Menzies House

Senate fun’n'games

A well constructed review by economist John Humphreys regarding the appropriately named "Senate fun and games".

Read More:

http://johnhumphreys.com.au/2013/08/20/senate-funngames/

Joe Hockey, Political Lies & Bank Regulation

Economists Dr. Joe Clark and John Humphreys analyse Joe Hockey's economically illiterate calls for the RBA to 'act as referee' on bank interest rates, and conclude that they really, really hope he's lying and doesn't mean what he says:

We hope that Joe Hockey is a liar. We can understand why a politician would want to bash banks, and we can understand why a politician would want to promise more regulation to control the “naughty market”. Both of these are populist positions which hit the political funny bone, and score cheap points.

It is no surprise that Wayne Swan regularly complains about evil bank profits, and we’re sure the Greens (and other assorted reds) would eagerly agree to more regulation. But while we can understand the political desire for populism, when it actually comes to managing the rules for our economy, we can only hope that Hockey is not serious about his stated desire to have the RBA act as referee on interest rates.

We already know that Joe Hockey wanted to introduce a psuedo-national bank, and he wanted more regulation to ensure that banks gave more risky loans, and also gave fewer risky loans. 

Now the issue is whether banks should be able to set their own prices for loans. To be fair, Hockey has only suggested that the Reserve Bank of Australia (RBA) should nudge banks, but given his track record on not understanding finance it’s a dangerous start. It hints very much towards government regulation of interest rates, which is price fixing of some of the most important prices in the economy.

Farmers, miners & private property rights

Menzies House Editor in Chief John Humphreys looks at Tony Abbott's comments that farmers should be able to control access to their land:

 The debate about mining on agricultural land has long frustrated me. While one side argues to help the “farmers” and the other side wants to help the “miners” it seems everybody has abandoned the most obvious solution — clear allocation of private property rights. As nobel prize winner Ronald Coase explained, conflicts over resources can be solved by allocating private property rights and then allowing trade so that the resources end up going where they are most valuable.

So my suggested approach to the mining/farming debate has been to strengthen the private property rights of farmers so that they have the “right to say no” regarding access to their land. Miners can then deal directly with farm-owners to come to mutually beneficial deals regarding access. Unfortunately, this approach has been ignored by both sides of politics. Until now.

Yesterday Tony Abbott supported the idea that farmers should be able to control access to their land. The Courier Mail reports him as saying: “If you don’t want something to happen on your land, you ought to have the right to say no.” Good stuff.

Abbott goes on to say that he wants a review of foreign investment rules, which I think is unnecessary. But the main point is that the “market solution” is now on the table.

The government immediately came out against the idea, claiming that it would put mining investment at risk and would lead to less revenue for State governments (mining royalties will bring in $2.8 billion for the Queensland government this year). But this misunderstands how a market works. Giving farmers the right to say “no” doesn’t mean that they will say no. Indeed, the likely outcome is that the vast majority of farmers will say “yes”… but only at the right price.

Economic troubles & the decline of social democracy

Menzies House Editor in Chief John Humphreys examines the global economic situation:

 The most surprising thing about the economic troubles around the world is that they are considered surprising. The economic story is actually quite simple — western governments around the world have been consistently spending more than they have, and just hoping that continued economic growth would save them. The very obvious problem with this approach is that when debt gets too high while you have an economic slowdown, then the government faces a budget crisis. Then you have Greece getting bailed out and America extending their government credit card from $14.3 to $17.7 trillion.

But that’s only the start. Bailing out the Greek government does not solve the underlying problem of excessive European debt. And going into more debt does not solve the underlying problem of excessive American debt. These problems are currently being delayed, but not solved.

Some people are hoping that the solution will come from strong economic growth once again boosting tax revenue and making the debt look smaller as a percentage of GDP. With a bit of debt restructuring, and a bit of reform at the edges, maybe a bit of inflation, and a bit of luck, the western world may be able to come out of this crisis and muddle forward for a few more decades. But even under that optimistic scenario, the western world is in decline. The reason is that while we grapple with the current crisis, the western world is continuing with the underlying policies that are causing the trouble — the welfare state and regulatory state.

The welfare state (including the dole, pensions, public health, public education) is self-perpetuating, leading to greater dependency which requires greater welfare, and creating a political dynamic that requires ever more handouts. Add to this the demographic issue of an aging population requiring more pensions and government health care and you have a recipe for ever-growing government spending. The welfare state has grown enormously throughout the western world (under both sides of politics) and despite the fact that we continue to get richer, more and more people are becoming reliant on the government. Under current policies, the Australian government will go bankrupt in about 40-50 years… and Australia is actually in the best position of any western country.

A closer look at the income tax changes

Menzies House Editor in Chief John Humphreys performs an indepth analysis of the changes to the income tax system:

The government has announced their plans for a new carbon tax, and the related compensation payments and tax cuts. The good news is that the government is increasing the tax-free threshold and winding down the confusing and misleading “low-income tax offset” (LITO). Next year the tax-free threshold will increase to $18,839.

Unfortunately, the government continues to hide the actual marginal tax rates by reporting the LITO and medicare levy separately from the “headline” marginal tax rates. The actual marginal tax rates for 2011, 2012 and 2015 are at the bottom of this post. As you can see, they are as confusing as ever.

Some points to note…

• The government is claiming to increase the tax-free threshold from $6000 to $18,200 and have an effective tax-free threshold of $20,542. This is misleading for a number of reasons. First, the current TFT is actually $16,000 and so the increase is not as large as they say. Second, while normal income tax may not kick in until $20,542 the medicare levy kicks in at 10% for people earning over $18,839. This was a great opportunity for the government to scrap the mis-named medicare levy, or at least get rid of the regressive 10% bracket ($18,839 to $22,163). So the actual change in the TFT is from $16,000 up to $18,839. That’s the first bit of good news.

• In winding down LITO the government has had to adjust some other tax rates. It has been reported that they are increasing the 30% bracket up to 33%, but that isn’t right. In reality (as seen in Table 1 below) the current rate is actually 35.5% for people on $37 – $67k, and that doesn’t change under the new scheme. Also, the current rate is actually 20.5% for people on $30 – $37k, and that doesn’t change under the new scheme. People earning between $30 – $67k will be paying about $300 less tax per year and will not face higher marginal tax rates. That’s the second piece of good news.

• But not everybody is so lucky. People on $20.5 – $22.2k will see their marginal tax rate increase from 25% to 29% and people on $22.2 – $30k will see their marginal tax rate increase from 16.5% up to 20.5% (see bold tax rates in the tables). As can be seen, these rates remain regressive due to the absurdity of the medicare levy 10% bracket. While these low-income earners will actually be paying less tax thanks to the higher TFT, they will be facing a higher marginal tax rate. This is important because it is the marginal tax rate that determines the incentive to work. Somebody on $21k/year will now have an effective marginal tax rate (EMTR) of 72% (up from 70%) once you factor in the 60% withdrawal of welfare. These high EMTRs create a disincentive to work and can lead to a “poverty trap”.

• The other group who face higher marginal tax rates are those earning between $67 – $80k, who will see their marginal tax rates increase from 31.5% up to 34% and then 34.5% in 2015 (see bold tax rates in the tables). It is worth noting that these people will not be paying more tax (indeed, somebody on $80k will be paying $3 less tax per year), but they will be facing a slightly bigger disincentive against work.

• It is worth remembering that income taxes are implicitly increased every year due to bracket creep, where inflation pushes people into higher tax brackets even through their real (inflation-adjusted) income hasn’t improved. As Clinton Mead has shown, when you factor in bracket creep over the next two years, these tax cuts are mostly gone, and anybody earning over $40k will see a tax increase. (Note that Clinton does not include the medicare levy, and so his tax rates can’t be directly compared to the rates I provide below.)

• It is also worth remembering that these tax cuts are supposed to be compensation for a new carbon tax. However, while the carbon tax is designed to increase (from $23/tonne to over $100/tonne if government modeling can be believed) the tax cuts will not continue to increase. There is a tax cut in 2012 and another small cut in 2015, and then no further scheduled tax cuts.

In summary, these tax changes are a bit hit and miss — helping people on  about $18k or $50k, but decreasing the work incentive for people on about $25k or $75k. The biggest problem with these tax cuts is that they are far too small. The tax cuts are enough to compensate for 2-3 years of bracket creep, but then after that there is no compensation for the ever-increasing carbon tax or future years of bracket creep. The government has also missed an opportunity to index income tax brackets (ie stop bracket creep) or to entirely phase-out LITO or to remove the absurdities of the medicare levy.

Some people are seeing that the government is churning a lot of  money around the economy, and they are accusing the government of simply engaging in wealth redistribution. I think that accusation is missing the point. If the government wanted to redistribute from rich to poor, then they wouldn’t use a carbon tax — which is a regressive tax that hurts poor people more than rich people. The main redistribution from the proposed carbon tax is from people (both poor and rich) to the government.

I have previously said that a carbon tax could be a benign policy if the rate remained low & fixed, and it was matched with real tax reform. The changes proposed today to not meet that requirement. The government is introducing a growth tax and billions of dollars of new spending, and offering token income tax cuts that will soon disappear in bracket creep, while actually making the work incentive worse for many people. I have an open mind to including a carbon tax in tax reform… but the carbon tax proposal we saw today is no good.

UPDATE 11/07: The original version of this article incorrectly stated that EMTRs for people on 21k were now 89%. This was incorrect, and it has now been fixed. Thanks to Prof Peter Whiteford for pointing out the error.

Table 1: Actual marginal tax rates (2011)

		MTR	Tax paid
$0	$16,000	0.0%
$16,000	$18,839	15.0%	$426
$18,839	$22,163	25.0%	$1,257
$22,163	$30,000	16.5%	$2,550
$30,000	$37,000	20.5%	$3,985
$37,000	$67,500	35.5%	$14,812
$67,500	$80,000	31.5%	$18,750
$80,000	$180,000	38.5%	$57,250
$180,000	$250,000	46.5%	$89,800

Table 2: Actual marginal tax rates (2012)

		MTR	Tax paid	Tax cut
$0	$18,839	0.0%
$18,839	$20,542	10.0%	$170	-$256
$20,542	$22,163	29.0%	$640	-$616
$22,163	$30,000	20.5%	$2,247	-$303
$30,000	$37,000	20.5%	$3,682	-$303
$37,000	$66,667	35.5%	$14,214	-$599
$66,667	$80,000	34.0%	$18,747	-$3
$80,000	$180,000	38.5%	$57,247	-$3
$180,000	$250,000	46.5%	$89,797	-$3

Table 3: Actual marginal tax rates (2015)

		MTR	Tax paid	Tax cut (from 2011)
$0	$18,839	0.0%
$18,839	$20,979	10.0%	$214	-$212
$20,979	$22,163	29.0%	$557	-$699
$22,163	$30,000	20.5%	$2,164	-$386
$30,000	$37,000	20.5%	$3,599	-$386
$37,000	$67,000	35.5%	$14,249	-$564
$67,000	$80,000	34.5%	$18,734	-$16
$80,000	$180,000	38.5%	$57,234	-$16
$180,000	$250,000	46.5%	$89,784	-$16

It's time to stand up for smokers' rights

Menzies House Editor in Chief John Humphreys writes about anti-smoking bigotry at The Drum: 

Perhaps it is inevitable that people will always need to find a minority to hate. Whether it is based on race, or sex, or sexual preference, or lifestyle choice, or language, or religion, or personal habits... the instinct to discriminate, to distrust "different" people, and to enforce conformity is a constant theme throughout history and throughout the world. If this instinct was purely personal, then it would not be a big issue. People could simply choose to associate with those people they prefer, and we could all live in peace. But sadly, many groups want to use the government to force their bigotry on others.

Over the past 100 years there have been some great improvements in social policy, as the government removed most of their discrimination based on race, religion, sexual preference and sex. There are a few outstanding issues (women in the military, gay adoption rights, special rules for Aborigines) but on the whole we now have less official discrimination in these areas. Sadly, not all minorities have been this lucky.

While some minorities become popular political causes, other minorities are on the receiving end of negative political populism. Politically correct campaigners will loudly support the "good minorities" such as GLBT or immigrant groups, but they are equally loud in their condemnation of the "wrong minorities". This seems to indicate that we are not becoming more tolerant... we are simply switching our bigotry on to other areas.

Some of the biggest victims of this modern discrimination are smokers.

Immediately the anti-smoking bigots will insist that they are not really bigoted, because smokers deserve to be punished. Of course, that is exactly what the racists, sexists and homophobes say. 

Most people want to consider themselves a "good person", and so bigots often feel the need to create artificial reasons to justify their intolerance. The excuses range from the plain wrong to the desperate, but the common theme is that in all cases the freedom of smokers is considered irrelevant. If a "good minority" was dismissed this quickly there would be cries of pain from an outraged media and a horde of moralising pundits. But when it comes to smokers... the "moral police" join the lynch mob and declare smokers guilty by definition.

One of the first lines from the bigots is that smoking is bad for you. True, but so what? Lots of things are bad for you, but life is about more than longevity. 

Go to The Drum to keep reading... 

John Humphreys is the Editor in Chief of Menzies House and the President of the Human Capital Project (a non-profit operating in Cambodia). His personal blog is at www.johnhumphreys.wordpress.com

 

Why Stopping The Levy Matters

John Humphreys, a Queensland based economist whose home was destroyed in the flooding, responds to those who say the levy is too small to make a difference, and demonstrations the negative impact it will have: 

The primary way that taxes hurt the economy is by changing people's incentives at the margin. Each small change in taxes may not seem like a big deal to any one person, and for many people it won't change their behaviour, but it is possible to measure the change in behaviour and assess the economic consequences through statistical analysis. The economic cost caused by changed behaviour from taxes is called the "deadweight loss" and has been estimated at anywhere between 20% and 40% (depending on the study and depending on the tax). That means that for every $100 in tax raised, the economy shrinks by $20 to $40. So for a levy of $1.8 billion the deadweight loss costs are likely to be in the order of $0.4 to $0.8 billion. 

In addition to this, there are the administrative and compliance costs, but these are likely to only be in the millions and so are less costly that the deadweight loss described above. A third way that tax can negatively impact the economy is if the government is more wasteful in their spending. Generally, people spend their own money more carefully, and there are good reasons from public choice theory (and plenty of evidence) to suggest that the government can be wasteful in their spending of taxpayer money. 

These are the broad economic costs. Of course, there will also be some pain to families who will pay an extra few hundred dollars a year. For many, that extra impost will be easy to pay. For some, it will be more difficult as they juggle their household budget. You need to remember that while each tax increase may seem small, the sum of many small increases eventually creates a substantial cost. Seventy years ago there was no federal income tax, and next financial year it is expected to raise $156,050,000,000. 

But for me, one of the biggest reasons to be opposed to this tax is that it is another small knife in the back of voluntary community and a vibrant civil society. Humans are social animals, and we get a lot of value out of the social interactions we have through social and community groups. These are the places where we learn how to be decent people, and were we learn the value of tolerance, compassion, love, belonging, self-esteem, and forgiveness. Civil society groups promote independence, strength of character, consideration for others and a sense of moral responsibility to get active and make the world a better place.

There is clear evidence that big government crowds out civil society, and I think we have seen some of the consequences of that in long-term dependence, sometimes leading to low self-esteem, xenophobia, and anti-social behaviour. Children in dependent households have worse health, worse educational outcomes, lower life expectancy, and are more likely to end up in jail. These are innocent victims of a system that has prized the bureaucrat over real community.

It may not be easy to fix this, and I don't pretend to have all the answers. But the first thing to do is to stop going in the wrong direction. Stop increasing taxes and stop increasing the size of government.

John Humphreys is an editor of Menzies House and the President of the Human Capital Project (a non-profit operating in Cambodia). His personal blog can be found at http://johnhumphreys.com.au/. This was initially posted in the comments section of a facebook hate page dedicated to attacking Stop The Levy. Menzies House, and our administrators.

Growth in government

The size of the US government has grown dramatically since the 1930s, writes John Humphreys. 

The twentieth century has been the century of the state. Not only did the world have to deal with two militant statist philosophies (fascism & socialism) but the “free” world also slowly drifted further and further towards a statist outcome. Our methods have been fairer and our behaviour more humane, but ultimately the western world seems to be tip-toeing towards a situation where the state has significant control over our lives. Jonah Goldberg has described this shift to benevolent big-government as “liberal fascism” which might be a bit harsh… but also might be a bit fair.