In the AFR today, John Kehoe writes about the power of lobbyists and crony capitalists who are killing faith in markets. He refers particularly to the US where ‘crony capitalism’ is sapping vitality out of the US economy. He adds that

‘If you analyse the very richest Australians, beyond lucky inheritance, many have built their enormous wealth in industries heavily influenced by government regulation. Media, gaming and real estate development dominate the c.v.s of the upper echelons of the BRW rich list.’

See link to John Kehoe’s article: http://www.afr.com/opinion/regulation-crony-capitalists-are-killing-faith-in-the-markets-20160104-glyr2q

I am also reposting an article I wrote in May this year for our policy series. It was entitled ‘Vested interests and the subversion of the public interest‘.

Over the past forty years, leading developed economies, most notably the United States have experienced an upsurge in inequality of income and wealth. Most of the benefits of economic growth have accrued to those in the top 1 per cent of the income distribution. Meanwhile, living standards for those in the bottom half of the income distribution have stagnated or even declined.

Piketty’s work, published in reports and academic journals, has documented these trends. His book, Capital, not only brought the issues to the attention of a broader public, but presented an analysis suggesting that worse is to come. Piketty argues that we are in the process of returning to a ‘patrimonial’ society, in which income from inherited wealth is the predominant source of inequality.

Piketty’s work has previously focused mainly on the United States, but the research presented in Capital points to similar trends in the United Kingdom. Although inequality has grown much less in France, the third country on which he has detailed data, Piketty argues that the same trend will emerge unless there is a substantial change in political conditions.

To the extent that there is a general trend of the kind described by Piketty, we would expect it to emerge first in the English speaking world, where the shift to market liberalism and financialised capitalism was earlier and more complete. And, indeed, a sharp increase in inequality may be observed in other English speaking countries including Canada and New Zealand.

Australia, on the other hand, looks like a counterexample. On most measures of inequality Australia looks more like France than like the rest of the English speaking world. Although Australia’s have experienced an increase in inequality on most measures, the general picture is one of broadly distributed improvements in living standards, as illustrated by Peter Whiteford’s contribution to a recent seminar on Piketty published by the Australian Economic Review (AER). As Whiteford notes:

Income growth was highest for the richest 20 per cent of the population, at close to 60 per cent in real terms, but even for the poorest 20 per cent, real incomes grew by more than 40 per cent between 1996 and 2007.

Other measures such as the Gini coefficient and the ratio of median to mean income tell a similar story. Inequality has increased over the period since the 1980s, but only modestly and with frequent reversals.

Turning to the top 1 per cent of the income distribution, evidence from tax data, presented by Roger Wilkins in the AER volume suggests that the share of income accruing to this group has risen, but not to the same extent as in other English speaking countries This is consistent with the observations of Piketty himself, who notes:‪

the upper centile’s [top 1 per cent] share is nearly 20 percent in the United States, compared with 14–15 percent in Britain and Canada and barely 9–10 percent in Australia.

Much of the credit for this comparatively benign outcome must go to the Labor government that held office from 1983 to 1997 and implemented a relatively progressive version of the market liberal reform agenda. Labor managed a reform of the Australian tax and welfare system that shielded low income Australians from the worst effects of the market liberal revolution that swept the English speaking world in the 1970s and 1980s.

In most countries, policies of financial deregulation, privatisation and microeconomic reform were accompanied by regressive changes to the tax and welfare systems. By contrast, Labor introduced broadly progressive tax reforms including a capital gains tax and a crackdown on tax avoidance.

Rather than treating welfare payments and tax policy as separate, the restructuring sought to integrate the two, taking account of the combined impact of means tests and tax policies to optimise the balance between efficiency and redistribution.

These changes weren’t sufficient to prevent growing inequality of income and wealth, and some of them were eroded over time. Nevertheless, in broad terms, a redistributive tax–welfare system was maintained under the succeeding conservative government, even as it was being eroded in other English-speaking countries.

Labor returned to office in 2007, just in time to make its next big contribution: the fiscal stimulus that allowed Australia to avoid the recession generated by the Global Financial Crisis in nearly every other country. In combination with previous successful pieces of macroeconomic management, such as the Reserve Bank’s handling of the Asian Financial Crisis in the 1990s, the result has been an economic expansion lasting nearly 25 years, unparalleled in Australia’s economic history, and scarcely equalled anywhere in the world. The strength of the labour market has encouraged a broad spread of prosperity not seen elsewhere.

Together these factors explain why Australia has avoided the drastic increases in inequality seen in other English speaking countries. On the other hand, although Australia’s a long way from the plutocracy that already characterises the United States, there is no room for complacency.

Australia’s relatively equal distribution of income and wealth depends on a history of strong employment growth and a redistributive tax–welfare system. Neither can be taken for granted. The end of the mining boom has inevitably resulted in slower growth which bears hardest on those at the bottom of the income distribution. And, as elsewhere, the political pressure to take burdens from the rich and shift them to the poor is never-ending.

Moreover, Australia has not proved itself immune to the political dynamic, noted by Piketty, by which increasing personal wealth allows the wealthy to dominate politics, then enact policies that protect their own wealth. The archetypal example is Silvio Berlusconi in Italy but the situation in the United States is arguably worse. The majority of members of the US Congress are millionaires, with not much difference between Democrats and Republicans.

Given the pattern of highly unequal incomes, and social immobility observed in the US today, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood than for the current recipients of high incomes and owners of large fortunes. Inherited advantages in the patrimonial society predicted by Piketty will include direct transfers of wealth as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.

The move towards a patrimonial society already happening in the US is evident at the very top of the Australian income distribution. As in the US, the claim that the rich are mostly self-made is already dubious, and will soon be clearly false. Of the top 10 people on the Business Review Weekly (BRW) rich list, four inherited their wealth, including the top three. Two more are in their 80s, part of the talented generation of Jewish refugees who came to Australia and prospered in the years after World War II. When these two pass on, the rich list will be dominated by heirs, not founders.

The same point is even clearer with the BRW list of rich families. As recently as 20 years ago, all but one of these clans were still headed by the entrepreneurs who had made the family fortune in the first place. Now, all but one of the families are rich by inheritance.

So, Australians have no room for complacency. In an economy dominated by capital, and in the absence of estate taxation, there is little to stop the current drift towards a more unequal society from continuing and even accelerating.

On the other hand, Australia’s relative success in using the tax and welfare systems to spread the benefits of economic growth provides grounds for optimism elsewhere in the world. Australia’s experience belies the claim that any attempt to offset the growth of inequality must cripple economic growth. On the contrary, the evidence suggests that there is plenty of scope for progressive changes to tax policy that would partly or wholly offset the trends towards greater inequality documented by Piketty.

This article was first published on John Quiggin’s blog on 2 January 2016.

Let’s put aside the irony of a Liberal government, the preacher of the ills of ‘big government’, spending $45 million to reach its expensive Royal Commission tentacles into the operation of trade unions. Let’s put aside the obvious political nature of such a witch-hunt, designed to reduce the power of unions to negotiate on behalf of workers, a seek and destroy mission with the pincer-movement aim of a) benefiting employers at the big end of town, b) reducing unions’ capacity to contribute funds to Labor election campaigns and c) to discredit Labor MPs with union backgrounds. For now, putting these contradictions and political trickery aside, which are so wholly obvious to us but strangely not apparently obvious nor interesting to commentators in the mainstream media, let’s instead look at the Trade Union Royal Commission’s findings in relation to the lives of those people the commission paradoxically claim to represent the interests of; workers.

Using my own situation as a worker and union member as a representative case study, I note with alarm that the Prime Minister, Malcolm Turnbull, has proclaimed the findings of the Trade Union Royal Commission (TURC) as justification to fight an election over industrial relations. Clearly Turnbull thinks that there is a large enough problem in the trade union movement, a movement just as separate to the operations of government as a private company, that he’s pushing this problem to the top of his government’s agenda. The handful of bogey-man union officials who have been cited in the TURC findings as having acted not in the best interest of workers, are now the government’s enemy number one. As a union member, I don’t like to hear about my union funds being used to fund union officials’ extravagant lifestyles, nor do I appreciate reports of criminal activity, which appear to be almost entirely confined to rogue elements in construction unions. But, as a worker and a member of a young family, a woman, a parent to a young child who has childcare and then her whole education in front of her followed by a job search, a mortgage holder, a South Australian, a buyer of groceries, a daughter of aging parents, a wife to a husband who works in the manufacturing industry and a member of a society experiencing the scary and increasingly apparent effects of climate change, I must admit, the conduct of a few dodgy union officials in industries I don’t work in, whose conduct hasn’t been proven to adversely impact the conditions of workers they represent, is about as high on my list of ‘what is the government doing about this?’ priorities as the fate of Johnny Depp’s girlfriend’s court case over the illegal entry of small dogs.

And even if I did care deeply about the conduct of some dodgy union officials in the construction industry (which I don’t), I care a thousand times more deeply about those union officials having the freedom to do their job to help safeguard the safety of workers on construction sites. I’m pleased there are union officials stopping work when they see risks to workers, because it’s blatantly clear that if the union officials didn’t care, no one would. This is because it’s obvious that many construction employers care far more about the speed of their profit making than they do the safety and wellbeing of their employees. So if it wasn’t for the unions stepping in to insist on safety, far more accidents and deaths would occur. I would have thought a responsible government would be more concerned about safety on construction sites than the isolated actions of a few bad apple unionists. Especially after that very same government were so upset about the deaths of four insulation installers that they held a Royal Commission into a government program that funded the private companies whose unsafe work practices led to the tragic deaths of workers. Another Royal Commission aimed at hurting the Labor Party; do you see a pattern forming here?

I notice a day after the release of the TURC findings, the ABC News Radio poll asking ‘In your experience, are unions riddled with ‘deep-seated’ and ‘widespread’ misconduct?’, after 3,466 votes have been cast, found 74% said ‘no’.

This result suggests I’m not alone in my perception of the TURC findings as more of a political statement than the experience of union members.

As a worker, it would be wholly irrational for me to congratulate, or indeed vote for a government vowing to smash the power of unions. As a worker in an economy with stagnant wage growth, it would be counterproductive for me to encourage my government to give employers, who already hold an elephant-on-a-seesaw-unequal position of power in the Goliath-capital battle with David-the-workers, any more power to define my working conditions. Because let’s face it, not every employer wants to pay the minimum wage, without penalty rates, minimum entitlements and no chance of a pay rise. But enough employers do (take a look at 7-eleven) so that the entire wage structure of the country would be pulled down without unions pushing back against the floodgates. When former PM Tony Abbott said WorkChoices was dead-buried-and-cremated, workers always knew that it would only take a second-term Liberal government 5 minutes to resurrect the WorkChoices zombie from the grave; a zombie who’s bite is fatal to workers’ rights.

Therefore, if Turnbull wants to play this game and if he is really serious that dodgy union officials are the biggest threat facing our country, and his highest agenda item in an election, I echo Bill Shorten’s words on hearing Turnbull’s plans: BRING IT ON. And so say all of us.

Victoria Rollison is a political blogger, working in marketing and communications.

The Roosevelt Institute’s Chief Economist Joseph Stiglitz a Nobel Economics prize winner in his own right, has come up with a block buster report on the social and economic problems facing American society. This115 page report which was published as a book in November 2015 was put together with valuable assistance and input from a broad cross-section of people under the stewardship of Stiglitz. Notable economists such as Brad De Long and Robert Reich were among the consulting researchers.

Stiglitz’s team of researchers have revealed that the USA is in big trouble and at the heart of it are misplaced rules, laws and economic policies, based on faulty economic theory. If you combine this with an over-arching, pervasive, narrow minded neo-liberal ideology, then you have a recipe for economic and social disaster.

American neo-liberal ideology and orthodox economic thinking have produced income and wealth inequality of immense historical proportions. Lowly paid workers are in the majority whilst the greater percentage of income and wealth is transferred to an ever decreasing smaller number of people.

“Over the last 35 years, America’s policy choices have been grounded in false assumptions, and the result is a weakened economy in which most Americans struggle to achieve or maintain a middle-class lifestyle while a small percentage enjoy an increasingly large share of the nation’s wealth. Though these lived experiences and personal challenges are important, they are only the tip of the iceberg that is the crisis of slow income growth and rising inequality. To fully understand the scope of the problem, we must also examine the array of laws and policies that lie beneath the surface—the rules that determine the balance of power between public and private, employers and workers, innovation and shared growth, and all the other interests that make up the modern economy.” Dominant economic frameworks over the past 35 years—like “trickle-down” economics, and the idea that markets work perfectly on their own—paved the way for an onslaught of policies that decimated America’s middle class. This paper presents an evidence-backed alternative framework:

• Markets are shaped by laws, regulations, and institutions. Rules matter.
• The rules determine how fast the economy grows, and who shares in the benefits of that prosperity.
• Concentrated wealth can hurt economic performance. Under the right rules, shared prosperity and strong economic performance reinforce each other. There is no trade-off.
• A tentative, piecemeal policy response to help the neediest will not suffice. We must rewrite the rules of the economy with a focus on restoring a balance of power between the competing interests that make up the modern economy” p.7

What should and can Americans do to rectify this appalling predicament? According to Stiglitz and his researchers they must:-

1. Ensure that the financial sector becomes responsive to consumer needs, by removing hidden financial charges and fees. Bring in rules that penalises risky investments.
2. Make full employment the goal.
3. Introduce legislation to protect vulnerable workers. Allow workers to organise and strengthen their right to collective bargaining.
4. Change the tax system to make it fairer, by removing corporate welfare tax expenditures and raising taxes on capital gains and dividends. Introduce a financial speculation tax to deter short-term trading and encourage long-term investment.
5. Ensure some reasonable level in the remuneration of chief executive officers with ordinary salary/ wage earnings.

The most dramatic recommended changes were to:-

• Overhaul American social security, by introducing a universal Medicare and affordable health care.
• Expand Social Security with a supplemental public investment program modelled on private Individual Retirement Accounts, and raise the payroll cap to increase revenue.
• Invest in young children through child benefits, early education, and universal pre-kindergarten.
• Increase access to higher education by reforming tuition financing, restoring protections to student loans, and adopting universal income-based repayment.
• Expand access to banking services through a postal savings bank. Create a public option for the supply of mortgages.

The lessons learnt from the USA are there as a warning to Australia. Australians should be very careful now about allowing the present government to focus on deficit reduction via fiscal cutbacks, instead of new job creation. Full employment for anyone who wants to work is the keystone for any just and healthy society and should be the number one priority for any government. In addition, workers should be on guard where they have no union coverage or their union protection is whittled away by new industrial legislation that prevents unions from operating effectively in workplaces. Reducing deficits and worker protections during economic slumps will only impoverish workers, the unemployed and the poor and should be resisted vigorously by all ordinary Australians.

The Anglo-American variety of neo-liberalism has been a dismal failure in the UK and the USA, where it has caused only hardship and poverty for the populace, Australia should take the right steps not to make the same mistakes.

[Wayne McMillan is a keen follower of current economic trends and policies. He has been studying Economics for over 30 years, he lives in Whalan NSW.]

The article below by Professor Ray Markey was posted before the release of the recent Productivity Commission Report on penalty rates.

Following the release of the report, Professor Markey commented as follows:

‘The Productivity Commission report presents no new evidence for increased employment from reduced penalty rates. Mainly there are theoretical economic arguments and modelling based on it. Time use survey data is very selectively cited and dated anyway since the last survey was in 2006. It clearly shows that people prefer weekends for being with family and friends and does not refer to studies showing it is difficult to make up during the week for this weekend time being lost due to work. The one new argument in the report is very interesting, namely that the onus of proof about the impact of reduced penalty rates on employment should be reversed i.e. employers shouldn’t have to prove this is the case to get changes – clearly an admission of a lack of evidence.

It is tiring to hear penalty rates linked with productivity as the minister responsible, Senator Cash, did on radio this morning. It has nothing to do with productivity and neither the Productivity Commission nor the main employer submissions made this claim. Productivity increases would require increased output relative to inputs (labour). Reducing penalty rates will increase employer income and potentially profits, but it is inconceivable how it affects productivity positively. If the argument that employment will increase as a result of reduced penalty rates is true, it may have a negative impact on productivity. Cheaper labour costs certainly provide incentives for employers not to engage in innovation to increase productivity and this is the trap for low wage economies such as New Zealand, where they struggle with lower productivity than Australia and lower wages. Reducing penalty rates, therefore, is a distraction from the Prime Minister’s focus on an innovation agenda.’

In the current review of modern awards before the Fair Work Commission, employers are challenging the level of penalty rates. At the same time, the Productivity Commission says excessive penalty rates for Sundays reduce hours worked, mean unemployment is higher than it needs to be, and reduce options for businesses and consumers. It wants Sunday penalty rates in some sectors to be set at the Saturday rate.

A penalty rate for Sunday work was first implemented in Australia for working “unsocial” hours in 1919. The 1947 ‘Weekend Penalty Rates Case’ expanded penalty rates to Saturdays, while Sundays were set at a rate of double time. Later decisions specified that workers would need to be compensated for the loss of opportunity for family life and social time resulting from weekend work.

More than 60 years on, employers argue the world has changed. It has, but many of the arguments employers make are not supported by the evidence.

Myth 1: Given extended trading hours, it’s no longer abnormal for people to work weekends

Most employees still do not work unsocial hours. According to the Australian Work and Life Index, 38 per cent of workers work unsocial hours; only 32.2 per cent of workers work weekends and 18.9 per cent of workers work evenings after 9pm regularly. These figures include the 13.1 per cent of workers who work both evenings and weekends regularly.

Myth 2: It’s only young single people that work weekends.

While being single with no children is more common than other family types among these workers, they are not a majority: there are also many couples both with and without children, and sole parents.

Women are also more likely than men to work weekends. HILDA data indicates that only 22 per cent of male and 21 per cent of female weekend workers were dependent students; in other words, 78 per cent of all weekend workers were not dependent and pay their own bills.

Myth 3: The disadvantages of working weekends are only bad for those who work very long hours.

Employers argue that the adverse effects associated with working weekends are only relevant to those who work very long hours, and that the days and times themselves are no longer relevant, either because people no longer engage in the activities which previous decisions attempted to protect, or because these activities can be made up on other days and at other times.

But those who work on weekends do so at the sacrifice of time with friends and family, time which cannot be simply made up through time spent at other times during the week. This is particularly acute on Sundays, which remain a time for spending time with family. In spite of claims to the contrary, the differentiation between Saturdays and Sundays remains relevant in modern Australian society.

In general, the recompense of penalty rates is the key reason for willingly working weekends; with far fewer doing so to meet their own flexibility needs. However, the experience of the Work Choices era, and the importance and power of employer expectation, does suggest that many employees would not, in the absence of penalty rates, be able to avoid weekend work due to fear of losing their jobs, and indeed employees being forced to work weekends for no extra pay seems the most likely consequence of removing penalty rates.

Myth 4: Those who work in industries that pay penalty rates are not low paid.

Many workers on penalty rates are among the low paid. According to the Australian Work and Life Index, 37.8 per cent of workers who work weekends only and receive penalty rates rely on these to meet household expenses. This increases to 48.8 per cent for those working both evenings and weekends, and 52.2 per cent for Sundays only.

Myth 5: Reducing or eliminating penalty rates would increase employment.

The empirical evidence for increased employment as a result of reducing penalty rates is non-existent. Employer arguments have been based essentially on economic theory, which is merely hypothesis in the absence of empirical confirmation. What may be relevant in terms of the impact of wages on employment is that none of the available empirical evidence suggests minimum wages have a significant effect on net employment, a point reiterated by the Productivity Commission.

While some studies do suggest a substitution effect, this would be a matter of balancing one set of employed workers against another — older workers versus youth. However, a number of studies suggest no effect at all, and some suggest a positive effect.

Given the evidence, it is difficult to see any benefits likely to accrue from the abolition or reduction of penalty rates for employees, employment levels or greater availability of services to the public.

Professor Ray Markey is Director of the Centre for Workforce Futures.
This article was originally published on The Conversation on 2 December 2015.

Every year, the International Tax Review nominates its ‘Global Tax 50’ — the people and organisations who are most influential in improving tax systems around the world. Two years ago, David Bradbury made the list, for being “a vocal and proactive voice on a variety of tax issues”.

One of Bradbury’s award-winning reforms was tax transparency — laws that required the tax office to report the tax paid by firms with total income above $100 million. The Liberals didn’t like the change, and voted against it at the time. After winning government, they set about trying to repeal it — first by warning of kidnap risk, and then by suggesting that it might embarrass some firms if the public knew how little tax they paid.

Farcically, the government said that it wouldn’t pass its own multinational tax package unless the parliament agreed to wind back secrecy. In effect, Scott Morrison was holding a gun to his own head, but the Greens fell for it. On the last day of parliament for 2015, the Greens Party agreed to amendments that kept two in three private companies out of the tax transparency net.

This week’s release of tax transparency data has shown the value of letting the sunlight in. The 1300 economic groups covered by the report had a combined taxable income of $170 billion, and contributed $40bn in tax towards funding Australia’s schools, hospitals and roads.

Worryingly however, the tax office report also reveals that one in four of these companies paid no tax despite earning over $100m in revenue. In the energy and resources sector, 57 per cent of multinational firms paid no tax, while in the banking and financial sector the figure was 45 per cent. The companies concerned will no doubt want to explain these figures further to their customers and the Australian community.

Tax transparency matters because without it, we have no way of knowing if big companies are paying their fair share. There are plenty that do, and their contribution deserves acknowledgment.

More importantly, though, it is clear some firms don’t. When companies are paying tax at a fraction of the standard rate, Australians should ask why. At a time when the government is talking about raising the GST to 15 per cent — a decision that would hit low-income Australians hardest — it is right that we should look closely at whether all taxpayers are making a fair contribution.

While Labor has supported the Government’s baby steps on multinational tax, we don’t believe they are enough. We are particularly concerned about the government’s unwillingness to address the practice of companies loading debt into Australia to artificially inflate their tax deductions.

Thanks to the ongoing corporate tax inquiry — particularly the work of Labor senators Sam Dastyari and Chris Ketter — we know that some big companies are transferring money into their Australian arms and dressing this up as a loan, even though it’s really just shifting money from one pocket to the other. In paying back these artificial loans, companies can send their profits overseas while pocketing a tax deduction at the same time.

That’s the problem Labor’s package zeros in on. By moving to a worldwide gearing ratio approach, companies would only be able to claim deductions against the average amount of debt they owe to banks around the world.

Labor’s plan is grounded in careful OECD work, and costed by the Parliamentary Budget Office. By closing loopholes, we recognise that Australia needs a tax system that rewards the productive, the innovative, the resilient, the clever and the competitive. Not a tax system that rewards those willing to push the envelope the furthest.

We need a plan to win investment from the world, yes. But this plan should work because big firms think it is worth buying into Australia — not because our government thinks they have to cut special deals that sell us out. A plan that leverages the ingenuity of the Australian workforce, the strength of Australia’s institutions and the quality of Australia’s infrastructure.

Our plan for winning investment from the world should not be premised on how big a tax break companies can get here, because that is not a competition we’re ever going to win. If we want to join the countries at the top of the global league table, we need to invest in growth, not engage in a race to the bottom with our tax loopholes.

In recent weeks the OECD has handed down the final set of deliverables for its Base Erosion and Profit Shifting Action Plan. This plan has been more than two years in the making and lays out a comprehensive 15-point agenda to close the loopholes that have opened up in the tax net due to changing technology and an increasingly global business environment.

The 15 items on the action plan tackle everything from the taxation of intangible goods to hybrid instrument rules and the creation of a multilateral tax instrument to allow more rapid co-ordination of rules between OECD countries in the future. Australia is making progress in some of these areas — for example, the effort to extend the GST to digital downloads, which was supported by both Labor and Liberal state and territory governments. But there is still a lot of work to do.

The Treasurer has the OECD’s blueprint, and Labor’s costed proposals. He must now choose between his regressive measures and our progressive proposals. Unlike a 15 per cent GST, closing multinational tax loopholes won’t impede growth, worsen inequality or make housing less affordable. There should be no more excuses and no more delays when billions of dollars in tax revenue are potentially at stake.

Andrew Leigh is the Shadow Assistant Treasurer. This article first a appeared in the Business Spectator on 17 December 2015.