Thursday, March 23, 2006

Trading quarantine

The transcript of my ABC Background Briefing documentary, Trading quarantine is here.

It deals with the decisions, attitude and track record of Biosecurity Australia, a subject also covered in my Dateline SBS documentary, Foot in Mouth.

Wednesday, March 15, 2006

The Topsy-Turvy Politics of Climate Change

There are two major political parties in Australia. Only one of them trusts markets. That’s the inescapable conclusion to be drawn from comparing the Government’s position on climate change with the Opposition’s, released last week.

The Government can’t countenance the idea of allowing traders to buy and sell licences to pollute.

Kim Beazley and his otherwise Left-leaning environment spokesman Anthony Albanese not only want to allow trading in pollution licences but also want to hand them out for free, with the most licences going to those firms that pollute the most.

It’s a policy that is not only pro-market, but also pro-polluter. So why on earth aren’t environmentalists screaming?...

Because there are some problems that markets are extraordinarily good at solving, and in the most painless way possible.

The idea of trading in pollution permits has an impressive parentage. When in the mid-1990s the United States had a problem with acid rain it handed out permits to emit sulphur. The firms that polluted the most got the most permits. And then it encouraged the Chicago Board of Trade to set up an exchange on which those permits could be bought and sold.

Polluters liked the idea because they could make money by installing filters on their chimneys and selling the excess permits they no longer needed. Firms that found it difficult to install filters didn’t need to. They could go to the exchange to buy the excess permits, providing a tidy profit to those firms that had installed filters.

Each year that followed the US handed out fewer new permits. Over a decade the price of a sulphur emission permit on the exchange climbed from $US100 to $US800 a ton. The polluters who could cut back found themselves rich. Those that couldn’t found business increasingly expensive — but not as expensive as it would have been if they had been made to install filters. The market rewarded the firms that could cut emissions cheaply and cushioned the blow for those that could not.

The European Union introduced the first scheme for trading in permits to emit carbon in January last year. It handed out permits to 12,000 carbon-intensive businesses such as oil refineries, electricity generators, and iron and steel foundries. Any firm found emitting carbon without such a permit faced a steep fine.

And then it sat back and waited. At first, the permits weren’t much traded. Their price actually fell. But then the EU knocked back a number of applications for extra permits and the price soared, leapfrogging from €6 per tonne of carbon to around €27 per tonne at the moment.

Along the way an entire new industry of professional carbon permit traders evolved. Once you get used to the idea it is not unusual. Financial markets that trade in bonds are just as bizarre. In his book Bombardiers author Po Bronson describes a bond trader who one day demands to see an actual bond, ‘… any kind of bond. He says he can’t sell bonds anymore if he’s never seen one.’

It is too early say whether the EU’s trading scheme will actually cut the amount of greenhouse gasses emitted by the EU. But there are reasons for confidence.

Over the ten years since the US sulphur trading scheme was introduced, sulphur emissions there have halved. In some parts of the US acid rain is down 25 per cent. The annual saving in healthcare costs is said to top $US20 billion.

The US and Australia would have seemed to have been likely starters for a European-style carbon trading scheme. Both have governments that are thought to approve of market-based solutions and

Yet both have said no to a legislated system of tradeable carbon pollution permits. This might be because they have both refused to sign up to the greenhouse gas reduction targets set out for them in the Kyoto Protocol. Yet the two questions — targets and means to achieving them — are really quite separate. It is possible to have a system of tradeable permits together with a very mild greenhouse gas reduction target. It is also possible to have no system of trading at all and a very severe and damaging greenhouse gas reduction target.

Permit trading is simply the most polluter-friendly means of achieving whatever target the government sets.

Support for the idea is spreading. In Britain, Tony Blair wants to extend the European scheme worldwide. Japan will begin a pilot program next month. Eight States in the US are banding together to introduce their own unified trading scheme without waiting for President Bush. And in Australia, New South Wales and Victoria are considering combining separate State-based schemes for carbon trading in the electricity industry into one semi-national market.

Even the Coalition may not be able to resist the lure of market-based solutions for much longer. Australia’s Environment Minister, Ian Campbell, says carbon trading might have a place in the future, but that he first wants to kick start some ‘breakthrough’ pollution-fighting technologies.

This preference for ‘picking winners’ over harnessing the power of prices may only be temporary. The Treasurer Peter Costello is said to privately support emission trading. His nemesis Malcolm Turnbull lives and breathes market-based solutions. Generational change might soon make Labor’s policy bipartisan.


Annual Tax Pack ritual is just poor form

Spending money in advance to get money back later - maybe - doesn't make sense, says Peter Martin.

So the Treasurer wants to know what's wrong with the Australian tax system. Here's an idea the two business figures conducting his tax inquiry are unlikely to mention in their enthusiasm to make the case for a cut in Australia's "punitive" top rate of tax. That rate (47 per cent) will be paid only by the top 4 per cent of income earners after the changes announced in the last budget come into effect in a few months' time.

The imposition I am talking about is endured by nearly every one of us, year in and year out. It's the requirement to wade through the 120-question Tax Pack to send to the Tax Office information it most probably already has.

As Australian as the compulsory vote, it is a ritual not imposed on the citizens of Britain or New Zealand. In those countries, submitting a tax return is voluntary. Two out of every three citizens don't do it.

Going through the Tax Pack actually takes a lot more time than the compulsory vote. Two decades ago it typically took 4½ hours. (1) A decade later it took 8½ hours. (2) I don't know of any surveys since then but I do know that the Tax Pack has exploded in complexity in that time. Dr Andrew Leigh, an economist at the Australian National University, has costed the time lost nationwide as a result of attempting to fill in the form. He says it approaches $3 billion a year.

And it's not just time... Filling in unnecessary forms creates anxiety, often among those Australians with the simplest of tax affairs. And it can encourage dishonesty. An astonishing 75 per cent of us now use a tax agent - the highest proportion in the world. (3)

In New Zealand it is no longer possible to make claims for deductions. In Britain it has always been very difficult. The only things that matter for the tax affairs of a typical New Zealander are his or her salary (from which tax has already been deducted) and any income from interest or share market dividends (from which tax has already been deducted). The tax authority already has that information and it adjusts deductions throughout the year to make sure that, by the end, there is very little extra money owing. If it is, it sends a statement.

Entitled Simplifying Taxpayer Requirements, the change was introduced in 1999 partly to "reduce the extent to which the tax system intrudes on the lives of most individual taxpayers".

Reports from across the Tasman suggest it has been a success. I believe it would be here, too. Remember all the anguish leading up to the introduction of the GST? After the event, there seems no concern whatsoever among ordinary Australians. (Among businesses, there is concern, but that's the point: the more that the paperwork associated with a tax intrudes on someone's life, the worse they feel about it.)

So why won't authorities here make the income tax system as painless as New Zealand's or as the GST?

Peter Costello actually floated the idea in the lead-up the GST. He told a business lunch that if Australia "had a strong pay-as-you-earn tax system with a strong interest-withholding tax system, we could kick most Australians out of the necessity to file income tax returns". (4)

Then he moved the idea to the backburner. The Tax Office had tested it with focus groups and found people worried about losing their refunds: "For most taxpayers, refunds are what the personal tax system is all about." The obsession with the annual refund is indeed bizarre. Seventy-five to 80 per cent of us get a refund and we seem prepared to endure anything - even routinely having more tax than necessary taken out - to get it.

Professor Chris Evans, formerly of the British tax office, runs the Atax program at the University of NSW. He says: "Frankly, it is inexplicable, and unique to Australia. What rational person overpays in order to get something back at a later stage? It defies logical explanation - I would certainly not contemplate overpaying for my electricity in advance just so that I could have some 'forced savings' coming back to me at some point in the future." (3)

The lever most of us use to get a refund is to claim for so-called work-related expenses: things such as tools, conference fees and uniforms. But the rules governing what is in and what is out are so arbitrary as to make it look like a rort.

Professor Jonathan Baldry, of the University of New England, notes that a shearer can claim a deduction for the cost of jeans used as working clothes but plain-clothes police officers cannot claim for their clothes. (5)

The biggest claims are made by those with the biggest incomes. Baldry says the typical claim climbs by $49 for every $1000 increase in salary. Politicians and judges claim more than $10,000 each. We should abolish the right to claim deductions and let the chips fall where they may.

Then most of us wouldn't need to fill in the Tax Pack - although people such as landlords still would. Much of the information could be collected in another way. (For instance, the Tax Office could ask health funds directly about who is a member.)

An Australian twist might be to hand each of us a $300 deduction. That way we could still get our beloved refunds.

(1) Pope, J., and Fayle, R. "The Compliance Costs of Personal Income Taxation in Australia, 1986/87: Emperical Results"., Australian Tax Forum 8, (4) 485-538.

(2) Tran-Nam, B., Evans, C., Ritchie, K. and Walpole, M., 2000, “Tax Compliance Costs: Research Methodology and Empirical Evidence from Australia”, National Tax Journal 53(2): 229–252.

(3) Chris Evans, 2004, “Diminishing returns: The case for reduced annual filing for personal income taxpayers in Australia” Australian Tax Review 33: 168-181

(4) Committee for the Economic Development of Australia Conference, January 28, 1998

(5) Jonathan Baldry, "Income Tax Deductions for Work-Related Expenses: The Rationale Examined" Australian Economic Papers, 1998, vol. 37, issue 1, pages 45-57, Jonathan Baldry 1998, "Abolishing income tax deductibility for work-related expenses", Agenda, Vol. 5(1), 49-60.


Wednesday, March 08, 2006

A Tax by Any Other Name

Spare a thought for business figures Dick Warburton and Peter Hendy. They’ve been given just five weeks to produce an ‘authoritative statement’ on how Australia’s tax take compares to that of other countries.

And every second member of the commentariat is telling them that the task is dead easy.

Andrew Leigh of the Australian National University says Warburton and Hendy are being asked to find out what anyone who uses Google can get from a public website. Malcolm Turnbull says a lot of the work has been done before. And economist John Edwards dismisses the exercise, saying there is ‘absolutely zero point in having an inquiry to ascertain facts that are well known.’

But if the facts are so well known, why is it that all the accounts we get of them seem different?

The truth is that it is impossible to authoritatively compare Australia’s tax take to that of other countries. The reasons why this is so tell us a lot about the meaninglessness of the question.

I’ll explain.

Rich nations other than Australia also impose so-called ‘social security contributions’...
They are extracted from both workers and their bosses. Germany, for example, hits workers for 21 per cent of their income, and their bosses for another 21 per cent. The UK charges workers 16 per cent and employers 10 per cent, and the US 8 per cent and 8 per cent. Even low tax Japan charges workers 12 per cent and employers another 12 per cent.

When compulsory social security contributions are counted as taxes (as they should be) it is the rest of the OECD , rather than Australia, which looks high taxing.

The Australian Treasury says by this measure Australia collects less tax as a proportion of national income than all but seven of the OECD’s 30 members.

But this comparison also leaves something out.

Australia — uniquely — enforces the collection of another impost, very similar to a tax. Our Tax Office compels employers to pay nine per cent of each of their employee’s earnings into a superannuation fund.

It is true that the money goes into private rather than government hands, but it does it at government insistence in order to fund retirement, just as it does in those OECD nations that impose compulsory social security contributions.

Compulsory superannuation contributions are a tax by any other name. That’s certainly the view of Dick Warburton who will be conducting the Treasurer’s inquiry. Last week he aroused the ire of the father of Australia’s superannuation system Paul Keating by saying plainly: ‘I definitely do call it a tax because it is money taken from the people to do the same sort of task that we pay taxes for.’

For what it is worth, when you count the Superannuation Guarantee as a tax (as I think you should) Australia’s total tax take looks pretty unexceptional compared to the rest of the OECD.

By now you might be forgiven for wondering whether such an exercise is worth very much.

Ask yourself this: What if Australia removed its system of compulsory superannuation contributions? We would then be called a ‘low tax country,’ but what would have changed? Without compulsion, the well-off among us would still put aside money for their old age (perhaps even just as much money as before, and perhaps to the same fund managers).

Very little might have changed when it came to financial flows — except that we would be called a ‘low tax country.’

Similarly, Australia could become a ‘low tax country’ if our governments stopped providing free schools. But the drain on parents’ resources would be little changed. They would still have to pay for schooling — perhaps just as much as before, perhaps more — but directly out of their own pockets with the money they no longer contributed in tax.

Working out whether Australia is a high-taxing or a low-taxing country, as the Treasurer has asked his Task Force to do, is meaningless without also looking at what the tax buys. You wouldn’t judge an internet plan or a holiday package by assessing whether it was high-price or low-price and leaving it at that. You would also want to look at what that high or low price bought.

To his credit the Treasurer recognises this. The terms of reference he has given Warburton and Hendy note that: ‘Some countries have a much larger/smaller government sector than Australia, and therefore require a higher/lower level of taxes.’

But he doesn’t seem to have followed through the implication. The team should be examining value for money, not the absolute amount of whatever it is they choose to define as ‘tax.’

That would be an inquiry worthy of a future Prime Minister, and certainly worthy of more than the five weeks and the handful of researchers that will be available to Warburton and Hendy.


Wednesday, March 01, 2006

Is Brash City About to Crash?

The success of Australia’s brashest, crassest city has been something we’ve had to endure through gritted teeth for decades now, all the while holding onto memories of the days when it meant something to come from somewhere else, such as Adelaide or Melbourne.

Sydney is still the gateway to the rest of Australia. It sucks in almost half of Australia’s new arrivals. It serves as the regional headquarters for nearly every international corporation and is the Australian headquarters for most Australia-wide corporations. Its glittering harbourside real estate is said to be among the most desirable in the world.

But in the last year or so, it has begun to fall apart. Unthinkably, the unemployment rate in NSW is now almost the highest in the country (eclipsed only by Tasmania and the Northern Territory). The State is technically on the edge of recession and Sydneysiders are fleeing Sydney at the rate of thousands each month.

Even with the lion’s share of immigration, Sydney’s population is now scarcely growing. It climbed by just 0.7 per cent in the last year. By contrast Melbourne grew by 1.1 per cent; Brisbane by 1.9 per cent.

Who’s to blame?

As unlikely as it seems, I believe it is a Sydneysider....

John Howard is perhaps the ultimate Sydney Prime Minister. Aside from mainly enforced overnight stays in Canberra, he’s never lived anywhere else. Even though it is just down the road, Canberra was too far away for him and his family to live when he became Prime Minister ten years ago. He commandeered Kirribilli House — Sydney’s most impressive piece of real estate. Then, a year or two later, his Government set about feeding Sydney’s real estate obsession.

It wasn’t widely understood at the time what he was doing.

Added to the otherwise innocuous terms of reference for an inquiry into business taxation was one oddly specific measure dealing with personal, rather than business, taxation. The Ralph Committee, chaired by one of Howard’s friends, businessman John Ralph, was asked to examine the scope for ‘capping the rate of tax applying to capital gains for individuals at 30 per cent.’

At the time, income from capital gains was taxed at the individual’s marginal rate, often 48.5 per cent, minus the rate of inflation.

John Ralph did even more than he was asked. He recommended that only half of each capital gain be taxed — effectively cutting the top rate to 24 per cent.

Ralph’s report spoke of the boom in investment in Australian companies that would result, ‘particularly in innovative, high-growth companies.’

Others saw the likely result more clearly.

At the time Mark Latham was in self-imposed exile on Labor’s backbench. His then-leader Kim Beazley ensured that the Party supported the capital gains tax cut.

Latham described the cut in Parliament as ‘the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value-adding in the information technology sector.’

He was prescient.

As the Macquarie Bank’s Rory Robertson observed later: ‘Since September 1999 it is almost as though the Australian tax system has been screaming at taxpayers to gear up to earn increased capital gains rather than to work harder to earn increased wages or salaries.’

Borrowing to buy properties became amazingly tax effective. Much of the interest expense could be written off as a tax deduction — if the house or unit was new, the investor could claim a deduction for depreciation (whether or not the property had actually depreciated) and half of the capital gain was never taxed.

Property prices roughly doubled in the avalanche of buying and selling that followed, pushing up the already-high Sydney prices to levels previously unimaginable.

Those of us already well advanced on the property treadmill didn’t mind. In fact we felt richer. Howard’s then Parliamentary Secretary to the Treasurer, Ross Cameron observed succinctly: ‘[rising prices] makes for happy voters.’

But for many of those Australians not yet into housing — often too young to vote — Sydney was suddenly out of reach.

They are now leaving the city in droves. Six thousand more Australians now leave NSW each month than move to it. In South Australia and Victoria the net outflow is less than 1000. Queensland, Western Australia and Tasmania are actually drawing people to them.

It isn’t only those who can’t afford houses who are leaving. Many Sydneysiders who’ve done well out of the Ralph/Howard property boom are cashing in and buying more, cheaply, in more affordable cities. The ABC’s Richard Glover calls the phenomenon ‘Hobartering.’ Others are moving in order to find jobs.

Industry appears to be leaving Sydney as fast its people. The land prices in Sydney’s Inner West have made factories uneconomic. The owners can get far more by selling their land for housing than they can by continuing to run their factories . Some are relocating interstate or to the country, others are closing for good. Sydney’s Inner West is awash with so-called ‘brown field’ apartment developments, many with the factory exteriors intact.

In a less obvious way the Ralph/Howard property boom has also devastated Sydney’s State Government. It got it hooked on ever increasing stamp duty revenues, which eventually collapsed. Last week Premier Morris Iemma announced spending cuts worth $2.5 billion over four years. Five thousand public servants are to lose their jobs — at a time when the State’s unemployment rate is the highest it’s been in years.

Success is said to have many fathers; failure, very few. But it seems fair to acknowledge that John Howard is one the fathers of Australia’s manic real estate boom, the aftermath of which is set to send his beloved home city into recession.