I’ve just started the Statistical Learning course offered online by Stanford Uni. The guys running it are gurus in the field and it looks great. It’s not not too late to register if you’re interested in this sort of thing (It’s free – including a pdf of the textbook).
I’ve written recently about the desirability of a resource rent tax for Australia. However, it’s not a simple issue and there are some potential pitfalls. Possibly the most important of these is the risk that governments will become addicted to the revenue and will loosen restrictions on resource prospecting and extraction in order to maintain or increase revenue. There is clearly a conflict of interest when government is both responsible for ensuring environmental standards as well as benefiting greatly from the revenue from approved projects. We already see this playing out in Western Australia where Colin Barnett actively advocates for big resource extraction projects.
This type of conflict of interest also exists with respect to state government reliance on the proceeds of gambling taxes. While theoretically wanting to address problem gambling, many state government budgets would be in serious trouble if this goal was achieved. In 2010/11 in Victoria, gambling taxes raised over $1.6 billion in state government revenue, over 10% of total state taxes. It has been estimated that 60% of gambling revenue comes from problem gamblers which means the Victorian state government currently raises around $1 billion in revenue from this addiction. Unlike taxes on smoking which can reduce rates of smoking, gambling taxes do not reduce ratees of gambling because they are not levied on the gambler and are very difficult for venues to pass on. Also, gambling costs are not readily compared as the “product” is both entertainment and return.
Some ideas about how to deal with these problems will follow in future posts.
In an unusual move, Mission Australia and the Business Council of Australia recently co-authored a piece calling for a mature and open conversation about tax reform. They join a chorus of voices, from the Grattan Institute, to the CEO of PwC, to Saul Eslake, all concerned about structural problems with our taxation system. Government revenues are in trouble, in part, because of the looming end of two great economic booms.
We’re all familiar with the tale of the squandered mining boom but a less familiar narrative is that of the squandered baby boom. Baby boomers are now starting to hit retirement age, striking fear into treasury and health bureaucrats worried about the spiralling costs of health-care and age pensions combined with falling tax receipts.
While increased life expectancy contributes to population ageing, the primary cause in the 20th century was falling fertility rates (number of births per woman). This is important in understanding the boom. An increase in the proportion of the population that is retired (old-age dependents) occurs as a result of a decrease in the proportion of the population that are under working age (child dependents). However, there is a lag between the two which means we have an economic sweet spot that is referred to as the “demographic dividend”, where there are fewer total dependents as a proportion of the population (see the area between the dashed lines in Figure 1).
Figure 1: Dependency ratios in Australia 1950-2050. Data points after 2010 are projections based on an intermediate birth rate scenario. Data compiled from http://esa.un.org/wpp/
This is the economic boom provided by the baby boom generation. The historically low total dependency ratio shown in Figure 1 meant that, for a 25 year period, more money was free to be used for discretionary spending and investment. This helped to propel economic growth and drove up incomes – and the effect was even more pronounced because it happened to coincide with major economic reforms. It also helped set high expectations on what the average Australian could afford to buy and the lifestyle they could afford to lead.
Instead of seeing the coincidence of the height of the mining boom and the baby boom as an opportunity to save for the retirement of the baby boomers and to foster industries to shoulder the burden after the inevitable decline of the mining sector, the Howard government put in place permanent income tax cuts. These were extended under the Rudd government. Now that these temporary booms are both coming to an end, those tax cuts are really starting to bite and it is becoming increasingly difficult to adequately fund the services we’ve come to expect from a modern western economy.
We are not yet entering an unprecedented level of dependency. It will take until about 2035 before we return to the dependency levels seen in the 1960s. However, there is clearly a major shift from young dependents to old-age dependents. If the costs were the same and borne by the same people, there would be no problem. But many changes have occurred. The savings from the reduction in family size have been applied to discretionary consumption, including much higher expenditure per child, so the total cost of raising children has actually increased. Little is left for transfer to expenditure on aged dependents.
How will we face this challenge? Will we keep the age pension down near the poverty line and continue to cut other government services in order to pay the rising total pension and healthcare costs as more and more baby boomers retire? Or will we take account of the shift in dependence we see in Figure 1, acknowledge the role that the baby boomers have played in the country’s economic prosperity over the last 50 years and provide them with a retirement income that allows them to live in dignity and with access to a few of the luxuries available to a modern developed country?
Australia is a low tax country by OECD standards. We can well afford to provide the baby boomers with a decent standard of living during their old age. But just how would we find the revenue? The possibility exists to use the end of the mining investment boom to finance the retirement of the baby boomers.
The distinction between mining investment and mining production is important here. It’s not the boom in mining itself which is slowing down; it’s the mining investment boom. Many more people are employed during the establishment of new mines than are employed running the mines once they are in production phase.
With the mining investment boom coming to an end, a mining production boom will follow. Most of the proceeds of the mining production phase will be exported as profits by largely foreign-owned mining companies or pocketed by the likes of Gina Rinehart and Andrew Forrest.
The Australian public owns the resources in the ground that the miners dig up and sell. When we talk about mining income, what we’re mostly referring to is asset sales, not real income. You don’t sell your car and call that money income. The mining companies add value to the resources by digging them up and putting them on a ship in an accessible form but they do not create the value of the resources themselves. Yet it is primarily the mining companies that benefit from high resource prices, rather than those who own the resources (Australian citizens). This is the very definition of economic rent; it is profit that the companies do nothing to earn which is in excess of industry expectations.
Australian citizens deserve a reasonable return for selling their assets to the mining companies and a well-designed resource rent tax would deliver that return. This revenue could be placed in a sovereign wealth fund, similar to Norway’s, the proceeds of which could assist with paying pensions or be used to maintain and improve public services such as education and health. The one-off sale of assets should be invested in the future in some way, rather than just be used to plug holes in the budget of the present day.
Of course, resource taxation is just one of the many possibilities for increasing tax revenue. The Henry Tax Review, completed in 2009, is full of very sound recommendations, 95% of which have been completely ignored by both Labor and the Coalition. Land taxes are another good option, as is a financial transaction tax. Even increasing the GST is a viable option assuming adequate compensation for low income earners is included as part of the package.
Tax reform is difficult. It takes leadership because there are always losers and losers shout louder than winners – who tend to slink away with their proceeds and quietly hope nobody notices. Is there a major party political leader on the horizon with the sort of courage, honesty and charisma necessary to convince us of the need for tax increases and to resist the inevitable, well-funded backlash? Not that I’ve seen. But for the sake of those baby boomers facing decades of retirement spent in poverty, I hope that one emerges soon.
Warwick Smith does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
As we ponder who will lead our next government we need to ask who will best deal with Australia’s overblown ecological footprint. It’s about seven global hectares per person, which is about the size of seven soccer fields and is among the largest per capita footprints in the world. It is an issue that demands attention at the highest level.
So far in the election campaign, we have seen some discussion about reducing our carbon footprint, but none about how our economic system is putting more pressure on the planet than it can bear.
The ecological footprint measures the demand humans make on nature. It estimates how much biologically active land and water a human population uses to support its way of life. This system of accounting also measures bio-capacity, which is how much biologically productive area nature has available to provide these essential and nonessential services.
The available bio-capacity of the planet is declining alarmingly as human numbers and their individual demands on environments continue to increase.
Footprint analysis takes account of the sustainability of our food production and purchases, our manufacturing, buildings, transport systems and our energy systems.
By measuring and monitoring the ecological footprint of an individual, household, community, city, business, nation or all of humanity, we can continuously monitor our pressure on the planet and make progress in reducing it. We can and must learn urgently to live within the resource constraints of a single Earth.
Footprint methodology is well-validated science and it is being used nationally and internationally by governments and civil institutions to monitor comprehensively human impact on the environment.
It estimates footprints in global hectares per person. These are about the size of a soccer field. The 15% who live in rich countries use about 6.5 global hectares per person.
The 48% who live in middle income countries use 1.98 hectares per person and the 37% living in poor countries have an average footprint of 0.8 ha per person.
For a population of 7 billion people to live sustainably, we can use about 1.8 ha per person. We are using about 50% more that that and the planet is in ecological deficit.
We are surviving this overshoot by depleting the earth’s resources, raising the earth’s temperature and reducing further the stock of biologically active land and water at the very time that human demands for them are increasing. Our environmental overshoot will go on increasing unless we very quickly transform the human mindset and the global economy, contain the growth in human numbers and develop more equitable systems for sharing across national borders.
The really good news is that about half of the human ecological footprint is attributable to carbon dioxide emissions. We know how to reduce these and by weaning our species off energy derived from burning fossil fuels, humanity’s footprint could be very significantly and rapidly reduced towards Earth’s bio capacity.
How is all of this relevant to the coming election? We need to see evidence that our aspiring leaders understand this desperately serious issue, and its implications for Australians and other world citizens. Business as usual is no longer a responsible option. If we continue to expand our footprint, it further constricts the ability of poor countries to expand theirs and hastens the decline in existing biologically active land and water. Our next prime minister must be ecologically footprint literate.
We must engage our would-be political leaders in an urgent national discussion about the disgraceful inadequacy of our current carbon emission targets.
To avoid doing what we could so easily do in drastically cutting our carbon emissions is a culpable crime, not only against our own citizens of the future, but against the capacity of people in developing countries to achieve even basic standards of health and wellbeing.
And we need a national debate about the way our economic system affects our growing footprint. We need fundamental discussions about what we want from an economic system and how we should measure progress in achieving it.
Which brings us to the issue of human health and wellbeing. Increasing numbers of thoughtful Australians are recognising the impossibility of continuing with business as usual and are seeking leadership that will place population health and wellbeing at the heart of the national enterprise, which it is manifestly not at present.
The future survival of our species depends on us reaching an acceptable relationship with the finite resources of the planet. The mental health of our young requires that they can envision a viable future for themselves and their children. They need to know we are doing the things that as a nation make hope possible.
We must engage Tony Abbott and Kevin Rudd in active consideration of these realities.
Robert Douglas is a Director of the NGO Australia21 – http://www.australia21.org.au – which seeks to expand national understanding of issues such as Australia’s ecological footprint.
The consistently measured and sensible Ken Henry this week criticised both major parties for promising not to raise taxes. The Labor party has promised not to increase the total federal government tax take beyond 23.5% and the Coalition have promised to always be lower taxing than Labor. These promises are distressingly reminiscent of Swan’s ludicrous promise to return to surplus in 2012/13 no matter what.
Ken Henry’s criticisms were founded on the knowledge that we face unavoidable government expenditure increases in health and age pensions due to our aging population and that, if we don’t increase taxes, we will have to keep making deep cuts to other government programs. I agree with Dr Henry and have written about this topic elsewhere. However, I believe the reasons that we should increase the total tax take are much more profound than just covering the expenses of an aging population – we should do it for the happiness, health and future prosperity of our society.
What are the things that really improve our quality of life? More money in our pockets can help if we’re really poor but it has diminishing returns the wealthier we get. A lot of organisations and researchers have built indexes measuring different elements of quality of life in different countries and cities around the world. Looking across many of these measures, we see that those OECD countries with higher proportion of GDP taken in tax tend to perform better on measures of wellbeing. It’s complex and there are certainly measures which don’t show this trend and countries that buck trends within each measure but the underlying trend remains. Normative judgements about what is important shape every individual’s view about wellbeing making this a very difficult area in which to generalise.
Environmental protection is fundamental to happiness, health and prosperity but rarely generates enough income to pay for itself (tourism in some places is an exception). Our greenhouse gas emissions must be dramatically reduced if we are to avoid catastrophic effects of climate change. This requires either a high price on carbon through a tax or trading scheme or a large commitment in government expenditure. We also need to address salinity problems in our agricultural lands, biodiversity loss and the declining health of our river systems. These things are all critical imho but we currently lack the government funds to address any of them effectively.
Australia sits towards the lower end of OECD rankings with a total tax to GDP ratio of just over 30% (OECD average is around 36%). We can well afford to collect more tax in order to provide the best of what a wealthy country can offer its citizens. If we should choose to do so, I would again agree with Ken Henry that we should focus on taxing resource extraction and land values rather than increasing taxes on wages and profits.
I intend to make this the subject of future research so will likely make more posts on this topic over the coming months.
Housing affordability is an issue that perennially haunts political discourse. It rarely becomes the target of actual policy because the overwhelming majority of politicians refuse to face up to the real causes and are terrified of the few effective solutions. However, the truth is that introducing a broad-based land tax would take us a long way towards resolving concerns about housing affordability, urban sprawl, and falling government revenue.
If there are so many good reasons why we should increase our use of land taxes, why don’t we do it? The real estate lobby is obviously one well-resourced reason that land tax reform is difficult but there are about six million other reasons and they’re called home-owners.
The problem with land taxes is that explaining why they are good is complex and requires time, whereas the arguments that can be used by political opponents against them are simple, compelling and strike at the heart of modern consumerist security. In the age of the focus group and political sound bite, that stacks the odds firmly against land taxes despite overwhelming economic and social justice arguments for them.
“Homebuyers would be invited to pay even more, by introducing a new land tax on home owner-occupiers.”
GetUp may be right to question the motives of the BCA and it may seem reasonable to assume that recommendations made by the big business lobby are going to have a questionable social justice impact. However, I’d be willing to bet GetUp didn’t really do their homework on this one. If they did, they’d probably conclude that broadly applied land taxes would be well aligned with their progressive agenda.
Every significant taxation review carried out by independent experts in Australia has recommended making greater use of land taxes. The most recent, Australia’s Future Tax System, often referred to as the Henry Tax Review, was no exception, citing land tax as a potential efficient source of revenue for states and territories, concluding:
“The future Australian tax system should increasingly rely on land values as a tax base.”
The fact that an overwhelming majority of tax economists advocate for increased land taxes doesn’t automatically mean we should agree. The overwhelming majority of economists are wrong about an alarming number of issues, some of them fundamental to our wellbeing.
In fact, the reasons are so compelling that there are some who believe we should only have one tax and that should be a land tax. I wouldn’t go that far but I certainly include myself in the group of tax economists who believe land taxes should play a much greater role in our tax mix.
Fundamental in understanding all of these arguments is that we are talking about taxes on the unimproved value of the land only, not the land plus buildings and other infrastructure.
The capacity for the judicious use of land taxes to pay for infrastructure expenditure is potentially revolutionary. The amount that new infrastructure increases land values is a very good proxy for how useful and valued by the community that infrastructure is.
If we prioritised infrastructure projects based on projected land value increases and then taxed enough of that windfall gain to pay for the infrastructure, we could have rolling investment in major projects that pay for themselves. This was the essence of the point being made by the BCA report.
Prompted by the Henry Tax Review, the ACT is leading the way in state and territory tax reform. The ACT government has recently begun a transition away from inefficient stamp duties and insurance taxes towards land taxes. They are dealing with the tricky transition by rolling it out very slowly over 20 years, thus spreading the impact on land prices broadly enough to make it negligible in any particular year.
Other states and territories should follow suit as soon as they can. Even if they are reluctant, I expect the success of the ACT system will force them to eventually follow because those states and territories that get rid of insurance taxes, payroll taxes and stamp duties and replace them with land taxes will create a more attractive operating environment for business, more affordable housing and have a stronger more sustainable revenue base. Who could argue with that?
Warwick Smith does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.
Federal treasury just released a scoping paper on corporate taxation and have warned that they are basically impotent when it comes to preventing profit shifting by multinational companies. We’ve all heard about high profile cases like Apple and Google but this kind of behaviour is very widespread. These companies can’t shift the land they use overseas. Billionaires can’t pay clever accountants to hide the land they and their companies use in the same way they hide their income in trusts, super funds and other, more arcane tax dodging instruments. They can be more efficient with their use of land in order to reduce tax – but this is a good thing.
For more information on land taxes and land prices, see the Henry Tax Review Volume 2 pp. 247-270.