In today’s Fin (subscription required) Sinclair Davidson has a response to my earlier article on the Greens’ economic policy. A couple of points in response. First, although he’s kind enough to describe me as “one of Australia’s leading theoretical economists[1]”, he’s happy to dismiss proposals for a Tobin tax as coming from the lunatic fringe, without noting that the late James Tobin was considerably more eminent than either of us as both a theoretical and a policy economist (at least that’s what the Nobel Prize committee thought). Similar ideas have been put forward by a more recent Nobel Prizewinner, Joseph Stiglitz. Of course, there are plenty of equally prominent economists who oppose the idea, but it’s certainly not outside the range of legitimate debate.
The second is a fallacy I’ve pointed out previously in Davidson’s work for the CIS. The Greens assert that middle-income earners pay more of their income in tax than high-income earners. Davidson denies this. His evidence? Australian Taxation Office data on the ratio of tax paid to taxable income. But the primary method of avoiding (and for that matter, evading) tax is the use of legal, semilegal and illegal devices for reducing your declared taxable income. Davidson’s ATO data proves nothing more than that the income tax scale is progressive. The Greens, and many others, assert that tax avoidance is sufficient to offset this progressivity. This is hard to prove either way[2], but Davidson has not even addressed the issue.
fn1. A backhanded compliment in the context of policy discussion, but still a compliment’s a compliment
fn2. My own estimate, FWIW, is that the two roughly cancel out.
John Quiggin 
Your point about the limits of taxable income as a measure of actual income is spot on. But it’s only fair to point out that it cuts both ways:
– the large number of taxpayers with very low taxable earnings is no evidence of ‘working poverty’, as is sometimes asserted. The cash economy is still fairly widespread amongst tradesmen.
– the apparent loss of progressivity in the tax system over the last twenty years may be illusory, as Treasury’s explicit strategy has been to ‘broaden the base to lower the rate’. They assert (in the absence of good hard evidence, just like their critics) that the true incidence of taxation is more, not less, progressive than it was in the early 1980s.
As for the Tobin tax and similar schemes, I’ve always understood that the problem is not so much whether it is conceptually a good idea but that, absent it being universal among nations (including ones like the Cayman Islands), it is easy to evade with offshore transactions. Without some way of getting this universality advocacy of it seems like an example of Davidson’s ‘wishful thinking’.
DD, I agree that tax evasion/avoidance is not confined to the top quintile. Evasion is probably most prevalent near the bottom. But I’m confident that in total, there’s more evasion/avoidance going on at the top than in the middle.
Your Treasury sources implicitly confirm this. If replacing income tax by sales tax (which is at most proportional) makes effective tax rates more progressive, then the tax system as a whole must be regressive.
On the Tobin tax, adoption by OECD countries would be sufficient – the tax could be applied, at a higher rate if necessary, to repatriation of funds from the Caymans etc. In any case, I don’t think that the fact that a policy proposal is not immediately practical is sufficient to count it as wishful thinking (unless it’s crucial to the platform as a whole).
John, this is really in response to your earlier post on the Greens, which I didn’t have time to think about. I’ve been pondering the notion of anti-materialism for its own sake. I can understand why you might have no time for a policy based on some mystical philiosophy. To insist that we all consume less food, clothing or entertainment just to comply with some abstract creed we don’t all share, would be as bad as the Taliban prohibiting music or enforcing beard length.
However, as you know, Richard Layard has been arguing that, beyond a certain point, income doesn’t increase happiness permanently. There is a transitory effect, which causes people in rich coutries to work too many hours. In addition, people want to keep up with the Joneses. Layard advocates an income tax rate of sixty percent to induce people to opt for more leisure, and at the same time as a pigovian tax on envy, an externality created by increasing one’s income. One might not be convinced by the argument, but there’s nothing metaphysical about it.
I haven’t read Clive Hamilton, but I suspect that this isn’t too far from his position. So I’m guessing you would characterise Layard as anti-materialist for its own sake too. But this kind of poistion is miles away from the Taliban, if it’s based on valid reasoning and an acceptable premise, namely that happiness – whatever it is exactly – is a more fundamental objective than material consumption.
My question is, what conditions would need to be met by a proposal to reduce GDP per capita, in order to not be just for its own sake? But there’s no urgency about the answer: when you are short of a topic will be fine.
james,
this doesnt answer your question exactly, but the problem with the idea as presented is that its superciliously paternalistic.
basically the point is that its taking the freedom for people to decide what makes them happy, and putting it into the governments hand, based on some research by academia.
if the mindless materialist slobs want to keep up with the joneses, the rest of us should let them. (and the great thing about our society is that if you dont want to be one of them, just opt out. turn off your tv, work three days and week, and when your car breaks down, just leave it there. this is what i have done and im pretty happy)
the general point is that freedom is more important than happiness.
there are many reasons for this, namely that its easier to define freedom (choice) than happiness, and that people who are free can chose to be happy or unhappy in however way they want.
the novel brave new world is scary (to most people) because they are happy but not free…(the question of creating a free society or a happy one was not settled when i was 17, but now i think i fall on the side of freedom)
if you want to here these thoughts from a real economist, check out this krugman article:
http://slate.msn.com/id/56497/
A real economist, c3po? As opposed to? I guess you didn’t mean Quiggin. Layard has pretty good credentials too.
Three brief responses: First, there are many situations where rational individual choices sum to collective madness. People often won’t choose something on an individual basis, but welcome it when it’s introduced on a societal basis. Obviously, something like a shorter working week would still need to be explicitly chosen by voters. Second, most people do allow the state legitimate paternalistic functions: taxing tobacco, mandating seat belts and so on. So there’s no absolute principle at stake here, and a government that goes too far will be voted out. Third, the statement that freedom is more important than happiness may have some operational meaning in your mind, but it has none in mine, and I doubt it could ever be a guide to practical policy making. Can you think of any occasion when a government consciously chose a policy that increased freedom at the cost of happiness or vice versa?
James I made some comments about happiness, responding specifically to Layard, last years. To summarise drastically, I don’t believe you can draw useful inferences from the usual self-reports of happiness.
As regards the broader issue, I’m all for the view that we’d mostly be better off trading off some material consumption for more leisure, more meaningful work and so on, and that a combination of social factors, employment structures etc make this difficult. But this isn’t the same as arguing that consumption is undesirable in itself.
I agree you can take Clive’s arguments in different ways. But I’d prefer to line up with ACTU campaigns to improve work/life balance than to focus on somewhat moralistic criticism of excessive consumption.
The most worthwhile investment is in health & medication, since improvements in these increases both the quantity and quality of life.
Smoking and Obesity should be illegal.
People should work whatever hours are required to increase the rate of innovation in health & med.
That answers my question, John. I had in fact looked at the archive before commenting; hence the ‘As you know…’.
I’m glad you agree that in considering arguments for a stationary state we shouldn’t mistake rational arguments for ‘moralistic’ ones, or misrepresent the one as the other.
Jack is right too, but I don’t quite see where his point slots in.
A couple of quick points:
First, Prof. Quiggin’s point about top income-earners reducing tax liability by reducing taxable income needs to be broadened by including tax expenditures (see Research Paper #8, 2002-2003 (Parl. Library)). These work by reduction of liabilities and are estimated to be worth about $30b annually at the Federal level alone.
Second, I’m waiting for somebody to address the issue of national wealth (as opposed to income or tax) as a serious economic management issue. This would be a perfect issue for the Greens, because it opens the door to valuation of ecological services.