Public ideas


Taxing profits

First-year economics students always get amazed when the lecturer draws those supply and demand curves illustrating the workings of a competitive market, demonstrating that when all the conditions for a competitive market are met, the competing firms exactly cover their costs and none of them make any profit.

The lecturer explains to the incredulous students that companies must pay interest to their lenders, and a return in the form of present or future dividends to equity holders, but in the economist’s view of the world these are the costs of doing business, and like wages and inventories, are covered in the model’s cost curve. What shows up in the firm’s accounts as “profit” in a well-functioning competitive market is a cost according to the perfect competition model – a “normal profit” in econospeak. Any return to equity above that which prevails in a competitive market is a “supernormal profit” or an “economic profit” in economists’ terms.

In that same pure model the presence of supernormal profits generally indicates that there has been some departure from the economic model – monopolization, collusion, or some form of market failure.

Of course the real world is a little more complex. In industries with a high level of risk, the “normal” profit will be higher than in industries with low risk. The time-span over which profits are measured counts: startup firms, for example, may have many years of loss followed by a period of high returns, before competition sets in.

So, as Peter Martin explains in The Conversation, the Greens’ proposal for a super-profits tax has some economic justification: The Greens want a super-profits tax. Labor and business used to like the idea too.

The proposal has been met with squeals of protest from the usual quarters, particularly the Business Council. Martin’s response is measured. He explains why he doesn’t endorse the Greens’ specific proposal, but he acknowledges that there are good arguments for a tax on supernormal profits.

The economists’ pure model would be for a zero tax on normal profits, and for a high tax on super-profits, but by that same model super-profits would be only transient as new firms enter the market and whittle the profits away.

That’s not happening, Martin explains. In some industries, including mining, banks and supermarkets, super-profits are established. In theory there are not insurmountable barriers to new entrants, but as the ACCC notes in relation to supermarkets, there are barriers that are not always covered in the textbooks. Some form of a two-tier profits tax, therefore, is an idea worth taking seriously. In fact he explains that among public servants in the Treasury, in ministers’ offices, and even within the Business Council, the idea “has been taken seriously for some time”.

(As a footnote to this post, in the context of the fuss about some conspiracy about re-visiting negative gearing and capital gains tax, public servants are always looking at policy options, ready to brief governments should the need arise. More next week.)


When does fact-checking work, and when doesn’t it?

Crazies

Hard to convince


In a podcast – When fact-checks backfireAtlantic staff writer Jerusalem Demsas interviews Columbia University political scientist Yamil Velez, who has researched the conditions under which people change their minds on public issues.

Velez acknowledges what is called the “backfire effect”. That is the way some people harden their views when confronted with information that challenges their beliefs. But she believes, for the most part, people do update their beliefs when presented with new facts, provided that presentation is done properly.

Presentations that are aggressive or patronising in tone are less effective than more neutral presentations. Hardly surprising perhaps.

She distinguishes between beliefs and attitudes, although the distinction is not always sharp. I may believethat rates of violent crime are rising, that many thousands of people are coming to Australia in people-smugglers’ boats, or that inflation has risen since Labor was elected. In general, when I am presented with correct information from credible sources, I will modify those beliefs.

But it’s harder to change what she calls attitudes – a conviction that the Coalition is more competent in economic management than Labor, that renewable energy is more expensive than nuclear energy, that governments are intrinsically inefficient. (Perhaps what she’s getting at is that it’s easier to change a single belief, than to change a constellation of interdependent beliefs.) And of course there are some attitudes, based on purely normative frameworks, that are unlikely to be shifted by fact checking because they are incapable of testing: the existence of God, the morality of capital punishment.

She reminds us not to overlook the social costs of shifting beliefs. We often form communities around shared beliefs, even to the extent that sets of belief become a large part of our identity. Cults are an extreme example, but even people with reasonably independent belief systems can find changing beliefs will isolate them from their friendship groups.

Much of the discussion is about methodology, including some creative ways in which ChatGPT can be used in social research.