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I’m in Australia for Consilium, an annual conference which is hosted by the Centre for Independent Studies.

I spoke on fiscal policy and pontificated on the need for nations to restrain government spending.

That’s an important message (at least in my humble option), but I thought it was more interesting to learn more about the tax and spending policies of Australia’s current government, which is led by the supposedly right-of-Center Liberal Party (Aussies still use “liberal” in the European sense of classical liberalism).

Unfortunately, I learned that the Australian Liberals (like British Tories) need some remedial work on fiscal policy.

Prime Minister Abbott and his team, for instance, have proposed to increase Australia’s top tax rate. Here’s some of what’s been reported by the Australian Financial Review.

The Abbott government’s deficit tax means top earners will face a 49 per cent marginal tax rate, the eighth ­highest among developed countries. …. Australia already holds one of the highest personal income and company tax rates in the OECD. The 30 per cent corporate tax rate and 45 per cent personal income tax rate are higher than the average of 25.32 per cent for companies and 41.51 per cent for individuals. A personal tax increase will worsen the impact of “bracket creep”. …a higher income tax rate could also make Australia less competitive globally.

And the AFR also reports that a visiting scholar has thrown cold water on the idea of mimicking European fiscal policy.

Professor Prescott, who won the Nobel Prize for ­economics in 2004, …said that at 49 per cent the top marginal tax rate would hurt growth and the government should redouble its efforts to bring down expenditure instead. “It’s too high,” said Professor Prescott, who has written on the negative impact of increased taxes on economic growth in Europe. “You’re killing the goose that lays the golden egg.” …Lamenting “as sad” the standard of public and academic debate over budget deficits – both here and abroad – Professor Prescott said the focus should be on productivity and ­government spending. “What matters is expenditure. To spend is to tax and to tax is to depress.”

So why is an ostensibly right-of-center government copying Obama’s class warfare tax policy?

Beats me, though I’m told it’s because the politicians in Canberra (the nation’s capital) thinks this will appease the left and show “fairness.”

I imagine that strategy will be a flop, just like the first President Bush didn’t win any friends when he capitulated to a tax hike in 1990.

In any event, the Australian Taxpayers’ Alliance warns that the tax hike may lose revenue because of Laffer Curve effects.

“The idea of increasing the top marginal tax rate in Australia is unlikely to raise any revenue, and may actually decrease government revenue due to a shrinking in the tax base, as high-income people reduce their labour supply, investment, innovation and tax compliance,” said John Humphreys, the deputy director of the Australian Taxpayers Alliance and an economics lecturer at the University of Queensland. …“Based on mainstream estimates of the high-income elasticity of taxable income, it is fairly straight forward to calculate the tax rate that will raise the maximum amount of revenue, and in Australia that is about 45%. If tax is increased beyond that level, then it is unlikely to raise revenue, and may actually cause a drop in revenue.…” The modeling by Humphreys is due to be published in Policy Journal in the coming months.

I’m skeptical about the finding that the revenue-maximizing rate for the personal income tax is 45 percent, particularly when there is very rigorous analysis suggesting that 20 percent is much closer to the mark.

But I definitely agree that pushing the rate to 49 percent will backfire on the Australian government.

And the folks at the ATA do make the very sound point that politicians shouldn’t try to set the top rate at the revenue-maximizing level regardless.

“There is no logical argument for increasing marginal tax rates about the revenue-maximising level, and indeed there is no good argument for having tax rates anywhere near the revenue-maximising level since those taxes raise very little money but cause significant economic damage.”

Amen. Indeed, allow me to call your attention to some very impressive academic work on this issue.

Now let’s shift to the spending side of Australian fiscal policy.

The good news is that the Abbott government isn’t proposing big increases in the burden of government spending.

The bad news, however, is that there doesn’t seem to be any commitment to a short-term or long-term effort to shrink the public sector.

Here’s a chart, based on IMF data, looking at what’s happened to Australian government spending over the past 20-plus years. The purple-ish line is nominal government spending (left axis) and the blue line is government spending as a share of economic output (right axis).

Australia Spending

In the long run, the trend of the blue line is the most important variable.

Unfortunately, the burden of government spending has climbed since the late 1980s. It’s still much lower than the burden of spending in places such as France, but the line is moving in the wrong direction.

On the other hand, if you look at the data since 2000, you could accurately say that Australian policy makers have succeeded in keeping the burden of spending from climbing above 34 percent of GDP (there was some foolish stimulus spending beginning back in 2009, but it didn’t lead to a permanent expansion in the size of government).

But let me share some remarkable data showing Australia’s missed fiscal opportunity. If you look at the IMF’s annual government spending and do the calculations, you’ll find that government spending since 1988 has grown by an average of 6.8 percent each year.

Since nominal GDP also has increased at a good pace, the actual burden of government has “only” risen from about 30 percent to 34 percent of economic output.

But imagine if Australian policy makers had merely imposed some version of Mitchell’s Golden Rule and limited spending so that it grew by, say, 3 percent annually.

If they had engaged in that modest level of fiscal restraint, the burden of the public sector today would be only about half its current size. In other words, government spending in Australia would be less than 17 percent of economic output, which would be even better than Hong Kong and Singapore.

This explains why I’m so fixated on expenditure limitations. You can make big progress over just a couple of decades if politicians somehow can be convinced to restrain the rate of growth of government spending.

Or, as the people of Switzerland figured out, you can enjoy that progress if you impose a spending limit on the politicians.

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As part of my “Question of the Week” series, I said that Australia probably would be the best option if the United States suffered some sort of Greek-style fiscal meltdown that led to a societal collapse.*

One reason I’m so bullish on Australia is that the nation has a privatized Social Security system called “Superannuation,” with workers setting aside 9 percent of their income in personal retirement accounts (rising to 12 percent by 2020).

Established almost 30 years ago, and made virtually universal about 20 years ago, this system is far superior to the actuarially bankrupt Social Security system in the United States.

Probably the most sobering comparison is to look at a chart of how much private wealth has been created in Superannuation accounts and then look at a chart of the debt that we face for Social Security.

To be blunt, the Aussies are kicking our butts. Their system gets stronger every day and our system generates more red ink every day.

And their system is earning praise from unexpected places. The Center for Retirement Research at Boston College, led by a former Clinton Administration official, is not a right-wing bastion. So it’s noteworthy when it publishes a study praising Superannuation.

Australia’s retirement income system is regarded by some as among the best in the world. It has achieved high individual saving rates and broad coverage at reasonably low cost to the government.

Since I wrote my dissertation on Australia’s system, I can say with confidence that the author is not exaggerating. It’s a very good role model, for reasons I’ve previously discussed.

Here’s more from the Boston College study.

The program requires employers to contribute 9 percent of earnings, rising to 12 percent by 2020, to a tax-advantaged retirement plan for each employee age 18 to 70 who earns more than a specified minimum amount. …Over 90 percent of employed Australians have savings in a Superannuation account, and the total assets in these accounts now exceed Australia’s Gross Domestic Product. …Australia has been extremely effective in achieving key goals of any retirement income system. …Its Superannuation Guarantee program has generated high and rising levels of saving by essentially the entire active workforce.

The study does include some criticisms, some of which are warranted. The system can be gamed by those who want to take advantage of the safety net retirement system maintained by the government.

Australia’s means-tested Age Pension creates incentives to reduce one’s “means” in order to collect a higher means-tested benefit. This can be done by spending down one’s savings and/or investing these savings in assets excluded from the Age Pension means test. What makes this situation especially problematic is that workers can currently access their Superannuation savings at age 55, ten years before becoming eligible for Age Pension benefits at 65. This ability creates an incentive to retire early, live on these savings until eligible for an Age Pension, and collect a higher benefit, sometimes referred to as “double dipping.”

Though I admit dealing with this issue may require a bit of paternalism. Should individuals be forced to turn their retirement accounts into an income stream (called annuitization) once they reach retirement age?

I’m torn on this issue. Paternalists sometimes do have good ideas, but shouldn’t people have the freedom to make their own decisions, even if they make mistakes? But does the answer to that question change when mistakes mean that those people will be taking money from taxpayers?

Fortunately, I don’t need to be wishy-washy on the other criticism in the study.

Australia’s system does have shortcomings. It is heavily dependent on defined contribution plans and is vulnerable to weaknesses in such programs.

I strongly disagree. A “defined contribution” account is something to applaud, not a shortcoming.

The author presumably is worried that a “DC” account leaves a worker vulnerable to the ups and downs of the market, whereas a “defined benefit” account promises a specific payment and removes that uncertainty. Sounds great, but the problem with “DB” accounts is that they almost inevitably seem to promise more than they can deliver. And that seems to be the case whether they’re supposedly based on real savings (like company retirement plans or pension funds for state and local bureaucrats) or based on pay-as-you-go taxation (like Social Security).

*Since I’m somewhat optimistic that America can be saved, I’m not recommending you head Down Under just yet.

P.S. I’m also a huge fan of Chile’s system of private accounts. At the risk of oversimplifying, Chile’s system is sort of like universal IRAs and Australia’s system is sort of like universal 401(k)s.

P.P.S. There’s much to admire about Australia, but its government is plenty capable of boneheaded policy. Heck, the government even provides workers’ compensation payments to people who get injured while having sex after work hours, simply because they were on a business-related trip. Talk about double dipping!

P.P.P.S. Here’s my video explaining why we should implement personal retirement accounts in the United States.

P.P.P.S. The death tax has been abolished in Australia, so there’s more to admire than just personal retirement accounts.

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A reader from New York has a follow-up question for me.

Referencing a “Question of the Week” from last month, in which I expressed guarded optimism that America could be saved, she wants to know what I would do if things go the wrong way.

In other words, what if things go really wrong and America suffers a Greek-style fiscal collapse? And imagine how bad that might be since there wouldn’t be an IMF or European Central Bank capable of providing bailouts to the United States.

Perhaps because of an irrational form of patriotism, I’m fairly certain that I will always live in the United States and I will be fighting to preserve (or restore) liberty until my last breath.

But I probably would want my children someplace safe and stable, so I’ll answer the question from that perspective.

The obvious first choice is a zero-income tax jurisdiction like the Cayman Islands that is prosperous and reasonably well governed.

But I’m not sure about the long-run outlook for the Cayman Islands, in part because the politicians there have flirted with an income tax and in part because the jurisdiction inevitably would suffer if the United States was falling apart.

So what’s a place that is stable and not overly tied to the American economy.

Then the obvious choice is Switzerland. That nation’s long-run fiscal outlook is relatively favorable because of  modest-sized government and a very good spending control mechanism.

But while Switzerland is not dependent on the U.S. economy, it is surrounded by European welfare states. And I’m fairly certain that nations such as France, Italy, and (perhaps) Germany will collapse before America.

And even though most Swiss households have machine guns and the nation presumably can defend itself from barbarian hordes in search of a new welfare check, Switzerland’s probably not the ideal location.

Estonia is one of my favorite countries, and they’ve implemented some good reforms such as the flat tax. But I worry about demographic decline. Plus, I’m a weather wimp and it’s too chilly most of the year.

Another option is a stable nation in Latin America, perhaps Chile, Panama, or Costa Rica. I haven’t been to Chile, but I’m very impressed by the nation’s incredible progress in recent decades. I have been to Panama many times and it is one of my favorite nations. I’ve only been to Costa Rica two times, but it also seems like a nice country.

The bad news is that I don’t speak Spanish (and my kids don’t speak the language, either). The good news is that Hispanics appear to be the world’s happiest people, so that should count for something.

“G’day mate, we’ve privatized our social security system!”

This brings me to Australia, the country that probably would be at the top of my list. The burden of government spending in Australia is less than it is in the United States.

But the gap isn’t that large. The reason I like Australia is that the nation has a privatized Social Security system (called Superannuation) and the long-run fiscal outlook is much, much better than the United States.

Plus the Aussies are genuinely friendly and they speak an entertaining form of English.

So if America goes under, I recommend going Down Under.

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Australia is perhaps my favorite country. In part this is because there have been some good economic reforms, such as personal retirement accounts.

But there’s more to life than public policy, and I like Australia because the people are so outgoing and friendly.

Though sometimes their outgoing friendliness, so to speak, creates opportunities for really stupid government policy. A judge in Australia has ruled, for instance, that a woman deserves employment compensation after injuring herself while having sex. Here are some of the remarkable details.

The battle for compensation is not over for a woman who was injured while having sex in a motel on a work trip. Comcare, the Federal Government workplace safety body, has lodged an appeal against the Federal Court decision that the public servant, aged in her late 30s, was entitled to workers’ compensation.Comcare is appealing the judgment on four grounds, including that the court was wrong in finding the woman’s injuries were caused “in the course of her employment”.She is claiming compensation for facial and psychological injuries suffered when a glass light fitting above the bed was pulled from its mount while the woman was having sex in November 2007.Justice John Nicholas said it was not relevant whether it was the woman or her partner – who she met about a month earlier – who pulled the light fitting from the wall.The Administrative Appeals Tribunal had earlier upheld Comcare’s decision, finding that sexual activity was “not an ordinary incident of an overnight stay like showering, sleeping or eating”.”…She was involved in a recreational activity which her employer had not induced, encouraged or countenanced.”However Justice Nicholas overruled that decision and found in favour of the woman.

I have two reactions to this story.

Aussie sex position?

First, what am I doing wrong? How come I’ve never caused light fixtures to be pulled from a wall? That might be worth a facial injury.

Second, what sort of idiot judge concludes that an injury suffered during a sexual relationship entitles someone to get employment compensation money from taxpayers. Sounds like the Appeals Tribunal showed a lot more common sense in ruling that her sexcapades were a “recreational activity” and not “induced, encouraged or countenanced” by her employer.

I’ve come across lots of crazy government decisions in my time, but this is near the top of the list. Probably not as bad as the Greek government subsidizing pedophiles or demanding stool samples before letting entrepreneurs set up online companies, but still amazingly foolish.

It’s also at least as silly as the European courts that have ruled that there’s an entitlement to free soccer broadcasts and a right to satellite TV.

And it’s probably worse than the Finnish court that ruled there’s a right to broadband access, though not as nutty as the Bolivian decision that there’s a human right to receive stolen property.

In any event, at least the Australian government is appealing this moronic decision, so that’s another reason to think it’s a good country. Maybe when America falls apart and enters a Greek-style fiscal death spiral, I can emigrate.

Though I would still need to fight for freedom since Australia’s government does plenty of bad things, such as their version of wasteful “stimulus” and very shameful efforts to stifle political dissent on global warming hysteria.

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There are two serious problems with America’s Social Security system. Almost everyone knows about the first problem, which is that the system is bankrupt, with huge unfunded liabilities of about $30 trillion.

The other crisis is that the system gives workers a lousy level of retirement income compared to the amount of taxes they pay during their working years. Younger workers are particularly disadvantaged, as are African-Americans because of lower life expectancy.

These are critical issues, but perhaps looking at a couple of charts is the best way to illustrate why the Social Security system is inadequate.

Let’s start by looking at some numbers from Australia, where workers set aside 9 percent of their income in personal retirement accounts.

This system, which was made universal by the Labor Party beginning in the 1980s, has turned every Australian worker into a capitalist and generated private wealth of nearly 100 percent of GDP. Here’s a chart, based on data from the Australian Prudential Regulation Authority.

Now let’s look at one of the key numbers generated by America’s tax-and-transfer entitlement system. Here’s a chart showing the projected annual cash-flow deficits for the Social Security system, based on the just-released Trustees’ Report.

By the way, the chart shows inflation-adjusted 2012 dollars. The numbers would look far worse if I used the nominal numbers.

The two charts aren’t analogous, of course, but that’s because there’s nothing to compare. The Social Security system has no savings. Indeed, it discourages people from setting aside income.

And Australia’s superannuation system doesn’t have anything akin to America’s unfunded liabilities. The closest thing to an analogy would be the safety net provision guaranteeing a basic pension to people with limited savings (presumably because of a spotty employment record).

So now ask yourself whether Australia should copy America or America should copy Australia? Seems like a no-brainer.

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I haven’t written much on the global-warming debate, other than to warn about how agenda-driven government funding is corrupting scientific inquiry and to mock nutjob extremists who assert climate change will cause catastrophes ranging from genocide to AIDS.

But I feel compelled to address the issue today because of a despicable move by the Australian government. In a step that one might expect from a thugocracy such as Russia or Argentina, Aussie politicians are criminalizing free speech, at least when it comes to businesses dealing with the burden of a new carbon tax.

Here are some excerpts from a column in Australia’s Daily Telegraph.

Now that the carbon tax has passed through federal parliament, the government’s clean-up brigade is getting into the swing by trying to erase any dissent against the jobs-destroying legislation. On cue comes the Australian Competition and Consumer Commission, which this week issued warnings to businesses that they will face whopping fines of up to $1.1m if they blame the carbon tax for price rises. …Businesses are not even allowed to throw special carbon tax sales promotions before the tax arrives on July 1. “Beat the Carbon Tax – Buy Now” or “Buy now before the carbon tax bites” are sales pitches that are verboten. Or at least, as the ACCC puts it, “you should be very cautious about making these types of claims”. There will be 23 carbon cops roaming the streets doing snap audits of businesses that “choose to link your price increases to a carbon price”. Instead, the ACCC suggests you tell customers you’ve raised prices because “the overall cost of running (your) business has increased”. …But no matter how Orwellian the tactics, no matter how many carbon cops are sent into hairdressing salons to interrogate barbers on the precise nature of their price rises, the truth remains: Australia has gone out on a limb, imposing a carbon tax that will send businesses to the wall, cause undue hardship to families, and tether Australians more tightly to government handouts. And soon, we will send billions of dollars overseas to buy useless pieces of paper called carbon credits. Investment bankers, lawyers and carbon traders will get rich, as will all the usual spivs and scam artists ready to stick a bucket under the government spigot raining taxpayer cash.

As is often the case when I read something this grotesque, I hope the author is wrong, or at least wildly exaggerating. I don’t hold politicians in high regard, but I like to think we haven’t reached a stage where they are using government coercion to stifle dissent.

I’m especially chagrined that this soft form of fascism is happening in one of my favorite nations.

By the way, as those of us in the northern hemisphere prepare for winter, we also should prepare for more protests instigated by Al Gore. And if you like global-warming humor, this Hitler parody is a classic.

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Welcome Instapundit readers. Notwithstanding my next-to-last paragraph full of caveats, some people are saying I’m too soft on the Aussies. This previous post should disabuse people of that notion.

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The Economist magazine has a couple of good articles about Australia’s increasingly enviable economic status. Here’s a blurb from the first article, which outlines the pro-market reforms that enabled today’s prosperity.

Only a dozen economies are bigger, and only six nations are richer—of which Switzerland alone has even a third as many people. Australia is rich, tranquil and mostly overlooked, yet it has a story to tell. Its current prosperity was far from inevitable. Twenty-five years ago Paul Keating, the country’s treasurer (finance minister), declared that if Australia failed to reform it would become a banana republic. Barely five years later, after a nasty recession, the country began a period of uninterrupted economic expansion matched by no other rich country. It continues to this day. This special report will explain how this has come about and ask whether it can last. …With the popular, politically astute Mr Hawke presiding, and the coruscating, aggressive Mr Keating doing most of the pushing, this Labor government floated the Australian dollar, deregulated the financial system, abolished import quotas and cut tariffs. The reforms were continued by Mr Keating when he took over as prime minister in 1991, and then by the Liberal-led (which in Australia means conservative-led) coalition government of John Howard and his treasurer, Peter Costello, after 1996. …By 2003 the effective rate of protection in manufacturing had fallen from about 35% in the 1970s to 5%. Foreign banks had been allowed to compete. Airlines, shipping and telecoms had been deregulated. The labour market had been largely freed, with centralised wage-fixing replaced by enterprise bargaining. State-owned firms had been privatised. …the double taxation of dividends ended. Corporate and income taxes had both been cut.

This chart (click for a larger image), from Economic Freedom of the World, presents a more rigorous look at this period. It shows how Australia’s economic freedom ranking had dropped to as low at 19 (out of 72 nations measured) and now is up to 8 (out of 114 nations measured). This is akin to moving from the 74th percentile to the 94th percentile.

There is also an accompanying article about Australia’s private Social Security system. Called superannuation, these personal accounts have generated tremendous results.

…most Australian workers, over 8m in total, now have a private nest-egg for their old age. No tax is paid when members withdraw from their fund; they can take all they want as a lump sum, subject to a limit, or buy an annuity. Aussies are now a nation of capitalists. At the same time the state pension system, and therefore the taxpayer, is being progressively relieved of most of the burden of retirement provision, since eligibility for the state pension depends on both assets and income. As supers take over, the provision for old folks’ incomes will be almost entirely based on defined contributions, not defined benefits. So Australia is in the happy position of not having to worry too much about the pension implications of an ageing population… The supers…have created a pool of capital in Australia that might not otherwise have existed. Collectively worth about $1.3 trillion—much the same as GDP—they have made Australia the world’s fourth-largest market for pension savings.

Australia is not exactly Hong Kong. Marginal tax rates are still far too high. The burden of government spending is lower than in the United States, but is still far too onerous. Nonetheless, the Aussies have made impressive strides in reducing the overall size, scope, and level of government interference and intervention. And this has translated into much better economic performance.

This video uses the Economic Freedom of the World index to explain why comprehensive free market reforms (like Australia) generate the best results.

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