Not so persuasive after all …

In a marginal note to Missing Link the other day, I expressed the view that Jason Soon and Helen Dale’s advocacy for the LDP’s Negative Income Tax + abolition of minimum wage policy was “persuasive”.  And so it was at first glance.  Despite my frequently scathing remarks about extreme libertarians who think taxation is theft, the state is evil and property rights (however ill-gotten) are sacrosanct, my own instincts are moderately libertarian or classical liberal at the very least.

Alas, as with most tax policies, the devil with the LDP’s proposals is hidden in the detail.  I examined them fairly closely today and here’s what I discovered:

  • The LDP’s $9000 minimum income/NIT represents a reduction in current levels of unemployed Newstart Allowance of between $2400 (22%) and $5000 (36%) depending on whether the recipient is currently eligible for rent allowance (as most other than those still partly supported by parents are).  In either case $9000 is significantly less than a subsistence income in just about any part of Australia, and much less in the larger capital cities where rents are high.  LDP apologists blithely suggest that these mendicant unemployed could rely on charity to make up the shortfall.
  • For those in partial or full employment earning up to $30,000, the LDP’s policy provides substantial effective tax cuts (albeit on a sliding diminishing scale).  However, the Party’s policies also involve abolition of any minimum wage. Since people earning less than $30,000 are almost by definition low paid and mostly lacking in bargaining power in the employment market, they are highly vulnerable to wage cuts in a completely deregulated market, which would certainly occur as soon as the minimum wage was abolished.  Thus the LDP’s tax cuts for this group will mostly be more than offset by wage cuts.  Its effect (no doubt deliberate) would be to create a large class of US-style working poor whose earnings are at or below subsistence levels.
  • For working families with incomes above $30,000, the picture is slightly more mixed.  Between $30,001 and $75,000 the LDP’s 30% flat tax rate amounts to an effective cut in total tax for an individual of $3600, however that’s eroded by the fact that all current tax deductions are to be abolished.  For a couple where both spouses are working, the benefits may be slightly larger, though again eroded by removal of all current tax deductions.  For most families (those eligible only for the current basic rate of Family Tax Benefit Part A) the LDP’s effective tax cut is in the “sandwich plus a milkshake per day” range because the loss of the Family Tax Benefit Part A is almost exactly counterbalanced by the LDP’s policy of increasing the $30,000 tax-free allowance by $6000 for each child.  However, poorer families eligible for more than the basic rate of FTB Part A, and even more so for those eligible for FTB Part B and/or childcare allowance (neither of which is available under the LDP’s proposals) may well actually be slightly worse off under the LDP’s policies than at present.
  • For single individuals earning between $30,001 and $75,000, the LDP’s tax policies are also worth $3600 per year, but again reduced by removal of all current tax deductions.  Again it’s “sandwich plus a milkshake per day” territory.
  • At an annual individual income of $75,001 or more (i.e approximately the top 10% of income earners), however, the LDP’s tax cut would be worth a considerably more worthwhile $7,600, though again somewhat reduced by abolition of current tax deductions and by a slightly less generous treatment of superannuation.
  • At an annual individual income of $100,000 or more (i.e approximately the top 5% of income earners), the LDP’s tax cut would be worth $11,200, though again somewhat reduced by abolition of current tax deductions and by a slightly less generous treatment of superannuation.  However, for families in this income range the picture is even more attractive because they still get the LDP’s $6000 increase in tax-free threshold per child (because it wouldn’t be means-tested, unlike the current FTB Part A).
  • At an annual individual income of $150,000 or more (i.e approximately the top 2% of income earners), the LDP’s tax cut would be worth $16,200, though again somewhat reduced by abolition of current tax deductions and by a slightly less generous treatment of superannuation. Again as with the $100,000 bracket, for families in this income range the picture is even more attractive because they also still get the LDP’s $6000 increase in (non means-tested) tax-free threshold per child.

The bottom line?  Only the top 10% of income earners would benefit substantially from the LDP’s policies.  Middle income earners would get little or nothing, and the unemployed and low income earners would be substantially poorer and in many cases unable to support themselves without charity.

All this might be justifiable if Australia had a high unemployment rate and if there was a reasonable expectation that forcing down real wages for the poor through abolishing minimum wages would lead to a substantial increase in total employment (albeit at sub-subsistence levels).  However, we actually have historically low levels of unemployment.  Moreover, the current rigorous work test for Newstart Allowance means that the implicit assumption in the LDP’s policies, that there are substantial numbers of dole bludgers who could be forced back into the workforce by effectively slashing dole payments by between 22 and 36%, is clearly nonsense.  It’s conceivable that abolishing the minimum wage might create some additional low paid jobs, in cleaning, nannying and waitering in restaurants for the top 10% of income earners who will be further enriched by the LDP’s policies, but it seems quite unlikely that enough new jobs will be created in that way to justify the associated drastic increase in inequality, insecurity and loss of basic dignity.   Certainly it won’t force down real wages enough for Australia to compete with China and India as a base for cheap, dirty, badly regulated manufacturing industries or telephone call centres, even if we actually aspired to such a future.  Once you examine the LDP’s policies in detail, Jason and Helen’s “let them surf” propaganda line is revealed as a fantasy akin to Marie Antoinette’s apocryphal “let them eat cake”.

Why would anyone think such policies would be a good idea?  There are three obvious possibilities:

  1. Self-centred, short-sighted greed (a sin of which I wouldn’t accuse either Jason or Helen, I might add);
  2. The conviction that success in a market capitalist system equates closely with merit and hard work, and that failure is equally deserved in some moral sense;
  3. Even if that isn’t true, that the market capitalist system provides human needs for goods and services more efficiently and abundantly than any other economic system so far tried, and is dependent for its survival or cotinued success on the sort of grossly unequal distribution of wealth that the LDP’s policies advocate (the “can’t make an omelette without breaking a few eggs” approach).

Let’s examine each of those possibilities in turn.  The 90% of Australians who won’t benefit from the LDP’s policies are unlikely to be impressed by the first explanation, nor should they be.  As for the second, even the libertarians’ hero Hayek conceded that any connection between merit and wealth/success in the capitalist system was a rather loose one, certainly not close enough to serve as a justification for anyone with even a passing concern for values of fairness.  Wealth and success quite often flow from sheer dumb luck (being in the right place at the right time, winning the lottery) or the equally dumb luck of financial or genetic inheritance.  Mind you it seems that, while many people think the latter sort of luck is unfair in the abstract, very few resent at least genetic dumb luck once it’s reduced to concrete situations.  Even socialists mostly don’t think it’s unfair that ugly people can’t be fashion models, stupid ones neurosurgeons or slow runners sprint champions.((Note that I agree with Sinclair Davidson that there’s at least enough correlation between merit, hard work and capitalist success that both they and successful risk-taking need to be tangibly rewarded. ~ KP))

Hayek rightly conceded that the merit principle couldn’t justify the sort of seriously unequal distribution of wealth it actually creates in the absence of competition and other regulation and state-engineered income redistribution.  Consequently, Hayek was prepared to countenance some redistributive taxation and a welfare safety net, as Don Arthur has pointed out in a series of recent posts.  Nevertheless, Hayek envisaged only a very limited degree of restribution or safety net.    He called in aid the third justification above to reach the conclusion that redistributive taxation and welfare policies needed to be severely limited: the sort of entrepreneurial spirit that he and others like Schumpeter saw as the primary engine of capitalism would seize up if subjected to anything resembling socialist or even strong social democratic redistributive policies.  The omelette would unscramble itself.  Why would entrepreneurs bother to take big risks unless they had sufficient freedom to innovate and a reasonable expectation of big rewards for risk?

It sounds fairly plausible; after all market capitalism is the best economic system human beings have so far discovered, and the “creative destruction” of entrepreneurial innovation is a primary engine of its extraordinary success.  But what do the facts tell us?

First, modern Denmark and Finland have consistently shown up in The Economist newspaper’s surveys as among the very best countries to do business, despite total tax takes much higher per head than Australia. They rank first and second respectively in the most recent survey.  Other Scandinavian nations also do quite well.  All have total tax takes around 50% where Australia’s is around 32%  They also rank among the most prosperous nations in the world per head on a PPP basis, though Denmark and Finland are slightly below Australia on the most recent measure (Norway OTO is higher).  At the very least we can say that somewhat higher levels of redistributive taxation than Australia (we’re one of the lowest taxing western countries in the world) are equally consistent with capitalist success and do not seem of themselves to stifle innovation or the entrepreneurial spirit.((I don’t in fact suggest that Australia could or should adopt Scandinavian levels of taxation.  For a start we lack quite a few of the attributes that I suspect make it sustainable for them: compact size; existing highly developed infrastructure; proximity to the huge wealthy markets of the rest of Europe and North America.  However, we don’t need those sorts of tax levels to fund a better targetted social safety net or better health, education and material public infrastructure.  Possibly we don’t even need higher levels at all if we spend the current large surpluses wisely and reduce some “middle class welfare” measures. ~ KP))

Moreover, lots of research about entrepreneurship has been done since the times of Schumpeter and Hayek:

Cooper also says that entrepreneurs see failure as confirming their inner fears but following failure they do not give up; they just get started again to try and prove that they can get it right a second time. Cooper also observes that being an entrepreneur has negative aspects to it. They tend to be unable to have and miss out on close relationships and the family life that others have. Their focus is only on the business to an obsessional degree, which can be likened to a drug. Only a few entrepreneurs actually set out to build big businesses and to attain wealth and, interestingly, money is not a prime motivator.

Cooper has classified entrepreneurs into two categories; those who are functional and those who are real. He suggests that functional types are not genuine entrepreneurs. They tend to have one success and subsequently live off that success and need to show to people that they have been successful. They like to be seen with their money as they have little drive to establish another success. This varies significantly from the real entrepreneur. They keep coming up with new ideas to prove to themselves and to their peers that they are capable to doing so. Their main driver is a fear of failure and not for tangible wealth benefits. A real entrepreneur never stops.

Clearly, entrepreneurs need a flexible, supportive, innovation-friendly business environment, but that need not include the lowest conceivable taxation regime. Although few if any Australian voters bothered to examine the LDP’s policies in 2007, indeed hardly anyone even knew the LDP existed, ignoring the LDP was certainly the right decision.

Ironically, examining all these data critically does give us useful information about an optimal public policy mix. It tells us that, at least in theory, the sort of “progressive fusionism” that Don Arthur and Andrew Leigh have been advocating in the blogosphere recently could actually work well. The egalitarian impulses of moderate social democrats could be satisfied by slightly higher (or better targetted) levels of redistributive taxation than Australia currently enjoys, providing a fair social safety net with “equal dignity/respect”; while entrepreneurial innovation could be nurtured by more flexible regulatory regimes with lower compliance burdens.

Even a Negative Income Tax and abolition of minimum wage could work provided that the NIT base level doesn’t involve slashing the incomes of the poorest Australians, and if it was introduced at a time other than one of historically (over)full employment. Wrongful dismissal laws could also be abolished completely, allowing businesses to respond to competitive pressures more quickly and flexibly, as long as the state provides an adequate safety net for income maintenance, retraining and a limited mortgage repayment holiday for displaced workers. Broader deregulation of the labour market might even be feasible and saleable, without a Howard-style AWA “no disadvantage” red tape nightmare, as long as true rights of freedom of association are safeguarded, including laws prohibiting any form of discrimination against workers who choose to bargain collectively.  Howard’s policies had much more to do with his career-long obsession with smashing unionism than with rational market-oriented reform.

However, none of this will ever occur unless libertarians get a lot smarter than they currently show any sign of being capable. They need to discover that success in a market capitalist system is not the same thing as merit, that the poor are not inherently undeserving, and that entrepreneurial innovation can be nurtured without screwing workers or awarding large tax cuts to the rich in an already low-taxing country. Conversely, “progressives” will only ever sign up to this sort of policy agenda if they genuinely accept that market capitalism is the best and most efficient system we’re likely to find in the foreseeable future, that profit isn’t a dirty word and that anything closely resembling equal outcomes is neither possible nor desirable nor does equal dignity require it.((A proposition perhaps best illustrated by Ronald Dworkin’s rather bizarre “luck egalitarian” hypothetical life lotteries. ~ KP))

It would be unwise to hold your breath waiting for a blinding flash of realisation from either group. Political “progressive fusionism” is probably at least as distant as its nuclear energy namesake.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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James A
James A
13 years ago

How to Promote Startups considers some of the above and other ways help entrepreneurs, although the comments go downhill a bit.

conrad
conrad
13 years ago

“At the very least we can say that somewhat higher levels of redistributive taxation than Australia …”

And probably at the very most too, if you want to add all those countries in Europe that no-one mentions with high tax rates rather than just cherry picking the most successful ones or add the successful countries with a low tax rate. In addition, since those countries also have some form of cultural protection that stops their professional workers moving overseas in a way that places like Australia don’t (not speaking English as a first language is probably a big factor), they don’t need to worry about their workforce moving to places like the US for more money in the type of way Australia would and NZ does.

NPOV
NPOV
13 years ago

Except Conrad, in most Scandinavian countries, professionals in the current generation almost all seem to speak English quite fluently, so I’m not sure that protection exists any more.

Having said that, it is a reasonable point that if Australia’s taxation levels were too high, it would inevitably push away more of our best talent. I often wonder why it is that so many talented enterprenerial types do remain in Australia, and I suspect the reason is the weather and generally easy-going lifestyle as much as anything else (plus of course that people generally prefer to remain near family). But as it is, if anything makes Australia financially unattractive currently, it’s surely housing prices far more than tax levels.

What’s attractive about the 30/30 plan is a) the simplicity – most taxpayers shouldn’t need to bother with tax returns, the cost of administration and compliance enforcement should be able to be slashes considerably and b) the lack of high EMTR’s. However, I think these advantages could be maintained while having a far more sophisticated mathematical model for calculating taxes: my preference is something like a gradually rising EMTR that goes from, say, 25% for the lowest-paid jobs up to 50% for those on over $150K. As for the minimum wage, I’d agree that throwing it out entirely would be a big mistake, but I also accept that there’s a need for better flexibility: there are parts of Australia where requiring employers to fork out $13.74 an hour is unnecessarily preventing jobs from being available, and there other parts where paying them any less would be sheer exploitation, a likely poverty trap, and encourage employers to skimp on investing in training and equipment necessary to ensure that employee productivity was kept high. However, exactly how inflexible is the current arrangement? Can somebody tell me, with the current laws the way they are, if, out there, there is an employer happy to pay somebody, say, $12 an hour while providing training, and an employee who has been out of work for a considerable time and keen for the job, is there really no way in which some sort of temporary arrangement can be negotiated as a special case?

skepticlawyer
13 years ago

The key is to keep EMTRs low for the poorest people, and – as both Jason and I argued – liberalise the economy sufficiently so that mutual obligation could go (it really is quite perverse in its effects, and hits the poor and disabled hardest). I’m afraid the Peter Saunders article Jason linked to really did sound awfully Victorian to me – of the ‘people need to be hassled to get off their arses’ variety. No, they don’t, that’s just petty.

Interestingly, some of the Scandinavian countries do an interesting dance with aspects of libertarian policy – Denmark, for example, has the most liberal hire, wage & fire policies you’re ever likely to see, but relatively generous welfare, which means (a) it’s easy to get work, but also (b) easy to leave if the job turns out to be really awful.

JC
JC
13 years ago

Despite my frequently scathing remarks about extreme libertarians who think taxation is theft, the state is evil and property rights (however ill-gotten) are sacrosanct,

Don’t hold anything back, Ken. Tell us how you really feel :-)

Excellent post, KenP.

Why would entrepreneurs bother to take big risks unless they had sufficient freedom to innovate and a reasonable expectation of big rewards for risk?

I actually see this as a sort of fallacy that we all seem to fall into. Entrepreneurs are actually risk adverse. A good entrepreneur abhors risk and tries to reduce it as much as s/he can. You can accrue risk by simply going racetrack. This is an important distinction because we sometimes hear that we ought to reward those that take risk, which is an argument that I see as intellectually incorrect. If we reward risk we ought to reward betting at the racetrack or simple gambling. What we shouldnt be doing is impeding the ability of those that see opportunity in putting together the three factors of production to create goods and services. The market will ultimately judge the final result by either rewarding the enterprise or sending it down the river.

Entrepreneurs are looking to squeeze a margin out of an enterprise and reduce, hedge or eliminate risk as much as s/he can. In other words they see an opportunity to arbitrage a gain and if its big enough will try to marshal the factors of production to bring this to the final conclusion I think this is a very important distinction that invariably gets to wages and wage levels. Entrepreneurs are not so much worried about the absolute wage but rather the cost of the marginal input (in of itself). The factor that would limit the wage rate is the final price s/he can achieve in the market for the final product after adding together all the inputs. In other words the entrepreneur is really an aggregator and risk taking is a potential adversity.
———

There are some, but really few libertarians that would support a total elimination of Welfare. A large number seem to support Friedmans view of a welfare state- a much skinnier welfare state while still maintaining social safety net. I actually believe that after a time this would become obvious in a state that is more attuned to libertarian ideals and we would begin to see the dark side of a rampant welfare state we have created. Bad policy such as churn would be seen for what it is dead weight loss.

There are also many other important things that the LDP advocates such as Voucherizing education; particularly at the primary and high school level that would highlight the benefits of introducing market based outcomes. Vouchers would also apply to health care as well that help move away from the present command and control system.

Moving some way to strengthening property rights would also be greatly beneficial. The Islamic school issue we recently discussed is the outcome of loosened property rights.

The LDPs environmental policy is without question the soundest policy of any political party in Australia at the present time and its worth taking a look at.

Many libertarians support the open borders policy. Catallaxy or John Hs site has also toyed with the idea of setting up an open borders policy for immigration that could be supported by demanding an entry fee and a slightly higher tax structure from the newly arrived immigrants. Very high levels of immigration are problematic when associated with a welfare sate.

As for the fusion idea.

As I see it the rump of libertarian support would come from two factions of the two political parties: Labor right and the centre small L liberal groups. There is next to no chance of ever seeing a fusion with the left IMHO.

The DailyKos tried that In the US in the 04 elections as he saw an opportunity there seeing around 10% of the US voting population actually show strong libertarian leanings and weak two party affiliations. That date didnt make it to the starters let alone the first drinks. Theres never a chance of a fusion with the left IMHO as economic policy and social policy of the two groupings are mortal enemies.

People see libertarians and the left having similar policies in such areas as drug policy and gay marriage and conclude there is a case for fusion. The outcome may be similar but the way both arrive at these policies to my mind highlights the differences rather than the similarities. Libertarians see the individual right to privacy etc. as paramount and the state has no right to interfere in a persons private life whether in cases of self harm or ones bedroom. So the libertarian case for gay marriage derives from the argument that the state should not be in the business of recognizing personal relationships and therefore marriage is very much a private affair. The left approaches this from the angle of discrimination with the state very much still in control in what relationships it does recognize.

Jason Soon
Jason Soon
13 years ago

Ken I think you missed two rather important points in my piece which wasn’t simply about promoting the 30/30 and which also render your criticisms rather redundant. In fact I’m quite aware of your criticisms of the 30/30 plan and think it imperfect too.

I had 2 points, one of which went to the philosophy of welfarism and the other of which went to political economy
1) I tried to transcend the ‘welfare is a right’ line of the left and ‘welfare is a positive right and therefore not really a right’ line of the right by arguing that insofar as governments were contributing to unemployment, at least part of the welfare payment can be seen not merely an entitlement but a form of restitution. I suggested various ways in which governments crowded out employment opportunities and not all of them had to do with the labour market, I also mentioned product market regulations (e.g. licensing of various kinds).

2) I was making the political economy argument that libertarians would be perceived as being two-faced if on the one hand they argued that deregulating labour markets was fine since the redistributive element of labour market regulations would be better addressed by transfers if they then turned around and put caveats on transfers. I argued that the political capital of libertarians would be better spent on arguing for liberalisation and quarantining the welfare system (not middle class welfare but genuine redistribution) – insofar as they had reason to believe that further gains from liberalisation were potentially pareto-optimal (i.e. gains would dwarf losses) then even in quarantining the welfare system the reforms would pay for themselves in the long run. This is perfectly consistent with the Rawlsekian- progressive fusionism line being promoted by Don Arthur i.e. quarantine genuine income transfers and only attack the regulatory state which in economics is an imperfect tool anyway since regulating prices and quantities is generally less efficient than making transfers.

In addition I also think there is a genuine classical liberal argument for some level of unconditional welfare both on the grounds of pure transparency and simplicity as well as because insofar as it can be regarded as a public good like defence (which it can – defence is collective insurance against physical insecurity, a safety net is collective insurance against economic volatility). In addition, some stable and transparent level of unconditional welfare will mean that the population is less likely to demand regulations to protect themselves against economic volatility which may be far more economically destructive e.g. the reintroduction of tariff barriers and various restrictions on competition.

Your discussion of the market system not being perfecly meritocratic is completely irrelevant as this is a premise I share with you – indeed it those who are in favour of mutual obligation who are more likely to not share these premises.

I do not believe any of these criticisms are dependent on the 30/30 scheme, I have simply made an argument for why unconditional welfare is more conductive to classical liberal political economy in the long run than mutual obligation.

JC
JC
13 years ago

Numerous authors, not least Troppos Fred Argy e.g. here, have analysed the factors leading to the success of Scandinavian countries by comparison with other parts of Europe that do much less well with high tax rates.

I hope Fred’s well enough to take a look through this link as the case for the Scandinavian model really doesn’t look so rosy.

(hope you’re getting well Fred, by the way)

This is as good a case as i have seen why we should not adopt the Scandinavian system and maintain the free(er) market oriented Anglo system.

The Scandinavian model isn’t socialist so much as it’s highly interventionist, which is an important distinction.

http://www.fee.org/publications/the-freeman/article.asp?aid=8152

skepticlawyer
13 years ago

They appear not to have considered disability support pensioners. The DSP is higher than the dole (and thus considerably higher than the tax free threshold). The situation of the unemployed (towards the end of the report) isn’t too rosy, either.

skepticlawyer
13 years ago

To be fair, Ken, I advocated the LDP policy as an example of a fully costed regime applied to Australian conditions. I don’t think it’s perfect either (and nor does John Humphreys, who originally developed it). I do think it’s better than what we currently have. This is what I actually said:

Another issue worth adding to Jasons discussion of the plethora of regulations that actually inhibit workforce participation is the problem of high effective marginal tax rates. These penalise the poor – especially the disabled – more than any other income group. In the case of a disability benefits recipient, for example, above a paltry sum (

JC
JC
13 years ago

The link offer the most graphic contrast of all argments that i have seen and literally trounces the idea that the Scandi model is somehow superior on an outcomes basis to the Anglo free(er) market model. The reason is that we have had the wonderful experience of both models tried and tested at approximately the same time in both the same regional location with a fairly similar population a political systems (the Irish troubles were actually a headwind.

Ireland was the backwater of Europe until 20 odd years ago. In fact Boston was fast becoming the capital of Ireland as the young and the energetic were leaving by the plane load for a better life in America and elsewhere. At around time Ireland began to reform the Scandis decided to go interventionist. Let’s see what the link says about this:

2a. Between 1970 and 2003, in OECD rankings of economies: Denmark declined from third to seventh place; Sweden Finland rose from 17th place in 1970 to ninth in 1989, then fell back to 15th in 2003. fell from fifth to 14th.

2b. Over the same period (19702003) Ireland shot up from 22nd to fourth. In 1989 Irish taxes and government spending equaled 53 percent of its GDP. In 2006 this had fallen to 35 percent.

2c. In 2004: Irish productivity per working hour was nearly 26 percent higher than in Finland, just over 29 percent greater than in Sweden, and a whopping 43.2 percent above the Danes.

Ireland is now one of the richest areas in Europe.

There’s more too.

Mark Hill
13 years ago

Ken,

A comprehensive critique of the best welfare policy on offer. However, I think you should be more specific. The LDP is working to further change its welfare reform to make further improvements.

I think some of your criticisms are so broad however they could be applied to any welfare (or economic) system, as Jason says.

The Scandinavians have success in spite of their sceleoretic paradigm (may I remind you a labour official was recently quoted saying the real rate of unemployment in Sweden was more like 25% as opposed to 13%) due to high levels of openness with trade and capital flows. Here they are doing better than us and we should immediately follow their lead and better them. As for international business, this all comes back to human factors. These countries do not have an advantage over us (both countries share charactersitics of high levels of firm internationalisation, our migration policies might help us in the long run), but they have had a very long headstart before Australia had an open international market. The change in Australian international business and entrepreneurship since 1983 is remarkable.

The real problem with the 30/30 plan is that it is welfare for all. I think this is a reasonable tradeoff, but if this problem can be eliminated whilst retainin the advantages, then it is an improvement.

You are somewhat right about parsimony. The policy isn’t new – John came up with it a long time ago. Effectively tax cuts and inflation have taken the atractiveness away from the policy. Firstly, at the time this was not parsomonius, secondly, with the reduction or abolition of taxes such as tariffs and excise taxes, there may not have been a decrease in real income. It is important to acknowledge we have a 17.5% tax on clothing in Australia, before the effects of effective rates of tariff protection kick in. May I ask you what percentage of income a minimum wage earner or welfare recipient pays in excise taxes and effective rates of protection?

(Perhaps more importantly – what are the EMTRs after all taxes are paid in Australia, and how much deadweight loss do we pay? Clearly here we see job destruction through careless plucking of the goose). The tax system is so bad it reduces the demand for labour significatnly, increasing unempoloyment and decreasing real wages.

These problems identified in the tax system and our own policy have led a move towards favouring a consumption tax with no change, reduced income tax (and no other taxes) and a basic income with a higher (real) base and removing welfare for all without reimposing kinked or higher real EMTRs. Abolishing regressive taxes like excise and tariffs has to be part of the overall policy. It will be difficult but we are working on it.

(As for equity of a carbon tax, the LDP would remove all subsidies to carbon producing industries and simply impose a flat rate on all emissions – keep in mind that our excise tax on fuel already prices carbon at over $100 per tonne. LDP policy would simply to have a non distortionary tax, no counterproductive subsidies and compensate with tax cuts and upping welfare payments).

Another problem with your critique is that you are implying that minimum wages and labour market rigidites help the poor. They don’t and the econometric evidence says so. The often quoted and abused work by Card and Kreuger was found to be flawed and is no even rejected by the authors.

As for your idea that EMTRs “only” impact on 7.5% of the population, the high, segmented and often inefficient myriad of taxes we pay, levied on each stage of production is highly counter productive and has a heavy toll. Australia has a problem in keeping and attracting knowledge workers and those left behind work overtime to pay off their mortgages which consist highly of the capitalisation of many inefficient taxes (land development fees, stamp duty) paid out after already paying high income tax rates where thresholds kick in far too early.

Tax reform and welfare reform are both highly important and should not be shelved for trivial matters like wowserism and small town political bullying that are all the rage at the moment.

skepticlawyer
13 years ago

I think the LDP’s going to be the first Oz political party to thrash out its policies on blogs ;)

That apart, I want to know how you did those nifty bullet points and lines in the middle of a comment, Ken.

Off to bed for me, Evidence to be studied for the rest of this week! (Exam on June 26).

Tim Quilty
Tim Quilty
13 years ago

And to add to what Jason and Helen said – the NIT stands independent of the LDP 30/30. I think it should be clear from every post made in favour of the NIT in the previous thread that this was the case being argued. Insert your NIT brackets and rebates of choice, but don’t dismiss the idea, because it is good policy.

And secondly the 30/30 policy is decidedly long in the tooth, and due for serious revamp. It was John’s thesis back in 2001 or so and times have moved on. Just that fully costing a new polcy is dificult for a little party. The charity angle for disability was dropped at the last LDP national conference as being unsaleable, probably to be replaced with an additional suplement. Whether it simply becomes 45/30 or gets more radically revamped we’ll see.

Moving from a progressive tax system to a flat one is always going to in theory benefit high income earners. Of course these high income earners are not currently employing a wide range of tax minimisation schemes. Like using trusts to shift taxable income around and companies to limit tax paid to 30%. And taking advantage of every loophole that highly paid tax planners can find. So clearly they will get the full beneft of the tax cut that the low income earners will not.

Tim Quilty
Tim Quilty
13 years ago

Ken (#14) Instead of cutting company taxes, how about only imposing then on distributed profits. So profit may be reinvested in the business tax free. That will lead to signifigant growth. Though you’d need to keep CGT to tax profits when companies are sold.

JC
JC
13 years ago

Tim

This should read?

Of course these high income earners are currently employing a wide range of tax minimisation schemes.

Tim Quilty
Tim Quilty
13 years ago

No, JC, because it is sarcastic. Though there were another two paragraphs under that I lost somewhere that made the comment a little more rounded and pointful…

NPOV
NPOV
13 years ago

JC, if “Sweden rose from 17th place in 1970 to ninth in 1989”, then fell afterwards – that would seem to be case *for* a more inventionist, high-taxing state, seeing as, at least as I understand it, that was the period in which interventionism and the welfare state grew substantially (though the process began even earlier of course). It was only in the 90’s and since that more right-leaning governments have attempted more economic liberalisation.

I’ve said this before, but ultimately I don’t think there any objective way of determining what degree of government intervention into the economy is “best”. Some people value freedom and independence highly – other’s value solidarity and equality. I think Australia has generally got the balance pretty good – though my personal bias is towards a system that values solidarity and equality slightly more highly, simply because I look at countries like Norway and Sweden and don’t see any real indication that that anyone there has noticeably less freedom, whereas there isn’t a country in the world that has implemented a policy of truly small government that I can see as example of something I’d like to see Australia become more like.

On the other hand, outside of economic policy, Australia has a long way to go. The restrictions that still exist on our personal lives, in areas such a euthanasia, recreational drugs, marriage, access to pornographic material etc. all seem very difficult to justify. And while I’m enormously grateful that Australia is not riddled by the gun culture of the U.S., there is some evidence that many of the gun controls we have here are either overkill, insufficiently flexible, or in some cases counterproductive. We might be the 4th most economically liberal nation in the world (only Singapore and Hong Kong significantly outrank us there – we pretty much share equal 3rd place with Ireland), but we’re still a long way from being a truly liberal nation. Unfortunately it seems that this is what the populace largely wants – seeing as the two major political parties are both very socially conservative (in fact, there’s very little about the ALP that isn’t conservative), and I doubt that the Greens get all that much of their vote largely because they are seen as being more socially liberal.

JC
JC
13 years ago

I didn’t look at your link Ken until now.

I think it’s safe to look at where Ireland was before the reforms and where it is now. The point that blows everything off the charts is that Ireland was essentially a backwater. It was where you were born and quickly left as soon as you could afford a plane ticket even on vendor terms as soon as you could.

I don’t have the figures but could go looking for them later… the net return migration -the return of the diaspora- also should be examined as this has been quite material over the past decade.

I don’t have the figures to compare but countries like Sweden, Denmark were quite high on the European economic wealth ladder in the early 70’s and early 80’s. In fact Sweden at one stage before its own interventionist reforms was in the top three per cap wealthiest in the world.

The CIA fact book now has Sweden at $US36,500, Ireland $US43,100 both 2007 est.

I think this is an astounding statistic. It’s all the more so when one takes into the account the catch up by Ireland in reaching this remarkable achievement.

However not all is bad with the Scandis. The headwinds they created through heavy duty interventionism is mitigated by its open trade policies and the fact that in some Scandi countries job benefits may be guaranteed but hire and fire is basically unrestricted.

Another example is Britain itself and it would be wroth comparing where it was compared to the Scandis before the Thatcher reforms to where it is now. But Ireland presents the best economic case study I’ve seen.

London may very well be the wealthiest capital in the world primarily because of its strong international financial services business that really didn’t exist prior to the reforms and has been carefully nurtured by new Labor.

JC
JC
13 years ago

access to pornographic material etc.

That’s very high on your list, N?

No, no I’m not being judgmental, just curious.

Jason Soon
Jason Soon
13 years ago

access to pornographic material etc.

Trying using Google – just a thought :-)

NPOV
NPOV
13 years ago

Actually I have zero interest in using recreational drugs, buying a gun, accessing x-rated pornographic videos, marrying a guy, or committing euthanasia any time soon. But I have a very strong interest in living in a country that allows people to make their own decisions in such matters.

JC
JC
13 years ago

Actually I have zero interest in using recreational drugs, buying a gun, accessing x-rated pornographic videos, marrying a guy, or committing euthanasia any time soon. But I have a very strong interest in living in a country that allows people to make their own decisions in such matters.

Yep. Agree with all you say. Not knowing I was just curious if you thought the quality of porn here wasn’t up to scratch, that’s all.

FDB
FDB
13 years ago

“Actually I have zero interest in using recreational drugs, buying a gun, accessing x-rated pornographic videos, marrying a guy, or committing euthanasia any time soon. But I have a very strong interest in living in a country that allows people to make their own decisions in such matters.”

Thanks NPOV, as a big fan of both porn and drugs, for your support.

Jono
13 years ago

Why should we really entertain such a discussion which is based on some weak attack on capitalism and market systems because of the correlation between success and merit ?

This is entirely beside the point. And anyway, which alternate system provides a superior matching of merit and success ? I certainly don’t think that a government Department of Merit would do any better. I certainly don’t see how our income tax and welfare system achieve this. All it does is punish success and reward need.

The bottom line? Only the top 10% of income earners would benefit substantially from the LDPs policies. Middle income earners would get little or nothing, and the unemployed and low income earners would be substantially poorer and in many cases unable to support themselves without charity.

This is not a decent attempt at dismissing the merits of the 30/30 tax system. Firstly, the savings in administrative and red-tape cutting would be nothing less than astronomical. The simplification would be revolutionary.

Secondly, whats wrong if the middle and lower income earners are hardly affected, and the top 10% are substantially better off ? The merit of the 30/30 system has absolutely nothing to do with its comparison to the status quo. The current system is a completeky unsustainable failure that will result in massive government liabilities is fiscally irresponsible. The number of people who receive welfare payments continues to skyrocket. and should not serve as a benchmark or reference point for future tax systems.

DavidLeyonhjelm
13 years ago

Actually I have zero interest in using recreational drugs, buying a gun, accessing x-rated pornographic videos, marrying a guy, or committing euthanasia any time soon. But I have a very strong interest in living in a country that allows people to make their own decisions in such matters.

NPOV, that’s precisely the LDP’s position. You don’t have to be interested in those things, or even approve of them. You just have to prefer they are your choice rather than the government’s.

For Pete’s sake join man. Just talking about it makes no difference.

JC
JC
13 years ago

But it wont happen while the party remains dominated by otherworldly nerds

Bird’s left the party, Ken.

last time I head he’s trying to interest One nation in forming a coalition to start a gold-backed fractional reserve free banking system on Mars as well living in an established pyramid up there.

But yes, the party has this issue with guns although the gun policy goes back to pre 1996. I also don’t see the need to own a Glock 38 cal automatic loaded with hollow point cop killers.

NPOV
NPOV
13 years ago

David, while I’m firmly with the LDP on those issues, there are too many other areas where I’m simply unable to buy into the LDP’s devotion to free market causes. I also object to the tendency of those associated with the LDP to be vehemently antagonist to the Greens and even often environmental concerns in general.

JC
JC
13 years ago

I actually take back what Ive said about a possible fusion with some factions of the left. Having read and participated in a few discussions with Jeremy- AnonLefty- I think hes truly sincere in his views on issues to do with civil rights.

Hes a stand up guy in every way. In fact I dont really see much in the way of a contra-distinction between his views in this area and those of the LDP even in terms of their derivative origins. Hes always been absolutely consistent on this issue all the way down the line.

I also think his concerns for the less well to do citizens is admirable although I believe hes 100% wrong in the way he wants to solve them. Bleeding heart righties(yes there some) and lefties are a possible source of membership and support.

However even if he doesnt come round to a libertarian way of thinking Im sure there are numerous other lefties like Anon who could be persuaded that the outcomes from a more libertarian society offer a better alternative.

DavidLeyonhjelm
13 years ago

it wont happen while the party remains dominated by otherworldly nerds immovably welded to silly pet schemes that have Buckleys chance of ever winning broad popular acceptance.

I don’t believe you have a clue who dominates the party Ken. And given that, I also question if you’d know what would win broad popular acceptance. You are not the public, and vice versa.

Your conclusion that low income earners will be worse off under 30/30 is only valid if incomes fall, as you predict. Yet this is simply an unsupported assertion. Our assertion is that the economy will benefit from the lower and simpler tax environment, and incomes will not fall. Equally unsupported.

I acknowledge the unemployed will be a little worse off if they remain unemployed, but our assumption is most will seek to work because of the low EMTR. They will not lose the Negative Income Tax until their total income reaches $30K.

You say you are a moderate libertarian, but point to high tax countries as potential examples for Australia. The essence of libertarianism is to control what you own, including your money. It is irrelevant whether Denmark has a higher average income nothwithstanding higher taxes. Low taxes are inherently preferable. And I’m not aware of anyone in the LDP who thinks taxation is theft.

NPOV
NPOV
13 years ago

“The essence of libertarianism is to control what you own, including your money”

If there were no income taxes, but employers were required to make a co-payment to the government of 50c for every dollar they paid me, would that mean I had more control over what I could do with my money?

Tim Quilty
Tim Quilty
13 years ago

Perhaps when Jacques talks about simple to sell, he’s also saying that it wasn’t simple to change the policy to adjust for inflation and economic growth and still keep it coherent. 39/27.5 doesn’t have quite the same ring to it.

I suggest, contra to your original post, that the heaviest burden of the current tax system is bourne by the middle income earners. As a trainee accountant, that is what I see every day. People earning over $100,000 invariably have effective tax planning to bring their tax down. Trusts to distribute income to children, spouses and retired parents, self-managed super funds which they can jiggle to maximise deductions, a company for parking and investing excess income until a later, more convenient date. People making round $80,000 seem not to have access to much of this and pay lots of tax.

As others have mentioned, I don’t think it is a problem to reduce the welfare benefits a little (not necessarily 36%) while providing easier access to part time unpenalised work. Perhaps there could be easing back provisions to avoid shock therapy.

Pretty sure the LDP is moving to a carbon tax per John’s paper, rather then cap and trade. I remain skeptical rather then denialist, and guess many in the party share that view, though clearly others are fully on board the global warming bus. I don’t have the science or math to even follow the debate but I suspect the costs of global warming are massively overstated. But if we have to do something, lets make it a tax that creates the least distortion and can be easily removed again if the need is no longer there.

Now I have to stop wasting time on the interwebs and go and study for my exam tomorrow morning…

DavidLeyonhjelm
13 years ago

You appear to take the view that people must swear allegiance to every single aspect of the 2007 30/30 before they can call themselves moderate libertarians

If supporting low taxes for its own sake makes me authoritarian, then so be it. Just be grateful I don’t flog you with the Tax Act.

despite the fct that Jason Soons views appear not too dissimilar to mine and that apparently even John Humphreys (the architect of 30/30) acknowledges that it needs tweaking.

Jason Soon is not a member of the LDP. And yes, I am well aware John Humphreys is considering revisions to 30/30. But I guarantee he’s looking for ways to lower taxes even further than 30/30. We have no aspiration to be a tidied up version of what the Liberals pretend to be.

JC
JC
13 years ago

N says

I also object to the tendency of those associated with the LDP to be vehemently antagonist to the Greens and even often environmental concerns in general.

you and lefty excluded.

I find that party’s policies to be the equivalent to a wrecking ball. They’re also dishonest in terms of what they represent while people who really take no interest in economic issues vote for them because they somehow think they represent green issues. As i see it they don’t. They are basically a far left stasist socialist party that’s does a good job of conning people into thinking they are a green party. A green party ought to some degree be almost color blind in terms of left/right ideology. They could just as easily support one the ALP’s tax policy or the Libs tax policy. I see it as basically a socialist grouping using green policies to further its cause.

I also object to the tendency of those associated with the LDP to be vehemently antagonist to the Greens and even often environmental concerns in general.

Okay, have a look at this discussion that went on at catallaxy. Most of us a really groping around trying to understand a really complex subject and we’re not scientists. This isn’t a bad discussion to finding a solution. Follow Mark Hill’s comments and responses about reforestation.

http://catallaxyfiles.com/?p=3611&cp=all#comments

I disagree that libertarians are uninterested in environmental polices. There are some who are indifferent to it, but most people want to see a a good outcomes solution. To be perfectly frank, AGW seems to me to be more of a pricing issue we need to resolve, however pricing “air” is a little difficult. We’re also lucky in being rich enough to be able to take a good look at this issue as concern for the environment is really a past time for rich societies- not poor ones.

JC
JC
13 years ago

And Im not aware of anyone in the LDP who thinks taxation is theft.

Met with a stony silence, looking sideways and down hoping no one’s looking.

NPOV
NPOV
13 years ago

We’ve been through this before. The Greens’ policies just aren’t all that different from that of many continental European nations that are all doing just fine, thank you. I wouldn’t choose them personally, but they don’t particularly concern me, which is far more than can be said of some of the LDP’s policies.
At worst they’ll take Australia from being the 3rd or 4th most economically liberal nation in the world to maybe the 10th (out of over 150!). I’d consider that an acceptable price to pay for becoming a far more socially liberal nation, and one that is actually prepared to make some tough choices for the sake of reducing our fossil fuel dependency.

Vee
Vee
13 years ago

What if the LDP policy largely went ahead and was supplemented by a UBI of $20K? That is what a friend of mine often proposes.

Other than that sometime ago after taking a liking to the 30/30 policy I too ended up dismissing it for largely the same reasons Ken just outlined, particularly the first two points.

Mark Hill
13 years ago

NPOV,

You don’t have to make that sacrifice. The Democrats were always more centrist economically and the LDP is more lasseiz faire. It isn’t because we are a cheer squad for business. It is because mucking about with these things hurts everyone when bad policies go belly up.

Being dependent on fossil fuel has no costs. Anthropogenic warming might have costs. A flat, non distortionary tax will mitigate and see the industry based changes. The tax would be compensated by a cut income tax (perhaps GST) or upping welfare. There is a possibility we can mitigate at an even lower cost though aforestation. The specific tax should then be lowered to fund this programme.

Vee – your idea sounds good. I would prefer States to levy income tax and the Federal GST (no other taxes at all perhaps other than the carbon tax) to stay and replace the NIT with a BI. I don’t know if we need the BI that high though. Remember that real incomes would be much higher if we abolished tariffs and excise taxes. Finally we need to work out how to get rid of welfare for all without creating EMTRs.

Yes I am optimistic about the final point. But before Freidman came up with the NIT, not many people envisiaged EMTRs could be tackled.

derrida derider
derrida derider
13 years ago

Vee, a UBI of $20k would require about $420b (ie 21m times 20k), assuming we give it to kids too. Compare that with current welfare of $102b. So you’d need to raise about an extra $29k (($420b – $102b) / 11m)) per taxpayer. That’s not a trivial public finance problem.

Discussions of tax and benefit systems that don’t include at least back-of-the-envelope calculations of numbers are a waste of time.

derrida derider
derrida derider
13 years ago

Oh, and Mark, the NIT can be found in JS Mill, and was widely popularised in Britain in WWII by Lady Rhys Williams as an alternative to the Beveridge proposals for contributory social insurance. Attributing its invention to Uncle Milton is just showing how little notice Americans take of the rest of the world.

Mark Hill
13 years ago

..or simply a good reason to take up the challenge of designing a system that does not have welfare for all and also to keep the EMTR advantages of a NIT.

That way the back of the envelope calculations are a lot more affordable.

Mark Hill
13 years ago

Yes derrida that is totally noteworthy but were they as well designed as say John’s 30/30 system?