It’s time, once again for the Monday Message Board. As usual, civilised discussion and absolutely no coarse language, please.
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John Quiggin 
Lately it seems to be the ALP that is saying we need more tax cuts and the Liberals that are saying that more tax cuts currently seem unlikely. What are we to make of all this?
Did anybody see reports of the KPMG report calling for a cut in corporate tax rates? I personally think that they should be cut to 0% and we should simply tax dividends instead. That way it would allow companies to reinvest earnings (creating jobs and a bigger superannuation pie) instead of relying on debt. Expanding economic capacity in this way should also put downward pressure on inflation.
I heard Beazley say the other day that the ALP has a ‘comprehensive plan’ to deal with climate change. Is this true? Of what does it consist? Is it any good?
I was looking the other day at an EU report on merger and acquisition activity involving EU countries and was surprised to learn that market capitalisation in the EU grew from 30% of GDP in 1990 to 113% of GDP in 1999. The same report indicated for comparison that, in the US, market capitalisation increased from 50% of GDP to 192% over the same period. These numbers give real meaning to the word “bubble”.
The same report surprised me even more by indicating that M&A activity in the EU increased from less than 3% of GDP (reading from Graph 15) in 1991 to something like 16% or 17% in 1999 (comparable figures for US are given as similar for 1991 and nearly 20% in 1999). These numbers prompted me to wonder about how much influence M&A activity has on reported GDP. Unless an acquisition is financed purely by a share swap, the money has to go somewhere. Does anybody know of any work on this?
Companies get used for a lot of things – if their tax rate is zero they’ll be used to defer taxes by parking profits. This already happens with trusts due to Australia’s very liberal trust laws (profits are parked at the company rate of 30% rather than the marginal personal tax rates of the trustees which are usually much higher – 47% including medicare levies).
Therefore my preference is to simplify the tax system by removing all distorting influences. Pick a top rate (eg 30%) and apply it across the board: 30% on company profits, 30% top marginal personal tax rate, 30% short term and long-term capital gains.
That would remove all incentives to move money around for tax purposes. If you have $1 of profit the decision to pay it in salary, pay a dividend, or reinvest for (presumably) capital gain will be tax-neutral.
Did anyone see this excellent article in WaPo? Bush is now arguing that the USA must stay in Iraq because terrorists would use Iraq’s oil to blackmail the West, pushing oil prices up to $300 or $400 a barrel. The article de-bunks his argument on several levels.
Meanwhile, war cost estimators say US$2 trillion may be an under-estimate!
If a company retains $100,000 in profits over a number of years and in the process pays $30,000 in taxes is it reasonable that when the owner sells the company for $70,000 more than the original purchase price the owner has to pay another round of tax due to the capital gain? In such an situation the owner is better off closing down the operation and bleeding the money out slowly over a number of years. Given the effort required to establish a business operation it is quite a perverse incentive that encourages the active destruction of social capital (ie the customer and employee goodwill as well as the processes inherient within a business operation).
When an asset such as a company increases in value it is typically (although not exclusively) due to either retained earnings or a change in the projected earnings. Both of which are income flows that are already taxed (or will be taxed). As such capital gains tax is in most instances simply a case of double taxation.
Given a general tax framework based on taxing income it seems to me that it is reasonable enough to tax company dividends (at source if necessary). However taxing company retained earnings and taxing capital gains is quite inefficient as well as being quite unfair.
The term “debate” in Australia has been used recently in terms of action on climate change. It is strange that what some people see as “debate” is to doubt the existence of a changing climate due to human influence. We should be debating what to do given our current state of knowledge. This I believe is what the Stern report was trying to do, but we still get crazies (i.e. Boltians) debating existence. Will the media every move forward or will be constantly in a state of denial?
Also the 1% of GDP expense on mitigation of climate change is a good outcome as it gives a definite number. So we should expect Australia to spend about $2 billion on clean technology each year? I’ll be checking the budget to see if that is lived up to. It will probably go to the coal industry and nuclear power cause of the federal government’s current totalitarianism in terms of climate change technology. If they really believed in the power of market forces, and in the threat of a changing climate due to emissions of greenhouse gases, we would put a cost on emissions.
I seem to be in the minority however as seeing this a totalitarianism. One form of state control is ok, but others are not. Welcome to the world of double standards.
If you haven’t noticed then let me be the first to inform you that the Federal government has lots of double standards when it comes to personal freedom and open markets. I think most people who spend any time thinking about politics have noticed this also. In fact most parties are indifferent to such double standards and happily formulated policies that reveal contradictory views regarding freedom.
I think it is this deficit in the political market place that motivated John Humphrey to started the LDP with individual freedom from government coercion as the central plank in party philosophy. The next federal election will give us a good indication as to how many early adopters there are for this type of political product. Whilst I think it is idealistic to expect any overnight end to government coercion it is heartening to know that at least one party is dedicated to seeking out opportunities to remove this coercion. If nothing else it should help liven up debate.
Lefties want economic control, but care less about social control. Righties traditionally want social control, but care less about economic control. Although in Australia that really is no longer true: the current, supposedly right-wing government spends vast amounts of taxpayers money propping up and bailing out inefficient private enterprises such as farming, sugar cane, various manufacturing industries. And they will happily see the population pay 10X the tariff-free rate for goods to protect a minor constituency (bananas). But apart from one or two notable exceptions, the current government does not seem to care much about social control.
There’s no-one left to vote for. Time to emigrate.
There are not many real option left as far as emigrating goes. It seems that freedom is everywhere in retreat.
I hear they have barrels of freedom in Iraq. Nasty climate though. 😉
New Hampshire looks promising: their license plate and state motto reads Live free or die.
(although you might contest that such a motto on a license plate is something of an oxymoron.)
“In such an situation the owner is better off closing down the operation and bleeding the money out slowly over a number of years.”
Well, only because of more distortions in the tax system due to tax-free thresholds and welfare payments that make it advantageous to be on low income.
Not that I am necessarily against tax-free thresholds, but their presence will always distort the decision making process when the profit is small enough.
Although, in reality in Australia most small business owners will pay almost no tax on a $70,000 gain (you get the 50% normal discount if you have held the asset for 12 months, then the 50% small business tax concession provided you and your related parties hold a controlling stake in the business and your assets don’t exceed $6M (so now we’re down to 11.25% tax assuming your original marginal rate was 45%), and then if you roll the remaining tax bill into super you pay only the super contribution tax (15% of 11.25%, so about 1.6% tax on $70,000 gain)). In fact, you can pay 1.6% on a $6M capital gain assuming you hold no other assets.
But I take your point on the double taxation. The taxes paid on profits should offset any ultimate capital gains tax. Can’t you achieve the same thing by paying all earnings out in dividends to a related entity that then loans the money back to the business?
I thought that only applied if the asset had been held for 15 years or more.
Re: Freedoms and Government.
It really depends what people mean by freedom. Someone says, “I should have the freedom to drive my car anywhere I want.” Yet that freedom is presupposed by the fact that a collective agreement, between a community and its political representatives, was made to build the road (to somewhere).
If a majority of the people do not see the worth, then the road will not be built. Someone then yells and screams that their freedoms are being violated. Compromise is in the nature of Democracy.
People who stand up and tell you that you are violating their freedoms by not allowing them to do EVERYTHING that they want to, show little regard for the democratic process. There are lots of little utopias that people create for themselves (so that they can do as they please). The problem is that most of the time they are populated by loony religious nuts like the Branch Davidians.
Having said that, I think that more variety in the political discourse is probably better.
15 years gets you a 100% concession on CGT, no questions asked. But you can still get the 50% concessional treatment (on top of the normal 50% concession) if you’ve held the asset between 12 months and 15 years.
Out of date (it is now easier to qualify), but the ATO website has the details
Sure, but few people are that extreme. There is little doubt we’re massively over-governed. The costs added by government at the margins nowadays far outweigh any benefits. In my home state of SA the government has chewed up billions and billions in extra GST revenue for absolutely no benefit to the state whatsoever.
One of the interesting things about the Howard years has been watching him throw away his small government principles. When faced with a choice of reducing taxes, or buying votes Howard has always been chosen to buy votes.
The baby bonus is a great example. Government takes the taxes. Then gives back a three or I think its now four thousand dollar bonus on the birth of a child. The more logical option from a libertarian’s point of view is simply to reduce taxation by the same amount. But that would give no political benefit to Howard. The way it has been implemented he is able to buy good will with a certain politically important segment of the electorate.
It has been instructive for me, as someone who does not believe in libertarianism, to see how we get tax levels we do.
Exactly. And all the while justifying vote-buying with the argument that at least the country is better off if the other side are not in power. But once you buy enough votes, your policies becomes so corrupted that policy is no longer relevant, and hence all parties are indistinguishable.
This process is not yet complete in Australia; if the ALP ever wake up and shed their union and latte left baggage it will be game-over.
I have a question for the hardcore libertarians. Is someone free if they receive no education other than their parent’s doctrine that the world was created by the flying spaghetti monster? Is that person who understands nothing of economics, reason or science, and only knows the doctrine of the flying spaghetti monster as espoused by their parents, free in a real sense?
How would a zero or near-zero tax system which is totally non-coercive stop this child abuse? And for that matter, how would such a system stop any form of child abuse?
Most libertarians are not hardcore in the sense you describe. Just as most lefties are not communists, and most righties are not fascists.
I don’t believe in zero tax. But pushing 40% of GDP (or maybe more) in total tax take is simply absurd.
Friedman in “Capitalism and Freedom” – something of a moderate libertarian manifesto (IMO) – speaks of exactly these issues. Most generally, he points out that children are not “responsible” individuals and therefore decisions must be made for them by others. But given the necessity of education for social stability, nor can their education be left entirely to flying-spaghetti-monster-believing parents. He puts it quite eloquently:
He then goes on to discuss consequences of this for government intervention in education, mainly concluding that the government should set minimum educational standards, and then advocates a voucher-type public/private system, not unlike the system in Australia. He also distinguishes vocational education from “basic” education, pointing out that the state should not be paying for vocational education since the benefits largely accrue to the individual in that case.
Somehow, I don’t think that we are heading to a one-party state quite yet. In fact I think that it’s elements like the latte left who keep the bastards honest. How can you hide from the chattering classes? Graft and corruption doesn’t stand a chance when the population feel free to gossip and muckrake. A totalitarian state wouldn’t put up with it, but it keeps our politicians somewhat honest.
I want a tax burden like we had in 1901.
I was look through my regular blog roll tonight when I came across this:
http://www.realestatejournal.com/buysell/mortgages/20061106-ip.html?refresh=on
It appears that the US housing market is now in a full flung decline. A graph that I saw recently showed that the housing boom in Australia was larger than the boom in the US and the UK by at least a few percentage points. I wonder if our Federal Reserve Bankers will ever admit that they left rates too low for too long, thus fueling the speculative housing boom?
P.S. Is deflation really that big a boggey man? I would have thought that a bit of deflation every now and then would be a good thing. Keeping us honest, so to speak. But as usual everyone wants to claim that what they’ve got is worth a kazillion dollars.
And a lifestyle to match?
“P.S. Is deflation really that big a boggey man? I would have thought that a bit of deflation every now and then would be a good thing. Keeping us honest, so to speak. But as usual everyone wants to claim that what they’ve got is worth a kazillion dollars.”
I agree with this, but my understanding is poor. I found a clear trend that real GDP growth is negatively correlated with inflation (i.e. high inflation, low GDP growth), right down to 0% inflation (i.e. the higest yearly GDP growth happened with very low inflation). The data seemed to fit a linear trend fairly well. Except for deflation, this seemed to be uncorrelated with GDP growth (insufficint data I guess).
With this in mind I don’t see why 2-3% is the target range? Why not something like 0-1%? Given this data, that would achieve the macroeconomic benefits that most governments want, i.e. high real GDP increase with the added benefit of a stable currency.
The only argument I can see against this is that it decreases the amount by which people’s wages go down by (in real terms) without renegotiating each year.
Also, it would be political suidside in the current political climate. If the control of inflation was only interst rates and this was the goal, they would shoot though the roof. But I guess that is the kind of inflexability you get when you make grandous claims during an election campaign.
With respect to the very first post in this thread by Terje – I’d think it was obvious that Liberals will wait until the most opportune political moment to offer reductions in tax rates. Labour’s claimed policy of reducing taxes at that point would offer no policy difference to the gov’ts.
Smiley,
Lets imagine that you owe the bank $500,000. And image that every year the value of a dollar (or the effort required to produce a dollars worth of stuff) is increasing. You might feel a little screwed.
Post WWI there was a deflation induced across most of the British Commonwealth caused by Churchill putting the pound back on the gold standard at an unrealistic exchange rate (between gold and pounds). It was not an insignificant component contributing to the Great Depression. John Curtin made some noise about it in Australia at the time. Essentially anybody who was in debt had their debt revalued upwards. Tenants were now paying more rent in real terms. Businesses were paying unsustainable wages. Something had to give and by the end of the 1920s it did. Of course their were also other factors.
In the modern context deflation also nobbles monetary policy that is based on targeting interest rates. If deflation is at 10% per annum then with nominal interest rates at 0% you still have real interest rates at 10% and monetary policy remains too tight to escape the deflation (because nominal rates can’t drop below 0%). This is of course one of the reasons why targeting interest rates is a silly construct but it remains a paradigm widely embedded in economic thinking.
Deflation hit Japan through most of the 1990s and was the prime cause that brought an end to the Japanese economic miracle. It stalked the USA in the late 1990s and helped cause the asian financial crisis (due to these currencies being fixed to the US dollar much as the Austalian currency was fixed to the pound in the 1920s). In the USA it caused a general spike in bankruptcy and also brought on the tech wreck.
Deflation is not a benign pay rise. I would not wish signicant deflation on any nation.
Having said that Britian had a very slow deflation from 1800 to 1900 during which the general price level halved. Most economies could cope with such a slow deflation. This deflation was essentially due to a slow doubling in the value of gold that occured in spite of at least two major wide spread gold discoveries (California and Australia). Economic growth such as Britain enjoyed in that century is naturally a little bit deflationary.
Regards,
Terje.
Or if it were the other way round, you might tend to delude yourself, that because you’re older (and earning more inflated dollars), you are also wiser. When infact, it was just inflation that made you feel smug. And besides, you spent so much more money paying for those high interest rates, that the value of the asset that you payed $500,000 for, better have risen by as much.
Deflation discourages you from getting into too much debt. I would actually say that was a plus.
Right after the property market had just gone through a humongous boom (read: humongous inflation). Cause and effect.
Likewise, you could also say inflation is not a benign pay rise (assuming that the inflation has worked its way into your pay). And roaring inflation of 10% will probably cause roaring deflation in the not to distant future. Given that most of the Reserve Banks around the world hobbled the measurement of inflation in the mid 90’s, the 3% target is probably way off the actual mark.
Inflation is nasty for people at either end of the life cycle. If you’re young and starting out in life, or old and retired, inflation can only hurt you. No wonder the biggest demographic in our society (at the moment) weren’t worried about the inflation that occurred in the last decade. It was all good, as some say.
So in summing up:
1. Roaring deflation is nasty.
2. Roaring inflation is nasty.
I’m not sure I have actually learned anything. Oh, except that governments (and Federal Reserves) should be smoothing the bumps out (instead of trying to create booms, followed by busts, for the next government to fix). But maybe I already knew that.
Smiley,
You said:-
Agreed. The difference is that inflation has been institutionalised by our system of monetary policy. And that system (due to poor design) does not easily escape from “a bit of deflation every now and then”.
I mostly agree with your other points.
Regards,
Terje.
Terje, I think what is implicit in your comments about deflation is that it is harmful if there isn’t a proper transition – not that it is intrinsically harmful.
The thing is, inflation is intrinsically harmful in that way, because it causes a wealth transfer from everybody else to the money suppliers (now, governments and their emanations). That may of course be offset by whatever they do with the funds. But with deflation, the wealth transfer is the other way, and – as you note – ordinary economic trasactions then trickle it around fairly automatically. There is no need for a further correction process.
Of course, transitions are indeed very significant. British deflationary processes included things that moved relict subsistence activity into the cash sphere, e.g. the commutation of tithes. These changes were handled badly, and thus had casualties – but it doesn’t need to be so.