Working Papers

When Costello Attacks

Treasury costings of Liberal MHR Malcolm Turnbull’s tax reform proposals purport to show a greater cost than allowed for in Turnbull’s discussion paper.  This analysis somewhat misses the point that meaningful tax reform should come at a cost to revenue.  That these costs might be greater than assumed by Turnbull is not in itself an argument against the proposed reforms.  Analysis by the Melbourne Institute shows an expected increase in labour force participation from the tax reform proposals of both Turnbull and Labor MHR Craig Emerson.  Increased labour force participation is meant to be a key objective of government economic policy and yet the Treasurer shows no interest in tax reforms that might be helpful in realising this goal. Hiding behind Treasury costings does not conceal the fact that Treasurer Costello remains a policy-free zone when it comes to tax.

Perhaps the biggest mistake the tax reform debate has made to date has been to assume that tax cuts can only be funded out of the surplus, rather than through net reductions in government spending, particularly the welfare churn that sees many middle-income households paying no net tax.

posted on 11 October 2005 by skirchner in Economics

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agree mostly.

I am familiar with FTB and this is a joke concerning protecting people who are on the periphery of society.

If howard hadn’t lost his nerve last election and spent all that money greater tax reform could have been considered.

Also why can’t Treasury let us have better information of how much tax reform could be?

Because this would pressure a ‘conservative’ government to do it!

Posted by .(JavaScript must be enabled to view this email address)  on  10/12  at  08:35 AM

I’ve lost all respect for Costello recently.  He clearly doesn’t have the stomach for further tax reform, and spends his days wasting treasury resources to shoot down others (Turnbull, Emerson et al) who are putting forward constructive ideas.  But then, can we expect more from the man that introduced the idiotic Ralph reforms?

The middle-class welfare churn must be grossly inefficient.  I hate to think how much money is being wasted there.

BTW, can anyone guess who said this in Parliament on 22/9/99:

“If you asked a prospective tax avoider what sort of income tax system they would want in Australia, they would say they want one personal income tax rate, a separate company income tax rate and a separate rate for capital gains tax. Out of the recommendations of the Ralph review, that is what this government is planning to. It is planning to give the tax avoiders in this country more complexity. It is planning to give the tax avoiders three separate tiers of income tax rates.

We know what the likely outcome will be—people will shift around their tax arrangements to suit the various rates. They will shop around within those rates for the best chance to minimise their tax commitments. Further, if you were to ask someone how to most substantially hurt the knowledge economy in Australia, they would say, ‘Provide tax incentives to move economic effort from trading income to asset trading.’ Again, what is this government proposing to do out of the Ralph committee? It is proposing to do the thing that tax avoiders want. They want incentives to move out of trading income into trading assets. They want the opportunity for property and asset speculation in the Sydney land market rather than a taxation system which promotes value adding in the information technology sector.

The member for Rankin outlined some of his concerns about the Ralph review. Let me say that my prime concern is that it will add, through these shoddy capital gains tax proposals, to the great Australian disease of asset and property speculation, particularly in our big cities. It will take away resources from the knowledge economy and put them into the least productive, least honourable aspects of Australian economic activity.”

Posted by .(JavaScript must be enabled to view this email address)  on  10/12  at  10:00 AM

you are too kind to costello. hes not a policy free zone, hes actively blocking good policies from members of his own party.

Posted by .(JavaScript must be enabled to view this email address)  on  10/12  at  10:14 AM

Perhaps the biggest mistake the tax reform debate has made to date has been to assume that tax cuts can only be funded out of the surplus, rather than through net reductions in government spending, particularly the welfare churn that sees many middle-income households paying no net tax.

What about the massive “churn” in financial markets? It seems that the value of all financial transactions is more than an order of magnitude more than that required to cover each industrial action.

Just because financial marketeers are “consenting adults” does not make it right. Cartelists, sado-masochists and polluters are all consenting adults whose activities we would like to constrain.

The spill-over instability effects of financial speculation can also be drastic. Remember the the Japanese Bubble, Asia Crisis, dot.com, Enron-coms?

Buffet estimates that that around 3% of Fortune 500 earnings go to pay the “frictional costs” for all these churners. Pretty Big Bucks in the US context:

If you and I were trading pieces of our business in this room, we could escape transactional costs because there would be no brokers around to take a bite out of every trade we made. But in the real world investors have a habit of wanting to change chairs, or of at least getting advice as to whether they should, and that costs money—big money. The expenses they bear—I call them frictional costs—are for a wide range of items.
And what do they come to? My estimate is that investors in American stocks pay out well over $100 billion a year—say, $130 billion—to move around on those chairs or to buy advice as to whether they should! ... In other words, investors are dissipating almost a third of everything that the FORTUNE 500 is earning for them—that $334 billion in 1998—by handing it over to various types of chair-changing and chair-advisory ‘helpers.’

And on the subject of effectiveness, equitability and efficiency of welfare expenditure, I would not be putting too much faith in the privatization of community services. Macquarie Bank is an example of what happens when public utilities fall into private hands. And Ken Arrow estimated that the largely private-owned US health care system costs about 30% more than the EU average, per patient cared for.

Posted by Jack Strocchi  on  10/20  at  01:23 PM

The real world of “churn”.

the available figures do point to galloping growth in the global operations of financial firms. In the early 1980s, the volume of transactions of bonds and securities between domestic and foreign residents accounted for about 10 per cent of gross domestic product (GDP) in the United States, Germany and Japan. By 1993, the figure had risen to 135 per cent for the U.S…Much of these transactions were of bonds of relatively short maturities.

Since then not only have these transactions increased in volume, but a range of less traditional transactions have come to play an even more important role.

...In 2003, the value of world merchandise exports touched $7.3 trillion, while that of commercial services trade rose to $1.8 trillion. Thus, the daily volume of transactions in foreign exchange markets exceeded the annual value of trade in commercial services and was in excess of one quarter of the annual merchandise trade.

More significant is the trade in derivatives. The Triennial Survey indicates that the…total derivatives trading stood at $5.7 trillion a day, which together with the $1.9 trillion daily turnover in the foreign exchange market adds up to $7.6 trillion. This exceeds the annual value of global merchandise exports in 2003.

Posted by Jack Strocchi  on  10/20  at  01:43 PM

sado masochists are consenting adults and we dont want to restrict their actions.

polluters are adults but the cost of their pollution sometimes is borne by others, who do not consent. unfortunately your example doesn’t fit the model.

we never want to restrict consenting adults. we sometimes want to restrict the actions of adults when the costs of their behaviour are borne by others who do not consent (eg pollution)

Posted by .(JavaScript must be enabled to view this email address)  on  10/20  at  02:39 PM

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