Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

It’s not just about distribution

Robert Carling

01 June 2018 | Ideas@TheCentre

It is difficult to find anyone in politics willing to make a case for income tax cuts for anyone considered a ‘high’ income earner. That would be understandable if no such case existed, but there is a strong case on both economic and moral grounds.

The reality is that in a climate of debate dominated by warped views of inequality and fairness, even those who recognise the case for higher income tax cuts — with a few notable exceptions — run a mile from it and would rather join in the slanging match about distribution.

Thus, we have government spokesmen insisting the budget tax cut plan is one for low and middle income earners, based on improbable claims as to what a middle income will be in six or 10 years’ time. At the same time, the opposition paints it as a gift to the better off. The truth, as usual, is somewhere in between.

The latter stages of the tax cuts — if they ever occur — will deliver benefits at high incomes as well as low and middle incomes. However, the package as a whole does not benefit high earners disproportionately. Whether this group is defined as the top bracket or the top 20% of taxpayers, their gains will be no greater than the (very high) share of total income tax revenue they currently account for.

In fact, the share of income tax paid by the top bracket will go up under the government’s plan, as will the proportion of taxpayers in that bracket. It is a matter of arithmetic that as long as the top marginal rate stays at 47% (as the government proposes) the dollar benefit flowing on to top bracket taxpayers from cuts further down the scale will be capped and decline in percentage terms as income rises.

More to the point, why does the debate have to be fixated on distribution and why don’t we hear more about the economic benefits from easing the crushing burden of income tax on those who pay most of it?

Will we ever again see a treasurer get to his feet on budget night, make the case for an income tax cut for high earners and lower the top rate from 47%? A single rate of 34.5% from $41,000 to $200,000 is good as far as it goes, but not as good as a single rate of 34.5% from $41,000, period.

Superannuation reform score: maths 1, good intentions 0

Matthew O’Donnell

01 June 2018 | Ideas@TheCentre

The Productivity Commission wants to help Australians get a better return from superannuation, but unfortunately good intentions can’t trump basic maths. In its draft report Superannuation: Assessing Efficiency and Competitiveness, the PC recommended:

  • Members should select a default superannuation product once, upon entering the workforce.
  • A ‘best in show’ shortlist should be developed to help members pick a good super product.

Having members choose their default fund once, thereby reducing the impact of administration costs on their investment returns is a very sensible reform measure.

In fact, any measure to reduce the impact of management fees is a good one because study after study of financial products has shown virtually no evidence that paying higher fees leads to higher returns.

The share and bond funds — in which superannuation funds largely invest members’ money — tend to charge higher fees if they have performed well in the past. Unfortunately, past performance is a terrible indicator for future performance, so paying higher fees tends only to reduce your future returns.

Based on these facts, the PC’s second recommendation of developing a best in show short list for superannuation funds is sheer folly. The chance of a government selected panel regularly picking winning funds is as likely as Donald Trump giving up Twitter. Cue the public indignation and cacophony of criticism, once the funds on this list inevitably underperform the market.

A vast phalanx of financial advisors are employed to try to beat the market and the majority of them fail to strike gold because of the tyranny of maths — half of all funds must be below the average. If highly paid, skilled financial advisors can’t beat the odds, do you think that a politically-selected panel of indifferent, risk-adverse ‘experts’ is going to accurately select the 10 best superannuation funds in Australia?

Of course member retirement savings would be higher if they were invested in above benchmark funds, but this is not Alice in Wonderland. The Red Queen may be able to think of six impossible things before breakfast but superannuation investors will just have to live with the impossibility of everyone beating the average.

Review needed urgently of L3 literacy program

Jennifer Buckingham

01 June 2018 | Ideas@TheCentre

L3 is used in hundreds of schools across NSW and is a core component of the NSW Department of Education’s Early Action for Success strategy. L3 is supposed to provide early literacy intervention for all students including the most disadvantaged groups in order to reduce the number of students needing intervention in later years of schooling.

A primary concern with L3 — as outlined in our Research Brief —  is that it is based on the same constructivist pedagogy as the Reading Recovery program.  A recent longitudinal analysis of Reading Recovery found the long term impact to be limited for the vast majority of students — and even negative for some — so from 2018 the NSW DoE no longer provides system support for Reading Recovery.

One would think that the L3 program would have been evaluated carefully to make sure it is achieving better results, unfortunately, this is not the case. An evaluation of L3 was promised for 2017, but to date this has not been carried out. With $340 million invested in EAfS in 2017-2020 alone, we should expect improvement in student outcomes, but an evaluation of the literacy and numeracy strategy, of which L3 is a key component, has not improved NAPLAN results.

This is not surprising given L3 content does not reflect the evidence base for effective reading instruction in the early years of school, as identified by the NSW Government’s own research unit. A critique of the L3 program by Dr Roslyn Neilson and Dr Sally Howell found that it does not teach the five key components of early literacy systematically or explicitly.

If the NSW DoE is committed to “rigorous evaluation to focus investment and effort on what works” as stated in the 2017-2020 Literacy and Numeracy Strategy then they must carry out a comprehensive evaluation of L3. The DoE should halt any expansion of the program until effectiveness has been established, and assist schools to transition into an evidence based literacy instruction program that reflects the scientific evidence for effective teaching of reading.