The real value of the government’s “phenomenal” $20k asset write off

The government’s small business budget has been a big success, it seems. They got positive headlines about the Budget being stimulatory, and now approval ratings of the PM are back up.

It’s a PR success. And a lot of that is due to attention lavished on the $20,000 tax write-off for small business.

It’s “Phenomenal” apparently.

Get ready for a lot more asset write-off announcements in future. Because they buy the government a lot more headlines than they deserve.

You wouldn’t know this from reading about it, but the “$20,000″ asset write off is worth only about $1000.

Here’s why:

The $20,000 is not taken off the tax bill of a small business. Instead it’s a deduction from income – same as when an individual gives to charity.

After a small business takes $20k off their income, they save the 28.5 per cent tax they would have paid on it. 28.5% of 20k is $5700.

That’s the actual value of being able to instantly write off a car or machine from your tax this year.

But here’s the thing. Businesses could always write off asset purchases against their income. They just had to do it more slowly.

Using a depreciation schedule from the ATO website, I calculated how much a small business would have been able to save off their tax under the old rules.

It’s $5700.

The only advantage is that under the new policy, a business can claim all that $5700 in this tax year, instead of claiming it in dribs and drabs over the next decade.

Here’s a graph for how your depreciation works under instant write off versus slow depreciation.

Years since purchase on the horizontal axis.
Years since purchase on the horizontal axis.

We can measure how much benefit instant access to the write-off provides. All we need to do is make an assumption about how small business values money over time. We do that with a discount rate. Lets assume a discount rate of 8 per cent.

If that is the case, the net present value of the flow of money is $4660. Only $1040 less than the value of the money right now.

(If you assume small business is even more patient, the value of the instant write-off is even less. At a 2 per cent discount rate the NPV is $5350 and the net value of the new policy is a mere $350.)

In summary, the government is getting great value from this policy in media coverage terms.

Compare it to another tax break they gave small business in the Budget – a five per cent tax cut for unincorporated businesses. You probably haven’t seen mention of that anywhere.

But this five per cent tax cut (full disclosure, I run an unincorporated business!) is worth even more to the Budget bottom line. That’s it in the blue bubble on the right side – worth $1.8 billion. This graphic was in the glossy brochures journalists got in the Budget lock-up.

budget glossy

It’s one of the most expensive measures in the Budget. And it has barely got a headline. The government will not make that mistake again.

Expect asset write-off thresholds to be even higher in the next Budget as governments seek a headline that says something like $100,000 Asset Tax Bonus for Small Business.

Budget Day!

I’m in the nation’s capital for the federal Budget! For me, this is like Christmas.

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At 1.30pm I go into Parliament House for the lock-up and start diving into the Budget papers. (Budget paper 2 is the choice of the connoisseur.)

No phones or internet are permitted inside, and once in, you can’t leave until 7.30pm. At that time the Treasurer stands to deliver his Budget speech to the House of Representatives and the Budget is finally public.

I’ll be writing for The New Daily, a free news website with its head office in Melbourne. Hopefully by 8pm my stories will be published on their website. ( And hopefully, the government’s promise of a “dull” budget will be another promise on the scrap-heap!)

Until that time, please check out these two pieces of pre-budget coverage I have had published in other places.

A “Fantasy Budget” I wrote for Crikey.

A very simple Budget explainer I wrote for The New Daily

Parental leave changes will hurt more than the Government believes

The government offers new parents 18 weeks parental leave paid at the minimum wage. It’s worth $11,500. Until now that policy was available to everyone. But the government will now retract the offer for people whose jobs offer them parental leave.

I can see the attraction of cutting it, to save $1 billion. And I don’t expect vast waves of public sympathy for the kind of people who have good employer parental leave schemes. These people are wealthier and well-attached to the labour force.

“At the moment people … are effectively double dipping — we are going to stop that,” – Treasurer Joe Hockey.

But the “double dipping” terminology is partly responsible for the positive initial reaction to this announcement. I was surprised to see even the redoubtable Peter Martin using that terminology in his report on the policy this morning.

Looking at it like that is insufficient. The question is complex. How to take away government services as the private sector provides them is one of the trickiest parts of any policy sphere.

In some policy areas, no matter your private endowments, the government provides. Public transport is available to people whether or not they own cars. Medicare is universal – even those with private health insurance can use it.People with Foxtel are still able to tune into the ABC. Public schools are not reserved for those who can’t afford private ones, etc.

In other areas, we means-test things tightly. Welfare payments are removed as quickly as possible as people earn more money, even though that creates high effective marginal tax rates.  (There is a strong movement arguing for a “basic income” which would effectively be a universal and non means-tested welfare payment).

In each of these cases, a range of questions comes to bear. Is the offering in question a universal right, or a safety net? Is it very expensive to provide widely without means-testing? Is it advantageous to have public and private provision alongside each other? And what will be the effect on private sector provision if the government means-tests?

This last point is crucial in this case.

If you work for a university like the Australian Catholic University that offers 52 weeks paid leave, your employer might not see the new policy arrangements as competitive. The government’s 18 weeks at minimum wage is no substitute. But the average duration of paid parental leave in Australia is under 10 weeks.

For most companies, I expect they will see that their expensive-to-provide policies are offering little or no net benefit to their employees, so they will have no reason not to cancel them.

This policy might actually provide savings to employers, but it will lead to a real fall in the amount of paid time new parents can spend with their children.

Instead of drawing on both, parents will then draw on only the government scheme and there will therefore be a drop in the amount of parental leave taken.

Faced with this shorter period of parental leave, parents will then choose whether to return to work. It could even cause some new parents to sever their connection to the workforce. The consequences could be further reaching than they seem.

Australia’s small business obsession.

Unlike its pineapples, this country likes its businesses best small.

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The federal government continually showers the small business sector with largesse. One of the most-publicised announcements next Tuesday is a tax cut for small businesses. Tony Abbott is spruiking that 95 per cent of businesses will access the tax cut. Which is true, because most business are small.

But most business is done by big businesses. That’s where more people work. And they thrive despite much tougher regulatory and tax standards. Small businesses get an easy run on labour law and tax law. They’re not eligible for the special tax Mr Abbott introduced at the last election to fund his parental leave scheme.

I know – I run a (very) small business as a sole trader and I don’t even have to collect GST. It’s actually administratively very simple.

But how good is this for the economy? Should we encourage small business?

  • small business survival

DATA SOURCE

A huge number of small businesses just disappear. Every single one of them represents disappointment and sorrow, and probably years of work and capital equipment that now is useless.

Small businesses come with real economic and social costs. You might support small business if they reliably turned into big businesses.

But even the ones that survive simply hang on. Of the 500,000 small businesses that employed 1-4 people in June 2013 and survived the year, most did not fare well.

  • 52,000 of them now had no employees – about 10 per cent.
  • 423,000 were the same size.
  • And just 34,000 got bigger. (Of those, 1000 now employ more than 20 people and 27 more than 200 people.)

Government woos small business because there are so many of us. We’re a voting bloc. But economically, it makes little sense.

Thoughts on how to invest right now.

Yesterday, the stock market tanked, having its worst day in two years. Meanwhile, interest rates are at new record lows.

The “search for yield” is no longer just the refrain of central bank governors. Today, a real person with a self-proclaimed ignorance of economics asked me this:

If I can’t put my money in the bank, and I can’t put my money in the share market, where can I put it?

The short answer is I don’t know.

I’d be more confident about Australia’s medium-run growth prospects if there was not such strength in the property market. But the risk I see is of a property market correction. That makes me nervous about property.

A fall in property prices would crimp consumer spending and hurt the stock market. So I’m nervous about stocks.

But the risk of a property correction is just one of the factors that makes me nervous about buying into Australian companies. I’m also worried about China. On anyone’s terms China has had a remarkable run. What happens when that ends?

Overall, as an Aussie, we’re very exposed to Australia as it is. Our employment prospects hinge (primarily) on the economy here. Should our investment returns be correlated with our employment prospects? It would seem unwise. So we turn our gaze overseas.

Investing globally looks risky, though. America’s S&P 500 is the highest it has ever been. And the ratio of stock prices to stock earnings is about a third above its long term average.

S&P500 at record highs
S&P500 at record highs

The reason people are so into stocks, of course, is the failure of bonds to offer anything approaching a reasonable return. Most countries can take your money for 10 years and reimburse you less than two percent a year -unadjusted for inflation.

But investing overseas looks relatively wise. If you think the global economy is normalising, you may be more inclined to bet on the Aussie dollar falling rather than rising. By buying foreign assets now, you gain the chance to get some positive returns in the foreign exchange market.

I personally wouldn’t buy Apple shares, because even though they have a lot of cash, I think they’re out of a far more precious commodity – ideas. The Apple watch is a giant distraction from the fact Apple depends almost entirely on the iPhone, a category where people replace their products every few years.

apple
Google trends data – this watch is not the saviour Apple wanted.

America is not completely devoid of investment opportunities though. A company that can benefit from a lower oil price might be a good safe buy. Perhaps an airline.

Nevertheless, upsides will be limited when buying established companies. Those with appetite for risk might be looking at other options.

I’ve been following Bitcoin for a few years, and while I remain skeptical, I think the hype-to-potential ratio is as good as it has been in a long time. Bitcoin’s price has stabilised (well, stable for Bitcoin) in the mid-US$200s.

btc

Bitcoin will live and die on its technical usefulness in transactions. I don’t think volatility is the problem. Bitcoin’s price can be unstable across a week or a month, but it won’t matter if people can buy some, transfer funds, and then sell it a few minutes later without accepting too much risk.

If there is a constant supply of people wanting to use it for transactions, then demand will be strong. Other people will hold it as a longer-term investment. The more this latter category grows, the fewer Bitcoins will be in circulation for transacting, and the more the price will rise.

The key will be simplifying the interface so people can use Bitcoin easily and safely.

For that reason recent developments that see infrastructure being developed for transacting in Bitcoin are encouraging. Bitcoin is now legal for transactions in CaliforniaAn avalanche of new bitcoin transaction apps is hitting the market. And the biggest investment banks are getting involved with the currency.

The biggest risk Bitcoin faces is regulatory. Its appeal to organised crime makes it a target for governments, and so it remains an option only for the bolder investor. (I haven’t got any yet, but I am considering doing so. If I do I shall write up my experience).

So dear readers, if you want to dispute my assertions, share any stock tips, or provide investment wisdom, please leave a comment below!

Will India save us from the decline of China?

This chart in the RBA’s chart pack today made me smile.

RBA chartpack china india

The Indian economy has been able to accelerate its growth rate over the last three years to the point where it is now above Chinese growth. This is a good result for Manmohan Singh and his successor Narendra Modhi. It will transform the lives of millions of Indians. They’ll gain opportunity they never before had.

But I want to look at this from Australia’s perspective. Chinese growth has been essential to our economic health. The extra economic activity it added each year forced the Australian economy to expand too. But now its growth is shrinking. Will we see Indian growth take up the slack?

Here’s how much extra GDP the two giants add when they both grow at seven percent.

Screen Shot 2015-05-06 at 12.09.06 pm

They don’t compare. China is far more valuable.

The reason is a bigger economy. China has more people and they are far richer. All those years of ten percent growth mean China’s economy is now worth over $9 trillion US dollars a year. India’s economy is worth less than $2 trillion a year.

So we ought to be cautious about anybody hyping the new economic miracle of India.

1. India will soon be the new China.

2. India: the Bullish case

3. Asia’s next big story

The two economies’ contribution to global growth, and their capacity to boost Australia, would equal out only if China’s growth slumped to two percent, and India’s rose to ten percent.

china 2 india 10Even if this amazing scenario happened, with China stuck in the doldrums and India roaring ahead, it would still take two decades for India to become a bigger economy than China.

India in red, China in blue
India in red, China in blue

We should cheer Indian economic growth, of course. It is not a country where poverty is relative and middle-class concerns about the prioritisation of material lifestyles apply. Indian growth will eliminate misery.

But it will not single-handedly save Australia. Relying on India for the sort of lift China gave us over the past decade is a recipe for disappointment.

We are blind as bats when it comes to opportunity cost

Last night, the television program QandA invited renowned philosopher Peter Singer onto the program. (I normally don’t watch QandA because I find it too stressful/annoying and end up yelling at the TV. Last night, for some reason, I watched.)

In the context of debating philanthropy, Singer said something that makes perfect sense to me. I paraphrase:

If it costs $20,000 to train a guide dog in Australia, and $100 to prevent a case of blindness in the third world, should we not consider giving nothing to guide dog charities, and instead giving that money to a charity preventing blindness?

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I saw nothing too controversial there. I’ve written before about finding the best value way to spend your charity dollar.

So I was quite surprised when another panellist immediately leapt to the defence of guide dogs.

Don’t stop giving to the guide dogs! said Amanda Vanstone, a former government minister.

Ha! I thought. That’s weird. Doesn’t she see she’s tacitly condemning poor people to blindness by saying that?

But you know, I like fluffy yellow puppies as much as the next person, so I can understand why people might get confused on this topic in the heat of the moment.Screen Shot 2015-05-05 at 9.20.41 am

Then, this morning, I opened the website of my favourite newspaper to see the debate being rehashed again, by senior journalist Neil McMahon

In essence, [Singer] suggested that the costs of funding guide-dog training in the wealthy west compared to the cost of donating to save someone in a developing country from becoming blind in the first place made the latter a better use of your charity buck. “It’s a matter of getting the best value for your money,” Singer said. ‘What’s better – to prevent someone becoming blind or give a dog to a blind person?” The obvious question – can’t we do both? – didn’t come up.

McMahon says we should simply do both!

Does he know that to do both would require doubling our charitable giving?

It is as if the concept of opportunity cost is completely invisible to him. When a charitable dollar is expended in one task, it is not there for another task. The way such choices are made is therefore really important.

With apparently wilful blindness about opportunity cost racking our society, is it any wonder that our society makes so many bad choices, from building very expensive freeways, to how and where we build our submarines to whether or not to feed $10 billion into pokie machines a year.

I’ve tried to write about opportunity costs of purchases in lurid ways, for example:

Rolls Royce drivers are baby killers, and

Buy Australian – about as sensible as Fuck Off We’re Full.

But it’s not sinking in. Apparently, even a quick stint in introductory economics course won’t change that – people who did economics 101 performed as poorly on opportunity cost questions as the population at large. 

Why is opportunity cost so counter intuitive? I’m tempted to spend a dozen paragraphs speculating. But alert to the opportunity cost of having you read on, I’ll stop this post here.