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.

Periscopes down

Simon Cowan

29 April 2016 | Ideas@TheCentre

It is telling that when the Prime Minister announced that Australia will spend $50 billion or more on 12 new submarines he was flanked by the South Australian-based federal Minister for Industry, Christopher Pyne. Since the start of the Future Submarine project, the key driver has been pacifying the shipbuilding industry in Adelaide.

One of the most persistent myths in the case of the subs is that spending $50 billion in Adelaide will automatically help the economy of South Australia and thereby is in the national interest.

There are several flaws in this argument.

First, the premium paid for an Australian build is substantial. RAND Corporation estimated that it was 30%-40%, however it could be much higher. The challenges of the troubled Air Warfare Destroyer project are instructive: the project is plagued by cost overruns, poor delineation of authority between Defence and the AWD partners, and scheduling issues. 

The AWD price tag has nearly doubled, increasing by billions of dollars. The build for the original Collins Class submarines also ran over time and over budget. Cost overruns of just 10% could see the premium for an Australian built submarine comfortably exceeding $10 billion. As this must be funded by extra taxation, it represents a significant deadweight loss.

Much like the failed automotive manufacturing industry, protection for one industry comes at the expense of higher costs for all other industries. This economic law doesn’t cease to apply simply because the industry is defence.

Second, defence manufacturing involves significant spending on technology rather than labour. Most of the cost of the Future Submarine will be spent on components, many of which will be imported. Less than 3,000 workers will be employed in the build and supply chain.

Moreover these are highly specialised jobs, requiring specific training and preferably experience. Defence industry policy simply isn’t a good area for government dollars if your primary objective is reducing unemployment.

Finally, we cannot ignore the opportunity cost involved in this acquisition. By committing $50 billion to submarines, the money available for other projects (or even just for efficiency generating tax cuts) will be lessened. Too often these nation building projects come with nation crippling price tags.

Simon Cowan is Research Manager at the Centre for Independent Studies, and author of the report Future Submarine Project Should Raise Periscope for Another Look.

CGT trumps negative gearing

Robert Carling

29 April 2016 | Ideas@TheCentre

Housing negative gearing taxIf England was a nation of shopkeepers as Napoleon is said to have asserted, modern Australia is a nation of landlords. The popularity of small-scale residential bricks-and-mortar investment, and the national obsession with the ups and downs of house prices, explains why negative gearing is such a hot button issue.

Negative gearing and capital gains tax concessions are often lumped together by the taxation hunters and gatherers, but they are vastly different beasts. There is little basis to attack negative gearing — which is simply an application of the principle that expenses incurred in earning income should be tax deductible — but even less to cut the capital gains discount. Increasing capital gains tax by half (by cutting the discount from 50% to 25%) would apply much more broadly than any change to negative gearing and be more damaging, but the objections are barely heard above the negative gearing commotion.

The principle that capital gains should not be taxed like recurrent income is recognised almost universally by discounts or lower tax rates, or in some cases by complete tax exemptions. Australia’s 50% discount is unexceptional.

It is often said that the Howard government, when it introduced the discount, ‘halved’ capital gains tax. It did nothing of the kind. It replaced indexation for inflation (effectively a discount in a different form) with a 50% discount, and abolished the averaging provision that reduced the effect of large, lumpy capital gains pushing taxpayers into higher tax brackets. The net effect relative to the previous regime was ambiguous, and in fact CGT revenue held up.

Cutting the discount to 25% would result in the harshest CGT regime Australia has ever had. The exact comparisons depend on rates of capital gain and inflation, but in many situations where the real return is low, the effective CGT rate would be higher with a 25% discount than it was under the indexation regime.

And those advocating a 25% discount are not advocating a return to the averaging provision to soften the blow.

Capital gains tax should be left alone, and the indications are that it will be in next week’s budget.

It all makes work

Theodore Dalrymple

29 April 2016 | Ideas@TheCentre

paper report overload stackThe Victorian State government has announced it will spend $500 million more on the reduction of family violence over the next two years. This is really quite a modest sum, working out at only $1,101,321.59 per recommendation of the Royal Commission per year. The recommendations, each of 227 of them, probably cost more to make than that.

Some might say that any report that has so many recommendations is, ipso facto, useless, and an open invitation to bureaucratic waste. Certainly, some of the recommendations were so long that they put me in mind of Thomas Macaulay’s review of a nineteenth century biography of Lord Burleigh by an unfortunate author called Nares:

The work of Dr. Nares has filled us with astonishment similar to that which Captain Lemuel Gulliver felt when he first landed in Brobdingnag, and saw corn as high as the oaks in the New Forest, thimbles as large as buckets, and wrens of the bulk of turkeys. The whole book, and every component part of it, is on a gigantic scale. The title is as long as an ordinary preface, the prefatory matter would furnish out an ordinary book, and the book contains as much reading as an ordinary library. 

According to an article in the Age newspaper, ‘advocates have hailed it as an unprecedented commitment that will save and change lives.’ Note that it will, not that it might. This is to mistake aspiration for achievement, and activity for results. One’s confidence is not increased when one reads recommendation 207 (taken at random):

The Victorian Government develop or commission the development of a 10-year industry plan for family violence prevention and response in Victoria, to be delivered by 31 December 2017 with commensurate funding for workforce transition and enhancement to begin from that date.

Here I am put in mind of the line from the old Flanders and Swan song: it all makes work for the working man to do.

Theodore Dalrymple is the Centre for Independent Studies 2016 Max Hartwell Scholar-in-Residence.