Privatising Medicare payments is a distraction from real reform – The Drum

Posted on March 13, 2016 by Warwick Smith

This article was originally published at The Drum.

By Warwick Smith

Posted 10 Feb 2016, 10:23am

A group of Medicare sit on a table
PHOTO: Are we facing a death by a thousand cuts approach to Medicare reform? (Giulio Saggin, file photo: ABC News)

Would the privatisation of the Medicare payments system save money? It’s not impossible, but we have good reason to be sceptical, writes Warwick Smith.

The West Australian newspaper broke a story yesterday claiming that the Federal Government has a well-advanced investigation into the possibility of outsourcing the Medicare, Veteran’s Affairs and aged care payments systems.

Medicare is one of the world’s most efficient healthcare providers and is instrumental in our consistently high ranking in international comparisons of health expenditure efficiency. For example, Bloomberg’s 2014 ranking of health efficiency put Australia at number six in the world.

That said, there’s no doubt that there is waste and inefficiency and the potential for billions in savings. Previous investigations have identified huge waste in the unnecessary use of expensive treatments and diagnostics and big savings to made through greater use of preventative measures.

By contrast, the privatisation of the Medicare payments system hasn’t rated a mention by any recent major investigation or review of the healthcare system, with the exception of the Government’s ownCommission of Audit. The Productivity Commission’s recent review of the efficiency of the healthcare system didn’t mention the payments system as an area of interest or concern, let alone make any recommendations that it be privatised.

Does any of this demonstrate that this isn’t a worthwhile reform? No, but it definitely should make us suspicious. International comparisons tell us that privatisation in medicine often leads to lower efficiency. The US provides us with the clearest example with by far the highest per capita expenditure on health care for only mediocre outcomes. However, this is not a proposal to outsource the provision of medical care, only the payments system.

Could a provider that already has a modern payments system in place do the job more efficiently than Medicare? It seems that is at least possible. Can they do it more efficiently than Medicare plus make a profit and still come in cheaper than Medicare? Again, possible, but a bit less likely.

Historically, the government has a terrible record when it comes to IT service procurements with massive cost blow-outs and the now cliché of redundant public service IT staff returning to do the same work as consultants for three times the money. It’s been well demonstrated that in-house investment in IT by government departments lifts productivity but the impact of the privatisation of IT services is a lot more patchy with no consistent benefits.

While it might appear that organisations like Australia Post or the banks have the infrastructure necessary to deliver this service, the reality is almost always much more complicated, with each system being unique and often requiring building from the ground up. If it’s necessary to build a new payments system, why not invest in the capacity within Medicare which has proven over four decades to be a very efficient organisation?

Medicare has recently transformed its client side payments system with the introduction of mobile apps through which claims can be made – thus avoiding turning up at a crowded office with paper receipts. These changes have met with approval from many users and show progress towards more efficient service delivery.

Efficiency isn’t the only consideration though. In order to provide this service, the private provider would have to have unprecedented access to Medicare and other records of all Australians. We have to ask whether or not this is desirable and what reductions in government spending make the potential breaches of privacy worthwhile. Other important considerations include dispute resolution and customer complaints. The costs of dealing with performance issues are often borne by the public when government services are outsourced. Buck passing between governments and private providers is common and accountability can be opaque.

For many, these reforms will be seen as yet another Coalition attack on our iconic national healthcare system. The Liberals have a love hate relationship with Medicare. They are forced to love it (or at least pretend to) because the Australian people do. They hate it because its efficiency and effectiveness are a thorn the side of their small-government pro-private-sector ideology.

They can’t dismantle Medicare, as John Howard wanted so badly to do, because it’s too popular. Instead they have tried to incrementally erode its universality and effectiveness through the creation of incentives to take up private health cover, the tightening of bulk-billing criteria and the proposed introduction of GP co-payments to name just a few. This proposal could be a continuation of that long-standing death by a thousand cuts approach to Medicare reform, or it could be a genuine attempt to improve service and efficiency. History would tell us the former is more likely.

Meanwhile, let’s see if the Turnbull Government can deliver on real efficiency and service improvements like increased focus on preventative medicine and more targeted use of expensive diagnostic equipment as mentioned above. There’s not only billions to be saved there, but also a lot of political mileage for any government that can make genuine improvements to our much-loved Medicare.

Warwick Smith is a research fellow at progressive think tank Per Capita.

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Death and taxes on 2SER’s breakfast show

Posted on November 17, 2015 by Warwick Smith

I was back on 2SER’s breakfast show this morning with Mitch Byatt. We talked about inheritance taxes: whether they’re good or not; why they were abolished in the ’70s and what other options there are for tax reform.  It was slightly too early for me but I think I somehow managed to be reasonably coherent – though perhaps not at my entertaining best.

You can listen to the podcast here.

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Cynical workforce participation policy forces solo parents into ranks of unemployed – The Age

Posted on November 2, 2015 by Warwick Smith

By Warwick Smith

First published at The Age

The Turnbull government is peddling workforce participation nonsense.

By investing in the children of solo parents we are investing in our nation’s future. Photo: Gabriele Charotte

Some things have changed under the leadership of Malcolm Turnbull. Many things haven’t. When it comes to employment, the government continues to “push on the string” of workforce participation. Discussing proposed cuts to Family Tax Benefits affecting single parents and grandparents who are primary carers, new social services minister Christian Porter said the government was unequivocally trying to increase workforce participation.

I call this “pushing on a piece of string” for good reason. Unemployment in Australia is at 6.2 per cent. There are many more people looking for work than there are jobs. So, I’d be very keen to hear how pushing more single parents and grandparents into the job market is going to be a positive thing for this country or for the individuals concerned.
Taking away payments from everyone because of the actions of a tiny minority is the kind of collective punishment that society long ago abandoned in every other sphere of life.

There are two possible outcomes from such a move (if it was successful). Those individuals either get a job at the expense of one of the other job seekers or they join the ranks of the long-term unemployed, suffering all the indignities and deceptions that routinely go along with that.

Another insidious accusation sits behind these kinds of statements. Christian Porter is suggesting that there are a lot of single parents out there who could find work but choose not to because of government payments. I reckon Christian Porter doesn’t know many struggling single parents don’t you? The idea that they could just pop out and find a job that fits within school hours but they’re not because of $2000 a year in government payments is the kind of thing that only a politician could believe.
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Of course, there will always be a small minority of people who play the system or who are just lazy, but taking away payments from everyone because of the actions of a tiny minority is the kind of collective punishment that society long ago abandoned in every other sphere of life.

There’s a discrimination present here of another kind as well. Couples with children, particularly well off couples, can choose to have one parent stay at home to care for the kids and keep the household running well. Single parents are being told this should not be an option for them and their children. Instead, they should be forced to run as fast as they can in the hamster wheel that is modern life.

As a society we need to take stock of what’s important. One of the most important things we can do is provide a stable and caring environment for our children. Yes, a 13-year-old is still a child. Pushing single parents into further financial and time stress is not a recipe for a better society.

If we want to improve workforce participation then we should focus on job creation. It doesn’t take a genius to realise that increasing jobs, not increasing the number of unemployed, is the way to improve workforce participation. I said earlier that only a politician could believe the opposite, but the sad fact is they don’t believe it either.
They know it’s nonsense, but it fits within the victim blaming narrative that allows those who are ideologically opposed to social welfare to cut government expenditure and reduce the comparative negotiating power of workers. The more desperate unemployed people there are the less upward pressure can be applied on wages and conditions.

Options for government policies that create jobs are too numerous to list. The problem is that most of these policies require increased government expenditure. Never mind that many would pay for themselves in the medium to long term; the bizarre obsession with budget deficits and budget balances means that such nuanced discussions cannot be had.

Implementing many of the recommendations of the highly regarded, but now buried, Henry Tax Review would create jobs; some without costing governments a cent. These are off the table because tax reform always creates losers, often wealthy losers, and they shout a lot louder than the winners. Instead of considering those recommendations Turnbull is launching his own tax reform process so that it can generate recommendations for some future government to ignore.

Instead of tackling real problems, like tax reform, or investigating novel solutions, like a job guarantee, it’s much easier to kick those who are already down. They’re too busy just trying to survive to fight back.

Warwick Smith is a research economist and writer. He blogs at reconstructingeconomics.com and tweets @RecoEco.

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Malcolm Turnbull and the distraction of economic growth – Independent Australia

Posted on October 20, 2015 by Warwick Smith

If we stop obsessing about economic growth and focus directly on our social aims then economic growth will take care of itself, writes economist Warwick Smith.

First published at Independent Australia

(Image via onlinecitizen.com)

WHY ARE WE so consumed by the pursuit of economic growth?

Malcolm Turnbull made the economy the primary focus of both his pitch for leadership of the Liberal party and his victory speech. It was a smart move because, under Abbott and Hockey, almost everyone was questioning that age-old belief that the Coalition are the better economic managers.

Economic measures have become the principal indicators of success or failure of governments. They shouldn’t be, but they are.

Economic theory holds growth to be desirable for two major reasons. The first is that the more money an individual has, the more of their preferences they can satisfy; that is, they can get more of what they want. This preference satisfaction is the very definition of human welfare, according to economic theory.

The second reason that economic theory holds growth to be desirable is employment. Almost any increase in efficiency must be accompanied by economic growth if employment levels are to be maintained. To take an example: supermarkets will eventually have no staff at checkouts, either through technology that automatically registers all items or, as is already happening, by passing the cost over to the customer in self-service aisles. The supermarket saves money and can increase profits and discount prices. If checkout staff find alternative work without displacing other workers, the economy grows because more work is being done than before.

Similarly, if we have net migration above zero – more people coming into the country than leaving it – then we need a growing economy in order to provide them all with jobs.

So, economic growth creates jobs — most of the time.

The problem with both of the above justifications for the pursuit of economic growth (preference satisfaction and employment) is that they are indirect ways to achieve their stated goals.

Preference satisfaction is a very crass and imperfect proxy for human welfare. While there’s no doubt that those in extreme poverty benefit enormously from additional wealth, the effect diminishes as we get wealthier. Research has shown that you pretty much have the same impact on any person’s self-reported wellbeing by doubling their income. In other words, you can get the same increase in overall wellbeing by spending $20,000 to double the income of a poor person (in Australia), or $200,000 doubling the income of a wealthy person.

If human welfare is our main concern, then it’s clear from the data that, in wealthy countries, the distribution of wealth and income is far more important than simple measures of overall economic growth. It’s possible for the economy to grow while income and wealth at the bottom of the distribution stagnates or even declines. Since the financial crisis in 2008, a staggering 95% of income growth in the United States has gone to the top 1% of income earners. A growing economy but a stagnating middle and lower class.

Similarly, if employment is a major concern, then employment should be directly targeted rather than assuming that economic growth will take care of it. In the post-war period of the 20th century most developed nations had full employment policies. Australia’s unemployment through the 1950s and 60’s averaged about 2%. Economic reforms in the 1970s and 80s that are credited with fostering 25 years of uninterrupted economic growth also lifted what we viewed as an acceptable level of unemployment to around 5% and actual unemployment often significantly higher than that.

It is important that we understand that this is a policy choice. If we so chose to, we could return to an unemployment rate of 2%. There are many paths to full employment including a full-blown job guarantee policy. Under such a scheme the Federal Government could act as employer of last resort. In other words they would give a job – at or maybe just below the minimum wage – to anyone who wanted one. The impact would be not only to eliminate involuntary unemployment, but also to make the economy more robust and flatten out the boom and bust of the business cycle.

We know a job guarantee could work and it would be much more effective than just targeting growth and then crossing our fingers.

So, where does this leave us with respect to public policy priorities? The simple reality is that if we stop obsessing about economic growth and focus directly on our social aims then economic growth would take care of itself. High levels of inequality reduce economic growth. High levels of unemployment, particularly long-term unemployment, reduce economic growth. Climate change, if not addressed, will cause massive economic damage.

Let the private sector obsess over growth if that’s what they want. The public sector should focus on the public.

Warwick Smith is a research economist at the University of Melbourne. He will be running a workshop discussing these issues and more at the Local Lives Global Matters conference in Castlemaine, Victoria, from 16 to 18 October. You can follow Warwick on Twitter @recoeco.

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China’s ETS will boost Turnbull’s chances of shifting Coalition policy – The Drum

Posted on October 2, 2015 by Warwick Smith

OPINION

By Warwick Smith

Originally published by the ABC at The Drum.

Posted Mon at 4:19pm

A woman rides her bicycle past a coal power station in Beijing.PHOTO: A woman rides her bicycle past a coal power station in Beijing. (David Gray, file photo: Reuters)

It would be a mistake to write off the new Prime Minister’s climate change policy ambitions at this early stage. With global momentum building, the situation could look very different after the next election, writes Warwick Smith.

China’s announcement that it will implement a nationwide emissions trading scheme in 2017 is globally significant, but it also shifts the power balance in Australia’s climate policy chess game.

For Turnbull, and others in the Federal Government who take the threat of climate change seriously, this is not about convincing the climate naysayers in the Coalition of the merits of more meaningful action; it’s about working towards checkmate where all of their reasons against action are undermined and they have no more publicly defensible arguments.

The inaction of the US and China, the world’s largest emitters of greenhouse gases, has long been one of the key excuses for inaction in Australia. The argument has been repeatedly made that if China and the US are not taking action, then it’s pointless for us to do so.

That excuse is clearly no longer credible – if it ever was.

Here’s what Greg Hunt, then opposition environment spokesman, had to say in April 2013:

Where a real global agreement will come is when China and United States reach a point of common position and when that’s backed up with India and the EU.

Ongoing joint announcements by China and the US on their climate policy pledges are representative of international momentum that is steadily building towards the critical Paris climate conference in December.

Leading the way, Sweden has just announced plans that it says will set it on the path to become the first fossil fuel free nation. The likelihood of a meaningful agreement being reached in Paris is growing by the day. Both explicit and implicit pressure is building on Australia to come to the negotiating table with more ambitious emission reduction targets.

Despite this building pressure, Malcolm Turnbull has recommitted the Coalition to the emission reduction target announced by Tony Abbott (26-28 per cent reduction on 2005 levels by 2030) and has signed an agreement with the Nationals that there will be no change to Coalition policy on climate change.

Many think Turnbull has sold his soul to the right of the Coalition in order to become Prime Minister. However, Turnbull’s ego and self-confidence should not be underestimated, and it would be a mistake to write off his policy ambitions at this early stage. That said, in order to pursue his own climate policy goals, he has to play a highly nuanced game.

Turnbull must stick to his agreements with the right of his own party and with the Nationals in order to create the stability needed to win the next election, but he also needs to give signals of his intention to change policy if he’s to avoid the accusation of acting without a mandate. He currently appears to be putting the Coalition into something of a policy holding pattern in the short to medium term, placing pressure on Bill Shorten to lift his game in response to flagging support for Labor in the polls.

After the next election, if the Coalition wins, all bets will be off and the agreement between the Liberal and National parties will be renegotiated. After an election win, Turnbull will be in a much stronger position to push his own agenda both within the Liberal party and with his Coalition partners.

It is in this context that we should view Environment Minister Greg Hunt’s recent comments regarding the possibility of strengthening Australia’s targets during future reviews the Paris agreement. This doesn’t break promises made to the Nationals (though it will certainly make them nervous) but it signals to the electorate that the current weak targets are not locked in for the long term. Comments like these create the escape hatch against future accusations of backflips or broken promises.

Despite what he may be saying publicly, we know that the Prime Minister thinks the direct action climate policy is inadequate. He’s stated openly and plainly on more than one occasion that putting a price on carbon is the only way to achieve the kind of deep cuts that are needed to avoid the worst impacts of climate change. Watching him walk the tightrope between the promises he had to make in order to become Prime Minister and his own personal views will likely be one of the more interesting political spectacles of the coming year.

Warwick Smith is a research economist at the University of Melbourne. He blogs at reconstructingeconomics.com and tweets @RecoEco.

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Joe Hockey’s unscripted moments of truth reveal what the Government really thinks – The Age

Posted on September 4, 2015 by Warwick Smith

By Warwick Smith

Originally published by The Age on September 3, 2015 – 12:17PM.

Talk of throwing Hockey to the wolves is worrying. After all, it’s his slip-of-the-truth lines that give us a glimpse of the Government’s real agenda: only the rich and powerful matter.

Treasurer Joe Hockey addressed the CEDA conference at Parliament House in Canberra on Monday 22 June 2015. Photo: Andrew Meares

In a political system based on spin and obfuscation, clarity and honesty are rare indeed. This is why recent talk of throwing Joe Hockey to the wolves is worrying. When Hockey tells Sydneysiders to get a good, well-paying and secure job if they want to enter the property market, he is telling us what this government really thinks. If you don’t have a job that pays much better than the average wage then you don’t deserve to own your own home. If the best you can do with your life is be a teacher in a public school or a nurse or a waiter then you’re not worthy of his concern or interest. Get a better job, then come talk about your problems.

Hockey’s unscripted moments of truth and clarity combine with his budget measures to leave us with no doubt that looking after those with wealth and privilege at the expense of those without is the overarching guiding principle of this government. Of course, he would have his own internal justification for this stance that would sound a lot less aristocratic but if exposed to critical scrutiny it would be unlikely to hold water. This, of course, is why such views are not exposed to public scrutiny except in those lovely moments when Hockey has a slip-of-the-truth.

“What [Hockey] really thinks is that those who can’t afford to buy a house don’t deserve to have one.”

Hockey represents those who don’t need to even think about housing affordability. He knows lots of people who are buying in Sydney. He knows lots of people who own lots of houses in Sydney. ‘How can it be unaffordable if people are affording it?’ he earnestly asks.

Treasurer Joe Hockey’s great value is that occasionally he slips up and accidentally tells the truth. Photo: Alex Ellinghausen

There are two kinds of people in Hockey’s world; the ‘lifters’ who have money and power and the ‘leaners’ whose primary role is to provide the goods and services to those with money and power. Only the former really matter. If you’re not up to the task of gaining money and power then don’t come knocking on Joe Hockey’s door. By contrast, if you’re wealthy enough to have clever accountants who can funnel your large income through trusts, companies and self-managed superannuation funds then Hockey’s your man in Parliament. He’s keen to cut government expenditure on anything that benefits the ‘leaners’ but massive government tax concessions for the ‘lifters’ are out of bounds in the crusade to balance the budget.

Clearly Hockey is not stupid enough to think that everyone can have an above average salary. Therefore, what he really thinks is that those who can’t afford to buy a house don’t deserve to have one. You’re either part of the wealthy elite or you’re the scum on the bottom of the pond. I wrote about this very attitude in the aftermath of Hockey’s first budget, explaining how Hockey and Abbott want to make Australia more like the United States where being born poor means worse (or no) healthcare, worse education, worse job prospects and worse life outcomes while being rich means paying a lower rate of tax than your secretary.

So, what is Joe Hockey’s internal conversation about wealth and welfare likely to look like? I doubt we need to look any further than the work of Ayn Rand, an author with a cult following among those who run the world. Her books are reverently passed around the halls of world’s elite colleges. The heroes of her novels are people of principle held back by the parasitic masses and the governments who represent them. Rand’s great delusional thesis is that everyone should just get out of the way of great people and let them do their thing. Rupert Murdoch is probably the quintessential real-life Randian hero.

I’d be willing to guarantee that if you could have an honest conversation with slip-of-the-truth Hockey he would admit to being a fan of Ayn Rand, or at the very least agree with her central ideas.

This is a man who would make young job seekers wait six months before receiving any income support while definitively ruling out touching the tens of billions of dollars we hand over every year in tax concessions to the top ten percent of income earners. Maybe you could forgive him somewhat if there were vast numbers of unfilled jobs waiting for applicants but the opposite is true; there are far more job seekers than there are jobs. Joe really wanted to punish young people for not being in one of the non-existent jobs. He knows this is the reality of his proposed measure. Ask yourself what kind of man would want to do that to young job seekers. The same kind of man who thinks poor people don’t drive cars.

Don’t call for them to sack Joe Hockey; his slips-of-the-truth are the only glimpse we get of what this government really thinks.

Warwick is a research economist at the University of Melbourne.

Read the original at The Age .

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Abbott’s love of coal is holding us back on emissions targets – The Drum

Posted on August 20, 2015 by Warwick Smith

Originally published at The Drum (ABC).

By Warwick Smith

Posted 11 Aug 2015, 4:23pm

Tony Abbott visits a newly opened Queensland coal mine in 2014.

PHOTO: Tony Abbott visits a newly opened Queensland coal mine in 2014. (AAP: Dan Peled)

A larger emissions reduction target would have come at very little additional cost to GDP, but it would have involved the loss of jobs in the high emissions industries that our Prime Minister champions, writes Warwick Smith.

Tony Abbott has today confirmed that his Government will commit to reducing Australia’s greenhouse gas emissions by between 26 and 28 per cent on 2005 levels by 2030.

The Government will take this commitment to December’s United Nations climate summit in Paris where post-2020 global targets will be negotiated. This target is among the lowest of any developed country, with even laggard Canada committing to a 30 per cent reduction from 2005 levels.

The barriers to deeper cuts are neither economic nor technical, and it’s abundantly clear that Australia, one of the richest countries in the world, can afford much more substantial cuts to greenhouse gas emissions than the Prime Minister is offering.

The Government has previously committed to targets in line with keeping global temperature increases below 2 degrees Celsius. However, Australia’s Climate Change Authority has calculated that Australia would need cuts of at least 45 per cent on 2005 levels by 2030 if we are to make our fair contribution towards this goal.

The per cent figures can be confusing because different countries are choosing both different reference dates and different target dates. For instance, the US is promising 26 to 28 per cent cuts on 2005 levels but will achieve it by 2025, making it significantly more ambitious than Australia’s 26 to 28 per cent by 2030. The EU have promised to go much further with a 40 per cent cut on 1990 levels by 2030.

Australia already intends to cut emissions by 5 per cent on 2000 levels by 2020. This equates to about a 13 per cent cut on 2005 levels. This means we are only offering an additional 13-15 per cent on top of what will have already been achieved.

There are many paths to such a modest target, the cheapest likely to come from efficiency improvements in the energy sector.

As was revealed in The Guardian today, Government-commissioned modelling by economist Warwick McKibbin found that the target of 26 per cent to 28 per cent below 2005 levels would reduce gross domestic product by around 0.2 per cent or 0.3 per cent by 2030. More interestingly, the modelling reportedly showed that increasing the target to 35 per cent would come at very little additional cost to Gross Domestic Product.

What’s hidden within those small GDP cost figures is that there will be some big losers and big winners. Any genuine effort to keep global temperature increases below 2 degrees will eventually require us to almost entirely stop burning fossil fuels.

While we will see the steady demise of the coal industry, we will also see the emergence of low-emissions alternatives to many products and services. It is this surge in low emissions alternatives that makes it possible for us to achieve substantial emissions reductions with a relatively low national price tag.

Many will lose jobs in high emissions industries, but many jobs will be created in other areas. Such employment transitions have always accompanied technological and social progress. Defending the status quo based on sectoral job losses is to effectively argue against all technological progress.

“The Government’s Direct Action plan for reducing emissions is soundly rejected on efficiency grounds by virtually all economists.”

The economics of emissions reduction is very straightforward. There are a handful of accepted market-based methods to efficiently reduce emissions; from a carbon trading scheme to theCitizen’s Climate Lobby proposal for a carbon tax and dividend (where the proceeds of the tax are divided between all citizens).

By contrast, the Government’s Direct Action plan for reducing emissions is soundly rejected on efficiency grounds by virtually all economists. It’s desirable from a polluter perspective because they get paid for their reductions instead of having to pay for their pollution.

Outside of accepted mainstream options for emissions reductions, there are plenty of more radical options. Our stationary energy production is responsible for around half our greenhouse gas emissions and holds the key to a successful transition to a post-carbon economy. Given the tailing off of the mining construction boom, it would be possible for the Federal Government to employ that spare capacity to build 21st century renewable electricity generation and distribution infrastructure. This would result in dramatic reductions in emissions and would also spark investment in energy-intensive ecologically sustainable industry.

Borrowing costs are at an all-time low and borrowing for such a project would definitely come out favourably in a cost-benefit analysis if climate costs and benefits are included. However, with inflation risk currently very low, and appropriate spare capacity in the economy, it would also be possible to simply create the money necessary for such a project.

We have seen the US Federal Reserve and the European Central Bank create vast sums of money (referred to as quantitative easing) to avert crises in the financial sector. Why not create money to avert a crisis in the atmosphere? I can hear gasps of horror from the financial semi-literate but it’s simply a sign that they don’t understand the reality of post-Bretton Woods monetary economics. If carefully managed to avoid inflation risk, this project could be almost costless and generate substantial economic stimulus.

Options for deeper cuts abound and, given that the Government’s own commissioned economic modelling shows that increasing the target to 35 per cent would cost little extra, it is clear that this low commitment is purely about protecting Tony Abbott’s beloved coal industry at everyone else’s expense.

The sad news for Tony Abbott is that no matter what he does, the coal industry is living on borrowed time. The sooner we understand that in Australia, the sooner we can build new sources of prosperity.

Warwick Smith is a research economist at the University of Melbourne. He blogs at reconstructingeconomics.com and tweets @RecoEco.

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TAXual healing – Interview on 2SER 107.3 FM Sydney

Posted on July 22, 2015 by Warwick Smith
By

This morning I was talking tax on 2ser‘s breakfast program with Mitch Byatt. We focussed on state finances and today’s tax meeting between state premiers and the Prime Minister. An increase in the GST is on the table but, in the interview, I suggest they should pay heed to a recent Treasury report (that I referred to in my last Conversation article) showing that land taxes are bar far the most economically efficient option for shoring up state finances. Land taxes also don’t require complex and expensive compensation packages that must accompany any increase in the GST.

You can listen to the five minute podcast of the interview here.

Thanks Mitch and 2ser.

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Four tax policies Australian house prices rest on – The Conversation

Posted on July 21, 2015 by Warwick Smith

There’s more to house prices than supply and demand. Dave Hunt/AAP

Warwick Smith, University of Melbourne

First published at The Conversation

The issues of tax and house prices are colliding in new ways ahead of the release of the government’s options paper on tax reform later this year.

Treasurer Joe Hockey is ramping up discussion of tax reform, but at the same time, the Reserve Bank among many others are calling for tax reform with respect to housing.

Would be first home buyers are being increasingly priced out of the market, particularly in capital cities, and many are resigned to a lifetime of renting.

To say that taxation has a profound effect on investment decisions is to make a gross understatement. In Australia, real estate is very favourably taxed. This results in a skew towards real estate investment that lifts prices. Most investment is in existing housing stock – proof that the resulting impact on supply is minimal.

There are many tax policies that impact on real estate investment and prices but the four most important are negative gearing, the concessional treatment of capital gains, stamp duties and land taxes.

Negative gearing

A negatively geared property loses money with respect to cash flow. The costs (primarily, but not restricted to, interest payments) exceed the income (rent). Negative gearing provisions mean that these losses can be offset against other income.

The fact that negative gearing is so popular should ring alarm bells. Investment properties are operated at a loss only on the assumption that the real return will come from capital gains when the property is sold. In other words, negative gearing is entirely dependent on investors making unearned income (economic rent).

Capital gains are unearned income because the owner of the property does nothing to create the extra value. Buildings depreciate in value over time but land tends to rise in value. This is where capital gains come from, land value increases. Land values increase due to community and government action; including the provision of infrastructure and services and population growth.

Capital gains tax

One of the reasons negative gearing is so popular is because of the concessional taxation of capital gains.

No capital gains tax is paid on a primary residence and, for individuals, only half of a capital gain is taxed for investment properties. Capital gains tax is levied at the owner’s marginal tax rate but, because of the concession, the maximum tax on capital gains is 22.5% (half the top marginal tax rate). As a result of negative gearing and the concessional treatment of capital gains real estate is an artificially attractive investment class.

Stamp duties

Stamp duties are state based taxes that are levied at the time of purchase and are based on the sale price. Economists overwhelmingly consider stamp duties to be inefficient and undesirable. The primary reason for this is because they are a barrier to the efficient allocation of housing stock.

The large cost of stamp duties acts as a disincentive for people to move to properties that better suit their needs. The classic example is that of parents remaining in a large family home after their children have left because stamp duties would erode much of the financial benefit of moving to a smaller home.

Stamp duties do, to some extent, discourage investment in real estate. However, this effect is small when compared to the impact of the concessions described above.

Land taxes

There are currently two types of land taxes in all Australian jurisdictions; local government rates and state or territory government land taxes. Both taxes are levied on investment properties but owner-occupied housing is exempt from state and territory land taxes. Land taxes are among the most economically efficient taxes.

A recent report by the Commonwealth Treasury showed that land taxes actually create a net economic benefit whereas all other taxes examined created additional costs in excess of the taxes themselves (referred to as marginal excess burden) with stamp duties being the worst of those examined.

Stamp duties are the least efficient of the taxes examined while land taxes were the most efficient; actually generating net economic benefits instead of losses.
Treasury estimates, Author provided

Social justice

The overwhelming majority of tax concessions go to the wealthiest 20% of citizens. Concessions on real estate are no different. Meanwhile, stamp duties create a substantial barrier to lower income Australians purchasing a home while wealthy investors can afford the stamp duties with the expectation that they will be recovered through capital gains.

Not only is the current taxation of real estate economically inefficient and results in artificially high prices, it is also inequitable. State and federal governments have created benefits that substantially favour those with high incomes and wealth and costs that disproportionately disadvantage the rest.

Reform options

A recent Grattan Institute report suggested cash strapped state and territory governments could generate an extra A$7 billion per year by switching from stamp duties to a low rate annual land tax. Not only would this help state governments fill their revenue holes but it would also create a more efficient economy. The ACT is leading the way and is making this transition in slow increments over the next 20 years.

I would go further and suggest that negative gearing should also be abolished and the concession on capital gains tax for real estate should be removed. Land taxes should replace many minor and inefficient state and territory taxes including insurance taxes. Well targeted land taxes could also be used to fund substantial infrastructure investment.

The often stated purpose of concessional taxation of real estate is that it encourages the supply of housing. However, the overwhelming majority of these concessions go to investors who are buying existing housing stock. At the very least these generous concessions should be quarantined to only apply to new housing stock.

The barriers to reforming real estate taxation arrangements are significant. Around two million Australian taxpayers have investment properties and would likely oppose reform. In addition, the imposition of a significant land tax would cause a one-off fall in land prices, potentially leaving some recent buyers with mortgages higher than the value of their properties. In order to make the reform palatable it would have to be either phased in slowly (as the ACT is doing) or grandfathered so that existing investments operate under the old tax provisions.

Serious tax reform is notoriously politically difficult but the benefits can be enormous. The reforms outlined above would significantly contribute to the repair of both state and federal budgets, result in a more efficient tax system and a more efficient economy.

The Conversation

Warwick Smith is Research economist at University of Melbourne.

This article was originally published on The Conversation.
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