NEWSFLASH! In September I will join The Conversation as its Business and Economy Editor. I have been honoured to work at The Age for the past ten years, originally alongside the legendry Tim Colebatch, and for the past four years as economics editor in my own right.

At The Conversation, my job will be to make the best thinking from Australia's 40 univerisites accessible to the widest possible audience. That means you. From the new year I will also write a weekly column.

On this site are most of the important things I have written for Fairfax and the ABC over the past few decades. I recommend the Search function. The site is a record for you, as well as me.

I'll continue to post great things from The Conversation and other places here, and also on Twitter and Facebook. Enjoy.

Thursday, November 12, 2015

For dopey career males like me.. When tax doesn't matter

Scott Morrison has got tax the wrong way around. A week ago he told bunch of bemused economists that income tax had "become the silent tax", as if that was a bad thing. He liked the line so much, he used it on Sky News a few days later, and then at a press conference at Parliament House. "With income tax, you pay it all year and often don't see what's getting taken out of your pocket," he told Sky. "You go to the automatic teller machine and you pull out your money and it doesn't say on there that you paid 19 cents in the dollar or 45 plus the Medicare levy, plus the deficit reduction levy." "This is a silent tax, it's a forgotten tax and this is something that is holding Australians back who want to actually work more," he told the press conference. Whoa. If income tax really was silent (and I don't think for a minute it is – it's on pay slips and group certificates) it wouldn't be holding anyone back from doing anything. It'd be a close to perfect tax, one that didn't change behaviour. It wouldn't be a drag on productivity because no-one would ease off work in order to avoid paying it. If only. As it happens, income tax is a bit like that for many men. They know what they are paying, but it doesn't stop them working. As Melbourne University's John Freebairn confided to delegates at the conference Morrison spoke at: "For dopey career males like me who are are no good at cooking and looking after children, our elasticity of labour supply is almost zero." Such men have nowhere else to go. High income tax rates aren't going to stop them working. "But women with children have lots other things they can do," Freebairn continued. "Their elasticity is pretty high. Setting labour tax rates high on dopey males like me has almost no distortion costs. But setting it high on smart young women thinking about starting families has huge costs." Women considering returning to work or putting in more hours after having children most certainly do factor in the tax they'll have to pay (they look it up) along with the extra childcare costs they will incur and the family tax benefits they will lose. The total, the so-called effective marginal tax rate, is often close to and in some cases surpasses 100 per cent of what they would earn, meaning work leaves them no better off. It most certainly does put them off working. It's a drag on the economy far bigger than than that faced by working men pushed into higher tax brackets that Morrison says they don't even know about. Removing distortions the tax system actually imposes ought to be at the heart of the changes we will make. Helpfully, the treasury ranks them in its tax discussion paper. The worst – by far – is stamp duty on real estate transactions. The treasury says it is three times as distorting as income tax. People really do stay put rather than move house in order to avoid paying it. The best tax, by far, is land tax. As Freebairn says, land can't go anywhere. Taxing it makes little difference to anything. The benefits from simply swapping stamp duty for land tax are immense, dwarfing the treasury's estimate of the benefits from swapping income tax for goods and services tax. As would be the benefits of more broadly taxing super-profits (despite the kerfuffle over the mining tax). Super profits flow from things that are stuck here. They derive from the minerals and petroleum that are stuck in the ground and from the monopoly position of businesses such as banks. People will continue to mine and operate banks even if extra tax cuts the profits to just a bit beyond ordinary, rather than super. If a super-profits tax was used to cut ordinary company tax, it'd be a double win. And if all income was taxed as income, income tax would distort very little. Right now fringe benefits and super contributions are taxed more lightly than wages. Yet they come from the same pot. As Freebairn says: "a dollar is a dollar is a dollar, certainly to the employer." Taxed evenly, people would no longer be encouraged to accept company cars and dine out in lieu of cash. And Morrison would rake in an extra $20 billion. There's a lot he can do to get Australia moving. The GST is the least of it. In The Age and Sydney Morning Herald