Articles – Page 14

ChAFTA: Union Campaign Misses The Point

The union campaign against the China-Australia Free Trade Agreement (ChAFTA) is a mixture of misinformation, confusion and xenophobia.

But it does hide an uncomfortable truth. Labour market protectionism encourages the exploitation of foreign workers. We’ll come to that shortly.

The ACTU argues that ChAFTA will “shut out locals from jobs”. They point to three controversial provisions.

The first is the elimination of labour market testing for Chinese workers in the 457 visa program. Labour market testing requires employers to advertise locally before they employ foreigners on in 457 visas. But the requirement has always been a tick-the-box waste of time. An independentreview last year found it was pointless and cumbersome. There’s no evidence that unemployed Australians in any way benefit from this regulatory hurdle.

Another controversy relates to skills requirements. The unions say ChAFTA means foreign tradies could come to Australia who do not meet Australian standards. But the skills requirements under ChAFTA are exactly the same as for most other countries we accept skilled workers from. ChAFTA just removes a discriminatory higher bar for Chinese workers. (The higher bar still applies to a small number of other developing countries)

The final controversy concerns major projects. A side memorandum to ChAFTA establishes a new type of labour agreement – “investor facilitation agreements” – that allow major infrastructure projects to bring in foreign workers.

But we already have similar labour agreements. The essentials of the law haven’t changed, as the Migration Council’s Henry Sherrell notes. All agreements have to be approved by the immigration minister. And major projects have to pay foreign workers Australian market rates. Claims that ChAFTA changes existing major project wage requirements are simply wrong.

The unions can get away with these fudges because migration law is extraordinarily complicated – a byzantine regulatory environment of quotas and controls. The Immigration Department offers dozens of different types of visas for different types of people. Each have their own criteria and conditions. The Migration Act is a behemoth: currently 1048 pages, not including supporting regulations.

There are lots of reasons for this complexity. But one big one comes from the unions, who want migration to be heavily controlled to protect Australian jobs. If we were more open to migration – if there was wider acceptance of the evidence that immigrants do not steal jobs – then these rigid and regulated visa schemes would not have to exist.

This is the political economy behind union stories of foreign workers being exploited in Australia.

To the extent that there is exploitation in Australian immigration, it is because employers are able to use restrictive visa conditions – demanded by unions to protect Australian workers – as a stick to wield against foreign visa holders.

For instance, on the weekend Fairfax papers and Four Corners uncovered what they say is widespread exploitation of 7/11 workers. No doubt the story has a way to run before we learn all the facts. But notice how many allegedly exploited 7/11 employees are working on student visas.

The visa conditions on one student “gave the franchisees leverage to threaten to go to the authorities to have his visa cancelled if he complained about his salary or working conditions.”

At least student visa holders might be able to find other work. Workers on 457 visas have just a single sponsor, with correspondingly greater leverage.

It is possible to be opposed to foreign workers from China and not be xenophobic. But you’d have to be blind to miss the undercurrent of xenophobia in the anti-ChAFTA campaign. Just as the union campaign against poles and wires privatisation in March this year leant heavily on anti-Chinese sentiment, so too does this month’s spectre of Chinese workers.

Our highly regulated migration system is better than none at all. Immigration is the most powerful anti-poverty tool we have. People who migrate from poor countries to rich countries dramatically improve their wellbeing and those of their families.

We ought to be accepting more foreign workers. And we ought to be reducing the visa restrictions that make them vulnerable to exploitation.

Because when we talk about immigration policy we need to keep the focus on the immigrants themselves – and why they would want to come to Australian in the first place.

When unions campaign for Aussie jobs – when they campaign for crackdowns on visa categories, for more rules on who cannot work in Australia, for limiting foreign workers on projects – they are campaigning not against business or “capital” but against people who are less well-off than they and who were born in countries poor than ours.

International solidarity, it seems, only goes so far.

Forcing GST On Imports Doesn’t Stack Up

In opposition the Coalition promised no new taxes or tax increases. On Friday Joe Hockey announced the Coalition’s latest tax increase: eliminating the GST low value threshold on imported goods.

Currently GST is not imposed on imports worth less than the low value threshold of $1000. When you buy books from Amazon or clothes from ASOS, you don’t pay GST. As of July 2017, you will.

Well, you probably will. This is going to be very hard for the Government to implement.

The GST collection won’t be levied when goods are imported. Inspecting packages at the border costs more money than it raises, as the Productivity Commission conclusively found in 2011. (The Assistant Treasurer, Josh Frydenberg, has been saying that “real improvements in technology” make that finding no longer true, but the inspection problem isn’t really a technological one, it is a time and warehousing costs one.)

Instead, Australian Taxation Office officials are going to fly around the world to ask “hundreds” of foreign companies exporting more than $75,000 worth of goods to Australia to levy the GST at their end. Nice work if you can get it.

The politics here is obvious and unflattering.

Friday’s announcement satisfies the retailers who have been lobbying for years to reduce the threshold, claiming it makes domestic goods uncompetitive.

Of course, the GST threshold is a convenient scapegoat for much deeper issues in the Australian retail sector. Even if GST were imposed on all goods, many representative products would still be more expensive sold from Australian shops than foreign ones, as my colleague Mikayla Novak has shown. And international shipping isn’t free.

Friday’s announcement also satisfies Treasury and the state governments who are clamouring for more revenue. Like everything else Hockey has dressed up as a “tax integrity measure”, the elimination of the GST threshold is nothing more than a tax grab.

But, politics aside, let’s look at the low value threshold on its own merits.

Almost nobody in the debate has acknowledged that the threshold has been slowly lowering ever since the introduction of the GST. This is because the $1000 threshold is fixed – it is not indexed to inflation. And a grand isn’t worth as much as it used to.

This is the point the Treasury’s own Tax Board made in 2010, writing that inflation will “reduce over time any potential bias in favour of imported goods over local goods of the same quality and value”.

So Australian retailers have been complaining about a tax distinction that has been constantly and automatically eroding in their favour for the last decade and a half.

And that’s before we consider the fact that the dramatic reversal of the dollar has made domestic retailers much more competitive than foreign ones in the last few years.

The GST is usually described as a consumption tax. It is not a consumption tax because the GST is not levied on consumption. It is levied on sales by firms operating in Australia. In the real world, the GST is a sales tax with an input credit.

That observation might sound pedantic but it has big implications for the import threshold debate. If the GST is in fact an Australian sales tax, then trying to impose it on sales by foreign companies in foreign countries is not a tax integrity measure at all. It is a tax on imports. It is, in other words, a tariff.

Foreign companies do not, and should not, pay Australian taxes – just as companies in foreign countries do not operate under Australia’s regulatory framework or our political institutions.

As the Howard government said when it introduced the GST in 2000, “the government wants to ensure it does not unnecessarily draw non-residents into the GST system”.

And the idea that we need to raise taxes at our border in order to ensure “competitive neutrality” or to “level the playing field” is mercantilist nonsense. In fact, it’s not clear why GST should be levied on any foreign imports at all, apart from a pure protectionism.

In practice, the GST is only going to be levied on foreign companies that a) provide more than $75,000 goods into Australia and b) don’t slam their door in the face of Australian tax officials when they come knocking.

So there’s a non-trivial chance Hockey’s GST move will just encourage Australian consumers to move from bigger websites to smaller websites, trying to avoid the 10 per cent tariff.

On Friday Hockey said he has many “levers” at his disposal to “pressure” companies overseas to collect Australian taxes.

Maybe he does. But if so, that should be recognised for what it is: trying to squeeze money from foreign companies for no other reason than to satisfy retail lobbyists and feed the Government’s apparently unrestrainable spending habit.

Why Multinationals Are Not Avoiding Australian Tax

with Sinclair Davidson

The title of the interim report of the Senate economics committee inquiry into corporate tax avoidance, released this week, is “You cannot tax what you cannot see”.

This is a rather embarrassing admission that the evidence for widespread corporate tax avoidance – the avoidance which has filled so many newspaper columns, so many hyperbolic speeches in parliament – just doesn’t exist.

Imagine being pulled over by the police and told that even though you’ve been observed driving below the speed limit, stopping at stop signs, giving way at give way signs, indicating correctly, wearing your seatbelt, and maintaining a respectable distance from the car in front, the police have a hunch you’re somehow violating community expectations.

While the Senate committee feels sure there are questionable corporate tax practices going on, it doesn’t actually find any.

Rather, it relies very heavily on the political rhetoric of a now-discredited 2014 report by the Tax Justice Network, which claimed that firms were denying the government vast sums of revenue through opaque and confusing tax arrangements.

In fact, what the committee’s interim report shows is that the tax practices of the big tech firms are quite explicable.

For instance, Microsoft and Google have their regional headquarters in Singapore. As the committee admits, these headquarters are not shells, existing solely to avoid giving Joe Hockey money. They’re real. They have real offices, real assets, and real staff doing real work. In Singapore. Not Australia. Just because those Singapore headquarters digitally export some products and services to Australia does not mean they should pay Australian corporate tax on the profits.

Even more explicable is large firms with large research and development costs deducting those costs from their taxable profits. The R&D corporate tax deduction is bipartisan government policy. It seems a bit much for governments to introduce a tax incentive then get angry with firms for using it.

The lack of evidence of tax avoidance makes the committee’s belief that the Australian government should name and shame corporate tax avoiders vaguely comic.

Certainly, the Australian Tax Office should be vigilant ensuring firms are paying what they owe. Firms that fail to do so should face the full consequences of the law. But that already happens. Australia has some of the strongest anti-avoidance laws on the planet. The government has the tools, right now, to deal with illegal tax evasion.

Underpinning this whole debate is the fact that Australia’s corporate tax rate is very high. At 30 per cent, it is substantially above the OECD average of 25.3 per cent. And Australia is one of the most heavily reliant countries on corporate tax revenue in the OECD. The Senate committee admits that this heavy burden puts Australia at a “comparative disadvantage”.

With such a disadvantage, it is no surprise that multinational companies are not lining up to establish their regional headquarters here.

But a failure to establish regional headquarters in Australia – “avoiding permanent establishment” in the lingo of the committee – does not constitute tax avoidance. Australia’s tax and regulatory environment is not competitive. Singapore’s is competitive. This ought to cause some soul-searching by the Parliament. Handwringing about phantom corporate tax avoidance just postpones consideration of the real problem.

Perhaps we might expect the sort of anti-corporate nonsense espoused at the inquiry from Labor and the Greens. What’s really disappointing is the full-throated support of the corporate tax panic from the Coalition.

Government senators on the committee wrote a dissenting minority report. Yet their complaint was that the committee did not fully acknowledge all the exciting work the Abbott government was doing to clamp down on multinationals.

Earlier this year the government released its own proposed legislation to deal with corporate tax avoidance. In effect that legislation would empower the ATO to second-guess where it feels profits should be booked for tax purposes.

The consequences of such an approach would be dire. It would expose multinational firms to double taxation. It would be a huge incentive for those firms to leave Australia all together, taking jobs and economic activity with them.

All this fretting about tax avoidance makes good demagoguery. But it might seriously harm Australia’s economy.

There’s Nothing Conservative About Using The Constitution As A Political Trick

The Australian constitution has one great feature. It is incredibly hard to change.

This, obviously, is what Scott Morrison was thinking about when he proposed last week that Australia hold a constitutional referendum to deal with same-sex marriage.

A plebiscite would simply determine the public’s view on changing the Marriage Act via Parliament, but a constitutional referendum would propose adding the words “opposite and same-sex” before the word “marriage” in section 51(xxi) of the Constitution.

A plebiscite would have to simply receive a national majority to be considered decisive. But a constitutional referendum would have a much higher bar: both a national majority and majorities in at least four states.

Australia’s constitutional amendment system is often described as “notoriously difficult”. We are a “frozen continent”, constitutionally speaking.

Only eight out of 44 referendums have succeeded. This often cited figure understates the failure rate. Other possible referendums have been abandoned before coming to a vote. Kevin Rudd dropped Julia Gillard’s local government referendum when it became clear the Coalition’s enthusiasm for change was waning.

The Australian founders may not have intended it to be this hard to change the constitution. But there are good reasons for constitutional change to be difficult.

Constitutions exist in order to provide fixed rules about what governments can and cannot do. The strength of a constitution derives from the certainty it provides. A constitution that can be easily changed is not a constitution at all, in that it does not offer the stability necessary for long term economic and political management. In the pre-constitutional era, governments did not feel bound by rules. Now they do. That’s a very good thing.

This does not mean constitutions should be impossible to alter. But the danger to the constitution comes from reckless change, not stubborn adherence to the status quo. As Geoffrey Brennan and Hartmut Kliemt have written:

The slowness of the procedure will give us pause and help us steer a steadier constitutional and political course than we would do otherwise.

It’s important to note that the desirability of constitutional rigidity holds true even if we think the constitution is weak, or flawed, or could be amended in an obvious way.

Yes, we all have our own ideas of how statutes and constitution might be rewritten that would make this country more perfect. But just have a brief scan of the previous 44 referendums (Wikipedia has a nice list, with links to the questions themselves). It is pretty clear that Australia is better off, on balance, for having rejected most of them. Almost all were outright and explicit power grabs by the Commonwealth.

With all this in mind, the requirement that a constitutional referendum achieve a double majority – majority of the population and majority in the majority of states – is in fact a relatively low bar for a change to the rules that govern the structure of the government.

After all, what is the alternative? Simple majority voting? Majority voting is not inherently more democratic.

We are more likely to make democratic decisions – that is, decisions that more represent the will of the people – with a higher threshold. When 51 per cent of the population impose their views on 49 per cent of the population, it’s hard to say that imposition has much moral authority.

This is the basic case for constitutional conservatism (couched admittedly in economic terms rather than the usual legal ones). Continuity should be preferred. Change should be resisted.

The Liberal Party used to be the party of constitutional conservatism. Labor has always wanted constitutional reform. The Coalition’s historical role is to hold the line, to espouse modesty and stability; the sort of virtues represented by the Samuel Griffith Society and a long line of conservative judges and political leaders.

Yet under Tony Abbott, the Coalition appears to have abandoned that storied and entirely necessary tradition.

In opposition, Abbott had signed up to Gillard’s local government referendum. He had to be pulled back into line by state Liberal party divisions.

Abbott wants to amend the constitution to recognise Indigenous Australians. You only need observe how the recognition debate has spiralled out of the Government’s control to see how antithetical it is to the conservative mindset.

Now senior ministers of the government are seriously proposing a constitutional amendment for no other reason than to stack the deck against a policy they oppose. And that policy is, we are repeatedly told, a second-order issue.

There’s no reason for a constitutional referendum on same-sex marriage. The High Court has said the Commonwealth Parliament has the power to legislate in this area. The constitutional approach is only being floated because Morrison and others want the measure to fail.

Constitutional conservatism was once a matter of deep Liberal identity. Now it’s just another political trick for short-term gain.

Let’s Be Honest, Question Time Makes Everyone Look Stupid

The importance of the speaker in Australian Parliament is wildly overstated, because the stakes of parliamentary Question Time are wildly overstated.

It is a sign of how far the Abbott Government has lost control of the agenda that the appointment of what is normally a minor administrative position became the centre of Canberra politics.

By now the entitlement saga has spiralled out of control, enveloping every side of politics.

But recall that Labor was delighted when the Bishop helicopter photos emerged. It seemed like a perfect encapsulation of the charge they’d levied at Bishop ever since her appointment. Bishop was hopelessly partisan. Indulgent. Shameless. Here was Bishop’s performance as speaker converted into metaphor and given corporeal form.

That delight was really because Labor’s constant complaints about her speakership weren’t exactly resonating with the public. There’s nothing more inside beltway than complaining about how many people Bishop threw out of the chamber during Question Time.

Of course, you can understand why parliamentarians think the conduct of Question Time is important.

It’s a big part of their parliamentary week. For many of them, Question Time is a theatre where they can try to rise above the undifferentiated mass of other representatives. The person who held the record for being thrown out under Bronwyn Bishop was Nick Champion. Champion is the member for Wakefield and shadow parliamentary secretary for health, hardly a high-profile day job.

Labor types have been tweeting all weekend about the need for a new speaker to uphold standards and restore respect to Parliament. But never mind whether the speaker is biased. What are all these parliamentarians doing yelling and heckling from the back seats, and then blaming the speaker for Parliament’s low reputation? It’s like criminals blaming the police for failing to prevent their crimes.

Back in 2011, Katharine Murphy described the Gillard-era Question Time as the worst “grinding and time-wasting ritual” in federal politics. Murphy wrote that we should “make it matter once again”.

If anything this is too optimistic. Commentators often lament the lack of presence in the current Parliament. They are nostalgic for the great performers of previous generations. We used to have politicians who looked like they owned the room, and by extension, commanded the country. Question Time favours the fast-witted, the biting, and the aggressive. Peter Costello is acknowledged as a great Question Time performer. Paul Keating is known as the master.

But to what end? YouTube helpfully has Keating’s most famous performance: the “I want to do you slowly” response to John Hewson’s question about an early election. It’s great fun, sure. On the other hand, strip it back and Keating was just hurling a barrage of insults. Nothing wrong with that, but we shouldn’t pretend that it was a great democratic contribution.

Even at its most legendary – even in its most memorable, brightest moment – Question Time was just entertainment. Entertainment for an infinitesimally small portion of the population.

More commonly, Question Time is just the forgettable recitations of the lines of the day – short term Capital Circle obsessions intoned as if they were matters of great Shakespearian substance.

It’s true that there was a previous era in which Question Time was not the farce it is today. As this guide to parliamentary practice notes, Question Time evolved out of the ad hoc custom of asking ministers questions without notice. The earliest Commonwealth parliaments would only feature a few such impromptu questions. Questions would be asked when there were questions to be asked.

Have a look at this “question time” from July 1915. The questions were simple and unadorned. The answers were direct (“I shall make inquiries into the matter” was the sum total of one response by the Assistant Minister of Defence.) There’s little of the modern preening and bluster.

The standing orders that govern questions without notice have changed many times in the last century. Many proposals to reform Question Time focus on these standing orders. But the problem isn’t with the rules. Nor is it with the speaker. No doubt Tony Smith will be a great improvement on his predecessor. But Bronwyn Bishop didn’t wreck Question Time.

Question Time is farcical because it is an empty ritual. It adds nothing. It distracts the press gallery. It distracts our politicians. It undermines the more serious work that goes on in Parliament. It is divorced from the actual business of government, the actual business of legislation, and the practical needs of democratic accountability.

Let’s be honest, Question Time makes everyone involved look stupid.

Bronwyn Bishop’s accidental contribution has been to illustrate just how ridiculous this feature of Australian politics truly is.

Entitlements Review: This Is A Problem Of Definitions

To be a parliamentarian is to have a strange job. To be speaker of the house in federal Parliament is to have an even stranger one.

Recall that Bronwyn Bishop’s first line of defence was to say that she flew to the Liberal fundraiser in Geelong to talk about the role of Parliament. Is that really what she is employed to do? Does that count as party business or political business or parliamentary business? Should we be paying for it?

It’s easy to say we want to reform the entitlements system. But it’s much harder to decide what constitutes “official” business that taxpayers should support, and “political” business that taxpayers should not. There’s not always a bright line separating the two.

Yes, a helicopter to Geelong, or charging taxpayers for attending a wedding, clearly crosses the unacceptable line. But what about arranging meetings in Melbourne to justify attending a party function the night before, as Tony Abbott did in August last year? I challenge you to write a rule that prevents tricksy scheduling.

Unsurprisingly, a 2010 review into parliamentary entitlements concluded that there were “unclear and sometimes inconsistent definitions” of what constitutes parliamentary, party, electorate business.

So let’s start with first principles. In the business world, employees’ expenses are covered on work trips. The job of employers, or their human resources staff, is to monitor employees to ensure that the firm and its shareholders aren’t being ripped off through extravagance. Our parliamentary entitlement regime tries to ape this private sector practice.

But parliamentarians aren’t employees. They have no boss. Yes, when they’re ministers or parliamentary secretaries they report to the prime minister. But as representatives, they answer only to voters, and they only answer every few years.

In fact, parliamentarians are much more like sole traders, who, through an election, win contracts to represent us – to act as our agent in the legislature.

This is a distinctly unromantic vision of the work of a politician. But if we’re trying to figure out what politicians are “entitled” to we should first figure out what their job is.

This subtly amusing parliamentary fact sheet tries to derive the “job description” of a parliamentarian by observing how parliamentarians exercise their time. They do parliamentary work (voting, committee hearings), constituent work (pressing flesh, going to fetes) and political work (party conferences, branch meetings, scheming).

But just because politicians do a lot of things doesn’t mean we should pay for those things. We elect them to represent us in federal parliament, not to visit fetes. They might enjoy being local celebrities but why should we pay for them to campaign?

A few years ago my IPA colleague Sinclair Davidson spelled out in The Australian an alternative model for dealing with expenses. Politicians should be well paid – probably a lot better than they are now. But once they’ve received that lump sum, they should pay their expenses themselves, just like any independent contractor would.

Those expenses – not “entitlements”, expenses – would then be treated as work-related deductions. Under that model, if Bronwyn Bishop wanted a helicopter ride she would have declared it not to parliament but to the Australian Taxation Office in her 2014-15 return.

(Ministers’ expenses – who actually are employees of the government – would be strictly controlled but covered in the same way employees have their expenses covered.)

This model has many advantages over the present system.

First, it would keep expenses in check. It’s easy to be loose with taxpayers’ money. It’s harder to be loose with your own.

Second, it avoids the interminable debate about what counts as parliamentary or political expenses. Either way, it all constitutes work-related expenses for tax purposes.

Third, it leaves subjective questions of whether spending is extravagant to the politicians themselves. Bishop wants a helicopter? Up to her.

Fourth, it leaves the question of what constitutes work-related to the tax office. I said politics is a weird job but it is not so weird that the ATO wouldn’t be able to handle these questions. They have a lot of experience here. Anyway, we’re at the mercy of the tax office. Our representatives should be too.

And fifth, it would be a hell of a lot less complicated than what we have now. The Finance Department says there are 300 separate entitlement codes in the existing entitlement management system, belying the complexity and confusion that surrounds political compensation.

There’s a deeper problem revealed by the Bishop affair.

Tony Abbott has been eager to blame the vagueness of the rules about entitlement use for the scandal. But all that means is the current system rests largely on individual judgment.

And if our parliamentarians are unable to exercise their individual judgment in a way that accords with the expectations of voters, then we have a serious problem.

Politicians are expected to make some of the biggest decisions affecting our lives. We place them in positions of great trust to act on our behalf.

What does it say about representative democracy if our politicians don’t even have enough judgment to prudently and responsibly arrange their own travel? Nothing good.

Please, Just Give Us A Real Growth Strategy

Every once in a while something brings the nonsense of daily politics back down to earth.

Last week Reserve Bank governor Glenn Stevens suggested that the slow growth we have seen over the last few years might not be a temporary post-Global Financial Crisis aberration. It might, actually, be the new normal.

Rather than the three or so per cent growth each year we’ve come to expect, we might have to get used to 2 per cent GDP growth.

For Stevens, this lower growth is a hypothesis, not a prediction. But even so it’s a big worry. In the long term, lower GDP growth means lower living standards for everyone. There is nothing more responsible for our historically unprecedented prosperity than our relentlessly growing economy. Growth is critical. Growth is fundamental. A richer society is a happier, healthier society.

Even if your taste in economic philosophy is less free market than mine, growth is the foundation on which government social services are built. Growth pays for the National Disability Insurance Scheme and helicopter flights to Geelong alike.

We can debate how much tax the government should impose. But you can’t tax income that doesn’t exist.

Yet neither party has any idea – let along any proposal, plan or program – for how to boost Australian growth back up to three, let alone four per cent per year. They’re not even talking about it.

Given that the most effective way to bring the Commonwealth budget back to balance is to increase growth (and therefore tax receipts) this silence is all the more stark.

A quick survey of the economic proposals on the political table is disheartening. Labor wants to boost taxes on savings (cracking down on so-called superannuation “concessions”). The Coalition wants to boost taxes on consumption, by raising the GST and imposing it on online and digital transactions. Labor wants to tax greenhouse gas emissions again. New taxes are not pro-growth.

Tony Abbott was widely ridiculed a few weeks ago when he responded to a question on the Greek turmoil by referring to the Government’s grocery code of conduct. This was all very funny but Abbott’s tone-deaf response hinted at the much deeper issue facing the Government: it has no central economic agenda.

That the Government can propose higher taxes and proclaim its desire for lower taxes in the same breath isn’t a failure of messaging, it reveals an absence of purpose.

The deregulatory drive of the Coalition’s first year, as inadequate and insubstantial as it was, is now a memory.

And abolishing the carbon and mining taxes was good. But somebody is going to have to pull the Abbott Government aside and quietly tell them economic management is about more than righting the wrongs of the Rudd and Gillard governments.

What would a pro-growth strategy look like? It’s not like there isn’t any low-hanging fruit for governments to grasp.

Our absurd and anachronistic restrictions on foreign investment should be eliminated. Competition law should be liberalised and reformed to allow firms to take advantage of economies of scale. The four pillars policy – which prevents mergers between the big four banks – is unjustifiable on any grounds apart from populist anti-bank sentiment.

Business formation is a proxy for economic dynamism. We need regulatory and workplace law to encourage business start-ups, rather than hinder them.

Some of our largest and most potentially-innovative sectors are held back by bureaucracy and regulation. A pro-growth political platform would have healthcare reform at the centre. Innovation policy needs serious change so innovators can bring ideas to market sooner.

And given the importance of education to growth it is embarrassing that the debate over education policy has devolved into a squabble over a shrinking pool of government money. The last big idea implemented in education was the introduction of HECS in 1989.

A pro-growth platform would liberalise Australian trade barriers without waiting for multilateral or bilateral trade deals to endorse them.

And a pro-growth platform would look at the teeming mass of skilled and unskilled labour around the world and see opportunity, rather than threat. Economic powerhouses have been built on immigration. Australia, with our abundant space and stable institutions, is uniquely placed to attract their entrepreneurial energy.

The economist Mancur Olson once described the progress of human society as an accumulation of special interests who defend the status quo. A country slides into stagnation as more and more groups grab privileges that hold back necessary structural change.

Olson’s is a pessimistic story. Let me amplify that pessimism. Australian policy debate is constrained most by the tyranny of the status quo – a refusal by the political class to consider anything but the most moderate, marginal adjustments to existing policy settings.

It’s obvious that Canberra still believes it has the broad strokes right. After all, they think a grocery code of conduct counts as reform.

Perhaps in the parliamentary triangle it looks that way. Right now, all special interests are being nicely catered for. Rents are sought in an orderly fashion.

But, from outside Canberra, it looks like the economy is slowly grinding into stagnation, and our political class is apparently powerless to do anything about it.

Hockey’s ‘Grand Deal On Tax’ Is Just Wishful Thinking

Joe Hockey is looking for a “grand deal” between government and the community on tax reform. On Wednesday last week he addressed a PricewaterhouseCoopers audience calling for a discussion about big, long-term changes to the tax system that might set us up for coming economic changes.

There’s no reason to doubt his sincerity. Hockey seems genuinely interested in the structure of the tax system. He was recently speculating whether the GST has a future in a global economy, where transactions are digital and borderless. It’s not hard to imagine the blue sky conversations he’s enjoyed with Treasury boffins where they ponder such imponderables.

But his hope for a grand deal on tax is folly. Tax reform is easy to talk about. It’s very hard to implement. It’s even harder to implement in a way that prevents the political system from undermining the virtues of the reform in question. And it’s almost impossible to implement when your government has no political capital.

Australian governments levy more than 100 separate taxes. Each of these interact in complicated ways, introducing incentives for us all to rearrange our affairs, to work, spend and save differently. No real-world tax is perfect, perfectly fair or perfectly efficient. They all bias economic activity somehow. (Sometimes this bias is intentional. So-called “sin” taxes are designed to stop us buying the product that is being taxed.)

Over time, governments have amended the system to reduce the most obvious biases and distortions. Many of those policies that are today fashionably described as tax loopholes or concessions exist because, in their absence, some activity would be penalised.

On The Drum last year, for instance, Alan Kohler criticised dividend imputation for making Australian investors obsessed with collecting dividends. But if we didn’t have it, income earning through corporate investment would be taxed twice – first in corporate tax, then when it is returned to investors through income tax.

The tax system is an evolved formula that reflects decades of lessons, errors and political compromises.

So designing a more efficient tax system than what we have now is relatively easy. Everyone has their own ideas. Yesterday John Daley and Brendan Coates of the Grattan Institute were pushing for property levies. NSW Premier Mike Baird proposed a 50 per cent increase in the GST. Tony Abbott likes that one.

But there’s a big difference between tax design and tax reform, as the Harvard economist Martin Feldstein noted four decades ago. Tax systems can be designed on a blank sheet of paper. But tax reform has to be done in an existing political system, underpinned by existing political institutions, coordinated with existing political compromises, and against the backdrop of a welter of political interest groups with political influence and media friends.

All that politics inevitably leaves its mark. All economic reform is the result of bargaining between the most powerful interest groups. What looks like a beautiful, clean, theoretically-efficient tax on paper is distorted and damaged when the political class try to enact it. Not all laws come out looking like firmly-cased and richly-coloured sausages. Sometimes what falls out of the legislative meat grinder is just a coarse pile of mince and broken pieces of pig intestine.

Hockey should know this. Remember the mining tax? The idea of a resources rent tax was, as so many economists said at the time, an elegant and efficient tax compared to the royalties system. But imposing such a tax on top of the Australian landscape was, it turned out, a hopeless task.

First of all, the mining tax was introduced by the federal government. But state governments owned the resources and charged the royalties. So the designers had to work around that problem by crediting back royalty payments. Second, it had to be introduced into an existing landscape where decisions about mining investments had already been made – hence another round of compromises and transitional arrangements.

And all this happened before the Rudd government learned it was not strong enough to resist a publicity campaign by mining companies. The replacement mining tax, introduced by the new prime minister, Julia Gillard, was even worse.

The last real tax reform success was 15 years ago, when the Howard government introduced the GST. But that success is easy to overstate. Parliamentary negotiations meant that large swathes of consumer products now fall outside the GST net. The original intention was that states would eliminate stamp duties on mortgages and other loans. That didn’t happen. And the way the GST is distributed means states bicker over their share and generally act like mendicant clients of an autocratic Commonwealth.

Hockey wants big picture thinking and long-term reform. It is good we have a Treasurer thinking such thoughts. But Hockey is not a theoretician. He is a parliamentarian. And what can be imagined on paper and what can be negotiated in politics are very, very different.

Why We Value The Old School Tie

It’s a very Melbourne thing to be horrified by school fees – and there is much to be horrified about. The fees at Melbourne’s most expensive schools are pushing $30,000 per child.

But take a step back. These big fees are a positive sign of the financial seriousness that society takes educating the next generation. Before we get to discussing equality or standards or choice, let us agree, please, that spending money on education is good.

There’s a real sense in which anti-private school hostility has nothing to do with education, per se, in that some people are richer than others.

What is the hypothetical alternative to wealthy parents investing in their children’s education? That they splurge on holidays and cars? Hand the money over as inheritance? Buy property? Surely we can welcome the money being used to develop human capital.

The returns on education are vast. A better secondary education experience leads to more choice of tertiary education, which in turn can translate into higher earnings over a lifetime.

No wonder parents want to buy as much schooling as they can possibly afford.

Individual students reap most of the benefits from their education. But as education advocates constantly point out, society benefits too. A more educated population is a more innovative, productive, and ultimately prosperous population.

Thus some investment by wealthy parents on private education – over and above what is churned back to them through the taxation system – flows through to society as a whole.

All this makes the hyperventilating about private schooling that forms such a fundamental part of Melbourne’s intellectual life more than a little ridiculous.

In an Age column on Thursday, Julie Szego suggested private schools seem a little like a “con” for those parents who are “bleeding money on private school fees on the assumption this buys their child a competitive advantage”.

Perhaps if you imagine modern Australia as a dog-eat-dog fight for prestige, then every attempt to increase human capital formation looks like a brutal feeding frenzy.

But it’s true: there’s a puzzle here. While private schools get better year 12 results, a whole host of evidence shows that once researchers control for things such as family background, the education level of parents, peer performance and so forth, many differences in results between private schools and public schools substantially decrease. Educated and engaged parents are likely to have educated and engaged kids, regardless of what school those kids are sent to.

So are parents being irrational when they send their kids to private schools? Of course not.

In many ways, by paying for private education, parents are buying their children friends. Who you go to school with matters. It is better have classes with peers that brag about doing too much study than too little. In his new book, Our Kids, social scientist Robert Putnam argues that in the United States peer effects cause a large part of education disparities.

Also, education is about more than test scores. All we know about why parents choose individual schools relates that choice to a school’s values, facilities, extracurricular activities, location, or how nurturing or driven the staff are. In other words, how good a fit it is for their child.

Rather than obsessing about the riches hidden behind the private-school fence, why not focus on how to make public schools more appealing?

Public schools would be more competitive against private schools if governments allowed more variation between schools, granted them more independence, and made it easier for more children to attend schools outside their geographic school zones. Remember, it isn’t just money and test scores driving demand for private education.

The obsession with the most expensive schools ignores those smaller, cheaper private schools blossoming around Melbourne, offering marginal improvements and more choice than that offered by the public system.

Funny how the debate about equality is always focused on the lifestyles of the rich, rather than the living standards of the poor.

The Age reported last week some private schools are taking legal action against families who fail to pay fees owed. But by all accounts private schools go out of their way to be lenient on payment. If you’re going to be in debt to anyone, you’d want it to be a school.

After all, it’s hard to imagine much sympathy for families that, for instance, did not pay a builder for a renovation and were subsequently taken to court.

Such is the moral baggage around private schooling that recouping debt fairly incurred is seen as some sort of ethical violation – yet another black mark against these malevolent institutions.

All that fury, all that outrage, directed towards what? Too much money spent on education?

There’s No ‘War On Wind’, Just MPs Doing Their Job

There was a lot of heat in the debate about the Clean Energy Finance Corporation over the weekend, but not much light.

On Sunday, Fairfax papers reported the Abbott Government had directed the CEFC to stop funding new wind farm projects.

Social media was livid. Tony Abbott was waging a “war on wind power”. How dare the Abbott Government presume to interfere with such a virtuous independent market program to tackle climate change?

That reaction was, to put it mildly, a load of nonsense. The Government’s direction to the CEFC is not unprecedented interference in an independent body. Nor is the CEFC a “market” mechanism. The CEFC is a government program whose funding policies are set by the executive.

Yes, the Coalition wants to abolish the CEFC outright. But it can’t. So the Government says it would rather the CEFC focus on funding innovation rather than established technology. There are a lot of objectionable things in Australian politics. This doesn’t rate.

The CEFC’s enabling legislation – which was written and introduced by the Gillard government and passed without Coalition support – allows the sitting government to do exactly what the Coalition is doing now. As noted in an explanatory memorandum authored by the Gillard government:

It is appropriate that the Government, as manager of the economy and owner of the Corporation, have a mechanism for articulating its broad expectations for how the Corporation’s funds will be invested and managed by the Board.

So each year the government is required to provide the CEFC with an investment mandate direction.

The memorandum specifically nominated “allocation of investments between different types of clean energy technologies” as one of the areas in which ministers might issue a direction.

What independence is provided by the CEFC Act is a requirement that ministerial directions not be contrary to the CEFC’s statutory obligations, and that ministers must not direct or prevent CEFC investments in specific companies. All fair enough.

With these provisions, the Gillard government gave itself the statutory leeway to direct the CEFC’s investment direction. If it didn’t want an Abbott Government to have the same leeway, it should have written the legislation differently. It knew the Coalition was opposed to the CEFC.

Anyway, that discretion is entirely proper. The CEFC is not an ethereal, non-political part of the Australian social fabric. It is the result of a four-year-old political compromise, designed to funnel money into one particular sector of the economy as part of the quid pro quo for theGreens’ carbon tax support.

So it’s a little bit silly to hear (as we did over the weekend) that by changing the CEFC’s mandate the Abbott Government is “picking winners”. That’s exactly what the CEFC was designed to do. The CEFC was designed to pick winners. It was designed to choose investments that it felt were not being adequately funded by open capital markets.

And the CEFC legislation already favours specific technologies. The body is not allowed to invest in carbon capture and storage or nuclear power. Nor can it invest in non-Australian projects. This last constraint seems a little peculiar if you think the CEFC’s ultimate goal is to reduce carbon emissions – a global, not a national, problem. But foreigners can’t vote.

Because it is not driven by the profit motive in a competitive market, the CEFC has to rely on non-market criteria on which to evaluate alternative investments. Right now that is done by these folk – the board of the CEFC. All the Abbott Government’s no-wind mandate does is constrain their criteria some more.

The idea that the CEFC is a “commercial” operation is nonsense. If it makes a profit consistently then it is a good candidate for privatisation. Why should the government own a profit-making financier? Why would it need to?

The CEFC got upset earlier this year when the Abbott Government asked it to lift its investment returns, asking it to “consistently outperform the market by a large margin”. But if the CEFC can’t beat the market with its government support, then the case for its continued existence is pretty weak.

Australia has a long history of government-owned banks like the CEFC – banks designed to push money into politically favoured sectors.

Who now remembers the Commonwealth Development Bank or the Australian Industry Development Corporation? Or the Commonwealth Bank’s Mortgage Bank Department and Industrial Finance Department? Or the joint public-private ventures of the Australian Resources Development Bank, the Primary Industry Bank of Australia, or the Australian Banks’ Export Refinance Corporation?

These banks were abolished or privatised because Australia came to recognise that markets allocate capital better than bureaucrats.

Right now there is a majority in the Senate preventing the abolition of the CEFC.

But it is almost inevitable that one day parliament will end the CEFC. Just as it ended all its other special development banks.