Diverted Profits Tax Will Go Nowhere

With Sinclair Davidson

The Turnbull government’s diverted profit tax has passed the Parliament. Introduced in response to the moral panic that, somewhere, somehow multinational corporations don’t pay a fair share of taxation, this new tax is at odds with the government’s professed belief in lowering the corporate tax burdens, is at odds with our international competitors, and (as we learnt just this month), is even at odds with the Australian Taxation Office’s tax enforcement priorities.

The 40 per cent tax on diverted profits is expected to raise $100 million. That implies that the federal government estimates a mere $250 million of diverted profits. To put that figure into perspective, the federal government recently announced a tightening of the rules on the grandparent child care benefit. That policy change would result in welfare savings of $250 million.

Grandparents allegedly rorting the welfare system are a much bigger budget problem than multinational corporations allegedly rorting the tax system.

Indeed, Tax Commissioner Chris Jordan gave the game away on March 16 when he told a Tax Institute conference that the gap between what large corporates and multinationals pay and what they should pay in tax was “relatively modest” and that “the biggest gap we’ve got in the system is us” – that is, individual taxpayers.

After five years of hyperventilating about corporate tax avoidance, this is a striking confession. The previous treasurer Joe Hockey made much of the fact that the ATO had identified 30 multinational corporations likely to offend and had embedded agents in those firms and would carefully investigating their practices.

True, Scott Morrison did say that this diverted profits tax is a tax integrity measure. Ensuring the integrity of the tax base is a legitimate policy goal. But a diverted profits tax is a counterproductive and illiberal way to go about it.

It allows the ATO to impose upfront liability and collect tax on allegedly diverted profits. It reverses the onus of proof and removes the right to silence – thus multinational corporations the right to natural justice under the Australian legal system. That is not a reasonable integrity measure but rather a punitive regime that targets foreign investors and successful Australian companies.

This is a policy that substantially increases the powers of the ATO without any governance measures to ensure that abuses do not occur. No doubt these powers will be exercised by the ATO to collect revenue beyond the amount intended by Parliament. That is simply the nature of regulatory bureaucracies and it will be small comfort for those multinationals who successfully challenge the ATO that their money is eventually returned to them.

Even more fundamentally, the diverted profits tax doesn’t sit well with current policy settings, nor with economic reality. There is currently a lot of effort and anti-business rhetoric to collect $100 million. Is it a coincidence that business investment is low? Or is that government is passing tax laws that violate societal norms of fairness and are creating an uncertain and arbitrary tax environment?

Business doesn’t know what tax rate they will face in Australia in years to come. It could be 30 per cent. It could go down to 25 per cent over 10 years if the Turnbull government’s corporate tax cut goes through. Or it could be as high as 40 per cent if some Canberra bureaucrat, empowered by the diverted profits tax, gets a bee in their bonnet about multinational structures they do not understand.

There’s been a lot of talk about policy uncertainty in the Australian energy market. With a lot less fanfare the corporate tax confusion is doing the same to the entire corporate sector. This is not how to ensure jobs and growth

In the meantime, Australia is facing an international environment where the British Prime Minister is openly discussing turning the UKinto a tax haven, and the Trump administration wants to reduce America’s corporate tax rate to between 15 and 20 per cent. The Turnbull government has chosen the wrong time to put multinational engagement with Australia at risk.

Is reform hopeless in an era of disillusion?

Around 23 per cent of Australians gave their primary vote to minor parties and independents at the July federal election. This is the highest number since the formation of the Liberal Party and the three party system at the end of the Second World War.

When political historians look back on our era it is unlikely they will focus on the machinations that have seen prime ministers spilled and governments rolled. Rather, they are likely to see the most important trends of our time and the growing popular disillusion with the major parties — indeed, the growing disillusion with the entire political class. It’s no surprise that in the privacy of the ballot box, more and more Australians are voting for none-of-the-above.

This trend is not unique to Australia. In the United States, the support for Donald Trump in the Republican Party and Bernie Sanders in the Democrats shows that even party loyalists are tired of what the mainstream is offering up. In the United Kingdom, Jeremy Corbyn’s ascent to the Labour leadership and Brexit — the successful referendum to withdraw from the European Union — was driven by a similar anger.

This is the politics of our time. It’s not about individual politicians — it’s no more about the individual characters, even policy positions of Nick Xenophon or Pauline Hanson or Derryn Hinch, no more than it is about Donald Trump as an individual or Bernie Sanders or Jeremy Corbyn. It’s about what has driven so many voters in the richest, most stable liberal democracies that human history has ever known to reject the political mainstream.

A matter of trust

A democratic political system is based on trust. Each party trusts that the other will accept the result of an election that does not go in their favour. This is a trust we take for granted in a country like Australia but a very real challenge for weak democracies in the third world.

But there are other layers of trust. We the voters trust that having elected a party it will govern in a way that resembles that which it promised before the election. In a representative democracy no government is obliged to fulfil its campaign promises — it does so by convention and fear that it will be punished by voters for failing to do so.

That promises are often broken is one of the long-standing norms of democratic politics. One 2009 survey of studies into election promises found that political parties in Europe and the United States kept an average of 67 per cent of their promises when in government. This number is if anything remarkably high. But in the Australian context what has mattered in recent years is not the number of promises broken or fulfilled, but how those achievements or failures have reflected in the perception of the government that promised them.

Take Julia Gillard’s infamous election-eve statement that there would be ’no carbon tax under a government I lead’. This was followed in government by a fixed price emissions trading scheme that all commentators on the left and right admitted was functionally equivalent of a carbon tax. Were many voters duped into voting Labor because of the specifics of a fixed price emissions scheme, and subsequently angry that they had voted under false pretences?

This seems unlikely. But it spoke to a betrayal of the values which the Labor party had presented in 2010. Before the election, Gillard had punted the divisive issue of an emissions trading scheme to the ‘citizen’s assembly’ — 150 ordinary Australians who would listen to experts on climate change and what to do about it, and provide recommendations to the government. Labor’s deal with the Greens to push through a carbon tax immediately not only reversed the go-slow approach but it gave the impression of a vastly different Labor government to that which had been cultivated during the campaign.

Broken promises only hurt when they speak to a party’s overall identity. Likewise, Tony Abbott’s decision not to pursue his promised repeal of section 18C of the Racial Discrimination Act has been a running sore on the Coalition’s time in power because it presented, for the government’s supporters, a rejection of the ambitions of a centre-right philosophical resurgence.

Section 18C is not the be all or end all of liberal policy, or even of the threats to freedom of speech in Australia. But its promise sent a powerful signal that the tide could be turned towards liberty, and that a mainstream party was able and willing to make that change. When Abbott abandoned the promise, he undermined the vision of liberal-conservative government he had cultivated in opposition. The Coalition surrendered the very ‘Freedom Wars’ it had declared.

It must have been somewhat to their horror that Malcolm Turnbull and Scott Morrison spent the first half of their eight-week election campaign talking about their changes to superannuation. Superannuation stung them for the same reasons that the carbon tax stung Julia Gillard and 18C stung Tony Abbott. Repeatedly throughout the Coalition’s term in government it rejected the possibility of increasing taxes on super. Tony Abbott had ruled out no changes to superannuation in the 2013 term ‘or the next’. Scott Morrison was publicly opposed to changes as recently as November 2015.

The Coalition was gearing up for an argument that pitted the high taxing Labor party against the low taxing, small government Liberal-Nationals. Their error was in part strategic — to announce an extremely complicated policy that harms self-funded retirees, many of whom would be expected to be Liberal voters was always going to be fraught — but it was a serious policy mistake as well. It was a breach of faith that recalled the deficit levy in 2014, demonstrating that the Coalition was happy to whack its own supporters for expediency.

Trust, indeed, is fundamental to the superannuation system itself. Superannuation has long been presented as a secure foundation for savings. But now the Coalition has established that the Commonwealth sees it as a money pot which can be dipped into for fiscal or political expediency. Having changed the rules this time, savers will rightly believe the rules can be changed again. This is the sort of policy manoeuvre that erodes faith in the public policy system as a whole.

In his 2016 book The Trust Deficit, Sam Crosby, executive director of the Labor leaning think tank the McKell Institute, points out that voters who do not trust that governments will act in their interests will vote for non-incumbent and third party candidates. Trust — as nebulous as it is — is the bedrock of political power in a democracy. And the major parties have been systematically eroding it, by governing contrary to what people thought they were voting for.

Kevin Rudd promised fiscal conservatism, and gave us the record stimulus spending. Julia Gillard promised a sober approach to climate change policy and gave us the carbon tax. Tony Abbott promised a slower, more adult government than Labor and could not live up to that. Malcolm Turnbull promised us a new disciplined approach to economic management, and gave us six months of policy confusion, a tax increase, and an eight-week election. The minor party vote is a reflection on the failures of the major parties.

The consequences

Australia’s fiscal and economic problems demands serious reform. In 2016-17, the Australian government will spend, as a percentage of GDP, as much as it did when Kevin Rudd was stimulating the economy. In other words, the Commonwealth is at a permanent emergency level of spending.

Furthermore, our policy settings seem deliberately geared against the needed economic growth that might bring the budget back to surplus. For instance, Institute of Public Affairs calculations have found that red tape — that is, unnecessary and counterproductive regulation — costs the Australian economy $176 billion a year. There are nearly 500 separate government bodies at the Commonwealth level involved in the imposition, administration and design of red tape.

Australia has fewer taxpayers supporting more people who are dependent on the state. As the Weekend Australian pointed out in May 2016, if you add the 4.48 million people who are wholly dependent on federal government pensions, allowances and parenting payments to the 1.89 million people who are public sector employees, that means 44 per cent of Australians draw their livelihood from the non-productive sector.

This is not sustainable — certainly if we are to maintain the high living standards we expect.

Whether they like it or not, the Turnbull government is going to have to reckon with these deep structural problems in the Australian economy. Yet the eroded trust between population and politician is going to make it extremely hard to do so. That lack of trust affects the possibility of reform in two ways. First, it is not clear that the minor party and independents that have been thrown up by the anti-major vote are capable of reckoning with this problem.

Neither Pauline Hanson nor Nick Xenophon — to take the two most prominent winners from 2016 — have an appreciation of the need for drastic economic reform. If the Coalition acquiesced to some of their policy positions — such as subsidies for private firms and protectionism — our economy would be in a substantially worse shape than it is now.

Second, and more fundamentally, reformers need the trust of the voting population in order to push major reforms through. Complex reform needs explanation, and if the public believes that explanation is not done in good faith they will reject it. No matter how certain they are of their course, few governments can swim against the tide of public opinion indefinitely.

This looks like a pessimistic story but it is not. One of the arguments that came out of the Gillard years was that the era of reform was over. Paul Kelly, most influentially, argued that the political system had evolved a few key features that made reform if not impossible, then improbable. In his argument, the faster pace of political life (encapsulated by the unending panel shows of 24-hour news networks and the anarchic, unpredictable world of social media) along with the power of sectional interests (here he is thinking of the mining industry’s campaign against Labor’s mining tax) are structural barriers to reform.

There is no question that the pace of political life has changed. It’s unclear how this selects against reform — more venues for political commentary does not imply the population is more interested in politics than they were in the past. Kelly’s concern with ‘sectional’ interests is also misplaced. We are in an era where old power blocs are breaking down, rather than consolidating their power — at no time in history have the old industrial empires (media, unions, corporations) been under as much pressure and contestation as today.

In fact, Kelly’s argument would be more convincing if he had traced the opposite argument: getting through political reform is no longer a matter of a few handshakes between unions and corporate leaders. The trust deficit is in part a reaction to that cosy, conspiratorial style of politics.

Seen through this light, there’s a clearly undemocratic thread running through complaints that minor parties make reform impossible. The criticism that non-major parties are ‘populist’ is a bizarre complaint in a democracy where voting is supposed to aggregate the popular preferences of the masses.

The nostalgia for political moves like the Hawke government’s Accord is a nostalgia for government by handshake rather than popular consent. Political strategists advise governments to shirk reform because it is unpopular. It is true that John Howard took a GST to an election, explained the need for reform clearly and comprehensively, and nearly lost. But he pushed the policy through parliament after that election, and the GST is widely seen as the cap on the reform era.

By contrast, Malcolm Turnbull took very little to the 2016 election — failing to explain either his superannuation tax increase or his corporate tax reduction — and nearly lost.

Howard left 1998 empowered, despite the election being a close run thing. Turnbull looks wounded from his 2016 near loss. Reform is hard to argue for. But if we are to tackle the substantial economic problems facing the Australian economy, the focus will have to be establishing a trust between the political class and the population they purport to represent.

Populism is not a dirty word

The political news right now is Malcolm Turnbull’s tenuous hold on government.

But tight elections aren’t unusual. The real significance of the 2016 election is how it reveals the growing dissatisfaction with the political class and mainstream parties.

This is a thread that links the support for Nick Xenophon and Pauline Hanson in Australia with the support for Donald Trump and Bernie Sanders in the United States and for Jeremy Corbyn and Brexit in the United Kingdom.

It’s easy to dismiss these movements as “populist”. That word has already been spat out hundreds of times on panel shows and through the quality media since last weekend’s election results began to come in.

But “populist” is a strange insult in a democracy. Democracy is a system by which we come to agree as a group about how we live together. It has lots of flaws. The idea that the conclusions it comes to are too popular – too widely accepted – surely aren’t one of them.

To call a politician or political movement populist is a dodge. A comforting, revealing dodge. An admission that the speaker sees the consent of the governed as a frustrating hurdle, rather than the reason parliament exists in the first place.

But even more than that, it’s deeply condescending. Yes, they’re less polished. They’re less refined. But those apparently dangerous and unacceptable populists deploy much the same arguments and same rhetoric as the major parties.

Consider their approach to foreign investment. Nick Xenophon and Pauline Hanson both want to “take back the farm” and make it harder for foreigners to buy Australian assets. This could have catastrophic economic consequences. Australia needs international capital.

But then again the major parties have been telling us that foreign investment is risky, even dangerous, for years.

The Coalition government has been running a crackdown on foreign investment in housing. It prevented the sale of the cattle station Kidman & Co to a Chinese company. It blocked the American firm Archer Daniels Midland from buying GrainCorp. Kevin Rudd made foreign investment scepticism a key plank of Labor’s 2013 election bid.

So if it is agreed by all parties that foreign investment is a bit of a problem, why would anyone vote for a major party whose concern for this issue seems only skin deep? Why not support a minor party that takes the concerns more seriously? The majors make the argument, and the minor parties increasingly grab the votes.

Likewise free trade. The Coalition government signed some important free trade agreements that are important for the future of the Australian economy. The Labor Party professes support for trade as well.

But too often those free trade agreements are presented by the political class as extracting concessions from foreign countries for Australian exporters, rather than allowing us to import goods cheaper and thereby raise our living standards.

The Labor Party used the Trans-Pacific Partnership for a scare campaign about Chinese workers being brought into the country. When Qantas moved its operations into Asia a few years back, the Transport Workers Union screamed that the company was being “Asianised”. Who does that sound like?

The Nick Xenophon Team wants the next government to directly support struggling companies – particularly the Arrium steelworks in Whyalla. On the one hand this flies in the face of every basic principle of sound economics, representing a transfer of wealth from taxpayers to public companies. On the other hand the major parties do that sort of stuff all the time. The Napthine government handed money to SPC Ardmona after the Abbott government refused. The only jobs plan either major party has for South Australia is to pay South Australians to build submarines.

In other words, no major political party has been making the argument for free trade, foreign investment and market competition. Yet now they blame the voters for being anti-market.

Major party strategists will tell you quietly that they have no choice but to take “populist” positions. Only the impotent are pure and all that. If the voters want protectionism the parties need to deliver it.

But this belief confuses policy means with policy ends. Do voters want higher tariff schedules, or do they want jobs and a sense of economic security? Do voters want lower immigration quotas or employment opportunities for their children?

The Australian public cannot be expected to know every detail of every policy, or the voluminous literature on trade and migration. They have families and businesses to worry about. But the protectionist and interventionist economic policies attracting people to the minor parties won’t protect jobs. They will hurt jobs by slowing the economy.

Basic economics can be counter-intuitive. It needs to be argued for. No major party is making that argument. They’re fudging and hedging, trying to be all things to all people, never committing, constantly doing one thing and saying another. No wonder people are voting for something else.

Where did it go wrong for Turnbull? The budget

How did it all go wrong for Malcolm Turnbull?

The Coalition may be returned to government yet, either as a minority or a majority. But it’s hard to deny that what we saw on Saturday night was partly the result of a strategic miscalculation.

The eight week campaign was held at the time of the Prime Minister’s own choosing. The Government had to make some almighty efforts to do it. Senate voting reform had to be passed. Double dissolution triggers had to be lined up. Parliament had to be prorogued. The budget day had to be moved. Scott Morrison had to write a budget that both served as a steward of the Government’s finances and a political campaign document.

Almost none of this worked as planned. The campaign – particularly its slow, strange, uncertain first month – only reinforced the impression that the Turnbull Government was dithering rather than driving.

The Senate reform was supposed to clear up the supposedly feral crossbench. Now it looks to be delivering at least as diverse an upper house as the previous term, but one that might be more hostile to the Coalition than what it replaced. Already it is clear that a joint sitting is unlikely to pass the double dissolution triggers.

But the biggest problem with this plan was the budget. Some of that was about timing. The Coalition found itself in a messy argument with its own supporters about its retrospective superannuation changes at the very same time it ought to have been energising the centre-right to defeat Labor.

The superannuation argument dragged on and on. This might have been predictable. Superannuation is a complex policy. It takes time for the downstream consequences of complex policies to spread, first to be identified by specialists and for their findings to flow through to the mainstream media. Julie Bishop was tripped up by the “transition to retirement” issue four weeks after the budget. The ABC ran an explainer on transition to retirement on June 2.

Imagine how frustrated Coalition strategists must have felt as they found themselves debating budget details with their own fundraisers halfway through an election campaign. As Denis Shanahan pointed out on election night, this issue has been an internal policy issue within the Coalition for eight weeks straight.

Of course superannuation did not swing the election. But superannuation is a particularly sensitive example of the Turnbull Government’s broader economic problem – and speaks to the policy reasons the Government has found itself in such an ambiguous parliamentary spot.

Budgets frame Australian politics. They are the filter through which policy is conceived and announced. The 2016 budget failed to give the Turnbull Government’s economic story the depth it needed. The Coalition made a pitch for economic certainty. They asked voters to “stick to the plan”. What plan? “Jobs and growth” is as much a catchphrase as anything Tony Abbott ever said, at least without a coherent policy agenda to back it up.

Looking at the budget papers with the benefit of hindsight is revealing. What is marketed as the National Economic Plan for Jobs and Growth is barely distinguishable from anything a Labor government might propose: infrastructure spending, trade agreements, wage subsidies, defence spending, and hitting high income earners. To the extent this constitutes a “plan”, then every budget that spruiks minor policy adjustments and boondoggles is a plan.

The real point of difference with the Labor Opposition is barely detectable in the budget glossies. One of the Coalition’s few budget announcements that actually speaks to its jobs and growth mantra is the company tax cut. But the Government has been embarrassed by it. During the campaign the Coalition spruiked the small business tax cut more aggressively than their broader, better policy.

Perhaps Turnbull would have liked to talk about the company tax cut more. There are ideas and concepts that speak to him personally, and they work neatly together: jobs and growth, innovation, global competitiveness, digital technology, disruption, entrepreneurship. Turnbull is visibly giddy when inspecting cutting edge technology firms.

But not everybody works for cutting edge technology firms. Everything he says in this context is correct – the economy is undergoing a major transformation, technological change will define the future of work, we need to be smart, we need to be agile. But Turnbull has neither been able to translate his genuine enthusiasm into an electoral coalition, nor been able to devise a policy agenda that would suit these changes.

That is a great disappointment. Political drama, with its narcissism and bloodletting, tends to overshadow everything. But as the two parties vie for government, the Australian economy faces the same fundamental structural challenges it did eight weeks ago.

Perverse small-target strategies leave voters guessing

Oppositions often run small-target strategies. It’s been pretty special to watch an incumbent government run one.

On the one hand, this approach by the Turnbull Government has its logic.

Looking at nothing but precedent, you’d bet on a first term government holding power. Yes, even after the recent upsets in Victoria and Queensland. Commonwealth politics is still very different to state politics. It has a different dynamic. The chance that this government would be the first Commonwealth government since James Scullin to lose an election after one term is low.

But on the other hand, the strategy leaves voters with a dilemma.
A vote at an election is either an endorsement (or rejection) of the performance of a government’s previous term, or an endorsement (or rejection) of its promises for the future. The two are of course related – previous performance offers some guide about how promises might be fulfilled – but what use is that if the government is coy on its future plans?

It is striking how many policy issues have been ruled out, are seen as out of bounds, or deliberately downplayed throughout this campaign – issues that have dominated the elections of the past, issues that have swung votes, issues that have led to the downfall of leaders and governments.

Take climate change policy for one. For the last decade Australian elections have featured complicated, emotional and often arcane contests about emissions trading schemes, carbon taxes, the cost of emissions restrictions on living standards, and the ability of Australia’s parliament to affect the global climate.

But this year you’d be hard-pressed to find much discussion on the national stage about the fact that not only does Labor have a policy to reintroduce the emissions trading scheme, but the Coalition’s direct action scheme has a built-in mechanism – the so-called safeguard mechanism – that could easily be switched into a full-blown trading scheme at will.

Labor doesn’t overemphasise its policy for fear of sparking the sort of criticism that characterised the last three elections.

For its part, the Coalition doesn’t want too many voters to know about their safeguard mechanism because the whole thing relies on a confidence trick. The Turnbull Government is building an emissions trading scheme that doesn’t look like an emissions trading scheme.

In this sense, climate policy is not just bipartisan. It is deeply misleading. Voters deserve to know that debate on Australia’s role in global climate policy has been ruled out.

Same with industrial relations. The reforms to union management that were the justification of the double dissolution in the first place have been underemphasised to the point of constitutional negligence.

When Turnbull became leader last year it looked like the ducks were lining up for changes to penalty rates. I wrote about this at the time. Earlier this month Turnbull even ruled out legislation to enact the minor penalty rate change recommended by the Productivity Commission – that is, bringing Sunday penalty rates in line with Saturday ones.

Both Labor and the Coalition have decided to defer to the independent Fair Work Commission, which will make a decision on penalty rates sometime after the election.

But penalty rates are such a minor part of Australia’s industrial relations system – and the proposal to bring Sunday rates and Saturday rates together is such a minor change – that this hardly counts as any policy at all.

Ironically, Tony Abbott – the leader who declared WorkChoices “dead, buried and cremated” – had a more prominent policy on industrial relations in 2013, when he was very clear that the Fair Work Act was going to be reviewed for its red tape burden.

After the success of Brexit many supporters of the Remain camp have focused on the apparent ignorance of voters. It is certainly true that people make votes with less than complete knowledge. How could they do otherwise? A vote to change a government is one of the most complex, information-intensive decisions we ask the population to make.

Even voters who are relatively informed compared to their fellow citizens are, in an absolute sense, highly under-informed. There is just no way a single voter could maintain a working knowledge of the sheer volume of policy responsibilities of the Commonwealth government. Governments are so large, have their fingers in so many pies, and affect our lives in so many ways.

That’s what makes the deliberate, strategic shrinking of the range of political debate so perverse.

The next government, whether it is under Bill Shorten or Malcolm Turnbull, will have an industrial relations policy and they will have a climate change policy.

It shouldn’t require painstaking detective work for voters to figure out what those policies are.

Australia’s minimum wage prevents people from getting a job

Prime Minister Malcolm Turnbull called a double dissolution election because Parliament wouldn’t pass the Coalition’s anti-union corruption legislation. But industrial relations is peculiarly absent from this campaign.

Perhaps that’s to be expected. For a decade Australia’s industrial relations debate has missed the point. What do we want out of the Australian workplace system? Certainly, we want less union corruption. Certainly, we want to increase productivity. But surely, most of all, we want to get the unemployed into work. And it’s here that we need to focus not on union royal commissions or building construction regulators, but on Australia’s minimum wage.

In May, the Fair Work Commission’s annual review lifted the national minimum wage from $17.29 an hour to $17.70 an hour – an increase of 2.4 per cent. It is now illegal to be employed at an hourly rate of less than this. If you are unable to find work at this wage, you have two options: scratching out an unstable living doing contract and cash-in-hand work, or starting your own business.

Or you can go on the dole. The Newstart allowance for a single person with no children is $527.80 per fortnight. Assuming a 38-hour work week (as the Fair Work Commission does when determining the minimum wage), Newstart recipients are on the equivalent of $7 an hour. This is the minimum wage trap – if you can’t find work paying $17.70, you’re pushed into unemployment at $7 an hour. And, of course, once you start receiving Centrelink benefits, you’re treated as a welfare recipient, with all the social opprobrium and paternalistic control that implies. Is there any other way to describe this trap than “cruel” – cruel to exactly the people the minimum wage is designed to help?

It used to be well understood by economists that the minimum wage created unemployment. Looking at evidence from Western Australia in the early 2000s, Andrew Leigh, now Labor’s shadow assistant treasurer, found increases in the minimum wage resulted in a reduction in the demand for labour – that is, the number of jobs available for workers. Leigh found the demand dropped most for young workers. A wage floor disproportionately affects people with poor work histories or prison records, elderly people, or anyone employers see as a risky bet for employment.

In the past decade some economists have started to argue the minimum wage does not harm jobs. In their view, the employment market doesn’t look like a market where employers compete for workers; it looks more like the fabled company town with one employer that holds a monopoly over jobs. The Productivity Commission endorsed parts of this argument in its recent review into workplace relations law. But how plausible is this new theory? If any employment market is competitive, you’d think it was the market for low-skilled, low-wage jobs, where there are lots of employers and lots of employees. By contrast, the new theory seems to describe the market for high-skilled work better. People with expensively acquired niche skills have a much smaller pool of potential job opportunities.

The research underpinning this theory is a controversial work in progress. But, contrary to the Productivity Commission, it has not undercut the basic minimum wage problem. Even when the employment consequences of the minimum wage are accepted, you sometimes hear that small increases in the minimum wage have only small effects on the availability of work. But there are real people behind those numbers. We should care about them.

As one of the world’s foremost experts on the minimum wage, American economist David Neumark, wrote in December: “Let’s not pretend that a higher minimum wage doesn’t come with costs, and let’s not ignore that some of the low-skill workers the policy is intended to help will bear some of these costs.”

The Australian public debate ignores those costs. There are a few topics in Australian politics that are out of bounds – policies that by questioning them is to cast yourself as a dangerous extremist. Compulsory voting is one. The minimum wage is another. Its supporters imply that the minimum wage is a crucial part of our national heritage, never to be challenged or examined. Who is that silence supposed to help? Certainly not Australia’s unemployed, pushed out of the employment market by a minimum wage they are told is for their benefit.

Rio’s financial crisis reveals the moral bankruptcy of the Olympics

The mayor of Rio de Janeiro would like the world to know that the economic crisis engulfing Brazil “in no way delays the delivery of Olympic projects and the promises assumed by the city of Rio.”

Other non-Olympic promises are in jeopardy. On the weekend Rio’s state governor declared a state of financial emergency. The city faces “a total collapse in public security, health, education, transport and environmental management” if it does not receive funding from the federal government of Brazil.

What a contrast. On the one hand, Rio’s politicians have absolute confidence they will deliver this year’s summer Olympic games, which begin on August 5. On the other hand, they have almost no confidence they will be able to provide their citizens with the basic functions of government.

Rarely is the moral bankruptcy of the Olympics so starkly put. Bread and circuses both consume scarce resources. What should we think of governments that put circuses first? What should we think of the circus?

Brazil is in the middle of an economic and political crisis. The Brazilian economy has been in recession since the start of 2015. It has shrunk a massive 5.4 per cent since this time last year. Brazil’s inflation rate is around 10 per cent. The only silver lining is that the economy shrunk by slightly less than experts had predicted.

Brazil’s recession is having social consequences. The cash-strapped Rio state government cut the police budget by a third, reversing advances in crime reduction made since the turn of the century, and raising concerns about tourist safety during the Games. Unemployment is at 11 per cent and growing, and 24 per cent of young people are unemployed. This is the worst economic crisis in Brazil since the 1930s.

The political crisis is almost as calamitous as the economic one. President Dilma Rousseff has been stood down while she is impeached by Brazil’s senate. Rousseff is formally accused of manipulating the government budget to hide the size of the deficit. (Simply servicing Brazil’s debt costs 7 per cent of the country’s GDP.) But she’s also tied up in a major corruption scandal concerning a state-owned oil company. The interim president is also tied up in a corruption scandal. Indeed, up to 30 per cent of the country’s politicians might be implicated in a corruption scandal shortly.

It could well be that the Rio Olympics go off without a hitch. News stories about delayed projects and panicked construction are as much a part of the Olympic ritual as the torch relay and parade of nations.

But outside the athlete’s village and ticket-only areas will be a country straining to foot the enormous Olympic bill.
Hosting the games is a terrible economic deal at the best of times. Hosting the games when you’re a developing economy in the middle of a serious recession is its own scandal.

The woeful economics of the Olympics are clear-cut and, outside the corridors of political power, uncontroversial. A paper published in the Journal of Economic Perspectives in May this year summarising a mass of scholarship and analysis found that the Olympics are almost always a “money-losing proposition”.

The influx of tourism rarely compensates for the decline of economic activity displaced by the Games, and rarely translates into long run tourism increases. It is true that hosting an Olympics encourages governments to invest in infrastructure, but the bulk of those funds are spent on uneconomic specialised venues that cities struggle to utilise once the closing ceremony is finished. Only construction and development companies gained from the Sydney Olympics, as my colleague Sinclair Davidson has found.

The economics are even worse for developing countries. To avoid disaster host cities need extremely capable and non-corrupt management, as well as the political stability to facilitate that management. These sorts of institutions are sadly lacking in poorer nations.

Hosting the Olympics is particularly dangerous for countries that lack tight control over government expenditure. For instance, the Athens games in 2004 exacerbated Greek fiscal profligacy – while the Olympics did not cause the Greek economic crisis, the stadiums and infrastructure stand as monuments to the reckless spending that did.

Brazilian governments spend 41 per cent of the country’s GDP, which, as the Wall Street Journal pointed out in April, approaches the sort of spending levels seen only in mature social democracies like Germany and Norway. It is just not a country with the institutions to manage the extreme political and economic pressures of Olympic hosting.

It is galling, then, that the International Olympic Committee has been encouraging bids from developing countries. Even a failed bid can be extremely expensive – the “low cost” bids for the 2024 games cost about $AU80 million each.

This money of course comes not from the politicians who flank their bids and take box seats at opening ceremonies. It comes from the taxpayers of the bidding countries, and from the public services not provided as scarce resources are redirected towards stadiums and ceremonies.

The Olympic movement likes to affect an image of sporting valour and nobility. But it is the epitome of government waste, almost always doing great harm to its host and taking a real human toll. Once the athletes have gone home, let us hope Brazil can recover from this recklessness quickly.

Australia isn’t immune to the Brexit debate

It is not always a good idea to draw an opinion on the domestic affairs of other countries. But in the case of the upcoming British referendum on June 23 to withdraw from the European Union, Australians should be paying close attention.

The pathologies that have led to the Brexit vote are not unique to Europe – there are deep lessons for Australian policymakers too.

At its heart Brexit is a contest between technocracy, red tape and administrative power on the one side, and democracy and sovereignty on the other. In other words, what we see in the byzantine bureaucracies and agencies of the EU is an extreme form of trends that are common across all Western liberal democracies.

Polling this weekend showed the vote to withdraw from the EU has a 10-point lead over the vote to Remain, with 55 per cent of respondents supporting Leave.

This finding is important not just because of what it suggests about the outcome of the vote. The received wisdom has been that voters primarily concerned about immigration – the free movement of people across Europe has never been more controversial than after the Syrian refugee crisis – would vote Leave. Voters primarily concerned about the economy would vote Remain.

Modelling done by the UK Treasury has claimed that British households would be £4,300 worse off in 2030 if the country had left the EU than if it had stayed. This result is derived from the apparent decline in openness to trade and foreign investment that withdrawing from the EU might bring.

But the weekend’s polling shows that the Leave argument is making significant inroads into the group of voters who see the economy as paramount.

As Dan Hannan, a British member of the European Parliament and supporter of Brexit has pointed out, catastrophic claims about the decline of trade and openness resulting from a Leave vote are nonsense. Withdrawal will not be instantaneous following a successful referendum. Rather, the referendum is a mandate for the British government to negotiate withdrawal; to forge new trade agreements and arrangements while simultaneously stepping back from Europe-wide ones.

There are two distinct visions of European unity. One has perversely flourished, and the other has become distorted beyond recognition. The first is the dream of a government of Europe – a transnational European equivalent of the bureaucracies and political institutions that run national governments.

This first project, it must be said, has been an enormous success. The EU has a parliament, courts, a monetary system, and an enormous administration. One 2008 estimate of the number of bureaucrats working in EU institutions – the EU itself is cagey on its total staff – came to 170,000. This is more than the British army.

But it’s one thing to create a government, it’s another to create a responsible, legitimate government. Even the EU acknowledges that it suffers from a perceived democratic deficit – that the citizens of Europe do not feel they are able to reject the administrations and policies that rule them.

While the European Parliament is an elected body, the six other key European institutions are not.
The European Council, the Council of the European Union, the European Commission, the Court of Justice of the European Union and the European Central Bank are all at one or more steps removed from popular control.

In this sense EU institutions are the natural end point of a trend that affects Australian administration as well – the spread of administrative and regulatory independence designed to keep politics out of policymaking. But this comes at the expense of democratic control.

The second vision of European unity was as a free trade bloc. The 1957 Treaty of Rome conceived of Europe in distinctly classical liberal terms, allowing goods, services, capital and labour to move across borders. This was an enormous achievement at the time, given the economic source of so much intra-European antagonism.

The perversion of the ideal of European free trade occurred with the development of the common market. Properly understood, a country with its markets open to free trade is still able to write its own rules about the conditions in which goods and services are produced and sold within the borders of that country. However, the European common market developed in such a way that widened its focus to the regulatory constructs within each country that make it harder to sell (for instance) an Italian product produced according to Italian standards in France, where French standards apply.

The common market aimed to eliminate these differences. Unfortunately it did so by imposing pan-European regulatory requirements across the whole continent. Without the constraints provided by democratic institutions, the EU has been an enormous source of new regulation and red tape – what is understood by European citizens as EU meddling and domestic interference.

One think tank calculated that since 1957 the EU had passed and incredible 666,879 pages of law. In some states up to 84 per cent of national legislation involves the implementation of new and adjusted EU rules. Analysis based on the British government’s own regulatory impact statements show that red tape coming from Europe costs the British economy at least £33 billion (AUD $63 billion) a year.

The European Union represents the worst inclinations of modern government – heavily bureaucratic, deliberately undemocratic, meddling and interventionist. Australian policymakers should not imagine that British discontent with Brussels has no lessons for them.

The case for a company tax cut is rock solid – and Labor knows it

To read most election comment you’d be forgiven for believing that what was until very recently a bipartisan consensus – that there was a strong case for Australia’s company tax rate to be cut – was in fact a mass delusion.

In 2010 Wayne Swan as treasurer declared that, “Reducing company tax will create new jobs and grow the economy right around the country” and was open to a reduction in the rate from the current 30 per cent to 25 per cent. Chris Bowen was arguing for a 25 per cent rate as recently as September last year.

But now that the Turnbull Government has announced a reduction to 25 per cent to be phased in over the next decade, Swan says there’s “no case for a company tax rate” because multinational companies are avoiding their tax and to suggest otherwise has something to do with Margaret Thatcher and Ronald Reagan and “trickle-down economics”.

For their part, Bowen and Bill Shorten now describe the 25 per cent rate as a $50 billion giveaway to big companies.

This is a rather damning indictment of the current Labor leadership, which has abandoned a long-held position simply to paint the Coalition as pro-big business during an election campaign.

Still, why blame a politician for acting like a politician? The populist argument against company tax cuts is just too easy to make. What’s remarkable is not that Labor has reversed its view but that successive governments actually managed to reduce the company tax rate from 49 per cent in the late 1980s to 30 per cent today.

The case for a corporate tax cut is rock solid. It’s about ensuring that the Australian economy is internationally competitive. A competitive economy attracts foreign investment – and with that investment comes growth and jobs. By contrast, an uncompetitive economy is a declining economy.

As the Rudd government’s Henry Tax Review pointed out, in 2001 the OECD average corporate tax rate was 32.5 per cent. At that time Australia’s 30 per cent rate was a good effort. But now the OECD average is about 25 per cent, and Australia’s rate hasn’t changed.

A word has to be said here about our system of dividend imputation. Under dividend imputation, investors receiving a dividend are credited for tax already paid on company profits. This avoids profits being taxed twice – first as company tax and then as personal income tax when dividends are returned to shareholders.

You often hear that dividend imputation makes the 30 per cent headline rate meaningless, as a reduction in company tax would be automatically made up by a corresponding increase in income tax collection. But that only holds true for domestic shareholders. Foreign companies have foreign shareholders who do not benefit from dividend imputation. And it is foreign companies we want to attract – along with their money and jobs and economic activity.

Indeed, the fact that we need a dividend imputation system at all partly demonstrates why the company tax is a bad tax. In truth no “company” pays tax. Companies are made of people and people pay tax – whether those people are company’s customers, shareholders, workers or management.

Who ultimately pays what proportion of the company tax is a matter of great controversy.

Last year Chris Bowen accepted that the bulk of the company tax was paid by workers. If, alternatively, investors pay the bulk, then it’s worth remembering that through compulsory superannuation we’re all investors. If management pay the bulk – and you sometimes see arguments that the company tax is a de facto tax on wealthy managers – then it is a wildly indirect way of taxing the rich.

This confusion and complication is why every serious investigation into tax points out that the company tax is one of the most inefficient – that is, wasteful – taxes available to government. (See Chart 1.5 of the Henry Review.)

Yet Australia relies on this inefficient tax for its revenue (18 per cent of the total tax take as of 2013) more than any other OECD country (with the exception of Norway, where company tax provided about 22 per cent of the total tax take).

In that light, Wayne Swan is exactly wrong to argue that multinational tax avoidance means we shouldn’t reduce the company tax rate. I’ve argued in the past that avoidance is for the most part a non-problem. But to the extent that company tax is being avoided, it is because other jurisdictions – like Singapore – offer much more welcoming tax environments than Australia does.

Our extreme reliance on company tax makes us particularly vulnerable to corporate tax avoidance and demonstrates how uncompetitive Australia has become for investment.

Labor used to understand this. Given how close they are to winning government, it’s a real worry they no longer do.

Why we’re seeing less pork barrelling this election

When you boil them down to their essence, Australian election campaigns are really just elaborate pork barrel road shows. For all the talk about vision and ideology, politics is about what pleases marginal electorates, not philosophy.

Bill Shorten was in Western Australia last week doling out $45 million for Perth’s Wanneroo Road. Malcolm Turnbull was there a few days later, announcing his own Wannaroo Road upgrade, but a slightly cheaper one – just $20 million.

I complained about this pattern in the 2013 election. Shorten and Turnbull are competing to head the government of a $1.6 trillion economy – Australia is one of the richest countries in the history of the world – and their job application involves dribbling out money for grade separations.

And yet there’s something different about this election. It’s not that the pork barreling isn’t happening. Coalition and Labor candidates are dutifully travelling their electorates to announce minor environmental projects, CCTV installations and community centre upgrades. But at a national level there’s a slight feeling of embarrassment about the whole charade.

Fundamentally both major political parties know that every new spending promise – every new security camera, every new fence around a local park – is a further setback to repaying the national debt.

This week Shorten announced that Labor would not promise to restore the Schoolkids Bonus, which had been scrapped by the Coalition, and refused to guarantee it would restore money to the pension that the Abbott government had cut.

These announcements constitute a dramatic reversal of years of Labor rhetoric. Both the Schoolkids Bonus and the pension changes were essential elements of the attack on the Coalition as being unfair to low and middle income earners.

This is the first election since the Global Financial Crisis in which the reality of deficit politics is beginning to dawn on both major parties.

Tony Abbott and Joe Hockey made the changes on the grounds that cuts had to be made to the Commonwealth budget if it was ever to return to surplus. Now finally at the end of the Coalition’s first term in government Labor has conceded the point – yes, perhaps cuts, even uncomfortable, unpopular cuts, need to be made.

No doubt Shorten has known this for some time. Labor in government was unable to restore the surpluses they promised, but were nonetheless willing to reduce spending in ways that hurt them politically. Recall the cuts to single parent payments which so agonised Labor’s own supporters. Shorten must feel he has a non-trivial chance of becoming prime minister, and needs to start tamping down expectations.

This is the first election since the Global Financial Crisis in which the reality of deficit politics is beginning to dawn on both major parties. Neither party has a plan to bring the budget back to surplus, but they are starting to accommodate it. It seems unlikely either side will give the sort of blanket “no cuts to health, education, the ABC, SBS” promise that Abbott did so fatefully on the eve of 2013.

Both Labor and the Coalition announced tax increases before the campaign begun. We saw in the debate on Sunday night that the Coalition is still trying to deal with the fallout from its retrospective superannuation changes. Tax increases are not ideal electoral politics, and the last thing the economy needs is a heavier tax burden. But the increases were probably necessary to give at least some patina of credibility on all the spending promises that were to be announced – at least in the absence of expenditure reduction.

Shorten says that his backtrack on the Schoolkids Bonus and pension changes came after the release of the Treasury’s Pre-Election Economic and Fiscal Outlook. This is nonsensical. PEFO – one of the rituals which makes up Australian elections – did not forecast anything significantly different from the 2016 budget.

But PEFO represents Treasury’s “best professional judgement” on the state of the economy, undiluted by the political needs of its masters. The Coalition in opposition is sometimes willing to second-guess Treasury. Labor is not.

PEFO made two claims that have been obvious for a while but look particularly devastating when expressed in an official Commonwealth document. First, without either tax increases or spending reductions there will be no sustained budget surplus.

Second, budget forecasts are based on an assumption that economic growth will return to its long run average. If that assumption does not hold – if, say, we go into an economic downturn – then the budget is going to be in a dire state.

The upshot of PEFO is that no side can believably maintain the traditional laissez faire approach to campaign spending promises. Sure, there’s the usual money for playgrounds and intersection upgrades. But the 2016 election carnival has an unusually depressing tone. The Australian political class is learning to live with deficit politics.