Shorten wins the tax debate

John Quiggin116 Comments

Bill Shorten doesn’t have a lot of public support, a fact that reflects his background as a machine politician with a penchant for self-promotion. For a long time he has been accused of pursuing a “small target strategy”, hoping to win by default against Tony Abbott.

The latest developments in tax policy ought to prompt ] a reassessment. The nature of policy debates like this is that the government holds all the cards: control of the political agenda, expert Treasury advice, and the capacity to manage the media with judicious leaks.

Despite all of this, Shorten has left Malcolm Turnbull and Scott Morrison looking flat-footed. Their preferred option of raising the GST rate and expanding its base is dead in the water, but not yet formally disavowed. Opposing it was an easy choice for Shorten, but still one that required him to override some supporters within the ALP.

The general assumption was that the government would soon announce Plan B. But Shorten has now beaten them to the punch. His proposals to limit negative gearing and scale back the concessional treatment of capital gains are more substantial than anything they are likely to contemplate in relation to property taxation. And Labor has already signalled willingness to limit tax concessions for superannuation.

So, unless the government is willing to do something really radical, involving an explicit break with the Abbott era, anything announced in the Budget will look like “me too”.

Update Immediately after posting this, I found this piece by Laurie Oakes, arbiter of the Australian political zeitgeist, making an almost identical argument.

Waist deep in the Big Muddy

John Quiggin26 Comments

The sudden collapse of four for-profit vocational education enterprises including Aspire college is the latest in a string of scandals, failures and license revocations in the sector.

Meanwhile, in the US, the Apollo Education Group, owner of the “University” of Phoenix, has been taken private for $1 billion, a fraction of its peak market value. UoP pioneered the model of providing a bogus education to publicly funded students, ripping off both the students and the public purse. As the US has cleaned up the worst abuses, UoP and others have seen their profits shrink, to the point of bankruptcy in some cases.

The provision of public funds to for-profit operators has been a predictable, and predicted disaster. Of all the disasters perpetrated under the banner of microeconomic reform, education reform has probably been the worst.

In these circumstances, it would make sense for the national government, which has borne much of the cost, to take over the vocational education sector, properly fund the public TAFE system, and close down the for-profit sector, as was recently done in Chile.

The idea of a national takeover is, indeed, on the cards. But far from closing down the for-profit sector, it appears the Turnbull government plans to push the reform agenda even further.

Waist deep in the Big Muddy, and the big fool said, Carry On.

The patrimonial society comes to Australia

John Quiggin80 Comments

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.

Increasing GST: not worth the effort. How about inheritance taxes?

John Quiggin104 Comments

I posted this analysis in December, suggesting that, once the necessary compensation is paid for, an increase in GST wouldn’t be worth the effort. Apparently Treasury modelling (which I haven’t yet located) produces the same conclusion. Given that everything is supposedly on the table, maybe it’s time to look at some new options. An obvious example is inheritance taxes, which raised a fair bit of money before being scrapped in the late 20th century. As the inequality of wealth increases, the case for such taxes becomes every stronger.

Repost

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.

Abbott without the attitude

John Quiggin18 Comments

Nearly five months after Malcolm Turnbull became PM, it’s finally possible to get a clear view on the big question of what the change means. Has the shift from Tony Abbott has led to a real change in policy approach, centred on growth and innovation? Or is it merely cosmetic, amounting to the end of the tribalist rhetoric and gesture politics that eventually cost Abbott his job.

Based on recent developments, the case for “merely cosmetic” seems overwhelming. Turnbull’s rhetoric about innovation is starkly at odds with the reality of:

* massive job cuts in CSIRO, focused on climate change. The fact that the new entrepreneurial CEO is flogging the dead horse of coal to diesel adds insult to injury; and

* the $5 billion Northern Australia infrastructure fund, a boondoggle based on mid-20th century rhetoric about “unlocking the North”. It was pushed by Abbott as a sop to the Institute of Public Affairs, who underwent a sudden conversion to the cause of publicly subsidised dam projects a little while ago. The political imperative has gone but the money still flows, it seems.

The picture is just as bad on other issues. Turnbull is going ahead with the $160 millikon plebiscite on equal marriage, even though its leading backers, who only pushed it as a delaying tactic, have announced they won’t be bound by the result. Turnbull should have taken these statements as releasing him from any commitments to the anti-equality right, and allowed a free (in both senses of the word) vote in Parliament instead.

On climate change, the rhetoric in Paris sounded OK, but there has been no action to speak of. Turnbull hasn’t even committed to maintaining the Renewable Energy Target, let alone increasing it as he will need to do in the absence of an effective carbon price.

I imagine the appearance of improvement will last long enough to secure an election win for Turnbull. But, unless he starts delivering some change, the reality will become evident before long.

Adani: the dog that caught the car

John Quiggin41 Comments

Adani has finally received environmental approval from the Queensland government for its proposed Carmichael mine in the Galilee Basin. At this point, in a standard news story about a multi-billion project, we’d be reading about the domestic and global banks that were competing to be the lead financiers for the project, and those who would have to content with the crumbs. Along with that, there would stories about the partners and subcontractors who would get the lucrative work of construction.

Instead, we have a long list of banks and other funding sources that have announced that they won’t finance the project, or have pulled out of announced and existing finance arrangements. The list includes the Commonwealth (formerly a big lender to Adani), NAB, the Queensland Treasury, the State Bank of India, and global banks including Standard Chartered (another former big lender), Citigroup, JP Morgan Chase, Goldman Sachs, Deutsche Bank, Royal Bank of Scotland, HSBC, Barclays, BNP Paribas, Credit Agrilcole and Societe Generale. The US and Korean Export-Import banks have been touted as possible sources, but appear to have backed away. Even the Abbott-Turnbull $5 billion slush fund for Northern Australian boondoggles, seen when it was announced as a rescuer for Adani, now appears unlikely. At the recent Northern Australia Investment Forum, the fund was the centre of attention, but Adani apparently didn’t get a mention, unless it was implicit in Frydenberg’s claim that the government wouldn’t be investing in “white elephants”.

The situation with suppliers is just as bad. Adani sacked the engineering team from Worsley Parsons and the construction group from Posco (also a supposed equity partner) last year. A $2 billion announcement of work for Downer EDI seems to have vanished into thin air. And at Abbot Point, Adani, as owner, is engaged in a nasty brawl with Glencore, the current operator.

In summary, we appear likely to find out what happens when a dog catches the car it has been chasing. Adani and its backers have been denouncing green tape and “lawfare” as the only obstacles to the bonanza they have on offer. Now, the legal and administrative obstacles are gone, so they have only to line up the money, rehire the contractors and announce the starting date. My guess is that this will never happen.

A question about group selection

John Quiggin73 Comments

I’m doing some work on evolutionary models of game theory and need to understand the debate about group selection. It seems pretty clear that the great majority of evolutionary biologists reject the idea of group selection, but I haven’t found an adequate (to me) explanation of why they do so. A crucial problem for me is that the literature seems, without exception as far as I can see, to conflate group selection with co-operation and altruism. But the problem of group selection arises in non-cooperative settings, provided they are not zero-sum.

To illustrate the problem I’m struggling with, suppose that two previously isolated species meet as a result of some change. In one species (peacocks), competition between males for mates takes the form of elaborate, and energetically costly, displays. In the other species (penguins) males compete by providing food to their mates. In all other respects (diet, predators and so on) the two are similar. It seems obvious to me that the penguins, with their more efficient social arrangements, are going to outbreed the peacocks and eventually drive them to extinction.

It seems to me there are only two possibilities here
(a) My reasoning is wrong, and we can’t judge which species, if either, will dominate; or
(b) Even though it involves one group being selected over another, this isn’t what is meant by group selection

I’d really appreciate some help on this. I’m happy to have thoughts from anyone, but I’d most like to hear from actual experts with contact details.

Education is an investment, not a filter

John Quiggin44 Comments

There’s been a fair bit of fuss about reports that it’s now much easier to get into a university course than it used to be. This is the unsurprising result of decades of public policy aimed in this direction (with some brief reversals, most notably when David Kemp was minister). This piece by Leith van Onselen is fairly representative

Thanks to the former Labor Government’s uncapping of university places in 2012, allowing universities to recruit as many students as they can fit, actual tertiary entrance scores have plummeted, meaning every man and his dog can now get a degree, devaluing their worth in the process.

Implicit in this statement is the “screening” theory of education, that the point of getting a university degree (or finishing high school for that matter) is to show that you are smarter than the people who didn’t. The idea that doing a degree might equip you with useful specific knowledge, or with general skills in reasoning, writing and so on, doesn’t get mentioned.

Assuming, as is fair in this context, that the “worth” of a degree is being conceived in monetary terms, the claim that degrees have been “devalued” depends on the future earnings of the students now being admitted. We can’t know this (neither can van Onselen). However, the long-term evidence is clear: in Australia, as everywhere else in the world, the wage premium for graduates has remained large enough to make going to university a very good decision, even as the proportion of young people undertaking university education has risen from a tiny minority in the mid-20th century to around 40 per cent today.

One interpretation of this is that, over the past century or more, the entire world has been engaged in more and more elaborate screening for no good reason. A more plausible explanation is that technological change has eliminated the kinds of jobs that used to employ kids with a Year 10 education (the median level of achievement when I was young), and replaced them with jobs that need the skills (specific and general) of a university graduate.

There’s every reason to think that these trends will continue in the future, so we are going to need more education not less. In my view, just about everyone should undertake post-secondary education either at university or TAFE.

In this context, I shoud note that van Onselen is spot-on about the disaster area that is for-profit education, particularly in the vocational sector. As I’ve said before, the for-profit providers should either be shut down or turned into contract providers for the TAFE system.

Known unknowns (crosspost from Crooked Timber)

John Quiggin22 Comments

In September 2002, according to Politico magazine, Donald Rumsfeld received a report (mostly declassified in 2011) stating that the intelligence on Saddam Hussein’s putative weapons programs was essentially worthless. For example, the report says:

Our knowledge of the Iraqi (nuclear) weapons program is based largely—perhaps 90%—on analysis of imprecise intelligence

The report was seen by Paul Wolfowitz, then Deputy Defense Secretary and now an adviser to Jeb Bush, but wasn’t shared with President George Bush, or with other members of the Administration, such as Colin Powell. And despite his musings about known and unknown unknowns (unsurprisingly the subject of some sardonic comment in the Politico piece, Rumsfeld showed no doubt in his public pronouncements about the supposed weapons.

This report ought to be (but won’t be) enough to discredit Rumsfeld and Wolfowitz once and for all. Given that they knew that the claimed legal basis for the war relied on spurious intelligence, both are guilty of the crime of a war of aggression. More to the point, in terms of US political debate, a Defense Secretary who sends thousands of US troops to their deaths in pursuit of a goal he knows to be illusory ought to be condemned out of hand.

On the other hand, does the report help to exonerate those who advocated war based on the spurious intelligence being pushed by Rumsfeld? Not to any significant degree. The fact that Rumsfeld was a four-flusher was obvious in December 2002, when Saddam denied having any weapons. As I observed at the time

In the standard warblogger scenario, the declaration was the trigger. Once it came out, the US would produce the evidence to show Iraq was lying and the war would be under way … Instead, Iraq is denying everything but the US is in no hurry to prove that Saddam is lying … The only interpretation that makes sense is that, despite all the dossiers that were waved about a few months ago – including satellite images of ‘suspect’ sites – the Administration doesn’t really have anything

Anyone who wasn’t already committed to war could have followed the same reasoning, and many did.