Jason, I agree entirely and pushed all these ideas in my book Taxing Times.
I had thought this book had sunk without trace, but it now turns out to be have been surprisingly influential – more on this tomorrow.
John’s quite right, of course, that there are more serious financial incentive problems around than the top marginal income tax rate; you have to suspect the motives of those arguing otherwise.
And, yes, there are probably other ways of raising revenue that are both fairer and more efficient. But Nick underestimates the political difficulties of introducing reforms with large distributional consequences – the losers always scream a hell of a lot louder than the winners cheer.
Against all this, I get really annoyed at a common myth on the left that we could get a big boost in services by raising marginal rates on ‘the rich’. The fact is that the very rich have only a relatively small slice of Australian taxable income – the bulk of revenue is always going to have to be raised from the middle class, because that’s where the bulk of the income and consumption is. Maybe people should peruse this document before talking about tax brackets.
Who said I thought that these tax reforms are easy? They’re not. That’s why they require patience and constant persuasion – and consistency of message from a group of zealots whose ranks gradually swell in the opinionosphere. Before you know it the politicians are gnashing their teeth, and telling us “It may be hard, but there is no alternative”. This was the case with tariffs. There was nothing politically easy about tariffs, and there was nothing easy about tax reform circa 1985 or 2000. The last reform stands as a kind of symbol of the exhaustion of the economic reform agenda – in which politicians showed that they were anything but ‘poll driven’, that they really were prepared to expend political capital.
Alas when they could have been expending their political capital on something useful – congestion taxes, environmental taxes, death duties, land taxes lower marginal tax rates for those moving from welfare to work – they got fitted up with a complete dud – a major upheaval of our indirect tax system with small allocative efficiency gains and huge compliance costs arising from drawing around a million new tax payers into the system. A sad story all round.
Is is true that the purpose of the Federation scholar scheme is to attract scholars to Australia who would otherwise not be here, and if so, are you saying Q that this objective is not achieved in your case?
The stated objectives of the scheme are:
“The Australian Research Council’s Federation Fellowships are innovative and highly prestigious awards designed to develop and retain Australian skills.
The introduction of the Federation Fellowships represents the ARC commitment to support excellence in research, attract and retain world-class Australian researchers in key positions, and create new rewards and incentives for the application of their talents in Australia. ”
In my view, there’s something here for everybody. Since my application didn’t make much of the possibility that I might leave the country, and since my previous research output did not suggest that I was under-incentivised, I will immodestly assume that my award came under the heading “support excellence in research”.
Although the money is appealing of course, the FF also has big psychic rewards, and not just those mentioned in the post. After a long period in which managers have ruled the roost it was an affirmation that universities are really about scholarship.
I allus wondered how a professor could afford to buy in Indoroopilly. Now I know.
“universities are really about scholarship”
That is true of the G8, though it would be nice if they were also good at teaching.
How much scholarship goes on at the converted TAFEs and CAEs that are now branded as universities?
That review of Adams’ book on the civil war makes interesting reading. It says that Adams shows that northern interests wanted to coerce the southern states out of secession because “the South paid roughly four times as much in tariffs as the North did” so the North was afraid of losing the tariff revenues from the highly trade protected South; and also because “the Confederacy’s low tariffs would draw trade away from the North”, so the North was afraid of losing business to the highly free trade South.
Just a touch inconsistent, no?
If Adams arguments in his book about taxes are as badly made, they would be hyper-drivel. Let’s hope for his students’ sake Sinclair Davidson doesn’t make them read it.
.
In any case, if tariffs had been the issue, secession would have taken place at the time of the nullification crisis. The South seceded only when Northern votes elected an anti-slavery president.
I’m surprised that Saunders would team up with someone as silly as Davidson.
Now, now, JQ. That reasoning doesn’t work. There were several different factors at the time of the nullification crisis. One was that Andrew Jackson was seen to be a strong president (Lincoln wasn’t, until he went and showed them). Another was that AJ was a southerner, so undercutting the chance of all southern states getting together (Lincoln was the first northern president for a long time who wasn’t compromising with southern interests).
But I would say that the slavery issue provided a principle for interests to crystallise out around, as well as energy for the policies. I do think it made a lot of difference, but not that it was the sole driver; it also worked catalytically, giving both north/midwest and south a focus that abstract economic issues like tariff burdens did not. Tariff pressures certainly fed in – and don’t forget, Morill et al were really ramping up tariffs for protective reasons around then, whereas before they had been more nearly revenue oriented.
I kept thinking today about John Q’s comment that he got pleasure from infuriating his opponents. (I sometimes feel the same way, so no specific moral judgement directed at John).
So what’s the source of John’s pleasure? Its almost as irrational as me being envious of his Fellow’s purse. His monetary happiness doesn’t hurt me and his opponent’s grief doesn’t really help John. I say ‘almost as irrational’ because he has a claimed ‘reason’ for deriving the pleasure — he is dealing with an ‘opponent’ and intuitively, I guess, you want your opponents to suffer even if the suffering brings no direct benefits to you. This is somewhat strange — what is the source of utility interdependence here, why are we envious and at times, well, somewhat spiteful?
So (as usual) when confronted with life’s complexities I asked my 16 year old daughter about this and she said ‘well its nice to think you can at least manipulate and control your opponent’s emotions even if you can’t stop them thinking or acting in ways you dislike’.
I can’t do better than this but still don’t quite get it.
I mean really — it’s far easier and more sensible to move money than it is to move people, if you want to escape high rates of taxation. They even have special places set up for this – there called tax havens.