One useful issue raised by Tony Abbott, Dick Smith and, with less coherence, by Pauline Hanson, is the size of Australia’s immigration intake. Do we want cities of Melbourne and Sydney to have populations of 8 million by 2050? Do we wish, under a high immigration intake scenario, seek to double our total population by then? I definitely don’t. Our cities are large and congested now and a doubling of their population would make them unpleasant (and ultra-expensive in terms of house prices) places to live in – if not for me then for my children and their children. Moreover, the natural environment of Australia is one of the most remarkable on the planet – I’d like to conserve it as well as provide a home base for people.
Then there seem to me two ways out. Either one of two options: (i) Dramatically cut the immigration intake so that our population tapers off at a few more million than it is now – perhaps at 27 million. The immigration program would be designed to offset the significant emigration that occurs from Australia each year and from the shortfall in natural population growth required to maintain population size. Or (ii) Develop new cities at a sufficiently rapid rate so that net growth in the major population centers is reduced to zero. I prefer option (i) because I cannot see the option (ii) working satisfactorily.
The option of creating new cities would require the creation of 10 new cities (or the augmentation of existing small cities) by 2.5 million people each over the next 30 years of so. It is a big task made difficult by the practical difficulties of socially-engineering where people will live. This is the reason that academic areas such as “regional development” have fallen into such disrepute. Australia has only a handful of large cities now but the imperatives of doubling our population by 2050 would require the creation of 10 new cities the size of Brisbane or Perth. Those who wish to pursue the high migration intake – the Housing Industry Association that represents the construction industry and the various business interest groups must explain clearly how this task will be carried out. Otherwise, they must rationalize the creation of large megacities in all the current capitals.
The standard response on the left to such concerns is to claim that those expressing them are “racists” which is true in the case of a few but overwhelmingly untrue. It is not the composition of the immigration intake that is being questioned here but its aggregate size and the implications of current intakes for how Australians will live in the future. An additional foolish response is the claim that we need more young immigrants to balance the aging of our population. This is Ponzi scheme reasoning – let us take in more now to delay the problem that will be worse in the future because of our current efforts. With a bigger population and a declining birth rate the problems will get increasingly worse not better.
A final argument is that by taking people from the overpopulated parts of the world (China, India, Africa) we relieve population pressures there. That is true but, with reduced population pressures, these short term effects will be plausibly offset by increased births in those immigrant source countries. China has already abandoned its “one child per family” policy and India will soon overtake China as the most populous nation on earth. These countries will become “developed” over the next half century or so and will impose crippling demands on the global environment as a consequence. They should, to the contrary, be forced to face up to their population problems now.
I used to believe that economic manipulations (entry charges, congestion taxes etc) could handle the issue of rapid population growth in Australia’s favor. I no longer do. High house prices as a consequence of immigration-driven population growth as well as high rates of urban disamenities such as congestion and pollution are not being addressed by economic instruments such as taxes and charges. Indeed, I was naive to think they ever could be. The charge towards a high population Australia needs to be stopped. A small bunch of political figures are raising such issues and they deserve to be listened to.
The web and social media, such as FB, comprise an innovation that, in some ways, makes us all worse off. For example, FB undermines the printed media because individuals almost endlessly provide hyperlinks to it, thereby providing an open access alternative to buying the content by, for example, purchasing a newspaper. The result is that the newspapers decline in circulation and suffer economic adversity for reasons linked to a failure in the market for information This, in turn, leads to cost cutting and staff redundancies in newspapers and other media which feed back into lower quality journalism, to lower quality pilfered links in social media and, ultimately, to a more poorly-informed public. News, once published, can be digitized in many ways and. to some extent, this always involves a public good type of market failure – one newspaper can pilfer from another, for example. But this type of theft becomes much more severe when millions of web users have access to this type of pilfering by simply citing a hyperlink.
The only way to get, at least partly, out of this downward spiral is to get rid of the externality here by rigorously defending the property rights of the commercial media to the news they provide. That applies both to individual users of social media and to news gathering organizations that rely primarily on pilfered material for their such matter.
It is technically possible to prevent hyperlinks to published material but much harder to prevent lengthy quotation of pilfered material. Of course, no-one likes to pay for material that they are currently accessing for free but the alternative is an ever-diminishing level of effort in providing news and the end of such things as investigative journalism. This disadvantages us all because we all then operate “in the dark” in settings where a knowledgeable few can set the social agenda.
Kenneth Arrow was, with Paul Samuelson, one of the two greatest economists that the world has known since at least the time of Lord Keynes. I read of his death at age 95 this evening. An astonishing man, he wrote on a myriad of aspects of modern economics and he wrote well and with great insight. A great applied mathematician he was also a skillful craftsman of the English (and French) languages. A profound intellect, he influenced a whole generation of economists.
Simply put: I idolized the guy. Continue reading Kenneth Arrow RIP
Vietnam is the second largest coffee exporter but its coffee has a low international reputation and much of it ends up in instant coffee brews. In fact, there is a substantial coffee culture in Vietnam with (non-alcohol serving) coffee shops operating everywhere (I made the unspeakably bad error of judgment of asking for a beer in one – I got it though the owner had to raid her husband’s supplies!). Vietnamese coffee does take a bit of getting used to – it has a thick somewhat chocolatey taste and is quite strong. But, like the best coffees served in the West, the best Vietnamese coffee is very concentrated and served in specialist coffee shops – one magnificent shop next to my hotel in Hue served far better coffee than in the up-market hotel next to it. I grew to like Vietnamese coffees and will purchase them given half a chance. Certainly worth a trial though they are different.
And the Vietnamese do sell the ethically challenging civet coffee which comes from the bowels of a civet cat who selectively choose the best civet beans and then excrete such. It is, in fact, literally “shit coffee”. Against my better ethical judgment, I bought a packet at Hanoi airport. Good smooth coffee with, if anything, less of the chocolatey taste of the standard Vietnamese coffees but with a fairly intense flavor. These civets “generate” good coffee. The Economist article below provides a more complete review.
A major issue with my WordPress blog is its inability to consistently connect with Facebook whereI spend too much time these days. I have refreshment all settings and this post tests whether a connection has been achieved. I used the WP blog for 10 years so I would dearly like to get things working again. Helpful advice appreciated.
Xmas is a celebration of what is guessed to be the approximate birth date of Jesus Christ. It is an important occasion in almost all civilised societies for both Christians and Non-Christians alike.
In Australia the number of people who describe themselves as Christians has fallen from 71% of the population to only 64% in the 10 years to 2006. I have been a non-believer for my entire adult life so I am gradually acquiring more companions. As Kevin Rudd said recently, Christianity faces the prospect of being a minority belief – part of the ‘counter-culture’ – in Australian society. But Christianity remains by-in-large an important positive force in our society and Xmas remain important to many of us – both the secular and the religious.
I lack empathy with multi-culturalists and those from other religions who see the widespread respect paid to Xmas as something offensive to atheists and non-Christians. Given my early Christian upbringing I still feel comfortable celebrating the message of hope, forgiveness, friendship and kindness that Xmas brings to us. I have a long-standing respect for the values that the man Jesus Christ espoused. Most of all, the birth of a baby indicates the hoped-for possibility of living in a better world. The materialism associated with Xmas does make me reflect – but most of us enjoy giving and receiving gifts. One can be too puritanical about such matters. Most of us enjoy some of the incidentals of Christmas – carols being sung, food and wine being imbibed and homes being brightly decorated. At the very least these are a valued part of our cultural traditions.
The idea of hope associated with Xmas and the belief that the world can be a better place because of the birth of a boy is a beautiful parable. I do not believe that to appreciate the beauty of this notion that one, in fact, needs to accept the idea that the young boy is the ‘son of God’ or our ‘saviour’. It is enough to think about our prospects for renewal and for trying to live a life that reflects Christian values of kindness and forgiveness even if not of Christian theology.
No religion – Christianity included – should ever be seen as having the last word on anything. One of the great advantages of living in Australia is its openness and the freedom of choice it offers with respect to religion. But the wisdom of many religions, freed from their bigotry, can guide us towards living happier, more fulfilled lives. Whether you are thinking about what job you should take, what partner you should live with or how you should deal with the neighbours and with outsiders, the message of Christianity has something to teach us all. God might be irrelevant in all this – we are after all human beings – but the core message of Christians and the hope of Xmas is not.
The case for diversifying your equity portfolio internationally is obvious given that Australian equities are such a small component on the overall international equity market and given the strong growth potential in many newly emerging markets. One way of doing this – that I have in the past thought was a sound idea is to buy “low load” (low transaction cost) exchange traded funds from firms such as Vanguard. I have increasingly developed reservations about pursuing this path.
Consider the VEU fund from Vanguard. It has very low management costs (around 0.15%) and covers all the world markets except for the US – investment in the US itself is covered by a variety of other funds. It sell as around $58 Australian and is freely traceable at normal brokerage fees. The difficulty for me is that it sell as a 61% markup to its asset backing. Its popularity has made it expensive.
What would make sense here are funds that make available investment in the range of equities covered by VEU but which are available in perfectly elastic supply at a slight markup to asset backing. That would facilitate diversification but without the hefty markup.
The difficulty here is that in a downturn the premium over set backing is likely to fall. In a downturn the assets will be valued at less but the markup over asset backing would likely be less too creating large capital losses.
There are a few investment funds out there that currently sell at a discount to their asset backing. One is Argo Global which invests mainly in US infrastructure assets (electricity, toll roads, airports). It is currently selling for around $1-70 but its asset backing is around $1-90. It charges much higher fees (around 1%) and has nothing like the coverage of the Vanguard ETFs but, on balance seems to me a better bet.
The above is not to be construed as advise to buy or sell anything. It is mainly intended to clarify my own investment thinking and to receive feedback. I am not a qualified financial advisor.
Introduction. One of the important constraints on tax reform in Australia is widespread ignorance about notions of tax incidence. A mistaken theory of tax incidence – the “flypaper theory” – suggests that taxes impact on those groups that they are directly levied on. So, payroll taxes and superannuation levies fall on the companies they are levied on. Economists call this type of incidence “nominal incidence” and distinguish it from “effective incidence” which shows who ultimately bear the impact of a tax. Nominal incidence varies from effective incidence because agents can take actions that transfer the tax to others. For example, to a firm a payroll tax and a superannuation levy are simply additions to the cost of labour employed. Firms, therefore, pay wages that are reduced by the size of these charges and the effective incidence of the tax is on labour, not the firm. These are fairly obvious examples of the distinction between nominal and effective incidence that many will understand. But some confusions are pervasive and are damaging to the case for sensible tax reform.
One of the worst confusions is with respect to company taxes – more specifically to taxes on the profits of incorporated enterprises with shareholders. Here there is a confusion about the effective incidence of a tax and an incorrect view of the way such firms operate. Let us first consider the case of corporations that are primarily domestically owned. We then consider the case of Australian firms where equity is primarily owned by foreigners. Finally, we consider the role of government budget constraints. Does cutting back on company taxes when governments have a binding need for a certain level of revenue, force reliance on taxes that are even more distorting than the company income tax?
These notes are subject to revision although I will note at the end any significant changes. This is work-in-progress.
Continue reading Thoughts on Australian company tax reform
The Labor Party propose restricting natural gas exports from Australia to ensure greater availability (and lower prices) for domestic gas supplies. This is a poorly thought through policy proposal.
The basic economics of international trade suggest we will export goods we can produce more cheaply than those produced in our export markets. Therefore, when we do export goods, the price will rise for domestic consumers assuming that a single price is charged both domestically and internationally. Moreover, competitive, profit-maximizing firms seeking to optimize their returns will force a single price. Thus, local consumers are worse off as a consequence of exporting. This is not only so for natural gas but for other products we export – beef, wine, and many other products provide recent examples.
Economics 101 teaches that these losses are exceeded by the gains to local producers who naturally earn extra returns from being able to export at higher prices. This is the source of what economists call the “gains-from-trade” in exporting. Our consumers are worse off but our producers get greater gains. We pay more for our beef when we export it but gain more than we lose through the increased value of our exports.
An exception to this argument can arise if the companies doing the exporting are multinationals who can transfer price away the profits they earn so that Australia gets no gains net on the supplier side and loses on the demand side as well. Several points here. (i) If multinationals cannot transfer price and face the same tax liability as local firms on the true profits they earn then there is no problem provided that, when if they purchased the Australian assets, they did so at their true value accounting for their future export potential. Cutting back on transfer pricing options or using tax-raising measures such as output- or revenue-based taxes are ways of addressing the transfer pricing issue. These are “second-best” policies that come into their own because true profits cannot be readily identified. (ii) The core issue of foreign ownership of natural resources such as mineral deposits (and land) needs to be addressed if transfer pricing cannot be addressed. If foreign multinationals will pay premium prices for Australian natural resource assets simply because they understand they will be able to secure extra profits from cheating the taxman then there may be a case for imposing controls on such purchases. (iii) In practice, for natural gas sales, it seems unlikely that the issue of transfer pricing cannot be addressed so that issues of immiserising foreign ownership become less urgent in this case.
Chris Bowen and his AWU mate, Scott McDine, who wrote the AFR article I link to, want to set up a regulatory agency to assess the case for gas exports on the basis of the “national interest”. These weasel words should send shivers down the spine of every thinking Australian. They will certain scare off investment in this currently troubled sector of the economy. Firms such as Santos and Origin Energy (both dominantly Australian owned) are already facing real difficulties – indeed issues of corporate survival – recovering the billions they have invested in natural gas because of the recent decline in the prices of gas. The proposed Labor policy will increase the real problems faced by such firms and again Australia would shoot itself in the foot were such policies to be introduced.
These authors claim that other countries (particularly the US) do not allow markets to determine gas prices and restrict supplies onto international markets. Those policies benefit Australia by providing extra returns to Australian exporters because of these artificial restrictions. But the general point here is that Bowen/McDine are restating the oldest argument in the world for protectionism – we should do it because others do so. This is nonsense. If other countries seek to damage their national self-interest Australia need not follow suit.
A student pointed out to me the Doddle Software for organizing meetings. It is easy to use and effective for seeking “majority rules” solutions to scheduling. Here.
The move by Chinese interests to purchase 1.3% of Australia (the Kidman properties) for $300m is against Australia’s economic and political interests. The land will be used by the Chinese to pursue pastoral activities in Australia using imported Chinese capital resources and, at least down the line, Chinese workers. In fact the land – apart from taxes paid to the Australian Government – will effectively become part of China. Moreover, the taxes paid will be minimized by transfer pricing of the meat and other products produced so that the transfer of ownership will be effectively complete with Australia gaining little if anything. The only possible economic benefit to Australia will be the pathetically small contribution of $300m to the Australian land owners.
Gains-from-trade and from trade in factor flows rely on increasing the value of non-traded goods and factors. Foreign investment will drive up the value of the wages of non-imported labour and land. Foreign labour flows will drive up the value of non-traded capital and equipment and land. International trade increases the return to non-traded inputs and to locally-owned land. All these changes from gains to Australia. But if all inputs are foreign owned then all gains go to the foreign owner except perhaps for those small profit tax receipts that cannot be transfer priced away. The difficulty here is that the underlying land asset does not exchange at its value – the Australian vendors of the asset cannot benefit from cheap Chinese labour and cannot transfer price as the Chinese will do. The land value reflects the value that the Australian vendors can realize. The economic losses are the difference between the gains that accrue to Australia from having Australian-owned land and from the resulting profits being taxed and accruing to the Australian Government.
The measure goes through because although there is a benefit to the private vendor Australia loses.
Politically this type of move is disastrous for Australia since it sets up a totally Chinese enclave in Australia. Australia loses autonomy with respect to land management policies such as environmental policy. Indeed what incentives do the Chinese face to observe Australian environmental standards on the fragile landscapes they have purchased? I have focused on this particular sale because of its scale. But the analysis applies to any fixed land asset. We should welcome Chinese trade and investment but not their ownership of our primary factors. This is Australia not China.
This land sale if it proceeds will be a really poor policy decision. I would base the 2016 election campaign based on o. Who supports it and who opposes it opposing this terrible move? The deal is anything but complete. Indeed the position has not really changed since last November when it was announced that Kidman had been sold – the Foreign Investment Review Board (FIRB) still have to approve the sale and they have said this will not occur until after the federal election, which is tipped to be held on 2nd July. Furthermore, the Kidman offer is scheduled to close on 5th August
An interesting debate on superannuation was initiated in the AFR a few days back by Geoff Carmody. His argument was that the current system of superannuation should be scrapped and replaced by an age pension entitlement for all. He argues this would save the government money in the sense that the value of the tax concessions implied in the current superannuation arrangements would exceed the cost of simply providing a full pension entitlement for all.
Shifting to a full pension system now would raise the costs of the pension by 54% now (about 50% of eligible people now get a full pension and another 30% get a part pension) or about $24b. The cost of superannuation concessions now, however, is only around $30b. Indeed, these figures understate the net saving since wealthy individuals receiving a full pension would gain incomes that yielded some tax revenue.
The universal pension scheme is much fairer too since the current superannuation scheme benefits mainly the rich.
The net gains from switching back to a full pension for all are disputed. John Freebairn and Andrew Podger in a subsequent AFR article argued they would be smaller using arguments that were unusually opaque.
But there would be other gains from rejecting Paul Keating’s “compulsory savings” plan. First would be the savings in superannuation fees – Brian Toohey in today’s AFR estimates these as $22b annually. Watch this lobby scream like crazy if this proposal gets any air. Superannuation is not manna from heaven despite the devotion of the labour movement to it. Whether superannuation payments are made by workers or employers they are all born by workers now. A future gain is borne by lower living standards now.
Relying on a compulsion to drive savings does not make a lot of sense. Families, for example, often need the money when they are young and raising a family. Of course, the biggest gain of all is simply to allow people to decide themselves how much they want to save.
Draft subject to revision. Comments appreciated.
This Age journalist complains about the $18 cost of his son’s cross town journeys to visit his girlfriend. His diagnosis of the problem is, however, wrong. The costs of using CityLink in Melbourne are based on guaranteeing a secure profit for Transurban. The objective is cost-recovery with a margin. The more sensible reason for road pricing is to address traffic congestion in which case, if his son travelled away from the peak, he would pay nothing. Congestion should only be priced if there is congestion.
Monsieur Dupuis in the 18th century understood that, without congestion, public goods like roads should be provided free but funded from the public purse using taxes. Then people are not charged for use that exceeds the marginal cost of providing a facility.
User pays is not generally a sensible proposal for roads because it violates this last requirement. People are inhibited from using a road if the value to them of use is positive (though less than the road toll) even though their social cost from congestion of using the road is zero. It is better under these circumstances to provide the road for free and to only charge when there is congestion.
I think roads should be privately constructed but managed by the government on the basis of congestion charges. Given that private owners already own most of Australia’s toll roads a “second-best” way out would be to force their operators to congestion price perhaps by making a lump-sum compensation from government to compensate for any profitability losses. The latter compensation should not be that expensive since operators, as local monopolists, will appreciate the opportunity to charge high prices on roads that are in high current demand and this is roughly what congestion pricing requires.
I always told my economics students that while retailers often did not know the elasticity of demand for their products – how sensitive demands are to prices – they could easily infer this information by experimenting with price variations. If prices are increased a bit and firm revenues from a product fall then demands are elastic (they depend sensitively on price in the sense that, for example, a 10% increase in price causes more than a 10% reduction in quantities demanded); if revenues increase then demands are inelastic (a 10% increase in price causes less than a 10% reduction in quantity demanded).
Cigarette products have conventionally been assumed to have inelastic demands – the price elasticity is around -0.4 so a 10% increase in price causes about a 4% reduction in the number of cigarettes smoked. They are assumed to be inelastic because smoking involves an addiction to nicotine, a habit that is notoriously difficult to kick. But elasticities are not fixed numbers – they vary with the level of prices as a consumer operates at different points on their demand curve. At high enough prices all demands will become elastic as consumers substantially reassess the desirability of goods. So if cigarettes are costing $40 per pack, as proposed recently by the Labor Party, this might make people think twice about smoking – a packet per day then costs $280 weekly. Have prices for cigarettes reached levels where demand is elastic? Have cigarette prices become so high that further price increases will produce more than proportionate reductions in cigarette consumption and hence less revenue?
There is now some evidence that this might be the case. Cigarette prices have increased strongly in Australia in recent years because of excise tax increases. These taxes are “specific taxes” that are levied per stick or per cigarette. The ABS’s latest volume measure of tobacco consumption published in early December showed that, since mid-2014, cigarette consumption has declined at double digit pace. This is higher than at any time since 1983 and 4 times the average decline over the past 10 years. Excise revenue is expected to fall by 2.3% from 2015 to 2016 and by a further 4.7% from 2016-2017. Spending on cigarettes fell to a record low of $3.4b in the September quarter of 2015.
The qualifications to the claim that price sensitivities have increased are that, in recent years various non-price disincentives (plain packaging, anti-smoking propaganda) will likely have also had an effect on consumption.
The importance of the view that elasticities have increased is that, if this is so, the labor Party’s plans to fund further expansion of schools by charging higher excises on tobacco, will fail with certainty. They will fail because there will be a reduction in cigarette consumption that is proportionately greater than the excise increase. It might still be a good idea to increase the excise to force more cigarette quitting – with high prices such excise increases will be particularly effective at doing that – but relying on increased excises to fund increased education spending will fail.
I posted this on FaceBook on 27th August, 2015 but current events in world equity markets invite a repost and some further comments. Quote:
“There is hysteria over the alleged “China slowdown”. 7% growth in an economy that has been growing at 8-10% for a decade is substantial growth.
Do the arithmetic.
Incomes of 100 units 10 years ago in China were generating growth in demand of 10 annually. Those incomes are, as a result of compound growth, now worth at least 200 units and 7% growth adds to demand at least 14 which is an increased absolute growth. The difficulty for countries like Australia is that much of this growth is not resource-based. Services in China have grown strongly particularly in recent years and that is where Australia’s export drive needs to focus. Australia’s recent FTA with China helps”.
My own view is that current pessimism regarding the world economy is grossly overdone. The US economy is recovering well and Europe is beginning to move. China may not hit the 7% figure portrayed in the numerical example above but should grow at 6.6%+ in the immediate future until it converges with developed country growth rates around 2050. The basic point remains that China is contributing more to growth in global demand than it was 10 years ago. If course if enough people are pessimistic because of the current wave of pessimism – however poorly based – the expectations will become self-fulfilling and our economic future will be imperilled. But on balance I think this is likely to be unrealistic – it might drive a temporary slowdown in equity markets but the economic fundamentals are sound. There are economic incentives for third rate economists to make repeated pessimistic forecasts in the hope that they will eventually have a higher perceived market value. There are also incentives for large investors to talk down markets in order to generate buying opportunities.
Australians particularly are unduly pessimistic about their economic future. Our growth is forecast by Treasury to be a respectable 2.75% over the next few years rather than 3% as assessed earlier mainly because population is growing slower and people are working less. Yes we have a rather important minerals sector that gets buffeted by Cobweb Cycle imbalances between demand and supply – currently excess supply. We have seen it all before repeatedly. The minerals sector will recover – perhaps on the basis of new strong demands from India and eventually Africa – and and optimists will take over and start to talk again of new never-ending booms,. Remember that the China Boom was forecast to last for a century! Foolish exaggerated views take hold in the community and among CEOs of firms.
Have a cup of tea, a BEX and a good lie down.
Draft of a book review of Gernot Wagner & Martin L. Weitzman, Climate Shock: The economic Consequences of a Hotter Planet, Princeton University Press, Princeton, 2015. Comments very welcome.
This is a brief, non-technical and rather witty introduction to the economic implications of global warming. It will be easy reading for resource economists but taxing, given the density of some arguments, for the general citizen. It was a fun read for me because I fall into the former category and appreciated the basic messages.
The core premise is that anthropogenic climate change raises serious risk management problems because of potential catastrophic effects linked to climate change. These management issues are difficult to resolve because switching from traditional carbon-based fuels is not straightforward. High carbon taxes are viewed as essential and energy transitions may not be smooth unless technologically optimistic forecasts pan out. The problem of climate change will however be even more difficult if left unaddressed. On balance, there is a convincing case for immediate decisive action. Without substantive action we will likely face a more hostile and erratic climate with, at non-negligible probability, dramatically adverse implications for all human and non-human life and particularly for agriculture and human use of the oceans. Continue reading Book review of “climate Shock”
The discussion of company tax and firms that don’t pay it often seems to me to be confused. Company tax is a tax on profits, on income earned after costs. These profits could be distributed as dividends to shareholders or held in firms as retained earnings and eventually paid out as dividends. When they are paid out as dividends (now or in the future) to residents they are subject to the income tax paid by residents but, under the imputation system, to avoid these dividends being double taxed, a credit is given for any tax paid by the firm as company tax. Thus resident shareholders are only levied the generally positive difference between their marginal tax rate and the company tax rate of 30%. Thus the firms as as acting as “withholding tax” agents for the government.
Thus reducing the rate of company tax will make very little difference to total taxes paid by residents. More will then simply be paid by resident shareholders as personal income tax since their personal tax rates invariably will exceed those of companies. .
The only difference cutting company tax rates will make is to the taxes paid by non-resident shareholders who will now pay less tax since they generally do not benefit from dividend imputation. Thus cutting company taxes can only be motivated as a means for cutting the taxes paid by foreign shareholders in Australian-based companies. This effectively increases the rate of return foreign shareholders receive on Australian equity investments. Are there arguments for reducing taxes on foreign investors in Australia? The main argument is that such increases in the rate of return on equity will increase the foreign capital flows that enter Australia thereby promoting business and, in particular, increasing the returns to Australian workers who will, therefore, be better equipped with physical capital. This depends on how mobile capital is internationally and therefore how responsive capital flows are to the rate of return improvement. It is difficult to believe differential tax rates are a major issue in driving investment given that most of our mining industry and much of our industry anyway is foreign owned.
Of course if local firms already transfer price most of their profits into inflated costs borne overseas then the effects on capital inflows will be zero since there will be no effect on returns on equity of tax reductions since the firms pay no tax.
My own view is that the company tax-cum-imputation system has that the two great advantages of (1) providing just tax treatment to residents and, (ii) bringing foreign shareholders into the Australian tax base. Impact (ii) is more important the more the transfer pricing games paid by multinationals can be stopped and it seems to me that tax reform efforts should concentrate on this rather than reducing a rate which falls only on foreign holders of Australian equity.
The claim that the Australian company tax rate – and taxes generally – exceed those payable in China (including Hong Kong) and Singapore seems to me a point of irrelevancy. We do attract plenty of foreign investment from these countries which suggests that high rates of tax are not having a strong deterrent effect.
This book by George Akerlof and Robert Shiller, “Phishing for Phools” deals with the deep issues that arise in rejecting the “rationality” assumption in economic theory. If, as economic actors, we are rational and well-informed then free markets make a lot of sense. If we make irrational choices (choices that create an unforeseen disadvantage for us) and this disadvantage can be turned into profits by someone else then, applying the rationality assumption to this other person, means that they will take advantage of our stupidity. That is clearly unless they have ethics that go beyond self-aggrandisement. Then the view that free choice works in the sense of guaranteeing social optimality then becomes a theoretical point of zero practical interest. Continue reading Foolishness (by Phools) & its exploitation (by Phishers)
This nit complains that Uber charged him a 3.6X multiple of the ordinary taxi fare during a period of high demand – namely Melbourne Cup day. The alternative was for the usual flat fare to be charged and therefore for the excess demand to remain unmet on this day with some punters in urgent need of a taxi consequently being left stranded at Flemington. Continue reading Optimality of pricing high when there is an excess demand