Shorten wins the tax debate

Bill Shorten doesn’t have a lot of public support, a fact that reflects his background as a machine politician with a penchant for self-promotion. For a long time he has been accused of pursuing a “small target strategy”, hoping to win by default against Tony Abbott.

The latest developments in tax policy ought to prompt ] a reassessment. The nature of policy debates like this is that the government holds all the cards: control of the political agenda, expert Treasury advice, and the capacity to manage the media with judicious leaks.

Despite all of this, Shorten has left Malcolm Turnbull and Scott Morrison looking flat-footed. Their preferred option of raising the GST rate and expanding its base is dead in the water, but not yet formally disavowed. Opposing it was an easy choice for Shorten, but still one that required him to override some supporters within the ALP.

The general assumption was that the government would soon announce Plan B. But Shorten has now beaten them to the punch. His proposals to limit negative gearing and scale back the concessional treatment of capital gains are more substantial than anything they are likely to contemplate in relation to property taxation. And Labor has already signalled willingness to limit tax concessions for superannuation.

So, unless the government is willing to do something really radical, involving an explicit break with the Abbott era, anything announced in the Budget will look like “me too”.

Update Immediately after posting this, I found this piece by Laurie Oakes, arbiter of the Australian political zeitgeist, making an almost identical argument.

116 thoughts on “Shorten wins the tax debate

  1. The implosion continues with Turnbull et al preaching armageddon over negative gearing while business and others lament his lack of policy

    AFR “This week spelled the final burial of the Coalition’s Turnbull Spring, when all things had seemed possible…without the big policy picture that a party in power should be able to project, the Coalition has reduced itself to series of isolated, individual policy fights which will produce only limited results – and on which it risks being politically bettered.”

  2. @Ikonoclast

    I’m sorry, but I’m none the wiser about how any of this relates to my original comments.

    On people’s ability to pay for amenities such as those provided by big cities, including Melbourne, I’ll note the following. Many, many poor people live in big cities in Australia and other countries, in the most part, I think, because big city economies simply could not function without low-skilled workers. Many, for example, provide personal services that cannot be produced elsewhere and imported.

    I think poor people are likely to value, and pay for, many big city amenities. They won’t be willing or able to pay as much as rich people, but they don’t need to because there isn’t a single market price for them. The price they pay—how much of a hit to their real wages they take by living in a big city rather than another location—depends in part on how nominal wages vary in different locations, and the spatial variation in wages for low-skilled workers doesn’t have to be the same as it is for high-skilled workers.

    For example, if low-skilled workers do not value big-city amenities at all, the wage premium they earn in big cities will have to fully offset the higher costs of living in order to attract them away from other locations. If high-skilled workers do value big-city amenities, their wage premiums in big cities won’t have to fully offset the higher costs of living. Additionally, of course, low-skilled workers may end up living in the less desirable parts of cities, where living costs are lower than the city average.

  3. @J-D

    People’s locational decisions certainly do have a range of impacts, some of which involve market failures. The example you give, traffic congestion, is an obvious negative externality associated with population growth. There are also positive externalities—for example, thicker labour markets (those with more workers and firms) do a better job of matching firms and workers, thereby reducing unemployment and boosting productivity and wages.

    These positive and negative externalities will be felt wherever growth occurs. Their existence means that market outcomes are unlikely to be optimal, but it doesn’t provide any guidance as to what an optimal outcome might look like; there’s no basis, for example, for concluding that too many people move to Melbourne, and it’s equally plausible that too few do.

    Other impacts aren’t market failures even though they are frequently used in arguments for government intervention. For example, higher housing prices play a far, far more important role in increasing living costs in big cities than traffic congestion. But the bidding up of land prices, and the consequent increases in housing prices, aren’t themselves market failures. Arguments that governments should encourage people to move away from big cities in order to reduce housing prices there (which, sadly, are sometimes made by prominent economists who should know better) have no economic basis.

    The general view of people who are experts in this stuff (such as Paul Krugman, who won his Nobel in part for his work on spatial economics) is that we don’t know enough to usefully intervene. At any rate, I doubt that we have the political capacity in Australia for sensible policy-making in this area (and the derp offered by some in this comment thread certainly hasn’t made me more optimistic). There was a time, when Ken Henry gave an excellent speech on the topic, when a fruitful national debate seemed possible. But good policy was never going to happen under Abbott, and, sadly, things have remained the same under Turnball. Policy in this area (for example, northern development) is still the preserve of mining and farming interests and NIMBYism.

  4. @GrueBleen

    No, I don’t usually answer for Ernestine and if I did make such attempts I would be wrong a great deal of the time. In fact, this is about the first time I have ever attempted to answer for E.G. and I made it clear that my answer was very provisional for that reason. By luck or good memory I happened to hit on an approximately correct answer this time.

    At times I debate with Ernestine (which is not answering for her) and it’s pretty much like when I debate with J.Q. I either end up in furious agreement or furious disagreement with said parties. When I disagree, I am often disagreeable and annoying. I’m trying to work on that; to debate views without being snarky. I have a long way to go.

  5. Luke Elford,

    I found a very interesting short paper at;

    It goes right to the issue of urban scales: title – “Scaling: The surprising mathematics of life and civilization.” A key paragraph which sums up their discoveries is this:

    “Infrastructural measures, such as numbers of gas stations and lengths of roads and electrical cables, all scale sublinearly with city population size, manifesting economies of scale with a common exponent around 0.85 (rather than the 0.75 observed in biology). More significantly, however, was the emergence of a new phenomenon not observed in biology, namely, superlinear scaling: socioeconomic quantities involving human interaction, such as wages, patents, AIDS cases, and violent crime all scale with a common exponent around 1.15. Thus, on a per capita basis, human interaction metrics (which encompass innovation and wealth creation) systematically increase with city size while, to the same degree, infrastructural metrics manifest increasing savings. Put slightly differently: with every doubling of city size, whether from 20,000 to 40,000 people or 2M to 4M people, socioeconomic quantities – the good, the bad, and the ugly – increase by approximately 15% per person with a concomitant 15% savings on all city infrastructure-related costs.”

    This is a very interesting empirical outcome. I understand from what they say about their research it is an empirical outcome. This sort of work might mean we do now know enough to usefully intervene. However, a caveat or two (or more) would come with that. If we researched people’s preferences well we might get an idea of how they rank as concerns all the socioeconomic quantities (both good and bad) which fit the 1.15 exponent rule and how they rank the benefits which come with the 0.85 exponent rule. The “items” would have to be listed in the surveys in a “methodologically neutral order”, if such is possible, with no reference to the actual exponent rules of course. We might find (I am just guessing here) different identifiable population segments who would “go” for different things. So there might be ways to plan somewhat “qualitatively different” cities such that another regional city in Victoria (possibly Geelong) could grow to that sort of minimal magic number for a city (the 400,000 mentioned earlier). So much depends on employment opportunities of course and on the geographical / water supply suitability of the area and so on.

    Alternatively, the insights from scaling research might indicate there is no economic point in trying to take the big population focus away from Melbourne. In that case, extra work and budgets would need to go into dealing with and ameliorating the socioeconomic “bads” which go with big city-ness. Better transport, better health, better education, better social programs and increased (enlightened) policing and so on.

    I am usually the biggest Chicken Little alarmist on this blog, yet I don’t see any great danger of Melbourne turning into a “hell-hole” if it gets considerably bigger. That will only happen if Victoria and Australia neglect the items I listed in the last sentence of the previous paragraph. Melbourne and Montreal are about the same population for their larger metro areas. Of course, there is a great deal of climatic and topographical difference. Nevertheless, Montreal has done some marvellous things which one would think Melbourne could emulate. Montreal has a wonderful underground metro and vast multi-level underground shopping malls and precincts under the city centre. Their cold climate is clearly an incentive to do this. But given the problems changeable weather, heat waves and climate change can and will cause Melbourne, building underground might be the go. I see they do have challenges but not insuperable ones in building underground. The stupidest thing possible is to build underground roads and tollways. That is sheer idiocy. They must build underground electric rail only when it comes to transport.

  6. @Ernestine Gross

    Now folks, let me remind you what Ernestine actually said so I can explain what my reply meant. What Ernestine actually said was:

    “Ikonoclast has covered the main points”

    And I replied: “He usually does.”

    Which clearly means I am saying that “he” (viz Ikonoclast) “usually covers the main points”. It was a slightly amused (well, I was, anyway) reference to Ikonoclast’s habit of “covering the main points” in just about every thread.

    Now if, Ernestine, you had said “He answered for me” not “he covered the main points” then, and this goes for you too, Ikono, I’d have known you were referring to him answering for you – about which you said nothing – and not to “covering the main points” which is what I was referring to.

    Are we all clear now folks ? Can I return to “towing the line” ?

  7. @BilB

    You write that ‘“many” people need to try a city of 400,000.’ I’m curious to know which ones you have in mind. Taking your figure as a rough one, there are few cities in Australia with populations between a quarter of a million and half a million, and none in Victoria.

  8. @J-D

    Try Geelong, J-D. It’s population in 2016 is 234,000 (approx.) and projected to keep growing. So, currently only about 16,000 short of your lower limit and will reach it Real Soon Now.

  9. @Ikonoclast

    Apology most definitely NOT required, Ikono, for this or anything else you say. It’s just that this was such a small, and I thought obvious, thing, I wasn’t expecting radically different deconstructions. At least, not from you 🙂

  10. @GrueBleen

    You write that ‘governments have been trying to make TROV more attractive for the best part of 100 years and so far haven’t succeeded’. You don’t write about what sort of things governments have done in an effort to make TROV more attractive (as a place to live). Possibly the things governments have done have been misconceived. Possibly they’ve been purely token efforts, or window-dressing. I don’t know that it’s possible to do anything better; I do think the question could be worth investigating. Also, even if governments have been making worthwhile serious efforts, the effects may have been cancelled out by other government measures. The following example is just off the top of my head, being based on the personal fact that I chose the place where I live (not in Victoria) partly to be near a railway station. As I recall, the Kennett government closed down a lot of railway lines in TROV. If there are significant numbers of people who (like me) find living near a railway station attractive, that closure would have made TROV significantly less attractive as a place to live. It may be that re-opening those railway lines would not be effective in making TROV more attractive as a place to live, or it may be that the cost would be too high for the benefit, but it might be worth discussing.

    The point you raise about immigrants settling in Melbourne (and not in TROV) doesn’t affect the argument, though. If it is possible (and I’m still not definitely asserting that it is) to make TROV more attractive as a place to live, the result would be either (a) more immigrants settling in TROV instead of Melbourne, slowing the growth of Melbourne or (b) more people moving from Melbourne to TROV, at least partially offsetting the movement of immigrants into Melbourne and again slowing the growth of Melbourne.

  11. @J-D

    “You don’t write about what sort of things governments have done in an effort to make TROV more attractive (as a place to live).”

    No I don’t, it being a messy topic extending over many years and I just don’t have enough lifetime left to become interested in a topic that will have about zero impact on my life.

    “Possibly the things governments have done have been misconceived.”

    Given the utter failure of governments to attract, or even force, people into TROV over at least the 60-odd years that I’ve taken any notice, I’d say that you might even have made a valid point there, J-D.

    “As I recall, the Kennett government closed down a lot of railway lines in TROV.”

    Yeah, and he sold off the electricity generating facilities (SECV), and amalgamated a lot of councils and a few shires etc and sold off a lot of school properties so that Melbourne now has a school site crisis and so on and so on. The railway lines closed were mostly seasonal produce carrying lines, not passenger lines. Though back even that recently, there wasn’t a real lot of daily passenger travel from TROV to Melbourne via rail – the single exception being Geelong-Melbourne which was, of course, commuting traffic of those who choose to live in Geelong but have to work in Melbourne. Both Ballarat and Bendigo are increasing somewhat as commute centres, but not at the volume of Geelong.

    Yes, if, apart from forcible moves such as the Worksafe shift from Melbourne to Geelong, ways could be found to make TROV noticeably more attractive than it ever has been before, then maybe Melbourne’s rate of growth will slow. Of course, there is the usual waffle about taking over various country towns (eg Warragul, Kilmore etc.) to make them into ‘dormitory suburbs’ of Melbourne, and as usual, absolutely nothing will come of it.

    The thing is, no matter what is tried, it will take decades to make it work (if it can be made to work at all), and in the meantime, Melbourne will have become intolerably crowded. The Melbourne suburban rail system is already seriously overcrowded with trains carrying more passengers than is deemed safe. Such is life.

  12. @GrueBleen

    True; but it seems unlikely that BilB meant ‘a place like Geelong’; ‘a city of 400,000’ is not a natural way of expressing that meaning.

  13. Referring to my post at number 6 above about scaling. The most economically effective trend might be for Melbourne to keep growing and TROV to remain as relatively low-populated as it is now. The assumption that the growth of Melbourne is bad is exactly that, an un-examined assumption. It runs counter to what scaling studies tell us about the economic advantages and some social advantages of cities scaling up.

    The issue lies in the social disadvantages of cities scaling up. The studies showed broad economic advantages from scaling up but a mix of social advantages and social disadvantages from scaling up. Thus the key issue is to get policies right to ameliorate or negate the social disadvantages and problems from scaling up. In theory, it’s simply a matter of using the economic gains from scaling up properly and putting them into social welfare spending.

    In terms of environmental protection, dense cities and lightly settled countryside might better protect the environment. More regional, low-density sprawl and more communication corridors though the countryside can only damage more environment and not save it. For a given population and a given primary industry level, a large, well-ordered city and more pristine countryside, rather than more regional cities, may be the best way to protect the environment overall.

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