In macroeconomic terms, the RBA decision to keep interest rates unchanged looks like a good call. With the levels of indebtedness we have in Australia, the risk of overkill, as seen in 1990, are greater than the risk of delaying for a while to see what happens. Although the evidence is patchy, the claims that economic activity has peaked look quite plausible. On most reasonable estimates, interest rates are still below their ‘neutral’ level and it looks as if they can’t go significantly above this level without producing substantial damage

In microeconomic terms, the decision looks far less appealing. Interest rates represent the price of current consumption in terms of future consumption. If they are permanently held below their equilibrium (roughly the same as neutral) level, the result must be too much consumption and too little saving and Australia has seen this in spades, with negative rates of household savings for some years. Not surprisingly, this has been accompanied by a boom in asset prices, particularly for residential land. This in turn has been associated with a shift in investment towards housing which, since it produces non-tradable services, is not helpful in addressing a huge current account deficit.

When one set of considerations strongly suggests holding interest rates steady and another suggests they need to rise significantly, the obvious conclusion is that we are trying to do too much with one instrument.

The National Tertiary Education Union, of which I’m a member, has nominated today as a day of protest against the government’s Industrial Relations reforms, but has left it up to members how to make their protest. For me, the obvious thing to do is to get to work on my long-promised analysis. I’ve written most of a draft, and I hope to get the rest done this evening, but in the meantime, I thought I’d give a short statement of how I see the relationship between industrial relations institutions and inequality, which is my central concern.
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An anonymous reader has sent me some interesting charts on average tax rates. The first shows the average income tax rate for a single person, taking into account the Medicare levy and the low income tax offset. The average tax rate rises with income as you’d expect but much more slowly than the marginal tax rates

The second takes into account the withdrawal of social security benefits, to compute an effective average tax rate, where the denominator is private income+maximum transfer payments and the numerator is tax paid+benefits withdrawn. The third does the same for a couple with one child. These average tax rates peak at a fortnightly income of about $500 for a single person and $1000 for a couple, and are otherwise fairly flat.

The pics are attached over the fold

Update Sorry, all that there are some problems with these pics. I’ll try and fix them ASAP.

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I’ve now got the tax tables working reasonably well, with some useful assistance from “Down and Out in Sài Gòn”. The first column of the table gives a multiple of average weekly earnings, the second the associated money income (for 1996 in the first table and 2006 in the second), the third is the tax paid and the fourth is the average rate. As you can see, the tax burden has risen for those below the average and fallen for those above.
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During the leadup to the Budget, the term ‘flat tax system’ was bandied about in Australia and overseas. The Economist gave the idea a run pointing to Eastern European countries that tax personal and corporate income at a common[1] flat fate ranging from 13 per cent (Russia) to 26 per cent (Estonia) applied to all incomes with no deductions. A further nod to neatness (with no real basis in tax theory) is to set the rate of Value Added Tax (that is, GST) at the same rate as personal and corporate income tax (reader Joff Lolliot alerted me to this and some other points covered in this piece.)

Not surprisingly, I’m unimpressed by the concept and the arguments put forward in its support.
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Here’s my piece from today’s Fin, on the expenditure side of the budget

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Following up on the Budget, I’ve been looking at the incidence of income tax over the Howard-Costello period. To start with, I’ve just looked at the tax scales, disregarding deductions, avoidance and evasion, and confining attention to single taxpayers. The results are perhaps not surprising, but certainly disturbing

Single taxpayers on average weekly ordinary time earnings faced an average income tax rate of 22.8 per cent in 1996, and that will be pretty much unchanged at 22.2 per cent when the second stage of the Budget tax cuts are phased in in 2006. Since the GST has come in in the meantime, raising more revenue than the indirect taxes it replaced, we can conclude the tax rate for this group has risen. Also, since the mean exceeds the median, this means most single wage- earners are paying more tax than they did in 1996.

The effect is stronger ot 0.6 times AWOTE, where the average income tax rate has risen from 15.4 per cent to 16.9 per cent. On the other hand, for those on 1.5 times AWOTE, the average rate has fallen from 29.4 per cent to 26.2 per cent, and for those on twice AWOTE, from 33.8 per cent to 30.1 per cent.

Since someone is bound to jump in and point out that this is still a progressive system, let’s remember that the income tax is just about the only progressive element of the system. Except for the bottom 20 per cent, the tax system as a whole was roughly proportional before the latest changes, and is likely to become increasingly regressive if policy continues along these lines.

Andrew Leigh has a different way of looking at the numbers, but reaches much the same conclusion.