As I mentioned a while ago, I’m using the blog as a database of snippets that seem likely to be useful, but need to be cut from articles for space or other reasons. Comments are appreciated as always

The recent higher education policy paper Backing Australia’s Future has estimated that students are currently contributing about 25 per cent of the cost of their education. However, this is a gross under-estimate. It involves an overstatement of the subsidy associated with HECS, ignores the tax deductions that would apply for alternative investments, and fails to take account of the cross-subsidies inherent in the university system, from undergraduate education to research and supervision of graduate students (far from recognising these cross-subsidies, Backing Australia’s Future tries to claim that research funding Îsupports individual [undergraduate] studentsâ.)
For undergraduate students in areas like commerce and business, the contribution is closer to 100 per cent of the resources allocated to them than 25 per cent. For law students the contribution may already exceed 100 per cent, and will certainly do so under new proposed arrangements.

The SMH has the news that Malcom Turnbull has managed to interest Wizard Home Loans in the idea of home equity loans. I was a member of the academic panel of the PMs Task Force, organised by Turnbull looking into this idea. Most of the actual work was done by Christopher Joye, a livewire young economist who’s currently with the Menzies Institute.

The home equity proposal has been widely criticised as likely to further inflate the housing bubble. This is only true if financial institutions are willing to buy equity at inflated prices, as opposed to lending to individuals.I commented on all this in my most recent opinion piece in the Fin, which I have now posted on the Website. An excerpt

The home equity proposal put forward by the Taskforce may also be seen as a kind of insurance [against falling house prices]. Instead of paying a cash premium, homebuyers would forgo part of any possible gains in return for sharing the risk of declining prices with an equity partner. Once again the willingness, or otherwise, of banks to enter such deals may be seen as a financial market judgement about the sustainability of current prices.

It now appears that Turnbull is going to put his money where his mouth is on this one.

Also on the website is a piece on road safety from 5 June much of which I roadtested here on the blog before taking it out for a spin in print. Thanks again to everyone who commented.

Update The SMH story has caused a bit of a fuss about whether it is (or would be) appropriate to use the results of publicly-sponsored research in this way. I don’t see a problem myself. In any case, I got the following email from Malcolm Turnbull indicating that the issue may be moot

The SMH story is quite a beat up I am afraid. The position is that Wizard is keen to investigate whether a commercial product can be developed which implements some of the ideas in the MRC paper. I have not offered to finance Wizard products nor, as the story stated, am I negotiating to do so.

In the Thursday comments thread “Factory” writes,

One thing I didn’t get about the GST was that it was generally seen as a issue that was owned by the right, but similar tax regimes seem to be the norm in Europe.. hmm..

As I explained here, the reason for this, and for the unpopularity of the GST was that

the Australian advocates of a GST/VAT have tied this change to logically unrelated proposals for a change in the tax mix to give more weight to indirect taxation and for the removal of existing exemptions, notably for food. It is rather as if the advocates of metrication had suggested that the metric system was not worth having unless we also made French the national language and introduced the guillotine.

With the exemption of food, and the associated introduction of the Australian Business Number, the GST has improved the effectiveness of the tax system. The associated income tax cuts made the package as a whole regressive, but not nearly as much so as the previous proposals for a GST (Fightback! and Option C)>

Following financial deregulation and the floating of the dollar, both the current account deficit and net foreign obligations (debt and equity) grew rapidly, reaching about 5 per cent of GDP and 50 per cent of GDP respectively by 1990. Since then the current account deficit has fluctuated and net foreign obligations have risen slowly to around 54 per cent of GDP, the great majority of which is debt. By contrast, in 1980, two-thirds of foreign obligations were equity (Parliamentary Library Research Paper No. 3, 2002ö03, Australia’s Foreign Debt).

It is straightforward to compute that if nominal GDP is growing at 6 per cent per year and if nominal foreign debt grows by an amount equal to the current account deficit, debt will remain stable at 50 per cent of GDP if the current account deficit is equal to 3 per cent (=0.50*0.06) of GDP. Since Australia’s current account deficit has generally been greater than this, it seems likely that debt will grow over time.

I’ve put up my article, ‘Fairy gold’ turns to debt from the Fin of 10 April. Here’s the conclusion.

as long as financial innovation is seen to be good in itself, politicians will continue to pursue these [Public Private Partnership] schemes, not as a method of optimally allocating a complex set of risk, but as a source of fairy gold, from which valuable public assets can seemingly be spun out of thin air. Of course, just like fairy gold, this illusion will disappear in the light of day, leaving a mountain of debt and poorly-structured projects.

For those interested, I’ll be featured in the ‘Duel’ segment of Saturday’s Fin, in combat with Wolfgang Kasper on the proposed Free Trade Agreement with the US.

Is this, as Simon Crean has repeatedly told us, the highest taxing government in Australian history? Before answering this question, I’ll make a more important point. If this isn’t the highest taxing government in Australian history, it ought to be. The demand for the kind of services provided by government (health, education, protection against income risk) rises more than proportionally with income. So the share of income allocated to publicly-provided services, as opposed to private consumption, should increase as income grows.

Update I’ve fixed a broken link to OECD data
Read More »

My post on bracket creep brought up some discussion of the idea of a smooth tax curve in place of the piecewise linear one we have now.

I’ve long thought this was a good idea and I have what I think is a neat way to implement it. Instead of providing a table that lets taxpayers calculate their tax payment in one step at present (take the tax payable at the threshold below actual income and apply the marginal rate to income above the threshold), I’d provide a similar mechanism to enable calculation of the average tax rate which would increase linearly between threshold points, just like total tax in the current system. Calculating the tax payable takes one more step – multiplying income by the average tax rate.

The big merit of this it that it focuses attention on the variable relevant to social choices about tax – the average tax rate, rather than on the marginal tax rate, although you can still calculate the latter if you’re so inclined.

The tax cuts announced in yesterday’s Budget essentially involve handing back bracket creep. But how much bracket creep? The threshold for the main (30 cent) tax bracket has been raised by 8 per cent from $20000 to $21600. If you take the common definition of bracket creep ‘inflation pushing people into higher tax brackets’ and assume inflation is running at about 2 per cent per year, that would mean the cuts gave back four years worth of bracket creep.

But, as the Treasurer is happy to point out, real incomes are rising. If the ratio of income tax to national income is to be held constant, tax brackets must be adjusted in line with increases in nominal income per person. At the income levels we’re looking at here, this basically means movements in average weekly earnings, which have been growing at 4 or 5 per cent per year lately, depending on the measure you use. So on this definition the tax cuts offset between eighteen months and two years worth of bracket creep.

The top bracket wasn’t adjusted at all, so those on incomes above $50 000 didn’t get much relief from bracket creep this time, however, you mention it. But they (or rather we) have done pretty well under this government, with big cuts when the GST came in and the halving of capital gains tax, as well as the absence of any serious attack on tax avoidance through trusts and companies.

Update 15/5 The last para of this post was completely wrong. All the thresholds were adjusted. The 42 per cent threshold was increased from $50,000 to $52,000 and the 47 per cent threshold from $60,000 to $62,500. Both are about 4 per cent, equal to two years inflation or one years wage growth.

From the British Public Finance (published by the Chartered Institute of Public Finance and Accountancy) reports on a British deal in which the private supplier of school services simply walked away, two years into a five-year contract. One would suppose that there was some sort of performance bond to guard against this, but it isn’t discussed.

Some more interesting stories report higher costs due to PFI causing cuts in services and problems with the London Underground PPP.

Even more interesting is the suggestion here that the vogue for the provision of public services by for-profit companies has passed its peak and that interest is now turning to “public interest companies” – a version of what used to be called quangos (I’ll add a link on the etymology of this interesting term when I get time).