Thursday, March 31, 2016

Why the states should charge income tax

Suddenly the election is about something else: how our states have had it too good for too long. And about how we've had it even better.

In every previous election we've been able to vote for better hospitals, schools and roads at the state level (which of course we want) and for lower taxes or lower budget deficits at the Commonwealth level (which of course we also want).

We've been able to kid ourselves we can achieve both.

It's been excruciating for our prime ministers and treasurers, and for anyone who cares about things being done properly. Elected in 2013 to cut the deficit without putting up tax, Tony Abbott and Joe Hockey slashed future grants to the states for hospitals and schools by $80 billion over10 years. They said after 2017 they would lift grants for hospitals by only inflation and population growth. The actual cost of running hospitals is climbing much faster.

It's the sort of thing we asked them to do, to find savings to eliminate the deficit. But then the state governments squealed and said they were unable to do the sort of things we asked them to, and pressured Malcolm Turnbull to relent.

He will relent. He'll offer to lift grants more or less in accordance with the actual cost of running hospitals for another three years. But only if the states agree to negotiate in good faith about what happens next. Beyond 2020 he'll revert to the miserly formula of inflation plus population growth. If the states feel they need more (and over time they will) they'll have the option of imposing their own income tax surcharge. Turnbull will cut Commonwealth income tax by a few percentage points to make room, and then allow each state to replace some or all of those points.

Initially the states >would be limited to merely replacing what the Commonwealth took away, but after that they could charge more. In Turnbull's words, they would be "accountable to their own voters".

It would cut both ways. Any state that wanted to offer a Rolls-Royce hospital service would be able to do so, as long as it charged for it through tax. Any state that wanted to keep its taxes low would be able to do that, so long as it offered fewer grand services.

Voters would be able to choose, or in extreme cases move. Queensland (to use a hypothetical example) might want to position itself as the low tax state. Anyone who moved there, attracted by the low tax, would know they were also taking chances with their health. Anyone who moved to South Australia to take advantage of good health services would know they had to pay for the privilege.

Every election, for decades now, the Australian National University has surveyed voters about what matters to them most. Until recently their number one concern was tax. In 1998 about 23 per cent labelled it "extremely important". Only 10 per cent thought health and Medicare were extremely important.

But at the turn of the century things began to shift. In 2001 tax and health were on level pegging at 16.3 per cent and 16.1 per cent respectively. By 2013 the positions had reversed. Now 19 per cent think health and Medicare are extremely important and only 11 per cent are as concerned about tax. It's the sort of change you would expect as the population gets older and richer.

Critics of these surveys say they don't mean much. People aren't asked to put their money where their mouths are. But under the scheme being hatched by Turnbull they will. For the first time Australians would be forced to choose between more health spending and lower tax when they vote. I'm betting the surveys are right and people will opt for better hospitals. But that's not what excites me. It's that voters will have to make a choice, to acknowledge that good hospitals cost money and wear the consequences of their decisions.

To tell the truth, I'd love it if each state decided on a different mix. Then each could look at the other and see what worked best. NSW was the first to make Australian history compulsory in high school. Victoria was the first to make seat belts compulsory. Tasmania was the first to introduce daylight saving. Each picked what worked. Experimentation is what federations are meant to be about. It's no accident that federations such as Canada, the United States and Germany usually work better than unitary states such as Italy, Greece and France.

By presenting states with hard choices Turnbull will not only make the experimentation more real, he'll also make the states run things better. There isn't a terribly strong incentive to run hospitals and schools well when you're not coming up with all the money yourself. There's a much stronger incentive if you're paying for the lot.

States funding what they provide is hardly new. Each state raised its own income tax before the Commonwealth entered the field in 1915 and then generously offered to also collect income tax as an agent for the states during the depression. In the Second World >War, without consultation, it kept the lot for itself as a "temporary" measure and never gave it back.

It isn't surprising that in modern times the states haven't asked for its return. Politically they've had the best of both worlds and we've been able to vote as if we are in La La Land. Turnbull wants us to face reality.

In The Age and Sydney Morning Herald

Tuesday, March 29, 2016

CEDA experts back Labor policy to tackle budget

A high-powered independent commission has backed Labor's approach to capital gains tax and negative gearing, undercutting Prime Minister Malcolm Turnbull and Treasurer Scott Morrison who say it will "smash" housing prices.

The Balanced Budget Commission, established by the Committee for the Economic Development of Australia, includes two former heads of the Department of Prime Minister and Cabinet and one former Cabinet Secretary. Between them, Paul McClintock, Terry Moran and Ian Watt have served prime ministers Howard, Gillard, Abbott and Turnbull.

"No economic problem which is in our power to resolve is graver or more urgent in Australia than the persistence of large budget deficits," the Commission chair Mr McClintock said, launching the report at the National Press Club on Tuesday.

The Commission finds that in order to eliminate the budget deficit by 2018-19, spending should fall by $2 billion and revenue should climb by $15 billion.

It sets out five options for achieving that goal, all of which include a cut in the discount applied to the capital gains tax along the lines proposed by Labor.

Option 1 would halve the 50 per cent discount on capital gains tax, as proposed by Labor, apply a progressive tax scale to superannuation contributions, halve the fuel tax credit scheme and increase taxes on luxury cars, alcohol and tobacco. It would also cut government payments for drug manufacturers under the Pharmaceutical Benefits Scheme and cut budget spending on industry assistance by 10 per cent.

The report says the recommended halving of the capital gains tax discount would "take much of the power out of negatively geared investment strategies" as more of the gain on each investment would be taxed.

As recently as last week, Mr Turnbull derided the proposal saying: "Capital gains tax is obviously a tax on gains from investments, so you increase that tax, what are you going to get? Less investment. The government takes more of the investment gains so people will invest less and they'll certainly invest less in things that are risky."

Mr McClintock said he accepted that the proposal had the potential to cut investment spending, but added that the right question to ask was: "How much support are we prepared to give to a particular activity?.

"It doesn't mean it is a bad activity, but you can say there is too many billions of dollars going into that activity and we cannot afford that. With things like negative gearing, the inflation rates are lower, there is a strong argument to suggest you can lower that and still produce an environment where people are willing to invest. Our judgment call is that, yes, of course, it will have some marginal impact, so will everything, but it's a manageable impact."

Option 2 also adds in a 25 per cent cut in the private health insurance rebate and an efficiency dividend in the higher education sector.

Mr McClintock, a former Chairman of Medibank Private, said the right approach was not to criticise the private health insurance sector but to say: "We respect the role you are playing; we know you are healing the sick and doing good things but we have run out of money and we have to find savings. I am very sorry but we have selected you to assist."

The report says cutting the rebate would not have a big influence on the number of people insured because most were more affected by the prospect of paying the Medicare levy surcharge and the rules governing lifetime cover.

The third option cuts the capital gains tax concession even further, by 75 per cent and removes negative gearing on all types of assets purchased after December 2015. Between them, those two measures save the budget deficit by $8 billion per year. The fourth option boosts petrol tax by 10 cents per litre and cuts industry tax concessions across the board by 25 per cent. The fifth option cuts the capital gains tax concession from 50 to 40 per cent and continues the high income temporary budget deficit repair levy due to expire in June 2017.

Mr McClintock said he thought the public was much more willing to accept measures to cut the deficit than were politicians. After it was cut to zero the government could consider genuine tax reform.

In The Age and Sydney Morning Herald

Thursday, March 24, 2016

Restoring the ABCC a poor foundation to build an election on

Of all the unlikely reasons to call an election. Industrial relations has never been anything like the most important issue facing Australia in Malcolm Turnbull's mind. Most of his speeches, including his first in Parliament, barely mentioned it.

Instead that speech talked about the green hills and golden beaches of his Sydney electorate, "strung like jewels between the harbour and the sea". It talked about the republic, how Australia's head of state should be one of us. It talked about climate change and the need to better manage water, it talked about the importance of marriage, families and having children.

And it talked about the importance of boosting productivity. But it said nothing about unions or workplace relations, except perhaps this: a reference to Turnbull's first job, loading bananas in the Sydney markets.

He told me about it a few years later: "I think I had been sacked or I was having some problems with my employer so I went down to the Trades Hall to ask for help. [Labour council secretary] Barry Unsworth listened with a modest amount of interest and said, you should see another Trades Hall official, Bob Carr."

"Bob didn't seem particularly interested in my employment issues in the market, but then uttered the line I've never forgotten, which was: 'Do you know, I've just read a fascinating book on the politics of Eastern Europe, would you like to borrow it?'"

Carr went on to become foreign minister, Turnbull prime minister. Neither spent much of their careers complaining about unions. Until now.

"Unlawful conduct on building sites around Australia is holding back our economy," Turnbull told Monday's press conference. The extra costs were "a serious handbrake on economic growth".

What changedwent wrong? Labor abolished a Howard-era "cop on the beat" named the Australian Building and Construction Commission (ABCC) and replaced it with a cop called the Fair Work Building and Construction (FWBC). Whereas the ABCC could compel witnesses to appear and answer questions (contrary to common law principles in the view of the Law Council) after a three-year transition period the FWBC could not. Whereas the ABCC could reopen disputes after they had been settled, the FWBC could not.

These modest changes, along with changes to penalties and the right of union officials to enter workplaces, amounted to something of a silver bullet, in the view of the Prime Minister. "When the Australian Building and Construction Commission was in force, productivity in the sector grew by 20 per cent," he said on Monday. "Since it was abolished, productivity has flatlined."

It's an extraordinary statistic. Rarely does anything have such a clear-cut effect. Turnbull gave a hint as to where it came from when he told  the ABC's 7.30 that there was "plenty of work been done on this by Independent Economics that shows there was an increase in productivity following the introduction of the ABCC".

Independent Economics, formerly known as Econtech, did the work for the ABCC itself. After academics from Griffith University uncovered errors in the analysis, the ABCC removed it from its website. Then the Master Builders Association commissioned Independent Economics to update it. The Productivity Commission examined the findings in 2014 and disassociated itself from them in unusually strong terms.

"When scrutinised meticulously, the quantitative results provided by Independent Economics or others do not provide credible evidence that the Building Industry Taskforce – Australian Building and Construction Commission regime created a resurgence in aggregate construction productivity or that the removal of the ABCC has had material aggregate effects," the Productivity Commission said. "Indeed, the available data suggests that the regime did not have a large aggregate impact."

The absence of a big effect was "neither surprising nor inimical to the need for further reform". It thought productivity in some parts of the industry probably had improved during the ABCC era, and it recommended boosting penalties and adequately resourcing the body that replaced it. But it stopped short of recommending the re-establishment of an organisation with the power to compel witnesses to answer questions. It's a power denied to courts and denied to the Australian Security Intelligence Organisation.

It thought productivity in some parts of the industry probably had improved during the ABCC era, and it recommended boosting penalties and adequately resourcing the body that replaced it.

But it stopped short of recommending the re-establishment of an organisation with the power to compel witnesses to answer questions. It's a power denied to courts, denied to the Australian Securities and Investments Commission and denied to the Australian Security Intelligence Organisation.

Turnbull's office says his claim about a 20 per cent jump in productivity came from the Australian Bureau of Statistics. It's there all right, if you use 2012-13 as the end date for the ABCC even though it finished at the end of 2011-12. But over the same period productivity in the entire market sector jumped 14 per cent. Something other than the ABCC was at play. In the post-ABCC era productivity in the construction sector climbed 3 per cent. Productivity in the entire market sector climbed 7 per cent.

Industrial disputes are indeed high in construction. In the 14 quarters since the ABCC they've totalled 180 working days lost per 1000 workers. But in the previous 14 quarters during the ABCC era, they totalled 164 working days lost.

This week's Essential Poll finds more Australians support reinstating ABCC than oppose it, even among Labor and Greens voters. Civil liberties aside, the ABCC ought not to be particularly controversial, certainly not enough to build an election around.

In The Age and Sydney Morning Herald

Tuesday, March 22, 2016

Revealed. The 56 Australian millionaires who pay no tax:

Paying tax has become optional for 56 of Australia's highest earners.

Newly-released tax statistics show each of the 56 paid next to no income tax in 2013–14, not even the Medicare Levy, even though each earned more than $1 million.

But escaping tax cost the millionaires dearly. The same document shows 27 of the 56 claimed a combined $46.7 million for the "cost of managing tax affairs", around $1.7 million each.

The Tax Office says "cost of managing tax affairs" includes the cost of preparing and lodging tax returns, the fees paid to recognised tax advisors, the cost of court appeals and interest charges imposed in relation to tax disputes.

Combined, the 56 earned $128.6 million, around $2.3 million each.

The claims for the cost of managing tax affairs are so big in relation to their reported incomes as to raise suspicions that at least some had access to extra income they did not report.

Each of the 56 managed to drive their taxable incomes down below the $18,200 tax-free threshold. Fifty-one managed to drive their taxable incomes down below $6000. Forty-three reported taxable incomes of zero. Eight reported combined losses of $19.3 million.

Fifteen claimed a combined $21 million for gifts or donations to charities and political parties, equating to $1.4 million each. Three claimed deductions for uniforms or clothing, amounting to $150 each. Seven claimed deductions for interest payments, amounting to a combined $4 million.

Nine had been unsuccessful farmers, carrying forward previous losses of $6 million. Four had been unsuccessful in other businesses, bringing forward previous losses of $18.1 million. Seventeen had sold assets at a loss, carrying forward capital losses of $28.2 million. Five negatively geared, losing between them $240,000 in rent.

All but two paid no income tax at all. One paid $3603, the other was asked to pay just $4...

>Millionaires weren't the only high-income Australians who managed to bring their taxable incomes down below the tax-free threshold. Another 117 high earners taking home between $500,000 and $1 million managed to drive their taxable incomes below the $18,200 tax-free threshold, paying no tax. They paid a combined $15 million to manage their tax affairs.

Another 2305 Australians earning between $100,000 and $500,000 succeeded in bringing their taxable incomes below the tax-free threshold in order to pay no tax. Between them they made $420 million. After deductions they lost a combined $38.2 million. They spent $47.9 million managing their tax affairs and lost $16.2 million negatively gearing.

A Tax Office spokesman said there were legitimate reasons wealthy taxpayers might escape paying tax in any particular year. Nevertheless wealthy taxpayers that do not pay tax were more likely to attract the attention of the Office and be subject to further scrutiny to ensure they are complying with their obligations.

"It is the Tax Office's role to safeguard Australia's tax and superannuation systems and ensure a level playing field," he said. "A key part of this is working closely with individuals we have identified as being wealthy (controlling assets between $5 million -$30 million) or highly wealthy (controlling more than $30 million)."

The figures show 1.26 million Australians negatively geared during 2013–14, around 1 in every 10 taxpayers. A further 777,000 rented properties for profit. The negative gearers lost $11 billion between them, far more than the $7.2 billion made by landlords who rented for profit.

The average wage or salary income in 2013-14 was $56,690. The highest taxable incomes, averaging $200,015, were found in the Sydney postcode of 2027, which takes in Darling Point, Edgecliff, Rushcutters Bay and Point Piper in the Prime Minister's electorate of Wentworth. The second-highest average taxable incomes of $167,407 were in the Melbourne postcode of 3142, which takes in Hawksburn and Toorak.

In The Age and Sydney Morning Herald






Thursday, March 17, 2016

Expect great things from Turnbull’s first budget. No, seriously

While the media has been obsessing about tax, Malcolm Turnbull has been focused on setting Australia up. To do it, he'll need to borrow big sums of money for exceptionally long periods at at extraordinarily low interest rates.

We should have done it sooner. Right now Australia can borrow for 10 years at 2.7 per cent, just a few points above the the Reserve Bank's inflation target of 2.5 per cent, meaning we are able to get money for close to nothing. But it's still unattractive for long-term projects because there's a risk that in a decade's time when the loans have to be refinanced, the new rates will be higher. So Turnbull's looking at borrowing for 30 years.

Australia has never before issued 30-year bonds, although we have been experimenting with borrowing for 24 and 25 years. The US and Britain borrow for 30 years and get certainty for their repayments right through the life of very big projects.

What will Turnbull want the money for? Here's where it gets interesting. He dropped broad hints in a speech in Sydney on Friday.

The mining boom was made possible by investment in physical infrastructure such as mines, railways and ports. Over time it will make Australia rich. Turnbull believes the next boom will also require physical investment. If it's the result of people providing services in fields such as finance, law, health and others not dreamt of, you may think it requires little more than people, a good education system and the phone system or national broadband network to bring them together.

The Grattan Institute finds that workers in the Melbourne CBD (including Docklands and Southbank) typically produce $87 an hour, much more than the Melbourne-wide average of $53. Workers in the Sydney CBD produce $100 an >hour, much more than the Sydney-wide average of $61. The combined CBDs of these two cities alone – a landmass of just 7.1 square kilometres – accounts for nearly 10 per cent of Australia's production, three times what's produced by agriculture.

Turnbull quotes economist Edward Glaeser, who wrote Triumph of the City, to make the point that cities are our greatest invention. We not only work better when we rub shoulders with others, we are also more likely to be hired by them, more likely to hire them and more likely to steal ideas from them.

The fact that people need to work with each other and bump into each other was a point never acknowledged in the screeds of reports Labor commissioned about how the NBN would free us from travelling in to work.

Getting more people into cities boosts the Australian economy, boosts incomes and boosts government revenue. Which is where the budget comes in.

Turnbull's predecessor funded roads more or less as he wanted. He didn't insist on thorough analysis. And despite labelling himself the infrastructure prime minister, Tony Abbott never spent that much money. Turnbull is prepared to spend more, so long as it can be rigorously demonstrated that the project will pay dividends.

In Britain it is done through so-called "city deals". If a city such as Manchester can demonstrate that a road or rail line that gets more people into it will lift incomes, the central government backs it as a long-term investment. It knows it will cream off one-third of the extra earnings in tax. The Melbourne Metro would have passed such a test. The East West Link would have failed it...

As well, Turnbull will insist that the states go further than they have been prepared to in grabbing benefits for themselves. Traditionally when a railway station or a hospital opens in a new location, the nearby businesses and landowners get a windfall. Turnbull wants the states to grab a large chunk of it, perhaps charging the locals a third of the increase in value of their businesses or their homes. Then he'll need to put in less, funding perhaps four major projects for what would have been the price of two.

States talk about capturing value, then chicken out. They don't like offending the locals. Turnbull wants to give them cover. By insisting that they won't get anything unless they grab some of the proceeds for themselves (and perhaps for the Feds) he'll allow them to say he made them do it.

Value capture isn't a new idea, just one that's fallen into disuse. Melbourne's underground rail loop was funded in part by a long-running 1 per cent levy on the value of land held by city businesses and householders. It turned out to be more than worth their while.

Turnbull's major projects minister, Paul Fletcher, will produce a discussion paper outlining how value-capture will work within weeks. It could open the way for all sorts of projects previously regarded as uneconomic or not yet economic, including a Melbourne-Brisbane freight rail line, a railway to the site of Sydney's second airport,  and (perhaps) a Melbourne-Brisbane high-speed passenger line.

At the same time it would close the door on future projects like Peninsula Link, that arguably did little more than allow high-income Melbournians to escape quickly to their holiday homes.

If he is really bold, Turnbull will change the way the budget is presented, showing the income and expenses related to the ordinary running of government on one page (where the deficit is hopefully shrinking) and the borrowing and spending on major projects as well as the projected payoffs on another (where the borrowing will be hopefully growing).

It will take some explaining. But Turnbull, more than any prime minister since Hawke, is capable of explaining good ideas and taking the Australian public with him. The rare coincidence of unusually low long-term interest rates and good ideas with demonstrable payoffs is too good to waste.

In The Age and Sydney Morning Herald

Monday, March 14, 2016

'New wave of quitting' likely as we smoke less

Plain packaging and higher cigarette prices appear to have done more than cut the number of people who smoke. They've also cut the amount remaining smokers smoke.

Official surveys conducted by the Institute of Health and Welfare and the Bureau of Statistics find that in the past decade the number of Australians smoking has fallen 25 per cent. But an analysis of the December quarter Australian National Accounts conducted by health policy specialist Martyn Goddard finds the volume of tobacco consumed over those 10 years has fallen 48 per cent.

He says the difference can only be explained by the remaining smokers smoking less – at least 30 per cent less.

"It might well be more, because people who successfully quit are more likely to be low to moderate smokers than those who remain."

"On that basis, they would be responsible for less than an equal share of any overall consumption decline, and current smokers responsible for more."

Mr Goddard said it was impossible to say which tobacco control measure was the most responsible. But it was clear that restrictions on where people could smoke had made it more difficult to be a heavy smoker and almost impossible to be a chain smoker. Many of the restrictions had been introduced in the past 10 years.

It wasn't at all clear that the Australians who had cut back were less likely to die, but it was certain they were better placed to give up completely.

"They have less of a nicotine habit, they may already have tried to give up and not yet succeeded; and lowering smoking gradually to zero, combined with nicotine patches, is just as effective as going cold-turkey," he said.

The cutbacks were setting the scene for a new wave of quitting.

In March an extra 19 cents was added to the price of a packet of 30 cigarettes in the latest half yearly round of excise increases, taking the price to $16.12.

In September an extra $3 a pack will be added in addition to the excise increase in the last of the four increases of 12.5 per cent imposed by the Gillard Labor government and maintained by the Coalition.

Labor has promised an extra four more increases of 12.5 per cent if elected, lifting the excise to around three quarters of the retail price.

Australia survived a challenge to its plain packaging laws from Philip Morris International under a Hong Kong Australia investment treaty, and is at present defending itself against a challenge in the World Trade Organisation from Cuba, the Ukraine, the Dominican Republic and Honduras.

In The Age and Sydney Morning Herald

Thursday, March 10, 2016

Negative Gearing. It's turning us into landlords and serfs

Once we talked about the great Australian dream. Now it's something meaner: "getting ahead".

The great Australian dream meant owning your own home. "Getting ahead" means getting ahead of someone else. It's how Treasurer Scott Morrison sees the Australian dream.

"I think it is great in this country that people want to aspire to do better and provide for their kids, so I don't judge people for actually wanting to get ahead," the treasurer told radio host Neil Mitchell a few weeks back. "That's what this country is about."

It's certainly what negative gearing is about. "The vast bulk of Australians who use negative gearing are just trying to get ahead and trying to get their family in a better position," Morrison says. But negative gearing only gets them ahead if prices climb. The more that people negatively gear in order to get ahead, the more prices climb. The further they climb, the harder houses become to buy. And the harder they become to buy, the more the Australian dream recedes.

This is what has happened. Back before the explosion of negative gearing around the turn of the century, 52 per cent of Australians aged in their mid-20s to mid-30s actually owned their home. At the most recent census in 2011 it was 47 per cent. Before the turn of the century, 70 per cent of Australians aged in their mid-30s to mid-40s owned their own home. It's now 64 per cent.

The negative gearing-driven explosion has made it harder for Australians to buy houses to live in. Here's how Luci Ellis, head of the Reserve Bank's financial stability department, puts it: "It's a truism that if an investor is buying a property an owner-occupier is not."

It gets better, for investors: "To the extent that person is not then buying their own home, they are therefore creating a market for rental and making it attractive to purchase investor properties."

Betting on prices going up becomes a self-perpetuating machine. The further they climb out of reach of owner-occupiers, the more the Australian dream recedes and the more renters there are to rent to, which allows investors to bet still more on prices rising.

The man who chaired the inquiry that Ellis spoke to was John Alexander, the Liberal member for Bennelong. He says the changes are turning Australia from a "commonwealth", with huge home ownership, into more of a "kingdom" in which landlords rent to involuntary tenants who pay through the tax system for their acquisitions...

"Some have said we are on track to becoming a kingdom where the Lords own all the land and the biggest Lord will be King and the enslaved serf tenant is paying rent to the Lord to become wealthier," he told the Financial Review. "Is that an over-dramatisation or is it very, very close to the truth?"

A landlord-heavy housing market is inherently unstable. Whereas owner-occupiers aren't that likely to sell if interest rates rise or prices threaten to stop climbing, landlords can run for the doors. The Property Council makes the point dramatically in an advertisement depicting housing as a house of cards.

One way to wind things back would be to gently limit negative gearing. It's an idea endorsed by the Murray Financial System Review and now the Business Council of Australia. It's Labor policy, and despite Morrison's talk about the need to support mum and dad investors (over mum and dad buyers), it might yet be adopted by the Coalition in some form.

Alexander's committee was considering limiting the amount of mortgage interest that could be deducted from wages. At the moment it's 100 per cent. That proportion could be adjusted by an authority such as the Reserve Bank to keep the market stable. And the committee was considering extending to owner-occupiers the concessions afforded to investors.

Right now investors get to deduct interest payments from their income for the purpose of determining tax. Under the proposal owner-occupiers could opt to have a portion of their interest payments treated the same way. If for example they chose to deduct 20 per cent of their interest payments from income they would be taxed on 20 per cent of the eventual gain when they sold. 

Every time a negative gearer sold to an owner-occupier the government's tax position would improve, the housing market would become more stable, and more Australians would be protected from poverty in their old age.

The changes in politics at the end of last year saw Alexander removed as chairman of the committee and another chair appointed who has also since moved. The report was due at the end of last year, but it will now be finalised later this month as soon as another chair is appointed.

Public opinion backs Alexander, just. This week's Essential poll shows 34 per cent of Australians would prefer lower housing prices and 32 per cent would prefer higher prices. Landlords strongly favour higher prices.

For a while, before politics overtook things, it looked as if we would have a sane discussion about what our headlong rush into negative gearing was doing to us. I'm hoping it's not too late.

In The Age and Sydney Morning Herald



Monday, March 07, 2016

Modeller lauded by Morrison once opposed negative gearing

Negative gearing encourages excessive use of debt, lifts overseas borrowings and raises real interest rates, according to the economist whose work on the subject has been lauded by the Treasurer Scott Morrison.

Kim Hawtrey, now with consultancy firm BIS Shrapnel, wrote the words more than 20 years ago when he was an academic at Macquarie University in an article in the journal Australian Tax Forum.

"Deductibility of interest payments on debt creates a tax advantage for debt over equity," he wrote. "Negative gearing ensues by way of combining debt interest deductibility with concessional tax treatment of capital gains, encouraging over-investment in property and related asset inflation sectors."

More than two decades on, Dr Hawtrey says he won't divulge his personal position on negative gearing, saying the work his firm released last week was "technical" and "dispassionate".

"I have not commented on my views and I am not going to comment on my personal views, from a policy point of view, or as a voter or whatever," he told Fairfax Media.

"We were simply given a task and we carried out that task, and no attribution or nothing should be read into that as to any policy preference."

"Any policy issue in Australia, we do reports on both sides of those issues for parties that are on both sides of the political fence, if you like, and we do that impartially and dispassionately as economists, as technicians, if you like"..

Dr Hawtrey said then that negative gearing created a more highly leveraged economy than would otherwise prevail. The study he released last week at the request of an unknown undisclosed client said measures that clamped down on negative gearing would result in higher rents, lower dwelling prices and less home building than would otherwise be the case.

After 10 years, dwelling prices would be 15 per cent higher instead of 22 per cent higher. Rents would be 41 per cent higher after 10 years instead of 34 per cent higher.

"That report is not recommending for or against negative gearing," he said. "It is an if-then report: if this happened, then this would happen. It doesn't pass any judgement about whether the policy is good or bad, about whether the results are good or bad."

On ABC radio last week Mr Morrison described the report as a damning indictment of Labor's policy. "What this report shows is that it will drag growth, it'll send growth backwards and retard grown in the economy," he said. "It has a devastating impact on property markets and people's homes."

Dr Hawtrey said the report made no "judgement one way or the other about negative gearing".

"Our report contains no recommendations about policy, and my personal views about negative gearing as a voter may bear no relationship to the report," he said.

In a survey of 51 leading economists conducted by the McKell Institute last week 90 per cent described negative gearing and capital gains tax concessions as major tax distortions that led to an inefficient allocation of resources. More than 70 per cent thought house prices would continue to grow under Labor's proposed cutbacks.

Labor wants to limit the deduction of losses from investments to investment income and capital gains. They could no longer be deducted from wage income. Existing negative gearing arrangements would continue and would also apply to investments in newly built properties.

The Coalition is considering imposing a cap on the amount that can be deducted from wage income. Mr Morison said last week that a cap of $50,000 per year would affect only 1.6 per cent of the taxpayers who negatively geared.

In The Age and Sydney Morning Herald



Sunday, March 06, 2016

Confused by the modelling about negative gearing? That's the whole idea

Politics is about trust.

Prime Minister Malcolm Turnbull has been claiming for weeks that Labor's plans for negative gearing would smash house prices.

"The 70 per cent of Australians who own houses will see the value of their single most important asset smashed to fulfil an ideological crusade," he told parliament.

His Attorney-General George Brandis​ has made it sound even worse. "There is one thing we know about the negative-gearing debate," he told us. "If the Labor Party were to implement its policy, the value of most Australians' homes would collapse".

His assistant treasurer Kelly O'Dwyer​ briefly said the opposite. Labor's policy would "increase the cost of housing for all Australians; for those people who currently own a home and for those people who would like to get into the housing market".

And then his treasurer Scott Morrison latched on to a "credible report" that said Labor's policy would have "a significant impact on property values".

He latched on too quickly. The report, by BIS Shrapnel, said no such thing. Prices would continue to rise in all but two of the next 10 years under the scenario it modelled, just as they would if negative gearing was maintained. After a decade, they would have climbed 15 per cent. That's less than with full negative gearing, but its still an increase.

The report explained that house prices are typically "sticky in a downwards direction," unable to fall lower than the cost of construction plus a markup. When new attempts at negative gearing were temporarily suspended between 1985 and 1987 real estate prices continued to climb.

While new investors would be less keen to buy if Labor's policy stopped them negatively gearing, existing investors would be also less keen to sell, because they could only continue to negative gear if they hung on to the properties they had. Prices wouldn't be smashed.

It's all there in the report Morrison lauded as credible (because it said rents would rise), but appeared not to properly read....

Certainly his eyes appeared to glaze over the howling error on page one. The report said Australia's national income would average $190 billion over the next ten years when it meant $1.9 trillion.

And they appeared not to be troubled by its suggestion that a measure that raised around $2 billion per year would shrink the economy by $19 billion per year. That's $9 of economic damage for every $1 collected, a sum so big as to be way out of the ballpark of anything his department has ever modelled.

When Treasury modelled a range of taxes for its tax discussion paper, it found the worst of them, stamp duty, did 70 cents of economic damage for each dollar collected. Yet first thing Thursday morning on AM Morrison described as "credible" a report that found removing negative gearing would create multiples of the biggest damage his department could find.

The Grattan Institute's John Daley says the finding doesn't even pass the giggle test. Try it for yourself. Attempt to say: "a tax that raises $2 billion will shrink the economy by $19 billion" without laughing.

What's really odd about the report is its false precision. Limiting negative gearing would create 175,000 fewer jobs over ten years. The unemployment rate would settle at 5.9 instead of 5.8 per cent.

And its woolliness. It assumes away the role of the Reserve Bank in stimulating the demand as economic growth slips, and also the role of state governments in controlling the release of land to regulate the housing market.

The oddest thing is its origin. Who commissioned it? BIS Shrapnel won't say. Why did it release it instead of the client? And was the whole idea to get a gullible politician to swallow and regurgitate it so that the public became even more confused and decided any change was too risky?

It's happened before, in the mining tax debate, in the carbon tax debate and whenever anyone suggests anything that might hurt the superannuation industry.

Economic modelling is the cheapest and dirtiest way to muddy a debate. It lends an appearance of authority to what amounts to guesswork, with key mechanisms often deliberately or accidentally left out. The Australia Institute wants a code of conduct for economic modellers. There's one for auditors and accountants. They'd have to spell out their assumptions and who was paying them.

Right now, with the enthusiastic assistance of people who should know better, we're being had. And we don't even know by who.

In The Age and Sydney Morning Herald


Thursday, March 03, 2016

TPP: Would anybody mind if the deal fell over?

Hillary Clinton is misguided. Her opposition to the Trans-Pacific Partnership is based on "misinformation". Malcolm Turnbull's new trade minister says so.

Within hours of being sworn two weeks ago, Steven Ciobo eschewed the traditional approach of getting up to speed and consulting widely, and blundered into the US presidential race.

"I am not surprised that the trade union movement and, of course, the political arm of the Australian Labor Party is on a similar platform to, for example, Hillary Clinton," he told the Financial Review. "They both derive their key support from the union movement."

The woman most likely to be the next US president, the former secretary of state who ran America's missions abroad, the woman who criss-crossed the world pressing flesh about the Trans-Pacific Partnership, knows less about it than Steven Ciobo.

Asked directly whether he thought her opposition to the TPP was based on misinformation, he replied: "Absolutely".

And he was going to clear it up. "I will not take a backwards step in terms of putting forward the clear truthful situation in the face of an ongoing campaign of misinformation," he said.

So what is the clear truthful situation? What is it that Clinton (and also Trump) are failing to grasp? The awful truth is that Ciobo's department isn't particularly keen on finding out.

Back in 2010 the Productivity Commission found little evidence that Australia's trade agreements to that point had "provided substantial commercial benefits". It recommended the government first work out what it wanted to achieve, review its goals annually, and enter into trade negotiations only if they were likely to meet those goals and only after examining alternatives, including the alternative of "no further specific action".

The examination would be independent and made public. When the agreement was complete and about to be signed it would be examined again by an independent body which would produce a public assessment of the costs and benefits.

None of those things have happened with the Trans-Pacific Partnership, the biggest trade deal in Australia's history. Set to take in nearly 40 per cent of the world's economy including Australia, Canada, Singapore, Brunei, New Zealand, Chile, Mexico, the United States, Japan Malaysia, Peru and Vietnam, it will encourage us to buy and sell from each other rather than the rest of the world, and it will tie us to common (largely US-driven) standards.

Former trade minister Andrew Robb signed it in Auckland last month without commissioning any outside analysis. His department's so-called national interest analysis, required by law, ran to just 19 pages, most of which merely summarised the 6000 page agreement. New Zealand's national interest analysis ran to 277 pages.

Robb's department turned down an offer from the Productivity Commission to do the job properly, observing that modelling such an agreement was "very, very difficult to do"...

The modelling that's been done overseas finds the benefits for Australia close to non-existent. The World Bank finds that after 14 years the agreement will have boosted Australia's GDP by 0.7 per cent. Depending how you round it, that's a boost of either 0.0 or 0.1 per cent per year. A separate study by Tufts University in the US concurs, but says the growth will come at the expense of jobs, around 39,000 after 10 years. The agreement won't exactly "drive jobs and growth".

Willful blindness over the benefits wouldn't matter so much if there wasn't also wilful blindness to the costs. The Department of Foreign Affairs and Trade appears to have never examined any of Australia's 18 free trade agreements after the event, but the Australian National University has. Ten years after the US-Australia free trade agreement it found it had cut rather than boosted trade.

That's because free trade agreements help and hinder trade. By rewarding trade within a group they penalise trade outside the group, even the use of foreign-tainted inputs which can see entire classes of exports labelled non-compliant. Businesses find it easier not to import from outside, or not to use the agreement.

And they miss out on getting benefits they could have had years ago. The TPP promises tariff cuts worth $135 million over four years. But they could have been delivered without the TPP had the government not held them back, possibly in order to have tariffs to negotiate away.

Because we've comparatively few barriers to negotiate away we've been under pressure to agree to other things, like tighter copyright rules and extra-territorial tribunals to which foreign firms (but not our own firms) can take the Australian government after losing their case in Australian courts.

It may be that these concessions are worthwhile. It would be good to know, and it's not too late. The TPP may have been signed, but it won't come into force until at least half of its members have ratified it, including Japan and the United States. The parliament's treaties committee is examining it now and is accepting submissions until Friday March 11.

I'd feel better about the whole process if I didn't have a sneaking suspicion that leaders, including our prime minister, know full well that its not such a great deal and wouldn't much mind if the US kicked it over.

In The Age and Sydney Morning Herald