Australia – Thomas the Think Engine

Bring back core and non-core promises

The election is no longer “on the horizon.” It’s close enough to smell the sausages. Everyone involved in politics is working hard, trying to get us to listen, trying to get us to believe, trying to get us to vote.

Most of what they are saying is lies. Or to be a little kinder, false predictions about what they will do in the future.

Screen Shot 2016-06-23 at 9.56.44 PM.png — Labor’s policy list

Labor has set out 100 positive policies on its website.They’re really quite interesting and I recommend having a look.

But will it do them all? No way.

Take its plan to cut capital gains tax and negative gearing. These are very bold reforms any party would struggle to get through the Senate.

And – despite recent reforms – the coming Senate is going to be a particularly mixed one.

Psephologist Anthony Green predicts eight Greens, three Nick Xenophon Teamers, either Glenn Lazarus or Pauline Hanson, Jacqui Lambie and an associated senator, plus probably one other odd-bod from Tasmania.

It’s a volatile mix that would wreak havoc on the most carefully-planned legislative agenda and laugh heartily at the very idea of a mandate.

And there is no guarantee of a mandate, for anyone. A hung parliament is quite possible, with independents and Greens set to make good runs in a range of lower-house seats. Nick Xenophon Team is a huge factor because it is competitive in some classic Coalition seats in SA. One expert tips six cross-benchers.

The odds of a hung parliament are 4:1 against and the closer the two major parties get, the better the chance a couple of independents (Yes Tony Windsor, I’m thinking about you) could have the parliament in the palm of their hands.

What all this means is that words spoken before the election – however earnestly meant – cannot all come true.

Why don’t politicians admit that?

Instead of having broken promises littering the field of battle, creating the impression “they’re all liars”, why not explicitly admit some outcomes are state-contingent?

They could make promises contingent on election outcomes:

“If we win a Senate majority we will pass all our policies. If not we will make health and education our top priorities.”

Promises contingent on Budget outcomes.

“If company tax revenue rises above $100 billion, we will fund a new hospital in Launceston.”

Or promises contingent on other promises.

“If we can get our negative gearing reform bill through, we will fund the building of submarines in South Australia.”

Politicians demur on hypotheticals for a reason – adherents of the more cynical schools of political communication will insist the complexity is too high for voters. And I’m sure the first few weeks after adopting this approach would be full of mocking.

“The Leader of the Opposition is a maybe man, a possibly politician, an if-then individual,” the PM would jeer. “He’s built an escape route into every promise!”

Perhaps most politicians would wilt immediately under such ripostes – and the bad press that would follow. Gallery journalists – whose expertise in reading the tea leaves might be slightly less valuable in such a scenario – might be unwilling to give the approach a decent chance.

But maybe, just maybe, a contrast would eventually become apparent between one side explaining their priorities and the risks and contingencies while the other side baldly claims things that can’t all come true will all come true. It just takes one politician floundering when asked, “But what will you do if you don’t control the Senate?” for that to become the favourite question of press-packs everywhere.

If so, the pressure for truth-telling would ultimately fall on the party that over-simplifies their plan. If that party won an election and then failed to keep their promises the consequences would likely be harsher, given the good example set in advance.

There would still be plenty of opportunity for broken promises. Sometimes politicians simply do the opposite of what they say they will, as Tony Abbott demonstrated after the last election.

But without the cover of all those things promised that were only really deliverable under very particular circumstances, the flat-out lies would be much easier to see.

Class war and cognitive dissonance: do the rich pay enough tax?

In the SMH, Jess Irvine has written a post accusing the rich of not paying enough tax. Strong piece. Very clickable, quite memorable, and in places, very reasonable:

“It is right to think that rich people should pay more tax than the poor. Happiness studies show an extra dollar means a lot more to a poor person than a wealthy person. So, we maximise society’s wellbeing when we raise taxes from the rich, rather than the poor.”

In the AFR, an equally strong reply:

This was written by the gossip columnist though, which suggests The Fin is passing up the opportunity to really take the bait.

All this has me thinking. Do the rich really pay enough tax?

Instinct says “No!”

There is, however, a bit of cognitive dissonance the average policy wonk faces in answering such a question.

Let’s face it. Most of us consider that question by imagining those richer than us paying more. Few readers interpret it as “should I pay more tax?” even though plenty of you find yourselves in a household making over $100,000 a year.

Secondly, the average policy wonk already knows the facts. (The graphs that follow come from a terrific Productivity Commission report that is just a few months old.)

Those on higher incomes do pay the most tax in Australia. The few families making $175,000+ a year contribute more total tax than the (far greater) numbers of households making under $100k.

The tax burden is squarely aimed at the top of the income distribution curve.When you look by assets things get a bit more complicated, but the overall trend is still richer people tend to pay more.

n.b. for whatever reason the data above is by group not decile, and the groups aren’t evenly sized. Sorry. Here’s the distribution of actual households across those groups:

One technique Jess Irvine uses to support her call for more tax on the rich is raising the spectre of widespread income tax rorting.

I wrote about rorting in Crikey last year after we learned 55 people who earned over a million dollars paid no tax in 2012-13. That fact went viral. But it represents just 0.6 per cent of millionaires.

Most income millionaires seem to pay a lot in tax – 93 per cent of them are in a group with an average tax rate of 42 per cent. Another 6 per cent pay an average rate of 35 per cent.

I reckon tax evasion is far more common in corporate tax than income tax. But Irvine’s article says we can’t do anything about that.

She goes on to argue we should institute a land tax. It’s a good conclusion to what has been a fairly odd argument. I support a land tax. I’ve been pleased recently to see it getting a fair bit of attention.

But it doesn’t really follow from her argument.

It seems to me the rich already pay a lot of tax, are fairly honest about it, and don’t actually complain that much. Is that the end of the argument?

I say no.

This “do the rich pay enough tax?” question is just a proxy – an emotive, perhaps even fun-to-think-about proxy – for a question about whether our society is fair.

So, is Australia fair?

That’s a better question, because it allows that bubbling pot of cognitive dissonance to simmer down for a moment.

The answer is probably a qualified yes. It could be fairer still, if we focus on eliminating disadvantage.

We can hold onto the fact the rich pay most tax, and permit the idea society could still be fairer.

There are many ways to eliminate disadvantage, and make society fairer. Minimum wages and strong public health systems are a big part of it.

When we look at America, we see what can happen without them. That is an economy much less fair than the one we experience.

Transfers are another major way to make a nation fairer. A basic income, or minimum income policy would go a long way to making Australia fairer. But I don’t see arguments for hiking taxes on the rich helping create the sort of consensus necessary for that change.

Among the many charms of minimum wages, public health and transfers is they don’t discriminate. Everyone has access to them. It’s far harder for a Tory gossip columnist to mock the idea of Medicare than the idea of soaking the rich.

So thinking about areas of disadvantage that are important to eliminate seems to be a better way of looking at fairness in the Australian context. If higher taxes are required for such policies to be afforded, precedent suggests they will fall on those with capacity to pay.

Meanwhile thinking about ways to raise the same amount of tax more efficiently is probably the best argument for land tax.

For these reasons, I’d suggest dialing back instinctively appealing arguments the rich should pay more tax, in favour of more targeted arguments about avoiding corporate tax fraud or eliminating disadvantage.

Should we be more worried about the sharemarket, or housing?

Is the housing sector so pumped full of credit it is about to explode? Or is the business sector so credit starved it is about to die?

Data sourced from today’s RBA financial aggregates.

Why people think tax reform is a knife, and why that’s a problem for Australia.

EDITED on Tuesday September 29 to make it better, fairer, more accurate.

My hypothesis is this: A large part of the Australian public does not understand ~~the tax reform “debate” at all.~~ a substantial part of the tax reform debate.

I hypothesise these people are smart, capable and have Australia’s interests extremely close to their heart. But they have no training in tax theory and therefore lack mental models to understand why, for example, Labor’s Chris Bowen, Shadow Treasurer, would be willing to consider cutting corporate tax to 25 per cent.

They just don’t see how tax affects growth.

The most mentally available model of tax is not one where tax is an ingredient in making the cake, but a knife to cut it up with at the end. This matches lived experience. As a worker and consumer, tax happens at the end of transactions. You get paid, then you pay tax. You buy something then you pay GST at the checkout.

So my hypothesis is the concept of tax as an input to the rate of economic growth is not one that is available to most people.

I’ve been thinking about this hypothesis for a while. Today I decided to test it. I chose the following four tax-related articles and read the comments in all of them.

The Age: Malcolm Turnbull halts tax white paper in major reset (163 comments)

Herald Sun: Imbalanced Tax system stunting growth, says Business Council of Australia (7 Comments)

The New Daily: Scott Morrison wants to give us tax cuts (22 comments)

SMH: Scott Morrison: Work Save Invest the Mantra for the new Treasurer (90 Comments).

If people understood that the tax reform was about boosting growth, I expected to see comments engaging on that topic – supporting the link or refuting it, talking about high-tax high-growth countries like Scandinavia, and low-tax low-growth countries too.

If people did not bring this frame of reference, I expected to see the comments focus on other topics, especially distribution.

I read about 280 internet comments. (Which – as you can imagine – meant deciphering a great number of garbled sentences and enjoying an even greater number of insults.)

I coded them according to whether they mentioned growth or output; distributional outcomes; loopholes; or ‘other’. ‘Other’ accounted for over 200. The remaining results were crystal clear.

Discussion of growth was present in just over two per cent of total responses and was outweighed by discussion of distributional issues about 9:1.

I tried to be generous with the comments I coded as addressing issues of growth. Here’s one:

“The most important thing to do to fix the economy is to get the taxation right! Fact is the economy under Abbott and Hockey was a blatant disaster getting worse!”

Here’s another:

“Penalty levels of taxation combined with high levels of social welfare payments result in deficites, high borrowing costs and a downward spiral of he economy. That is exactly what is happening in Australia. Our economy is headed the same way as the Greek economy. To reverse this Australia needs to increase the incentive to work and invest and reduce the reward for not working.”

In the 61 comments about “loopholes” there were very many along these lines:

“No change in the policies, give the big end of town a tax cut, and spread the burden over everyone with an increase in the GST. Lower income people are worse off as a result.”

Please note that I am not criticising this last comment. Distributional issues are a crucial part of tax policy and that kind of comment is an important input to a well-grounded tax debate.

The point is we do not have a well-grounded tax debate until everyone is on the same page.

The broader tax debate does not address the impact of tax settings on the output capacity of the economy. It is far more focused on fairness.

The “elites” must work to understand the grip matters distributional have on the public imagination. If they still want to press on with tax reforms – and I think they probably should – they need to take two courses of action.

Prioritise matters of distribution in their own thinking. No tax reform will be possible so long as it obsesses on output to the exclusion of fairness. Multinational enterprise tax reform was a very common thread in comments about fairness.
Work to give people the mental models to understand how tax affects output. Without this very little tax reform will be possible at all.

Elites, building a case for reform does not mean repeating the phrase “We need reform!” It’s truistic to the people who understand it, while confusing and annoying to everyone else. It sounds like you’re talking in code, and that implies you’re plotting something.

Instead, talk about “changing tax law so businesses want to do more work in Australia and hire more people.”

If you hector people about tax by saying “it affects investment decisions!” you’re unlikely to cut through. “Investment decisions” sounds like it has something to do with Macquarie Bank.

The comments on the article about Scott Morrison’s “Work Save Invest” slogan showed “investment” was uniformly interpreted as being about buying shares. Many commenters pointed out they couldn’t afford to do that. “Foreign investment decisions” is probably even worse language. It conjures Chase Manhattan and Bank of China conspiring to rip us off.

Talk about economic growth in language people can understand. Use this language even among yourselves, so when it comes time to talk to “real people” it comes naturally.

One way to build capacity in the community is through using metaphors:

Tax is not just a knife, but also the yeast that grows the cake.
The economy is like a party and tax is adding water to the beer.
The economy is like a football match and tax is like adding more umpires ready to blow the whistle at any moment. They disrupt the natural flow of the game.
The economy is like a road and tax is traffic lights. If we put in too many in the road won’t be useful any more.

But that can’t be all. The explanation needs stories about business owners who expand their business once their returns meet a benchmark, and how returns are affected by tax. I can imagine an animation. A business owner making a business plan. Every time she does the maths she comes out in the red, until the tax percentage becomes lower. Then she opens her shop and hires some staff.

Understanding a concept requires knowing several mutually-reinforcing stories that illustrate the same point. The Australian people have not heard enough of these stories. And that is why Tax reform is going nowhere.
NB: In todays’ Fin Review, Laura Tingle talks about this exact issue:

Just as the tax reform debate threatened to choke itself on too many conflicting agendas – increasing the GST, lowering company tax, fixing bracket creep, doing something about superannuation tax concessions – our new treasurer has injected a rather important ingredient: the need to define a reason to do it all.Some of the contributors to the AFR Tax Reform Summit this week have made the observation that an organising principle for the tax reform debate has only rarely been seen amid the worthy, but perhaps too often repeated, calls for individual tax measures to be addressed.

The organising principle needs to be a political argument to voters about why you actually need to mess around with tax in the first place. An argument about corporate competitiveness isn’t really going to cut it out in the ‘burbs.

Yes, we all heard Tony Abbott and Joe Hockey talk ad nauseum about “lower, simpler, fairer” taxes. But they were never able to cut through to voters about why this was such a good idea: that it would – or should – help boost and transform the economy. Instead, it just sounded like a bit of conservative government ideology.”

So if Morrison wants to prosecute that case for tax reform he needs to formulate a story that’s as clear as “Stop the Boats” but for a much more complex concept. Good luck Scott.

Here’s a late-breaking caveat I decided to add.

Among the people who appear to not understand the nature of tax reform are a group who understand it perfectly well but oppose it. They fan the flames of the distributional arguments.

They’re not the only self-interested sorts in the debate.

The fact company tax cuts are now widely accepted as the most growth-crucial tax cuts in our whole economy is very interesting. Of course cutting it would help growth. But at what revenue cost? And why is it #1? Self interest lurks in any issue where facts are complex.

Ross Gittins swings at reform, misses, falls flat.

Ross Gittins has just published an article making a case against the reform obsession that grips the current political class.

I like Gittins and I’m always interested in a smack-down of a new religion, so I started reading eagerly.

But Gittins was unable to deliver a smackdown. Unable to deliver much at all.

See if you can spot the fallacy here:

“Simple statistical theory should be telling economists that a protracted period of below-average growth is most likely to be followed by a period of above-average growth.”

Whew, that’s embarrassing.

The nicest thing I can think of to say about it is there are economic models suggesting poorer countries grow faster than richer ones. They imply a degree of catch-up – perhaps those were the theories Mr Gittins was fumbling for?

But the problems with the article go beyond just one dodgy paragraph. His whole case against “reform” depends on the idea that the economy will grow just fine without it.

That’s certainly possible. I actually think the economy might well be about to bounce back a bit. But that doesn’t make a case against reform.

Economists know you get growth from adding more people and machines, and then you get extra growth for free via productivity gains. Productivity gains are the really good gains because they come without real trade-offs. You don’t need more ingredients, just a better recipe.

Productivity gains can come from two main sources.

Better ways of doing business (innovative ways of combining inputs inside the firm), and
Better-functioning markets (innovative ways of combining inputs outside the firm).

Why do we obsess over the latter one? It’s where we have our hands on the lever. Governments can’t really control innovation at the firm level. Not in the short-term at least. They do control market regulation.

So “reform,” that buzzword that’s as popular as a buzzard, refers to this latter issue. Making markets work better.

Sometimes they work better with less regulation (economists arguing against the taxi cartel, for example) sometimes they need more regulation (economists arguing for a carbon tax or higher capital requirements for banks.)

Whether or not you get the first kind of productivity improvement, there’s a chance you can bring growth into existence by focusing on the latter.

Growth matters.

The desire for growth is not about the hope of self-enrichment. The sad fact is growth remains the only way we know to ensure full employment. Unemployment is horrible. It hurts people and ruins lives long-term. Meanwhile higher growth can bring better standards of medical care, lower infant mortality, safer foods, more opportunities to work in satisfying jobs. So the hunt for growth is a humanist pursuit. Obsessing over it is a risk-averse social scientist’s way of trying to maximise human happiness.

Gittins seems to think gambling on future growth is a great idea.

When you convince yourself, as many economists have, that the only way we’ll see faster growth and further productivity improvement is for governments to engage in extensive reform, you’ve convinced yourself our economy is deeply dysfunctional.

Optimism is an endearing quality in a friend, not an economic policy-maker.

The great thing about market reform is it should work whether or not we’re getting the other kind of productivity inside firms. It’s additive. If Mr Gittins’ optimism is rewarded and we see a great surge of firm-level productivity unleashed, it won’t be a mistake to have unleashed market-level reform too.

There are strong arguments against reform. Arguments about the extent of economic encroachment into our lives. About materialism and reification. About market power. About whether we can shape economic growth in ways that brings us more of the good and less of the bad. These are good arguments we should all be engaging in.

It’s a shame those column inches didn’t attempt such an engagement.

Want a glimmer of hope? Look at this.

Things look bad.

Today, economic growth figures are coming out (at 11.30am) and for the first time in ages, people are predicting negatives.

Recession talk is in the air. I have my doubts about that. But the talk alone is very suggestive, and there are lots of reasons for it.

Chinese markets are falling, our own stock-market is in a sustained slide, and with all that bubble talk our housing construction sector looks weaker.

Is Australia about to get a surge of growth, or a slump?

One way to answer that is to look at what business is up to. In May, we checked in with business spending plans and they gave me intestinal cramps. Things have changed, sort of…

Capital expenditure is what makes your business bigger, lets you employ more people, etc. It’s one of the big signals of future economic growth. And it’s going backwards.

The mining sector is in such a funk that it won’t bring us any growth. This next graph shows the plans the mining industry has for capital expenditure.

The grey bars show actual expenditure. The last one for 2014-15 is the lowest in four years. The white ones are plans for next year. The latest white bar (3rd estimate for 2015-16) is the lowest 3rd estimate in five years.That is having a seriously negative effect on Australia’s total capital expenditure. Check out the increasing steepness of that slope at the end. Manufacturing won’t save us. But there’s other parts to the economy. Other selected industries are investing more than ever.

Other selected industries sounds like a miscellaneous grab-bag. But check out the labels on the vertical axes. This is a massive part of our economy. Not only that, it just invested more than it expected, which is more than ever. Plans for 2105-16 are more modest, but increasing fast.Other selected industries* includes:

Electricity, Gas, Water and Waste Services
Construction
Wholesale Trade
Retail Trade
Transport, Postal and Warehousing
Information Media and Telecommunications
Finance and Insurance
Rental, Hiring and Real Estate Services
Professional, Scientific and Technical Services
Accommodation and Food Services
Administrative and Support Services
Arts and Recreation Services

In other words, a whole lot of important parts of our economy that we can actually believe in.

And there’s one simple reason why they might grow. Our falling dollar.

The fall in our currency is a bit like being a lobster in a boiling pot of water. Unlike stock market fluctuations it happens slowly and we don’t pay it so much mind. But it matters a lot.

The slow growth of non-mining industries in the last few years can be attributed to our high dollar. America’s incredible recovery from its recession in the same time period can be explained by its low currency.

A falling dollar could flip slow growth on its head. And we’d be too busy worrying about mining to notice.

The current mood of widespread gloom may prove to have been peak fear.

*This whole private capital expenditure data-set excludes healthcare and social assistance, which as we know, is one of the fastest growing sectors of the economy. In Melbourne, a billion dollar new cancer hospital is being built, for example. That’s not in the stats. Further reason to hope.

The puzzle of where men outnumber women, and vice-versa.

The concentration of men and women in various parts of Victoria is stronger than you’d expect according to random variation.

There’s some real trends in place that seem like a genuine puzzle. (These charts are made from fascinating data released by the ABS this week.)

Fully a third of postcodes have a gender ratio that’s skewed more than 5 per cent one way or the other. There are slightly more postcodes where women outnumber men by 5 per cent (79) than those where men outnumber women by 5 per cent (62.)

That’s to be expected because there are 99 men per 100 women in Australia.

But where men outnumber women they do so by a lot more.

The top result is Port Melbourne Industrial, which is a place I’m surprised anyone calls home. And indeed there are just 9 males to 4 females (ratio 2.25). Security guards who sleep among the containers? Who knows.

The next one is Braeside. A similar story with a ratio of 12 men to 6 women. Then Alps East with 18 and 9. I’d like to imagine those 18 men have swags and wake each day to see their horse breathing steam under an old ghost gum.

Anyway, we can discount those three because the samples are tiny.

Screen Shot 2015-08-20 at 11.50.54 am — Female dominated suburbs include Chelsea and Rosebud. More men live in Seymour. Is this another case of nominative determinism?

Rosedale is the real thing. 2645 men to 1863 women (ratio 1.42). A little hamlet out in the Latrobe Valley, it is probably full of people working in the coal-fired electricity industry. A hard place for a fella to get a date, no doubt. Although the photos on the Rosedale Tavern’s facebook page suggest that’s where the local ladies go. (and it’s not as bad as East Pilbara where men outnumber women 350 per 100.)

It’s easy to explain some locations of high concentrations of men by reference to workforce pressures. They are found around heavy industries and agriculture.

Some are more tricky. Why is Footscray so full of testosterone? Why Docklands?

And why do women crowd into the expensive eastern suburbs? We see Burwood, Camberwell and Armadale in the top 10 with less than 90 men per 100 women.

Toorak, the suburb most emblematic of wealth, has a ratio of 91 men to every 100 women. Are there many young single women there perhaps? Or families whose daughters live with them for a long time?

The CBD , meanwhile, has a ratio of 107 men to every 100 women.

Perhaps we are seeing women self-select into suburbs they deem are very safe, while men are more willing to live in supposedly rough areas?

Do you have another explanation? Please feel free to share it in a comment below!

EDIT

Commenter Matt points out that women live longer, which is a very good point (that I wish I thought of). This is definitely part of the explanation as we can see in the graph for the most skewed suburb, Burwood:

But it’s not the whole explanation. If it were, Footscray would look similar up til the mid-40s, when men start dropping off. Instead Footscray has more men at every age.

I think the puzzle has had a lot of pieces added, but there’s still some blank spots… Any further ideas?

The curious case of poll-driven political reporting.

The Guardian published a report yesterday about Bill Shorten. The author set out to repent for calling Bill Shorten a “tired accountant”. The impetus for the story was the turn around in the polls.

“Shorten is still leading the Labor party in the wake of this latest credibility disaster for the Coalition, after last week’s credibility disaster (blocking a free vote on marriage equality) and the preceding week’s credibility disaster (chopper-friendly Bronwyn Bishop). He’s now sitting atop polls from both Ipsos and Morgan that have the Coalition facing a loss of between 36 and 44 seats.

Is it time for a rethink?”

I’ve seen this kind of thing before, and I don’t like it.

Interpreting what a political leader does through the polls is intellectually vacuous. It’s easy to write. There is no need to have a view on tough questions about policy effectiveness or priorities, the merits of intriguing questions about whether the head of the AWU should be matey with big business, or the management and composition of their front bench.

The author of yesterday’s piece is not especially guilty. She has written about policy more than polls. But overall, allowing poll numbers to drive judgment of politicians’ merits is now commonplace. [1, 2, 3, 4, 5, 6, 7, 8, 9].

The rise of this sort of reporting means a swing in the polls does double business.

Not only does a poll bump get the leader kudos in their party, but it changes the tone of reporting about them. The new, glowing stories therefore amplify swings in popularity. That may be responsible for the increasingly binary popularity positions we see among our political leaders (They’re often wildly popular like Baird or old Abbott, or wildly unpopular, like Gillard and new Abbott).

This kind of reporting validates the paradigm that political hacks of the most cynical kind push inside their parties: We can do good once we’re in power. For now let’s focus on winning. It sidelines those inside a political party who think they should focus on making the country better, not just making the polls better.

Here’s a choice example of the kind of reporting I’m talking about.

The Sydney Morning Herald's Peter Hartcher thinks parties should use poll numbers not policy ideas to choose their leader. Is he right? — The Sydney Morning Herald’s Peter Hartcher thinks parties should use poll numbers to choose their leader. Is he right?

I can only imagine the cognitive dissonance some reporters must experience when they write articles demanding more policy substance and less poll-driven rubbish.

Of course, we do need some political reporting. It’s helpful to peek behind the curtain from time to time and see the way the magician performs his tricks. You feel like an insider.

But it can’t be all we have, most of what we have, or even a substantial minority of it. It’s a sometimes food.

Our meat and veg must be stories about policy.

Rising house prices: not a wealth fountain. A money-go-round.

RBA deputy governor Phillip Lowe gave a great speech last night. Lowe is the guy most likely to replace Glenn Stevens when Stevens quits as Governor and it is worth paying attention to what he says.

Last night’s speech was pretty radical. In the guise of a dry discussion of Australia’s balance sheet, Lowe single-handedly deflated arguments for rising house prices.

That puts him in direct opposition to noone other than Prime Minister Tony Abbott. Abbott, of course, said in June “I do hope our house prices are increasing.”

The argument Lowe makes is so smart and so obvious it’s amazing we don’t hear it more often. He starts out by showing that the rise in “house prices” is really a rise in land prices.

“[T]he figures that I have presented invite the conclusion that our national wealth has risen largely because of higher land prices. But is such a conclusion really warranted? Have we really become wealthier as a nation simply because the value of our land has increased?

“The answer would clearly be yes if this increase was because we had discovered more land. To my knowledge, though, this has not happened.[⁷]”

Lowe argues that the rise in house prices is not a nice neat story about the returns to city life increasing. He says prices rose because of financial deregulation and supply constraints.

This creates not a wealth fountain but a money-go-round, he explains.

“from the perspective of society as a whole, much of what is gained on the one hand is lost on the other: there are windfall gains from higher land prices but then everyone pays more for housing services.”

Lowe also reveals that the “baby boomers are ripping off the kids” narrative has some credibility even in that palest of economic ivory towers, the RBA.

“For an older person who owns their own home and has no children, the capital gain from the higher land prices more than offsets the expected higher future housing costs. Such a household is better off. The same is true for owners of investment properties, since they own multiple dwellings on which they earn a capital gain. In contrast, for young homeowners with multiple children, the calculation can look quite different. If they care about the future housing costs of their children, then, in some circumstances, it is possible that the higher future expected housing costs could exceed the capital gain on their dwelling. In a welfare sense, the increase in land prices could make them worse off, even though they own land. The same is obviously true for renters as they do not have any capital gain to offset the higher future housing costs.”

“I think many Australians have an innate understanding of the concept and share the concern. Many parents around the country look at the high housing (really land) prices and worry that their children will not be able to afford the type of property that they themselves have been able to live in, even if their children were to have the same life-time income profile as they have had.”

“So it is arguable that the main impact of higher land prices is not really to increase our national wealth, but to change the distribution of that wealth.”

He goes on to argue that if parents help their kids buy houses, high house prices are perpetuated. But their wealth effect is diminished because the people that have expensive assets are using them as collateral for buying more expensive assets. That is to say the high prices bring no benefit.

If, however, parents don’t help their kids buy houses, and instead spend up big (say on trips overseas) then house prices are more likely to moderate.

This latter scenario, as unpleasant as it may seem to some, is actually the better one for social stability. Because with Australia’s strong immigration profile, not everyone has parents who own property in Australia. The divide between new migrants and established citizens will only grow larger if property wealth is transmitted across generations.

Who is to blame for the state of the labour market?

Last week unemployment was up. This week wages growth was down.

chart — Worst annual growth on record (since 1978)

These two series measure the most important and relevant determinants of Australia’s economic well-being. Both are deteriorating.

Forget interest rates. Forget house prices. Forget the dollar. Forget petrol prices and forget the share market.

How much money people make is the single biggest determinant of how well off they are. And we’re not doing well at all on that score.

This is a failure of economic policy. No government should be complacent in the face of a weak labour market.

The Government is silent on this and to its credit the opposition is squawking at them.

For the first time in over 20 years, Australia has over 800,000 people unemployed (the last time was November 1994)

— Bill Shorten (@billshortenmp) August 6, 2015

But it is to no avail. No decent policy is evident.

There’s a Productivity Commission report on our workplace relations policies, but nobody really thinks that will make a lick of difference, even if the government had the political capital to implement it.

These days it seems like some on the left actually relish a bit of weak wages growth. They use that to bash the government for hypocrisy over a wages breakout and guard against workplace reform.

In the June quarter Australian wages failed to keep pace with even our low inflation rate. And still employers want a return to Workchoices.

— Bernard Keane (@BernardKeane) August 12, 2015

I wouldn’t mind seeing a wages break-out. Isn’t that what good economic policy would produce? Wealth shared widely?

The failure of our labour market to do very much in the last few years probably comes down to macroeconomic factors. The high dollar crimped output and hiring. So did weak federal spending.

The high dollar was a result of US quantitative easing and there was little more we could do beyond slashing official interest rates. That policy front was maxed out. But fiscally, we pulled puches.

Esteemed labour market economist Jeff Borland argues our failure to remedy unemployment is due to a shortage of aggregate demand.

“•The rate of unemployment in Australia has increased from 4.0 to 6.4 percent since the GFC. Over that period it has shown little tendency to decline. The rate of unemployment in the US is now lower than in Australia.
• This increase in the rate of unemployment in Australia appears to be explained entirely by the cyclical downturn in aggregate demand.”

How could the government have increased aggregate demand? Spending more would have been one answer.

The Swan Budgets in 2012 and 2013 and Hockey’s efforts in 2014 and 2015 were all deficit-obsessed. All were focused on “return to surplus.” None of them achieved it. Instead unemployment has risen from 5.2 per cent to 6.3 per cent.

That deficit obsession hurts us all.

The Wilting West

A high-vis vest slowly buried in the blowing sands of the Great Sandy desert.

A small business owner awake at 2am, wondering if they should talk first to their bank manager or their spouse.

Fridges, clothes, tables and chairs all packed into boxes, in a freight train chugging east across the Nullarbor.

Two crazy ideas for the asylum seeker problem

Asylum seeker boat arrivals – fairly inconsequential in real terms – are a major political problem.

Last night on QandA a Labor minister indicated that the “journey” would not be “re-opened” for asylum seekers, indicating a maniacal desire to “stop the boats” is a bipartisan ambition.

The racist pandering to Western Sydney inherent in “stopping the boats” was always called out as the bullshit it was. Until the video of the drownings of asylum seekers on the coast of Christmas Island in 2010. Suddenly it was possible to say preventing asylum seekers from arriving in Australia by boat was a moral imperative.

That’s an extreme idea, requiring the sort of broad view of morality that would also support fencing off Australia’s surf beaches to prevent drownings. Most people would say imperative #1 is to not harm people with your actions.

One year ago I wrote about how powerless and ineffective I feel when faced with asylum seeker policy. What’s changed is that the extreme nature of the “solution” – including laws preventing reporting of child abuse – permits a broader range of alternatives that might previously also have been seen as “extreme.”

So is it possible to solve the boat arrivals “problem” without spending billions and becoming a police state? It must be. Lets think outside the box.

1. Make a queue

People are always fighting about queue jumpers, and whether there is a queue. What if we made an actual queue on the shores of Indonesia, where the boats are leaving from?

Asylum seekers get on a boat because that’s how they imagine they can get into Australia. What if we let them get into Australia without getting on a boat?

Could we rent some space from the Indonesians, bring it inside the migration exclusion zone and process refugee claims up there?

Budget impact score: 9/10. No more detention centres, less need to police the seas for boat arrivals, etc.

Political acceptability score: 5/10. Should diminish boat arrivals so long as the applications are processed swiftly.

Direct morality score: 8/10. Assuming they are able to live in the community in Indonesia, there need be no imprisonment.

Indirect morality score: 9/10. No more drownings between Indonesia and Christmas Island.

2. Open slather.

Embrace boat arrivals. Stop turnbacks, Close off-shore detention; close on-shore detention; visas to live in the community while refugee applications processed.

This is about stopping boat arrivals from being a political problem. If you wanted to change the narrative on boat arrivals, you’d have to own the arrival of each boat. Get a video crew, translators and a government minister onto each boat as it arrives, so we can see them shaking hands with the asylum seekers, chatting and smiling. Interview the people, find out their stories and their names. Publish lists of asylum seekers, their smiling photos, and key quotes from them. Humanise not dehumanise. Let’s hear about their desire to live in Australia, their interest in what they’ve heard about us, their qualifications and jobs in their home countries, what they’re fleeing, what skills they bring, etc. This would absolutely freak everyone out for a while but the rate of repetition and the volume of boat arrival footage might eventually make boat arrivals very very boring.

(I think this approach could be helped along by some sort of non-government work to try to humanise asylum seekers. Greenpeace made us care about whales by having little inflatable boats out there and video cameras showing what was happening. Can we do the same with Asylum seekers? Could Sea Shepherd open up a northern Australia branch, for caring about humans? )

Budget impact score: 10/10. This is cheap.

Political acceptability score: 2/10 in the short-term as boat arrivals will go up up up.

Direct morality score: 10/10 (No more taxpayer-funded imprisoning of innocent people)

Indirect morality score: 5/10. (Some drownings still likely).

–

I’d be very interested to hear any other crazy ideas people have. Please share them below!

Speech – Prime Minister Wyatt Roy. January 26 2038.

Speech – Prime Minister Wyatt Roy.

January 26 2038.

[check against delivery]

My fellow Australians.

On this 250^th anniversary of the arrival of the First Fleet on this continent, I want to make a few comments about our society and economy.

Arrival Day, as we’ve known it for several decades now, has become a day to look back on things we’ve done wrong. Dedicating a day to critical self-reflection is one of our nation’s finest achievements. We can’t undo our mistakes. But we can learn from them and use that to set the future on the right path.

That’s why it’s very important we think about house prices. How did we get to this point? When I travel across this country, I see three disappointed generations – one owning homes that have slumped in value; one owing giant debts on low-value homes, and one perhaps able to buy a home, if they were not wounded by the economic shrapnel that came from the explosion.

We were like butterflies. We thought our brief glimpse of the world told us everything we needed to know. House price crashes had never happened in our lifetimes, so while rates were low, we treated the banks like an all-you-can-eat salad bar.

Interest rates were low for so long that we began to think they’d never go back up either.

When the RBA raised rate in 2025, after so many years of inactivity, perhaps the house price upswing might have stopped. That was our chance.

But fate intervened.

We now know that China’s overstretched financial system was, at that exact moment, about to burst. The failure kept interest rates low, even as Chinese funds flowed out of China and found their way to Australia.

RBA Governor Stevens repeated his now infamous signature move and cut rates. The price of housing in Australia continued to rise. Median prices in all major capitals topped $1 million. Sydney’s average price rose over $2 million.

A first home loan of six figures was de rigeur. And why not? With rates at 1 per cent, young people around Australia could afford that sort of debt to obtain their own home.

Their parents, in most cases, had done likewise. Who would talk them out of it? I saw my own children – Morgan and Orbison – make the exact choices I had, and although I felt a tremor of unease, I didn’t want to dictate their lives to them. Personal freedom is one of the strands of philosophy that enlivens the Libor Party I lead, and I try to live it out in my own life too.

At home I bit my tongue. To my shame, I did the same from the opposition benches in Parliament.

Treasurer Bandt seemed to have a firm grip on the economy. House price appreciation was as Australian as a Golden Gaytime on a 45-degree day. Who was I to argue with a trend that had run my entire life?

Environment Minister Irwin read me a quote the other day that I knew I must use in this speech.

“That men do not learn very much from the lessons of history is the most important of all the lessons of history,” she said. That’s from a science fiction writer from last century. He saw something of the future, Bindi told me, but only by paying careful attention to the past.

That’s our job, from hereon. To make sure we pay attention to the full sweep of history. We must not only be obsessed with what’s right under our noses. The more things change, the more they stay the same. The lessons of 5 years ago may glow more brightly than the lessons of 105 years ago, but they are not always more pertinent.

We should make sure our memory of the excesses of the mid 20th century inform our debates on government over-reach. Make sure our memories of the 18th and 19th centuries inform our debates on unchecked poverty. Make sure our memories of the rise and fall of civilisations long past informs our thinking about our permanence.

On this day, above all others, I commend the study of history to all of us.

So, should you spend a bit more to get a fancier car?

This story originally appeared over at The New Daily. (They’ve asked me to write a consumer-focused story each week, which I will also post here)

–

I recently looked up the cheapest new car and the most expensive new car being advertised in Australia. I was gobsmacked at both ends of the spectrum.

At the very bottom end was a Mitsubishi Mirage, 2014 model, with only 15km on the clock. It cost $9,880 before on-road charges.

The most expensive was a new Rolls Royce Phantom. The only one of its kind in Australia. Price $994,000, drive away, no more to pay.

That’s 100 times more expensive! Obviously you get big differences depending on which car you choose.

Only one of these cars has a 5-star ANCAP rating – the highest local standard for safety, and a 5-year warranty.

As you probably guessed, I’m talking about the Mirage. Yep. You can pay a million bucks for a car that has no official Aussie safety rating and a shorter (four-year) warranty.

The Mirage’s little motor also boasts far better fuel efficiency, at 4.6L/100km. That compares to 14.8L/100 km for the 12-cylinder engine beneath with the winged lady.

So the cheapest car is winning on some pretty important features. This made me wonder. What is the real difference between a cheap and expensive car?

Once upon a time it was reliability. Mercedes of old ran for hundreds of thousands of kilometres. Not so much any more.

The great industrialisation of Japan, from the middle of last century changed the game. The brilliant standardisation of quality pioneered by companies like Toyota made quality a starting point.

These days the car that endures that is likely to be a Honda or Subaru.

So luxury cars distinguished themselves with features. Leather seats. Sunroofs and electric windows. (Remember how exciting the smooth glide of an electric windows was when they first came in?) Cruise control and heated seats.

But it turned out that when you’re making millions of Camrys, it is possible to cheaply fit them all with an impressive swag of desirable features. So the game shifted again.

Now the luxury car distinguishes itself on some rather weird parameters.

The reviewers dwell on things like the noise the engine makes in a Porsche, or “a rather striking cherry wood inlay in the luggage area” in a new Mercedes.

Do these things matter to anyone who isn’t looking for a reason to buy an expensive car anyway? They remind me of the blueberry notes the labels are always so eloquent about in fancy bottles of wine. Important for an extremely refined few.

Most of us operate at a rather more prosaic level.

Let’s look at two vehicles in the fastest growing category around – “crossover” SUVS. A Ford Kuga costing around $26,000 and a Mercedes GLA costing around $55,000.

Here’s a comparison on some important features.

Okay, I’m being facetious.

There are actual differences. For example, the Mercedes gives you 4.6L/100km, the Kuga 6.3L/100km. And there’s more:

There are lots of other little differences too, in things that are probably good to have. But adding them up, are they worth an extra $30,000+?

The difference in comfort between a $25,000 car and $55,000 car is more slight than the difference between economy and business class on an aeroplane. If you sit in that car for an hour a day for ten years – 3650 hours – a $30,000 price difference means you’re paying a premium of $8 an hour.

Whether that $8 hourly rate looks like a worthwhile investment or a worthwhile saving depends on the person, and their income.

Interestingly, it seems income is a big factor.

Official statistics show the rich spend far more on cars than the poor. Households at the top of the income distribution spend eight times more on cars than the bottom of the distribution.

Maybe they can afford it. Maybe they value the small luxuries of life. But there’s another explanation possible too.

It is called signalling. On the African savannah, the male lion grows a mane which may actually harm its survival. Doing so and still managing to thrive shows it is super fit and healthy – and worth mating with.

Some experts think conspicuous consumption is similar in humans. Throwing money around announces to the world that you are special.

The larger and more frivolous the expenditure, the more effective the announcement. It makes sense – the person who buys that one-of-only-25-in-the-world Rolls Royce is far more likely to be someone trying to demonstrate something about themselves than a person with an extreme passion for fine wood inlays.

So when we see someone insisting they need electric lumbar support and alloy wheels, and the Mercedes is simply the best way to get that, we are probably justified to wonder whether they are falling into the trap of simply showing off.

–

Obviously, there’s a minimum price point –perhaps somewhere below $10,000 – where spending less on a car is a risk too big to take. And there’s a point – probably somewhere above $100,000 – where spending more is entirely silly. But where’s the tipping point? What’s too much to spend on a car? What’s too little? Please share your views below!

Disenfranchised but safe: Australia now.

The ABS has just released an odd bundle of data with a whole lot of hidden gems in it.

This part on political enfranchisement caught my eye. Between 2006 and 2014 fewer people felt able to have a say, down from 29 per cent to 24 per cent. Meanwhile, a growing share of people thought they couldn’t have a say.

But it’s not all bad news. Aussies feel a lot safer.

Is this the classic trade-off of voting for authoritarian governments – gaining safety but giving up your voice? Perhaps that’s a bit glib…

Let’s look instead at how men and women perceive safety.

Women fear more for their safety. They are three times more likely to feel very unsafe.

The question itself though is a bad one. How much you fear for your safety when home alone is less important than how much you fear for your safety when you’re home with your partner.

Intimate partner violence is the leading contributor to death, disability and ill-health in Australian women aged 15-44, according to White Ribbon.

I call on the ABS to lift its game and ask the right questions.

This next set of data didn’t come in a time series, but was interesting. A snapshot of who is happiest, it contains a few surprises: The elderly are the happiest, recent migrants are happier than average, and gays and lesbians are about as happy as the average.

It shows where society can improve – people with mental health conditions are far worse off than the average, and people who identify as non-heterosexual but not gay or lesbian are the least happy of all. I’m not sure what the policy options are for that last category, but I do know we can and should do more in mental health prevention and treatment.

One simpler issue I’d like to draw attention to is the unemployed. They are more unhappy than a person with a disability, and there’s more of them than there have been for years. Joe Hockey’s first Budget must bear a lot of blame for Australia’s recent surging unemployment rate. His second budget is better, but still not enough to undo the harm. Fixing unemployment is not a parlour game of economic philosophy. It’s an urgent issue to do with human suffering and it should be a national priority.

The industry that’ll save Australia doesn’t require coding

There’s an industry on the brink of a break-out, and it doesn’t require us to learn C++. It would rather we learned to smile widely.

That industry is tourism.

Tourist arrival numbers hit records in November, December, February and March. Glancing at this graph of the last 15 years tells us we’re onto a winner. Look at that uptick since 2012!

Arrivals in March 2015 were 13 percent higher than a year ago. Arrivals in February were 14 per cent higher.

It’s time to turn your place into an AirBnB, people. There are already dozens of listings within walking distance of my house.

And it is more than just a cottage industry. There are thousands of real jobs available in the sector too.

That’s five times the number of jobs I could see in mining.

The tourism sector has been in growth mode for a long while, although we don’t celebrate it much.

Politicians are more likely to say they want to live in a country that makes things.

Are we somehow ashamed of tourism? Do we feel it debases us to offer hospitality to visitors? While it’s somehow strong and tough to make things and send them to those same people?

Bangladesh makes a lot of things. I’d rather live in a place people want to visit.

We can make Australia better for tourists by improving transport in our cities and nation-wide, by teaching languages, and by preserving our natural environment.

A politician that made tourism the centre-piece of their economic recovery plan would get my vote.

A tropical metropolis on top of this antipodes?

Tony Abbott has a plan – to make the north of Australia more economically vibrant.

It says, “A growing northern economy benefits the whole nation through jobs, investment, infrastructure and services.” But is that true? Let’s have a look

Darwin has just 136,000 residents. It’s the smallest capital in Australia.

Darwin certainly seems to be a lovely spot with room to grow. So why not? It doesn’t make sense that most of the population is in the southern half of the country, far from our populated neighbours in Asia.

A highly developed north could be Australia’s California.

California grew late in America’s development – in 1900 LA had 100,000 population while New York had 3.4 million. Comparable figures to Darwin and Melbourne today.

But if expansion of population is the plan, we need to be clear why we’re doing it.

Having more population made sense back when Australia feared being invaded. Populate or perish was the cry. These days our big risks are different. So the idea needs to stand up economically to make sense. Let’s have a look at what the economics of this tropical metropolis might be.

BENEFITS:

1. The Northern Territory would have a higher population, so the fixed costs of operating the jurisdiction – such as parliament – would be spread over more people. This is efficient. It would have a minor upside for the rest of Australia as smaller GST transfers would be necessary to the NT, and the remainder of the country would keep more.

2. With more people living in the tropical north, the area would have bigger markets, and greater economies of scale. Prices should drop for consumer goods, and the range of goods and services would increase. Good news for Darwinians tired of the same few pubs and restaurants!

3. Australia would get a higher GDP. This might give us more clout in global affairs, but wouldn’t mean much for most of us. It wouldn’t necessarily solve our unemployment problem. Per capita GDP is what matters – lifting the total output of Australia is irrelevant for most of us.

4. The NT is 30 per cent indigenous. By creating more employment opportunities in the north of Australia, development could help reduce indigenous disadvantage.

5. If successful, a booming northern frontier could reduce the population growth rates in the southern capitals. This might reduce the rise in house prices and diminish pressure to build expensive infrastructure through crowded areas.

6. A more happening north might attract more tourism. Darwin is already a big tourist town and with Australia on the brink of a tourism boom a bigger, better offering could help the whole nation attract more tourists. The risk would be actually diminishing its charm. The key is good urban planning so the inevitable ugly parts of development are invisible from the tourist hotspots.

COSTS

1. Economic development always uses land. Changing the use of land always comes with an opportunity cost. In this case, the change would turn natural environment into suburbs and industrial parks. National parks are already close to the centre of Darwin. The location of development would need to be very carefully managed to make those opportunity costs worthwhile.

2. Putting another big city absolutely miles from the rest of Australia’s cities is only going to increase travel costs and times for the rest of us. Perth is bad enough!

3. Government effort could be expensive and futile. The plan to deregulate domestic routes in the north is already in tatters. Here’s the thing – forcing economic activity to happen in a certain place is next to impossible. Economic activity happens where it wants to. The venn diagram of development policies and failed development policies looks like a circle with only the faintest shadow. Having worked in both domestic regional development agencies and international aid efforts, I think I can say this with some confidence. We could be investing in a tropical white elephant.
Is this plan more likely to create Australia’s California or Australia’s Alaska? Please share your views below!

I wasn’t panicking about the Australian economy … until I saw this graph

This graph makes my tummy turn into a knot.

[Source: ABS]

It shows how much money business in Australia expects to invest. Businesses invest in new trucks, new computers, new buildings, etc. Investment is what makes businesses grow, what makes the economy grow.

The white columns are spending plans, the grey columns are cold reality. Looking at those last two small white columns, we see business is terrified.

They show how much money businesses expect to invest in 12 months from July 1 2015. It’s low. Very low. The worst since 2010-11.

We can expect the plans for investment (the white columns) to grow a bit as the year continues, same as in every other year. The third estimate of plans for investment (third white column) is often the biggest. Reality (the grey column) rarely beats that third estimate. This year’s final business investment number hasn’t come in yet (there’s no grey column seven yet in 2014-15) but it looks likely to be the lowest since 2010-11.

And next year’s business investment looks like it will be worse.

WHAT IT MEANS

Low business investment means low economic growth. Low economic growth means higher unemployment. Higher unemployment means more human suffering. (Why do we need high growth to keep people in work? This is something I wish I understood better about economics.)

The information in the graph comes from a survey the ABS does. The survey happened in April and May, so it would have caught some (but not all) of the Budget leaks about the supposed small business bonanza. Of course we will have more information about the effect of the Budget next month.

But for now, it looks like Hockey’s second Budget is a dud.

Partly, the problem is mining. The end of the mining boom is as sudden as the start, and the cash rivers flowing to projects in WA and QLD are drying up fast.

But the real problem is that other industries are not picking up the slack. Here’s the graph for selected industries excluding both mining and manufacturing. The pattern is the same. Estimate two for next year is 10 per cent less than estimate two for this year. That spells trouble.

What can we do?

The federal government should spend more to give the economy more of a boost. They know that and Hockey has been blaming the Victorian government for cancelling the east-west road project.

But given the sacred status of surpluses, there’s little more we can expect from fiscal policy.

Instead, all eyes turn to the RBA. Will it try yet more monetary policy to keep the economy moving? Will it cut interest rates yet again?

Some people think yes. In some ways, there’s nothing else we can do. Even though the RBA has already cut rates to record lows and house prices have gone crazy. So long as inflation is modest next time CPI comes out, another rate cut is very plausible.

But will it work to make those white columns go up? To ultimately make businesses plan to grow and hire more people? To keep people in jobs and prevent the suffering of joblessness? I fear not.

Why we should tax tampons, and everything else.

Tax on tampons is a hot topic, with Tony Abbott and Joe Hockey in major disagreement. The issue was brought into the spotlight via a petition on communityrun.org.

“And how can a bodily function be taxed? Because the government doesn’t consider the tampons and pads we’re forced to buy every few weeks ‘necessary’ enough to be GST-free.

On the other hand, condoms, lubricants, sunscreen and nicotine patches are all tax-free because they are classed as important health goods. But isn’t the reproductive health and hygiene of 10 million Australians important too?”

I didn’t sign the petition, and here’s why

Sanitary items are different from “condoms, lubricants, sunscreen and nicotine patches”, because people already want to use them, and there is no evidence of significant public health risk if usage falls. Also, “necessity” is not the binding criterion for determining what gets taxed – we tax electricity.

“Half the population menstruates and they shouldn’t be financially penalised for it.

If you still aren’t convinced, let’s consider some statistics: on average women, who make up the majority of people who use sanitary products, earn $262.50 per week less than their male counterparts, and they are also statistically at greater risk of living below the poverty line. Furthermore, this tax disproportionately targets those who may already be disadvantaged, that is the homeless and unemployed.

So why force this underpaid, at risk and disadvantaged portion of society to pay more for basic essentials?”

Healthy women menstruate for about half their life. So, less than 25 per cent of the population menstruates. How big is the financial burden of this tax on them?

A 16 pack of brand-name tampons costs $4 at Coles. Let’s estimate a woman spends $10 a month. GST on that adds up to $12 a year.

The number of people who can’t afford tampons because of GST is therefore negligible. The number of people pushed into poverty because of that $12 slug would be small. Most people campaigning against this tax have no trouble affording $12 a year.

So if you want to make a difference to the financial well-being of poor women, this is an indirect and very marginal approach. It comes with real trade-offs – it would cost the government revenue. That undermines the ability of society to support the poor.

Here’s a petition I’d support instead: raising income support payments to a more reasonable level.

WHAT’S REALLY HAPPENING

If this petition is not really about public health, necessity or fairness what’s it about?

People hate paying tax. They really hate taxes they can’t avoid. They then create ex-post reasons why they should not have to pay tax, generally involving the welfare of the wretched. (Their own benefit is merely incidental to the social good they’re pursuing!).

The mining industry showed the way, with its campaign against the mining tax, focused on the health of small towns and communities. The big polluters mimicked this in killing the carbon tax, worrying about the electricity bills of families on the bread-line.

It’s no surprise these tactics have spread – they’re extremely effective!

The crux here is whether there is a link between fairness and avoidability. Is a tax fair only if there’s a way to avoid it?

Unavoidable taxes are the backbone of our revenue raising system. We already raise lots of revenue effectively through big taxes on things everyone agrees are “good,” like earning income and buying clothes. I’ve previously written that we need more taxes nobody can avoid.

Tax theory says not to introduce loopholes. That was the mantra when I worked at Treasury – maintain the integrity of the system. Always use payments to solve problems, because exemptions are not targeted and get exploited.

But perhaps I am out of step with community sentiment.

Hate for (certain) unavoidable taxes goes back a long way – Poll taxes brought down Margaret Thatcher, for example. Also, exemptions to the GST were what bought it enough legitimacy to be introduced.

I sometimes wonder if sin taxes – tax on alcohol and cigarettes for example – are to blame for the way people see tax in general. A lot of people interpret the tax system as a moral agent judging their actions. If I saw all tax as punishment, I’d be furious about paying tax on sanitary items too.

Tax is not punishment, so maybe we should rename sin taxes to something other than taxes. What we should not do is carve up the system with more exemptions.

Exemptions undermine the efficiency of the tax system but also the sense that tax is our common duty.

I see plenty of normal people arguing that big companies that contort themselves to pay very little tax in Australia are “just doing what anyone would do”. The sense that everyone can and will avoid tax at every turn is pervasive.

I don’t mind paying tax because I can see the benefits it brings. (even though I’m quite aware it’s not all spent efficiently.)

“Tax is what we pay for civilized society.” US Supreme Court Justice Oliver Wendell Holmes, Jr.

—

Thanks for reading this far! If you’d like to agree, disagree or accuse me of obnoxious mansplaining please do so below, and I shall attempt to respond!

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.

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.

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.

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