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.
John Quiggin 
I’m sceptical about the effectiveness of raising income tax for the higher end of town without tackling NG, capital gains and plain old evasion (generally offshore) but something has to be done.
The Edison story has drawn the attention of the Quote Investigator. The first record found was from a long-time associate of Edison’s, and it was subsequently implicitly confirmed by Edison himself, but both men’s testimony was recorded long after the fact, so it’s practically certain that Edison said something of the kind, but impossible to be sure what the exact original statement was (in particular, the number of things that reportedly didn’t work varies between accounts).
(More details can be found by looking up the Quote Investigator’s full report.)
The AHTQ government? Is there a silent Q in Morrison? Fixed now, thanks
It is a total circus, particularly when it is laid out in that way.
Perhaps the real solution is more of one and a little less of the other with high income earners carrying the larger load and the tax free thresh hold pulled back several thousand dollars as well. This coupled with the adjustment to the medicare levy, we are getting closer to some intelligent fiscal management. Next adjust the insurance bonanza, reduce negative gearing, reinstate the carbon price, and we might be slowing the decay.
I’d also like to see how much the Government were being ask to contribute to the car industry against how much they have lost in tax revenue with that industry’s collapse.
Maybe analysis of income tax without looking at wealth is doomed to be partial and inequitable and pointless. Is for example a 1% property tax the answer. Maybe deferrable till sale for retirees but no exemptions. Could be part of a package that is sort of tax neutral eg no stamp duty. Don’t worry, I am dreaming but is it the sort of thing a responsible Federal Governent could take a lead on. Would it appeal to a treasurer steeped in the real estate sector? Nope.
Here’s one I haven’t heard yet: Sell Tasmania to China and lease it back. Is that one off the table?
Well David Allen, after the climate change related natural disasters in Tasmania it sounds like you are suggesting a fire sale.
They are a number of ways that would work and have been raised by many people.
It’s not just finding a 1000 ways that don’t work it’s flailing around to try and find one that is acceptable to them and their backers.
If they can pull a swifty on the general public and sell a pig in a poke that would be the prime option second is blaming someone else because the con job went belly up and they were sprung. Third is doing nothing of real value or use and kicking the problem down the road for someone else hopefully a future Labor government which they can then kick around.
A couple of points.
It is not correct to say Edison invented the light bulb. The idea of “all-at-once-invention” by isolated genius is a fallacy. A great many developments and a great string of people and teams are needed to develop a technology, any technology, over time. Sometimes there are key figures for certain processes in the development of an invention. Joseph Wilson Swan, English physicist and chemist, arguably played much more of the scientific and technical role in the development of the light bulb than did Edison. It would be much nearer to the truth to say that Edison got the patent on the light bulb and drew economic rents from his “ownership” of the idea.
On the tax issue, it appears that Mal and the Neolibs want no solutions. When apparently intelligent people politicians advance a string of stupid ideas when the right ideas stare technically competent people in the face, we can reasonably infer that this is deliberate misdirection by said politicians. They want no reforms (in the old-fashioned, progressive sense of the term) and will rant, obfuscate and filibuster so that the cows never come home, the chickens never roost etc. in the brains of the deliberately ill-educated, misinformed and misled public. The dreadful standard of government in this country is a farce rapidly becoming a tragedy.
@Ikonoclast
Then isn’t it a good thing that John Quiggin didn’t say that?
What he actually wrote was
Not the same thing, is it?
Although it does turn out that what John Quiggin wrote wasn’t accurate, either, in the sense that the remark under discussion was originally made not in the context of work on lightbulb design but in the context of work on the development of a new kind of nickel-iron storage battery.
You may also be interested in the following line lifted from the Quote Investigator’s citation of the original reference from the biography by Edison’s associate Walter Mallory (with my emphasis added):
And I think you’ll find if you look into it that it’s not correct to say, as you do, that ‘Edison got the patent on the light bulb’; it is probably closer to the truth to say that he was one of several people each of whom had a patent on a light bulb.
On the second point, pre election Abbott promised to axe the tax yet retain the compensation for the tax thereby swallowing the bait hook line and sinker.
Panama Papers should lay to rest *forever the trickle down concept. This should give Turnbull an opportunity to slug the rich but as he is one, and so obviously enjoys being one, the chances of this happening are close enough to zero.
*forever being a political not philosophical term.
@Ikonoclast
On your first point – Yes .Another good example is Mark Zuckerburg .I’m assuming the ‘The Social Network’ movie was accurate as he didnt sue anyone. He stole/ bought / swindled/ appropriated the various elements (the (originally woman bullying) comparison element was his). Often the ‘genius’ who gets remembered is the one who pulls already existing parts together and presents them as a coherent whole. Bill Gates(via lawyers) and Sigmund Freud are also good examples of that but there are many more. Yes ‘ownership ‘ is key. There is evidence that Einstein had alot of help from his first wife- who was also, unusually for back then, a physicist. Apparently the very first registration of his first relativity paper was under both their names . There is alot invested in the idea of the lone genius.
As to your second point – I dont think the government wants solutions or reform either .The only changes they want would push us in a direction we have already gone too far in and the public wont take any more of. So do nothing ,leave things as they are and let wealth continue to accumulate at the top anyway. In the absence of war or similar emergency going further to the (socially Conservative economically Libertarian) Right will need to be a slow process of making us more greedy and fearful by cultural engineering like John Howard did. The legislation should follow but not precede the cultural change or the project will fail as the 2014 budget did.
Empirical work estimating the Mirrlees model (Saez etc) is an interesting way of thinking about the optimal MTR. It is a tough issue and I don’t share your confidence though admit you may be right. Work disincentive effects on low-income earners don’t matter much since not a lot of income is lost. On high-income earners it matters a lot since s lot of income that can be redistributed is lost if the rich don’t work or invest as much. The original Mirrlees argument – ignoring the recent embellishments – which sought to optimize efficiency jointly with equity – seems to me to make a lot of sense: set relatively high MRTs for low and medium income earners so average tax rates on the rich can be quite high. But set low MRTs on the rich so much income can be redistributed to the poor. The pool of unskilled non-earners can be supported by large transfers from the rich. I’ll be interested in seeing the numerical work you do. An example of the Saez style calculations is in Chapter 2 (I think) of the UK Mirrlees review. Calculating the highest MRT seems much simpler than getting the whole structure worked out.
@hc
Given that marginal tax rates were much higher in the 40’s, 50’s and 60’s, is there any research on how high income earners responded in those times?
@sunshine
Re your second paragraph. Good points on what is a kind of “stasis thesis”. The rich have set up the perfect system which funnels all the money to them. Why would they want to change anything? It’s the perfect scam.
@JB
When the claim was that there were strong adverse incentive effects – particularly in the UK. I don’t know about serious empirical studies but I think investment rates in the UK were very low.
Apart from anything else, the AHTM scramble makes “The Thick of It” so re-watchable.
One can only imagine the profane and fevered phone calls happening in the back of commcars now the Panama stuff is out.
@ hc
FWIW, under-investment by the wealthy in the domestic sector is a long-standing problem in the UK. The later C19 was particularly bad – with a very large outflow of capital abroad while Brit industry had trouble modernising to face German and US competition. The usual reasons given are political rather than economic – it was not the rate of return but the fear of “socialism” aka trade unions which drove the wealthy to invest abroad. This at a time when taxes were very low. The experience lies behind Keynes eventual belief in a strong state role in directing investment.
The ABC report: “Panama Papers: Fraudsters, former tax officials among Australians identified in Mossack Fonseca leak.”
“Convicted fraudsters, directors banned by the corporate regulator and former Australian Tax Office (ATO) officials are among hundreds of Australians linked to companies incorporated by Panamanian law firm Mossack Fonseca.”
Corruption has become embedded and systematic in the world economic system. Corruption is now the standard state of international finance.
I’ll be interested in seeing the numerical work you do.
Formal mathematical economic modelling is not actually that useful, and certainly not dispositive. Because:
+ economies, and thus useful economic models, are feedback/differential-equation systems and are thus chaotic
+ we lack sufficiently accurate information to set the model up accurately enough to overcome the chaotic effects
Combination of “chaotic systems” and “insufficient data on structure of system” gives you “extremely unreliable results”. Your informal, qualitative gut-feel results are actually more useful, because they’re stripped of the false — erroneous — precision you get from formal models.
I mean, if you’re dealing with a crazy economist who’s proposing some daft idea based on some fundamentally-misconceived model then some models of your own might help you temporarily overcome this, but really this is a pretty minor effect.
[the effort made into making your model “more detailed” is pretty much useless, IOW. Unabashed toy models, the sort you can run in your head and call “intuition”, are no less accurate because the oversimplification of the model is basically never your limiting factor: “ignorance or misunderstanding of the options people have open to them” and “ignorance or misunderstanding of the process people decide between the options they have” are basically always going to have bigger effects. Note that both the ignorance you’re aware of and the ignorance you don’t know you hold are important effects, and the latter can’t even roughly be corrected for.]
@hc
Imagine a person (maybe you; maybe me) who has control over number of hours worked.
Now suppose that the income this person receives for each hour worked increases for some reason (maybe a cut in income tax rates, maybe something else).
I can imagine at least two possible reactions.
One reaction is to increase hours worked, because the increased return makes this more attractive. Another reaction is to decrease hours worked, allowing total income to remain constant but freeing up more spare time for recreational activities.
Conversely, suppose that income received for each hour worked decreases for some reason (maybe an increase in tax rates, maybe something else).
Again, I can imagine at least two possible reactions.
One reaction is to decrease hours worked, because the decreased return makes them less attractive. Another reaction is to increase hours worked in order to keep total income the same, sacrificing some hours of spare time to achieve this objective.
Which way do people actually react? If hourly rates go up, do people work more hours or fewer? If hourly rates go down, do people work more hours or fewer?
If you build a model that starts with the assumption that lower rates of hourly return discourage people from working more (or even as much), but the opposite is in fact the case, then your entire model will be a mistake and no conclusions from it will be valid.
@Ikonoclast
Compare and contrast this alternative statement:
Which do you suppose is closer to being accurate?
Thanks John for a simple summation of the LNP’s fearless reform proposals of our tax system. Why is it that not one of our journalists can put the events of the last two and a half years so succinctly?
There has never been a more exciting time to be an Australian taxpayer witnessing this daily continuity and change in Coalition policy……
It makes Utopia and Hollow Men look like documentaries…
@Jim
Things must be pretty toxic in the LNP at the moment. I don’t envy Turnbull. Too much dysfunction.
In your list of options the government had ruled out or killed off you didn’t mention inheritance taxes — was that option also explicitly excluded at any stage?
Any change that results in the government collecting more tax in total must mean that at least some people pay more tax, just as any change that results in the government spending less money in total must mean that at least some people receive less money from the government.
What the government probably wants is to come up with a package with which they can disguise as much as possible who it is that is being made worse off (at least in this narrow individual fiscal sense).
JOHN,
Now even RWNJs like Terry McCrann think Malcolm is a dud and going to lose the next election. You are, I must say, keeping very dubious company:
[Saviour Malcolm Turnbull has turned out to be `a dud – and is headed for electoral defeat
BLUNTLY, and to put it quite simply, Malcolm Turnbull is a dud.
No, that’s not an acronym for a three-word slogan. But as “Dr Google” tells us: “A thing that fails to work properly or is otherwise unsatisfactory or worthless.”]
http://www.heraldsun.com.au/business/terry-mccrann/saviour-malcolm-turnbull-has-turned-out-to-be-a-dud–and-is-headed-for-electoral-defeat/news-story/b58444011a0497914fa2994cae231291?from=google_rss&google_editors_picks=true
@FREDDO
Why would a RWNJ like McCrann or any other RWNJ be expected to support Turnbull anyway? The “lefty” who dethroned their beloved dear leader?
Troy: I would have thought Turnbull would be just the sort of financial spiv McCrann would love – certainly a lot more than Shorten.
@FREDDO
Dunno Freddo, McCrann has (for a while now) struck me as more of a RW ideolog masquerading as a business commentator. Maybe it’s coz there’s certain quota of RWNJ rants expected from any (non sporting) contributor at Rupert’s rags to illustrate their allegiance to the cause.
http://www.theshovel.com.au/2016/04/05/one-helpless-little-turnbull-tax-policy-dies-every-5-minutes/
How about we reverse the distribution of tax collected, that is the States get all of the tax, seeing that they spend most of it, and get the federal government to come cap on hand to the premiers to get funds to run what they have control off. Couldn’t be much worse than what happens now.
With Andrews willing to throw his cap in the ring for the leaders job, and Dennis Jensen, climate change denier, losing preselection for his safe seat, everything is lining up for a split between the rwnj’s and the slightly more sensible party.
I know it’s off-point, but George Christensen calling you Professor Quiggin “an absolute leftie economist” – that’s got to go in your testimonials on the right, hasn’t it?
@Philip Picone
The States don’t want to collect income taxes. They’ve made that abundantly clear — just as they have done on other occasions in the past when the idea has been floated.
I guess the state income tax idea is already dead so this post is a bit belated. The idea made no sense to me. We have one national income tax law system (combined with other tax laws) and it is horribly complicated now. How would six (or more) horribly complicated income tax systems help us?
A while ago, I found an old J.Q. post which unfortunately I can’t find again. It summed up the tax situation very well. IIRC, it mentioned getting rid of all the economy distorting subsidies we currently have like negative gearing, fossil fuel subsidies, superannuation subsidies (deductions) and fuel subsidies. Getting rid of these alone would make an enormous improvement to our budget bottom line. Then, as J.Q. and E.G. have said, taxing high income and high wealth (maybe by death duties) would also greatly assist.
The solutions are obvious. When people, like Mad Malc and the LNP, don’t see obvious solutions it’s because they don’t won’t to see them. They will say and do anything to divert attention away from the clear, easy solutions staring us in the face. The reason for these diversions is clear. They (the neolibs) like the system exactly the way it is. It neatly funnels most wealth to the tiny minority of very rich people and very effectively keeps it ensconced there. They have the system pretty much jigged the way they want it except that they want to keep going until taxes are zero or negative on rich people and corporations and wages and conditions for workers are pushed down to bare survival levels.
Slight typo in above post. I wrote “don’t won’t to” when I meant “don’t want to”.
And a little, additional thought. It seems to me that it’s a standard neoliberal tactic, when they don’t want to consider or do something, to pretend that it’s “too hard”. It reminds me of the toddler on the supermarket tiles kicking and screaming because walking is too hard. Never mind that kicking and screaming expends about four times the energy of walking quietly. The neolibs kick and scream and say tax reform is “too hard”. If the job is too hard for them then they have to be booted out. Get someone who can do it.
@Ikonoclast
It’s a standard tactic of everybody who doesn’t want to do or to consider something to aver that it’s too hard.
@J-D
Indeed. If there’s any silver lining to come out of the whole fiasco for the Federal Government, it might be a future comeback to states who whinge about GST distribution – “well, we offered you this…”
Democracy works in an explict manner – because it can due to the small ‘country’ in term of population.
The Panama Papers revealed that the wife of the now then existing Prime Minister had off-shore companies.
The Prime Minister looked out the window on the following day and saw suffient evidence to conclude that no vote had to be taken on whether or not he should resign.
He offered his resignation.
Maybe we should be calling this election a reverse election where the winner gets the poisoned chalice and thus becoming the loser and the loser declared the winner by default, or whatever.
I agree with John, basically, our highest tax rate needs to be raised. I also believe that we need something in the order of an environmental tax (consumptive??) levied at the source. This will help the government’s bottom line and help to bring our carbon emissions into line. Mind you, any hope of keeping global warming to below 2 degrees Celsius has, in my opinion, long disappeared out the window!!
@Troy Prideaux
The offer was intentionally absurd. Its corollary, which Turnbull has now made explicit, is this.
“The states won’t take responsibility for income tax, therefore tax reform is impossible.”
Only in an alternative universe, the Turnbullverse, would this statement make any sense.
He is an aptly named fellow: a man with a turn for bull.
Malcolm is apt too. From Wikipedia: “Malcolm, Malcom, Máel Coluim, or Maol Choluim is a Scottish Gaelic given name meaning “devotee of Saint Columba”.
In turn; Saint Columba (Irish: Colm Cille, ‘church dove’;[a][1][2] 7 December 521 – 9 June 597) was an Irish abbot and missionary credited with spreading Christianity in what is today Scotland at the start of the Hiberno-Scottish mission.”
So Malcolm is a follower of the Abbot(t). QED. 😉
@Ikonoclast
I don’t know if I’d go as far to say it was intentionally absurd. The broad argument was put that those who spend the money (state governments) should be the ones raising it. Whether that’s practical or not or fair or not or efficient or not I don’t know, but I can see the conceptual appeal to some and there’s an odorous scent of “that’s more work for us, so… no, it’s all too hard” that appears to be a central tenet of state government ops.
@Troy Prideaux
A “courageous” Federal Government would go the other way. But I can see political pitfalls there too.
PM – Okay, we’ll take over all the public hospitals and run them ourselves.
[The rest of the conversation is sotto voce.)
Advisor – That’s a courageous decision, PM.
PM – What? How courageous?
Advisor – Veeeery courageous.
PM – Very courageous? Oh, dear. How do I back-flip now?”
Advisor – You don’t have to. Everyone thought you were joking.
PM – They did? Wonderful! What a splendid idea to hold this meeting on April 1st!
After watching Four Corners on tax havens it seems that unless we fix them, there is no need to worry about taxing high income earners at a higher rate, rather just taxing them at all.
Do the “entities” in tax havens buy, say, houses in Australia, and then let certain people live in them rent free? Or else how do you use the funds you’ve salted away in a tax haven?
@John Brookes
See comment #1
If you raise the upper marginal income tax rates, that just means more “minimisation” and will definitely raise buggerall money unless you crack down on NG, super concessions, CG concessions and offshore evasion which is far more prolific than is being assumed IMHO.
@Troy Prideaux
But my problem is I don’t understand how tax evasion works.
Say I’m running a successful business here, making a profit. So I set up a fake company in a tax haven which lends my business money at usurious rates. So my business no longer makes a profit – great, it doesn’t have to pay tax. The business in the tax haven makes a profit, and pays some low or paltry rate of tax.
So how do I get my money back from this business? If it sends me the money, don’t I have to declare it as income? Exactly how do I get that money back without paying any tax on it?
@John Brookes
That’s how companies do it (inter company lending), I’m not sure about individuals? I know there are lots of trusts and bogus entities with the primary purpose to create such complication that it’s impossible to follow the trail without throwing impractical resources at it.