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Why the GST should not be increased

By November 19th, 2013 Uncategorized No Comments

Dr Maheswaran Sridaran

In the recent federal election, whether or not the GST should be increased was a central issue. Though both Labor and the Coalition did eventually adopt the same essential position—that the GST will not be increased until the next federal election—during the election campaign and after it, there has been considerable public discussion mainly on why the GST ought to be increased. That discussion, which has been based on economic policy analysis, has not, even in the slightest way, explored the deeper social and political policy implications of increasing the GST. A tax is not something that only has economic policy implications; a tax is, more importantly, something that has very deep social and political policy implications. Based on a review of the social and political policy implications, this article will argue that the GST should not be increased.

All taxation must, at best, be progressive: that is, those with a greater ability to pay tax should pay tax at a greater rate than those with a lesser ability to pay tax. Admittedly, those of the libertarian school of political philosophy oppose progressive taxation, as they hold that all taxation must be at the same rate, that is, not at graduated rates that increase corresponding to the taxpayer’s ability to pay the tax, but at one flat rate. That opposition to progressive taxation will be considered, and disposed of, later.

The reason why taxation which prevails in Australia must always be progressive taxation is because progressive taxation, in Australia’s context (irrespective of the context of progressive taxation in any other country), is not merely a technical construct of economic policy; rather, progressive taxation, in the context of Australia, is a foundational construct of social and political policy. That is absolutely clear from comments the attorney general, Mr William Hughes, made at the time legislation was introduced to enact the first federal income tax in Australia in 1915. Attorney general Hughes (who was later prime minister) said at the time:

[The federal income tax was] necessary to meet the great and growing liabilities created by the war.

But this is a graduated tax, distinguishing between incomes in such a way that the rate on small incomes is very much less than the rate on large incomes. The rate of tax increases as it proceeds, upon an even scale of graduation, so that each additional Sterling Pound of taxable income bears a higher rate of tax than that which precedes it.

The tax falls on the shoulders of the community in such a way as to bear most heavily on those who have an ample margin over and above that which is necessary to maintain themselves according to the station in which they live.

Those comments of William Hughes represent a very clear statement of social and political policy as to why taxation in Australia must always be progressive taxation. That policy can be explained in two complementary ways: in a society of decent customs, it is only decent that those members of the society with lesser means be asked to contribute a lesser share of their means towards the costs of the community than those with greater means; and in a decent society, inequality of economic means must be moderated in some way, given that control of economic means does almost always confer power to those who possess that control, and the inequality in the distribution of power among its citizenry can undermine a liberal democracy.

The merits of progressive taxation from the context of social and political policy, therefore, cannot be impugned. Those of the libertarian political philosophy, though, hold that the intervention of the government in the lives of individuals must be kept to an absolute minimum and, since taxation imposed on individuals constitutes such intervention, any taxation imposed must not discriminate between individuals; they accordingly hold that all taxation must be imposed at a uniform rate, that is, a flat rate. Libertarians, therefore, oppose progressive taxation.

One of the most authoritative defenders of the libertarian political philosophy was Noble laureate economics professor Friedrich A Hayek. In his most influential work The constitution of liberty, Professor Hayek said:

The task of erecting a barrier against abuse of progression is complicated by the fact that, as we have seen, some progression in personal income taxation is probably justified as a way of compensating for the effects of indirect taxation.

Professor Hayek’s statement should be understood as follows: Indirect taxes (unlike direct taxes) are regressive (that is, indirect taxes result in those with smaller means paying a greater share of their means as taxes than those with greater means); therefore, in order to compensate for the regressive effects of indirect taxes (such as the GST), direct taxes (such as the income tax) must necessarily be somewhat progressive.

Accordingly, if the GST is to be increased (either through an increase in the rate at which GST is imposed, or through a widening of the goods and services that are made subject to the GST), necessarily, there must be an increase in the progressivity of the income tax, that is, there should be steeper graduation in the rates of income tax. Any increase in the GST not accompanied by an increase in the progressivity of the income tax will necessarily make Australia’s tax system more regressive, a most offensive social and political policy.

From a social and political policy perspective, the GST is a tax that can never be preferred since the GST is a regressive tax. The GST is a regressive tax because those with smaller economic means spend a greater proportion of their economic means on consumption expenditure, and so pay a greater proportion of their economic means as GST, than those with greater economic means.

The GST, however, is a necessary tax, as those who illegitimately avoid paying income tax (and a sizeable number of taxpayers do so), will, at any rate, pay GST when they spend their incomes on consumption expenditure. The GST, therefore, is a necessary tax in Australia’s overall tax mix, but the incidence of GST (primarily, determined by the rate at which GST is imposed) must be kept low, given that GST is a regressive tax.

Australia’s federal arrangements underpinning the GST are not conducive at all to ensuring that the GST is maintained at a moderate level. That is so because the GST has been designated as a tax whose proceeds will be wholly and exclusively distributed by the commonwealth to the states. Given the states consequent heavy reliance on the GST, the states can (and do), therefore, exert great pressure on the commonwealth to increase the GST. The commonwealth has resisted that pressure to date, but it may well feel forced to relent in the near future.

Accordingly, Australia’s federal arrangements underpinning the GST must be amended at the earliest to exclude the obligation of the commonwealth to wholly and exclusively distribute to the states the GST revenue collected by the commonwealth. Such an amendment would remove the potential that currently very decidedly exists for the states to exert pressure on the commonwealth to increase the GST.

It follows that the income tax, imposed at progressive rates, must remain Australia’s principal tax. Despite there being no constitutional impediment for the states to impose their own income taxes, since the Second World War, only the commonwealth (and not any state) has imposed the income tax, which must remain exclusively a federal tax, as true progressivity can never be achieved in a state-imposed income tax; that is, for progressivity to be truly achieved, it is compulsory that the income tax remains exclusively a federal tax, imposed only by the commonwealth. The states cannot impose a proper progressive income tax as, should one state impose a progressive income tax, the residents of that state may relocate to another state which does not impose a progressive income tax or which imposes a less progressive income tax.

Dr Maheswaran Sridaran is a tax practitioner in Sydney. He is the author of “Are capital gains equitably taxed in Australia?”, published last year, his first book on Australian tax policy. These are his views and do not necessarily represent the views of The McKell Institute.

The high road versus the low road on productivity

By December 3rd, 2012 Uncategorized 6 Comments

Authored by Peter Bentley – Executive Director of The McKell Institute

First things first, let’s get Paul Krugman out of the way: “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

The reason the Nobel-winning economist’s quote is so often referenced is it distils the basic obviousness out of the challenge: if we don’t succeed in squeezing more outputs from the same inputs, then living standards in the long run will decline.

Australia’s productivity performance over the last decade has slipped. The reason our living standards haven’t followed suit is that our commodity boom and terms of trade boost have essentially covered for us. But it can’t last indefinitely – Australia’s terms of trade are likely to decline as the commodity price cycle runs its course.

Unfortunately, we have allowed the critical national productivity debate we should be having to be hijacked by those who are determined to bash its circular form into the square hole of industrial relations reform.

Lobbyist after lobbyist lobs up Australia’s poor productivity growth purely to facilitate the overhead smash of labour market deregulation: calls for cutting unfair dismissal laws, overtime, and other minimum standards.

These are solutions in search of a problem.

But this is no longer a debate we can afford to surrender to the sectional-interest-masquerading-as-public-interest vortex.

The new report released by the McKell Institute, ‘Understanding Productivity – Australia’s Choice’, comprehensively debunks a range of cherished myths surrounding our productivity decline.

The report, compiled by Professor Roy Green, Dr Philip Toner and Dr Renu Agarwal, finds no evidence to support claims that productivity decline has been a result of changes to Australia’s industrial relations regime or excessive business regulation. Indeed the period of most significant productivity decline in Australian coincided with the most radical deregulation of the labour market – otherwise known as WorkChoices.

Furthermore, the report shows that Australia’s multifactor productivity (MFP) decline over the last decade, far from being generalised, is the result of large falls in a small number of specific industries, notably mining, agriculture and utilities. Unprecedented capital spends in the mining industry, for example, have driven down our national MFP averages significantly.

It leads to the inescapable conclusion that the current lens we are using for our productivity discussion is the wrong one. So how should we change it?

Essentially, what we need to do is take a step back and acknowledge there are two distinct approaches Australia can take toward productivity improvement: a high road and a low road.

The low road involves cost cutting, further deregulation and, an almost certainly un-winnable race to the bottom. Sure, it might improve productivity, but the kind of society we will create won’t be the envy of many.

The high road, on the other hand, involves improving the education and training of managers and the workforce, creating efficiency gains through innovation, and better utilising the skills we currently have to their actual potential.

These concepts can appear woolly in the abstract, but consider, for example, the impact of technology has had on the world of work in the last decade. Video conferencing now allows meetings to convene from different corners of the country without half a day wasted getting to and from the airport. People have the capacity to follow up on emails while waiting for a late appointment, instead of simply re-reading the newspaper.

These are all productivity gains derived from innovation and changes to work practices.

And there are practical steps that government can take along this path, the recent announcement by the federal government of a $12 million Centre for Workplace Leadership to help bring about organisational and cultural change at a workplace level is a good example.

Although most of our Asian neighbours are at a quite different stage in their economic development – don’t think they don’t understand and seek the high road. They are already taking concrete steps to improve their living standards and become high-wage, high-skills economies.

If we opt for the low road to productivity growth, the 21st century will see us passing many of the nations in our region in terms of living standards – as we whiz by in the wrong direction.

Australia in the Asian Century: engagement or isolation?

By October 7th, 2012 Uncategorized 2 Comments
Analysing the past and present to determine the future 

In light of Australia’s victory in our bid for a non-permanent seat on the United Nations Security Council and the continued rise of the Asia-Pacific region as the economic, military and powerhouse of the world, this opinion piece considers Australia’s position in the region which will not only be crucial to our own interests, but also the peace and prosperity of the world.

As Australia moves into the 21st century, it is necessary for us to re-examine our priorities and develop a strategy of effective engagement with the Asian region. The old rhetoric that Australia’s geographic location and mineral resources will be enough to sustain long-lasting and deep relationships with our Asian neighbours is out-dated and against our interests. Our future peace and prosperity rests in the region, not separate to it. This piece will provide a broad overview of the history and politics of the region in order to establish the challenges and opportunities that Australia will need to deal with and embrace respectively. It will be argued that only through a dynamic and innovative partnership with the Asian that extends beyond traditional economic and diplomatic ties can Australia flourish in the Asian century.

Discussion about Australian foreign policy is impossible without reference to the alliance with the United States, enshrined in the ANZUS Treaty and the alliance’s impact on our engagement with Asia need to be examined. Both conservative and Labor Governments for over half a century have been committed to ANZUS for good reason. While some would argue that it is the sole bedrock of our security, it certainly represents a key plank of our broader diplomatic and strategic conduct, despite some tension in the Nixon-Whitlam relationship as President Nixon was weary of our loyalty given our establishment of full diplomatic relations with Communist China at the height of the Cold War (a decision which has since paid handsome returns to Australia).

The East Asian financial crisis of the previous decade confirmed the volatility of growth and economic stability in the region, in turn raising scepticism of multilateral processes to solve common issues by Asian leaders. Recently, the Global Financial Crisis has seen the collapse of major banks and financial institutions, high unemployment, unmanageable public debt and stagnant economic growth in the United States and most parts of Europe while Asia has been powering ahead, despite some turbulence, particularly in Japan’s economy. Nevertheless, as Australian political leaders are keen to emphasise, neither Australia nor the region is immune from the problems faced on the other side of the world, increasing the urgency of a more comprehensive regional framework for greater cooperation.

Nowadays, it is now common parlance to describe the situation as an historic shift of power from ‘West’ to ‘East’; commentary that would push Edward Said and scholars of his work on Orientalism – where he states that the Orient is a creation of the West through which the purpose is to maintain dominance – into an academic frenzy.

A common question posed by those analysing the direction of Australian foreign policy is how it will succeed in the context of the century of the Asia-Pacific. How Australia approaches its engagement with the region will shape both our security and prosperity for many years to come.

This poses a number of critical considerations for Australian governments of both political stripes to deal with. While there are indeed significant benefits to be reaped, a number of key challenges will need to be appropriately negotiated. Sometimes these may be in conflict with what is perceived to be our national interest, meaning there are no easy answers.

Our understanding of and appreciation for the region has been shaped over a number of years. Beginning at the Fall of Singapore in 1942, then the subsequent bombing of Darwin and the attempted invasion of the mainland through then Australian-controlled Papua New Guinea, it was high time for Australia to play a more independent role in international affairs. This was especially the case as the British Government had decided to sacrifice Australia in pursuit of its own interests in the Middle East, even attempting to refuse Australian soldiers permission to return to defend their homeland.  Since then, our connection to the region has grown to include economic, cultural and political ties, representing a ‘shift’ of focus to the Asia-Pacific. A lot has changed since the end of World War Two, which will be discussed henceforth.

The Hawke-Keating Governments, realising Asia’s growing military and economic might to add to its existing geo-strategic importance, began talking openly about Australia as a part of Asia. It was arguably around this time when Australia formulated its own unique form of foreign policy, an interesting blend of realism, seeking to pursue our economic interests and securing our borders; and liberal internationalism, playing an active role in solving issues by fostering greater multilateral cooperation. Thus our diplomatic modus operandi has since been that of a ‘creative middle power’, reflecting Australia’s relatively small population size, but great potential to assist in global peace and prosperity.

Highlighting this is the central role that Paul Keating played in developing the Asia-Pacific Economic Cooperation leaders’ forum, bringing together not only the states in our region, but the heads of government from key powers such as the United States, Russia, China and emerging power Indonesia. This was a major step forward. Similarly, one of the nation’s greatest achievements – indeed then-Foreign Minister Gareth Evans’ proudest accomplishments – was the negotiation of the Cambodian Peace Plan.

The myth of Australia needing to ‘choose’ either the US or China is simply that, a myth. Nonetheless, it does remain a dangerous proposition for Australia, should a future government take this course of action. History would suggest, perhaps even prove, that the relationship with the US has not been an impediment to the continued strengthening of links with our neighbours. On the other hand, it has even been identified as a positive factor, albeit from the perspective of realpolitik. This is demonstrated by the fact that it was mainly due to our northern Asian neighbours’ desire for a counterweight to increasing Chinese influence in the region that we were accepted into the East Asia Summit and the ASEAN Regional Forum, institutions that we had previously been pro-actively barred from joining. Herein rests the potential of Australia as a global middle power and regional leader.

The suspicions of China’s increased presence in the region are vast. Indeed, the reasons for these are to varying extents attributable to the self-interest of its neighbours and numerous historical and existing geo-political factors. Vietnam and China have previously fought a war and tensions remain. The case is similar with China and the Philippines having competing territorial claims in the South China Sea, and Beijing still has territorial disputes with Japan. The ‘Taiwan issue’ still lingers over Sino-American relations as the US has made clear that it intends to continue its arms trade with Taipei and it is still required by its own domestic law, the Taiwan Relations Act of 1979, to protect Taiwan in the event of any non-peaceful  hostilities. This is the case even though the nationalist Kuomintang candidate Ma Ying-jeou was recently elected President in Taiwan who, somewhat ironically, supports closer engagement with the People’s Republic across the Straight. Another regional issue that must be dealt with by the region is North Korea’s continued disobeying of requests by its sole economic lifeline, China, to cease its nuclear weapons program. This creates particular grievance for the Chinese politburo as it seeks to project its image as a responsible global power to the wider world. To be constantly rebuffed by an isolated, bankrupt, unstable and unpopular garrison state that is comparatively tiny economically, geographically and population-wise is certainly viewed dimly by Beijing and not likely to be something they will tolerate for much longer, despite calls by some commentators that China deliberately likes to keep Pyongyang as an ongoing headache for the West. China may arguably be in competition with the United States for influence in Asia, but it is certainly not going to risk playing proxy wars where the potential for serious unintended consequences is extremely high. In an interview with me earlier this year, former Australian Foreign Minister Gareth Evans noted his opposition to the theory that China wants a buffer between itself and the Western-ally of the South, stated that ‘China is always unwilling to be seen to be putting pressure on the North Koreans but in fact it has been a fairly steadying influence over the years and we shouldn’t underestimate its willingness to go on playing that role’.

Looking to Central Asia, there are ongoing political sagas playing out in Pakistan. Despite its long distance from Australia geographically, the consequences of unfolding events in the Central Asian state will be felt here at home, with the final icing on the cake being that it possesses up to a hundred nuclear weapons. Were the central government in Islamabad to implode, an Asian arms race would very likely ensue. Surrounding nations, primarily India, would understandably feel the need to increase military presence along the border and in the disputed Kashmir region. If India does it, then China would do it. The United States is still present in neighbouring Afghanistan and would take a dim view of any threats to its regional interests. If that weren’t enough, add to the equation the fact that Khomeini/Ahmadinejad-controlled Iran is within proximity, and you’ve got trouble. Four nuclear-armed states, with one’s political system is disarray; the presence of al-Qaeda; a nation run by zealots who are only too pleased to murder dissidents after fraudulent elections if needed; border disputes; regional realpolitik and a lot of natural resources all potentially spell trouble, especially should the delicate situation be unravelled by the fall of stable governance in Pakistan. Australia would inevitably be drawn into the equation in such a scenario, which would place it in a tricky position as Canberra seeks effective diplomatic relations with all aforementioned countries, however would rightly feel the need to pro-actively ensure the stability of the region. This could include measures such as commitment of military forces, support for sanctions at the United Nations or a mediatory role. While all of these avenues can be taken consistently with our values and could gain us credibility in the region, Australia would not want to be offside with any nation when it can be avoided.

Finally, the potential for serious conflict between China and India, two nations which have previously fought a war in 1962 and came close to a second Sino-Indian war after a brief Chinese incursion into northern Indian territory in 2009, should not be understated. India has announced that it will send an additional 100,000 troops to the China-India border over the next five years. This would pose an undesirable public policy dilemma for Australia, because while economic relations with the two are healthy and growing, our diplomatic partnerships have experienced tense periods. Supporting one would mean a break-down in relations with the other, with the economy being the main loser in such a scenario. Thus, our intention would be to play a mediatory role in any way we could, a task we could well be called upon to undertake. Again, our influence as a middle power and regional leader mean that we could indeed be a positive actor and a true test of our values on the international stage.

Recommendations

1. Australia must seek to be a part of Asia culturally, diplomatically and economically, not just geographically. This includes an increased emphasis on citizen diplomacy, through measures such as high-school exchange programs, cultural study tours and tourism. Once trust is built between nations’ people and friendships are formed, it’ll naturally become part of their government’s strategy over time to cooperate peacefully.

2. Being a regional major power comes with great responsibility and doesn’t give us the right to directly control, or seek to control, the domestic politics of smaller states. Australia has proven through peacekeeping efforts and natural disaster responses that it is capable of effective leadership that serves both regional and national interests. We won widespread and well-deserved respect for our intervention in Timor-Leste during their fight for independence, because we sought to build a regional coalition for action and lead it successfully. Australia also played a positive role in Burma’s democratisation by being one of the first countries to remove sanctions and assisting the nation through the process. Initiatives such as these must continue.

3. While Australia has at various stages of its history realised that despite their importance, Great Britain and the US are not the only countries that matter to us, we must also remember that Asia does not necessarily revolve around Beijing. China is a superpower (the ‘emerging’ tag can be dropped now) but it is not the only powerful or ambitious Asian country. In fact many nations, as previously illustrated, are weary of or even openly hostile to increased Chinese influence, or interference, in the region. As Dr Ruan Zongze of the Chinese Institute of International Studies recently said, China itself considers the Asia-Pacific region to belong to every nation within it, not just a single country, and also that the region is incomplete without Australia.

4. Following on from the previous point, Australia’s Asia policies must be dynamic because the region is dynamic. All countries are different due to a range of economic, cultural, religious, linguistic, ethnic considerations. As such, a broader ‘Asia’ policy must be carefully crafted for each individual nation with which we engage. We would otherwise risk being perceived as either superficial or just plain stupid. An example would be that while our relationship with Japan is adequately robust and our democratic principles are similar enough to openly criticise their policies on whaling, such public criticism of other Asian states’ policies such as Indonesia and Vietnam would be rather inappropriate due to existing and historical political factors. At the same time, where there is clear evidence of serious human rights abuses, Australia must stick to its principles and speak in support of those being unduly persecuted for whatever reason. However, we must note that Asian states are weary of outsiders, particularly Western nations, engaging in ‘megaphone diplomacy’ on human rights issues and that such actions can be counterproductive, as Bill Clinton’s well-intended efforts to publicly call on Indonesia to halt violence in East Timor proved.

5. Engaging in ‘aid wars’ in the Pacific is not in our long-term strategic or moral interests. In fact, this is an area where we can demonstrate our sincerity and build on the trust and esteem our neighbours regard us in. The anarchic international political system means that trust and respect are invaluable assets for any nation, especially a regional power. China and Taiwan are already engaged in such a battle, and while the governments of Pacific Island states may enjoy the perks in the short-term, they would be fully aware that the aid money is simply part of a political game rather than a long-term commitment to development. Also, Vanuatu’s recent assertive expulsion of two Federal Police officers due to a diplomatic stand-off highlights the fact that no amount of aid or power can ‘buy’ another nation. Whether or not we are represented on the United Nations Security Council, we should always stand up for the concerns of small island Pacific states in the various international for a with which we engage.

6. We must not be under an illusion that our partnerships with China and the US lead to a zero-sum scenario. We can and must maintain strong links with both while not compromising on our core principles. This may not suit the self-interest of either Beijing or Washington, but Canberra must make foreign policy decisions that advance Australia’s interests. A perfect example is that despite rhetorical objection to US Marines training in Darwin, this has not hampered deeper military engagement with the Chinese People’s Liberation Army, which has actually grown stronger in recent times.

7. In addition to the traditional areas of engagement, we must explore areas of cooperation in other areas that will affect our region in the long-term. Whether these issues affect us negatively or not will depend on how they are tackled. Such topics include food and water security; refugees and irregular people movement; climate change and environmental protection; health epidemics; cyber-security; emergency management and human rights promotion.

8. Domestically, we can demonstrate our willingness to be an independent nation that is pluralistic and respects many cultures. This would not only advance harmony and unity amongst Australia’s ethnically-diverse population, but also gain us widespread credibility around the region. For instance, Asian tertiary students would know that they will be welcomed to Australia with open arms, as well as receiving a world-class education. Two steps we should take include firstly, becoming an independent republic. As Evans makes clear ‘there’s definitely a widespread perception around the region that it’s very, very odd for a country to have as its Head of State someone living half a world away and in the Australian context in particular, it certainly does reinforce the lingering perception that Australia is still a prisoner of its history rather taking advantage of its geography’. Secondly, we must remove the remaining discriminatory Sections within our Constitution, Sections 25 and 51(xxvi), to make it absolutely clear that Australia has moved beyond the ideology of White Australia which viewed Asian migration as a threat. Most importantly, it would speak volumes about our national character, meaning that we walk the walk when it comes to discussing human rights.

Conclusion

This piece is intended to generate discussion about Australia’s engagement with the region. Given the extensively complex and dynamic nature of the Asian region, it is not feasible to describe what Australia’s response should be to each and every hypothetical issue that could arise in such a short space. Indeed, the region will have changed to an extent by the time this is published, reflecting its dynamism. With the overall history and context provided, it is hoped that Australians will form a more nuanced and positive perspective of our place in the Asia-Pacific.

Having travelled extensively throughout the region, I have spoken to many people at bus stations, taxis, hotels and people in rural villages and the reception I have received as an Australian, and their impressions of Australia, are overwhelmingly encouraging, even in places where I thought it’d be a bit more challenging, such as in Pakistan and Vietnam. There is huge scope for Australia to not only vigorously advance its national interest but to also help achieve a safer, more prosperous and cohesive Asia-Pacific. Such an outcome is not simply a choice but a necessity, and there is a lot of work ahead of us.

Francis Ventura is a visiting researcher at The McKell Institute. These are his views and do not necessarily represent the views of The McKell Institute.

Will the housing affordability crisis in Sydney get better?

By September 18th, 2012 Uncategorized 23 Comments

Sydney is Australia’s most expensive city and the world’s third least affordable city to buy or rent a home.

The median weekly rent for a house in Sydney is $500 and the median price to purchase a home is $642,000. Compare this to the much more affordable Melbourne where median rent is $360 and the average house is $531,000.

Data recently released by the McKell Institute indicates that  Sydney has completed only around 60% of the dwellings needed to avoid a deeper housing affordability crisis over the last 5 years.

Since the beginning of the Sydney Metropolitan Strategy period (1 July 2006) until the first quarter of 2012, Sydney should have delivered 133,975 new homes.

However, over this period Sydney has delivered only 80,466 new homes, a deficit of 53,509 homes (or roughly 40%).

There are some green shoots in Sydney’s housing market and the NSW Government has released new plans aimed at building more homes in Sydney and improving affordability.

What are your experiences in Sydney’s housing market, either renting or buying?

Do you think the dream of owning a home in Sydney is becoming unachievable and unrealistic?

What are your solutions to improving housing affordability in Sydney?

Tell us what you think.

Why progressivity of the income tax must be increased

By June 27th, 2012 Uncategorized 4 Comments

Dr Maheswaran Sridaran

Income inequality in Australia must be moderated. That is because income inequality causes a number of social ill effects and undermines political democracy. The reasons for moderating income inequality, which are very compelling reasons, are, accordingly, social and political, not necessarily reasons founded on economics.

A principal way for moderating income inequality is for increasing the progressivity of the income tax: that is, those with high incomes must be required to pay income tax at a much higher rate than they currently do. It is common to argue that such a policy would impede economic efficiency. In other words, some argue that such a policy will distort the decisions made by those who make up the Australian economy as to how they work, invest, and save. Such an argument may have some substance, but it is not an argument that can prevail. It cannot prevail because the reasons for moderating income inequality are dictated by societal wellbeing and political democracy, reasons which are not subordinate to economic policy. Economic policy must serve to better societal wellbeing and political democracy, which are of higher supremacy in importance to the Australian polity. Societal wellbeing and political democracy, accordingly, cannot be compromised to promote economic efficiency.

There is an argument mooted by some that a progressive income tax must be replaced with a flat tax, or that the progressivity of the income tax must be decreased. They argue that a flat tax will result in those with higher incomes paying a greater amount of income tax than those with lower incomes, and consequently the objective of progressivity is met, which is that those with higher incomes must pay more tax than those with lower incomes. Such an argument relies on an incorrect definition of what progressivity of tax means, as progressivity of tax, in its proper sense, means those with higher capacity to pay tax must pay tax at a rate higher than the rate at which those with a lower capacity pay.  Such an argument also does not stand up to close scrutiny.

The most comprehensive and most authoritative study on why a progressive income tax is necessary was carried out by two professors in the USA in 1953. The two professors were Walter Blum and Harry Kalven. Their study was published as a book titled The Uneasy Case for Progressive Taxation, which has endured as a classic in tax literature. It was a study completely free of preordained ideological preferences on the part of any of its two authors. The authors reached the unequivocal conclusion that progressive taxation in the USA is a necessity. They, however, reached that conclusion, as the title of their study demonstrates, with proper regard to all arguments against progressive taxation. They reasoned that:

… ultimately a serious interest in progression stems from the fact that a progressive tax is perhaps the cardinal instance of the democratic community struggling with its hardest problem.

What Blum and Kalven meant was that, if a nation is to remain a genuine democracy, to ensure that each person of that nation has the same political power as the other, those who are more wealthy must be prepared to part with some of their wealth, however hard and inconvenient they find doing so, so that a share of their wealth can be given to the less-wealthy, to ensure that they are afforded the same political power as the wealthy.

Blum and Kalven are not alone. Richard Musgrave, a long-time professor at Harvard University, widely regarded as the foremost public finance economist of the last century, concluded:

In my view, [the social welfare function] should reflect the … premise that the issue of distributive justice is not settled by innate entitlement to market earnings, but calls for a rule of fairness to be reached by social consensus. My voice in that consensus would reflect a view of the good society in which excessive inequality is avoided.

Musgrave reached this conclusion in a paper published in 1991 titled Social Science, Ethics, and the Role of the Public Sector. His conclusion can be paraphrased thus: To ensure distributive justice prevails in a society (that is, every member of that society being possessed with equal political power), that society must reach a consensus that there will be a transfer of wealth from the wealthy to the less-wealthy as, absent such a transfer, the distribution of wealth resulting from a free market will cause excessive inequality among those in that society.

Australia imposes a large number of regressive taxes, that is, taxes which the less-wealthy pay as a greater proportion of their incomes as compared to the wealthy. GST, for instance, is imposed on most goods and services consumed by Australians. Less-wealthy Australians spend a greater proportion of their incomes on consumption, and therefore pay a greater proportion of their incomes as GST. The wealthy pay GST of a smaller proportion of their incomes as, because their incomes are higher, they spend a smaller proportion of their incomes on consumption. GST is not the only regressive tax Australia has. There are very many other regressive taxes, imposed at all three levels of Australian government: federal, state and territory, and local.

Given such regressive taxes, in order to compensate the less-wealthy for the impact of those regressive taxes, Australia’s income tax must be more progressive. Admittedly, the highest rate of income tax must not be increased to an extent of such severity as to seriously impede economic efficiency. There is scope, however, to add a higher rate of income tax, fixed between 50 and 60 percent of taxable income, payable by wealthy individuals, and to increase the rate of income tax payable by large companies to 40 percent of taxable income. At present, the highest rate of income tax paid by individuals is 45 percent, and all companies pay income tax at 30 percent. There is scope also to introduce in Australia a progressive wealth tax and a progressive gift tax. Such measures would increase the progressivity of the Australian tax system, which is a necessity to moderate income inequality. The absence at present of any progressive tax on wealth and on gifts seriously retards the progressivity of the Australian tax system.

A doyen of free-market capitalism, Nobel-laureate economist, professor Friedrich A Hayek, conceded, in his highly influential work, The Constitution of Liberty, published in 1960, that progressive taxation is a necessity. He conceded so in the following terms:

… The task of erecting a barrier against abuse of progression is complicated by the fact that … some progression in personal income taxation is probably justified as a way of compensating for the effects of indirect taxation [that is, regressive taxation]. Is there a principle which has any prospect of being accepted and which would effectively prevent those temptations inherent in progressive taxation from getting out of hand? Personally, I do not believe that setting an upper limit which progression is not to exceed would achieve its purpose. Such a percentage figure would be arbitrary as the principle of progression and would be as readily altered when the need for additional revenue seemed to require it.

Hayek, accordingly, conceded that progressivity of the income tax is necessary to compensate for the regressive incidence of other taxes, and that the degree of progressivity of the income tax is always a political judgement, as what that degree ought to be cannot be established with any scientific precision.

On close scrutiny, therefore, there is no sustainable case—libertarian, liberal, or centrist—that can be made against increasing the progressivity of the Australian tax system, which is a necessary policy measure that must be implemented for moderating income inequality in Australia.

Dr Maheswaran Sridaran is a tax practitioner. He was previously a university academic who taught Australian tax law. His work has been published in prominent Australian newspapers and journals. These are his views and do not necessarily represent the views of The McKell Institute.

 

 

 

Why income inequality must be moderated

By May 22nd, 2012 Uncategorized 2 Comments

Dr Maheswaran Sridaran

The predominant economic model practised in the world today is free-market capitalism. It is the economic model which has, in all human history, resulted in the creation of the greatest wealth. It therefore has its merits. Chief among them is its propensity to impel human initiative in pursuit of material gain for one’s self, which is a cogent incentive indeed. It rewards, however, only those who are able enough to compete and prevail. Those who can, amass riches. Those who cannot, that is, those who are too weak to compete and prevail, fail, and can fail hopelessly.

Free-market capitalism, therefore, results in some people having high incomes, and others having low or no incomes. That is an outcome with far-reaching ill consequences.  That such consequences do exist must be recognised if the harshness of their impact is to be mitigated though sensible policy measures.

Richard Wilkinson and Kate Pickett, both professors in the UK, in their 2009 book “The Spirit Level—Why More Equal Societies Almost Always Do Better”,  conducted an investigation of the correlation between income inequality and social wellbeing. Wilkinson and Pickett analysed a number of indices of societal health and development across 23 wealthy countries and all states of the USA.

The countries covered in their study included: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the UK and the USA.

They used the following indices of those countries as measures of societal health and development: mental illness (including drug and alcohol addiction), teenage births, homicides, incarceration, infant mortality, life expectancy, level of trust, educational performance of children, and social mobility.

The following are some of the key conclusions which the authors drew:

  • The wellbeing of children of parents with low incomes is poor, and the prospects for advancement during the life of those children are retarded due to their disadvantaged upbringing.
  • Trust among members of a society can be low where that society is one where income inequality is high.
  • The empowerment of women is low in a society with high income inequality compared to one where it is low.
  • Mental illness is relatively high in societies with high income inequality.
  • Illicit drug use in a society is positively related to the high income inequality in that society.
  • Countries with less income inequality have a relatively low rate of infant mortality.
  • The positive correspondence between a society’s rate of homicide and incidence of incarceration and the income inequality of that society is, indeed, quite strong.
  • Maths and literacy scores are higher in countries with less income inequality.

The book by Wilkinson and Pickett was very widely debated. It was reviewed well by a large number of authoritative critics, but was also critiqued by others as not adequately making the case that it was income inequality which was causative of the societal ill effects that the authors had observed. In other words, those critics argued that the societal ill effects observed by Wilkinson and Pickett were perhaps not necessarily the result of income inequality in those societies.

That inadequacy of income, or more specifically, poverty, can cause the societal ill effects observed by Wilkinson and Pickett is a point that is harder to refute. In other words, some being rich in a society is unlikely to cause those societal ill effects; what can cause them, is some being poor. The alleviation of poverty, accordingly, is the fundamental issue that warrants a policy response, which must necessarily embrace measures aimed at redistributing wealth from the wealthy to the less-wealthy.

All the social ills canvassed by Wilkinson and Pickett  do translate into real economic costs:

  • Poor health and poor education keep the productivity of a nation’s workforce significantly lower than they otherwise would be.
  • A society whose members trust each other less will have higher costs in consummating transactions.
  • Where some are disproportionately richer than the others, those that are richer can deploy their wealth to secure political outcomes that the others cannot, perverting the course of democracy.
  • Inadequacy of consumption (those who are rich consume a smaller proportion of their incomes compared to the poor) is not helpful to propelling growth in employment during times of economic recession.

That these social ills do translate to real economic costs is evidenced by a number of authoritative academic studies. Sir Michael Marmot, a professor of epidemiology and public health at University College London, in an article published in 2006, argued that there is greater prevalence of ill health in the USA compared to the UK, which he attributed to the greater inequality in the distribution of wealth in the USA (compared to the UK) and the consequent heavier mental stresses of those living in the USA experience.

In 2004, Jong-Sung You, a graduate student at the Kennedy School of Government at Harvard University, and Sanjeev Khagram, a Professor of Public Affairs at the University of Washington in Seattle, published a survey of 129 countries, in which they argued that income inequality can engender corruption, especially in countries which are democracies, as in them there was potential for political influence to be secured in exchange for wealth.

As the wealthy become wealthier, they can acquire greater political influence, and they indeed do, to ensure the enactment of policies that support them becoming even wealthier at the detriment of others. That was the conclusion reached by Edward L Glaeser, a professor of economics at Harvard University, in a paper which he published in 2005.

Drawing on the work on fairness by Daniel Kahneman, a Nobel laureate in economics, Steven Pressman, a professor of economics at Monmouth University in West Long Branch, New Jersey,  argued in 2006 that income inequality can lower productivity and reduce economic efficiency. Pressman reasoned that the widespread corporate practice of awarding substantial remuneration to senior executives while insisting on no pay increases, or even pay cuts, to rank-and-file employees will make the latter feel hopeless and may lower their motivation and thus productivity.

In 2004, the American Political Science Association appointed a taskforce to report on the impact of wealth inequality on American democracy. The taskforce comprised 15 academics from the following universities in the USA: University of Minnesota, University of Maryland, Princeton University, Harvard University, Stanford University, Yale University, Notre Dame University, George Mason University, University of California (Irvine), Syracuse University, Northwestern University, University of Illinois (Urbana-Champaign), and Boston College. The taskforce, in their report, unanimously drew the following telling overall conclusion with respect to their country, and it is a conclusion that we in Australia must heed, as our country is a liberal democracy not essentially dissimilar to the USA:

“Equal political voice and democratically responsive government are widely cherished American ideals. Indeed, the United States is vigorously promoting democracy abroad. Yet, what is happening to democracy at home? Our country’s ideals of equal citizenship and responsive government may be under growing threat in an era of persistent and rising inequalities. Disparities of income, wealth, and access to opportunity are growing more sharply in the United States than in many other nations, and gaps between races and ethnic groups persist. Progress towards realizing American ideals of democracy may have stalled, and in some arenas reversed.”

The solution is not the abandonment of free-market capitalism. That would be foolhardy. The solution lies in two broad policy measures. First, there must be an optimal degree of progressivity in the nation’s tax system. Those who are wealthy must, accordingly, be made to pay a greater proportion of their wealth as taxes relative to those who are not wealthy. Second, expenditure programmes undertaken by government must confer benefits not on the wealthy, but on the less-wealthy. The entitlement to benefit from those programmes must, accordingly, be means-tested, unless there are overriding reasons why access to a programme must be made universal without means-testing.

Dr Maheswaran Sridaran is a tax practitioner. He was previously a university academic who taught Australian tax law. His work has been published in prominent Australian newspapers and journals. These are his views and do not necessarily represent the views of The McKell Institute.

 

Is it possible to have an efficient public transport system in NSW?

By July 25th, 2011 Uncategorized 13 Comments

Public transport in New South Wales can leave much to be desired.

We are often compared unfavourably to cities in Europe and Asia which appear to have seamless and effective public transport systems.

We often despair at our overcrowded trains (if you are fortunate enough to live near a train line) and buses.

But perhaps the problem is the design of our cities. We live in sprawling cities like Sydney, Newcastle and Wollongong that continue to expand geographically but without the population density of European and Asian cities that make infrastructure development financially viable.

Does this mean it is actually impossible to ever effectively service our cities with trains or buses, let alone light rail?

Should we instead refocus our energies on building better roads? Building more motorways, with more lanes, more adequate parking at end destinations, carpooling programs and fuel efficient cars?

Or is the ‘our cities are different’ argument just a convenient excuse for a sub-standard public transport system?

How do you travel? Would you rather be travelling in a different way?

What do you think?

Sydney: Should we stay or should we go?

By July 25th, 2011 Uncategorized 6 Comments

It’s expensive to live in Sydney. Recent surveys have shown it’s one of the most expensive cities to live in around the world.

But what is the solution? Should we be helping people that live in Sydney to pay the bills and make ends meet – or should we be helping them to move out?

The NSW Government recently introduced a $7,000 one off grant for Sydneysiders that move from the city to regional NSW.

The idea is to encourage economic and population growth in regional NSW.

Many would agree that properly managed decentralisation is a good thing. Less people on Sydney’s crowded public transport, more people breathing a new sense of life into struggling rural towns.

But what if Sydney loses the people we need most?

In London, a city which has struggled with cost of living pressures for decades, an additional allowance called the ‘London Weighting’ is paid to public servants, teachers, police and other government workers who live in London.

The goal? To ensure key workers like teachers and nurses who are hit by high cost of living pressures don’t leave London and move to much more affordable regional England. We hear more and more reports of critical workers that commute from Wollongong or the Central Coast because they can’t afford to live in the Sydney suburbs in which they work. Is it time to consider introducing a ‘Sydney Weighting’?

Could such a policy work hand in hand with the new relocation incentive – or is it one or the other?

What do you think?

Welcome to the McKell Forum – what do you think?

By July 25th, 2011 Uncategorized 13 Comments

Welcome to the McKell Forum.

The McKell Forum aims to provide a meeting place for ideas, opinions and discussion. Our view is that the more people think about ways to make our community a better place to live and work the better.

So, with that in mind, let’s start our first McKell Forum on that topic.

If you could change one thing about your community to make it a better place, what would it be? And how would you achieve it?

What do you think?