Thursday, March 29, 2018

Company tax cuts: all right for some

Parliamentary debates don’t matter much any more. We were never going to get much of one if the government had submitted its company tax bill to the Senate.

It was planning to ram it through as soon as it believed it had the numbers, if necessary sitting beyond midnight on Wednesday.

But when it discovered it didn’t have the numbers, the Coalition decided not to submit the bill at all, meaning no debate, until - if and when - it gets the numbers. Then it will probably revert to Plan A - and ram it through.

Which is a pity, because a proper parliamentary debate might have teased out what would actually happen in the event that company taxes were cut.

So much of what is proposed has been modelled and examined and tried out in the United States that we’ve got a pretty good idea of what would happen, one that’s worth sharing in case the idea comes back.


Put to one side any suggestion that a cut in the rate of company tax will create jobs. And there have been many such suggestions, from the Prime Minister, the Business Council, and Finance and Treasury ministers Mathias Cormann and Scott Morrison. Their own departments’ modelling comes up with a gain in employment of just 0.1 per cent - so embarrassingly low as to be indistinguishable from a rounding error. That's if the cut is funded by either higher personal taxes through bracket creep or by cutting government spending.

The gain would be higher, but still low, if the company tax cut was funded by a Thatcher-style fixed levy imposed on households. Separate independent modelling commissioned by Treasury as a check comes up with an even lower, barely perceptible, gain of 0.04 per cent, which has since been revised down to a barely perceptible loss of 0.02 per cent.

The reason why a company tax cut would on balance destroy as many jobs as it creates lies in its chief virtue: extra foreign investment.

When foreigners invest more in their own or in another’s Australian operations, the operations will find it easier to expand, either by employing more people or by investing in more modern equipment (which will mean there is less need to employ as many people). In the modelling, the two effects roughly cancel each other out.


A company tax cut will push up after-tax returns and make propositions that were previously line-ball more attractive, but not for everyone. Australians (and also some well-advised foreigners) are already as good as exempt from company tax through the dividend imputation system. It refunds to shareholders whatever tax has been paid in the creation of dividends, making the company tax rate close to irrelevant.

But some foreigners will find investing in Australian companies or their own Australian operations more attractive. The Treasury thinks the tax cut will boost investment by an eventual 2.6 per cent, although it has been acknowledged that in the first months of Trump tax cuts this year, investment in the US went sideways rather than climb as expected. What did climb were share buybacks, which are a means by which companies distribute windfall gains to their shareholders as an alternative to ploughing them back into the business. It’s one of four options the Business Council included in a survey of its members about what they planned to do with Australian tax cuts.


If foreign owners invest more, either in more workers or in machines that require more skill to operate, they’ll have to pay higher pre-tax wages. They won't do it for some time. This  effect shouldn't be confused with any pledges made about immediate increases for public relations reasons. Post-tax wages won’t increase by as much, in part because the company tax cuts would most likely be partly or fully funded by higher personal tax rates than would otherwise be needed.

The Treasury says pre-tax wages would eventually climb an extra 1.2 per cent, and post-tax wages by a much lower 0.4 per cent. A competing analysis by Victoria University’s Janine Dixon finds that higher income taxes could eat up “most or all” of the increase in pre-tax wages.

But employers would certainly have to pay higher pre-tax wages. Not all of them would reap the benefit of the tax cut. The Council of Small Business says all but 200,000 of Australia’s 2.2 million smallest businesses use the personal rather than the company tax system. The government is offering them an improved Small Business Income Tax Offset, but the total payment under the offset is limited to $1000, meaning many will get nothing to compensate them for the eventual increase in their wage bill, unless they switch to the company tax system.

Windfall gains

Super profitable corporations such as the banks (and mining companies during booms) will enjoy windfall gains. They are already investing what they would. It’s why the Henry Tax Review, lauded by the Business Council, recommended the introduction of a special mining tax “at the same time” as the company tax cut. It’s why Britain, pointed to as an example by the Business Council, imposed an extra tax on bank profits at the same time as its company tax cuts.

They’re ideas worth considering next time around.

In The Age and Sydney Morning Herald

Monday, March 26, 2018

If governments can't undo what governments have done...

...what's the point of elections?

If company tax cuts become law, and then Labor undoes the law, will it have exposed investors to sovereign risk?

Arguably. But no more so than the Coalition exposed investors to sovereign risk when it undid Labor’s carbon price in 2014.

Sovereign risk is an overused term for the risk that a sovereign (a government) will change the rules of a game after it has started.

It has traditionally been used to describe the risk that a less developed country will default on its borrowings. The risk that Australia will default is low, which is why it has the highest possible credit rating.

Over time the term has been extended to refer to other risks. The risk that one government will approve the Adani coal mine in Queensland, and then another will revoke the approval has come to be seen as a sovereign risk, as has the risk that Australia will entice countries to come here with one tax rate and then change it. And it’s here that the idea gets troublesome.

If new governments couldn’t undo what old governments had done, there would be little point in elections. Which is why it has been held that they can. The centuries old doctrine of parliamentary sovereignty was summed this way by the British constitutional lawyer AV Dicey in the late 19th century: “Parliament has the right to make or unmake any law whatever”.

And if Labor announced ahead of time that it was going to block company tax cuts not due to come in until 2019 there wouldn’t even be the possibility of sovereign risk. No-one would have invested in anything on the basis of conditions that was introduced and then taken away.

If the scheduled company tax cut for companies with turnovers of more than $50 million passes the Senate one day this week and the next day Labor promises to revoke it, companies won’t have even had time to plan on the basis that it will be delivered.

It’s different for the cut for businesses with turnovers of up to $50 million which was legislated in 2017 and will come into force in July this year. A commitment by Labor to revoke any or part of that tax cut after the next election, after it has been delivered, would constitute a sort of sovereign risk, but no more so than other unexpected changes following elections. The reversal of the carbon price was one. Businesses had planned on the basis that the carbon price was there. Then it wasn’t. They got on with their lives. Our AAA rating remained intact.

In The Age and Sydney Morning Herald

Let Australians die as they want to, says PC

Tens of thousands of terminally ill Australians are dying in hospitals when they would rather be dying at home, a highly critical Productivity Commission report has found.

A wide ranging inquiry into ways to introduce competition and informed user choice into human services has found that most people want to die in surroundings that are familiar to them, surrounded by their family. Instead they are often rushed to hospital, even though it would be cheaper and more dignified to treat them where they lived.

“Aged care facilities are Commonwealth government funded and the Commonwealth considers palliative care a state funding issue, so aged care facilities receive very little funding for palliative care,” inquiry chairman Stephen King explained.

“It means that if you are in an aged care facility, and you are getting towards the end of life and need an intervention, you will most likely be popped in an ambulance and sent off to hospital.”

“Western Australia is the gold standard. It does state-funded well. Nurses visit homes and family members help with the care. It’s cheaper to set up in homes than in capital-intensive hospitals. After Western Australia it goes rapidly downhill. It wouldn’t be hard for all states to do as well as Western Australia and for the Commonwealth to fund palliative care in nursing homes.”

The report recommends that doctors encourage patients having their "70 plus" health check to create an advanced care plan that spells out ahead of time whether they would like to be revived after death or kept alive artificially. The plans should be updated within two months of entering an aged care facility.

The Commission also recommends that health insurance regulations be amended to make clear that patients can choose their own specialists rather than the ones their general practitioners refer them to. The right is already enshrined in law, but many GPs and specialists are unaware of it.

The MyHospitals website should be transformed into an information source on the performance of hospitals and specialists to make choice meaningful.

Dr King said that when Britain required the publication of of data on results, many poorly performing specialists left the profession or lifted their performance.

Many Australians were unaware of their right to public dental services and scared off by long waiting lists. The report recommends that states shorten waiting lists by contracting private dentists to perform services, which would result in earlier interventions and reduce the need for more expensive interventions later.

It recommends that Commonwealth rent assistance be extended to public housing tenants and that states contract out the provision of some public housing to private providers.

The inquiry was commissioned by Treasurer Scott Morrison. The government is considering its response.

In The Age and Sydney Morning Herald

Thursday, March 22, 2018

The best case for the company tax cut isn't that good

What’s the best case for a cut in the company tax rate? It’s that we’ll be better off and earn higher wages, eventually.

The modelling published by the Treasury looks at what will happen in the long term, after the company tax rate has inched down from 30 to 25 per cent and everything has settled. That could be in 10 years' time, or it could be in 20.

It produces a one-off change, rather than an annual change. So, in the modelling first published by the Treasury after-tax wages would eventually be 0.43 per cent higher than they would have been. With wage rates at present growing by 2 per cent a year, it’s four months' worth of wage increases, delivered well into the future.

That’s not to say it’s not worth having. It is to say that it would be worth being patient, and the eventual reward would be low by the standards of what happens every year.

The modeller who prepared those projections for the Treasury in 2016 has just updated them to take account of new data. If the company tax cuts are funded by bracket creep (he has also modelled funding them by other means including a lump sum tax, and increase in the GST and cutting government spending) the eventual boost to after-tax wages would become 0.29 per cent rather than 0.43 per cent: about two months' worth of wage growth rather than four. Its a pay rise delivered two months earlier.

The boost to gross domestic product is similarly slight, given the long lead-up. Eventually, after 10 to 20 years, GDP would be 0.79 per cent higher than it would have been according to the original modelling, now 0.72 per cent.

That’s about three months' worth of GDP growth. Whatever GDP was going to reach in 2030, it’ll get there three months earlier with a company tax cut, according to the modelling.

Employment, which wasn’t going to grow much as a result of the company tax cut in the first lot of modelling, will now slip somewhat as a result of the tax switch, but not enough to notice. The company tax cut was always about wage growth, not jobs growth.

And it was going make people better off. The original estimate was for a one-off gain in consumer welfare of $4.5 billion, now a lower $3.8 billion. But it would need to be shared between 24.8 million people, almost certainly more by then. That’s a one-off gain of just $150 per person – two to three months' worth of the internet – after perhaps 15 years of waiting. That’s the best case being put before the undecided senators who are asking for modelling.

Another scenario is worse. Professor Peter Swan, one of the people who can justly claim to be the father of dividend imputation, claimed on Thursday that it wouldn’t materialise. It derives from a jump in foreign investment. If it doesn’t happen, because for foreign investors the effective tax rate is already very low, the other benefits won’t flow.

Swan thinks it won’t happen, because the foreign share investors who are sensitive to tax have already found a way not to pay it. It’s easy enough to hold Australian shares, sell them before dividend time to an Australian who can make use of the tax credit offered with dividend imputation, and then buy them back for less, cutting the foreign’s effective tax paid to nearer zero than the new low US rate of 21 per cent offered by President Trump. That near-zero effective rate wouldn’t much change as a result of an Australian company tax cut, which means foreign investment wouldn't be likely to change much either.

Except for direct investment in businesses or factories started from scratch, and funded independently of the share market. A 25 per cent rather than a 30 per cent rate would help for these businesses, but they are generally not as tax sensitive as might be thought. To physically set up in Australia you need to be certain you’ve got a very good business plan, often based on your own technology or systems, like McDonald's, Aldi or Ikea, to the extent those companies pay tax. The investment proposition needs to look so compelling that tax is a second or third order issue, according to Swan.

Even if Swan is right, there might still be a small case for a company tax cut, but it needs to be set against the much bigger case for personal tax cuts. The Parliamentary Budget Office has bracket creep pushing up the average tax rate paid by middle earners from 14.9 to 18.2 per cent over the next four years. It’s a projection based on the budget’s own figures.

The mathematical truth is that every dollar that is shovelled into company tax cuts can’t be shovelled to us in tax cuts. And we’re likely to need them more.

In The Age and Sydney Morning Herald

Wednesday, March 21, 2018

'Already zero'. Economist questions company tax cut

A leading economist has criticised the Turnbull government’s company tax cuts, warning the foreign investment benefits are illusory. 

As the Coalition inched closer to a deal with the Senate crossbench on Wednesday to pass the stalled bill, Professor Peter Swan said a largely unknown practice used by foreign investors threatened to erode some of the economic benefit of the $65 billion plan.

University of NSW Business School professor Professor Swan is an expert on investment who advised the Campbell committee of inquiry into the financial system in the early 1980s. His advice led it to propose a system of dividend imputation, whereby company tax payments are refunded to Australians but not foreign dividend holders, a recommendation taken up by Paul Keating in 1987.

His new study on every Australian share traded over the past 14 years concludes foreign owners have largely “exempted themselves from paying corporate tax on marginal investments” by selling their shares to Australians ahead of dividend payments and then buying them back again afterwards.

The tax rules allow so-called recycling or “harvesting” of dividends so long as foreign owners sell the shares at least 45 days before dividends are paid.

“Those who do it face an effective tax rate of close to zero,” Professor Swan told Fairfax Media. “This is an ideal outcome for Australia as we gain the largest and most efficient corporate sector undistorted by taxes.”

But it meant a cut in the company tax rate would be unlikely to trigger a big boost in foreign investment because the foreign investors who were sensitive to tax already had ways to pay very little.

Modelling previously published by the Treasury predicted the company tax cut would boost investment by 2.7 per cent. In addition to stimulating foreign investment, the government argues a reduction in the tax rate from 30¢ to 25¢ in the dollar over a decade will lead to new jobs and more capital investment.

Professor Swan suggested the ongoing annual cost of the tax cut was likely to be $8 billion - more than the government’s estimated $3.7 billion net cost - because the expected boost in foreign investment would not eventuate.

“Where is the case to show that higher investment, even in the unlikely event that it were to eventuate, would yield a gain of this magnitude, even in the longer term?” he asked.

In a statement, a spokesperson for Treasurer Scott Morrison hit back at the claims: “The Turnbull government stands by Treasury’s modelling on the impact and benefits of the Enterprise Tax Plan.

"We need to ensure Australian tax rates for business remain competitive in an increasingly competitive world.”

However, new analysis by ANU economist Chris Murphy, who examined the proposed company tax cut for the Treasury in 2016, has wound back forecasts of the company tax package's benefits.

The new modelling says if company tax cuts were financed by bracket creep, after-tax real wages would eventually be 0.29 per cent higher rather than the previously projected 0.43 per cent. Consumers would be $3.8 billion better off rather than $4.5 billion better off, and gross domestic product would be 0.72 per cent higher rather than 0.92 per cent higher.

Mr Murphy said the changes were the result of updated figures, an improved methodology, and the US switch to taxing territorial rather than world income as part of the Trump tax package.

But he stressed the policy implications were unchanged. Cutting the corporate tax rate would improve consumer welfare, and increase it by more than any other feasible tax change.

For consumers, cutting the company tax rate from 30 per cent to 25 per cent has a benefit that is 2.04 times the costs, a small downgrading of the original estimate of 2.39 times the costs,” he said. By comparison, cutting personal income tax has a consumer benefit-to-cost ratio that is much lower 1.25 to 1.42 times, depending on the nature of the cut.”

Mr Murphy said the data he had examined on the prices at which the rights to dividends were sold did not support the contention that foreign investors were escaping tax by selling dividend rights to domestic investors.

In The Age and Sydney Morning Herald

Sunday, March 18, 2018

Australia. It depends on where you live

Woody Allen was right when he said 80 per cent of success was showing up. But only for some of us.

If you are born in Blacktown in Sydney or Broadmeadows in Melbourne, showing up probably won’t do. But showing up is about all you’ll need if you are born in Pennant Hills or Glen Iris.

It’s a shocking thought, and until now there’s been no evidence for it. It is well-known that people who are born in poor suburbs do more poorly later in life, but until now it has been thought that it's because of who they are rather than where they are.

It’s been hard to disentangle the two. Families with low aspirations and little education tend to congregate in the same suburbs. That their children do poorly could well be because of them, rather than the families and conditions that surround them.

Now Australian National University researcher Nathan Deutscher come up with an ingenious way to seperate the them. He got the Tax Office to match taxpayers born between 1978 and 1991 to their parents using the home addresses they first quoted when they applied for their tax file numbers. He compared their incomes at age 24 to those of their parents and also to the parents of their peers in the same postcodes.

Then he got clever. Some of those parents moved home while their children were growing up, to suburbs more than 15 kilometres away.

He examined what happened to the eventual incomes of the children who moved compared to the eventual incomes of the children with similarly well off parents who stayed put.

Moving out of a poor suburb helped them even when their parents’ incomes didn’t change. Unsurprisingly, it helped them more the earlier they left. But here’s what is surprising. When they moved didn’t matter much before the age of 11. Nor did it matter much after the age of 20. It mattered an awful lot in the teenage years. Every year that a teenager delayed moving to a higher income suburb cost them 4 per cent of the eventual boost to their income.

It’s as if it’s our teenage years most determine who we are, rather than the earlier ones or the later ones. That’s certainly how it is for our taste in music, and also for our ability to learn languages when we move between countries. Every teenage year delayed matters a lot more than each early childhood year delayed.

Deutscher is quick to point out this doesn’t mean our early childhood years aren’t critical. It’s just that there’s less variation in them suburb by suburb, after taking into account income. Parents that move don’t deliver particularly different early childhood experiences.

What is it about location that matters so much during our teenage years? Roughly half of it is because it’s where we live in those years that will most likely determine where we look for a job and try to settle down. It's where our friends are. It’s also where we are likely to develop the connections that will help us look for that job. It’s why Adelaide turns out to have been a less than good place for many to have spent teenage years. It’s also why during the mining boom Western Australia and Queensland turned out to be good places, although less so afterwards.

Much of the rest of it is to do with our peers – our friends in our teenage years. Deutscher gets at this by comparing the income of their parents (actually the income of all parents of children born in the same year in that postcode) to eventual personal incomes. The poorer our friends' parents, the poorer we will be ourselves. Naturally, the income of our parents matters more. But the income of our friends' parents matters quite a bit. It has about a quarter the weight of the income of our own parents.

Added to that would be the impact of our teachers, what’s available in the community and what seems possible in the community. All of this might be something many parents already know, which might be why so many of them spend so long obsessing about bringing up children in the right suburb. And it might be what pushes up prices in those suburbs and makes the distinction between high priced and low priced suburbs more extreme.

As would intermarriage. The Productivity Commission reported a few years back that two thirds of Australia’s high earners were married to other high earners. A decade earlier it was half.

We are increasingly less likely to move out of the circumstances in which we are born, unless our parents up stumps and move, which is itself increasingly difficult.

Australia is a far less equal place than it was in the 1980s. But that’s not all. There’s also less equality of opportunity. Just showing up is just about good enough for some, nowhere near good enough for others.

In The Age and Sydney Morning Herald

Thursday, March 15, 2018

There's a case for immigration, and it's not about us

It’s great that we are talking about immigration. But could we talk about immigrants as well?

I’ve never met one who wasn’t delighted to have made it here.

To conduct the debate as the ABC did on both Four Corners and Q&A on Monday night, as if it was only about us, leaves out half the picture.

People come here to get a better life, and they generally do. Those who don’t, leave.

If we can lift the living standard of people who would like to come here, without much harming (or even while enriching) our own, why shouldn’t we?

Here’s a quick run-through of some of the things that have been said about the harm immigration is supposed to have done to our prosperous country.

Tony Abbott says it has held down wages. Indeed, “It is a basic law of economics that increasing the supply of labour depresses wages.”

It would have held down wages, had it not lifted the demand for labour at the same time, which is what happens when the population grows.

To see that this is true, imagine an Australia with only half its present population. Would wages be much different? Or imagine an Australia with the population it has now, but cut in two along a line separating Victoria, South Australia, Western Australia and Tasmania from NSW, Queensland and the Northern Territory. Each half would have roughly half Australia’s present population, but would its wages change much?

The Productivity Commission examined every piece of international evidence it could and found only “small (either positive or negative) effects”. Its own Australian modelling found only a “negligible” impact overall, but allowed for the possibility that immigration would make some workers worse off and some better off.

In the United States, leading immigration economist George Borjas has found persuasive evidence that it’s the least skilled who have been made the worst off and the most skilled the best off. But when Australian National University economists Robert Breunig, Nathan Deutscher and Hang Thi To set out to replicate his work in Australia they found no such thing. Which isn’t surprising. The US immigration program is skewed towards low-skilled arrivals, while the Australian program is skewed towards the high end.

They examined 40 different skill groups and found “no evidence” that immigration damaged the labour market outcomes of pre-existing Australians.

“If anything, there is some evidence for small positive associations,” they wrote.

It shouldn’t be surprising. Migrants bring with them, or make, money, which they use to buy houses, start businesses and educate their children. They employ people.

What if we don’t want all that activity? What if we want a more peaceful life with fewer traffic jams and shorter commutes?

It’s a future we would be denying would-be migrants, who often come from places far more crowded than Australia. That there are places worse than Australia suggests that Australia isn’t yet populated enough compared with the rest of the world. Anyone who gets out of our cities and looks at our coastline will have to agree.

The "problem" is that immigrants want to settle in cities, and who could blame them? (Although it must be acknowledged that many settled in Western Australia during the mining boom at a time when existing Australians would not). They make our existing cities bigger rather than help us create new ones.

Building a new city is hard. Australia has only successfully done it once, in Canberra. But the second-best options aren’t bad.

This month’s Grattan Institute report says it wouldn't be that hard to build all of the extra homes we will need within our existing cities, so long as we get used to the idea of living closer together. It would bring us benefits. Berlin, Rome and Toronto are each more densely populated than Sydney and Melbourne, and easier to get around. Dense populations can make proper public transport worthwhile.

Sydney is leading the way, creating dense corridors along major roads, while leaving the suburbs surrounded by those corridors untouched. Canberra is doing it by stealth. Each ACT suburb has within it randomly distributed "Mr Fluffy" houses, contaminated by loose asbestos. The ACT government has bought each one, demolished it and resold the site on the condition that it can be used for multiple dwellings, whatever the zoning. Every suburb, leafy or not, will get used to denser living. When the existing residents sell, they too will want the right to have their blocks divided.

We’ve a right not to choose this future - one where, with good planning, there’s a chance our cities will work. We’ve a right not to be confident enough in our governments to do it. But only up to a point. The rest of the world has granted us a licence to use this continent on the implicit understanding that we populate it.

Most of the people we are populating it with are like us. They are us. One in every four of us is a migrant. Almost one in every two lives in a migrant family. We already allow New Zealanders free access. The biggest gyrations in our population result not from the actions of others but from locals either changing how they return home or leave. There’s no longer an us and them.

In The Age and Sydney Morning Herald

Tuesday, March 13, 2018

Housing risks 'catastrophic': Grattan Institute

Australia’s eight-year house price boom has savaged the living standards of poorer Australians while so far leaving the wealthy untouched, a new Grattan Institute analysis finds.

But the report, to be released on Monday, warns of a “catastrophic” impact on all income groups should mortgage rates rise by more than a few percentage points.

The institute’s chief executive, John Daley, said Australians who already owned their houses had been little affected by soaring prices to date because they had been “hedged”. If they moved, they could buy again for about the price they got when they sold. Property investors had done well out of the explosion in Sydney and Melbourne prices because they had always been planning to sell.

But new buyers had been locked out.

Home ownership had plummeted among Australians aged 25 to 34, sliding from 61 per cent in the early 1980s to just 44 per cent in the most recent census. Ownership among Australians aged 35 to 44 had plunged from 75 to 62 per cent.

Although ownership rates among older Australians had held up to date, outright ownership was slipping. The proportion of Australians aged 55 to 64 who own houses mortgage-free has slipped from 72 per cent to 42 per cent since the late 1990s. The proportion of Australians aged 65 and older who are mortgage free has slipped from 82 to 75 per cent.

“Some of these older households will, quite rationally, use some or all of their superannuation savings to pay off their mortgage debt,” Mr Daley says in the report. “This undermines the intent of the super system, and means that its substantial tax concessions are never used to reduce age pension costs.”

The report finds the bottom fifth of Australian earners are paying 28 per cent of their disposable income in housing costs (either in rent or mortgage payments), up from 24 per cent eight years ago. By contrast, the top fifth are paying 10 per cent, scarcely any more than they were before prices took off.

The unchanged circumstances of high earners reflect much lower interest rates, which until now have offset the effect of higher prices.

Low earners have suffered from a flood of investors into cheaper suburbs where they have pushed up prices in order to take advantage of negative gearing and avoid high land taxes.

Forty-four per cent of low earners are in rental stress, up from 35 per cent eight years ago.

Mr Daley warned that the Australians who had so far escaped higher housing costs were in for a shock when interest rates recovered from their historic lows.

“A 2 percentage point rise would be catastrophic for most new home owners,” he said. “It would be much more catastrophic than in the past, because when you start on a 3.5 per cent interest rate and go to 5.5 per cent, the increase in payments is huge."

In addition, mortgage holders could no longer safely assume that mortgage payments would shrink over time as a proportion of their income as wages grew. Higher mortgage rates combined with much slower wage growth could see them remaining mortgage holders for much longer.

The Howard government’s decision in the late 1990s to halve the headline rate of capital gains tax was responsible for much but not all of the blowout in prices by making negative gearing more attractive. The report recommends that the 50 per cent discount on capital gains tax be  phased down to 25 per cent.

Much of the rest of the blowout was caused by home building falling well behind population growth.

“It’s all very well running a strong migration program,” Mr Daley said. “But if you don’t build enough dwellings to back that up, the price of housing goes up. It’s not surprising.

“For much of the decade from 2005 to 2014, annual housing construction was at or lower than the average of the previous 25 years, but with population substantially higher, around 350,000 per year rather than 220,000 per year,” the report says.

“The share of Australia’s population living in our four largest cities is expected to increase from 58 per cent today to 66 per cent by 2061. The population of Melbourne is expected to climb to almost 8 million by 2051. Sydney’s population could climb to 8 million by 2056.”

Mr Daley said the “first best” policy was to run a strong migration program and build enough extra homes, as had happened in the past. Australia took in a large number of migrants in the 1950s with no material jump in home prices, because it built a lot of houses.

“Right now we are in a third best world, which is to have a really strong migration program while keeping the clamps on planning rules and land release, so that we can’t house them. Our young people are paying for that.”

The report recommends the Commonwealth use ‘carrots and sticks’ to encourage states and local governments to allow much denser housing, especially along transport corridors. Local councils that failed to meet density targets would lose their planning powers.

Residents who opposed denser housing should be told that without it, their children would most likely be unable to buy a home. They should also be told that without denser housing, including denser housing for aged residents, they would have to leave their suburbs when they became infirm.

In a prepared response to the report, Treasurer Scott Morrison seized on the finding that capital gains tax was not the only reason prices had been climbing, saying that Labor’s proposal to wind back the concession was a “blatant tax grab”. His response did not address the findings about planning.

In The Age and Sydney Morning Herald

Dividend imputation means Labor can offer more tax cuts

Australia gave the world the platypus, the echidna, and a system of taxing company profits so strange that no one - anywhere - has copied it.

Dividend imputation, introduced by Labor treasurer Paul Keating in 1987, is not unusual. Although the methods used vary, many countries attempt to ensure that company profits are taxed only once, either as profits in the hands of the company, or if they are not taxed there, as dividends when they are paid out to shareholders.

In Singapore it’s called the one-tier system. In Australia, Keating gave shareholders in companies who had already paid tax a credit they could use to reduce their own tax by the same amount – until the year 2000, when his successor, Peter Costello, went further. Costello also paid out the credit in cash to shareholders who didn’t pay tax, ensuring that, uniquely in the world, for those shareholders, Australia had a zero-tier company tax system. After the refund, the tax wasn’t collected at either the first or second tier.

Then Costello made things worse. He made all superannuation payouts tax-free for Australians aged 60 and over, as well as all pension income. Retirees on fair to high actual incomes but low or zero taxable incomes became eligible for refund cheques alongside their dividend cheques. And the super funds themselves became low taxpayers. Super funds stop paying tax when they move from accumulating funds while their members are working to paying out funds when their members have retired. As they did so, they increasingly came to rely on refund cheques, which Costello had ensured they were entitled to along with dividend cheques.

The leakage of company tax was growing so fast that the tax discussion paper commissioned by treasurer Joe Hockey referred to “revenue concerns” about refund cheques, concerns the Treasury has continued to pursue under his successor, Scott Morrison.

There’s more in it for Labor than plugging leakage, just as there would have been for Morrison. Along with its planned crackdown on negative gearing and its decision not to fully embrace the Coalition’s proposed company tax cuts, it will amass a larger stock of money than the Coalition will to pay for big personal income tax cuts. The maths are unarguable.

In The Age and Sydney Morning Herald

Sunday, March 04, 2018

Meet the MP who actually wants to know what works

A house in the Canberra suburb of Narrabundah had suffered multiple burglaries. For the sixth time someone had broken in through a window and taken things from the bedroom of a nine-year-old boy.

This time the offender was caught red-handed, with a pillowslip full of the Lego – he was the nine-year-old boy from next door.

When police officer Rudi Lammers arrived, he decided not to follow the usual procedure. Instead, he sat down with the two nine-year-olds and asked the victim, “What do you think we should do?”

The reply surprised him. The victim tipped out half the Lego, and gave the rest to the thief. Then he said, “Any time you want to play Lego, come over. But can you come through the front door? Because Dad gets really cranky when you come through the window.”

Decades later, Lammers was approached by a man in a Canberra club who whispered in his ear, “Do you know who I am? I am the Lego boy. That experience changed my life.” He had stopped stealing and gone on to run a construction company.

Without realising it, Lammers had been practising what’s known as ''restorative justice''. We know that it works better than the other kind, not just because of that incident (''data'' is not the plural of ''anecdote'', Labor politician Andrew Leigh reminds us in the new book that recounts the story) but because restorative justice has been trialled repeatedly in random experiments.

Whenever offenders have been randomly assigned either to arrest or meeting the victims, those assigned to meeting the victims have been significantly less likely to commit further crimes, even violent crimes.

Except in the family.

In the Minneapolis domestic violence experiment, police were given a special pad of report forms which listed three kinds of responses: arrest, send the perpetrator away from the home for eight hours, or provide advice. The three responses appeared in random order throughout the report pad. Where the injury wasn’t serious, the police had to do what the pad said.

The results were crystal clear. Households where the perpetrator had been arrested experienced half as much violence in the following six months as those in which the perpetrator had been temporarily removed or given advice. Arrest became the standard response.

Originally an economics professor, Leigh might well have the least number of preconceptions of anyone who has ever sat in parliament. On teenage sex, he reports that virginity pledges don’t work. On smoking, he reports that paying people to stop does work. Vitamin tablets and fish oil are of no use to healthy people, so Leigh has given them up. None of these findings was obvious, and none would have become apparent were it not for random trials, which Leigh wants to use when in government.

Rather than introduce co-payments for bulk-billed visits to the doctor, as Tony Abbott wanted to do, we could introduce them in one state, or postcode, and see how over-servicing and under-servicing or visits to emergency departments in that location change. Or we could make use of the giant Rand health experiment, in which Americans were randomly assigned to free visits, cheap visits and expensive visits. It found that co-payments cut visits, but that they do it indiscriminately, keeping away genuinely ill people just as much as the not so ill.

Advertisers do it all the time, running test campaigns in small states before going national. Pharmaceutical companies do it. By experimenting with different colourings in random trials they know that yellow tablets work best at fighting depression, white ones at reducing pain, green ones at fighting anxiety and blue ones at sedation.

Surgeons do it. But to ensure the experiments make sense, they have to actually perform surgery - sham surgery - on knees and sometimes brains, where people get put under anesthetic, cut open, not operated on, and stitched back together again. Three-quarters of the time those who get sham surgery improve just as well as those who get the real thing.

There are ethical problems, to be sure. But they are often overstated. My economics lecturer told me of an early researcher who reported the results of a study in which he had withheld treatment from randomly chosen patients. He displayed a graph that showed those who missed out died sooner. Amid uproar and suggestions he had blood on his hands, he apologised to the conference and turned the graph the right way around. By withholding treatment he had prolonged their lives.

Politicians are forever promising programs they say are ''evidence-based'', but they are usually less than keen on conducting the experiments needed to obtain that evidence. Leigh is different, which means that in government he’ll probably be different. He used randomly-generated advertisements to pick the title of the book. Randomistas: How Radical Researchers Changed our World got the most clicks.

In The Age and Sydney Morning Herald

Thursday, March 01, 2018

Money down the drain: how wine empties the budget

The hardest thing about putting together a budget is finding the money. Scott Morrison’s task gets harder each year.

Back in 2000, the first year of the GST, tax takings amounted to 25 per cent of gross domestic product. Put another way, one quarter of everything we earned went to Peter Costello to hand back to us via the budget.

By the end of the latest financial year, Morrison's first as Treasurer, the proportion had slid to 22.1 per cent. Morrison collected a total of $388.6 billion in tax. If the tax system had performed as it did for Costello back in 2000 he would have collected $439.7 billion.

This isn’t a story about the end of the mining boom. There was no mining boom in 2000. And nor is it a story about income tax collections being chipped away by tax cuts. They haven’t been chipped away. They are as high as they ever were, at 11.3 per cent of GDP, up from 11.1 per cent in 2000-01.

It is partly a story about vanishing company tax collections. But only partly. Costello collected company tax worth 5 per cent of GDP in 2000-01 while Morrison collected only 3.9 per cent in 2016-17, but company tax collections bounce around. In 2001-02, the year after Costello collected 5 per cent, he got just 3.6 per cent in the wake of the downturn that became a recession in the United States. Collections climbed back to a peak of 5.5 per cent in 2007-08 before collapsing, recovering, and then collapsing again. The Treasury is forecasting a recovery to 4.7 per cent in 2019-20, before a slide as a result of the cuts in the rate.

What’s happened is mostly a story about a different type of taxes, called ''indirect'' taxes. Direct taxes are those that tax income directly, such as income tax, fringe benefits tax, capital gains tax, company tax, and the tax on super fund earnings. Indirect taxes are those that get at income indirectly, such as the goods and services tax and the taxes on imports and luxury cars and wine and beer and cigarettes. It sounds like small beer, but it’s not, or at least it didn’t used to be. Indirect tax amounted 7.3 per cent of GDP in 2000-01. It has slid ever since, amounting to just 6 per cent in 2016-17.

Dollar for dollar, the slide in indirect tax collections has cost the budget more than the slide in company tax.

And it’s not because the GST is wasting away. That’s to come, as we spend more in ways the GST can’t catch, although government decisions to extend GST to online purchases will help. My rough calculations suggest the GST collected 3.5 per cent of gross domestic product in its first financial year and slightly more, 3.53 per cent, in the financial year just ended.

Nor is it because tobacco tax isn’t pulling its weight. It’s been pushed up repeatedly. Morrison collected 24 per cent more from it in 2016-17 than Joe Hockey did three years earlier, despite lower smoking rates.

The culprits are wine and beer, and the complicated relationship between them, set out in a pre-budget submission by former finance department budget official, Glenys Byrne.

In 2016-17 alcohol tax collections actually fell, by 0.7 per cent, at a time when total tax collections grew 5.2 per cent, the economy grew 2.7 per cent, and consumption of alcohol grew 2.4 per cent.

So much have alcohol taxes shrunk as a share of GDP that if they earned now what they did relative to the size of the economy in 2006-07, they would rake in $1.4 billion a year more. And things are worsening quickly. The budget update released in December had Morrison collecting $844 million less from alcohol in the four years to 2019-20 than the estimates he presented in his first budget in May 2016.

Beer is pretty well taxed. What’s charged depends on alcohol content and the consumer price index, which is why from time to time the manufacturers cut their alcohol content, to control costs. But the rules for wine are “incoherent”, to use the term applied by the Henry Tax Review. Cheap wine is barely taxed at all, and (astonishingly) its alcohol content doesn’t matter. This means the cheapest, strongest, most-destructive wine is likely to be taxed the least. Which isn’t new. John Howard introduced the so-called Wine Equalisation Tax in 2000. Byrne says it’s likely to be remembered as one of Australia’s worst ever taxes.

What is new is that people are switching from fully-taxed beer to barely-taxed wine, partly for that reason. Beer accounted for just under 40 per cent of alcohol consumed in 2015-16, down from 75 per cent in the 1960s.

The 2010 Henry Tax Review wanted to phase in a proper system of alcohol taxation, by unit of alcohol. Labor’s Wayne Swan ruled it out saying he wouldn’t do it in the middle of a wine glut. Five years later Malcolm Turnbull’s tax taskforce looked set to recommend the same thing before it was disbanded.

Doing nothing probably hurts the states more than the Commonwealth. The NSW Audit Office puts the cost to government services of alcohol abuse at $1 billion a year, or $416 a household. But it’s become material for Morrison. If he wants to plug revenue gaps, if he cares about his ability to deliver tax cuts, he’ll find a way to fix it.

In The Age and Sydney Morning Herald