Easytax redux redux

I got a brief run in the Murdoch press regarding Pauline Hanson’s revived proposal for a 2 per cent tax on all transactions (floated 20 years ago as “Easytax“). I was reported as follows: “University of Queensland school of economics professor John Quiggin said a 2 per cent tax would destroy small business and see a collapse in government ­revenue.” and the story was headlined “One Nation policy would ‘collapse the economy’” The headline is an exaggeration, but the quoted passage gets my opinion right.

Easytax is an example of a “cascade” tax, common in Europe a century or so ago. The point is that the tax rate is applied to the whole value of each transaction along the chain from primary producer to consumer. For a big firm, like Woolworths, the answer is simple: integrate backwards along the chain by taking over your suppliers. Then you pay the tax only once at 2 per cent. Small businesses, who can’t do this, end up paying the tax themselves, on goods that have already been taxed many times. So, they go out of business, and the total value of transactions falls far below the level used in the original calculation that a 2 per cent tax would be sufficient. Hence, government revenue collapses.

It was precisely because this process was happening that the French (the innovators in this field) dumped the cascade tax in favor of a value-added tax (VAT), the same model used in the GST. They were followed by the rest of the EU and then most of the world, except the US, which still relies on retail sales tax (levied only once, but still messy and narrowly-based).

The story also says “A spokesman for Senator Hanson said she had only advocated investigating the policy.” But the fact that such a nonsense idea is still part of One Nation thinking gives the lie to the suggestion of Hanson’s coalition partners in the LNP that this iteration of One Nation is different from the last. It’s just as racist and ignorant as ever. It’s not Hanson that has changed, but the LNP which is now indistinguishable from One Nation.

Why we should put ‘basic’ before ‘universal’ in the pursuit of income equality

That’s the title of my latest piece in The Guardian. There are two key points

First, in terms of effective tax rates and tax paid, any means-tested Guaranteed Minimum Income can be replicated by a non-tested Universal Basic Income, and vice versa

Second, for a number of reasons, it would be better to begin by expanding access to an adequate Basic income (in Australia, the Age Pension is an obvious benchmark) rather than starting with a small universal payment and then increasing it to a level sufficient to live on.

Identity crisis (repost from 2014)

When I posted the following piece two years ago, I didn’t suppose it would be enough to kill the absurd idea that “most Australians pay no net tax”. But, given its obvious kinship with Mitt Romney’s disastrous “47 per cent” catchphrase, I felt sure that hardheads on the political right would kill it off before it lined them up on the losing side of a class war.[1] Not for the first time, I was wrong. So, here’s a reprint.

In the latest issue of Gerard Henderson’s Sydney Institute Quarterly, Adam Creighton, economics correspondent at the Oz, “explains why most Australians pay no net tax”. That’s a striking conclusion, so I checked it out. Creighton has discovered that most Australians get about as much back in transfer payments and public services as they pay in taxation. The poor get a bit more, and the rich a bit less.

To save Creighton some work in future, can I suggest he consider the budget identity constraint “Expenditure = Income”. Since the government spends on services and transfer payments roughly the same amount as it raises in tax revenue[2], it’s obvious that, for the average Australian the same identity must hold, with income renamed as “tax paid” and expenditure as “transfer payments and public services”.

Next up: Why there is no net travel into the CBD

fn1. Romney wasn’t silly enough to push this line in public. He got caught using it at a donors meeting, when someone secretly filmed him.

fn2. Taking account of the seignorage from inflation, returns on assets, intertemporal transfers through debt etc, this rough equality becomes an identity. Please, no arguments about deficits, and especially about MMT. The point of this post is a really simple, and doesn’t need this kind of complication.

The Oz makes the case for higher taxes

A couple of days ago, I was one of fifty signatories to a letter opposing the proposed cut in company tax rate and rejecting the general idea that Australia needs lower taxes. We got excellent coverage from the ABC, Fairfax papers and so on. But by far the most extensive was from The Australian. I counted at least four stories all with a prominent run on the website

* A straight new story, though of course replete with phrases like “the left wing establishment”
* The IPA attacking the signatories as the “fatuous fifty”
* Shorten also attacking the company tax cut as a recipe for “mayhem”
* A front page piece saying a tax increase is a lazy way of solving our problems

Not so long ago, the Oz would have ignored a statement like this (or stuck it in a short story on the inside pages) with the plausible justification that it’s just a bunch of lefties saying what lefties usually say. The fact that they felt the need to reply over and over is revealing, in two ways.

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Proof by exhaustion that we need a higher top rate of income tax

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.

Refighting World War II

In keeping with his commitment to do exactly what Tony Abbott would have done, but with more style, Malcolm Turnbull has just announced that we are to spend a trillion dollars on fighter plans and submarines. Apparently, there are lots of problems with the hugely expensive F-35 Joint Strike Fighter, which Australia has on order. Rather than look at the details, it’s worth asking we are, yet again, arming ourselves to refight World War II.

World War II was fought on land, sea and air. Submarines and fighter planes played a crucial role. But since 1945, things have changed. The 70 years since 1945 have been marked by near-continuous land warfare in various parts of the world [1]. On the other hand, there has been essentially no naval warfare, in the sense of battles between ships or carrier based aircraft, with the exception of the absurd and unnecessary Falklands conflict. Air combat between fighter planes lasted a bit longer after 1945, playing a big role in the Korean War, but has been pretty much non-existent since the 1980s. All warplanes, these days, are effectively bombers, usually hitting targets that have previously been rendered defenceless by missile attack. Yet the problems of the F-35 stem, in large measure, from its capacity to engage in hypothetical dogfights.

Fighter planes and their pilots still attract most of the attention, and nearly all the glory, in air warfare. But the real work is increasingly done by drone operators, commuting from the suburbs to undertake their task of destruction in air conditioned offices: since they see exactly what they have done, the job is apparently much more stressful than that of a fighter pilot. So far, only the US is using military drones on a large scale, but it’s obvious that this is the way of future wars. The specific problems of the F-35 are irrelevant in this context: it will in any case be obsolete by the time it’s delivered.

As for submarines, Wikipedia gives a list of submarine actions since 1945. There have been six of them, three involving the sinking of surface ships, and three involving the firing of cruise missiles, something that can be done from craft as small as corvettes.

Submarines have been much more notable for sinking themselves. Wikipedia lists four US submarines sunk at sea since 1945, two with all hands. The Russians have done far worse, losing 18 subs, most notably the Kursk, lost with all hands in 2000.

Submarines aren’t obsolete in all their possible uses. If the world ends in a nuclear holocaust, the final missiles will probably be fired from nuclear-armed submarines. But the revival of old-style submarine warfare, using our subs to sink (say) Chinese naval vessels seems remote: the increasing power and range land based anti-ship missiles will soon make naval power obsolete. Even more remote (thankfully) is the use of submarines to attack merchant ships without warning, as was done in both World Wars.

Of course, no one can be certain that seemingly obsolete modes of warfare won’t be revived: For example, there was a cavalry charge during the Afghan war. But spending a trillion dollars on weapons systems that haven’t been used anywhere in the world for decades does not seem like a sensible use of public money.

Having posted this, I’m fully prepared to get a hammering from military buffs who will point out that I have got this or that detail of air and naval warfare wrong. But the idea that detailed knowledge of tech specs or the minor points of military history constitutes expertise is, in this context, quite wrong. In the absence of any significant air or naval warfare within living memory, supposed expertise is about as useful as Scott Morrison’s knowledge of unicorns. The only important thing to know is that, like nearly all military expenditure and nearly all wars, these proposed purchases haven’t been subject to a cost-benefit test and would fail it if they were.

fn1. There’s a case that land warfare has become less frequent, or at least less bloody over time. But it’s hard to tell.

The patrimonial society comes to Australia

Forbes just released its annual list of the ten richest Australians. Of the top eight, four inherited their wealth. The other four range in age from 75 to 85, suggesting that new heirs are likely to be joining the rich list before too long.

This pattern isn’t yet representative of the Australian wealth distribution as a whole, but it is becoming more so. Piketty’s patrimonial society is not far away.

There are a lot of things we can do to promote a more equal distribution of opportunity and outcomes, but a return to taxes on inheritance (preferably levied on the recipient rather than the estate) would be a good start.