In a marginal note to Missing Link the other day, I expressed the view that Jason Soon and Helen Dale’s advocacy for the LDP’s Negative Income Tax + abolition of minimum wage policy was “persuasive”. And so it was at first glance. Despite my frequently scathing remarks about extreme libertarians who think taxation is theft, the state is evil and property rights (however ill-gotten) are sacrosanct, my own instincts are moderately libertarian or classical liberal at the very least.
Alas, as with most tax policies, the devil with the LDP’s proposals is hidden in the detail. I examined them fairly closely today and here’s what I discovered:
- The LDP’s $9000 minimum income/NIT represents a reduction in current levels of unemployed Newstart Allowance of between $2400 (22%) and $5000 (36%) depending on whether the recipient is currently eligible for rent allowance (as most other than those still partly supported by parents are). In either case $9000 is significantly less than a subsistence income in just about any part of Australia, and much less in the larger capital cities where rents are high. LDP apologists blithely suggest that these mendicant unemployed could rely on charity to make up the shortfall.
- For those in partial or full employment earning up to $30,000, the LDP’s policy provides substantial effective tax cuts (albeit on a sliding diminishing scale). However, the Party’s policies also involve abolition of any minimum wage. Since people earning less than $30,000 are almost by definition low paid and mostly lacking in bargaining power in the employment market, they are highly vulnerable to wage cuts in a completely deregulated market, which would certainly occur as soon as the minimum wage was abolished. Thus the LDP’s tax cuts for this group will mostly be more than offset by wage cuts. Its effect (no doubt deliberate) would be to create a large class of US-style working poor whose earnings are at or below subsistence levels.
- For working families with incomes above $30,000, the picture is slightly more mixed. Between $30,001 and $75,000 the LDP’s 30% flat tax rate amounts to an effective cut in total tax for an individual of $3600, however that’s eroded by the fact that all current tax deductions are to be abolished. For a couple where both spouses are working, the benefits may be slightly larger, though again eroded by removal of all current tax deductions. For most families (those eligible only for the current basic rate of Family Tax Benefit Part A) the LDP’s effective tax cut is in the “sandwich plus a milkshake per day” range because the loss of the Family Tax Benefit Part A is almost exactly counterbalanced by the LDP’s policy of increasing the $30,000 tax-free allowance by $6000 for each child. However, poorer families eligible for more than the basic rate of FTB Part A, and even more so for those eligible for FTB Part B and/or childcare allowance (neither of which is available under the LDP’s proposals) may well actually be slightly worse off under the LDP’s policies than at present.
- For single individuals earning between $30,001 and $75,000, the LDP’s tax policies are also worth $3600 per year, but again reduced by removal of all current tax deductions. Again it’s “sandwich plus a milkshake per day” territory.
- At an annual individual income of $75,001 or more (i.e approximately the top 10% of income earners), however, the LDP’s tax cut would be worth a considerably more worthwhile $7,600, though again somewhat reduced by abolition of current tax deductions and by a slightly less generous treatment of superannuation.
- At an annual individual income of $100,000 or more (i.e approximately the top 5% of income earners), the LDP’s tax cut would be worth $11,200, though again somewhat reduced by abolition of current tax deductions and by a slightly less generous treatment of superannuation. However, for families in this income range the picture is even more attractive because they still get the LDP’s $6000 increase in tax-free threshold per child (because it wouldn’t be means-tested, unlike the current FTB Part A).
- At an annual individual income of $150,000 or more (i.e approximately the top 2% of income earners), the LDP’s tax cut would be worth $16,200, though again somewhat reduced by abolition of current tax deductions and by a slightly less generous treatment of superannuation. Again as with the $100,000 bracket, for families in this income range the picture is even more attractive because they also still get the LDP’s $6000 increase in (non means-tested) tax-free threshold per child.
The bottom line? Only the top 10% of income earners would benefit substantially from the LDP’s policies. Middle income earners would get little or nothing, and the unemployed and low income earners would be substantially poorer and in many cases unable to support themselves without charity.
All this might be justifiable if Australia had a high unemployment rate and if there was a reasonable expectation that forcing down real wages for the poor through abolishing minimum wages would lead to a substantial increase in total employment (albeit at sub-subsistence levels). However, we actually have historically low levels of unemployment. Moreover, the current rigorous work test for Newstart Allowance means that the implicit assumption in the LDP’s policies, that there are substantial numbers of dole bludgers who could be forced back into the workforce by effectively slashing dole payments by between 22 and 36%, is clearly nonsense. It’s conceivable that abolishing the minimum wage might create some additional low paid jobs, in cleaning, nannying and waitering in restaurants for the top 10% of income earners who will be further enriched by the LDP’s policies, but it seems quite unlikely that enough new jobs will be created in that way to justify the associated drastic increase in inequality, insecurity and loss of basic dignity. Certainly it won’t force down real wages enough for Australia to compete with China and India as a base for cheap, dirty, badly regulated manufacturing industries or telephone call centres, even if we actually aspired to such a future. Once you examine the LDP’s policies in detail, Jason and Helen’s “let them surf” propaganda line is revealed as a fantasy akin to Marie Antoinette’s apocryphal “let them eat cake”.
Why would anyone think such policies would be a good idea? There are three obvious possibilities:
- Self-centred, short-sighted greed (a sin of which I wouldn’t accuse either Jason or Helen, I might add);
- The conviction that success in a market capitalist system equates closely with merit and hard work, and that failure is equally deserved in some moral sense;
- Even if that isn’t true, that the market capitalist system provides human needs for goods and services more efficiently and abundantly than any other economic system so far tried, and is dependent for its survival or cotinued success on the sort of grossly unequal distribution of wealth that the LDP’s policies advocate (the “can’t make an omelette without breaking a few eggs” approach).
Let’s examine each of those possibilities in turn. The 90% of Australians who won’t benefit from the LDP’s policies are unlikely to be impressed by the first explanation, nor should they be. As for the second, even the libertarians’ hero Hayek conceded that any connection between merit and wealth/success in the capitalist system was a rather loose one, certainly not close enough to serve as a justification for anyone with even a passing concern for values of fairness. Wealth and success quite often flow from sheer dumb luck (being in the right place at the right time, winning the lottery) or the equally dumb luck of financial or genetic inheritance. Mind you it seems that, while many people think the latter sort of luck is unfair in the abstract, very few resent at least genetic dumb luck once it’s reduced to concrete situations. Even socialists mostly don’t think it’s unfair that ugly people can’t be fashion models, stupid ones neurosurgeons or slow runners sprint champions.((Note that I agree with Sinclair Davidson that there’s at least enough correlation between merit, hard work and capitalist success that both they and successful risk-taking need to be tangibly rewarded. ~ KP))
Hayek rightly conceded that the merit principle couldn’t justify the sort of seriously unequal distribution of wealth it actually creates in the absence of competition and other regulation and state-engineered income redistribution. Consequently, Hayek was prepared to countenance some redistributive taxation and a welfare safety net, as Don Arthur has pointed out in a series of recent posts. Nevertheless, Hayek envisaged only a very limited degree of restribution or safety net. He called in aid the third justification above to reach the conclusion that redistributive taxation and welfare policies needed to be severely limited: the sort of entrepreneurial spirit that he and others like Schumpeter saw as the primary engine of capitalism would seize up if subjected to anything resembling socialist or even strong social democratic redistributive policies. The omelette would unscramble itself. Why would entrepreneurs bother to take big risks unless they had sufficient freedom to innovate and a reasonable expectation of big rewards for risk?
It sounds fairly plausible; after all market capitalism is the best economic system human beings have so far discovered, and the “creative destruction” of entrepreneurial innovation is a primary engine of its extraordinary success. But what do the facts tell us?
First, modern Denmark and Finland have consistently shown up in The Economist newspaper’s surveys as among the very best countries to do business, despite total tax takes much higher per head than Australia. They rank first and second respectively in the most recent survey. Other Scandinavian nations also do quite well. All have total tax takes around 50% where Australia’s is around 32% They also rank among the most prosperous nations in the world per head on a PPP basis, though Denmark and Finland are slightly below Australia on the most recent measure (Norway OTO is higher). At the very least we can say that somewhat higher levels of redistributive taxation than Australia (we’re one of the lowest taxing western countries in the world) are equally consistent with capitalist success and do not seem of themselves to stifle innovation or the entrepreneurial spirit.((I don’t in fact suggest that Australia could or should adopt Scandinavian levels of taxation. For a start we lack quite a few of the attributes that I suspect make it sustainable for them: compact size; existing highly developed infrastructure; proximity to the huge wealthy markets of the rest of Europe and North America. However, we don’t need those sorts of tax levels to fund a better targetted social safety net or better health, education and material public infrastructure. Possibly we don’t even need higher levels at all if we spend the current large surpluses wisely and reduce some “middle class welfare” measures. ~ KP))
Cooper also says that entrepreneurs see failure as confirming their inner fears but following failure they do not give up; they just get started again to try and prove that they can get it right a second time. Cooper also observes that being an entrepreneur has negative aspects to it. They tend to be unable to have and miss out on close relationships and the family life that others have. Their focus is only on the business to an obsessional degree, which can be likened to a drug. Only a few entrepreneurs actually set out to build big businesses and to attain wealth and, interestingly, money is not a prime motivator.
Cooper has classified entrepreneurs into two categories; those who are functional and those who are real. He suggests that functional types are not genuine entrepreneurs. They tend to have one success and subsequently live off that success and need to show to people that they have been successful. They like to be seen with their money as they have little drive to establish another success. This varies significantly from the real entrepreneur. They keep coming up with new ideas to prove to themselves and to their peers that they are capable to doing so. Their main driver is a fear of failure and not for tangible wealth benefits. A real entrepreneur never stops.
Clearly, entrepreneurs need a flexible, supportive, innovation-friendly business environment, but that need not include the lowest conceivable taxation regime. Although few if any Australian voters bothered to examine the LDP’s policies in 2007, indeed hardly anyone even knew the LDP existed, ignoring the LDP was certainly the right decision.
Ironically, examining all these data critically does give us useful information about an optimal public policy mix. It tells us that, at least in theory, the sort of “progressive fusionism” that Don Arthur and Andrew Leigh have been advocating in the blogosphere recently could actually work well. The egalitarian impulses of moderate social democrats could be satisfied by slightly higher (or better targetted) levels of redistributive taxation than Australia currently enjoys, providing a fair social safety net with “equal dignity/respect”; while entrepreneurial innovation could be nurtured by more flexible regulatory regimes with lower compliance burdens.
Even a Negative Income Tax and abolition of minimum wage could work provided that the NIT base level doesn’t involve slashing the incomes of the poorest Australians, and if it was introduced at a time other than one of historically (over)full employment. Wrongful dismissal laws could also be abolished completely, allowing businesses to respond to competitive pressures more quickly and flexibly, as long as the state provides an adequate safety net for income maintenance, retraining and a limited mortgage repayment holiday for displaced workers. Broader deregulation of the labour market might even be feasible and saleable, without a Howard-style AWA “no disadvantage” red tape nightmare, as long as true rights of freedom of association are safeguarded, including laws prohibiting any form of discrimination against workers who choose to bargain collectively. Howard’s policies had much more to do with his career-long obsession with smashing unionism than with rational market-oriented reform.
However, none of this will ever occur unless libertarians get a lot smarter than they currently show any sign of being capable. They need to discover that success in a market capitalist system is not the same thing as merit, that the poor are not inherently undeserving, and that entrepreneurial innovation can be nurtured without screwing workers or awarding large tax cuts to the rich in an already low-taxing country. Conversely, “progressives” will only ever sign up to this sort of policy agenda if they genuinely accept that market capitalism is the best and most efficient system we’re likely to find in the foreseeable future, that profit isn’t a dirty word and that anything closely resembling equal outcomes is neither possible nor desirable nor does equal dignity require it.((A proposition perhaps best illustrated by Ronald Dworkin’s rather bizarre “luck egalitarian” hypothetical life lotteries. ~ KP))
It would be unwise to hold your breath waiting for a blinding flash of realisation from either group. Political “progressive fusionism” is probably at least as distant as its nuclear energy namesake.