Funding decent public services easier than you think

Imagine if we actually did have a government prepared to collect enough revenue to fund necessary services like dental care and disability services, let alone decent public health and education system. A Dr Richard Denniss, writing in Crikey this week as part of their “what would you do” budget discussion, has some ideas:

My fantasy budget would massively simplify the tax system and in the process collect a lot more tax revenue. It would be transformative because in one fell swoop tens of thousands of our best and brightest would be “freed up” from the stultifying, but very well paid, task of helping wealthy people engineer their finances to avoid tax.

So how to do it?

Step one is to abolish John Howard’s arbitrary decision to tax capital gains at half the rate of other income. Before that decision we had spent 20 years moving towards a simplified, harmonised system that reduced incentives to “financially engineer” ordinary income into more tax effective forms of income. The argument that such an incentive would stimulate investment is spurious, was mounted after the decision was made and is not borne out by the empirical evidence. That said, it’s very popular among the wealthy.

Step two is to abolish the bizarre notion that income from superannuation should be tax free. This was another of John Howard’s crimes against tax efficiency and equity. Those lucky enough to have accumulated millions, and in some cases tens of millions of dollars, in their superannuation accounts before the annual contribution limits kicked in can literally withdraw millions of dollars in income from their super, completely tax-free.

All up, tax concessions for superannuation cost the budget about $30 billion per year and anyone who says that these contributions are saving the budget more than $30 billion in reduced aged pension payments is either kidding themselves or kidding you. It’s demonstrably untrue, and Treasury’s own figures show that about $10 billion of that $30 billion goes to the highest 5% of income earners, the vast majority of whom were never going to be eligible for the pension.

There’s more on the link, but imagine if governments had the sense to even do that much. (Those calling the ALP’s recent budget “socialist” have no idea.)

About these ads

18 responses to “Funding decent public services easier than you think

  1. Step two is to abolish the bizarre notion that income from superannuation should be tax free. This was another of John Howard’s crimes against tax efficiency and equity. Those lucky enough to have accumulated millions, and in some cases tens of millions of dollars, in their superannuation accounts before the annual contribution limits kicked in can literally withdraw millions of dollars in income from their super, completely tax-free.

    It’s very easy to focus on the tiny minority of people who manage to squirrel away millions into their super, but what about people like my parents who only manage a few hundred grand (since halved by the GFC) that has to support them for the next 25-odd years ?

    The current Government has taken steps to remedy the problem (which I agree exists) by limiting the amount of money that can be salary-sacrificed into super.

  2. nicelittleunit

    Denniss, not Dentiss.

  3. Splatterbottom

    He sounds like a dentist to me, ripping the eye teeth out of tax-payers’ mouths.

    His first proposition is on the money. Tax rate arbitrage is a systemic inefficiency. For the same reasons, personal rates should be aligned with company tax rates.

    I would also expand the rollover relief available for switching assets. If you want to move your investments from property to shares you shouldn’t lose up to 30% of the value as a result.

    His point about super is a bit OTT. There are already measures to limit super contributions. However, There are probably more efficient ways to limit the tax benefits to what is required to fund a modest retirement. Anything above this should be fully taxed.

    I didn’t see what his third point was but I’m guessing it would be some form of limitation on negative gearing. This is practically impossible as any government that tries it will be booted in short order. A big part of the problem is that property investment has reduced risks of loss. Governments fear the consequences of a general decline in value of real property.

    Also I would target the spending side. In particular I would try to emasculate the crowding out of the private sector by the new class leeches who make so much from the government. After all the private sector produces the wealth the government spends with such abandon.

  4. For those that can’t read the article because you don’t have a Crikey subscription you can find it at the below link

    https://www.tai.org.au/index.php?q=node%2F19&pubid=999&act=display

    SB. It sounds like you broadly agree with what Richard has to say. At least the parts you could read.

    Disclosure: I work for the Australia Institute where Richard Denniss is the Executive Director.

  5. Cheers NLU, fixed.

  6. Splatterbottom

    Matt, my major point of agreement is that eliminating tax arbitrage is essential for an efficient tax system. Far too much waste, distortion and complexity us introduced into the economy because of it.

    I am not a big fan of the carbon tax, and would scrap that as being effectively useless.

    I would also start paying off government debt as fast as possible. It will take a long time to pay off and is an unfair burden on future generations. It costs about $9bn per year in interest to maintain.

    A good economy has a thriving private sector, an efficient tax system and provides adequately for the welfare of its citizens. Usually in these discussions there is not enough emphasis on supporting the private sector.

  7. I have never quite understood the fear around federal government debt. Sure $11.5bn in interest sounds like a lot, but it’s actually bugger all when you put it into context. Indeed total federal government debt is less than 10% of GDP making us the 3rd lowest debt country of the 34 developed countries in the OECD. That is the equivalent of being worried about a $10,000 debt if you earned $100,000 a year.

    Indeed when it comes to public debt people talk about how it’s irresponsible. Business on the other hand thinks it’s the best path to wealth generation. Households are told to jump into debt the moment they are able. Business debt is just under 70% of GDP and household debt is just under 80% of GDP.

    We think debt is clever for every aspect of our economy except for the government. Which is even stranger when you look at the interest rates faced by the private sector for debt and the interest rate faced by the government. The federal government has the lowest interest rate of anybody. Why? Because the financial market thinks they are the most responsible and most likely to pay it back.

    So debt is bad for the most responsible actor in the economy but fine for the rest of us. That’s just weird.

  8. Splatterbottom

    ‘We should do it because other countries do it’ is not a very logical or persuasive argument.

    Companies choose to finance their activities by way of debt when they believe that returns to shareholders will be enhanced by the borrowing. Part of this calculation will include the benefits of interest deductibility, which is not a material consideration for governments. A government might incur debt when the benefits of having the debt exceed the cost. So if the interest cost is $10bn per year then you would want to show $10bn of benefit from the borrowing each year.

    $11.5bn per annum is not all that trivial when you consider what benefits may be funded with that amount. If we added to that a principle payment of the same amount it would take about twenty years to repay the debt. So before a government borrows, even to the extent that Australia has under Labor, it should consider what it could fund with the interest over a considerable period of time.

    There are times when it will be necessary to resort to borrowing. That becomes more problematic the higher the existing debt level. The sensible thing to do would be to keep debt as low as possible most of the time so that it can be increased in emergency situations.

    Increases in national debt may also lead to inter-generational unfairness as future generations must repay it.

    So, overall I would try to keep debt down other than in crisis situations.

  9. So, overall I would try to keep debt down other than in crisis situations.

    There’ll be plenty of those over the next decade or two.

    Given the context of the GFC and the position of the rest of the world’s Governments, Australia does not appear to have anything to worry about with regards to its public debt.

    Our private debt, on the other hand, is going to completely fuck us in fairly short order, in no small part because “nobody” believes astronomical levels of private debt “matter” (despite the vast quantity of evidence from the rest of the world over the last five years).

  10. “A government might incur debt when the benefits of having the debt exceed the cost. So if the interest cost is $10bn per year then you would want to show $10bn of benefit from the borrowing each year.”

    Couldn’t agree more. And since the debt was incurred stopping us sinking into recession then its money was well spent. Imagine the value of the lost output if we had slipped into recession. That amount would be massive compared to the size of federal government debt.

    “So, overall I would try to keep debt down other than in crisis situations.”

    You mean in exactly the same way as has happened in Australia. It’s nice that you have endorsed the Labor government’s fiscal strategy.

    “If we added to that a principle payment of the same amount it would take about twenty years to repay the debt.”

    It will take nothing like 20 years to repay the debt. Apart from anything else the economy is likely to be twice as big as it currently is in 20 years, meaning we have twice the capacity to pay it back.

  11. Splatterbottom

    Matt, I’m not sure about the benefits of the stimulus. I supported it at the time but, with hindsight, there is an argument that it was unnecessary, too late and misdirected. The fact that demand for our exports did not fall dramatically might have been a large factor in the mildness of the downturn.

    It’s funny how Labor constantly claimed that good economic times under the Howard government was not Costello’s doing but merely the consequence of the mining boom. Now they are In office they seem keen to take all the credit themselves rather than look at other factors.

    “It’s nice that you have endorsed the Labor government’s fiscal strategy.”

    I have no problem supporting good Labor policies. I support some Green policies too. Hell, I even voted for the Greens for a while (until their rancid red innards started oozing out of the watermelon).

  12. “The fact that demand for our exports did not fall dramatically might have been a large factor in the mildness of the downturn.”

    The idea that a major factor in Australia avoiding a recession was our exports is a common misconception that just isn’t supported by the facts. If you look at Australia’s export data, you see our exports peaked in Oct 2008 and crashed down 45% by May 2009. They then stayed down till March 2010 before recovering.

    If we compare our export data to say the United States (who did not avoid recession) we see a slightly similar pattern. There exports did not fall as far as ours. From their peak in July 2008 they fell 31% before recovering far sooner than us in August 2009.

    Not only did the US fall less and recover sooner but since then they have grown more than us. Australian exports are currently 12% below our pre-GFC peak. US exports are 13% higher than their pre-GFC peak.

    This all makes sense when you think about what drives our exports at the moment. They are driven by the mining industry. The mining industry is highly capital intensive. This means that even after a huge expansion in recent years it still only employs around 250,000 people (just over 2% of the labour force). Such an industry would be unable to support employment in Australia.

    Also the mining industry is incredibly profitable at the moment. So while the industry only pays 10% of its income in wages it pays 30% in profit. Since the mining industry is 83% foreign owned in Australia, most of that profit goes overseas, and hence would be of no benefit to Australia during an economic down turn.

    Sorry for the long post but the conclusion is there is no evidence that our exports ‘saw us through the boom’ and when you think about it, they were never likely to.

  13. Splatterbottom

    Matt, the question for me is cause and effect. What we saw was a dip into negative GDP growth for one quarter at the end of 2008 and a recovery beginning the next quarter, so we avoided the two quarters of negative growth that constitutes a recession.

    Most of the stimulus spending came after the recovery began. What we saw with the exports was a dip and a quick recovery which mirrored the GDP growth trend. This is why I am a bit cautious about accepting an unqualified way (pun intended) that it was only the stimulus that got us through the GFC in reasonable shape.

    “Sorry for the long post but the conclusion is there is no evidence that our exports ‘saw us through the boom’ and when you think about it, they were never likely to.” (I assume here “boom” = GFC)

    I would have thought that continued demand for our exports would be much more helpful in difficult economic times than a sustained decrease in demand for them.

  14. Splatterbottom

    Matt: “So while the industry only pays 10% of its income in wages it pays 30% in profit. Since the mining industry is 83% foreign owned in Australia, most of that profit goes overseas, and hence would be of no benefit to Australia during an economic down turn.

    I assume it also pays a considerable amount in various taxes as well.

    The foreign profit is the return on foreign capital invested here. The real question is how far we can go in reducing that profit through taxation before we reduce capital investment. Of course if your political agenda includes the abolition of coal mining that may not be such a bad thing.

  15. “Most of the stimulus spending came after the recovery began. What we saw with the exports was a dip and a quick recovery which mirrored the GDP growth trend.”

    Sorry SB but the evidence does not support this. As I said exports collapsed after September 2008 (by 45%) and didn’t really start to recover till March 2010. That’s 18 months.

    GDP grew at 0.1% in September 2008, 0.0% in December 2008 and 0.1% in March 2009. After that growth rates rebounded. In the year between those low growth quarters and when exports started to recover the economy grew 2.8%. Remember trend growth is between 3% and 3.5%. So by the time exports were recovering we were most of the way back to trend growth. There is no way it could have been exports. The figures show that clearly.

    As to most of the stimulus package coming after the recovery, while that’s technically true it misses the point. The stimulus package was (from an economist’s standpoint) very well crafted. It had 3 phases. The first was the cash handouts in December 2008. These were designed to give an immediate shot in the arm to the economy (mostly retail). The second phase was short term job creation with projects like the insulation program. The third phase was in building projects like the BER. Each phase was designed to go off at different times in order to maintain the stimulus.

    So the stimulus package was working from December 2008, the economy was recovering by June 2009, while exports were not stimulating the economy until March 2010. The timeline is all wrong for exports to have been a factor in Australia avoiding a recession.

  16. Splatterbottom

    Matt I have been stuck in moderation so I’m trying again.

    “Sorry SB but the evidence does not support this. As I said exports collapsed after September 2008 (by 45%) and didn’t really start to recover till March 2010. “

    It seems that mining was a different story. If you look at chart 2 in this article it seem that the dip in mining exports was of much shorter duration than the figures you give for exports overall. If the thesis is that the mining sector had a material impact on the recovery from the GFC then these figures should be more relvant.

    I like your explanation of the way the stimulus was planned.

    As I said earlier I was in favour of the stimulus but, in hindsight, had some misgivings. It is an interesting puzzle to piece together, and to compare the approaches adopted by various countries and the outcomes achieved.

    “from an economist’s standpoint”

    You mean there is only one? I thought that there were more standpoints than economists. :-)

  17. narcoticmusing

    “from an economist’s standpoint”

    You mean there is only one? I thought that there were more standpoints than economists.

    Indeed, there is more than one type of economist and not all of them agreed with the stimulus. Friedman fans (not knocking Friedman per se), for example, would not have approved of such intervention, which is probably why the US stimulus didn’t do as well as Australia – they were trying to appease the two broad categories of economists (notwithstanding the many variations between).

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s