Getting a bit fat around the middle?

In the AFR earlier this week, La Trobe Professor Don Harding predicted that when Kevin Rudd’s 2020 Summit rolls around, not one of the proposals will entail a spending cut.

That won’t be true if they invite Fred Argy. In Club Troppo yesterday, Fred posted his middle-class welfare hitlist:

If one day Rudd were to decide to “review” some of his implicit or explicit election promises – and he has categorically ruled that out for the time being – he could do worse than critically re-examine the huge number of middle-class welfare programs in place. Here is a tentative list just off the top of my head:

• private health rebate (not means tested);
• federal government subsidies to private schools (not well targeted at socioeconomic disadvantage);
• superannuation (more upper than middle class welfare);
• Baby Bonus (not means tested);
• Some of the Family and Child Care Benefits (ditto);
• First Home Owners Grant (ditto);
• Capital Gains tax (preferential treatment, where the gains go mostly to better off);

I’m broadly in agreement with this list. In Imagining Australia, we suggested scrapping the Baby Bonus and the First Home Owner’s Grant, means-testing the 30% private healthcare rebate, and tying private school funding to parental income, not neighbourhood income (while we’re at it, why do private schools not typically offer lower fees to kids from poor suburbs, even though they attract larger government subsidies?). I’m not sure I understand all the superannuation concessions, but what little I’ve read seems to suggest that they’re one of our most inequitable policies. As to CGT, I’d like to see some evidence on the impact on investment (sometimes equity-efficiency tradeoffs are worth making).

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11 Responses to Getting a bit fat around the middle?

  1. Gavin Findlay says:

    I am also impressed by these ideas of Henry Thornton correspondent Sir Wellington Boot. Not spending cuts as such, but with the bottom line firmly in mind:

    “No one wants to see massive defaults on mortgages; people losing the roof over their heads is the most dreadful public policy imaginable. A National Housing Trust can buy mortgage distressed houses for an amount equal to the outstanding mortgage payment. The family then rents the house from the Trust for a reasonable amount. The family stays in its house; the bank gets its mortgage settled; the Housing Trust gets property whose value is greater than what the Trust paid for it and, most importantly, the society is not upturned by a housing crisis. Of course the money spent already by the family on the mortgage is money lost by them, but that is capitalism. Taking out a mortgage (like any serious dealings with a bank) is a dangerous activity”.

    To ease the pain for commuters, Canberra could: “… give grants to the states to half the ticket cost of public transport; plus big grants to buy more public transport to cater to the increased numbers who would use it if it was seriously cheaper. Fuel prices are going to keep rising ($5 per litre petrol is not a thousand years away) and it would be a mistake to start fiddling with the very complex tax regime associated with fuels. Increased availability and cheapness of public transport would help greatly in the cities”.

    “The skilled worker crisis can be partially alleviated immediately by simply abolishing the time requirement which is attached to every work visa. Until the problem of insufficient skilled workers in Australia is more manageable simply let everyone who is already here on a work visa stay as long as they want … one year, five years, ten years … take away from companies the worry that they will be losing their skilled staff in the next few months. This decision would cost exactly $0.00. It is entirely administrative and would be greeted with relief and applause by thousands of employers”.

  2. Though as I pointed out a Club Troppo, cutting private school subsidies would increase increase government spending, because some kids now at private schools would go to government schools where they would receive much larger subsidies than they do now.

    Cutting private health insurance subsidies would cause some increased expenditure in public hospitals, but would be a net saving.

  3. derrida derider says:

    I can see lots and lots of problems with the mortgage proposal. Basically negative equity – ie the mortgage being bigger than the value of the house – is very rare, so the mortgagee would almost always be better off allowing the sale because they’ll walk away with some of the money. And if they are able and willing to regularly pay market rent they would be good prospects for a loan – perhaps interest-only – anyway.

    Virtually all foreclosures happen either where the people become unexpectedly poorer with little prospect of returning soon to their former circumstances, or where they’ve flatly lied on their loan application. In neither case is it clear that renting them a bigger and better house than they can afford is a good idea.

    So unless the Trust heavily subsidises that rent (which creates obvious moral hazard, horizontal equity and land capitalisation problems) it just wouldn’t be a goer.

  4. Brendan says:

    Why is ‘equity’, the equality of economic outcomes, necessarily a desirable thing? If there were some government policy that would make the rich poorer without affecting the income of anyone else, would you want the government pull this lever? I wouldn’t. You could very well increase poverty while increasing ‘equity’. Likewise, you could very well decrease equity while decreasing poverty. So if there is a trade-off to be made, it ought to be one between reducing absolute poverty and efficiency.

  5. Fred Argy says:

    Brendan, you raise an interesting question on equity. I like to look at a policy reform and ask two questions.
    – Will it increase total utility?
    – Will there be losers and if so will the losers be people already relatively poor?

    If the answer to the first question is yes but the answers to the second and third questions are no, the reform passes my efficiency and equity test. I certainly do not insist that the gains from reform should be equally shared.

    In the case of the latest generous superannuation reforms, one can find little good to say about them. They may have some positive effects on work and saving – or they may not. The economic benefits are far from clear. But what is clear is that the gains go overwhelmingly (indeed almost exclusively) to the better off. And who will pay for the government largesse in the long term? Future taxpayers, including many of the low income earners who pay tax! So it meets neither my efficiency nor equity test.

    Much the same can be said of the concessional treatment of capital gains. Any efficiency gains are debatable. It may even encourage the wrong kind of speculative investment and it certainly fails the principle of tax neutrality. And the gains go overwhelmingly to the better off investors. The taxpaying “poor” have to partly ‘pay’ for the revenue foregone. So this reform has no clear efficiency benefits yet it breaches my equity test (low income people should not be losers).

    The more difficult cases are those like labour market reform. WorkChoices may have had some efficiency benefits but many of the losers were already relatively poor. Faced with such a trade-off, one’s normative values must prevail.

    And a passive redistribution from rich to poor which has adverse economic incentive effects is equally hard for economists to assess. Some would be prepared to trade off some economic gain if they thought the poor had higher marginal utility and a redistribution would improve social stability. Others would not. Values come into it.


  6. Brendan says:

    Fred, is your objective to help the poor or economic equality? Like I pointed out before, they are two very different things.

    Setting aside the question of whether or not redistribution of income towards the poor is justified. The question becomes: how do you do it while inflicting the least damage possible?

    If I was a redistributionist, then the best way to do it is through a progressive system of taxes and transfers. That’s it. Not through the healthcare system, not through labour market regulation, not through government administered schools, not through protectionist trade-barriers, etc. These policies are not only inefficient but also poorly targeted instruments for purposes of redistribution. To borrow the words of Andrew Leigh, the above policies are as effective at helping the poor as, “sending your bank details to a Nigerian scam-emailer to reduce poverty in Africa.”

    To the extent that we choose to redistribute income, we should use the best tools for that purpose: a progressive system of taxes and transfers. Everything else should be aimed at efficiency.

    “The taxpaying “poor” have to partly ‘pay’ for the revenue foregone.”

    This idea that somehow tax cuts/concessions are a form of government spending is absurd. Tax cuts are just that – cuts in taxation, not government spending. The government isn’t giving, they are taking less! It seems this idea that tax cuts are a form of government spending has been deliberately fostered to make it seem as if government is taking from the poor and giving to the rich.

  7. Fred Argy says:

    Brendan, gee we could have a terrific debate on these issues but this isn’t exactly the place. Let me give you a brief retort.

    I agree with some of your comments e.g. it is not very sensible to use labour market regulation or protectionist policies as a means of reducing income inequality. It does not help efficiency nor is it cost-effective. I have always argued against such forms of redistribution.

    But I am concerned to ensure that new (incremental) reform proposals achieve something close to a Pareto optimal outcome – not just a situation where winners can ‘potentially’ compensate losers. You cannot have an optimal welfare outcome if the losers are relatively poor. So if a reform is proposed which is regressive but good for efficiency I want to see actual redistribution – either direct (compensation through the cash transfer system as Howard did with the GST) or indirect (through non-cash benefits).

    Without actual redistribution, I might prefer to forego the proposed reform, including its potential efficiency gains – especially if these gains are small and uncertain, as with WorkChoice. The empirical evidence is clear: most forms of labour market deregulation tend per se to impact on distribution as well as on efficiency and it is not always feasible to compensate the losers.

    I also take issue with you on two other issues. First, I believe redistribution through opportunity levelling measures such as in education, health, housing, public transport and employment is superior to redistribution through passive welfare. The former has positive economic by-product effects which passive redistribution does not.

    Second, the Treasury rightly treats tax concessions (taxes which diverge from neutrality and provide a special benefit to a specified activity or class of taxpayer) as “tax expenditures” because it views such concessions as hidden forms of spending (what is the essential difference between giving say the motor vehicle industry a grant and giving them a tax holiday?).

    In Australia, tax expenditures amount to about 4.5% of GDP and have been showing an upward trend. The two largest, which account for more than half the total, are superannuation and capital gains concessions – what I have called a form of middle class welfare.

  8. Sinclair Davidson says:

    taxes which diverge from neutrality and provide a special benefit to a specified activity or class of taxpayer) as “tax expenditures”

    Assuming, of course, that the tax was ‘neutral’ in the first instance.

    what is the essential difference between giving say the motor vehicle industry a grant and giving them a tax holiday?

    That is the difference between receiving a dollar and not having a dollar taken from you.

  9. Fred Argy says:

    Sinclair, in either case the motor vehicle industry is getting an extra dollar (relative to the situation before and relative to non-eligible industries). It is simply getting it via different routes.

    The same is true with superannuation. The Government could have simply given all well-off retirees (but no one else) a new lump sum grant. That would have been classified as government spending. Instead it chose to give them a new tax concession which other super contributors and other savers are not eligible to receive. So it got classified as a new tax expenditure. The distinction is arbitrary.

    I agree that the way Treasury determines tax neutrality is controversial. But it makes sense to me.

  10. Sinclair Davidson says:

    Fred – we’ll are to agree to disagree. Tax expenditures are far too arbitrary for my liking and assume that all income that the government ‘allows’ taxpayers to keep is a ‘gift’ from the government. On that note, did you see David Bassanese’s piece in the Fin on Friday (pg. 11)?

  11. Justin says:


    Doesn’t the entirety of your argument depend on the proposition that you know what’s better for people, than people?

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