Catallaxy Files

There has been a lot mission slippage in Project Wickenby. It started off investigating tax evasion and tax havens, but quickly degenerated into into tax evasion and any offshore activity – including that well-known tax haven New Zealand.

Robert Agius was allegedly involved in a very simple scheme employing New Zealand banks to engage in round tripping. Clients would end up lending money to themselves and would claim interest payments as a tax deduction.

Under the scheme, Australian customers would transfer money to accounts in Vanuatu and New Zealand, claiming them as a business expense.

The money would then be returned to Australia less commission in the form of a loan, and a repayment would be treated as a tax deduction.

This is illegal and IMHO should be illegal. I have no problem with the tax authorities trying to prevent this sort of thing. Do we really need a special $400 million taskforce to prevent simple crime like this?

The AFP alleged the scheme involved evasion of $13 million in taxes on $100 million of the man’s customers’ business profits.

Mr Agius allegedly received $1.4 million in commissions, through foreign bank accounts, since 2000.

So why bring this up now?

A lawyer for the Commonwealth Director of Public Prosecutions is expected today to tell the NSW Supreme Court that the most serious charge against Mr Agius, money laundering, has been dropped. The charge carries a maximum sentence of 25 years’ imprisonment.

Two other charges of “conspiring to defraud” remain, with each charge carrying a maximum 10 years’ imprisonment. Mr Agius will be formally arraigned in court on those charges today.

That’s right – the case against Agius has more or less collapsed.

Bear in mind the scheme that he allegedly operated is very simple; now look at the case against him.

More than 200 witnesses were due to give evidence, with the case expected to last between six months and a year. Tens of thousands of financial transactions had been scrutinised and 420 lever arch folders full of documents had been prepared.

The matters in question were “taking considerable time to prepare” and were described as “enormous” by the lawyer for the crown.

So here is the trade-off; government has a duty to enforce the laws of the land but at the same time shouldn’t pass laws that are impossible to enforce. If the government cannot enforce laws against round-tripping it is going to struggle to enforce laws that attempt to expand the tax base beyond the territorial borders of Australia. That suggests that a source-based tax system is likely to dominate an international tax system.

The ALP costing (mind you not including the impact of the Greens alliance).

The Coalition costing.

The Coalition does a lot better in the new future – where forecasts are more likely to be more accurate – and worse in the further furture – where the forecasts are more speculative. In those future years the ALP is reliant on income from the mining tax. If that mining tax income is less than forecast (a very likely outcome IMHO) the budget under an ALP-Greens government starts looking very dodgy.

I was invited to address the BioProcessing Network at a dinner on the myths of public science. They were looking for a ‘thought provoking’ presentation for their membership.

I based my presentation around three IPA publications Back to basics: Why government funding of science is a waste of our money, The myths of public science and University research: The need for paying customers.
An author in this field well worth reading is Terence Kealey also the VC of the University of Buckingham.

The SMH has an article talking about the failure of the skilled migration program – apparently secondary applicants (usually the wives and children – the primary applicant is more likely to be male) are not employed to the same extent as the rest of the population.

Unemployment among skilled migrants and their families is 30 per cent higher than for the population as a whole, new research shows, but those who do have a job are more likely to be in a professional role.
…
Although the program is geared towards overcoming serious skills shortages, a significant number of skilled migrants are unable to find work.

At the last census, 7.3 per cent of skilled migrants were unemployed compared with 5.2 per cent of the population as a whole.

”[This] highlights the fact that the skilled migration program is not working,” a Sydney University migration expert, Dimitria Groutsis, said.

”We are not fully utilising the skills and vocational experience offered by people living overseas.

”There needs to be better … information for individuals when applying in their home country for emigration to Australia about what the expectations are.”

The original ABS report is here. The conclusions drawn in the SMH are far too strong for the data reported by the ABS. This is the bottom line from the ABS (emphasis added).

In general, half (50%) of Skilled Program migrants aged 15 years and over were employed full-time compared with 35% of Family Program migrants and 17% of Humanitarian Program migrants. Almost a fifth (18%) of Skilled Program migrants were employed part-time. In comparison, in the 2006 Census, 37% of the Australian population aged 15 years and over were employed full-time and 17% were employed part-time.

When you drill down there is a lot of detail.

Almost two-thirds (63%) of Skilled Program migrants aged between 15 and 19 were ‘not in the labour force’, compared with almost a quarter (23%) of Skilled Program migrants of all ages. Most (96%) of the Skilled Program migrants aged between 15 and 19 who were ‘not in the labour force’ were studying at an educational institution and they were all ‘secondary applicants’

So the children migrants tend to get an education. As do their wives.

A large proportion (40%) of the female Skilled Program migrants 15 years and over, who were ‘not in the labour force’ were studying at an educational institution. Note that male Skilled Program migrants were also far more likely to be primary applicants (64%).

So the data are far more nuanced than the SMH suggest. But that isn’t the real story here. There are two other factors that should come into play. The length of time that migrants have been here has an impact on the employment statistic. The ABS recognises this, but doesn’t calculate a time-weighted unemployment figure.

As length of residency increases, Skilled Program migrants were more likely to be working full-time. The proportion of Skilled Program migrants who were employed full-time was higher for residents who had been living in Australia for a length of time between 4 and 6 years (54%) when compared with recent migrants (48%).

The other problem is that we are not comparing like with like. The secondary applicants’ unemployment rate is compared with the Australian average. But the wives and children of migrants are a select group – they are often the wives and children of high-income professionals.

A higher proportion of Skilled Program migrants (16%), 15 years and over, earnt over $1,300 a week when compared with the Australian population, 15 years and over (10%).

So a comparison should be made with the labour force characteristics of Australian high-income professionals not the general population. I doubt the ABS have that data easily to hand, or even at all.

So all up there are two problems with the SMH interpretation. First many of the people described as being unemployed are less likely to have full-time employment anyway and given the logistics of migration the secondary applicant (usually the wife) is less likely to start work anyway because she would be managing the settling in period and ensuring that the children are happy at school etc. before going out to work. (At the same time, of course, she would normally begin looking for a job).

The blogger formerly known as Jane Galt, Megan McArdle, has an interesting question.

Which raises an interesting question: what if Keynesian stimulus works, but no one can ever actually afford to do it, short of something like World War II, where the government can tap into a patriotic outpouring of national savings by issuing bonds with negative real yields.

This is just another hurdle for Keynesianism. Even if it could work (unlikely), can we afford it? But it doesn’t stop there. Even if we can afford it, would we want to pay the vast amounts of money necessary? What are the costs and benefits of Keynesianism? During the GFC the government seemed to argue that avoiding recession at any price was money well spent.
(HT: Marginal Revolution)

Tony Makin has a very nice piece in the Australian.

IF the battle of the election ads was any guide, fiscal management was a key theme throughout the recent campaign.

The claim that fiscal stimulus saved Australia from recession competed furiously with the admonition to cut the waste and pay back the debt.

Yet the importance of fiscal policy as a reason for the result has been largely ignored by subsequent media commentary.

Fiscal policy isn’t being given the importance that it deserves in the post-election period. I was interviewed on Alan Jones’ show this morning and he was making the point that the Greens fiscal policy needs some scrutiny – especially if they’re going to hold the balance of power in the Senate and contribute a vote to maintaining the Rudd-Gillard government in office. The combination of an ETS with the mining tax would cripple the economy. Rather than play at social engineering, fiscal policy needs to be responsible and prudent.

Whichever side forms government, it will have to live with the legacy of the fiscal extravagance since October 2008. Just as present budgetary actions have implications for future economic activity, past actions have economic implications for the present and the near future.

Questions that will most likely arise during the term of the next government include the following: Why are long-term interest rates and the cost of obtaining funds from abroad continuing to rise? Why is private investment not improving as expected? Why is future economic growth now likely to be lower than otherwise? Why are inflationary pressures continuing to build?

The answer to each of these questions is the same. It’s either mostly, or partly, due to the excessive fiscal stimulus of the past two years.

There is a very strange piece in The Age and Sydney Morning Herald today. It seems that that the war on terror is an antecedent to the GFC. Here is the ‘logic’ of the argument.
Step 1. (emphasis added).

To raise funds to finance such an ambitious military adventure, the Bush administration tapped the international capital market by selling billions of dollars worth of treasury bonds in a few years. To make the US debt competitive, the Federal Reserve progressively slashed interest rates, which fell from 6 per cent on the eve of September 11 to 1.2 per cent by mid-2003, when Washington thought it had won the war in Iraq following the initial invasion. The then-chairman of the US Federal Reserve, Alan Greenspan, went along with this strategy even though the world economy was growing too fast and needed higher rates to prevent the formation of financial bubbles.

Step 2.

The steep fall in US and world interest rates between 2001 and 2003 created the ideal conditions for the spread of the subprime mortgage crisis and for the securitisation of bad debts – the genesis of the credit crunch. That policy precipitated the bankruptcy of Iceland, a country that accumulated a debt 12 times the size of its gross domestic product, and the solvency crisis of Greece.

I agree that US interest rates were too low for too long – that is an argument that John B. Taylor has made. What I don’t understand is how you make bonds competitive by lowering interest rates. Quite the contrary, bonds become competitive by selling them at low prices i.e. high yields. So the first step in the argument fails. Now I don’t want to say that war financing doesn’t distort the economy and that there haven’t been problems in the prosecution of the war on terror, but I don’t think the argument here supports the contention being made.

We’re going to see a lot more of this in the next few years. It is just waste. At some point citizen-taxpayers are going to have to draw the line at this sort of thing. Hopefully wasteful green policies such as this will start to receive more scrutiny.

TEC today congratulated the NSW Government, householders, and the solar industry on the outstanding success of the Solar Bonus Scheme which has triggered a rush of consumers to install roof top solar power.

“The tariff which is both generous and effective, has so far paid 30,000 householders 60 cents per kilowatt hour to sell their energy back to the grid, which is four times what it costs to buy energy,” said Mr. Jeff Angel, executive director of TEC. “This has meant that householders are able to pay off their investments in record time. It’s a win-win for all.”

Everyone wins except the taxpayer and perhaps future consumers of electricity.

The problem with this sort of thing – beyond the immediate waste – is that it undermines incentives to provide cheaper energy. If inefficient home-producers get subsidised that means that efficient mass producers don’t face the same cost-pressures and market tests to perform well. We’ve seen this in water provision already. Water is under-priced – now paying more money to government won’t make it rain – but paying more money to government would give them the incentive to earn more by letting people consume more. Water restrictions occur because the government doesn’t earn enough from selling water to ensure that they have a ready supply of the stuff (that means building dams).

(HT: Kevin)

Usually, the public is too dazzled by the seen to take account of the unseen. So politicians often get away with saying they have “created” this or that many jobs by spending taxpayers’ money. Few follow the trail back to where the money came from or project it forward to divine the consequences. That was not the case this time. Quite the opposite, in fact.

In the current crisis, advocates of stimulus and of government intervention in general have been badly hurt by two developments. First, the short-term effects of the stimulus—the “seen”—have been extremely disappointing. The stimulus was signed into law on February 17, 2009. In the preceding month, unemployment stood at 7.7 percent. A study released at the time by Christina Romer, who shortly thereafter became chair of the President’s Council of Economic Advisers, and Jared Bernstein, economic adviser to Vice President Biden, predicted that unemployment would never exceed 8 percent and would fall to 7.5 percent by June 30, 2010, if the stimulus were enacted. Without the stimulus, they claimed, unemployment would rise to 9 percent.

Instead, unemployment rose above 10 percent and was a still horrific 9.5 percent in June 2010. Perhaps a lack of stimulus spending would have made matters even worse. No one knows. You can’t do a controlled experiment. But you can understand the public reaction: We spent all this money, and got almost nothing.

Bastiat would have appreciated one of the obvious explanations for the impotence of the stimulus. In 1957, Milton Friedman argued that attempts to increase consumer demand through government spending are doomed. The reason, Friedman wrote, is that individuals make their decisions about consumption by looking at their likely income and wealth far into the future. (He called it the “permanent income hypothesis.”) If the government starts spending huge sums today, consumers foresee higher taxes and, by inference, presume that their lifetime incomes will drop because of the increased level of their tax burden.

If government spending is short-term or one-time-only, which is what the stimulus was supposed to be, then individuals might be expected to take a more benign view. But the 2009 stimulus did not take place in a vacuum. It was soon accompanied by other economic policies and proposals of the Obama administration and the Democratic Congress: health-care reform extending public coverage to 30 million new people, cap-and-trade energy proposals featuring vastly higher taxes, and the imminent expiration of the Bush tax cuts at the end of 2010.

Because of these policies, the “unseen” became “seen” in a fashion devastating to the politicians supporting them. Americans judged that the party in power intends the radical expansion of the size of government in perpetuity. That expansion will have to be paid for. There is no reason to expect very much good from the future if you are the sort of person who generates income and creates jobs. Your “permanent income” is going to decline, and your gut response will be to husband your resources.

More disastrously for the Democrats, the “unseen” became “seen” almost immediately, in the form of metastasizing budget deficits. In order to spend all that money it didn’t have, the federal government was, of course, forced to borrow. So Treasury debt held by the public has grown from an easily manageable 36 percent of GDP at the end of fiscal 2007 to a troubling 62 percent at the end of 2010. Only once in U.S. history—during and right after World War II—has the debt-to-GDP ratio ever exceeded 50 percent.

James Glassman in the WSJ.

The Wall Street Journal has a nice, if too short, bio piece on Peter Boettke.

Peter J. Boettke, shuffling around in a maroon velour track suit or faux-leather rubber shoes he calls “dress Crocs,” hardly seems like the type to lead a revolution.

But the 50-year-old professor of economics at George Mason University in Virginia is emerging as the intellectual standard-bearer for the Austrian school of economics that opposes government intervention in markets and decries federal spending to prop up demand during times of crisis. Mr. Boettke, whose latest research explores people’s ability to self-regulate, also is minting a new generation of disciples who are spreading the Austrian approach throughout academia, where it had long been left for dead.