Category: Economic policy

Bracket creep: How to get the answer you want

John Quiggin18 Comments

NATSEM recently released modelling showing that discretionary tax cuts have more than offset bracket creep since 2005 (that is, taxes are lower than if the income tax scales had been indexed to the CPI or a wage index). The Centre for Independent Studies replied with a study pointing out that you get the opposite conclusion by looking at the period since 2013. Why 2013?

We chose 2013 as the starting year because this is when the last change to tax thresholds occurred

Well, yes. If you pick a period in which there have been no discretionary tax cuts, you will certainly find that discretionary tax cuts have not outweighed bracket creep. As author Michael Potter observes

This shows the importance of the starting year.

There’s no need to check the CIS numbers: given the setup, only one answer is possible.

Correction Michael Potter advises that the CIS study includes the impact of the tax changes in 2012-13, making it possible in principle that these could have offset bracket creep. But the 2012-13 changes weren’t a general tax cut aimed at offsetting bracket creep. They offered small tax cuts for low income earners to offset the very modest impact of the carbon price/tax. These were clawed back by higher marginal rates so that upper income earners (appropriately) bore the full cost of the carbon price. The key point, stated below, is that the Howard-Rudd tax cuts introduced after the 2007 election were so large that they have more than cancelled out all the subsequent bracket creep.

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Increasing GST: not worth the effort?

John Quiggin30 Comments

The Grattan Institute has just released a report suggesting that the government should get more revenue from the GST, either by broadening the base to include food, health and education (yielding an extra $17 billion) or by raising the rate to 15 per cent (yielding an extra $27 billion). As you’d expect from Grattan, the analysis is sound and careful. As long as you accept the standard framing of the tax reform debate, in terms of the need to shift from direct to indirect taxation, it is reasonably convincing.

Grattan suggest using 30 per cent of the extra revenue to increase welfare payments and 30 per cent in cutting the bottom two tax rates, thereby compensating low income earners. The overview concludes:

Around 40 per cent of the additional revenue from a higher GST would be left over after welfare increases and tax cuts. At least some will need to go to state governments to help them address their looming hospital funding gap, as the price for their support of the change. This would leave a little – but not much – to reduce the Commonwealth’s budget deficit, or to pay for other tax cuts that promote economic growth.

(emphasis added).

Is that enough to sell the package? I can’t imagine the states going along with a deal like this for less than 20 per cent of the total extra revenue, which implies the Feds are left with 20 per cent, somewhere between $3.5 and $5.5 billion. From a political viewpoint, it’s hard to see this being worth the effort for the Turnbull government, especially with no guarantee of success.

As a comparison, the FBT concession for motor vehicles, reinstated by Tony Abbott costs the budget around $1.5 billion. Exemptions for non-profits, which have been comprehensively rorted, cost at least as much. Add in a few ‘rats and mice” concessions, and the Federal government would have as much as it could get, in net terms, from the Grattan package (Getting rid of the non-profit concession would probably require some compensating expenditure, but the same is true of the health and education concessions under the GST.)

That’s before we get to the elephants: superannuation concessions (also supported by the Grattan report), corporate tax avoidance, land tax and higher income taxes for (say) the top 5 per cent of income earners (reflecting elite opinion, the Grattan report suggests cutting these rates). All of these are hard, but not obviously harder than the GST.

So, why is GST reform at the top of the government’s list? The answer is simple enough. The advocates of reform haven’t had a new idea, on taxation or anything else, in 30 years. They didn’t get the GST out of Keating’s Tax Summit in 1984 and they didn’t get the version they wanted from Howard and Costello in 2000. So, the same old idea keeps on coming up.

For-profit education: plenty of blame to go around

John Quiggin33 Comments

Success has a thousand parents, failure is an orphan. The truth of that proverb is illustrated by the blame game now going on around the disaster that is for-profit Vocational Education and Training (VET) in Australia. In the last couple of weeks, I’ve seen dozens of different stories illustrating the extent of the failure. The Oz alone has at least ten.

Reading these stories, it’s clear that this isn’t a matter of bad apples or abuse of the rules. The for-profit sector as a whole is delivering abysmally poor results while chewing up billions of public dollars.

Unsurprisingly, Labor is blaming the government for allowing this to happen. Equally unsurprisingly the Oz is running the line, pushed by Minister Simon Birmingham that it’s all the fault of the ALP who extended the FEE-HELP scheme to the VET sector in the first place.

I had to check back on the history, which reveals that this was actually an initiative of the Howard LNP government, announced in its final year, implemented by the Rudd Labor government, and carried on by the Gillard and Abbott governments. Victorian governments of both parties led the charge at the state level. So, there’s plenty of blame to go around.

But, that’s history. The real problem is that no one is willing to admit the obvious lesson, already evident from the US; for-profit education, funded by public subsidies, is a recipe for disaster.

I should concede though, that Birmingham is already edging towards the right answer, saying that he is and not as keen as he was to extend subsidies to bachelor and sub-bachelor courses at private colleges.

Another piece of good news is that the ACCC and Auditor-General are finally getting their teeth into this, doing what should have been done by the supposed regulator, the Australian Skills Quality Authority, which has been asleep at the wheel ever since it was established.

But no amount of tightening up at the edges can fix this problem. The only solution is to abandon subsidies to for-profit providers and put a serious effort into restoring and upgrading the TAFE system.

Finally, a blast from the past. Back in 2012, ACPET, the for-profit VET lobby group cited me as saying

“I think we will continue to see many examples of (dodgy) educational institutions. They are going to be much more common than examples of successful profit driven training or educational enterprises”.

The report in question (paywalled) concluded by quoting me as saying

The only solution is ultimately for the federal government to take over this area [of VET] and to then have a much more robust accreditation system for private providers than we have, and a much more sceptical one”

ACPET suggested that my position was reminiscent of the Flat Earth Society. At this point, I’d say the Flat Earth Society has at least as much credibility as ACPET.

Populism, Patrimonialism and US politics (crosspost from Crooked Timber)

John Quiggin22 Comments

Nuance is nearly always appealing to academics. For a long time, that was true of my approach to economic issues, particularly including income distribution. When presented with simplistic populist solutions to inequality like “Make the rich pay!”, I was inclined to responses along the lines of “It’s more complicated than that”.

A big problem with “Make the rich pay!” is that with the kind of income distribution that prevailed in the mid-to-late 20th century, any change to income tax that would raise significant revenue would have to apply to the top quintile (20 per cent) of the income distribution. People in the top quintile of the income distribution mostly derive their income from (typically professional or para-professional) employment, don’t think of themselves as rich, and aren’t, in general, seen this way by others. So, the slogan didn’t match the implied policy.

But with the rise of the patrimonial society that’s largely ceased to be the case. The top 1 per cent of the US population now get more than 20 per cent of all pre-tax income, considerably more than the total revenue of the Federal government. Within that group, the top 0.1 per cent have done better than everyone else, and the top 0.01 per cent even better.

So, taxing the 1 per cent more makes sense. I responded a little while ago to a piece trying to argue increasing the top marginal tax rate would make no difference to inequality. And while I was drafting this post, the NY Times came out with an article that reached broadly the same conclusion as mine.

There’s nothing inherently ludicrous in the suggestion that the very rich should pay most or all of the costs of sustaining a system that benefits them so greatly[^1]. And, as in the 1920s, the very rich are different from everyone else. Their wealth is derived primarily from capital, or from control over capital (as business owners or from the financial sector). And, while most of the current cohort of ultra-wealthy did not inherit large fortunes, that’s an inevitable consequence of the fact that there weren’t many large fortunes to inherit until recently. As Piketty demonstrates, a society dominated by large accumulations of wealth will inevitably one in which inheritance, rather than effort, education or talent, determines life outcomes.

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Thinking the unthinkable

John Quiggin24 Comments

Thirty odd years ago, Richard Cockett wrote a classic analysis of the role of UK think tanks, most notably the Institute of Economic Affairs, in the economic counter-revolution that ushered in the present era of market liberalism. The crucial “unthinkable” idea put forward by the thinktanks was that profit-driven firms might do a better job of providing a variety of services that were then part of the public sector. This contrasted with the dominant view that any failings of the public sector were the result of specific problems such as poor management that could be overcome by better oversight, organizational restructuring and so on.

The resulting policies of privatisation, corporatisation, competitive tendering and contracting, PPPs and so on have transformed the public sector. Their success has also transformed the public debate, rendering their own ideas as part of the common sense[1] of the political class, and making other ideas unthinkable.

The case of for-profit education provides an example. There is now overwhelming evidence that for-profit education has been a disastrous failure wherever it has been tried, and particularly where for-profit firms can gain access to public funds through policies designed to enhance “consumer choice”. Here are some recent examples:

* A New York Times report pointing out that for-profit universities are getting millions of dollars in public funds every month despite a sustained track record of fraud and failure

* One of many reports from Sweden, until recently the poster child for the for-profit sector, now in a state of crisis, with declining performance an growing inequality

* A Senate Committee report, describing “rampant abuse, accelerating costs, and doubling of bad debt” under the FEE-HELP scheme for vocational education

The common element is that the abuses are well known and long-standing, but the proposed remedy is more of the regulation that has failed in the past. The unthinkable option is to shut off the flow of public funds to the for-profit sector and return to the combination of public and non-profit provision that has worked so well in the past.

Of course, once this unthinkable thought is allowed into public debate, the entire premise of National Competition Policy, based on the idea that “contestable” markets are invariably good for the public, would be cast into question. That would open up a reassessment of reforms in electricity, telecommunications, water, health and many other services provided successfully by the public sector over the course of the 20th century.

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Lots of different things

John Quiggin61 Comments

For no particular reason, I’ve been very busy in the past few days, commenting on this and that.

There’s this piece on the recently announced (but still secret) Trans-Pacific Partnership Agreement.

Also, this SMH article by Clancy Yeates, citing my criticisms of the Productivity Commission case against penalty rates.

And, Campus Morning Mail links to my criticism of the bodies representing and regulating post-school education.

Would a significant increase in the top (US) marginal income tax rate substantially alter income inequality?

John Quiggin38 Comments

Yes.

This, you might think, qualifies as another in the series “Short Answers to Silly Questions”. But a Brookings Paper study by William G. Gale, Melissa S. Kearney, and Peter R. Orszag reaches the opposite conclusion. (Hat tip: Harry Clarke).

The study looks at increasing the top marginal tax rate (currently 39.6, applicable to incomes above $400k for singles), with the strongest option being an increase to 50 per cent. The proceeds are assumed to be redistributed to households in the bottom 20 per cent of the income distribution.

The headline finding is that the Gini coefficient is barely changed, as are other popular measures including the 99/50 ratio (the ratio of income at the 99-th percentile to 50-th percentile, that is the median). But the 99/10 ratio and 90/10 ratios change a lot, from 50 and 17 under current law to 37 and 12.5 with the redistribution.

What does this mean? Two things:

(i) As is well known, the Gini coefficient is a lousy measure of income inequality, much more sensitive to the middle of the income distribution than to the tails
(ii) The proposed redistribution would substantially improve the welfare of the poor, with most of the burden being borne by taxpayers in or near the top 0.1 per cent.

It’s obvious, as the authors note, that the 90-50 measure won’t change, since neither group is affected (there’s no simulation of behavioral responses which might have indirect effects). But, since the 99-th percentile income is very close to $400k, there’s very little impact on this group either. But the tax, as modelled, raises a lot of money from the ultra-rich incomes. As a result, distributing the proceeds at the bottom of the distribution raises incomes substantially, which explains the big changes in the 90-10 and 99-10 ratios.

The real lesson to be learned here, one I came to pretty slowly myself is that old-style measures looking at quintiles or even percentiles of the income distribution are no longer very relevant. The real question, in the economy of Capital in the 21st Century is how much should go to the ultra-rich.

Some post-school education bodies we could do without

John Quiggin39 Comments

First, there’s the Australian Skills Quality Authority, which is supposed to regulate the quality of vocational education. AQSA’s performance makes the Greyhound Racing Queensland Board look good

In 2012, when I wrote a report on vocational education, it was common knowledge that the for-profit education sector was comprehensively rotten, particularly in Victoria where the push to privatisation began. This ABC report suggests that ASQA was on the case. But three years later, the only thing that has changed is that the rot has spread nationwide. All the big names in the industry – Evocca, Aspire and so on – are engaged in practices like using laptops as inducement to recruit low-income students who have no chance of either completing their courses or repaying their HECS-HELP debts. There’s no surprise here – it’s exactly the business model of US for-profits like the University of Phoenix.

The right solution is to stop giving any public money to for-profit education businesses. But, in the current market liberal environment that would probably fall afoul of competition policy. So, my suggestion is to cap the amount any publicly funded institution can spend on marketing to Australian students. Ideally the cap would be well below the amount currently being wasted by universities and other public providers competing against each other with our money. That in turn would be far below the rake-off being taken by the recruiters on whom the for-profits depend.

In the meantime, AQSA is a proven failure. It needs to be scrapped and its functions turned over to a body with some real teeth and a willingness to defend the interests of students and the public purse, rather than being a captive of the industry it is supposed to regulate. A joint investigation by the ACCC and the Auditor-General would be a good start.

Next, Universities Australia, the Go8 and the other Vice-Chancellors’ clubs. Fresh from the fee deregulation debacle, they’ve turned their attention to the question of how we should allocate research training places (such as PhD programs).

In the case of fee deregulation, the VC groups were uniformly wrong, not to mention tin-eared. This time, we have the odd spectacle of the Go8 directly opposing UA, even though one is a subset of the other. The Go8 want to stop departments with poor research records, based on the “Excellence in Research Assessment” from getting funding for research training places. UA is opposed, making the point that ERA is not “fit for purpose”.

In the abstract, I have some sympathy for both sides of this argument but in practice it just looks like special pleading on both sides – UA wanting to keep something for all its members, and the Go8 lobbying for special treatment.

But the real problem is the one I identified in the deregulation debacle. The VC groups claim to speak for universities, but exclude all but 40-odd of the people who work and study in them. In the present case, wouldn’t the perspectives of research students and the academics who supervise them be more useful than those of VCs and administrators? To repeat, we need to replace UA with a body that represents students and staff as well as top management.

And, while we’re at it, how about dropping the linguistic abomination of names like Universities Australia[1]? Even knowing nothing else about the group, a name like this reeks of the worst kind of 1990s managerialism.

[^1] Are there any grammar experts who can give a name to the part of speech represented by “Australia” in this title? It’s not known to Standard English, I’m pretty sure.