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Saturday, October 31, 2009 No wonder locals are leaving

A typical Sydney house now costs well in excess of $600,000 after surging at the rate of $5000 to $6000 a month all year.

The latest RP Data-Rismark property index shows prices in Sydney, Melbourne and Canberra continuing to climb apparently unaffected by a slowdown hitting other state capitals.

Sydney house prices are the most expensive, but Melbourne's are climbing the fastest, gaining 12.6 per cent so far this year, compared to Sydney's 9.4 per cent.

At the trough in December the median Sydney price hit $554,800 before climbing to pass through $600,000 in August and $606,800 in September.

The median Melbourne price climbed from $443,800 to $499,800.

But the RP Data index, Australia's most comprehensive, shows prices in other capitals turning down. The median Brisbane price slipped 1.3 per cent in September, the median Adelaide price 0.4 per cent; and the median Perth price 2.5 per cent...

The national picture shows prices taking a breather in September as the First Home Owners boost winds down.

"The key question is whether September is just a temporary pause or whether it represents a more general cooling," said Rismark managing director Christopher Joye. "Only time will tell, but we are projecting materially lower rates of house price growth going forward as mortgage rates increase."

The RP Data-Rismark index is typically ahead of indexes and identified the recovery earlier that those prepared by real estate agents. It compares "like sales" with "like sales" and so is not distorted by changes in the composition of the stock sold.

"The booming growth that they are reporting now may relate more to past than present conditions. We see no evidence of prices accelerating."

Reserve Bank figures released Friday showed demand for credit weak with total borrowing climbing just 1.7 per cent over the year to September, the slowest pace since 1993.

The Bank board is expected to increase interest rates by a further 0.25 percentage points on Tuesday, pushing the standard variable mortgage rate back up above 6 per cent and adding $45 to the monthly cost of servicing a $300,000 loan.

A Reuters survey has economists pricing in the equivalent of four extra such hikes before the middle of next year, taking the standard variable mortgage rate above 7 per cent.

Centrebet stopped taking bets on the Tuesday rate hike Friday, saying almost all the money was waged the favourite, a hike of 0.25 per cent.

"There was virtually nothing placed on a hike of 0.50 points, and nothing placed on no change. Even when we adjusted the odds, the favourite was all the punters wanted to back," said spokesman Neil Evans.

Most punters who backed a 0.25 point hike will earn $1.45 on every dollar invested.

"It'll go some way to easing the pain," said Mr Evans.

Only one punter bet really big, waging $3000 on a 0.25 point Melbourne Cup day hike.

Published in today's SMH and Age 
. Housing Armageddon now "unlikely"

. Affordable housing? That's what they wanted before the crisis

Labels: real estate, reserve bank

Friday, October 30, 2009

"How Henry's mother saved the economy"

There's more, for a price.


. Ken Henry's devastating question to Senators

. What went wrong: David Gruen

Labels: financial system, government guarantees, Treasury


Please. Now.

HT: Lucy Kippist


. It wasn't the industrial revolution that ignited living standards, it was sugar - centuries earlier

. Really, really good news... about coffee

. Coffee and Vitamin C

Labels: addiction

Thursday, October 29, 2009

Canberra is not the problem Paul Keating says "Canberra was in essence a great mistake".

Malcom Fraser says the new Parliament House should not have been built.

They are both wrong.

Canberra is a nice city, yes. With lovely people and a beautiful environment. But it is not un-Australian.

If anything it is the most Australian of Australia's cities, inland, small, friendly; with big backyards.

Jack Waterford cogently argues that it is not Canberra that is out of touch with the rest of Australia, but Parliament House that is out of touch with Canberra.

I've extracted highlights below the fold.

"My guess is that opposition to shifting the Australian capital to Sydney or Melbourne would be even more fierce today than it was 110 years ago; this time, however, probably joined by the citizens of NSW and Victoria as well as all the other states.

Each of these cities is a beautiful thing, Sydney more organic, for what that is worth, than Melbourne but neither is so well planned or designed that it could easily cope with the transport and other problems of plonking a parliament in a prominent place, let alone the infrastructure, buildings and insignia of a national capital...

When Keating was prime minister he would muse aloud, sometimes, about having the executive government thrown out of Parliament House. It would, he thought, be good for Parliament, as a legislature, and for improving the quality of administrative government.

I think he was right on that. One does not hear him on the subject now but it would be even better if the press gallery was thrown out of Parliament at the same time. Not prevented from reporting Parliament and the politics in and around the building, but forced to headquarter itself elsewhere, in the process being forced to inhale some of the air of Canberra as opposed to the air-conditioning of its mini-city.

Relocating ministers to offices in their departments could serve as a partial antidote to their increasing tendency to see comparatively little of their departmental advisers but to live cheek by jowl with political advisers. Minders themselves spend more time liaising with minders in other political offices than in dealing with departments.

Building, for our Prime Minister, a proper lodge with adequate living quarters and public spaces for entertaining and conducting cabinet, etc, and a reasonable "west wing"-style prime ministerial office, would give the position the dignity it holds in our constitutional system (whether in its present monarchical or later republican form).

Just as importantly, we might get a better parliamentary service from a building no longer so dominated by the "need" to give so much accommodation to ministers or for prime ministers and other ministers to colonise parliamentary spaces for their press conferences and functions, and by the way that ministers feel able to alter parliamentary timetables and routines simply for their personal convenience.

This is not to say that governments would not have the numbers in the Parliament, or be in a position to arrange matters according to the incumbents' view of the world. But a controlled distance between executive and Parliament might increase mutual respect, and, possibly, help restore a few balances.

A part of Keating's lament is that while one is slaving away at Parliament House, a run down to Manuka for some Chinese food does not always seem attractive. No doubt it is different these days in Double Bay, where he presides over coffee and croissants most mornings.

But his comment conceals a truth which reflects on journalists and minders as much as on politicians. Parliament House is a city in itself, down to its own cafes. A good many people who work there leave it only to fall into bed. Or, leaving late, only to go to bars patronised by journalists, minders and politicians, before falling into someone else's bed. The politicians who fly in and out according to the sitting schedule experience very little of Canberra. Those parts of Canberra, chiefly Manuka and Kingston, which were created for this sort of bizarre lifestyle, bear very little relationship to the way most Canberrans live, or the way most Australians live. It may suit politicians to pretend that they hate Canberra and can never wait to leave it, and that leaving Canberra is re-entering the real world.

The unreal world, however, is not "Canberra", but the life of the suitcase, the non-stop meetings, pretending one is living in a university college or boarding school, and the Holy Grail and other such hangouts. Young (mostly) unmarried journalists like to affect the same sort of ennui, anomie and world-weariness, and tend to blame Canberra rather than themselves. Merchant bankers and young lawyers, I am told, have many of the same problems in Sydney, if at about thrice the expense."


. Canberra in Autumn

. Not leaving Canberra

Labels: ACT, parliament house

The Melbourne Cup day favourite 



. Do you think the CPI is a joke?

. What's the damage?

. Why push up rates at all? - Argy

Labels: mortgage rates, reserve bank


Australia's not-so-super super 



. "Australia’s pension exposure to equities spells doom"

. Australia's new Superannuation Minister had a vision

Labels: financial planning, super


Crap doesn't begin to describe....

Oh my.
Labels: economic theory, financial planning





Could the Coalition have sunk this low?

As I wrote last month, "we expect and need to hear the truth from the Opposition."

This morning's Australian details an email sent by Coalition media adviser Peter Phelps to his colleagues on September 8:

"You don't get news stories by trying to change perceptions, you get them by reinforcing stereotypes," said the email, penned by Peter Phelps, media adviser to opposition cabinet secretary Michael Ronaldson.

Stories worth pursuing should cover: "Fat cat public servants not caring about taxpayers, pollies with snouts in the trough, special interest groups getting undeserved handouts from tax taken from hard-working Aussies, a favoured pro-Labor contractor who seems to be getting all the work for a particular job etc," the email said.

"While policy discussions are nice, the simple fact is that in opposition, the majority of our successful news stories are going to be ones which are a little quirky and which draw the attention of journos."

It says more senior Turnbull advisers who later saw the email were "outraged" and moved quickly to inform Mr Turnbull and rebuke its author.

And notes:

Earlier yesterday the opposition attempted to attack the government by revealing that the Department of Veterans Affairs had spent $1.3 million on an executive training retreat and $10,000 subsidising a departmental sports day.

But the attack backfired when Veterans Affairs Minister Alan Griffin revealed that the Howard government spent at least three times more on the events when it was in office.

Has it come to this?


. Hockeynomics - at times an embarrassment

. The Coalition Debt Truck: Running on empty

. A real Godwin Grech email

. Advice to Malcom Turnbull

Labels: Liberal Party, political donations


Towards a unified theory (of Superman's powers)

Bravo Ben Tippett, HT: Megan McArdle

Graphic: capedwonder.com


. Absolutely top notch listening - Paul Krugman, Mark Scott

. Can economists be funny?

Labels: economic theory, econophysics, humour, popular culture


What's left-wing? What's right-wing? Labels: graphs, politics

What is it with filling out tax returns?

"Our obsession with the annual refund is indeed bizarre. Seventy-five to 80 per cent of us get a refund and we seem prepared to endure anything - even routinely having more tax than necessary taken out - to get it."

The Australians vox popped on PM last night actually wanted to continue filing tax returns!

VOX POP: You won't be able to get many deductions and things like that, I mean, they might be rorting you so I'd prefer to work out my own tax so I can get the best possible return.

VOX POP: I guess I'd probably prefer to do it rather than, because it's a bit like Big Brother, them doing everything for me.

VOX POP: I feel that's kind of an invasion of your privacy to begin with. I prefer to keep everything in my own hands these days, then I can watch the progress. Also if somebody makes a mistake, I'm not in control of that.

Heaven help us! And good luck to them. They can keep doing their own tax returns or paying a tax agent to do it for them forever, for all I care.

As for the rest of us...

Peter Costello passed up a no-brainer - the ultimate piece of low-hanging fruit - when he allowed himself to be snowed by his advisors and abandoned the idea of introducing optional tax returns in the lead up to the New Tax System.

I'd been running pieces arguing for it on ABC radio in the lead-up to the new tax system and was mighty disappointed. Now, a decade on, Labor is set to pick up the low-hanging fruit.

Here's how I summed up the case in 2006:

The imposition I am talking about is endured by nearly every one of us, year in and year out. It's the requirement to wade through the 120-question Tax Pack to send to the Tax Office information it most probably already has...

As Australian as the compulsory vote, it is a ritual not imposed on the citizens of Britain or New Zealand. In those countries, submitting a tax return is voluntary. Two out of every three citizens don't do it.

Going through the Tax Pack actually takes a lot more time than the compulsory vote. Two decades ago it typically took 4½ hours. (1) A decade later it took 8½ hours. (2) I don't know of any surveys since then but I do know that the Tax Pack has exploded in complexity in that time. Dr Andrew Leigh, an economist at the Australian National University, has costed the time lost nationwide as a result of attempting to fill in the form. He says it approaches $3 billion a year.

And it's not just time. Filling in unnecessary forms creates anxiety, often among those Australians with the simplest of tax affairs. And it can encourage dishonesty. An astonishing 75 per cent of us now use a tax agent - the highest proportion in the world. (3)

In New Zealand it is no longer possible to make claims for deductions. In Britain it has always been very difficult. The only things that matter for the tax affairs of a typical New Zealander are his or her salary (from which tax has already been deducted) and any income from interest or share market dividends (from which tax has already been deducted). The tax authority already has that information and it adjusts deductions throughout the year to make sure that, by the end, there is very little extra money owing. If it is, it sends a statement.

Entitled Simplifying Taxpayer Requirements, the change was introduced in 1999 partly to "reduce the extent to which the tax system intrudes on the lives of most individual taxpayers".

Reports from across the Tasman suggest it has been a success. I believe it would be here, too. Remember all the anguish leading up to the introduction of the GST? After the event, there seems no concern whatsoever among ordinary Australians. (Among businesses, there is concern, but that's the point: the more that the paperwork associated with a tax intrudes on someone's life, the worse they feel about it.)

So why won't authorities here make the income tax system as painless as New Zealand's or as the GST?

Peter Costello actually floated the idea in the lead-up the GST. He told a business lunch that if Australia "had a strong pay-as-you-earn tax system with a strong interest-withholding tax system, we could kick most Australians out of the necessity to file income tax returns". (4)

Then he moved the idea to the backburner. The Tax Office had tested it with focus groups and found people worried about losing their refunds: "For most taxpayers, refunds are what the personal tax system is all about." The obsession with the annual refund is indeed bizarre. Seventy-five to 80 per cent of us get a refund and we seem prepared to endure anything - even routinely having more tax than necessary taken out - to get it.

Professor Chris Evans, formerly of the British tax office, runs the Atax program at the University of NSW. He says: "Frankly, it is inexplicable, and unique to Australia. What rational person overpays in order to get something back at a later stage? It defies logical explanation - I would certainly not contemplate overpaying for my electricity in advance just so that I could have some 'forced savings' coming back to me at some point in the future." (3)

The lever most of us use to get a refund is to claim for so-called work-related expenses: things such as tools, conference fees and uniforms. But the rules governing what is in and what is out are so arbitrary as to make it look like a rort.

Professor Jonathan Baldry, of the University of New England, notes that a shearer can claim a deduction for the cost of jeans used as working clothes but plain-clothes police officers cannot claim for their clothes. (5)

The biggest claims are made by those with the biggest incomes. Baldry says the typical claim climbs by $49 for every $1000 increase in salary. Politicians and judges claim more than $10,000 each. We should abolish the right to claim deductions and let the chips fall where they may.

Then most of us wouldn't need to fill in the Tax Pack - although people such as landlords still would. Much of the information could be collected in another way. (For instance, the Tax Office could ask health funds directly about who is a member.)

An Australian twist might be to hand each of us a $300 deduction. That way we could still get our beloved refunds.

(1) Pope, J., and Fayle, R. "The Compliance Costs of Personal Income Taxation in Australia, 1986/87: Emperical Results"., Australian Tax Forum 8, (4) 485-538.

(2) Tran-Nam, B., Evans, C., Ritchie, K. and Walpole, M., 2000, “Tax Compliance Costs: Research Methodology and Empirical Evidence from Australia”, National Tax Journal 53(2): 229–252.

(3) Chris Evans, 2004, “Diminishing returns: The case for reduced annual filing for personal income taxpayers in Australia” Australian Tax Review 33: 168-181

(4) Committee for the Economic Development of Australia Conference, January 28, 1998

(5) Jonathan Baldry, "Income Tax Deductions for Work-Related Expenses: The Rationale Examined" Australian Economic Papers, 1998, vol. 37, issue 1, pages 45-57, Jonathan Baldry 1998, "Abolishing income tax deductibility for work-related expenses", Agenda, Vol. 5(1), 49-60.

Related: At last - the half hour tax return! Canberra Times, Saturday, May 26, 2007

Labels: henry review, tax

Wednesday, October 21, 2009

Is the Chamber of Commerce for real?

Which brings us to this week.

Here's why: (It's worth watching the whole thing.)


Why do people have babies? (Caution - baby photos) Darn good question Joe, Peter...

I wrote about it a bit here in 2005 and here in 2007 after observing that children are very expensive:

"It might be a good thing that most of us don't do the financial calculations. We close our eyes and dive in. We manage by cutting our spending or by extending already impossibly large mortgages.

We sense that children bring benefits that can't be described in financial terms. They give us a sense of purpose - they believe in us, idolise us and depend on us.

It is almost financially impossible, but it's worth it."

Conventional wisdom is that our forebears used to have a lot of children to make money - they could put them to work early and hope that in later life their children supported them.

These days we are not allowed to put children to work, and these days we have pensions, unemployment benefits and super to support us. The conventional view is that change helps explain why we are having fewer children.

But as Bryan Caplan points out, that view is probably wrong:

The flaw in the story is the assumption that things used to be different. In an eye-opening 1996 JEL piece, Ted Bergstrom summarizes evidence showing that even in pre-modern societies, kids did not pay.

Kids did not pay in hunter-gatherer societies:

Among hunter- gatherers, resources flow from older to younger generations and not the other way around. These tribes all had very high average fertility (about eight births per woman), but in each case, children consumed more food than they caught, at all ages from birth until age 18. Grandparents continued to work hard to support their grandchildren and produced more than they ate. At almost no time in their adult lives, did adults produce less than they consumed. When people became too old and frail to work, death followed quickly. Suicide and euthanasia of the enfeebled were frequently reported.

Kids did not pay in agricultural societies:

Calculations by Mueller and by Goran Ohlin (1969) indicate that a parent who gave birth at age 20 and supported a child from age one to age 15 would receive a monetary rate of return of less than one percent on her investment if she retired at age 60 and was supported by the child until age 85 at the level of living that is normal for old people in peasant societies. When one accounts for the probability that either parent or child may die before the parent reaches 85 years of age, the expected rate of return becomes negative. In a peasant society, where land ownership is possible and where there are markets for borrowing and lending, such low rates of return are not likely to be acceptable on purely financial grounds.

An anti-natalist might take this as further proof that breeding is sheer idiocy. To me, though, it confirms that an intrinsic or "consumption" demand for kids is deeply rooted in human nature. It also shows that explaining the long-run decline in family size is harder than it looks. If parents in 1850 were willing to support five or six kids with a negative financial return, why aren't we?

Personally I've long thought of children as "consumption goods" and been ridiculed by non-economists for using the term.

But right now I'm consuming a lot - and loving every second.

Here are some photos: Lavinia in intensive care, Day 1 Lavinia with Toni, Day 2 Lavinia with Oliver, Day 5 Lavinia at school, Day 9


Published October 18, 2009

Last Sunday's Canberra Times told us about something that had gone
wrong at Canberra Hospital.

While we don't dispute for a minute the enormity of that tragedy our
experience at the hospital the previous Sunday could not have been
more different.

Without quick thinking from our midwife Ros and dramatic intervention
from a team of six health professionals who burst into our room at the
birth centre our newborn girl would not have lived.

Their thoroughness, caution, commitment and good humor was a tribute
to the Canberra public health system.

We were in very good hands.


. Honey, we can't afford the kids

. Sunday dollars+sense: The dollar cost of having a child

. Australian Costs of Raising Children, by Dr Paul Henman

Labels: ACT, children

Monday, October 19, 2009

Asylum seeker push vs asylum seeker pull

Possum Comitatus: 

Labels: immigration

Saturday, October 17, 2009

Absolutely top notch listening - Paul Krugman, Mark Scott

Boy do I mean it. These are the two best talks I've heard this year, and I've been listening to a lot of talks while cycling, and gardening.

The Paul Krugman talk, almost 90 minutes including questions delivered to the London School of Economics in June, is entitled The night they reread Minsky.

It is a tour de force about the state of macroeconomics; why it stagnated and how it got worse. There's even (one) Australian reference: "a Mad max world".

The 40Mb MP3 is here.

Mark Scott is the Managing director of Australia's ABC. You'll find no more compelling analysis of what's happening to old media, and the most likely path forward.

It is entitled The fall of Rome: Media after empire, it rips along, and I have placed the pdf below the fold.

The 50-minute MP3 is here.

Now back to gardening.

Fall of Rome 20091014

Labels: economic theory, financial system, journalism, media

Why women aren't as happy - the short video

It's here:

The funky dude in the middle is the Australian-born University of Pennsylvania economist Justin Wolfers and the happy looking woman is Betsey Stevenson of the University of Pennsylvania, to whom he is married.

This is what their paper says:

"The lives of women in the United States have improved over the past
35 years by many objective measures, yet we show that measures of
subjective well-being indicate that women’s happiness has declined
both absolutely and relative to men. This decline in relative wellbeing
is found across various datasets, measures of subjective wellbeing,
demographic groups, and industrialized countries. Relative
declines in female happiness have eroded a gender gap in happiness
in which women in the 1970s reported higher subjective well-being
than did men. These declines have continued and a new gender gap
is emerging—one with higher subjective well-being for men."

Frightening, hey? More reaction here.



. Women's pay plummets (relative to mens)

. Would my pay drop if I became a woman?

. Who works the hardest in your office?

Labels: gender, happiness

Friday, October 16, 2009

Should I Buy It - the flowchart
 HT: LifeHacker
Labels: behavioural economics, consumers, graphs


What to expect from Ken Henry

Today he delivered his last public speech ahead of the delivery of the report of the Henry Tax Review in December.

It is so good, I can't do it justice by highlighting.

It's worth reading the lot to find the clues:

Lessons from tax reform past

Address to the Committee for Economic Development of Australia, 15 October 2009

This will be my last speech on tax reform before the Review Panel on Australia's Future Tax System hands its final report to the Government in December.

I thought it would be useful today to reflect on past tax reform efforts and outline what I think are the lessons we should learn from them.

I don't offer these as scientific or economic proofs, although I think they are consistent with good economic analysis and recent research. What they represent are the conclusions of an experienced tax reformer:

. one who has spent his professional life advising governments about tax reform

. and one who has a big stake in seeing its findings make their way into the statute books for the benefit of the Australian people.

So I offer five lessons and a conclusion.

Lesson 1: The case for reform should be compelling

The first of my lessons is that the case we put for tax reform should be compelling.

We can't expect citizens to be enthusiastic about tax reform just because it has the word 'reform' in it. Reform may be regarded as self-evidently good in the think tanks and university departments in which many of this audience moves. But for everyday people, reform needs and deserves powerful justification.

Tax reform means changing prices in the economy, affecting existing incomes and wealth. If it is meaningful reform, it means that prices will change so that people have more incentive to do things that improve their own lives and those of others in the community. More incentive to work, invest, save; but also to consider how their actions impact on others, including others not yet born, such as through the impact they have on the environment.

Advocates of tax reform tend to focus on these benefits. But tax reform also has costs.

Many people can easily adjust to the new prices tax reform will bring. Some will adjust their sources of income, others will get new jobs or renegotiate existing ones, and some will adjust to the new pattern of investment. For many, there might be no perceptible impact at all. However, some people — those with stores of value based on previous prices and incomes — can find themselves worse off, especially in the short-term.

Whether people should be compensated for such 'windfall losses' is largely a question of fairness. Perhaps some – maybe most — should reasonably be expected to have anticipated that reform was inevitable. But we should not have this expectation for all. For example, some people may have only recently bought a tax preferred asset — long after the original concession was granted — at a price that reflects an expectation of the effect of the tax concession lasting indefinitely. This means they would suffer a loss of wealth in a reform that moved to a more neutral tax system, possibly making what most analysts would consider to be a fair and coherent tax reform seem, to them, both unfair and arbitrary.1 Others, on the other hand, may have accumulated their wealth from socially harmful activities and might not be considered worthy of compensation. But what about those who have earned their wealth from activities indispensable to prosperity, such as innovation or saving? Some will find change easy; others, such as the elderly, less so. Yet even if compensation is considered desirable in principle, it may be difficult to target those who need it.

Accordingly, a threshold issue is whether the size of potential compensation is so large, or its delivery so complex, that the tax reform may not be worth doing at all.

One of the best papers I have seen on this topic highlights how the benefits of moving away from the existing income tax system to a comprehensive consumption tax base quickly evaporate when it is concluded that compensation is required for certain groups. For example, such a change might mean governments want to provide additional assistance to low-income workers, who are worse off from the loss of progressivity, and the elderly, whose assets can buy less. The costs of providing this compensation can potentially outweigh the benefits of the proposed tax reform.

This highlights how the case for tax reform must be so strong, so compelling, that it outweighs probable compensation costs. It also means that the manner in which compensation is provided can determine whether a reform is a success or failure.

Can we find such a case in the current economy?

One possibility is road pricing reform. There would be few areas in economics where such a clear and rational set of policy directions have so consistently lagged in practice.

Most of the time, most cars impose minimal costs on other road users. However, when vehicles drive on a congested road they impose costs on other drivers. Each driver thinks of their own need to get to their destination, not considering how, by taking up space on the road, they impinge on the ability of other drivers to do so. There is no means for one driver to coordinate with others, to bargain about who should have priority, so that they can all be better off. This results in a predictable 'tragedy of the commons' which is estimated to waste around $9 billion a year in avoidable congestion costs, increasing to around $20 billion by 2020.3 Such costs will only increase with faster population and economic growth.

In the face of these costs, why have we stuck to the traditional 'fuel tax and rego' model for roads, when sensible pricing seems to offer such large benefits?

Personally, I think it is the inherent difficulty in deriving a feasible compensation framework.

Many people will have bought houses, cars and even taken jobs based on the existing set of road prices — explicit and implicit. I mention implicit prices because while many roads appear free, they are actually expensive in terms of time and taxes. Still, many people think that a change in road prices, or the burden of compliance, will necessarily make them worse off. And, with the history of urban transport services in some parts of Australia, this might not be an unreasonable assessment.

The case for change needs to be made. It is fast becoming one of the biggest public policy issues of the age.

We need innovative ways of dealing with the community's distributional concerns. For example, some truck operators might support road pricing as long as the costs they pay are reflected in better roads — their 'compensation' is a better functioning road network. They would also like assurance that the compliance costs of road pricing will be low and remain low. At least one automobile association supports road pricing as long as road users are 'compensated' by the abolition of fuel excise.

There are some instructive examples overseas. In London, commuters were 'compensated' through additional funding for public transport. An innovative study in Seattle gave some drivers credits to pay to drive on congested roads and let them cash in the savings they made by driving at off-peak times or choosing other modes of transport.

Reforms like road pricing will be difficult, but these overseas examples show that it is possible.

Compensation is inherently a political problem, as it is the political process that identifies those affected and those in need. Our political history reveals a capacity to manage massive change, given sufficient time.

Past politicians had the vision and foresight to avoid this outcome and the Australian people the good sense to agree with them. A similar vision is needed to make future tax reforms viable too — and it's our job to make the case for it.

Lesson 2: Uncertainty and risk impose costs too

The second lesson is not to frighten people by portraying tax reform as the equivalent of a short sharp jab.

The parents in the audience will understand that no one ever convinced a child to go quietly to the dentist by telling them it will hurt like hell but not for long.

There's an economically rational reason why people reject sudden upheavals in public policy; the mere prospect of change can cause uncertainty for taxpayers. Those of us who were around before the announcement of the introduction of Capital Gains Tax in September 1985 would well remember the almost hysterical atmosphere of the time. Scare campaigns about 'taxing the family home' were just as diabolical — and plain wrong — then, as they are now. Many people, including some of the most vulnerable in society, were made to feel less secure in their homes because of such misinformation. That is an extreme example. But there is a serious truth here; even by merely raising the prospect of change, tax reform imposes risk; and of course, risk can harm wellbeing.

Notwithstanding such risk, there are always calls to change the tax system. Our Review has received over 1000 submissions, none of which suggested leaving the tax system unchanged. This is somewhat refreshing to economic policy advisors like me who are keen to explore new ideas. But while the prospect of change makes refreshing reading for tax policy enthusiasts, it also has a very real impact on the economy and people's lives.

Change cannot be avoided. But it can, and should, be made coherent.

One way the Review can help reduce risk is by promoting a feasible long-term path for tax reform — in the way that the Asprey Review from 1975 created a reform framework that influenced the nation's tax reform direction for more than two and a half decades.

Like Asprey, the Panel understands that tax systems should evolve coherently towards some 'ideal system'. The tax system should evolve and its evolution should be coherent. Coherent evolution will be assisted by a clear articulation of an ideal system. The Asprey Review6 provided a reform agenda largely consistent with a comprehensive income tax benchmark. But the logic underpinning this benchmark has now largely been destroyed amongst tax policy specialists, and there is some uncertainty about the way forward.7

We have to be 'up-front' about this. But, at the same time, it is our responsibility to chart a clear course for future reform efforts.

Lesson 3: Simplicity often gets left behind

My third lesson is that we mustn't forget the importance of simplifying the tax system.

The history of Australian tax reform reveals a number of themes vying for pre-eminence. The very first taxes imposed by the colonies were customs and excise duties on rum and some other 'necessities'. Raising revenue was the overriding priority. It was the need for revenue to finance the First World War that led to the introduction of income tax in 1915, and the Second World War that led to its expansion in the 1940s. Not until the 1970s, and the Asprey Review, did equity gain prominence. This equity theme was highly influential in the 1980s, driving the development of general anti-avoidance provisions, capital gains tax, fringe benefits tax and the substantiation of claimed deductions. The 1980s also evidenced an emerging interest in efficiency issues, with a cut in the top personal marginal tax rate from 60 per cent to 49 per cent and the introduction of dividend imputation. In the 1990s and the current decade efficiency considerations became even more influential, as evidenced by company and personal income tax rate cuts and the Goods and Services Tax (GST).

What is striking about this potted history is how little attention simplicity has received in past reform efforts. While the relative importance of different principles seems to wax and wane, ensuring the system is simple to understand, and simple to comply with, has not. Our history of tax reform seems to reveal the following judgements: Is simplicity desirable? Yes. Essential? No. Achievable? Absolutely not.

But I would question these judgements, for two reasons. First, if simplicity is not the focus of a review, it will never be achieved. A complex system is the result of trade-offs along various constraints that are only relieved — and then only briefly — during a reform process. Second, ironically and perversely, a simpler system is more likely to be equitable, efficient and better able sustainably to raise revenue.

Consider how we tax individuals on their personal labour income. For tax to be fair it should reflect all of the resources a person has available to consume. For income tax to be efficient, people should not face incentives to derive their income from certain sources simply for a tax advantage. And, obviously, the more sources of income that are taxed, the more sustainable is tax revenue. Yet, currently, there are more than 40 offsets which can reduce taxable labour income that make the system very complex. And I am not aware of any study that has explored comprehensively the equity implications of this entire set of offsets. The task remains in front of us to explain to people how replacing complexity with simplicity will benefit them directly and benefit the nation as well.

Lesson 4: Perceptions of equity matter a lot

My fourth lesson is that equity is a powerful and under-utilised argument for tax reform.

I have been in the tax reform business for a long time, and have had the opportunity to observe how people respond to different arguments put to them about tax reform. People tend to take a keen interest in information that relates directly to their own interests. For example, the distributional tables outlining the impact of the GST were the most 'thumbed' part of the documentation, certainly by those Treasury officers answering phone queries. Of course, it helped that every individual and family represented across all income levels appeared better off.

Appeals to self interest are a seductive means of prosecuting reform. Several submissions to the Review emphasise 'how much larger GDP will be', perhaps in the hope that many people will confuse GDP gains with increases in their wage rates. In this way, the argument seeks to buy support for a particular reform proposal.

Perhaps it does.

But there are also costs emanating from this line of argument. By following it, we feed the mistaken belief that policy analysts are simply crude materialists. Reform, of course, does not just mean increasing GDP or increasing real wages. I will revisit this topic in a moment.

But this line of argument also fails to appeal — it might even be distasteful - to those people who are concerned about their community and the impact of tax reform on others. Equity has a strong base in all religions, most philosophies, good economic textbooks, and in the pubs and cafes of every Australian suburb and country town. On the Left and the Right; among Catholics, Protestants, Muslims, Buddhists, agnostics and atheists; even among economists — Australians care about social equity. Many deeply so. Self interest is crucially important to people's attitude to tax reform — but I believe strongly that we underestimate the power of equity to promote worthwhile tax change.

This means equity, or perhaps more correctly, distribution, matters. While many people find the concept of efficiency amorphous or even alienating, re-framing the same issue on equity grounds can sometimes make a powerful case for reform.

One example is the fringe benefits tax (FBT) debate in the 1980s. To tax policy specialists, a clear efficiency case existed for FBT reform. Resources were flowing to businesses and industries better able to renumerate their staff in fringe benefits. But this argument was not the one that claimed the most column inches. The argument was won by highlighting how unfair it was for 'fat cats' to enjoy tax-free lunches. Such images are more persuasive than graphs illustrating national 'deadweight' or welfare losses.

Framing some modern day issues in distributional language might also make the case for tax reform more engaging. Removing barriers to labour market participation can increase GDP. But it can also be presented as alleviating poverty, by providing people with the means of social inclusion. For example, lone parents can face barriers to employment that can work against their longer term earning potential and their full social participation. A worrying trend is that, in the last year, joblessness among families with children increased at a much faster rate than joblessness generally. As Professor Peter Whiteford noted last week, joblessness among families with children is a major contributor to overall income inequality, and leads to poorer health, lower educational attainment, elevated financial stress and increased risks of violence for lone parents. His assessment is one that I agree with — that government policy needs carefully to balance shorter term needs for an adequate income with longer term needs for lone parents to re-engage with work during their child's preschool years.

Consider also the case for reform to housing assistance. There is strong demand for public housing, as it provides greater support than does rent assistance. But this contributes to access being rationed by queuing. Queuing for public housing can harm a person's wellbeing. While queuing, people have an incentive not to take on jobs that make their income exceed the eligibility threshold. Also, eligibility is generally tied to a house. This may be one of the reasons why people on public housing waiting lists have lower employment outcomes than those actually in public housing.8 Assistance based on an individual's need, that supports the development, rather than depreciation, of capabilities would more effectively target poverty — a more efficient social housing market means a more equitable one.

While I have referred to the importance of 'framing', I am not saying that equity should be used simply as a 'sell job' or to 'sell' reforms that are otherwise unpleasant. I am saying that equity is usually a more intuitive and, indeed, a more meaningful way for many in the community to understand and become interested in tax reform.

Tax reform doesn't just mean increasing people's incomes. It means improving resource allocation to address social problems. This can be done directly by using taxes to target social costs, such as discouraging congestion or pollution. Or, it can be done indirectly by using the tax dividend from higher GDP to fund spending needs. A larger tax base means an increased ability to fund better health and education services, and improved capabilities for the disadvantaged, and better roads. Couched in these more approachable terms, tax reform avoids being dismissed as an exercise in arcane statistical composition.

Lesson 5: Governments need effective tools to improve peoples' lives

My fifth, and last, lesson is that we need tax and transfer reform because we need to give our governments the right tools to cope with the big changes going on in the world.

Not so long ago it was respectable to argue that the best counsel for governments was that they 'do nothing'. The Global Financial Crisis may have changed this forever — I don't know. But when designing a tax and transfer system for the future, it would be prudent to anticipate that our governments of the future will feel compelled to do many things. This provides a case for developing effective and targeted policy instruments, ready to be used, when needed.

How can I be sure? Well, it has always been the case. Look at the amazing period of reform in the mid 1940s when the Commonwealth took over and expanded some State programs that continue today. This includes child endowment in 1941 and unemployment and sickness benefits in 1945. Such instruments are more effective at providing assistance to those in need than Victorian-era soup kitchens or ad hoc state government programs. Another example is the introduction of the superannuation guarantee in 1992 to respond to the pressures of an ageing population. Governments want policy instruments that can finance a dignified retirement. Today, the Carbon Pollution Reduction Scheme (CPRS) is another example of a targeted policy tool, designed to address a problem perceived to be of major importance. Whether you are a climate change sceptic or not, there is no denying that market-based mechanisms, such as the CPRS, are better than existing programs for reducing carbon emissions.

Without these instruments, one wonders what costly, inequitable and, most likely, ineffective alternatives governments would have adopted to meet their policy objectives.

Some of the existing State taxes provide a clue. Many of these taxes – such as those on insurance policies and the transfer of property and motor vehicles – are generally recognised as being highly inefficient, sometimes even by the States themselves.

Yet in the absence of less distorting, more broadly-based taxes, the States have continued to use them to finance spending on critical services such as hospitals, schools and police. These taxes may not be noticed by people as much as other taxes, perhaps because they are only paid irregularly, possibly at times when people are thinking about the benefits they might receive from buying the house, or car or insurance. But what should we make of the fact that the burden of these taxes actually falls quite heavily on people who are more disenfranchised — such as those needing to adjust their housing circumstances due to relationship breakdown; or people in the lowest income quintile who spend a higher proportion of their income on motor vehicle purchases than the highest quintile; or those who bear risk where they would prefer to be insured but aren't, because of tax.

Taxes levied on broader bases would be more efficient policy tools, probably more equitable and certainly more transparent ways of raising revenue. Without such tools, governments will continue to rely on bad taxes to achieve their spending objectives.

In the course of this review, the Panel has identified a number of future opportunities and challenges governments will want to address:

- the ageing of the population, posing challenges for the financing of retirement incomes and of increasing health and aged care needs;

- environmental degradation;

- globalisation, particularly the ability to attract and retain investment capital in a diversified industrial economy;

- technological change, including such things as the increasing opportunities to improve the productivity of road infrastructure;

- improving the federation, policy formulation and administration; and
the continuing effectiveness of government, including how well governments deliver affordable housing.

Governments will need modern tools to meet these modern challenges that lie ahead.

A conclusion: The goal is to improve wellbeing

This means evaluating reform proposals against the many dimensions that go into ensuring Australians have the capability to participate fully in society; that they are able to enjoy the freedom that comes with being able to make choices they have reason to value. The Review Panel considers that there is a set of tax and transfer reforms — compelling, clear, simple, fair and effective — that can, over time, deliver that goal. The tax and transfer system is not the only means available to governments to increase the wellbeing of our people, but it is surely the most important.

It is in that way I would like to think history might reflect on this particular tax reform effort.


Why push up rates at all? - Argy

In Club Troppo:

"A recent version of the Taylor rule specifies that the Federal interest rate target should have a threefold aim: (a) to curb inflation (b) to avoid excess unemployment and (c) stop prospective asset prices.

With a rising Australian dollar (and with an under-utilised labour market), there is little prospect of inflation, at least for the next year or so. If anything, underlying inflation seems likely to range around 2%.

It is widely forecast that Australia will continue to have at least 1.5% to 2.5% of excess unemployment and under-employment over the next twelve months.

A rise in interest rate will do nothing to relieve housing prices, as it only hits demand and does nothing for capacity. It is more likely to have a significant effect on share prices but these are still well below their peak level of December 2007.

So why is the RBA tipped to put up interest rates by as much as 1 percent over the next 12 months?"
Labels: reserve bank I met Douglas Adams once and interviewed him - a lovely, enthusiastic, sort-of sad man, who died much too young.

Now, at the request of Adam's wife, Eoin Colfer has carried on the legacy.

He found writing part 6 in the increasingly inaccurately-named trilogy a challenge:

It's title: And another thing.

The Guardian says:

"Within pages, it's clear this is a triumph. Colfer has pulled off the near-impossible. It's faithful to Adams's humour and, more important, it's also got his rhythm, the cadences and the footfalls that made his style so often (badly) imitated. But Colfer doesn't shy from introducing his own brand of wit, his own complex logic confettis. It's the work of an author who can write anyway, with a beautiful, vaulting imagination, and who obviously loves Adams's style so much he can echo it without falsity or accidental parody."

I want to know... does it bring back Marvin? ??
Labels: popular culture


New figures: we're clawing back wealth

From CommSec "Federal Treasury’s Modellers’ Database shows that Australia’s private sector wealth stood at $4,894 billion as at the end of June 2009, up 4.0 per cent over the quarter. It was the first increase in wealth in 18 months and the biggest increase in five years.

"CommSec estimates that per capita wealth stood at $223,400 as at the end of June, up $7,400 over the quarter. However over the year wealth has fallen by around $12,500 or 5.3 per cent. Wealth peaked at $250,055 in December 2007.

Unfortunately no detailed break-up is provided of the quarterly wealth figures calculated by Federal Treasury."

Labels: wealth

Peter Martin, The Conversation 

The best economics correspondent - Ross Gittins

At least he is consistent, consistently wrong - Jamie Briggs Twitter: @1petermartin Top Columns (Random) subscribe via rss