Sunday, 29 April 2012

How companies like Apple reduce their tax bill

In How Apple Sidesteps Billion in Taxes Charles Duhigg and David Kocieniewski document some of the methods companies like Apple use to minimise the amount they have to pay in tax. If you want to know what a Double Irish With a Dutch Sandwich is then read the article.

Saturday, 28 April 2012

The luck of winning elections at the right or wrong time

Peter Brent in his Mumble blog has a great post called Deserve’s got nothing to do with it. In it he has graphs showing the budget balances from 2000–1 to 2009–10 for three countries: Australia, Canada and New Zealand. Basically all three had budgets were in surplus until the GFC hit and then all three went into deficit, and are sill in deficit.

He then looks at when their current Government was elected and how it's doing in the polls. It seems that in terms of timing, the current Australian Government was very unlucky. To quote from the blog:
No matter which country you pick in these graphs, the fiscal year in which you would least want to take government is 2007–8, the last pre-GFC one. Then the first budget you put together yourself is the 2008–9 one.

In each of those countries the government’s well-laid plans for 2008–9 were blown to smithereens and the bar dropped deeply into the red.

You can argue ‘til the cows come home about waste and too much spending and how many jobs were saved and at how much per job.

But no Australian government would have avoided going into deficit to the tune of tens of billions of dollars from 2008–9.

In political terms, $20 billion wouldn’t be much different to $50 billion. Either would have provided the ammunition Tony Abbott and team have been so adept at using. (Barnaby Joyce is especially talented with the metaphor.)

Throw in this politically-challenged government and it just gets better.

A perfect storm.

Wednesday, 25 April 2012

International Atomic Energy warning on catastrophic climate change

Fiona Harvey and Damian Carrington in Governments failing to avert catastrophic climate change, IEA urges have reported that the executive directory of the International Energy Agency is warning that migration to alternative energy sources is happening too slowly:
Governments are falling badly behind on low-carbon energy, putting carbon reduction targets out of reach and pushing the world to the brink of catastrophic climate change, the world's leading independent energy authority will warn on Wednesday.

The article goes on:
"The world's energy system is being pushed to breaking point," Maria van der Hoeven, executive director of the International Energy Agency, writes in today's Guardian. "Our addiction to fossil fuels grows stronger each year. Many clean energy technologies are available but they are not being deployed quickly enough to avert potentially disastrous consequences."

On current form, she warns, the world is on track for warming of 6C by the end of the century – a level that would create catastrophe, wiping out agriculture in many areas and rendering swathes of the globe uninhabitable, as well as raising sea levels and causing mass migration, according to scientists.

Split second decision making in sport

The article In the blink of an eye looks at the decision required in the high speed sports like cricket, baseball and tennis.
So what sets such batsmen apart? It is tempting to assume that they simply have better visual reaction times than the rest of us and can pick the ball up quicker. But according to “Wait”, a new book by Frank Partnoy, that is not the case. The book is about general decision-making in life, but contains a chapter on “super-fast sports”. It concludes that the best batsmen are no faster at “seeing” than their less successful colleagues, or even many amateurs. Whether you are Virender Sehwag or a village-green clubber, it will take you around 200 milliseconds to react to the ball. The best batsmen are set apart by what happens in the next 200 milliseconds, which the book calls the preparation stage. This means deciding on the shot, moving into the correct position and swinging the bat. (The third stage, hitting the ball, accounts for the last 100 milliseconds.) And here the margin between us and them is miniscule: “A cricket batsman who is just fifty milliseconds slower than an average professional—in other words, someone who is slower by just a fraction of the time it takes to blink—simply has no chance of competing with the pros.” Quoting Peter McLeod, an Oxford professor, the book goes on: “Their skill, it seems, lies in how they use the information to control motor actions once they have picked it up, not in the more elementary process of picking it up.”

Krugman on the cause of Europe's woes

Paul Krugman in Rogoff's Bad Parable writes that, apart from Greece, the cause of southern Europe's financial problems were huge private capital inflows rather than Government debt. Indeed, Government debt to GDP had been falling prior to the crisis.
What brought on the crisis were huge private capital inflows. Don’t think runaway politicians; think German Landesbanken lending money to Spanish cajas, fueling a real estate bubble.

So what was the big problem with the euro? Not so much that it promoted these flows; it probably did, but the GIPSIs aren’t the first economies bond markets have temporarily loved not wisely but too well. No, the key problem is lack of a way to adjust when the music stopped.

The mythology around Anzac

Paul Daly wrote a very interesting essay Anzac: Endurance, Truth, Courage and Mythology. It looks at the mythology around Anzac day and those Australians that served in war. Well worth reading.

Tuesday, 24 April 2012

High tax rates might not slow growth

In Diamond and Saez: High Tax Rates Won't Slow Growth Peter Diamond and Emmanuel Saez argue that countries that have reduced their top marginal tax rates have not seen any greater economic growth than those that have kept their top rates relatively high:
For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.  
However, what matters more is what is done with the extra revenue:
One cannot evaluate the ultimate growth effects of raising more revenue without identifying what is done with the revenue. If part of the revenue is used to reduce the federal debt, more of savings go into capital investment, enhancing growth. The fact that those paying higher taxes will reduce their savings somewhat does not fully offset this effect as some of their higher taxes would come out of consumption.

If some of the additional revenue is used for public investments with a high return, such as education, infrastructure and research, it raises growth further. The neglect of public investment over the last few decades suggests that the returns could be quite high.

Large losses in efficiency come when people are limited in their ability to finance good investment opportunities. Surveys show difficulty of borrowing as an issue for start-ups. And higher education is influenced by the finances of parents, and the earnings premium for higher education is very high. Access to investment financing is a much bigger issue for low earners than for high earners. By the time Bill Gates got rich, Microsoft was not likely to have trouble financing investments. Hence, increasing tax rates on the already rich might not hurt growth as much as increasing tax rates on the soon-to-be rich.

Dynamic Capitalism vs the Welfare Sate

There's an interesting article in The Fiscal Times, The Choice: Dynamic Capitalism vs. the Welfare State, comparing the economic performance of the US vs Europe during and after the GFC.
There is an implied tradeoff here. In the U.S. system, workers have less protection and hence more insecurity than in countries where protection is more prevalent. In return for giving up security, there are two promised benefits. First, it is argued, economic growth will be higher. With less government interference, lower taxes, and unions all but absent, the economy will be free to reach its growth potential.

Second, the economy will be more stable. If a big shock hits the economy, the U.S. will be able to reestablish full employment in new, productive, high-paying jobs much faster than countries with greater social protections and the flexibility inhibiting institutions that come with them.
If these two benefits are large, then trading security for dynamism, flexibility, and higher growth will be more than worth it. So has the economy lived up to these promises?

The article also notes that most of the growth in income in the USA over the decade preceding the GFC was in at the top.

In terms of economic performance (or at least unemployment) tt seems that the USA was middle of the road - it did better than the southern European countries but worse than the northern European countries.
With such a mixed outcome, it’s difficult to support the claim that the free market approach that began in the 1970s has lived up to the promise of a more dynamic, flexible, faster growing economy. And the case is even harder to make when the fact that the deregulation of the economy that helped to produce the housing bubble is factored in.

Interestingly those European economies with the highest levels of social welfare have had the least problems with sovereign debt whilst those with lower levels of social welfare (think Greece and Italy) have fared the worst.
A larger welfare state did not lead to a sovereign debt crisis, but it did lead to substantial protection during the recession and much better performance than in the U.S.
The author of the article suggests that the USA has room to improve in this area.

Australian quarter 1 2012 CPI graphs

There's a range of graphs at the Mark Graph blog showing the March quarter 2012 CPI data.

Superannuation and tax concessions

In The Global Mail Mike Seccombe has written an article about the tax concessions for superannuation to high incomers in Super Duped. He looks at the large amount of non compulsory contributions being made by high income earners taking advantage of the lower tax on salary sacrificed super.

Saturday, 21 April 2012

The invisible hand doesn't exist

Jonathan Schlefer writes in There Is No Invisible Hand that academic economists have long known that Adam Smith's invisible hand doesn't exist:
One of the best-kept secrets in economics is that there is no case for the invisible hand. After more than a century trying to prove the opposite, economic theorists investigating the matter finally concluded in the 1970s that there is no reason to believe markets are led, as if by an invisible hand, to an optimal equilibrium — or any equilibrium at all. But the message never got through to their supposedly practical colleagues who so eagerly push advice about almost anything. Most never even heard what the theorists said, or else resolutely ignored it.

Friday, 20 April 2012

Increasing creativity

Jonah Lehrer has written an interesting article in the New Yorker titled Groupthink. He first debunks the myth that brainstorming aids creativity. Instead he argues that people are more creative when they are brought together as a group and allowed to argue and debate. He cites a study by Brian Uzzi "a sociologist at Northwestern, has spent his career trying to find what the ideal composition of a team would look like". He then goes on to look at the success of Building 20 at MIT:
The fatal misconception behind brainstorming is that there is a particular script we should all follow in group interactions. The lesson of Building 20 is that when the composition of the group is right—enough people with different perspectives running into one another in unpredictable ways—the group dynamic will take care of itself. All these errant discussions add up. In fact, they may even be the most essential part of the creative process. Although such conversations will occasionally be unpleasant—not everyone is always in the mood for small talk or criticism—that doesn’t mean that they can be avoided. The most creative spaces are those which hurl us together. It is the human friction that makes the sparks.
Edit 13/6/2012:  Isaac Chotiner writes a less than complementary review of Lehrer's book Imagine.

Mark Latham on climate change denial

Over at the Financial Review Mark Latham has written a very interesting, and I suspect accurate, oped Climate change denial not just for fools. Recommended reading.

Thursday, 19 April 2012

Michael Pascoe on the Greek tragedy

Last year Michael Pascoe wrote an interesting article on the economic crisis in Greece The Greek tragedy - shoot the chorus. Ever so often I go looking for it so I can send it to other people. As I can't find where I've referenced it before I'm going to do so here so hopefully I can easily find it in the future.

Interesting article on middle class welfare

At The Conversation Gerry Redmond and Peter Whiteford have written an interesting article For richer or poorer: the delicate art of messing with middle class welfare. It notes how well targeted Australia's family assistance programs are, especially compared to other countries. They note that:
The main reason why family payments go to middle income and some higher income families is that we have generous base rates of payment for lower income families and we try to not withdraw them at too high a rate in order to avoid disincentives to work. Correspondingly, if governments wanted to substantially cut “middle class welfare” they would need to either cut benefits for lower income families or increase effective tax rates on middle income families through a tighter income test (or both).
Matt Cowgill has posted an interesting graph on Twitter that shows how "'middle class welfare' in Australia has changed - not as much as you'd think".

The welfare state did not cause the Euro crisis

On the We are all dead blog Matt Cowgill has written that The welfare state is not to blame for the Euro crisis. It's an interesting post that shows that the idea that the "Euro crisis is a crisis of the welfare state, caused by high taxes and/or welfare spending as a proportion of GDP" is just plain wrong. In a series of graphs Matt shows that the assertion that "European countries tax & spend too much, and that the bond markets have finally stopped the party" is false.

Matt notes that:
The European sovereign debt crisis is about a currency area that encompasses too many diverse regions, with too little fiscal integration and weak oversight. It’s about a central bank that is reluctant (or unable, depending on your point of view) to play the role of lender of last resort. In the case of Greece, yes, it’s about a government that spent too much, taxed too little, and fiddled its books to hide its deficit. But look at Ireland: it’s a low-tax, low-spending country that was held up as a paragon of fiscal virtue by conservatives before 2007. George Osborne declared Ireland to be “a shining example of the art of the possible in long-term economic policymaking.”

The crisis is not about the welfare state. I can’t understand Carr’s motivation in suggesting otherwise.
This is a blog post well worth reading, but then so it the rest of Mark's blog.

Public social spending in the US and Australia

Matt Cowgill has posted some interesting graphs on Twitter relating to public social spending. These graphs are in response to Joe Hockey's call for cuts to welfare. As Matt Cowgill notes:
If you want to make big cuts to public social spending, they have to come from health or old age pensions.
The first graph shows Australian Government public social spending as a percentage of GDP. As you can see, health and old age pensions comprise the bulk of social spending.


The second graph compares Australia's public social spending to that of other countries. Surprisingly, the United States is higher than Australia.


The third graph compares Australia and the US on social spending. I think it's worth noting that the US spends a lot more on health than Australia even though we have universal cover in Australia, unlike the US.


Update: Matt Cowgill has written an article Has Joe Hockey promised the end of the Australian safety net? including the above graphs.

Thursday, 12 April 2012

Tax receipts as a percentage of GDP

Bernard Keane tweeted this graph showing tax receipts as a per cent of GDP. It shows why the budget is in deficit.

This graph was copied from

Wednesday, 11 April 2012

Economics and good food

In Economic Theory Plots a Course for Good Food Damon Darlin interviews the economist Tyler Cowen and gets some tips on good eating.

A graph of top marginal tax rate vs real GDP growth

This graph is from the USA (although I don't know if it only uses USA data). I copied it from

Make of it as you will.

Austerity self-defeating

Jonathan Portes argues in Is austerity self-defeating? Of course it is that, you guessed it, austerity measures to reduce debt may be self-defeating.

Checking a climate prediction from 1981

In Now This Is Interesting: A Climate Prediction From 1981 James Fallows looks at a climate prediction made by James Hansen in 1981:
It is very much worth checking out an item on Real Climate, from two Dutch scientists. They have found a paper by James Hansen and others from 1981, before climate change was even an occasion for political disagreement.

Hansen is now famous in the world of climate studies, and infamous to the world of the right wing, but back then he was a 40-year-old researcher who came up with a projection of how rising CO2 levels might affect global temperatures. Science lives for the "falsifiable hypothesis" -- a claim that can be tested against the evidence -- and that is what the paper by Hansen and his colleagues offered up. Three decades later, his worst-case projections were matched against what has happened since then. You should read their full findings, but this gives you the idea.

Basically, actual observations show an increase on 30% over what Hansen predicted. Read the article to see a graph showing the increase.

Sunday, 8 April 2012

Why some inflation can be good for you

Paul Krugman writes in Not Enough Inflation:
Fundamentally, the right wants the Fed to obsess over inflation, when the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing. 
He goes on to write:
And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

Housing affordability

Australian cities have a problem with housing affordability. Blame for this has been assigned to a number of causes including lack of supply, red tape, stamp duty, and the market distortions of negative gearing and first home buyers schemes. It all helps to tell us how we got here. However, what we really need is a way to fix the problem. Unfortunately, what many people won't admit is that house prices need to fall, at least in real terms, for housing to become more affordable. This can either be via a fall in prices or, and it would take much longer, growth in house prices below the rate of growth in median income.

The elephant in the room? Two thirds of households, those who own their home or those with mortgages, aren't going to like either option. Any moves that reduce housing costs to aid affordability are likely to upset a sizable portion of the voting population. It will take a very brave Government indeed to implement such measures.

Chocolate may be good for you

Mayo Clinic nutritionist Katherine Zeratsky answers the question Can chocolate be good for my health? The answer appears to be yes, but with some caveats.
Chocolate and its main ingredient, cocoa, appear to reduce risk factors for heart disease. Flavanols in cocoa beans have antioxidant effects that reduce cell damage implicated in heart disease. Flavanols — which are more prevalent in dark chocolate than in milk chocolate or white chocolate — also help lower blood pressure and improve vascular function. In addition, some research has linked chocolate consumption to reduced risks of diabetes, stroke and heart attack. One caveat: The evidence for the health benefits of chocolate comes mostly from short-term and uncontrolled studies. More research is needed.
In the meantime, if you want to add chocolate to your diet, do so in moderation. Why? Most commercial chocolate has ingredients that add fat, sugar and calories. And too much can contribute to weight gain, a risk factor for high blood pressure, heart disease and diabetes.
So, to summaries, yes you can eat chocolate. But do so in moderation and the darker the better.
Choose dark chocolate with cocoa content of 65 percent or higher. Limit yourself to around 3 ounces (85 grams) a day, which is the amount some studies have shown to be helpful. Because this amount may provide up to 450 calories, you may want to cut calories in other areas or step up the exercise to compensate. 
If I might make a suggestion. Go for the darkest chocolate you can find. The darker it is, the healthier it is and the less likely you are to each too much of it.

Calls for legal right to flexible hours for carers

Mischa Schubert in Legal right to flexible hours wins backing writes about moves to allow parents and carers greater rights to flexible work hours. She writes:
But employer advocates are strongly resisting the idea, saying the current unenforceable right to ask for flexibility — which only applies to the parents of children who are disabled or preschool — goes far enough. And some carer advocates who welcome the move have voiced fears it could result in businesses being more reluctant to hire carers, a notion disputed by workplace academics.
She also notes that:
An inquiry into the draft legislation has heard evidence from workplace law experts that stronger laws for carers are working well in Germany, the Netherlands and Britain.

But the Australian Industry Group said business was under enough pressure at the moment, and that most already tried to accommodate their workers. It testified that if workers could appeal to an industrial umpire when they were refused a request for flexible hours, it would stoke adversarial tension.

"It changes the notion and the intent; instead of it being an open dialogue, it turns into an us-versus-them situation, which sometimes can be problematic," Ai Group workplace relations adviser Genevieve Vaccaro told the hearing.
So, when business groups call for greater flexibility it sounds as if they just mean greater flexibility for the employer, not the employee.

Oh, and I note the perennial argument of now not being the right time (in this case "business was under enough pressure at the moment"). If we any credence to this argument we'll never get anything done. Business should always be under pressure in a competitive environment (and how outside the ranks of our corporate executives doesn't want a competitive environment).

Comparing US and Australian jobs data

Stephen Koukoulas in A Striking Contrast: Australian and US Jobs Data compares jobs data from the USA and Australia:
In the latest data released Friday, the US labour force was 154.707 million people and of those, were 8.2% or 12.673 million people were unemployed.  The workforce participation rate was 63.8%.

Australia has a labour force of 12.076 million people, the unemployment rate is 5.2% or 632,000 people and the workforce participation rate is 65.2%.

He notes that:
If the US had Australia’s participation and unemployment rates; there would be an extra 3.47 million people in the labour force: the number of people unemployed would be 4.45 million people lower and the level of employment would be around 7.9 million people higher.
He goes on:
There are many issues that fall out from this contrast.  Here are a few.

Most importantly is the importance of economic growth.  Keep growing the economy and employment will remain resilient.  The stimulus during the GFC in Australia worked a treat, it kept the economy growing and supported employment.

Also important is a smashing of the notion of the benefits of US style labour market flexibility.  To be sure, the US labour market has more flexibility than in Australia,  much more, but look at the cost.  Flexibility to sack people and cut wages delivers flexibility to default on mortgages, to stop spending and to undermine productivity.  There is also a paper in the offing for those wanting to look at the “dreadfully inefficient, high cost” German workforce and compare it with the US at the moment.

Saturday, 7 April 2012

Education outcomes and family

In Family matters for education outcomes – and we have to accept and celebrate this Stephen King has a look at The Australian's headline story on wealth being the key to the success of schools:
The story is behind a paywall. But it notes something that anyone involved in the education system knows: Family background (including parental education), family income (probably because it is correlated with parental education) and family attitude matter a lot for the educational outcomes of children. Children are not equal before they arrive at their first day of school. Children from families that value education cluster in selective government schools and the more expensive private schools. And they are more successful at school.

Unfortunately the accompanying story – The evidence is in, not all children are equal – does not address this difference but focuses on money.

He argues that:
Undoubtedly, funding for students is part of the answer. But if family background and attitudes are a source of difference in education outcomes, throwing money at schools cannot be the whole solution. And the approach of focussing just on school funding can lead to attempts to bring the high achievers ‘back to the pack’.

So – a simple prediction. Even if ‘all schooling were equal’, so that children from families that value education highly and children from families that value education less highly, received identical schooling, my prediction is that the children from families that value education would still outperform the others in terms of education achievement.

Yet more evidence for the effects of CO2 on global warming

Pete Spotts writes in Ice age study delivers blow to global-warming skeptics:
A new study finds that rising levels of carbon dioxide drove rising temperatures at the end of the last ice age. The findings contrast with previous studies, which skeptics of human-triggered global warming said showed that CO2 levels weren't an important factor.

A proposal to increase the efficiency of corporate taxes

Flavio Menezes has written a paper titled The Business Tax Reform Agenda and published in Economic Papers: A journal of applied economics and policy Volume 31, Issue 1, pages 3–7, March 2012. To quote the abstract:
During the session on business taxation at the National Tax Forum in 2011, little consensus emerged between business representatives and union leaders on the reformations that should be made to the business taxation system. One proposal that greatly divided opinion was a reduction in the corporate tax rate. In this article, it is argued that changes in the treatment of tax losses and the introduction of a well-designed allowance for corporate equity represent a better business tax reform strategy than cutting the corporate tax rate.

He concludes with:

In conclusion, we now have a much clearer picture of the potential impact of the patchwork economy than we had at the time of the release of the ATFS Report. This picture provides a more compelling case for the introduction of an ACE and for changes in the treatment of losses rather than for a reduction in the corporate tax rate. Importantly, such business tax reforms might play a crucial role in eliminating the temptation to return to the old and very inefficient method of providing direct support to industries that are struggling.

Housing affordability

Jessica Irvine in Housing outlook remains grim for the forgotten people notes that buying their first home is still impossible for a third of households.
A lot has changed since the global financial crisis hit Australian shores in late 2008. For the third of households who own property outright, the news has been good - homes have largely retained their value. For the third of households paying off a home loan, the news has been similarly positive - mortgage interest payments have fallen dramatically.

But for the forgotten third - renters or those looking to buy - the outlook remains grim. Once the mortgage belt's demand for lower interest rates was satisfied, concern about high prices for first-time buyers evaporated. House prices may have plateaued, but a new generation of young peoplestill cannot, and may never, afford to buy their own home.

Tim Williams, the co-author of a report on housing affordability, released this week by the McKell Institute, says the proportion of those aged 35 or below who cannot access home ownership - they live at home or rent - now stands at 66 per cent, compared with about one-third for the population at large.

Jessica goes on to write:
From an outsider's perspective, Williams says the property market is fundamentally, and uniquely, distorted. ''I remember my head reeling when I discovered how generous negative gearing was. There's nothing like it in the known world in terms of its generosity and in terms of its middle-class welfare.''

By adding to demand for housing - people's ability and willingness to pay for housing - negative gearing had inflated house prices for decades.

''I just think it's an astonishing gift to the wealthy and it has perverse effects on the housing market. You are squeezing young people out of home ownership while some people have two, three or four units - the incentives are just wrong.''

All this distortion has resulted in an astonishing fact: 22 per cent of people now own 55 per cent of the homes.

Williams is similarly shocked by the breakdown in the supply of new housing in the big cities, and Sydney, in particular. A complete lack of trust in the planning system in NSW has forged an unholy alliance between environmentalists and wealthy homeowners who gain from higher house prices by restricting the supply of new housing, he says.

Taken together, governments have for decades stimulated demand for housing, while failing to increase supply; a simple equation that has driven home prices up as a multiple of household incomes.

The solution?
Tax breaks that encourage excessive investment in housing,such as negative gearing and capital gains tax exemptions on the family home, need to be curbed or phased out.

Transaction taxes on property, that is stamp duties, which discourage people moving to more suitable accommodation, need to be abolished. Higher density development along transport lines and a focus on developing multi-centric cities should be encouraged.

The cost of infrastructure that will benefit future generations should not be passed on to new home builders through developer levies.

Raising the top tax rate in the USA

Eduardo Porter in The Case for Raising Top Tax Rates argues that the rich in the USA should be paying more tax. If the USA wants to eliminate it's budget deficit and reduce its level of debt it probably needs to:
The math is easy: the federal budget over the next decade cannot be made to square without raising a lot more money. The nonpartisan Congressional Budget Office estimates that if we stay on our current path, federal debt held by the public will grow from about two-thirds of gross domestic product today to roughly 100 percent in a decade and twice that much by 2040. It is unlikely that even the most committed Republicans could reverse the trend without higher taxes. 
He goes on to write:
But an equally compelling reason relies on a new understanding of the economics of taxation. For 30 years, any proposal to raise taxes had to overcome an unshakable belief that higher taxes inevitably led to less growth. The belief survived the Clinton administration, when taxes rose and the economy surged. It survived George W. Bush’s administration, when taxes were cut yet growth sagged.
But now, a growing body of research suggests not only that the government could raise much more revenue by sharply raising the top tax rates paid by the richest Americans, but it could do so without slowing economic growth. Top tax rates could go as high as 80 percent or more. 
He also mentions the work of an economist that suggests that higher taxes on the rich don't reduce economic growth:
Perhaps the most controversial conclusion, made by Mr. Saez and two colleagues in another study published last December, is that while the rich would respond to a big tax increase by shielding income from the tax man and maybe working less, this would not slow the economy at all. That’s because a lot of what the rich do does not, in fact, generate economic growth. So if they reduced their effort in response to higher taxes, the economy wouldn’t suffer.

These arguments are not the mainstream view. Some economists really dislike them. And they are not absolutely airtight. The calculations rely on estimates about how higher tax rates would discourage the rich from working or investing over a couple of years at most. But we know little about how they might affect long-term decisions, like whether to become a brain surgeon or a hedge fund manager. We do know that in countries with higher tax rates, like France, people work fewer hours than in the United States.

But the new line of research has the potential to overturn contemporary thinking about government finances. And in one respect, it seems indisputable: three decades of tax cuts may have gilded the pockets of the rich, but they didn’t provide much economic juice. Among developed nations, incomes per person grew no faster in countries like the United States and Britain that slashed their top tax rates than in countries like Spain, Germany or Denmark, which did not. If taxes didn’t juice the engine of growth on the way down, there is little reason to fear they will stall it on the way back up.

Wednesday, 4 April 2012

Baloney Mass Index

In 'Baloney mass index' putting lives at risk the ABC is reporting that the body mass index (BMI) might be seriously underestimating how fat we are.
In Australia, about one quarter of the population is classified as obese.

But in the study, a dual-energy x-ray absorptiometry (DXA) scan was used instead of the BMI and 48 per cent of the women were actually classified as obese, while 25 per cent of the men were classified as obese.

Dr Eric Braverman, medical director of the Path Medical Clinic in New York and co-author of the new study, says the BMI should be referred to as the "baloney mass index" because it gets it wrong about half of the time.

"It just simply isn't going to be successful," he told Radio National's Breakfast program.

The US Centre for Disease Control says one in three Americans are obese, but Dr Braverman says it is much higher than that.

If BMI tests were banished and new tests implemented, he says the rate would be at 50 to 60 per cent in America alone.
The article goes on:
He also says the BMI particularly underestimates the obesity levels of older women.

"The older you get, the more fat you have inserted into your body's muscle, and what you end up with is a very skewed idea of what fitness is," he said.

"You could be 5'5", 125 pounds [57 kilograms] and look thin and fit in a dress, but you have so much fat.

"When we do a blood test with leptin we are able to adjust it, so at last obesity has a blood test that can be lowered and treated like cholesterol or the way sugar is treated in diabetes.
This is important because:
Dr Braverman is concerned with the study's findings, saying fat is behind today's cancers, heart attacks, stroke and gall bladder problems.

"Fat is what gives you a terrible future," he said.

The article concludes with a recommendation:
"A leptin blood test will tell you what's going on or best, when you go for a bone density, ask your doctor to find out how he can get his bone density machine to do a body fat [test]. Because the body fat can be done very simply."

Bill Hayden on the Resource Rent Tax

Former Treasurer, Opposition Leader and Governor General rejects Peter Reith's recent columns and argues for the Resource Tent Tax in Loyal to Labor and committed to the RRT.

A reason to increase taxes on the rich

Paul Krugman in The Simple Analytics of Soaking the Rich (Wonkish) argues that the rich should be taxed more:
The optimal thing, from the point of view of the non-rich, is to set a tax that makes the cost of hiring rich people to produce J equal to the true marginal cost of that J, a cost that includes the fact that buying more drives up the price of inframarginal purchases. And if you grind through, you find that the optimal tax is … 1/(1+ε). Even if the rich are uniquely able to supply the magic of jobcreation, they should face much higher taxes than they do.

And this is all perfectly standard economics — indeed, Econ 101.

So what’s the basis for claims that we must tax the rich lightly? Often, it seems as if conservatives believe that there are somehow big positive externalities to what the rich do; it’s as if they believe that industrial policy is nonsense, unless the industry in question is jobcreation by the rich, in which case loose arguments about huge spillovers are just fine.

But the simple analytics say that we should soak the rich, hard.
Ross Gittins has written an interesting column, Workers pay the penalty for one-way flexibility, on the call by some for the removal of penalty rates in the name of increased flexibility and productivity. He wonders if the economic gains are worth the social cost:
Why does being able to buy more stuff make up for husbands and wives being able to see less of each other, having less time with the kids, having a lot more trouble getting together with your friends, and having your day off when everyone else is at school or working?

Why is this an attractive future? Why should our elected representatives reorganise our economy in ways that suit business and promote consumption, but do so at the expense of employees' private lives?

This is a classic case of business people, economists and politicians urging on us a mentality that prioritises the economic - the material - over the other dimensions of our lives. Yet again, no one pauses to ask what these ''reforms'' will do to our relationships.

Why is it the politicians who bang on most about the sanctity of The Family are also those most inclined to make family life more difficult?

Monday, 2 April 2012

Debt and Superannuation

George Megalogenis in Future budgets offer super reasons for wholehearted tax reform looks at a couple of issues facing the economy - debt and superannuation. On lending he notes that, because of Australia's strong economy and good public finances, other countries want to lend us money. Unfortunately, it seems that the banks are less keen to lend to business. This is having a drag on the economy.

George also notes that the Government intends using some of the revenue from the Resource Rent Tax to help finance state infrastructure, something that might have a downside:
Wayne Swan, for instance, wants to use about one-fifth of the proceeds of the mining tax in the first three years to set up a fund to bankroll state infrastructure. Taking a little extra revenue from the resources boom to build a road, or a school or a hospital, may impress the focus groups. But it makes no fiscal sense for a government to buy with cash. In fact, dud investments are more likely if they are paid for directly out of the budget because politicians will err on the side of the cheap photo opportunity, not the big, bottleneck-clearing project.

The other reason to borrow for infrastructure is the cost to taxpayers can be spread from this generation to the next, across the life of the asset. It seems perverse, but the very fact of a loan focuses the public mind. If the benefit exceeds the interest bill, the project goes ahead. If not, no deal.
George also notes that the Government will receive less revenue as superannuation contributions are increased from 9% to 12% as these contributions are taxed at a much lower rate than income.

One other item in George's column:
The compulsory system turns 20 years old on July 1. In the first 14 years, it coincided with a fall in the household savings ratio (which measures the share of disposable income that is put aside in any form of savings, including voluntary contributions to super). In the 15th year, 2006-07, Peter Costello removed the tax on super payouts and encouraged higher-income earners to put an extra $1m of their own cash into super.
I actually think that removing the tax on super payouts was one of the worst decisions of the Howard Government. As the population ages the Government is going to be faced with declining revenue from income tax. I think a future government will at some stage need to re-instate the tax. That's going to be a very hard policy to sell politically.

Sunday, 1 April 2012

Yes, cost of living has increase, but income has increased more

Stephen Koukoulas points out in Fancy another $13,000 a year in your pocket? that while the CPI has increased by 12.1% over since the end of 2007, average wages have increased by 18%.