Economics
A discussion on economic policy
A journalist and a politician engage in a civilized discussion about short-term, medium-term, and long-term economic policy.
“Much better than 5 minutes of gotcha questions that you usually get” is one of the many comments on Alan Kohler’s podcast Energy crisis, the budget, and addressing AI – a 36-minute discussion with Treasurer Jim Chalmers, and the first of a series on the ABC’s That’s Business program. Kohler’s questioning is challenging but not hostile, and while Chalmers’ responses are politically guarded, they are frank and clear.
The session covers three areas of economic policy – the government’s handling of the immediate supply problems resulting from the Iran war, the coming Commonwealth budget (due on May 12), and longer-term economic structural policy to do with our energy transition, productivity, and tax reform. On the first two, at this stage, our only certainty is uncertainty about how the war will develop. (Opposition parties and the Murdoch press present the rapidly-changing development of the war as an example of government indecisiveness, as they are doing with the Prime Minister’s address to the nation.)
It’s a contribution to public understanding which, if spread to a wider audience, would dispel some of the naïve ideas fed by populist politicians and circulating in the media.
Those who have been following economic issues won’t be surprised by Chalmers’ explanations on energy, productivity, fiscal policy and tax reform, but they will find some hitherto little-covered discussion on the economic consequences of AI, and possible policy responses (from about 27 minutes to the end of the session).
Hovering over all three economic issues is the unhelpful idea that there is an inevitable tension between economic policy and political imperatives. The usual assumption is that in order to achieve economic reform the government may have to spend down some of its political capital. Although Kohler hints at this trade-off, Chalmers seems to dismiss it, hinting on his part that the turmoil of our time may have given the government the licence to pursue strong economic reform.
Chalmers mentions, almost in passing, that there has been some pickup in labour productivity. Indeed a pickup is revealed in the Productivity Commission’s quarterly monitoring of productivity. Economy-wide labour productivity was up by 1.0 percent over 2025. In the market sector that growth was 1.5 percent, while it fell 0.7 percent in the non-market sector. For many reasons to do with the unavoidable labour-intensity of government-provided services, difficulties in valuing outputs, and the long-tail of Covid disruptions, there is no clear way to interpret the latter figure.
Climate change and information integrity
No, they don’t cause your ewes to become infertile
A Senate committee has reported on the way misinformation and deliberate disinformation are distorting the debate about climate change, and are leading to polarization. Senators’ views do not follow strong party lines.
The media is awash with misinformation and disinformation about climate change and renewable energy. Scientists have still not established that the planet is warming, and even if it is warming it has nothing to do with human activity. It’s all an anti-growth conspiracy by scientists and the woke left. Wind farms cause brain damage. Offshore wind farms are slaughtering whales. Solar farms take so much land that they are driving us to starvation.
In an attempt to counter this rubbish, the Select Committee on Information Integrity on Climate Change and Energy has released its report: The Integrity Gap: Restoring Trust in the Climate and Energy Debate. It has 21 recommendations generally aimed at countering misinformation and disinformation about climate change and renewable energy. Some recommendations are about providing support for fact-checking bodies; some are about government bodies undertaking specific research on renewable energy issues in areas where the public have been deliberately misled.
Gareth Hutchens summarizes the report in a post Australia has to fight back against misinformation about climate change, drawing attention to the report’s findings about the extraordinary spread of misinformation and disinformation, “which is polarising public discourse and eroding trust in science and knowledge institutions”.
It is informative to glance at the “Additional comments” from the Greens, Labor and Senators David Pocock and Andrew McLachlan, who suggest that the report may be too mild in its findings and recommendations, and to contrast them with the “Dissenting reports” from Senators Matt Canavan. Malcolm Roberts and Ralph Babet.
The general flavour of Canavan’s report is captured in his first two sentences, before he launches into an attack on scientists:
This inquiry was conducted in a way which proved that it was not about a genuine effort to improve the accuracy of public dialogue but, instead, it was an attempt to bully and cajole people into silence. I have never seen a greater abuse of the Senate’s purpose.
Roberts and Abet are blunter: there is no strong basis for claiming that climate change is happening.
It should be noted that Andrew McLachlan is a Liberal Party Senator. In fact his family has a long association with Liberal politics in South Australia. As a Liberal Senator he is critical of the government, but not from the direction the Coalition “shadow cabinet” is attacking the government. He and David Pocock defend the report’s findings on misinformation and disinformation, and support its recommendations, but they state:
However, we do not believe the committee's report goes far enough. At a moment when democratic institutions are under significant and increasing pressure, incremental reform is not an adequate response. The evidence presented to the committee does not point to a marginal problem requiring modest adjustment. It points to a systemic failure, one that is already distorting public debate, undermining trust in institutions, and delaying urgent policy action.
Capital gains tax
We need to reform capital gains taxes but reducing the 50 percent discount is an unfair and distortionary way to do it.
It is not only One Nation who offer simple solutions to complex problems. So too do many on the “left”, when they seek reform about the way capital gains are taxed.
There is no doubt that reform is needed. There is something very wrong with our system when income from property speculation is taxed more lightly than income from work.
One common demand from welfare agencies and from those who claim to hold “progressive” or “left” values, is that the present 50 percent discount for capital gains should be reduced, perhaps to 25 or 15 percent.
To understand why this is problematic, and can be unjust, imagine that the discount is abolished altogether, and that tax is paid on the full gain in the investment when it is sold. If that investment had simply held its real value, keeping up with inflation, the investor would be charged tax on the nominal inflationary gain.
The system of capital gains taxation introduced by the Hawke-Keating government recognized this problem, and established a capital gains tax system that had no discount, but allowed the purchase price of assets to be adjusted for inflation. In the example above, there would be no capital gains tax payable. By contrast the property speculator who enjoyed a real gain over two or three years would pay tax on the whole real gain.
As has often been explained in these roundups, in a move deliberately designed to favour the finance sector, in 1999 the Howard government abolished the Keating reforms. The allowance for inflation was abolished, but as a compensation there was a 50 percent discount on the nominal gain.
This change is explained in a short paper published in Dissent in 2004 – Taxes and the housing bubble – how we ruined a rational tax system and in a more detailed paper prepared for Taxwatch in 2009 – The case for restoring capital gains tax neutrality.
Defenders of the Howard changes said that the 50 percent discount roughly compensated for inflation for the average investor, and made the calculations easier. That is correct, but with the qualification “roughly” and noting that it applied to the “average” investor. For many taxpayers, particularly those who invest in high-growth assets with fast turnover, it meant that they paid less tax than under the Keating system. But for some taxpayers who invested in low-growth assets, it meant they paid more tax.
One may argue, as the bankers did in 1999, that people should be encouraged to invest in high-growth assets, but that argument falls down when the “growth” is only an artefact resulting from high housing price inflation. That wasn’t of concern to bankers, their interest being in the cut they get from high turnover of assets.
As it has become more widely evident that the Howard changes have contributed to housing unaffordability, reformers have been calling for the discount to be reduced. But that is a flawed argument, because the closer the discount gets to zero, the more it results in tax being applied to 100 percent of the inflationary component, and the more it penalizes comparatively long-held, low-growth assets. “Patient investments” in other words.
To help people compare the previous (Keating) system, the present (Howard) system, and variations of proposed discounts, I have attached an Excel spreadsheet, into which users can plug their own assumptions about inflation and nominal capital gains. Under most assumptions, particularly for assets with high-growth in nominal prices (think established houses in Perth or Adelaide), the Howard system is more generous to taxpayers than the Keating system. Reducing the discount to 15 percent or so would collect more tax from property speculators – in many cases more than under the Keating system.
But in many situations the reverse holds. Below is a snapshot of one such simulation – an asset held for 30 years, over which time its nominal value trebles, in a 3.5 percent inflationary environment. For such an investment taxpayers pay more under the Howard system than they would have under the Keating system, and even more if the discount is reduced.
My work, based on a simple but realistic model, argues for a return to the Keating system, because it taxes only real capital gains, and achieves neutrality between labour and capital income. Reducing the discount only worsens the distortion that contributes to the taxation of nominal gains.
Using the same mathematics, a group of researchers at e61, in their article Everyone is different: The problem with a flat capital gains tax discount, have shown the results when these taxation systems are tested empirically. They have looked at 1.5 million property “investors”, concluding, unsurprisingly, that “high-return investors are under-taxed, while low-return or loss-making investors are over-taxed. Changing the discount rate simply shifts who wins and who loses, it doesn’t fix the underlying dispersion in circumstances”.
Their empirical result is really about the heterogeneity of investors – a heterogeneity assumed away in the Howard changes. Rather than making a broader claim about the overall generosity of one system versus another, the e61researchers simply point out the different tax treatments applying to different types of investors.
Note that property “investors” in the e61 sample are probably among those who hold investments for only a comparatively short time. Those who invest in their own enterprises, such as farmers and other small businesspeople, would hold their assets for longer, and enjoy lower returns than the property speculators in e61’s sample. Those who find they have to sell shares when the market is down will still be taxed on nominal gains. The Howard changes were particularly tough on long-term investors, but besotted by hype about “financial dynamism”, they didn’t think of that at the time.
Changing the discount for capital gains tax looks like a simple solution, but it can actually make the system worse. Those who criticize economically naïve politicians such as Pauline Hanson and Angus Taylor for offering simple solutions for complex problems have a point, but they should not fall into the same trap themselves.
The end of card surcharges
Most of us won’t miss them, but some tax-evading businesses might.
Although its heavy hand on the interest rate tiller makes a mess of monetary policy, the Reserve Bank occasionally does some useful and practical stuff.
On Monday it published its Review of Merchant Card Payment Costs and Surcharging, which will see the end of merchant surcharges on debit, prepaid and credit cards, to take effect from October this year.
In a post RBA to remove surcharges on debit, credit cards, card networks including eftpos, Mastercard and Visa ABC business reporter Adelaide Miller describes the history of these surcharges, which date back to a time when cash was dominant. Most business and consumer groups welcome their abolition, but it is unknown whether those businesses who still use surcharges will set the pre-surcharge or post-surcharge price when the changes come into effect. As Vibhu Arya of the University of Technology Sydney writes in The Conversation, Banning card surcharges will make paying simpler – but not necessarily cheaper.
It is clear from the Reserve Bank’s inquiry that many small businesses have been paying the banks far too much to process card payments. Larger companies, with better analytical capacity and stronger bargaining power have been able to negotiate lower fees in ways that small businesses haven’t. It is also apparent that many small businesses underestimate the cost of handling cash. These include the costs of reconciling cash registers, physically depositing cash at banks, and security generally. If they added up these costs they would surely be adding a surcharge for cash payments.
Not mentioned in the Bank’s paper is the use of cash as a means of tax evasion. Surcharges have given consumers an incentive to use cash which can be kept off the company’s books.