The symbiosis of capitalism and democracy

(This review is cross-posted at Goodreads.)

Theorists of the left and the right argue that there are tensions if not contradictions between democracy and capitalism. Left-wing theorists argue that business has undemocratic power, buying influence through political donations and altering policy by threatening to invest elsewhere. Right-wing theorists argue that democratic majorities vote for taxes and regulations that weaken incentives and undermine the efficiency of capitalist enterprises.

Judged by the normative standards of these theorists, these critiques have something to them. But judged by some other standard, such as elected governments maintaining capitalist economic systems with widespread high living standards over long periods of time, the ‘advanced capitalist democracies’ discussed in Democracy and prosperity: reinventing capitalism through a turbulent century, look very successful compared to other political and economic combinations.

democracy and prosperity


One contention of the book’s authors, Torben Iversen and David Soskice, is that a symbiotic relationship between democracy and capitalism contributes to the success of these countries. Although business and rich people may, at least initially, resist the increased taxes that democracies impose for social policy programs, often in the long run these programs contribute to economic success.

For example, education is electorally popular and provides business with the highly-skilled workforces they need. Government unemployment, health, and retirement programs reduce workers’ uncertainty about their future welfare, reducing short-termist behaviour and industrial conflict. Workers are less dependent on their employers.

In turn, key constituencies in advanced capitalist democracies depend on a successful economy for their own jobs and the tax revenues that support social programs. They support political parties that competently deliver economic growth, limiting the political potential of parties that would damage the capitalist economy. The rejection of Jeremy Corbyn’s Labour in Britain is an example. Continue reading “The symbiosis of capitalism and democracy”

Crowding out and in

In the 1990s I was interested in the social capital literature, as a way of empirically addressing some of the ‘communitarian’ criticisms of liberalism that I was writing about in my eventually abandoned PhD. Social democrats – such as Eva Cox in her Boyer lectures A Truly Civil Society – thought that there was a positive relationship between big government and social capital. I thought the opposite was more likely.

Over Easter I read this article by Isabelle Stadelman-Steffen using OECD social spending data and the results of European and World Values Survey questions on volunteering.

Overall for ‘social’ volunteering – for social welfare, health or community action on poverty, employment, housing or racial equality purposes – there was clearly a negative statistical relationship with public welfare spending. This is consistent with the ‘crowding out’ hypothesis, that to some extent the state displaces voluntary activity. In further support of this hypothesis, a large welfare state had no statistically significant crowding out effect for other voluntary activities. Continue reading “Crowding out and in”

Should welfare recipients get tax deductions for making themselves eligible for welfare?

As the media is reporting, the High Court has today ruled in favour of Symone Anstis in her claim to deduct from her taxable income expenses incurred in maintaining eligibility for Youth Allowance.

We have discussed this issue before.

My view on the substantive policy issues remains unchanged. The legal principle established by this case, that welfare recipients can claim as deductions expenses incurred to maintain their eligibility for their welfare payment, should be overturned by statute.

Ms Anstis claimed computer depreciation, textbooks, a student administration fee, and supplies for children taught during her teaching rounds. What claims would be allowed to maintain continuing unemployability or disability?

The expense to government of this decision may not be massive. Under the low-income tax offset many if not most welfare recipients won’t pay tax anyway. But the principle of no tax deductions for welfare eligibility should be established in law.

12/11: The Australian is reporting that

The decision …. overturns a long-standing ATO policy that self-education expenses to obtain a first qualification are not tax deductible…

This is incorrect. The deductions are not for self-education as such; they are for maintaining YA eligibility. People who don’t get YA can’t claim deductions.

Welfare quarantining for the middle class

The Education Tax Rebate – whether Labor’s version or the more expensive Coalition version announced today – is the march of welfare quarantining beyond the income-support reliant lower classes into the middle class. The eligible group of FTB A recipients includes all but about the top 25% of families.

Parents can get their welfare handout, but only so long as they spend it on a list of things approved by the state.

In practice, this rebate isn’t really going to be a major behaviour changer. Most parents will spend more than maximum rebatable amount anyway, making the rebate just a paperwork intensive form of FTB A for parents of school-age kids.

But it is a bad precedent for the state seeking to monitor more of family life. How long before nanny wants receipts for healthy food, or some other paternalist preoccupation of the day?

Cheesed off working families

Yet more handouts to families, this time to fund school uniforms, are another sure sign that an election is about to be called.

But as we have seen before, such is the sense of entitlement built up by the welfare state that people with no real need complain when they miss out:

Ms Pilgrim, whose two daughters, aged 13 and 16, attend Our Lady of Mercy College in Parramatta, will not qualify for the tax break because she and her husband earn a combined income of more than $100,000.

”It cheeses me off a bit,” she said. ”It’s a great help for families on Family Tax Benefit A, but for middle-income earners like me, we miss out.”

Of course my heart bleeds for the problems of ‘middle’ (actually, fairly high) income earners.

Some implications of a large temporary population

Because the number of people with Australian residence rights crept up with little public awareness or debate, our thinking about what this means for them and for the permanent population is not well developed. Some observations:

1. The distinction between temporary and permament residence is important in eligibility for a wide range of welfare rights. It is part of the dispute about whether international students should receive public transport concessions. I have argued in the past that as temporary residents international students should not be entitled to this taxpayer subsidy – that choosing to study here gives them no claim on public funds.

Commenter caf has suggested that the fact that many international students go on to acquire permanent residence rights complicates this argument. Another complicating factor is the claim that given that temporary residents pay taxes, why should they not all also receive government services? While international students aren’t likely to be paying much tax if they are observing the work conditions of their visas, section 457 visa holders will often be paying significant amounts of tax.

2. Does a large population with residential rights but not voting rights have broader political implications? Continue reading “Some implications of a large temporary population”

Does full-fare public transport deter international students?

International students have long campaigned for public transport fare concessions. I have argued before that this is based on a mistaken understanding of why Australian students receive cheaper fares, but I will concede that there is potentially an interesting debate here about the status of long-term but legally temporary residents in Australia. A massive increase in their numbers – principally international students and section 457 visa holders – during the Howard years creates issues we’ve never really had to think about before (I might post on this some other time).

While I can sympathise but not agree with the international students, I have no sympathy at all with the arguments made by my colleagues in the higher education sector.

An op-ed by La Trobe academic Anthony Jarvis in The Age uses the ‘financial burden’ of overseas study as a rationale for extending transport concessions. But surely the very high fees charged by universities are a far more significant burden. For example a La Trobe business course would cost an international student more than $18,000 a year, an 80% mark-up on what La Trobe gets for a domestic student. Continue reading “Does full-fare public transport deter international students?”

Should students be able to claim YA eligibility expenses?

As reported this morning, the full court of the Federal Court has rejected the ATO’s appeal against the decision we discussed in April to allow as tax deductions expenses that help make students eligible for Youth Allowance.

The respondent in this case, Symone Anstis, had claimed expenses for among other things her textbooks, depreciation on her computer, and supplies for children on her teaching rounds.

As Youth Allowance eligibility broadens over time this is likely to be an increasingly expensive decision. I don’t expect many continuing YA-dependent students will have paid any income tax they haven’t already claimed back via the low-income tax offset system (which has become more generous since Anstis made her claim).

However there will be many who receive YA for half a financial year as they complete their course, but then earn enough as full-time workers in the second half of the financial year to to have a tax liability for the whole financial year.

What in practice this decision will do is give a small financial advantage to ex-YA recipients compared to other graduates who relied entirely on their own earnings in their final semester. Particularly given the legacy of widespread rorting of the YA ‘independence’ test, this group should not receive another handout. There is a still a YA reform bill stalled in the Parliament. It should be amended to abolish these deductions.

Corporate welfare on the rise

As the Productivity Commission’s annual Trade and Assistance review revealed yesterday, corporate welfare is on the increase. After increasing at an annual rate of around 6% until mid-decade, it increased by 14% in 2006-07 and 23% in 2007-08.


But this is nothing compared to what is on the way. As The Age reported:

The Rudd Government’s spending plans for research and development, the car industry and the farm sector would add another $20 billion in coming years, it says. But the emissions trading scheme would put all that in the shade. The commission says free permits to emission-intensive firms alone would cost taxpayers $6.5 billion in 2011-12 under the original plans — now postponed for two years due to the global financial crisis.

The chapter called ‘Recent developments in industry assistance’ (pdf) runs to 35 pages, discussing over 40 developments – not all of them bad from an anti-corporate welfare perspective, but most of them. That’s up from 23 pages in the last full year of the Howard government.

Should the new YA ‘independence’ test be delayed?

It’s not often that a classical liberal unites with a Labor government in support of a more egalitarian income distribution. But that is what I am doing in the current controversy over changes to the ‘independence’ criteria for Youth Allowance.

What ‘independence’ means in this context is that Youth Allowance applicants are assessed only against their personal income, rather than against personal and parental income. In the budget, the government announced that it was abolishing the two softest work tests of ‘independence’. These were working 15 hours a week for 2 years (so that undergaduates working median part-time student hours would qualify automatically for their last period of study) and earning just under $20,000 over an 18 month period since leaving school (which effectively permitted anyone taking a gap year to qualify, though the YA cash would not start to flow immediately in their first uni year).

Like the government, I believe that this was turning YA not just into middle class welfare, but upper middle class welfare. Bruce Chapman’s study, though on a limited sample, found that there were more YA recipients in $100K+ households than <$50K households. My own work on the 2006 census found evidence of behaviour consistent with teenagers from higher-income households making themselves eligible. While there was only a 5% increase in uni enrolments between ages 18 and 19 for households likely to be fully eligible for YA support, and 13% for partly eligible households, in $100K+ households the increase was 29%.
Continue reading “Should the new YA ‘independence’ test be delayed?”