Rethinking tax policy for Australia

John Quiggin96 Comments

The title of this post is taken from that of the recent Treasury Discussions Paper on Tax, entitled Re:Think. Sadly, as I point out in this Guardian piece, there’s very little evidence of rethinking from Treasury. Most of the paper could have been lifted straight from the Asprey Review of 1975, and the sensitivities of the current government have ensured a step backwards from the Henry Review, with carbon taxes and resource rent taxes now off limits.

Undeterred, I’m going to start on my own review. I’m going to try something a little different in blog terms. This post will be updated whenever I get a chance, both with new material and in terms of publication date so that each new version will appear at the top of the homepage, hopefully with the comments being carried with it. I’m putting in some headings, and starting off with an idea I mentioned recently, that of a tax on bank profits

Aggregates: Revenue, expenditure, budget balance, debt and net worth

Revenue options

* A tax on the super-profits of banks, reflecting their privileged position. Tax base $29 billion. Possible revenue $5-10 billion, or 0.3-0.6 per cent of national income/GDP.

* Reforming the treatment of negative gearing “Quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains. Revenue estimate: rising over time to $5 billion a year, or 0.3 per cent of national income/GDP.

Expenditure requirements

Negative gearing

John Quiggin17 Comments

As I mentioned a while back, I’m planning a series of posts on tax policy. Since debate about “negative gearing” has been spurred by the suggestion that Labor might restrict it, this seems like a good time to cover the topic.

I’ll give my summary upfront, then go on. The problem is not negative gearing in itself but its interaction with the concessional treatment of capital gains. There are a variety of solutions, but the best is probably to “quarantine” business losses for individuals, at least with respect to housing investments, and allow them only to be used as an offset against capital gains.

Read More »

The cost of a policy depends on what policy you choose

John Quiggin14 Comments

I don’t usually respond to posts on Catallaxy, but I will try on this occasion to fix up what I hope is simply a misinterpretation. Responding to the recent proposal by the Climate Change Authority (of which I am a member) for an emissions reduction target of 30 per cent, relative to 2000 levels, to be achieved by 2025, Sinclair Davidson picks out the following sentence

As noted earlier, the Authority is not in a position to prepare meaningful estimates of the costs of meeting its recommended target, primarily because many of these costs will depend on the policies adopted.

and responds

Wow. Really wow. Let’s adopt a policy even though we have absolutely no idea how much it will cost.

This is a serious misreading. As the report says, there a variety of ways in which this target might be reached. There are the methods favored by economists, involving a major role for carbon prices. Costs of achieving emissions reductions using these methods have been estimated on many occasions. The invariable finding is that carbon prices can achieve large-scale reduction si emissions very cheaply.- typical estimates are for a reduction in the rate of economic growth of around 0.1 percentage points. Or, there are much more expensive methods, such as a massive expansion of the current government’s Emissions Reduction Fund (on which more later, I hope).

Since we don’t know what policy this, or a future government, might adopt, we can’t estimate the cost. So, to rephrase Davidson “Let’s propose a target even though we don’t know how the government, should they adopt it, will choose to achieve it”. That is, of course, exactly what the government asked the CCA to do in this report.

Lomborg review: repost from 2005

John Quiggin25 Comments

The announcement that the Federal government will be (they say, only partly, but UWA appears to have a different view) funding a move of Bjorn Lomborg’s Copenhagen Consensus Center to the University of WA has attracted plenty of comment.

Rather than pile on, I thought I would repost my, decidedly mixed, review of Lomborg’s first CCC effort in 2005.

Read More »

Loaves and fishes (updated)

John Quiggin19 Comments

Readers who attended Sunday School will remember the story of miracle of the loaves and fishes, performed by Jesus on the Sea of Galilee. A couple of fish and a few loaves of bread proved sufficient to feed a multitude.

Something similar appears to be happening in the Galilee Basin, where large, but economically marginal, coal mines are supposed to produce massive wealth for everyone. The Courier-Mail has a report of a court case in which the Alpha mine, owned by GVK Hancock, is claimed to be capable of generating $44 billion in royalties. The royalty rate in Queensland is 10 per cent for coal prices below $100/tonne (prices above that level will almost certainly never be seen again). At the current price of around $65/tonne, that’s $6.50/tonne. Alpha claims to be able to produce 32 million tonnes a year. If realised, that would make a little over $200 million a year. That is, to realise the amount claimed, the mine would have to produce at its maximum capacity for over 200 years.

But that’s the least of the problems. GVK Hancock’s own estimate of the cash costs of extracting coal is $55/tonne and others are as high as $70/tonne (I don’t know if this includes royalties. So, even at the most optimistic estimates of cost and extraction rates we are looking at a margin of $10/tonne for 32 million tonnes or $320 million a year, out of which a variety of corporate overheads will have to be paid. The capital cost of the project will be at least $10 billion. So, at current prices, the gross return on capital before interest, depreciation and amortisation (and tax, if any is paid) is at most 3.2 per cent, barely equal to the rate of interest on Australian government bonds. Obviously, no sensible lender or equity investor would look at this project.

A similar analysis can be performed for Adani’s Carmichael mine, which has apparently lost the $1 billion in funding proposed to come from the State Bank of India, as well as $300 million in equity promised by the Newman LNP government.

Adani claims cash costs of less than $50/tonne, but this seems very optimistic, being dependent on the assumption that other coal projects will fall over, reducing wages and other input costs. But it has a much higher projected output, around 50-60 million tonnes by 2022. So, it could be generating $900 million a year in EBITDA. But it’s hard to see that covering depreciation and interest on a $10 billion project. And of course, another $10-$20 off the coal price would kill the project completely, taking the lenders’ money with it.

In essence, these projects are being kept on life support in the hope of a recovery in coal prices to levels near those that were prevailing when the projects began. That really would be a miracle

Sandpit

John Quiggin16 Comments

A new sandpit for long side discussions, idees fixes and so on. Unless directly responding to the OP, all discussions of nuclear power, MMT and conspiracy theories should be directed to sandpits (or, if none is open, message boards).

Locke’s theory of just expropriation (crosspost from Crooked Timber)

John Quiggin41 Comments

For quite a few years now, I’ve been working on a response to Henry Hazlitt’s Economics in One Lesson, a defence of free-market economics first published in 1946, but still in print and popular among libertarians. Hazlitt, as he says, is essentially just reworking Bastiat’s analysis of opportunity cost, represented by the broken window parable. What I’m trying to do is take the idea of opportunity cost seriously, and apply it across the board, including to issues of income distribution and property rights. It’s obvious (to me, at any rate) that any allocation of property rights to one or more people has an opportunity cost, namely the benefits that could be realised if the property rights were allocated to someone else. This is a live issue when property rights are being created explicitly right now, as they are with various kinds of intellectual property. But it is just as relevant when we come to consider the historical origins of property. I’ve spent a fair bit of time debating the question of whether property rights have a basis (say, in natural law) for existence independent of the states or governments that typically define and enforce them. I don’t want to talk about that issue right now, but it explains why I’m taking an interest in (I think) the most prominent proponent of natural law in relation to property, John Locke.

It’s a long time since I read Locke and, at the time, I was mostly concerned with Hume’s objection that

there is no property in durable objects, such as lands or houses, when carefully examined in passing from hand to hand, but must, in some period, have been founded on fraud and injustice.

That’s true of course. But rereading Locke[^1] I now conclude that he is not offering a theory of original acquisition, but rather one of expropriation, designed specifically to justify the “fraud and injustice” to which Hume refers.
Read More »

Goodbye to CPD

John Quiggin30 Comments

Like Mark Bahnisch, Eva Cox and a number of others, I’ve resigned as a Fellow of the Centre for Policy Development. It’s a sad day, since CPD has done a lot of great work, and I’ve enjoyed being involved in it. But the leadership of the Centre has taken a decision to move to the right in the hope of being more relevant to the policy process. The most recent outcome has been a paper on tax policy that broadly accepts the Treasury view of the issue, and pushes for a broadening of the GST base, which means taxation of fresh food. This isn’t a new or innovative idea. Rather, it has been part of rightwing orthodoxy for decades. CPDs endorsement allows its advocates to claim some “left” support. That claim obviously gained credibility from having Fellows like Mark, Eva and me. So, we had no alternative but to resign.

I should clarify that, apart from a nice title and a publishing outlet, I wasn’t getting any direct benefit from being part of CPD. So, I’m making a statement rather than a sacrifice.