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.

US presidential race taxing

27 January 2012

Let’s face it. The two-year-long process leading to the inauguration of an American president has more in common with Madison Avenue and Sunset Boulevard than Pennsylvania Avenue, so we should not be surprised or shocked. But it is downright bizarre to see one Republican candidate tearing into another Republican candidate for not paying enough tax. After all, aren’t these guys supposed to favour a lower tax burden?

Newt is criticising Mitt because he pays only 15% income tax. If Mitt had been caught evading tax, Newt would be onto something, but Mitt is just complying with the tax code created by a Republican president, George W. Bush. If Mitt had paid more, he would be making voluntary contributions to the public purse, which as the late Kerry Packer once said is a mug’s game.

Soon the US media will go into a frenzy over Mitt’s tax affairs because he will have to go through that obligatory ritual for all presidential candidates of making public tax returns for the past few years. (Thank goodness our candidates for high office don’t have to do that.) But there is a perfectly good reason why Mitt’s overall tax rate is low: his income is mainly from capital gains and dividends, which are taxed at 15% in America. Australia prevents double taxation of dividends through the imputation system; the United States mitigates it by taxing dividends at a low rate. But taking into account the 35% company tax rate and the 15% rate on dividends in America, any dividends paid out of taxed profits are in fact taxed at almost 45% in the hands of the shareholder. The 15% rate on capital gains in America is approximately half the top marginal personal rate, as is the case in Australia.

The real issue is not whether Mitt is paying too little but whether the tax system as sketched above is right. There is nothing exceptional about taxing capital income more lightly than labour income. Australia does it to a point, and even the Henry review said we should keep doing it (albeit in different ways). The real worry in America isn’t so much the fate of Newt or Mitt at the hustings but that if the Republican primary campaign can take this bizarre turn, perhaps the populism of Barack Obama, Warren Buffett, and the Occupy crowd is setting the terms of the public debate on tax policy more than anyone realised.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.

Car industry handouts are childish

27 January 2012

An article in the Australian Financial Review last week opened with a question to the prime minister from a Ford Australia worker: ‘Will I have a job in 2016?’ The question came after Julia Gillard announced an additional $34 million in emergency subsidies to assist the automobile industry for another four years.

The question raises several unnerving issues about this particular worker and society in general: the blatant self-interest of an appeal for handouts, the disregard for the property of his fellow citizens, or the short-sightedness of what is effectively a bailout policy. Perhaps most striking is the sheer immaturity of a grown man demanding a job from his prime minister, like a child demanding a gift from Santa Claus.

Gillard is not Santa Claus, and she’s not giving away her own money. She is spending taxpayers’ funds, and this money is first confiscated from hardworking Australians before being doled out.

Of course, this sort of attitude is not uncommon among subsidised industries, and to some degree, it is to be expected. Car manufacturing in Australia has been protected and shielded from market pressures since its inception – either by tariffs, subsidies or both.

The economic arguments against industry subsidy are well known and well understood. They reward poor business practice, perpetuate reliance on handouts, waste valuable revenue on economically unviable projects, and prevent important structural adjustment.

But putting the economic arguments aside, policymakers and politicians should expect that after receiving assistance for half a century, employees not only grow dependent on handouts but begin to feel entitled. When subsidies are continually renewed, it is not hard to see why employees hold the government responsible for their employment circumstances rather than themselves.

Government should terminate these wasteful and corrosive subsidies and allow the employees of companies like Ford Australia the opportunity to finally bite the bullet and search for more economically sustainable and stable employment.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.

Wrong person for a difficult job

27 January 2012

When the International Monetary Fund (IMF) was looking for a new head last year, I wrote in this very forum that French Finance Minister Christine Lagarde was the wrong choice for the job (‘Glamour over substance,’ 17 June 2011). Recent statements coming out of the IMF vindicate my misgivings.

My main problem with Lagarde was that she was too compromised by her French baggage to lead the IMF through the European crisis. I feared that she would not act in the best interests of all IMF members but continue to promote French and/or European policies. This is exactly what we are seeing now.

No other official connected with the European crisis sounds as alarmist as Lagarde. Her gloomy doomsday prophecies make even usually pessimistic commentators like me look cheerful. The IMF’s predictions now regularly warn of imminent economic armageddon and another 1930s-style depression. Where policymakers usually talk the economy up, Lagarde always talks it down – as if she wants to create a self-fulfilling prophecy.

Of course there are good reasons to be concerned about the European crisis – indeed, there are very good reasons. Yet I cannot help but wonder whether Lagarde’s shrill warnings serve a practical purpose: to make the case for even larger emergency mechanisms to bail out European financial institutions and governments.

By painting the European situation in ever darker colours, Lagarde is seeking additional funding for the IMF, thereby increasing her own power. France’s lost AAA rating almost certainly reflects on her personally and her tenure as the country’s finance minister. Her attempts to restore confidence by facilitating an even greater rescue fund make more sense in this context.

However, with every further engagement of the IMF in the troubled Eurozone, the IMF becomes more compromised and less able to provide genuinely independent and impartial advice. As a thought experiment, how would a Mexican or a South Korean IMF director have behaved in Lagarde’s place?

My feeling is that we would have seen none of the emotional dramatisation of events and more cold-headed, sober policy prescriptions. Non-European IMF directors would have been able to assess the European crisis from the outside, unwilling to be drawn into it any more than absolutely unavoidable. They would have guarded the other IMF members’ capital with at least as much concern as the fate of some French banks. And they would not have felt the need to repair their own policy mistakes.

Lagarde was always the wrong choice for the job. The least that countries like Australia should do is vehemently defy her demands for additional contributions to her compromised IMF.

Dr Oliver Marc Hartwich is a Research Fellow at The Centre for Independent Studies.