Richard Holden

In the year ahead there will be a national discussion about the future of our taxation system. It will have important implications for economic growth and social policy. The discussion will only be productive if all options are on the table, and if participants don’t resort to what Robert Kennedy called “obsolete dogmas and outworn slogans”.

The quintessential such move in tax discussions is to label a change “regressive”. Raising the rate or broadening the base of the GST is regressive. Increasing the top marginal rate isn’t.

Case closed? Not so fast. To properly assess any tax proposal it’s vital to examine where we are now, and where we are heading.

First, let’s look at the baseline. Australia’s top 10% of earners pay 46% of total income taxes. The top 2% of earners pay 26%; the top 1% pay almost 18%. The bottom 20% pay 2.5%. This makes Australia’s income-tax system among the most progressive in the world.

And income taxes are just one component of the broader taxation-benefit system. There are other taxes and benefits designed to redistribute income, such as the Family Tax Benefit, the Schoolkids Bonus and the aged pension.

Then there’s a range of ostensibly free services such as healthcare. Finally, there are other taxes, such as the GST. The Australian Bureau of Statistics estimates that when all of this is factored in, only the top fifth of households ranked by income pay any net tax. This makes Australia’s taxation-benefit system among the most progressive in the world.

I’m for this. It’s part of what makes Australia a great country. But it can only continue if the system produces enough revenue. That’s what the debate will be about: how to maintain progressivity by taxing in the right way.

One deeply regressive thing that can happen to income taxes is bracket creep – where the dollar cut-offs for marginal tax rates do not keep pace with rising incomes. This pushes lower-income earners into higher and higher tax brackets.

Those earning a very modest A$40,000 a year are forecast to pay 25% more tax in just four years’ time because of the fixed cut-offs. By contrast, those earning A$200,000 a year would face a less than 2% increase in their tax bill. That’s the epitome of a regressive change in taxation.

Yet perhaps the most regressive part of the whole system is the reliance of many states on poker-machine and other gambling taxes. The NSW and Victorian governments get roughly 10% of their revenues from gambling taxes — pokies accounting for about two-thirds of that. This is staggering, and provides horrible incentives to pander to special interests (that means you, Australian Hotels Association).

But much, much worse is the impact that what may be the most widely available gambling in the world has on lower-income earners. It is estimated that as many as half a million Australians are problem gamblers — each losing about A$21,000 per annum. For three-quarters of them, poker machines are the cause; and lower socio-economic groups are vastly over-represented.

State governments have to pay for schools and hospitals. They need revenue, and they can’t tax incomes. So I understand why they resort to moribund, distorting, socially destructive taxes such as pokies and stamp duty.

But from a system-design perspective it makes no sense to deprive states of the revenues required to fund their mandates and then stand idly by while they use the worst kinds of taxes. To paraphrase Steve Jobs, it is “insanely stupid”.

Taxation-benefit systems are just that – systems. They are made up of many different parts – and looking at any one part in isolation is dangerous and foolish. Those who shriek, “But that’s regressive”, whenever a change to the GST is mooted should think harder.

Doing nothing is regressive because of bracket creep. Doing nothing is regressive because it leaves poker-machine “taxes” on the poor in place. Doing nothing is regressive because benefits that redistribute money to lower-income earners will inevitably shrink without a proper tax base to support them.

Our tax system needs to be reworked to provide the right incentives, to grow the economic pie and to redistribute money to the less well off. To keep Australia’s taxation-benefit system truly progressive means thinking about it holistically. Dogmatically invoking the “R-word”? Refusing to change one component to fix the system? Now that’s regressive.

Richard Holden is a professor of economics at UNSW Business School. A version of this post appeared in The Australian.

Chris Styles

I sat in a hotel room in Kuala Lumpur the night before a UNSW graduation ceremony and watched the lPO of Jack Ma’s Alibaba. Sitting in the shadow of the extraordinary Petronas Towers, it was strangely gripping TV.

Ma was interviewed on CNBC and was treated like a rock star. In his interview he repeated his mantra – customers are #1, employees are # 2 and shareholders are #3. But he still wants to make sure shareholders (or those soon to be shareholders) make money.

While at that point he didn’t have investors’ money, he said what he did have was trust. That seemed to be his key selling point for the company. One of the interviewers said he was feeling particularly uncynical about the whole thing. Ma has a vision to empower entrepreneurs through his e-commerce website and be the champion of small and medium-sized business in China.

“We want to be bigger than Walmart,” Ma says. He wants people to say that Alibaba is like Microsoft and Walmart – it changed the world.

Before the bell, the price was set at US$68. At that price this IPO should raise almost the total amount raised in IPOs so far this year. The scale – like all things in China – is immense. It will be the biggest IPO ever.

Masayoshi Son, CEO of SoftBank, biggest shareholder of Alibaba and now Japan’s richest man, followed Ma on TV and sang his praises. According to Son, money is not the goal, it’s about passion and vision. And Ma has both. Politics is not an issue. One is from China, the other from Japan.

When the stock went on the market, there was no indication of a selling price. There were hundreds of thousands of orders but no sellers. Indications were that the first sellers would come to market at around US$84-US$87.
Could this be the perfect IPO? Even with the uncertainties that come with the China market?

The stock finished the day at US$93, valuing the company at US$230 billion. More than Facebook.

In the heart of capitalism – the New York Stock Exchange – China could once again be changing the (economic) world order. Along with the Petronas Towers out my window, it is another reminder of the shifting centre of gravity to Asia.

The ticker for the company is BABA. “Ba” means 8 in Mandarin – a lucky number in Chinese culture. Ma and a bunch of investors got very lucky. Perhaps so too did global capitalism.

Let’s see if the luck holds.

Chris Styles is a professor of marketing and dean of UNSW Business School.

Professor Richard Holden

A “yes” vote to Scottish independence on September 18 would mean a great many things for Scotland, and also for the remains of the UK. But what would it mean for Australian business and financial markets?

It’s tempting to say “very little” — what do internal politics half a globe away have to do with us? Yet the Australian dollar strengthened markedly against the pound last week, almost surely due to a poll suggesting that the “yes” vote was ahead 47% to 45%.

To begin to understand what Scottish independence might do to Australian firms and markets, it’s important to understand what it would do to Scotland and the remains of the UK. The key economic question here is what currency the Scots would use.

The pro-independence team has been pretty clear about this. They’ll keep using the pound. And it’s true that the UK can’t stop them — just as Australia can’t stop New Zealand from using the Aussie dollar.

At first this sounds sensible — the pound is a big, liquid currency. The haggis — or whatever a Scottish currency would be called — would not be. Case closed, right?

Actually, no. Having a common currency without economic and political integration is a very, very dangerous thing. Monetary policy would be set by the Bank of England, presumably without reference to Scottish economic conditions. So if there was a recession in Scotland one would want lower interest rates, but unless the UK was also in recession of a similar magnitude the Bank of England would be unlikely to cut rates.

Worse, losing control of the ability to print money means that if Scottish debt got out of control it could not be inflated away. Ask Spain how that works out.

Worse still, Scottish banks would no longer be implicitly guaranteed by the UK. This is a huge deal.

The events of 2008 taught us how quickly modern-day bank runs can happen, how devastating the effects can be, and how only overwhelming credibility can prevent disaster. Scotland wouldn’t have that — and the remains of the UK would have no incentive to help out. Even if it wanted to, markets would have to believe it, and that’s far from a sure thing.

So it’s clear Scotland would be in a dangerous economic position — not obviously in trouble right away, but without any macroeconomic fire extinguishers if trouble arose.

This is a potential worry for major Australian exporters to Scotland — but there just aren’t very many of those. Australian companies with operations in Scotland could be affected.

A notable example is National Australia Bank (NAB), whose subsidiary Clydesdale Bank is located in Scotland and could face higher borrowing costs under independence. NAB has said it would seek to shift Clydesdale bank’s corporate registration to England in the event of a “yes” vote. But even in that case it’s a small part of the NAB.

The bigger concern would be if independence affects the remains of the UK in a significant way, since this is a bigger trading partner for Australia. As we saw last week, markets have rightly been concerned. At the very least there would be an 18-month-plus process of “demerging”, a process that would be complicated and distracting.

Yet, whatever the impact on the remains of the UK, it’s hard to see how it would materially impact Australian business. The pound might weaken relative to the Australian dollar, potentially hurting Australian exporters. Having said that, we would all do well to heed former treasury secretary Ken Henry’s advice on Tuesday to be less focused on the real exchange rate in this country. The impact of a modest devaluation of the pound just won’t make much difference.

Could independence lead to a major blow-up of the UK’s economy? As we learnt in 2008, a major problem in any significant economy can quickly reverberate around the world. We are all interconnected now. A big problem in the remains of the UK could be a big problem for world financial markets, Australia’s among them.

This is possible, but it seems highly unlikely. The UK is a very large economy with its own currency and a broad web of international economic connections. Scotland is close, historic, and important – but independence is not likely to lead to an economic meltdown in the remains of the UK.

Perhaps it could change politics in the UK in a big way and this could have an effect. Perhaps a more conservative Tory leader would emerge. And perhaps that would lead to different economic policies. But that’s a lot of perhapses.

Demerging Scotland from the UK would be wrenching. It would affect both entities — especially Scotland — in lots of ways, including economically.

Whatever the pros of a “yes” vote for Scotland, it would bring with it huge economic risks. And some for the remains of the UK, too. For Australia and Australian businesses, the risk is small.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Richard Holden

In his victory speech on election night last September, Prime Minister Tony Abbott declared Australia was “under new management and … once more open for business”.

There were, of course, specific promises such as repealing the carbon and mining taxes, balancing the budget, and building lots of new roads. But the “open for business” line foreshadowed a broad increase in confidence in the economy.

In terms of confidence since then, there has been little good news about the economy – and some bad, especially regarding unemployment. The Westpac-Melbourne Institute consumer sentiment index is 10.8% below its post-election peak.

Treasurer Joe Hockey has told us there is an imminent debt crisis, but can’t persuade parliament to pass all of his budget. Minister for Trade and Investment Andrew Robb has said budget blocking puts Australia’s credit rating in jeopardy.

The confidence of those receiving family tax and other benefits has been shattered, as has the confidence of those of us who are happy to see our tax dollars spent to make real the promise of opportunity for those less fortunate – a promise that has always been at the core of Australia’s social compact.

I get it: the first step to recovery is recognising that you have a problem. But so far the government seems to have scared global financial markets a fair bit, but not scared the Australian public and their representatives enough to do anything about it.

And that’s largely because we don’t have an imminent debt crisis. We have a long-term structural budget problem caused by an ageing population — a problem shared by most OECD countries.

Yet, despite the dramatic rhetoric, nothing has been done to address the structural problems. To say the least, this is not great “expectation management”.

A major election promise was to repeal the carbon tax – legislation that was passed last month. It remains to be seen whether the so-called “direct action” policy on climate change will be implemented, but this is one area where business is certainly happy.

And why not? Under a carbon tax or emissions trading scheme businesses pay if they pollute. Under direct action they get bribed not to pollute. It is, however, clearly bad policy for the economy as a whole — a fact that everyone except hardcore climate change deniers acknowledge.

Abbott aspires to be known as “the infrastructure PM”. But investments of the type Abbott promised take a long time – even to start – so it’s too early to tell whether he will be remembered as he wishes to be in this respect.

If we can glean anything, it comes from the yet-to-be-passed federal budget with nearly A$60 billion in infrastructure projects. Abbott has pledged that these and other projects will be subject to “rigorous cost-benefit analysis”.

If so, that’s exactly why some of them might not happen. As an economist I can hardly be against weighing up costs versus benefits. But costs are usually pretty easy to quantify (how much will it cost to build “X”); benefits, not so much.

Projecting how much traffic flow there will be on a road is not so hard, though tell that to AMP which is suing its consultants over forecasts of Lane Cove Tunnel traffic flows. Projecting the benefits of genuinely new types of infrastructure is much harder.

What’s the economic benefit of really fast internet access? It’s tough for even the most seasoned consultant to know what to put in the line in the spreadsheet that reads “stuff we never even knew it could be used for”.

So, paradoxically, Abbott’s legacy as “the infrastructure PM” may actually involve not being so wedded to standard cost-benefit analysis, but being prepared to take an educated guess about what a country such as Australia will need to face the economic challenges of the coming years.

On the mining tax, unlike many economists, I give the government some credit. Although there are intelligent arguments that those who benefit from digging up Australia’s natural resources should pay a good chunk for it, the mining tax was designed as a “super profits tax”.

If that sounds like the last refuge of banana republics that’s because it basically is. “You foreigners are stealing our future.” That is, at best, a cheap caricature of the Australian mining sector.

I’m still yet to hear a coherent definition of what a “super” profit is and how exactly it differs from an “acceptable” profit. Oh, and the mining tax didn’t raise any money, either. It was a bad idea, poorly executed. It’s good to see the back of it.

The Abbott economy at year one doesn’t look terrible. But it doesn’t look great, either. Unemployment is up, growth is flat, and confidence is down.

For Australia to really be “open for business” at year two will require a year ahead with: less scaremongering about non-existent debt crises; fewer ad hoc taxes such as the so-called debt levy and the 1.5% tax on the top 3000 companies; and no more draconian cuts to lower-income families struggling to raise kids and get ahead.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Tim Harcourt

We get a lot of free advice from billionaires on how to deal with Australia’s largest trading partner, China. First, we had gaming mogul James Packer saying we didn’t “bow enough” or treat our trading partners with sufficient deference. At the other end of the spectrum is Mineralogy owner Clive Palmer.

The two billionaires’ remarks, especially Palmer’s reference to “mongrels” and “bastards”, created ripples in Beijing and Canberra. Palmer has since apologised. But do either Packer or Palmer really have an impact on the long-term trading relationship between China and Australia? And what’s the future of Sino-Australian trade ties?

While iron ore and coal are a big part of the story, Australia will move from the mining boom to the dining boom, as its food exports grow rapidly and it sees more agricultural delegations visiting China to build up domestic farm capacity.

But will the trade relationship move beyond rocks and crops? It won’t and probably doesn’t have to.

Primary industry brings with it associated services in mining equipment, agricultural technology, human capital and education resources that China needs. In this regard, the proposed China-Australia free trade agreement (FTA) should help reduce agricultural tariffs and subsidies and smooth away tight services regulations.

According to the latest DHL survey, most exporters would welcome an FTA with China. Up to 61% of exporters think an agreement would benefit their business, 31% think it would be neutral and only 8% think it would have a negative impact.

In some ways, China’s development is as much about urbanisation as it is about globalisation, and Australia will play a big role in servicing China’s second and third-tier cities, such as Chongqing, Chengdu, Wuhan and Qingdao, which my Chinese friends tell me are “country towns” with more than or close to 10 million residents.

This means opportunity for Australian architects such as Place Design, which has moved its office from Brisbane to Chengdu to meet the insatiable demand for landscape gardening in Sichuan province, and Sunshine Coast horticulture company Bassett Barks, which has found China to be a happy hunting ground.

But the story of China’s structural reform is not only about rural-urban migration; it is also about transforming itself from being a nation of shippers to a nation of shoppers. It wants to rely less on exports and more on domestic consumption and investment.

Middle-class incomes are on the rise along with the demand for consumer goods, which were once considered a luxury in China. That’s why water-heater manufacturer Rheem is now based outside Chengdu to service the domestic market and BlueScope Steel is based outside Shanghai to transfer steel locally, free of tariffs.

Add to this the opportunities in the professional services sector, such as architecture, landscape design, education and financial services and the win-win picture becomes clear.

In fact, Australia’s export relationship with China is more broadly based than people think at first glance. According to Australian Bureau of Statistics data, more than 5,600 Australian small and medium-sized enterprises (SMEs) now export to China (plus another 4,900 via Hong Kong) and more than 3,000 are based in China and are flourishing.

More Australian businesses lose money in the US than in China, and more SMEs export to China than to the whole of Europe. Australian SMEs have battled their way into China and over time many have forged a reasonable business through enduring relationships.

Maybe we should listen more to the little Aussie battlers in the SME sector and less to our billionaires on how to succeed in China in the long run.

Tim Harcourt is the J.W. Nevile fellow in economics at UNSW Australia Business School. A version of this post appeared in China Daily.