Tuesday, May 14, 2019

Labor’s tax attack on savings is very counter-productive

Australia may find ­itself next week on the path to the largest peacetime tax increases since Federation. It is not simply the magnitude of the tax rises that makes Labor’s plans exceptional — both in historical terms and relative to global trends — it is that they are so heavily focused on penalising saving.

In the debate about those proposals, Labor and its critics have concentrated on who would, and who would not, pay the higher taxes. However, the costs that tax increases impose are never limited to those who sign the cheque.

Rather, as people adjust their behaviour, the economy shrinks. The precise extent of the effects is controversial. What is uncontroversial is that for each dollar of ­revenue raised, taxes on savings do more damage than taxes on ­income or on consumption.

And it is also uncontroversial that the higher the taxes on savings are to begin with, the greater is the harm further increases will cause.

It would, in other words, be one thing if we were starting from a situation where taxes on savings were low, and all that was involved in Labor’s plan was to bump them up slightly. It is quite another to begin with tax rates that are ­already high and drastically ­increase them.

That is what Labor intends. And given how large its proposed increases are, the tax rates Australians will face on many forms of saving will be far higher than those on income or current consumption, taxing longer-term savings at especially punishing rates.

To understand why, it is crucial to recognise that when savings are taxed as ordinary income, the effective tax rates can be ­extremely high even if nominal rates seem reasonable.

That is because the amount saved will have already been taxed; then tax will be applied to each year’s returns before they are re­invested, with the tax compounding and the rate rising as the amount grows; and finally, when the savings are cashed out and spent, some part of that amount will be taxed too, including through the GST.

To make matters worse, ­because what is being taxed is the nominal amount, the taxes may deprive the saver of any compensation for inflation, driving real ­returns to or below zero.

Consider a nurse who takes on additional hours and earns $1000, on which she pays income tax of $190. Assume also that she then ­invests the remaining $810 in a 20-year term deposit paying 2.2 per cent, each year reinvesting the ­interest after tax into the same ­deposit ­account.

If she remains on the 19 per cent tax rate, in 20 years she will receive $1150 to spend. However, with the inflation rate over that ­period ­averaging 2 per cent, her $1150 after tax will be worth just $780 at today’s prices, which is less than the amount she originally ­deposited. And assuming she pays GST on that spending, the initial $810 she saved will be reduced to barely $700 of buying power.

Thus, through the cumulative effects of tax and inflation, she loses more than she earns in interest: her effective real tax rate exceeds 100 per cent — which will discourage her not only from saving but also from working those hours in the first place.

So as to avoid those effects, every advanced economy protects savers from ordinary income taxes, providing concessions and exemptions through which to save for the long term. Indeed, expanding those protections has been a central element in tax reform ­almost everywhere.

Labor is going in the opposite direction, either further curtailing existing protections or eliminating them. It would thereby give savers few options but to face the punishing treatment they suffer under ­ordinary income taxes.

The taxes on capital gains are an important case in point. As things stand, the capital gains ­realised on the sale of assets that have been held for at least a year are taxed as ordinary income but on a concessional basis: only half the gain is subject to tax. Labor proposes to halve that concession, so that tax would be ­applied to three-fourths of the amount gained.

Many simplifications need to be made to present readily tractable examples of the impacts. But consider, as an illustration, a taxpayer who is in the 32.5 per cent ­income tax bracket. Assume that taxpayer faces a choice between spending $1000 now and buying shares in a company that pays no dividends but secures and each year reinvests a 6 per cent return on the initial investment, with that reinvestment boosting the value of its shares.

For the taxpayer who decides to buy those shares now and sell them after 20 years, company and capital gains taxes would, under today’s arrangements, reduce the payout from $3200 to $2070, ­imposing an effective tax rate of 55 per cent on future consumption (where the tax rate is calculated as the tax paid for each dollar of final spending power).

Moreover, because of inflation, that $2070 would, at today’s prices, be worth just $1400, slashing the pre-tax 6 per cent return to a real return of just 1.7 per cent a year.

Under Labor, however, the ­effective tax rate will rise to 63 per cent, further reducing the real ­return. And even that increase ­understates the difference between the future under Labor and that under the Coalition.

The Coalition has pledged that by 2024-25, 90 per cent of income tax payers will face a 30 per cent tax rate. Labor does not intend to flatten the income tax structure but to make it yet more progressive. And by including a greater share of the capital gain in taxable income, Labor will ensure more taxpayers who earn capital gains are pushed into its highest tax bracket, despite comparatively modest lifetime ­incomes.

Assuming then that under the Coalition, the recipient of the capital gains would remain in the 30 per cent bracket, while being pushed under Labor into the top bracket, the relevant comparison is between the Coalition’s already high 54 per cent effective tax rate on capital gains and a positively ­astronomical 77 per cent under Labor.

Taking into account the US and French tax reforms, which slashed taxes on savings, that will be easily the highest rate of tax on capital gains in the developed world. And its effects on ­savers will be compounded by the elimination of negative gearing on existing housing, the additional restrictions on superannuation, the clampdown on trusts and the ­refusal to refund company tax to low-income earners.

Labor’s mantra is that none of that matters because it is the ­infamous “1 per cent” who will foot the bill. However, even for capital gains, where it makes that claim most insistently, its argument has no basis in reality.

In effect, tax office data shows that high-income earners already pay capital gains tax at a rate that is only marginally below the top ­income tax rate.

Thus, in 2016-17, the top 0.32 per cent of individual capital gains taxpayers accounted for 44.2 per cent of the overall capital gains tax revenue collected from individuals. Those taxpayers paid an estimated average tax rate of 46 per cent — a shade less than the top rate.

That the concession has so little effect on those taxpayers’ tax rate is unsurprising: typically, the well-off have a large proportion of their assets in shares that are held for less than a year and so do not benefit from the concession. Rather, it is to the taxpayers who have only a few investments, such as a flat at the coast, that the concession makes the greatest difference.

Labor’s claim that its increase will mainly hit the “1 per cent” is ­incorrect for another reason. Most high-income earners have large and diversified asset portfolios, along with relatively easy access to credit. As a result, they have considerable discretion about when they realise capital gains and can do so at a time that optimises their tax position.

Middle-income households, with narrow portfolios and constrained access to credit, have little scope to manage the timing of asset sales. They are therefore more likely to find themselves forced to sell an asset when doing so will push them into a higher tax bracket and expose them both to Labor’s halving of the concession and its increased income tax rate at the top.

It is middle-income earners who will find it more expensive to save. Will that cause them to save much less? Possibly not — but that is not the relevant test. After all, it is obvious that if you ­increase ­income taxes, some people may not materially reduce the hours they work. But they will be worse off and are likely to change their behaviour in other ways — for example, by ­accepting non-monetary benefits as compensation. So even though overall hours worked may not fall much, it would be foolish to claim the tax hikes have a low economic cost.

Equally, while it may be that middle-income earners sacrifice other goals so as to maintain their savings levels, no one could sensibly deny that they have been made materially worse off, all the more so as their pattern of ­consumption has been so seri­ously distorted.

Perhaps that doesn’t cause Labor to lose any sleep, but the broader consequences should.

Thus, a higher tax rate on capital gains, particularly when it is combined with a steeply progressive income tax structure, increases the incentive to hold on to gains and realise losses. That makes asset markets less efficient — in terms of their ability to settle at a price that reflects long-term value — and more unstable, as the withholding of assets during upswings accentuates the boom, while the rush to realise losses when prices decline aggravates the bust.

At the same time, higher taxes on capital gains will hammer the medium-sized companies that rely on retained earnings — and hence on capital gains — to fund expansion, reducing investment and ­entrenching the oligopolistic structure of our economy.

There is, in other words, a steep price to pay for Labor’s tax offensive on savers. It is difficult to see how the costs it imposes could be justified. And making them even harder to justify is the fact that while Labor will punish voluntary saving, it will — by raising the superannuation guarantee — force many families who have more pressing calls on their ­incomes to save. As so often happens, choice will be replaced by ­coercion as taxes soar.

We can therefore safely conclude that Labor’s plan is not merely the largest peacetime tax increase in our history, it must also rank among the most inefficient. If that is what Australians want, they know how to get it.


Democratic society under attack from the Left

The dismal decade of Australian politics was defined by revolving-door prime ministers, loss of public faith in the political system and the rise of minor parties riding an anti-establishment wave.

Optimists believed the time of troubles was transient. It would give way to a new era on condition that political-media elites recovered respect for the inviolable principles of liberal democracy including freedom of speech, public reason, majority rule and loyal opposition. But the election campaign has exposed the fragile state of Australian democracy. The dismal decade may have ended, but the foundations of our democratic culture are under assault.

Democracy is both a form of government and a type of society. A liberal democratic culture is one in which citizens are taught to respect the mutual obligations that give rise to free society. They include recognition of the inherent worth of each person, equality before the law, freedom of thought and speech, freedom of religion and respect for private property. Civil society is sustained by accountable government, apolitical public institutions, the separation of church and state, and the principle of no (physical) harm. The cornerstone of democratic culture is public reason.

During the course of the election campaign, Australian democracy has come under siege from illiberal enemies within. Militant incivility is the order of the day. To date, most violence has issued from the green-left. Activists are using a range of tactics to silence dissent. Liberal MP Andrew Hastie’s bus was set alight. Greens supporter Amber Holt was charged with assault after allegedly attacking the Prime Minister. Australian Conservatives leader Cory Bernardi reported a Greens representative had physically assaulted a female volunteer in ­Adelaide.

The man allegedly grabbed the conservative woman after she walked away from him following “a forthright discussion” at a pre-polling booth.

Conservative women have suffered intimidation, harassment and assault during the election campaign. Paul Bunney, a volunteer for the Centre Alliance, was charged with stalking Liberal candidate Georgina Downer. Bunney was a campaign volunteer for rival candidate Rebekha Sharkie and had links to hard Left group GetUp. He denies the charge.

Liberal member for Boothby Nicolle Flint reportedly filed a complaint of stalking. Police have cautioned David Walsh, leader of Adelaide’s City of Mitcham Residents Group. He denies wrong­doing. Former Mitcham mayor Glenn Spear supports Flint. Flint was targeted by GetUp earlier in the year. The group called her South Australia’s “most backwards politician”. It planned an event for the purpose of “removing her from parliament”.

Jewish politicians have been subjected to anti-Semitic attacks during the campaign. Posters of Liberal MP Julian Leeser were defaced with dollar signs. Leeser recognised the graffiti as a reference to “old anti-Semitic lies of an international Jewish banking conspiracy; that Jews control the world’s money supply. These sentiments were used by Nazis and others who have sought to spread hatred of Jews for centuries”.

Treasurer Josh Frydenberg released a statement after a billboard for his campaign in the seat of Kooyong was vandalised with Nazi symbols. He used the anti-Semitic incident to encourage civility in public debate and remind people that “mutual respect is at the heart of a good society”.

However, there was little respect for Liberal candidate Jacinta Price after a Greens candidate used racist abuse against her. Greens leader Richard Di Natale supported George Hanna after he shared a Facebook meme that smeared Price with the racist term “coconut”.

Price is a Warlpiri-Celtic woman who rejects the politics of victimhood and cultural relativism. She embraces rational deliberation, women’s empowerment and the secular state. As such, she is anathema to the hard Left.

Price is not in the habit of taking abuse lying down. She rebuked the Greens: “To say that I’m black on the outside and white on the inside is to say that being white is something lesser. It’s a put-down based on race … just like any other slur based on race.”

The Labor leadership is also demonstrating a disturbing degree of contempt for democratic culture. In a previous column, I described Bill Shorten’s vicious smearing of climate economist Brian Fisher. After green activist Simon Holmes a Court posted Fisher’s residential address online, his home was attacked.

Last week, Labor senator Penny Wong violated the principle of loyal opposition when she refused to shake hands with Liberal senator Simon Birmingham after a discussion on Sky News. Yet a CNN article lavished praise on her and former race discrimination commissioner Tim Soutphommasane said: “She’s a role model for many people in Australian society who want to see a different face to our public life and our public institutions.” For other Australians, substance matters more than skin colour.

Labor and the Greens support the state censorship of politically incorrect thought. Shorten has become deeply hostile to critical questions from journalists. He has indicated his intention to target media critical of him while pledging more money for the comrades in the Left press. He is no friend of public reason.

The Shorten Labor Party is poised to attack the foundations of free society.

Do not reward a politician who fails to defend freedom of speech, universal equality and accountable government. To hand illiberal men the reins of democracy is to cast pearls before swine.


Climate politics as changeable as global weather

The politics of climate change is moving quickly and in different ­directions in different countries, presenting serious media and politicians with even more challenges in the coming decade.

Last Saturday week The Australian’s editor-at-large Paul Kelly argued that the election of a Shorten government would redefine the politics of climate change as voters accepted Labor’s assertion that Australia needs tougher ­action to mitigate carbon dioxide emissions than that offered by the Coalition and effectively rules out being constrained by policy costings. Kelly likened the situation here to protests in Britain by people wanting a commitment to carbon neutrality and cited the influence of Swedish 16-year-old savant Greta Thunberg.

Yet the push for carbon neutrality is not going as uniformly well as Labor leader Bill Shorten or Greens leader Richard Di Natale would have you believe. As this column has pointed out for three years, China and India, No 1 and No 3 respectively of the top global emitters, have not committed to start to reduce carbon intensity, let alone total CO2 output, until 2030.

Activists and left-wing media outlets never like admitting the one major emitter to have success in reducing emissions, though still short of the Paris commitments it is withdrawing from, is the US. It has achieved this on the back of fracking for natural gas.

Gas was expected to be the transition fuel to renewables here when former Labor PM Julia Gillard signed her deal with the Greens in 2010. Just as Greens’ maximilism destroyed Kevin Rudd’s emissions trading system, advocates after 2010 immediately pushed for a faster transition to renewables.

With no gas reservation policy to guarantee domestic prices, ­renewables that had been expected to phase in across 40 years ramped up faster than the grid could cope with and created instability and price pressure. Back in 2010, the idea had been that ­renewables would not dominate until 2050, when large-scale, grid-size battery storage technology had matured.

What Labor, the Greens and some media companies appear to have missed is that the same pressures that have created havoc in our power industry are now splitting EU and Canadian attitudes to renewables.

EU plans for total carbon neutrality are in trouble east of France. Europe’s biggest economy, Germany, long a leader in renewables, is facing a possible economic slowdown and historically high energy prices in its heavy manufacturing sector, just as energy conservatives have argued it would. While Britain, France and The Netherlands remain committed to the idea of zero carbon and want it sooner if possible, Italy, Poland and Hun­gary are falling in behind Germany in urging a more cautious approach. No EU country is as yet meeting its Paris commitments in full.

Several European countries, especially Poland and Hun­gary, are a long way behind their targeted reductions and Europe’s rate of renewables growth is ­slowing. Wind and solar photovoltaic ­installation rates have declined and total ­renewable installation in Europe last year was only at half the 2010 level.

Populist parties of the Right, ­especially in France but also in Finland and The Netherlands, are building electoral support for nationalist programs aimed at resisting the EU on centrally imposed climate policies. While these parties were once driven by anti-immigration sentiment, they are increasingly mobilising behind opposition to Brussels over planned carbon ­dioxide reductions. France’s protesting yellow shirts are violently opposing plans to increase fuel taxes. Wait until France’s farmers hear about Greens proposals to hit the meat, game and poultry industries, given agriculture is next on the activists’ list after electricity.

Even renewables as they are in Europe are not what many in the media may think. As business columnist Terry McCrann pointed out in The Weekend Australian on May 4, ­Europe is pulling what many would think is a renewables swiftie. The biggest renewables power generator across the EU is biomass, effectively firewood. Despite being a heavy emitter of CO2, biomass emissions are not counted in Europe’s carbon accounting.

The theory says carbon dioxide will eventually be reduced by growing new biomass, but this does not seem to fit alarmist scenarios calling for carbon neutrality immediately. Biomass was 60 per cent of renewables generation across ­Europe in 2016. And Europe, a long-time ­opponent of fracking, is doubling imports of US gas created by fracking.

Add to the European picture the votes in the Canadian provinces of Alberta and Ontario for conservatives opposing carbon taxes. Manitoba, Saskatchewan and New Brunswick are also facing federal carbon taxes because their governments have refused to ­implement their own.

However quasi-religious the rhetoric of the ALP or parts of the Coalition in committing to action on climate change, there is no point in a country with 1.3 per cent of global emissions destroying its economy when major emitters are increasing global CO2 output.

Politicians need to resist policies that hurt their own poor, and journalists should resist bullying calls for reporting conformity by parts of the scientific, political and business community, many with a vested interest in renewables.

Environment writers could start by reading the submission to the US congress on February 6 by eminent climate scientist ­Judith Curry. Curry, hated by climate alarmists, bells the cat on media lies about extreme weather events. She points out that even the UN’s Intergovernmental Panel on Climate Change rejects the idea that any individual weather ­incident can be linked to CO2 ­increases and cites data showing droughts and heatwaves in the US are not as ­severe as they were in the 1930s dust bowl era. She says more work needs to be done to understand the role of geology and the sun in global temperatures and ridicules the notion that CO2 can be used like a dial to change global temperature.

She urges the US to be cautious: “Drastic reductions … will not ­reduce global CO2 concentrations if emissions in the developing world, particularly China and India, continue to increase. If we believe the climate model simulations, we would not expect to see any changes in extreme ­weather/climate events until the late 21st century.”

Like Copenhagen Consensus director Bjorn Lomborg, published in this paper for 15 years, Curry ­rejects environmental spiritualism in favour of rational approaches that will not damage society. She urges greater adaptation strategies to deal with possible emerging weather changes and discusses ­social and planning changes to ­increase “resilience, anti-fragility and thrivability”.

Politicians who think commitments to action at any cost will win them votes need to be careful. While the Coalition has torn itself to pieces on climate change for a decade, Labor’s position is not without risk, as Germany and France show in different ways. Labor, the party of the worker, needs to be mindful of possible damage it could do by appealing to rich Greens and young voters at the expense of the older poor.

And journalists, before reporting ridiculous scientific claims, should look at a piece published in The Wall Street Journal last June 21 under the headline, ­“Thirty years on, how well do ­global warming predictions stack up?” The answer? Every scientific doom forecast has been proven wrong.


ABCC seeks huge penalties against CFMEU for ‘unlawful pickets’

The Coalition’s building regulator is seeking hundreds of thousands of dollars in penalties be awarded against the construction union and four senior NSW officials, accusing them of mounting unlawful pickets to try to force a Sydney crane company into signing a union enterprise agreement.

The timing of the announcement by the Australian Building and Construction Commission during the election campaign will be controversial, particularly as the agency is relying on little-used unlawful picket provisions introduced by the Turnbull government in 2016.

In a statement of claim filed in the Federal Court, the ABCC alleges the Construction, Forestry, Maritime, Mining and Energy Union set up pickets and issued threats to coerce Botany Cranes to sign up to a union agreement and reinstate a union delegate.

In refusing to sign the EBA, Botany Cranes claimed the agreement would threaten the financial viability of the company.

The CFMEU officials subject to the ABCC proceedings include its NSW state secretary Darren Greenfield, NSW President Rita Mallia, and two assistant secretaries Robert Kera and Michael Greenfield

The ABCC claims Darren Greenfield told the company’s managing director: “We are going to get our way here. You got a good business, you don’t want to f**k it. Just agree with everything in the EBA and let’s move on. You don’t want your blokes offsite, equipment damaged, cranes wrecked when in the end it’s going to be our way”

During a picket on January 25 this year, NSW police were required to assist Botany Cranes’ staff to enter and leave the premises.

On January 31 this year, following the pickets, Michael Greenfield is alleged to have told a Botany Cranes’ representative: “If I were you, I’d f**kin sign it [the EBA]. You haven’t seen anywhere near bad yet. See what happened to WGC and Boom Logistics, and they had money, what do you think will happen to you?”

The ABCC is alleging the CFMEU contravened sections of the Building and Construction Industry (Improving Productivity) Act 2016 that carry a maximum penalty for each contravention of $210,000 for a body corporate and $42,000 for an individual.

The ABCC is also seeking an order for compensation and interest payable to Botany Cranes for loss and damage suffered as a result of contraventions of the BCIIP Act.


 Posted by John J. Ray (M.A.; Ph.D.).    For a daily critique of Leftist activities,  see DISSECTING LEFTISM.  To keep up with attacks on free speech see Tongue Tied. Also, don't forget your daily roundup  of pro-environment but anti-Greenie  news and commentary at GREENIE WATCH .  Email me  here

No comments: