Q&A Forum: March 30, 2015

Posted in Open Forum | 267 Comments

Guest Post: Ashton de Silva – Interest rates, taxis and the Payday loans The Small Amount Credit market

How many times have you got into a taxi and thought: This is outrageous, the charge I am paying ‘per kilometre’ is extreme.  Planes are much cheaper!

Interestingly, I have – and came to the conclusion that the services are totally different.  For example, taxis cater for people needing to travel a small distance, often at relative short notice.   Further the service they provide can (typically) be secured at the time and place of the client’s choosing.  In contrast, flights need to be secured (often well in advance) and clients have no choice but to fit in with the schedule.

A similar distinction exists between the (Small Amount Credit Contracts) SACCs/small amount credit and other loan products.  SACCs are loans, typically unsecured, of up to $2000 with a contract of less than one year. Interestingly, some research has indicated that the bulk of these loans are less than $500.  The duration of these contracts can be very short lasting as few as 16 days.

According to legislation the maximum fee is 20% of the principle plus 4% per month.  In other words for a loan of $500 for one month this would result in fee of $120, for two months $140 and so on.  On the surface this does not seem much but remember it is 4% per month and as a result costs can escalate especially if “repeat” borrowing occurs.

Tonight on Four-Corners, the story Game of Loans will be featured reporting on the so-called Payday loan market – note the legislation refers to them as SACCs (and MACCs-more about that later perhaps) not payday loans. There will be stories that are of people in very difficult financial circumstances.  In addition the high effective interest charges are also likely to be referred to.

A question I have found myself asking is: Can the fees (effective interest rates) be justified? Economically I suggest they can, for example:

  1. The costs in screening clients are expensive – regardless of the loan amount.    Further, I suspect the legislative requirements in this area may make these screening costs even more expensive than a typical loan.
  2. My own research (conducted with two of my colleagues) suggests that the industry is in a consolidation mode.   In particular, the number of smaller operators have decreased. This suggests profit margins are being squeezed.
  3. Interestingly when comparing the proportion of total interest paid on an SACC to a home loan, home mortgages can be expected to pay back the principle in interest costs (depending on interest rates) – a  lot more proportionately speaking .

SACC providers seem to supply credit and services that banks can’t (or won’t) and charity agencies/governments (operating through No Interest Loan Schemes) can’t match.   Importantly, they are providing a niche product to a niche market.

I do not condone the behaviour of shonky operators.  However to argue that interest rates are high does not seem to me to be a strong argument.

Posted in Guest Post | 17 Comments

Taxing bank deposits: Still a bad idea

Things must be dire if the Abbott government is having to recycle discredited Rudd government policies.

The Rudd government’s Economic Statement, released today, reveals a raft of damaging tax hikes to bankroll a continuing spending splurge over the next few years, according to free market think tank the Institute of Public Affairs.

‘The Economic Statement is littered with tax increases, and is not a credible plan for systematically dealing with Australia’s overspending problem,’ said IPA Senior Fellow Dr Julie Novak.

‘The bank deposits tax has already caused damage to bank shareholders and superannuants with bank shares in their portfolios, as $4 billion was wiped from bank share values this week alone.’

‘Savers are likely to be punished for this measure, which is expected to raise $733 million at the end of the forward estimates period, as banks are forced to pass on the tax through lower interest rates on deposits.’

‘Contrary to government rhetoric, the tax is not an ‘insurance premium’ paid by bailed out bankers, but a cynical revenue grab from savers,’ said Dr Novak.

Bad enough that the government taxes your income, now they propose to tax the very act of payment.

Posted in Taxation | 41 Comments

Monday Forum: March 30, 2015

Posted in Open Forum | 325 Comments

We need more government spending NOW

In line with the ‘we need more taxation revenue NOW’ pleadings áre the calls: ‘we need more government spending NOW.

And the conflation of issues is extraordinary:

  • worried about domestic violence? more government spending;
  • 4 year olds need some early childhood learning, more government spending on all childcare fee subsidies, including for mothers who don’t work;
  • think science is important, more government spending.

On this last issue, we really reached a low point last week when the Academy of Sciences and the Chief Scientist, the Chubbster, released a report that had been jointly commissioned.  (Does this mean that the Chubbster has a budget of taxpayer funds to waste).

Entitled The importance of advanced physical and mathematical sciences (and undertaken by the Centre for International Economics, of which we would expect much better), the report tells us that advanced physical and mathematical sciences make a direct contribution to the economy of around $145 billion or 11 per cent of GDP.

HILARIOUS.  Surely, smart scientists can see the holes in the analysis after a minute or two of reflection but I guess when scientists/rent-seekers think there is more taxpayer money at the end of the rainbow, what the heck.

But wait there’s more: when the flow-on impact of these sciences are included,  “the economic benefit of these scientific fields expand to around $292 billion, or 22 per cent of the nation’s economic activity.”  YEH, SURE.

At this rate, the contribution of all fields of science will contribute more than 100 per cent of GDP.

And wait there’s even more, 7 per cent of total employment in Australia is related to physical and mathematical sciences.  YEH, SURE.  (Maybe they are counting all those accountants that need to be able to add up?)

And if the modelling results are not ludicrous enough, the report contains a number of underwhelming case-studies.

It is conceded that most scientific technologies have not emanated from Australia; but we need Australian scientists to use them.  For example, PIGS, a form of pipeline maintenance developed overseas needs Australian scientists (well, a small number) to implement and interpret results – in line with Australian conditions.

And of course there are those scientists who work in pathology labs dealing with routine blood tests, virtually all developed overseas.

The real point of the study, like the ones commissioned on the economic costs of irritable bowel syndrome, etc., is to make the case for even more government (aka taxpayer) spending on SCIENCE.


Posted in Budget, Taxation | 21 Comments

We just need more tax revenue

Here is a classic example of the urgent call for more tax revenue.

Actually, I think the figures in the article make my point really well: the system is incapable of generating significantly more revenue as a percentage of GDP.  That’s the real message.

Here is Alan Kohler’s piece:

It’s hard to escape the feeling that today’s tax reform discussion paper is an attempt by Treasury to go over the politicians’ heads and speak directly to the people. Nice try, but it won’t work.

Of course such a thing could never be confirmed, and Treasurer Joe Hockey naturally released it yesterday, but it has been produced by the Tax White Paper taskforce of Treasury and makes a direct appeal for “community engagement”, with detailed guidance for how to “join the conversation”.

And why not? For 40 years Australia’s politicians have manifestly failed on tax reform. Lately the business of Australian politics has been refined down to little more than scare campaigns, with the Labor Party’s appalling performance in the NSW state election only the latest example.

The cynical scare/deceitful defence method of debating legislation both during and after election campaigns means that sensible tax reform will be very difficult to achieve, not that it has ever been easy.

The central message of the discussion paper — that too much weight is being put on income taxes and that more revenue needs to be raised from consumption — is the same as the one at the core of the Asprey Report in 1975, although the reasons are changing.

Asprey made the point that “when a tax is levied on income, it falls on savings as well as consumption; and when income is earned from those savings in later years, that income too is taxed. This means that the effective tax rate imposed on consumption which is postponed is greater than the rate imposed on current consumption”.

To some extent that has been addressed through superannuation tax concessions. However, the Coalition’s decision in the lead up to the 2007 election to make consumption postponed entirely tax-free distorted things the other way.

Asprey’s was the benchmark tax discussion paper and there have been many since, all basically saying the same thing: that the tax system is inefficient, complex and unsustainable, and too heavily weighted towards income taxes. The latest one says the same thing.

According to the discussion paper, the proportion of revenue collected from income taxes, personal and company, has gone from 58 per cent in the 1950s to 72 per cent today. In another 10 years it will be 77 per cent.

The other crucial statistic is the total tax take as a percentage of GDP. According to the discussion paper, it was 27.3 per cent of GDP in 2012, which is “relatively low” compared to other developed countries (about 34 per cent on average), but higher than regional trading partners.

That’s roughly the same situation as 40 years ago. Asprey reported then that our total taxes were 26.6 per cent of GDP compared with an OECD average of 31.8 per cent, but 20.1 per cent for our main regional trading partner, Japan.

Interestingly, in 1965, according to Asprey, total taxes were 23.9 per cent of GDP, which happens to be the same percentage at which the Abbott government’s revenue projections propose to cap taxation receipts.

Given the growth in the size of government in Australia over the past 50 years, and the way it will continue to grow under the Coalition, it is hard to see how taxation can be held at the same proportion of the economy as it was in 1965.

And that’s really the point. The current run at tax reform which will culminate in a white paper next year followed by government policies for the 2016 election, must result in fundamentally more taxation unless there is a very significant and very unlikely cut in the size of government, as well as the greater efficiency, simplicity and sustainability set out in the discussion paper.

That pressure on tax reform has been the same for just about every episode since Asprey, except for the golden resources boom years of the mid-2000s, when tax reform for John Howard and Peter Costello meant handouts.

And as it almost always has. The mix of requirements for tax reform now means more needs to be raised from GST.

Posted in Taxation | 10 Comments

The good news: tax reform is impossible

downloadI think we are missing the obvious point here – the fact that tax reform is basically impossible in this country is the good news not the bad news.  We really need to recall what one of our masters, James Buchanan, would have said on this matter.

The fact that our tapestry of taxes, with its high degree of reliance on capital and labour income is not very good at generating revenue, means that, ultimately, government spending will be constrained.

The last thing we want is a tax system that simply tips in copious sums of revenue with the slightest uncontested tweak, simply to be mis-spent by politicians.

And Sinc makes a very good point that bracket creep will increasingly hit the lower and middle income earners (it is less of an issue for the top income earners); this large group may become a real force to pressure lower government spending to relieve them of the burden of higher average and marginal tax rates.  That’s no bad thing.

Let’s face it, the GST is not going to change.  With Labor, ACOSS and most state governments against any change, forget it.  And, Henry, makes the point that there is quite a lot of over-egging going on the Treasury tax discussion paper about the efficiency gains of switching the tax mix from income-based to consumption-based.

And Sinc makes a very good point elsewhere that the exemptions that apply to our GST are pretty much standard across the world apart from countries that have recently introduced a GST, such as New Zealand.

And good luck with the idea of removing dividend imputation – double taxation at 80 per cent?  Shall we all drink to that? (Shane, you know you made me say that.)

Is there any real evidence that dividend imputation deters foreign investment in Australia?  As I understand it, Australia is one of the most popular destinations for foreign direct investment, including from the Chinese.  The fact that dividend imputation doesn’t apply to foreigners means they are paying a disproportionate amount of tax to Australians – not a bad deal really.

The US is trotted out as a country where dividend imputation doesn’t apply.  Two points need to be made: first, company dividends are extraordinarily low in US and capital gains are king and, secondly, there are tax entity manipulations that can be undertaken to effect a very similar outcome to dividend imputation.

There is the usual Treasury guff about negative gearing – it won’t change, particularly given its application to all income-generating investments – but I guess a Labor government might increase the capital gains tax prospectively, although it would be big call.

For all the misinformation about superannuation tax concessions, there are massive issues associated with compliance costs and how to deal with defined benefits scheme in making changes at the contributions and earnings phases.

Imposing a withdrawal tax (that would lift the average effective tax rate of superannuation above 50 per cent, by the way) would only raise significant sums of money if it hit middle income earners, who would then clamber for a higher part pension.  I’m not sure that would work out very well.

And as for taxing all forms of saving in equivalent fashion, does this really make any sense when those forms of saving are not equivalent:

  • Superannuation savings are locked up for decades;
  • Investment in the family home produces real social capital and is a protection against poverty in old age.

Neither of these are equivalent to a one-year term deposit.  (There is a case for providing some form of rebate for this latter kind of saving, but not to be treated as equivalent to the above.)  There is the point that it is only REAL gains that should be taxed, which is important for savings held for for more than one year.


Posted in Taxation | 18 Comments


The government has launched its tax discussion paper.

Joe Hockey talking to the paper itself.

The paper itself is here.

The challenge is to ensure that this whole process becomes tax reform and not a tax grab.

Posted in Taxation | 17 Comments

Rafe’s Roundup 30 March

The debacle of the minimum-flush toilet.

The Romans invented indoor plumbing. It took America in the late 20th century to uninvent it. The fateful year was 1994, when the federal government mandated that all toilets manufactured and sold in the U.S. have tanks no bigger than 1.6 gallons. It was the new prohibitionism. Gradually over the coming years, the toilets stopped working as they once did.

Something a bit different.

Minimum wage. An experiment in Seattle.

Soon, Seattle will attempt to implement a “living wage” of $15 per hour. The web has been awash in reports of restaurants and small businesses already closing their doors or , at least, preparing to downsize significantly in anticipation of the new minimum. Understand, a living wage is nothing more than a glorified minimum wage. It’s a minimum wage with a new, more heart tugging name. After all, shouldn’t all workers earn enough of a wage that would allow a comfortable lifestyle?

Advocates for minimum or living wages say they are acting out of compassion for low skilled workers. Seattle won’t appear to be very compassionate after throngs of lower skilled workers, many of which are young people, begin to lose their jobs. In the long term, this may be a net positive for the surrounding communities. The outlying suburbs are now in a position to pick up the businesses that end up leaving the city in search for a more friendly business environment. At any rate, free market advocates will be watching Seattle with bated breath as the living wage becomes a hard hitting reality.

Stephen Matchett on Pharmacy costs.

“The choice is simple,” David Badham suggests. “Allow Big Pharma to continue undertaking competitive high quality research or call a halt with the inevitable result of stagnation in medicinal research.” Indeed, the problem is often less with drug developers than enemies of the market who want to socialise the benefits of drug development while privatising the risks.

Culture Spectator Culture House. New York Review of Books.

A new site of interest. CFACT. Committee for a Constructive Tomorrow. The power of the market combined with the applications of safe technologies could offer humanity practical solutions to many of the world’s pressing concerns. Check out the use of cement in China! More used in the last three years than in the US in the whole of the twentieth century.

Around the town. The Open Forum at Humanist House, Chippendale, Sydney.

Hendo and the media watchdog [Updated on Friday afternoon]. The Australian Institute for Progress, (AIP) “because the future does not look after itself”. IPA HEY. The Sydney Institute. Australian Taxpayers Alliance, Quadrant on line, Mannkal Foundation, Centre for Independent Studies.

Don Aitkin. Jim Rose, feral and utopian! Jo Nova, climate realist par excellence. Sean Gabb’s site.

Sites of interest. Spiked on line . Richard Hammer, Free Nation Foundation. Aust NZ libertarian students. Powerline. The British libertarian alliance.

Education, accuracy in academia.

For nerds. Melvyn Bragg’s radio program. Stephen Hicks, always interesting for nerds. Econotalk.

Posted in Uncategorized | 4 Comments

With reform an uphill battle, Canberra must cut spending instead

In The Australian today
The good news is that Mike Baird has been re-elected Premier of NSW. The bad news is that there was a large swing to Labor, un­deserving though it was.

Posted in Uncategorized | 9 Comments