Category: Tax & spend

First signs that familism has limits?

~ Andrew Norton ~ 13 Comments

The previous government was extraordinarily generous to families.  According to calculations I did from Treasury’s Intergenerational Reports, the FTBs alone increased, in per person terms, 29% per person between the 2002 and 2007 reports. And that’s not counting the baby bonus or childcare handouts.

Yet according to the 2007 Australian Election Survey, only 41% of respondents thought that the Howard government had become more generous over the last 10 years to ‘working couples with children’. 23% of Australians, who must have been holidaying on another planet during the Howard era, even thought that they had become ‘tougher’ on these working families.

But in this familist time, is there any end to the demands of ‘working families’? According to the AES, 49.5% of respondents agree that ‘working couples with children’ deserve more or much more from the social welfare system. My answer, that they deserve ‘much less’, is supported by a miserable 0.8% of respondents. Even the answer that they deserve ‘less’ support has only 4.5% support. And I thought I had a tough task selling higher education reform.

But some hope comes from this morning’s Newspoll reported in The Australian. About two-thirds majorities support means testing the baby bonus and FTB B, and 57% support means testing childcare tax rebates. And there is majority support for the testing to begin at $70,000 a year, which if based on household income would start to make some serious savings.

Of course I think these savings should be directed to tax cuts, which would in part benefit those same families. Yet this Newspoll, like other recent polling on the subject, finds that support for tax cuts drops (in this case from 66% to 36%) if respondents are told that tax cuts might cause interest rates to increase. But tax cuts financed from reduced family spending ought to be neutral for interest rates, since the total amount ending up in consumers’ pockets will be the same.

The intellectual uses of ‘liberty’ and ‘equality’

~ Andrew Norton ~ 19 Comments

In response to my implied criticism of Andrew Leigh for assuming that increases in inequality are bad and decreases good, but never specifying for what level of inequality would satisfy him, commenter Leopold responds:

one could turn the criticism around. Liberals believe in liberty – but how much liberty, exactly?

Leopold’s argument (I am paraphrasing here) is that preferences for greater equality or greater liberty are rules of thumb to be applied to specific circumstances, but there are cases where social democrats could accept less equality and liberals accept less liberty. We can’t always precisely calculate the final overall result of all these complex trade-offs to say what is the exactly right amount of equality or liberty. But this doesn’t invalidate the initial assumption that, all other things being equal, more equality or more liberty (depending on your philosophical position) is desirable.

I think Leopold’s point is reasonable. For example, I say that there should be less tax, and while I have clear pet hates among government spending programmes (eg FTB) that I think should be cut to reduce general tax rates, I never say exactly how much tax I think should be levied or what tax rates I would be happy with.

High-level political abstractions gives us intellectual tools that help organise our understanding of the world, but they don’t necessarily provide answers for specific problems. That requires far more detailed analysis.
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Should small government liberals abandon the Liberals?

~ Andrew Norton ~ 18 Comments

Sinclair Davidson’s suggestion that the most formidable opponents of small government are conservatives rather than social democrats is interesting. I wonder whether this could lead to a realignment of Australian politics.

– commenter Winton Bates, in a comments thread prompted by a post on how the rich paid an increasing share of net income tax under the Howard government.

As I argued in my big government conservatism article, the Howard government turned into a conservative social democratic government. Like Labor before them, the Liberals under Howard used the proceeds of a broadly market economy to finance a large welfare state. Under Howard, welfare spread up the socioeconomic ladder, towards the universalism that social democrats have long wanted to create wider support for the welfare state. And by boosting the not-poor but not-rich middle class from taxes on the top 25% of earners, Howard helped keep overall income inequality fairly constant under his watch, despite growing inequality in market income.

It remains to be seen whether this is a medium or long-term ideological shift. At one level, Howard’s policies can be explained (though not explained away) by factors that are unlikely to be permanent. Politically, periods of prosperity are accompanied by greater pressure to spend more on government-provided services, so we are in the spend part of the tax-and-spend public opinion cycle. It is hard for governments without massive public opinion support for other reasons to resist such political pressures – especially when the necessary money is just flowing in on existing tax arrangements with no need to raise tax rates.
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More self-serving arguments against HECS

~ Andrew Norton ~ 11 Comments

The National Union of Students had a flop last week with a very poorly attended ‘national day of action’. But they showed smarter tactics in peddling this story to The Age for a slow news Easter Monday.

The story opened this way:

THE Federal Government is under growing pressure to revamp the Higher Education Contribution Scheme, as students seize on research suggesting it could contribute to reduced home ownership, low fertility rates and tax evasion.

None of this ‘research’ should trouble the federal government, or anyone else, at all.

I’ve not seen any statistical evidence showing that graduates are suffering particularly in the housing market. Less than two weeks ago the papers were reporting research that despite high housing prices more young Australians were embarking on home ownership than in the past. I can’t find the paper on which that claim was based, and I am sceptical about whether it is true in absolute terms. But certainly earlier research found (pdf) that once you control for other factors affecting the time of house purchases, such as marriage and children, there hasn’t been a reduction in home ownership among the young (though the increases in house prices in the last few years should put a question mark over whether that would continue to be true in the future).

Regardless of the precise trends, though, as I argued last year there is no case for graduates getting a special first home owners grant. Effectively what NUS is saying is that even though graduates earn more on average than non-graduates, they should get an additional goverment subsidy so that they can further bid out of the market other Australians who did not go to university. Though Kevin Rudd has made the home ownership point himself, I would hope that on thinking more carefully a social democratic government would reject such a regressive policy.

On fertility, The Age says:

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Should workers support using fiscal policy against inflation?

~ Andrew Norton ~ 8 Comments

The Australian Workers’ Union commissioned Roy Morgan Research to conduct a poll on the idea that half Labor’s promised tax cuts should be diverted to superannuation.

As in the Galaxy poll of Queenslanders a couple of weeks earlier, a bit over a third of voters wanted the tax cuts in full. In the Galaxy poll, 55% wanted all the tax cuts to be put into superannuation. In the Morgan Poll, 50% wanted the money to be split half each between tax cuts and superannuation.

According to AWU National Secretary Paul Howes:

The poll shows voters are economically literate, and politically sophisticated enough to understand that in the fight against inflation and rising interest rates the option of increased superannuation rather than tax dollars in the pocket is smart stuff.

But should workers really be so keen on establishing the idea that budgetary policy should be used to combat inflation? As RBA Governor Glenn Stevens pointed out in a recent speech:
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The social democratic (former) Howard government

~ Andrew Norton ~ 17 Comments

I have argued before for the social democratic tendencies of the former Howard government. One basis for doing so is that upper income earners during the Howard years provided an increasing share of the government’s total income tax revenue.

With the release yesterday of the ATO’s 2005-06 income tax statistics, Sinclair Davidson has updated the series of statistics (1996 to 2003 here) he has been keeping on what proportion of all income tax the top 25% of taxpayers pay. As it did every year except one since 1996-97, the top 25% picked up a larger share of the tax bill in 2005-06 than it had the year before.

In 1996-97, the top 25% of income earners paid 60.8% of all income tax. By 2005-06 that had increased to 65.2%, compared to 64.3% the year before. That was despite the complaints back in 2005 (eg from Andrew Leigh) that the tax cuts implemented that year would be regressive.

Yes, this was off an increased share of total income – up from 50.5% to 50.9%. But such is the effect of still very high marginal tax rates that a 0.4% increase in the top 25%’s share of income translated into a 0.9% increase in the share of all income tax paid. It helps explain why overall income inequality is quite stable.

OECDitis, again

~ Andrew Norton ~ 13 Comments

Yesterday Education Minister Julia Gillard announced a major review of higher education policy, to report by the end of the year. The terms of reference are sensible enough. But I hope we will get over the bout of OECDitis on display in the Minister’s speech to the AFR higher ed conference.

As I noted last year, OECDitis is the modern-day version of the cultural cringe, except that now it’s not England that sets the benchmark for Australia, it is the OECD average. Whether or not other OECD countries are actually getting good outcomes, or if they are whether doing the same thing would work in Australian conditions, is all irrelevant. We must at least be the same as the OECD average.

So according to Gillard:
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Should the HECS debt be sold?

~ Andrew Norton ~ 13 Comments

Universities Australia, formerly the AVCC, today released a paper suggesting that HELP student loan repayments be securitised.

Versions of this idea have been around for many years. In the past, people in the finance industry have wanted to buy the stream of future repayments from previous HECS debts (now HECS-HELP and FEE-HELP). They would of course have demanded a huge discount on the face value of these debts, because of the risks of slow or non-repayment we have discussed before. For financial and political reasons, previous governments have never agreed to this.

The Universities Australia version gets around the political problem of explaining to the punters that the $13 billion dollars lent to students still outstanding at 30 June 2007 is, on the government’s own estimates, worth only $8.2 billion. It suggests that the government sells bonds in the capital markets to raise money for higher education, and uses the income stream from HELP repayments to finance the interest it would have to pay the bond holders. Money not immediately spent on universities would be put in a Future Fund-like investment scheme, and the returns spent on universities in later years.

This idea neither should nor will go far, for at least the following reasons:
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Tax and super

~ Andrew Norton ~ 6 Comments

Stephen Kirchner draws my attention to a Galaxy/Courier-Mail poll of 800 Queenslanders that:

found 55 per cent of respondents would prefer the proposed tax cuts to be delivered as extra payments to their superannuation fund. This included a majority of Labor and Coalition supporters.

Only 38 per cent of people wanted the money upfront through lower taxes.

That’s a very similar result to a Newspoll last May, in which a supplementary tax & spend question warning respondents that tax cuts would be inflationary saw opinion on tax cuts shift from 66% in favour to 33%, with the proportion against going from 19% to 53%.

The public seems to have paid a suprising amount of attention to the macroeconomic debates over the role of fiscal policy in inflation and interest rate outcomes.

There is, however, an important difference between this week’s Galaxy poll and last year’s Newspoll. As Stephen notes, people could get the tax cuts and voluntarily put the money into super. He suggests that the logic might be as follows:
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The cost of FEE-HELP

~ Andrew Norton ~ 50 Comments

Providing me with my second page one dial-a-quote this week, the SMH this morning leads with a story titled ‘Student debts out of control’. Drawing on an article by Bruce Chapman in this week’s Campus Review, it says:

GRADUATES from private colleges and universities are costing taxpayers more than those from public universities, and new ministers of religion present one of the greatest burdens.

Though for reasons I will explain this is not correct, Chapman’s original article does make a valid point. This is that under the FEE-HELP loan scheme for full-fee students there are implicit subsidies because student debt is only indexed to inflation, meaning that the taxpayer bears most of the real cost of lending students money to pay their tuition fees. (Aspects of this issue were discussed on this blog last October.)

Undergraduate FEE-HELP students do pay some real rate of interest, because they have to pay a 20% surcharge on any amount they borrow (eg, if they borrow a tuition fee of $10,000, they will owe the government $12,000). If these students repay quickly, that could work out at quite a high real rate of interest. But if they borrow a large sum that takes many years to pay back then their real rate of interest will be low, and they will effectively receive a subsidy from taxpayers.
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