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Monday, 07 March


What tax debate? What white paper? Peter Martin

Of all the questionable claims in the tax debate, the biggest is that it's been a debate.

Instead we've had Bill Shorten standing in supermarkets wrongly asserting that the government is planning to increase the GST, and for the most part the government saying nothing.

Even the Treasurer Scott Morrison hasn't made the case, apart from to say that pushing up the GST would be a bit like turning back boats, and that if the proceeds were used to cut income tax, fewer people would suffer bracket creep.

Bracket creep is the lowest it has been in decades, because wage growth is the lowest it has been in decades. And in any event, if bracket creep was high, tax cuts funded by a higher GST would be only a temporary solution. As it continued there would be a need to lift the GST again.

These points haven't been made much in the debate because there hasn't been a debate. We were meant to have one after the Treasury released its green paper setting out options and the arguments for and against. After the government picked its preferred option it was going to produce a white paper setting it out in concrete terms before putting it to an election.

The Prime Minister has confirmed there will be neither a green paper nor a white paper, and by implication neither a green paper nor a white paper in the related federation review which was meant to be conducted in tandem with the tax review.

Without a comprehensive review of the kind that preceded the introduction of the GST or Labor's changes to mining tax, it'll be hard to sell a big change.

But not impossible. The biggest changes are likely to involve superannuation. The government will need to finalise its position quickly and start explaining it very carefully.

In ...


Morrison's tax swap would have taken from the poor and given to the rich Peter Martin

The most shocking thing in the Treasury analysis delivered to Scott Morrison on January 25 isn't the finding that a cut in income tax funded by a lift in the goods and services tax wouldn't boost the economy at all.

It's what Morrison asked the Treasury to model.

He asked it to model a lift in GST from 10 to 15 per cent and then the handing back of every possible cent in income tax cuts. Because boosting the GST automatically results in extra spending on benefits such as Newstart, family allowances and pensions as prices climb it isn't possible to give all of it back.

But it is possible to hand back $30 billion of the $35 billion as tax cuts, and that's what Morrison asked the Treasury to model in the first instance, not legislated increases in benefits of the kind delivered by his predecessor Peter Costello when introducing the GST.

The impact is horrific.

High earning households do very well. In the top fifth, 81 per cent are better off. In the fifth below that, 80 per cent are better off.

In the bottom fifth, only 9 per cent are better off. Put another way, the change makes 91 per cent of the lowest-earning households worse off.

It makes 79 per cent of the next lowest earning households worse off, and 60 per cent of middle earning households better off.

Morrison had asked the Treasury to model a change that enriched middle and high earners at the expense of the least-well off.

And the results tell us something about the nature of the change. It appears to have been one that cut tax rates or adjusted thresholds at the top more than the bottom. All of the Prime Minister's talk about how any change must be fair appears to not have sunk in.

At his request Treasury and its consultants Econtech and KPMG also did sensitivity analysis. What would happen if, say, $6 billion of the...


Negative gearing and tax deduction cap being considered byTreasury Peter Martin

Treasury is considering a universal cap on income tax deductions that would apply to negative gearing as well as employment-related expenses such as self-education, transport, union fees and work-related clothing.

Arising out of the government's review into taxation, the proposal would abolish caps on specific expenses and replace them with an overall ceiling that would limit total deductions to a proportion of income or an indexed ceiling.

In Britain, which adopted the system in 2012, the ceiling is £50,000 or 25 per cent of income, whichever is the higher.

"It means there's an upper limit. If you set the ceiling high enough, 90 per cent of the population could be unaffected while the big claims would be knocked back," said Neil Warren, professor of taxation at the University of NSW.

Australia is unusual in imposing no total ceiling to the amount of deductions that can be claimed, meaning some claims exceed 100 per cent of income.

Tax Office statistics for 2012-13 show 55 of Australia's highest earners paid no income tax during that year. All earned at least $1 million and managed to write their taxable incomes down to below the $18,200 tax-free threshold.

Although most Australians claim only small deductions, Australians with multiple negatively geared properties are able to claim large proportions of their income...

While pledging to continue to allow negative gearing, Treasurer Scott Morrison told Parliament last week that the government was prepared to look at "areas where the system is being abused or areas where they are excessive".

Professor Warren said harsher rules applied in many of the countries to which Australia compared itself. Th...

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Sunday, 06 March


Link Peter Martin

Melbourne has pipped Sydney to become Australia's fastest-growing city, but risks a "lost decade" after years of underinvestment in public transport.

The latest spatial breakdown of economic growth produced by SGS Economics and Planning puts Melbourne at the top of the pack at 3.1 per cent, a growth rate exceeded only in regional Western Australia and the Northern Territory. Sydney's economy is growing at 3 per cent, Brisbane's 0.9 per cent and Perth's 0.3 per cent.

Adelaide is growing faster than the other second-tier capitals at 2.1 per cent, Canberra at 1.4 per cent, and Tasmania (no separate results are calculated for Hobart) at 1.6 per cent.

But regional Victoria is languishing. Away from Melbourne the calculations put Victorian growth at just 0.3 per cent, a rate that fails to cover population growth, meaning income per person is going backwards.

"It's been a bad year for both manufacturing and agriculture," said SGS partner Terry Rawnsley. "The closure of the Alcoa refinery in Geelong hit manufacturing, and we had drought in the Wimmera. Agriculture is seasonal so things might improve, but Melbourne is where the growth is."

Driving Melbourne's economy has been a rapid growth in the financial sector and a boom in apartment building, but Mr Rawnsley says both are at risk from years of underinvestment in public transport.

"Putting aside the regional rail link which has just opened, Melbourne's last big investment was the city loop in 1985. It expanded the capacity for people to get into the city, and the banks moved their operations to the Docklands. But by 2009 or 2011 tha...


The high earners who think they are battlers Peter Martin

High income earners are reluctant to part with their tax breaks in part because they think of themselves as battlers, new research suggests.

Two-thirds of the highest-earning households surveyed by Ipsos Australia for MLC Wealth define themselves as "middle class" or "lower middle class" or "working class".

Each brings home at least $200,000, putting it near the top 10 per cent of households.

Yet, according to the survey to be released on Monday, only 2 per cent of the high earners define themselves as upper class and only 31 per cent as upper middle class.

Almost half (44 per cent), say they are middle class. A further 10 per cent say they are lower middle class, and 13 per cent working class.

Many households in the top 10 per cent struggle to save. The survey finds one in five live "pay cheque to pay cheque", spending everything they earn.

Two out of three say the cost of maintaining their mortgage is "having a big impact on their lifestyle".

"It's a paradox," says Lara Bourguignon, MLC's general manager of corporate superannuation. "The people who are earning more are also spending more and feeling left behind.

"It might be because they are living in the major cities, living in the expensive areas of major cities, or working so hard that conveniences such as eating out seem essential."

Asked to nominate the average income of a household that was genuinely upper class household, high income households nominated $454,000...

Middle earning households were more realistic, nominating $280,000....


Negative gearers aren't poor, Mr Morrison Peter Martin

It's the myth that keeps going round, in part because it contains an element of truth.

"Two-thirds of the people who use negative gearing currently have a taxable income of $80,000 or less," Treasurer Scott Morrison told Sydney radio station 2GB on Monday.

The figure makes it sound as if negative gearers aren't particularly well off, which is why the Property Council started circulating it.

It's genuine as far as it goes. It comes from the Tax Office. But it's not what it seems. Note the use of the words "taxable income". The figure of $80,000 is what two-thirds of the people who use negative gearing manage to reduce their taxable income to as a result of negative gearing. Before negative gearing, their incomes were higher, in some cases far higher.

The same figures show an astonishing number of negative gearers report taxable incomes of $10,000 or less. They would make no sense if that was what the negative gearers actually earned (what bank would lend to them?) but they make a lot of sense if they had used negative gearing in order to push their taxable incomes below $10,000.

The word "chutzpah" is often illustrated by the joke about the the boy on trial for murdering his parents who begs the judge for leniency because he is an orphan.

It's funny because the boy has done it to himself. Most negative gearers appear to be less well off than they are because they have used negative gearing to do it, sometimes to absurd lengths.

Labor has dug into the same figures and discovered that 64,000 negative gearers report taxable incomes of less than zero. No one, certainly not the Treasurer, would believe they actually earned less than zero.

There may well be good arguments for retaining negative gearing. The apparent poverty of negative gearers is not one of them....


Terrified on tax: why Turnbull will squib it Peter Martin

A decade ago in a speech titled The Way Ahead, Malcolm Turnbull labelled negative gearing "tax avoidance". Tellingly, he observed that "every tax deduction, once created, develops a constituency which will fight to defend it".

What a long way he's come.

This week, he became a spruiker for the tax-subsidised end of the real estate industry. He even repeated its lines. The Property Council is pushing around a blackmail sheet listing the number of negative gearers in each electorate and how many votes it would take to change hands. In Parliament Turnbull used it against Labor's Chris Bowen. "There are nearly twice as many people in his electorate who are negatively geared as there are votes needing to change hands for him to lose his seat," he warned. "He should think about that."

Turnbull feels able to decisively side with the property industry against Labor in part because he has finally narrowed his options. He was right when he said "increasing capital gains tax is no part of our thinking whatsoever". He and his inner circle have narrowed their options to, not much, really.

Superannuation. They've carefully considered and rejected the radical concept of taxing super contributions at the marginal rate minus a discount. The change would have meant that instead of paying the 15 per cent tax on super contributions, most high earners on the 45 per cent rate would have paid 30 per cent, if the discount was 15 per cent. The accounts of low earners on a zero rate would have received a 15 per cent top up. It's a measur...


Bracket creep is code for cutting high-end taxes Peter Martin

I've never complained about being pushed into higher tax brackets. In fact I've been quite pleased.

I've seen it as a sign that I've made it, that I've moved up another notch.

And it has never meant that I've paid much more tax.

Work it out for yourself using the $80,000+ tax bracket. Put to one side the Medicare levy. If you had been earning $79,000 and then got paid $81,000, the tax rate on the last few dollars you earned would climb from 32.5 to 37 per cent.

But that doesn't mean you would pay 37 per cent of your wage in tax, or anything like it. It would mean your total tax bill would climb from $17,222 to $17,917. As a proportion of your (higher) salary it would climb from 21.8 per cent to 22 per cent.

It would be barely noticeable, but it would give you bragging rights.

And the strange thing is it would happen whether or not you moved into a higher bracket. Imagine you had been earning $75,000 and then got $77,000. You wouldn't change brackets but your tax bill would climb from $15,922 to $16,572. As a proportion of your salary it would climb from 21.2 to 21.5 per cent. Tax rates go up as income climbs whether or not people change brackets. The phenomenon shouldn't even be called bracket creep.

It happens because the more we earn, the more the proportion of our salary in the tax-free zone shrinks. "Crossing the threshold" matters symbolically but not practically.

But don't tell the Coalition, or talkback radio.

Here's Ray Hadley on Monday: "It is very hard to explain to people so...


TPP: Would anybody mind if the deal fell over? Peter Martin

Hillary Clinton is misguided. Her opposition to the Trans-Pacific Partnership is based on "misinformation". Malcolm Turnbull's new trade minister says so.

Within hours of being sworn two weeks ago, Steven Ciobo eschewed the traditional approach of getting up to speed and consulting widely, and blundered into the US presidential race.

"I am not surprised that the trade union movement and, of course, the political arm of the Australian Labor Party is on a similar platform to, for example, Hillary Clinton," he told the Financial Review. "They both derive their key support from the union movement."

The woman most likely to be the next US president, the former secretary of state who ran America's missions abroad, the woman who criss-crossed the world pressing flesh about the Trans-Pacific Partnership, knows less about it than Steven Ciobo.

Asked directly whether he thought her opposition to the TPP was based on misinformation, he replied: "Absolutely".

And he was going to clear it up. "I will not take a backwards step in terms of putting forward the clear truthful situation in the face of an ongoing campaign of misinformation," he said.

So what is the clear truthful situation? What is it that Clinton (and also Trump) are failing to grasp? The awful truth is that Ciobo's department isn't particularly keen on finding out.

Back in 2010 the Productivity Commission found little evidence that Australia's trade agreements to that point had "provided substantial commercial benefits". It recommended the government first work out...


There's more than one way to kill negative gearing Peter Martin

How easy would it be to move against negative gearing?

Soon after the introduction of the higher education student loan scheme, the Tax Office noticed something odd. Graduates were meant to start repaying their loans when their income climbed above a certain level. But instead, some borrowed to buy investment properties which they rented out at a loss to keep their taxable income below the threshold.

So government changed the rules. From then on graduates could lose as much as they liked on rental properties, but their income for purpose of determining their HECS repayments became their income before negative gearing rather than after.

Government toughened up more than HECS. Quietly, it outlawed negative gearing in the calculation of the Medicare surcharge, the Private Health Insurance Rebate, the Seniors and Pensioners Tax Offset and the Higher Income Superannuation Charge.

It would be dead easy to do it for the calculation of tax, and it would be consistent. Taxpayers would be able to lose as much as they liked renting out properties. They would even be able to use the losses to offset profits from other investments and carry them forward to offset any profits when they eventually sold. But, as in Britain, Canada, the US, France, Germany, Japan and most of the nations with which we compare ourselves, they wouldn't be able to use real estate losses to cut the taxable income from their salaries.

There's a reason surgeons, lawyers and mining engineers are far more...


Parliamentary Budget Office: the next election fix Peter Martin

Fixing the Senate voting system is good, but it isn't enough. Unless Malcolm Turnbull goes further and also fixes the rules governing the Parliamentary Budget Office, the election will be a charade.

Here's what happened last time.

The Coalition (then in opposition) released policy after policy, which it said had been fully costed by the PBO. But it didn't release the actual costings.

In effect, it verballed the PBO. The Office assigns each of its costings a reliability rating on a scale ranging from "low" to "highly reliable". Where the costing is unreliable, it says why. And it sets out the assumptions it used to derive it.

While keen to lend the authority of the PBO to its claimed costings, the Coalition, for the most part, sat on the documents that would have allowed us to understand what they meant.

At times, it went to absurd lengths. It had claimed that cutting the public service by 12,000 would save $5.2 billion. When the government and others started questioning the costing, it showed the PBO costing document to select journalists so they could see it was genuine, before whisking it away so it couldn't be photographed...

It was happy for the public to pay for the PBO ($7 million per year) so long as the public couldn't read what it had written.

Now Labor is doing it. It's now in opposition and it is misusing the PBO in the same way that the Coalition did. It has released policies on negative gearing, capital gains tax, superannuation, tobacco tax and school funding, all quoting what it said were the PBO's conclusions but without releasing the documentation needed to assess them.

The Greens have no such reluctance. They often release PBO costings...


Australia’s Fashion Opening in China The Diplomat » Pacific Money

China’s evolving consumers offer Australia a post-mining boom opportunity.


China’s Draft Budget The Diplomat » Pacific Money

Authorities unveil a leaner and more targeted budget.

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Saturday, 05 March


The Weekend Quiz – March 5-6, 2016 – answers and discussion Bill Mitchell – billy blog

Here are the answers with discussion for this week’s Weekend Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

The mainstream macroeconomics conception of the banking system characterised by the concept of the money multiplier posits that changes in the monetary base are driven by changes in the money supply.

The answer is False.

Mainstream macroeconomics textbooks provide an incorrect depiction of the monetary system when they discuss the credit-creation capacity of commercial banks. The concept of the money multiplier is at the centre of this analysis and posits that the multiplier m transmits changes in the so-called monetary base (MB) (the sum of bank reserves and currency at issue) into changes in the money supply (M). The chapters on money usually present some arcane algebra which is deliberately designed to impart a sense of gravitas or authority to the students who then mindlessly ape what is in the textbook.

They rehearse the argument in their undergraduate courses (introductory and intermediate macroeconomics; money and banking; monetary economics etc) that the money multiplier is usually expressed as the inverse of the required reserve ratio plus some other novelties relating to preferences for cash versus deposits by the public.

Accordingly, the students learn that if the central bank told private banks that they had to keep 10 per cent of total deposits as reserves then the required reserve ratio (RRR) would be 0.10 and m would equal 1/0.10...

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Wednesday, 02 March


How Not to Analyze the State of Chinese Outward FDI The Diplomat » Pacific Money

Is China Inc. really struggling with its foreign direct investment?

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Friday, 26 February


The Weekend Quiz – February 27-28, 2016 Bill Mitchell – billy blog

Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.

Please go to The Weekend Quiz – February 27-28, 2016 to view the quiz

Thursday, 28 January


288 – Bowie albums ranked Pannell Discussions

Since David Bowie’s death a couple of weeks ago, I’ve playing his albums pretty incessantly. Playing them all within a short time made me think about which ones I prefer. I’m sharing, in case it’s helpful to others thinking of expanding their Bowie collections.

David Bowie is in my second rank of favourite musicians: not someone whose music I’m completely obsessed with, but definitely one of the greats. He fits into mainstream rock, but like the most original and creative rock artists (The Beatles, Bob Dylan, Elvis Costello, Radiohead) he was renowned for making radical changes in his music from time to time. In fact, Bowie’s changes were more radical and more frequent than any other major artist.

My decade-by-decade summary would be:

  • The 1960s: An awkward debut, one brilliant single, and a very good second album.
  • The 1970s: Mostly stunningly good, progressing through five utterly distinct phases.
  • The 1980s: Starts with one very good album. After that, several dreadful albums that I can’t bear to listen to.
  • The 1990s, 2000s and 2010s: Everything from 1995 on was very good to excellent.

You can see that I have a strong preference for his more adventurous work, and a very strong dislike of his most commercial work (from the mid 1980s).

To be more specific, here is my ranking of all his albums, from best to worst, with some comments about each.

1. Low (1977). The second o...

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