Who's the Fairest of them all?

I have written about 'fairness' or 'social equity' many times already ( see Inequality in Australia is NOT rising ,Inconvenient truth on Fairness, The fairness test, A Wel-fairer system, 'Fairness' is in the eyes of the beholder ).  The Fairness mantra made quite a splash around the time of the 2014 Budget, and it was no doubt a success for the opposition. So it seems they are planning a re-run for the next election. All the signs are there with Shorten recently proclaiming that "inequality in Australia is at a 75 year high", a claim said to be 'patently false' by the way. This comes hot on the heels of similar claims of 'unfairness ' on penalty rates and even on education spending. No matter that the government, in a total capitulation to labor policies, proposed large increases in education spending, it was still not enough to prevent Shorten from unsheathing the unfairness dagger.  Most recently it is the inequity in the tax regime pertaining to discretionary trusts allowing the mega-rich to avoid paying their fair share.

So by now we can see the pattern. No matter what the government decides, Shorten sides with those who are in some way disadvantaged, then megaphones their concerns to the electorate painting the government as both heartless and favoring the rich. It has worked well for Shorten, at least as far as the polls show. Given a fickle self-centered electorate willing to identify with the disadvantaged, especially if they are to receive some benefits without their taxes being raised, and supported by a feeble media unwilling to present the counter side of what are such populist arguments, it seems this will continue to work.

I have been somewhat puzzled at both the electorate's and the media's acquiescence in this fallacious fairness dogma. How can memories be so short? Cannot people see where this fairness argument leads? Given that 20% of people already pay all the tax, that more than 50% of households pay no net tax at all, where does this stop? I can understand the naivety of youth. They have no memories of the socialist and communist experiments that have proven where the fairness dogma leads.

The idealized 'equitable' distribution of a society's wealth simply means that government takes money from those who earn more, and redistributes it those who earn less. This invariably removes incentive to earn more and by so doing the hard-working either coalesce in collective indolence or more likely, in today's world, simply move to countries that reward effort. This has a stultifying effect not only on the high earners but on all those who aspire to become so.

The inconvenient truth is that wealth creation is invariably linked with incentive and incentive goes hand in hand with some inequality.

The inconvenient truth is that wealth creation is invariably linked with incentive and incentive goes hand in hand with some inequality. I guess this has been written often enough, but certainly seems not to have sunk in. In today's society it seems we are always looking for shortcuts and those peddling magic elixirs are in the ascendant.

Perhaps it was Shorten's most recent calls of inequity that spurred me to be on the lookout, but I happened to come across a recent short YouTube video by Dinesh D'souza. I must confess I hadn't heard of him before, but given his forthright and sensible approach will look out for more of his commentary.

In his presentation he made a most compelling argument to counter Shorten's 'unfairness' mantra.

You can see the full video above, but the following is a trasncript of the core argument; -

" I am a great believer in social justice. The problem is that social justice can be argued about, its not self evident. It's not self evident how the rewards of a market should be allocated. It's not self evident what's fair,  in politics for example I've heard now 100 times Obama say 'you must pay your fair share ' my question to him is 'what is that fair share?'

 .."It is always reasonable to ask (any person who wants change); What level if change do they want? "'

'Ok you want taxes to be higher, ok, how much higher?'

At what point are you going to stop putting your hand into my pocket in the name of social justice.
You are taking 50 percent, will you be content at 60?
Can I be confident that if I give you 60, I will never hear from you again?
Or will you then decided you will want 70?
Why can't you tell me what's fair in advance, before you take it?

In other words we are having these debates about justice yet noone is saying what is 'just'.
Socrates starts and says what is justice? Define it . Don't talk about it like an idiot. Define it first. Second you tell me at what level the pie should be cut, then we can discuss your idea of justice, but if your idea of justice simply translates to give me more, that's not justice."

The Shorten Challenge

So here is my challenge to Mr Shorten. Tell us what is the fair level of tax any individual should have to pay, no matter where his income falls, battler to mega-rich. Tell us what level of personal tax should any individual have to pay for you to believe that it is fair? Then we can understand your view of social justice and we can make our decision whether to vote for you.

I challenge all the media to ask him this very reasonable question. You keep asserting what is unfair, so tell us what you think would be fair?

Whenever Mr Shorten cries "unfair' ask him, "what is fair"?

Inconvenient truth on Fairness

In what has become an unplanned serial I have explored some 'inconvenient truths' behind central policy differences between the ALP and the LNP. Previous posts have covered Education and Superannuation. In this post I want to look at Fairness. While Fairness is not really a policy, it has certainly been a principal war-cry of the ALP and the Greens. It was used very successfully against the first Hockey Budget of 2014 and indeed by the senate cross-benchers to justify their stance against government legislation. So it is not surprising that it has been brought into action in this election battle.

What is the Fairness argument?

The Fairness argument is rarely stated clearly. It is usually purveyed by implication or innuendo and takes many forms.

Some of the ways include;-

• The distribution of wealth in Australia is inequitable,
• a small proportion of very wealthy individuals control a disproportionately large share of the country's wealth. 
• The very wealthy get a disproportionate share of services yet they do not pay their fair share of taxes.
• Negative gearing is used by the wealthy to avoid paying their fair share of tax 
• You can always increase taxes on the rich they can afford it.
• The best private schools have plenty of money so should not receive any government funding

The argument is often dressed in softer terms of  "'equity", "fairness" or "justice", but in essence it appeals to the most base element of human nature, envy.  It appeals both to low income earners and welfare recipients who feel they are victims of an unfair system and also to some extent to the struggling middle income group who see real wealth as unattainable. This is a sizable proportion of the community. As a political tool it serves its purpose well. However there are some inconvenient truths.

Inconvenient truth 1; Incentive drives prosperity for everyone

The idea of raising taxes on the rich to bring "social equity" is not new. It has been tried in small and large measure in many countries over the years. At its extreme the communist doctrine "From each according to his ability to each according to his needs "  embodies the redistribution of wealth from rich to poor to create an "ideal" society. While communism actively supported the poor and weak and resulted in a somewhat more uniform standard of living, it did so by punishing the successful, the aspiring, the gifted, the hard workers. The consequences in all countries where it was instituted, in full or in part, was a stultifying lack of incentive to strive, resulting in lower production and leading to universal poverty. Everyone loses. Recall the sheer poverty of the Soviet Union and its iron curtain vassals at its collapse, or the impact of the 'Cultural Revolution' in China with millions dead through starvation.

Any tax that places a disproportionate burden on 'the rich' reduces incentives for all workers and ends up diminishing the wealth of the society as a whole. On the other hand societies that reward hard work inspire the whole workforce and generate prosperity for all. Consider the miracle economy of Singapore for example.

Inconvenient truth 2: Money has no borders

Today with the globalization of commerce money has no borders. Corporations and individuals can readily re-locate to lower tax countries. High taxes on Australian companies and individuals will simply lead to emigration. Indeed with higher personal income tax rates and higher company tax rates than the average around the globe, this has already been happening. For example a high income earner in a global business can readily relocate to Singapore with a maximum personal income tax rate of 20%. Similarly corporations can pick many competing low tax regions for branch or even their head offices.(BHP, James Hardie, etc.)

The bottom line is that Australian personal and corporate tax rates must compete in the global market and failure to compete will accelerate the emigration of the best most productive individuals and companies and diminish the prosperity of all.

Inconvenient truth 3: The politics of envy generates social unrest
Finally the real downside of the "Fairness", or really "class warfare", argument is the impact it has on society as a whole. The more frequent, widespread, and shrill the calls for social equity, the greater the general dissatisfaction of everyone in a society. By constantly repeating class warfare arguments our politicians engender distrust and resentment against each other. This can, if not managed, lead to social unrest. This is a by-product of the "fairness" argument that is too often ignored by our pollies and the media.

So what does this mean for our election campaign?

Evidently the Fairness argument can be aimed at virtually any policy that the LNP proposes. If it proposes to remove the 'temporary' Deficit levy paid by high income earners then it is pandering to the rich. It does not matter that if the LNP had not removed the temporary levy it would have been breaking its own and the ALP's commitments to the electorate.

If the LNP proposes to reduce Company taxes over a decade, then the ALP declares it is pandering to business interests notwithstanding that reductions in corporate taxes lead to greater employment, high wages and growth in the economy.

Even with the proposed Super changes that have caused widespread resentment among many LNP supporters, the ALP says "its not enough, the rich can pay more".

So the ALP/Greens have plenty to go on about. Australia has many successful, rich people who live in expensive homes and drive expensive cars. They serve as obvious targets to stoke the envy in all of us.

At the same time it must be said the LNP has failed to address these arguments head on. This is not entirely surprising. With half the electorate already paying no net tax, there are many voters with a vested interest in the current state of affairs. They may see any lowering of taxes for "the rich" as a potential extra cost to themselves. Consider the recent QandA 'hero' who by his question concisely embodied this attitude.

"Why are 'the rich' getting a tax cut and I don't get anything"

Forgetting of course that he has not been paying any tax and has been the recipient of welfare that was paid for, at least in part, by those 'rich' he envies. Australia's problem is that this 'entitlement' mentality is becoming increasingly pervasive.

Countering the 'Fairness' argument

Convincing the electorate that by reducing taxes on companies and high income earners will generate incentives that will work to produce growth and "raise all boats", is not an easy task. But there are some non-confrontational approaches to sell the message. Consider these 2 ; -

1. Set an INCLUSIVE vision to which we can ALL aspire

Our PM, Mr T, has tried to sell a vision for Australia with 'Innovation' as the key to 'jobs and growth' in an 'agile' economy.
The problem with this vision is that most older and less educated voters will not feel they are part of this vision. For many it is a warning of potential redundancy in a new, modern world in which they have no part.

The LNP, or Mr T, should carefully phrase his statements to include all Australians. When he talks about aspiration it has to apply to everyone.

Perhaps something like; 

"Australia is a lucky country, with plentiful natural resources and an inclusive culture that takes care of the needy and provides equal opportunity to all to achieve their maximum potential. We want to build on past success in developing not only our resources and agriculture but to develop new industries that employ all our people.  We will aspire to do this through incentives for investment in education, research and development and new industries. At the same time no one will be left behind.  We will strive to provide equal opportunity to everyone to access social services, education healthcare and employment. We will ensure our welfare safety net provides for the needy. While we approach the future with enthusiasm we will not abandon the industries that provide work for the much of our workforce. We will move gradually to create an Australia in which every Australian can participate productively."

Perhaps a bit wordy but then again it may suit Mr T to a T.

2. Repudiate EVERY claim by the ALP/Greens about 'unfairness'

Do not allow any claim of "unfairness" without repudiation. Left without a response gives the impression that the claims are justified and sets long-term perceptions.

There are always good arguments to counter claims of 'unfairness'; -

• Company taxes are lower in countries that have high growth economies. This leads to more jobs. We want to grow our economy to make everyone prosper
• Negative gearing is used extensively by low and middle income earners and contrary to ALP arguments they get a higher proportionate tax saving than high income earners. 
• Lowering the tax rate for middle and high income earners can be addressed with two points; -
• bracket creep has been eliminating the progressive nature of tax, the tax cut is therefore required to ensure the progressive nature is maintained
• Super measures in the budget provide benefits to lower income earners and make significant imposts on high income earners
• and so on

It is important to avoid the technicalities of these arguments, indeed the economists can handle that. The point is be willing to face the claims head-on, present the other side of the argument and not to leave any claims unchallenged.

Time to face Fairness head on

The election is still many weeks away yet the Fairness argument is being actively used as a weapon of choice.

If the LNP fails to speak up and quietly acquiesces to this false narrative, no matter which party wins the election, incentive will continue to be squeezed out of the system and over time our prosperity will dwindle.

The fairness test

It has been a busy week on planet Earth. Russia bombing ISIS and losing planes, chairs being arranged for the upcoming Paris Climate Change extravaganza, new 'draconian' security laws being introduced in the UK, Prime Minister Trudeau with 50% women "because it is 2015" and the steady background drone of migrants crossing borders in Greece, Serbia, Hungary, Austria and Germany.

Despite these distractions on the world stage, Australia has managed to cover topics of greater import; recovering quickly from a bad day at the World Cup with a good day at the Melbourne cup. Against 100:1 odds Prince of Penzance guided to victory by Michelle Payne, a young, pretty (dare I say that), outspoken, female jockey from a large family raised by a single Dad. It was indeed a fairy tale dream for the battler, and could not have been scripted better. The media hit the jackpot and have been milking it since the day.

But I digress. Back at the political coal face our freshly minted PM, Malcolm the optimistic, has launched the tax reform campaign with the much repeated mantra that any tax reform will be fair! (see 'Fairness is absolutely critical': Malcolm Turnbull says tax reform will be more than GST). I guess such an open and early declaration is sensible given the howls of criticism levelled at the previous leader's policies. But of course this won't stop anyone with a vested interest.

You and I, dear reader, are not subject to such earthly vices and can take a more objective look at this question. So despite all the other topics beckoning for some attention, I will focus on this one. What is Fair? By clearly nailing his colours to the fairness mast how high a threshold has our Mr T put on this tax reform? Is it even possible to create a fair set of changes? Indeed what is the Fairness Test?

Lets be clear the tax system is not fair today

At the outset we must recognise that we don't start with a level playing field. The current tax system is not 'fair' in any sense.

Consider Income Tax. The lowest earners pay no tax and receive substantial welfare payments. At the same time the top 10% of income earners pay 50% of the taxes. The following graph shows this distribution.





Table: Who is Paying Income Tax (from Fact Check)


Similarly for Company Tax, many large multi-nationals pay less tax than local companies because they manage to re-locate their profits to lower tax regions. Is this fair?

How about Payroll tax? Again states governments charge different payroll taxes in different states. What is fair about the cost of employing a person being different in one state than another?

Same with GST, it is applied to ice cream but not plain cream, to tampons but not condoms and so on. Is that fair?
Indeed with whatever definition of fairness you may care to dream up, there is nothing fair about the current range of taxes levied on individuals and businesses.

Our tax system seems to be a random concoction of rules resulting from the capitulation of governments to screeching interest groups over the decades. It sort of reminds me of the 1000 monkeys on 1000 typewriters ..

So lets be clear the current tax 'system' is not fair today.

The objective is to make the changes 'fair'

Lets take a charitable interpretation of Mr T's pronouncement, heaven knows there will be many others who wont. Lets take it that the government does not want to redress the inherent unfairness in the current system, but will ensure any changes to the system will be fair. So we need to look at the changes alone and not the sea of problems onto which they are to be applied.

Of course Mr T has not explained this and I have already heard many a call from the vested interests asking for re-dress of existing tax grievances.

What are the 'fairness' criteria?

Even with this more limited definition of fairness introducing change is not easy. Inevitably any changes to taxation rules will have both winners and losers. Any losers will immediately scream "Unfair!", as has been the case so often in the past. This can only be avoided if the 'losers' for one set of changes become winners on another. In other words there are no 'net' losers. This is no easy task when many vested interests see tax changes as a zero sum game, believing that they cannot 'gain' unless someone else 'loses'. Consider the claims by naysayers that the GST is regressive. Despite the already acknowledged low income earner compensation package that would come with any increase in GST, there are already calls for additional imposts on higher income earners through changes in Superannuation.

So this first imperative to ensure that there are no 'net' losers will not be an easy task.

But leaving interest groups 'no worse off' is not enough. Mr T and Scomo have already committed not to add to the overall tax burden. This is far less than the "we have a spending problem” mantra of earlier days. I guess our grandchildren, a demographic whose voice is weak, would be indeed worse off if the tax burden were to increase with borrowed money. Reducing or at least not increasing the overall tax burden is the second imperative.

If it were just these two criteria we could simply leave things as they are. Within our limited definition of fairness it would be 'fair'. No one would be worse off and indeed the tax burden would not have increased. But that would get us nowhere.

So we have the final fairness criterion. There  must be some benefit from implementing changes and the benefits should be greater than any compliance costs. Gains can come in many forms. They could be cost savings through increased efficiencies. eg a higher GST take requires no ongoing increase in compliance costs yet if it were to replace Payroll tax, it would eliminate compliance overheads for businesses as well as State Governments. Other reforms may modify incentives leading to more efficient use of resources, greater investment and growth in the economy. A reduction in company tax can reduce costs for consumers, increase business profits and thereby encourage greater investment. These potential benefits can be far greater than the costs of implementing them and can easily justify such reforms.

The fairness Test

So Mr T and Scomo, your challenge is to come up with a set of changes to our tax system that satisfy the Fairness Test represented by the following 3 requirements.

The Fairness Test

• All losses by any interest group are offset by gains by that same interest group 
• There is no increase in the overall tax take 
• Changes are beneficial to the country through efficiency and growth and exceed any compliance costs.

Mmmm. Good Luck!

Not so Super

Superannuation oft lauded as the savior of the working man, is also touted the savior of our welfare state. No wonder it is called 'super'.

What could be better than a system that encourages personal investment for one's autumn years and eases the State's welfare burden to boot. Instead of relying on an ever more encumbered public purse, the working man could look forward to years of idle leisure basking in the glow of self reliance. Indeed Super was introduced with these two objectives in mind.

Like many reforms it has undergone significant tweaking since its inception in 1992 by a forward looking Keating government. Not surprisingly, when Australia is meeting economic headwinds, governments facing an 'entitled' electorate are once again looking closely at superannuation. Some argue that the taxation foregone on Super contributions does not fall equitably across the workforce and should be re-balanced ( see for example ANZ chief economist Warren Hogan says superannuation tax breaks for wealthy too generous). Others point out that the effective tax on super contributions is greater than marginal tax rates and any more 'tweaking' would only further undermine confidence in the system (see National Reform Summit: super tax changes need proper analysis).

I don't propose to tackle these arguments today.  My question is simply,"Is it working?"
Will their contributions to super over their working life free an average worker from relying on an aged pension and as a result will the burden on the state be reduced?

We have a problem..

The Government's recent National Commission of Audit looked at the trends in welfare expenditure to 2050. The graph below is taken from the report and summarizes the result.  

The proportion of those who by their age are eligible for the aged pension, who end up receiving the full aged pension decreases, but at the same time the number of persons receiving a part pension increases. The overall result is that the number of people who can live off their super does not change despite having paid upwards of 10% of their wage into super throughout their lives.

Mmm. Doesn't sound like Super is working like it was meant to.

But worse still; -

"The 2010 Inter-generational Report (Australian Government, 2010a) projected that expenditure on age-related pension payments would increase from around 2.7 per cent to around 3.9 per cent of GDP by 2050." (quote taken from National Commission of Audit)

So by 2050; -

• the same proportion of the workforce will be on pensions as there are today
• Government expenditure on pensions is expected to increase by over 40%

It seems our Super system is not meeting its two objectives. It is neither increasing the number of workers living on their own savings, nor is the burden on the state being reduced.

The unexpected conclusion is unavoidable, our super is not working as intended.

Tweaking is definitely required. However I will look at that topic another day.