Free markets better than climate faith

It's entirely appropriate that a few weeks ago the Pope should talk about climate change. Climate change has after all become a matter of faith, not evidence.  And given that so many faiths celebrate their religion with music, it's appropriate that Al Gore should go to Davos to announce that in June there will be a series of "Live Earth" concerts around the globe.  They will be timed to coincide with the United Nations climate change talks in Paris.  (Gore didn't say whether Clive Palmer would be at the concert in Sydney.)  Gore predicts the audience for the musical extravaganza could be 2 billion people.  That truly would make climate change one of the world's great faiths.  Only Christianity, with it's 2.2 billion adherents, is bigger.

Also in June the Vatican will release an encyclical on climate change.  It's likely it will follow the line of Pope Francis that climate change is mostly man-made.  It's less likely the encyclical will acknowledge there's been no statistically significant change in the earth's temperature for nearly two decades.  In December much of the media breathlessly reported that according to NASA 2014 was the hottest year ever.  Subsequently NASA scientists admitted that 2014 beat the previous hottest year of 2010 by two-hundredths of a degree — well within the margin of error.  We've now also found out that because of that margin of error the likelihood of last year being the hottest ever was actually only 38 per cent.

Catholic theologians spent the Middle Ages arguing about how many angels can dance on the head of a pin.  Eight hundred years later the Vatican is going to pronounce on whether an increase in the earth's temperature of two-hundredths of a degree is in practical terms any different from an increase of one-hundredth of a degree.

Pope Francis is wrong about climate change.  Sadly, he's also wrong about something far more serious than climate change, and that's economics.  When the Pope isn't talking about climate change he's tweeting about economics.  Last year he tweeted something spectacularly muddle-headed:  "Inequality is the root of social evil".

When it comes to climate change the left might succeed for a little while longer in arguing that black is white, but when it comes to economics not even the most unreconstructed former Marxist minister in the new Greek government can deny the evidence of how free-market capitalism has lifted millions of people out of poverty and starvation.  Between 1981 and 2004, 600 million people in China escaped poverty.  The story is the same the world over.  On nearly every measure, people's lives are getting better — not worse.  Two hundred years ago, about 10 per cent of the world's population could read — now 80 per cent can.  The incidence of child labour has declined by one-third over about the last decade.

The recent Oxfam report on global inequality, which of course received wall-to-wall coverage on the ABC, misses the point.  If you're living on $1.25 a day it's irrelevant that the richest 1 per cent of people in the world owned 48 per cent of global wealth.  It is revealing that none of Oxfam's nine recommendations for overcoming inequality includied the promotion of free trade and the abolition of barriers that stop poor countries exporting to rich countries.

Economic inequality and climate change are all that the left can campaign on these days.  Economic inequality is a tenth-order issue.  Economic growth and taking people out of poverty are first-order issues.  Those who profess to be concerned about inequality are either using the issue as a vehicle with which to attack free market capitalism or they're simply motivated by envy.  If Bill Gates moved to Australia tomorrow we would become a more unequal country and not a single person would notice any difference to their lives whatsoever.  A society in which one person has a million dollars and one person has $100 is a lot more unequal than a place where one person has $50 and one has $40.  To find out which is preferable we could ask one of the billion people in the world who survive on less than $1.25 a day where they'd rather live.  Or maybe we could ask Pope Francis.

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Minimum wages and the path to poverty

Do minimum wages cause unemployment?

The Productivity Commission intends to find out.  In the words of its chief, Peter Harris, it wants to know "whether or not there is an impact from the minimum wage on employment — we will try and prove up that, or determine if it is a myth."

This is quite ambitious.

The minimum wage is one of the most contentious issues in economics.  This issue has been banged around since at least the 18th century.  The broader question of whether imposing price floors reduces supply is centuries older again.

But it is obviously true that any sufficiently large minimum wage above the market price will lock workers out of the workforce.

Imagine we doubled the minimum wage from its current $16.87 an hour to $34.  Employers would shrink their workforces and only hire people whose productivity could justify the new cost.

Still some doubts?  Imagine tripling the minimum wage.  Quadrupling it.  Make it $168.70 an hour.  Of course people would lose jobs.

Labour markets are markets.  They are governed by the impersonal, amoral forces of supply and demand.

Yet our Fair Work Commission thinks "modest minimum wage adjustments" have a "small, or zero, effect on employment".

Small or zero?  How small is small?  How modest is modest?  It is obviously true that as a minimum wage increase approaches zero its unemployment cost will approach zero as well.

In Fairfax papers on Saturday, the economics writer Peter Martin argued there was little evidence that the minimum wage costs jobs.

Martin cited the most famous paper on the minimum wage in the last few decades — a 1993 study by the economists David Card and Alan Krueger.  Card and Krueger looked at a minimum wage increase in New Jersey in 1992 and found a) the minimum wage didn't cause unemployment, b) it actually increased employment, and c) it increased it by a lot.

Card and Krueger's paper has become one of the most influential papers in modern economics.  But it's not the only study done on minimum wages.  There's much evidence that points the other way.

For instance, this paper from 2014 found that American minimum wage increases during the late 2000s increased the unemployment-to-population ratio by 0.7 percentage points.

A 2012 study that looked at 33 different countries between 1971 and 2009 found raising minimum wages "reduce employment levels amongst young people and those at the margins of work."

This 2011 paper finds that minimum wages cause employers to favour young workers from more privileged households than less privileged ones.

This study concludes that the minimum wage hurts job growth over time, a burden that falls most on young workers and low-wage industries.

And in a 2003 paper, Australian economist-turned-politician Andrew Leigh also found small but real unemployment costs of the minimum wage.

We could go on, but ideally Drum columns should not just be lists of journal articles.

It's true that for all the studies that find the minimum wage causes unemployment in the short or medium term, there are some studies that disagree.  This is not a surprise, for a few reasons.

First, much of the research has been done in the United States, which has famously low minimum wages.  American minimum wages are probably very close to the wages that would prevail in the open market, so they can't distort employment all that much.

Second, when looking at minimum wage increases, we're talking about very small changes to prices in very complex systems.  Disentangling what policy change causes what variation in employment — particularly over the course of years, when there can be lags and broader economic changes — is incredibly difficult.  Measurement is hard.  Determining cause and effect is even harder.  Welcome to economics.

And third, the cost of minimum wage increases might not show up in reported employment or wage data, but still could be worn by employees nonetheless.

For instance, employers might reduce conditions to compensate.  They might save on training.  They might spend less on heating the workplace.  They might reduce non-monetary benefits.  These costs are hard to measure, but they're very real.  (This paper from the US-based National Centre for Policy Analysis details those non-monetary costs.)

Despite these challenges, surveying the broad evidence in their book Minimum Wages, the economists David Neumark and William L. Wascher conclude that minimum wages are a "relatively ineffective social policy for aiding the poor":

They entail disemployment effects that are felt most heavily by low-skilled workers.  They discourage human capital formation.  They lead to price increases on products frequently consumed by low-income families.  And, on balance, they seem to do little, if anything, to raise the incomes of poor and near-poor families, and more likely have adverse effects on these families.

Of course, it is possible to accept that minimum wages cause unemployment at some margin but still support them, under the belief that the social security net should catch people who are kicked out of the workforce as a result.

But as I argued in the The Drum last month, our actually-existing safety net is a hotchpotch of paternalism and bureaucratic restriction.

Imagine how bad it will be if the Abbott Government legislates its no-welfare-for-six-months policy.  Young workers unable to find work at the minimum wage will also be ineligible for the dole.  This is a recipe for destitution.

It's true that minimum wages are popular.  So were housing rent controls and trade protectionism.

One day, hopefully, the Australian public will realise that by preventing the most vulnerable Australians from getting a foothold in the labour market, the minimum wage is creating the very poverty trap it is supposed to alleviate.

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The lost art of British history

"There's so much that Britain has given to us," said Tony Abbott, addressing UK Prime Minister David Cameron in the House of Representatives just before the G20.  "There's so much, indeed, that Britain has given to everyone:  parliamentary democracy, the common law, constitutional monarchy, and English".

Opposition leader Bill Shorten agreed, noting that "our democracy, our faith in the rule of law, our respect for individual liberty and our sense of fair play are priceless gifts from [Britain]".

Both were right.  Much of modern Australia's short history is virtually inseparable from Britain's.  But this is not reflected in what is being taught in our schools or our universities.

In the existing National Curriculum for history, British history is little more than a footnote.  The curriculum skips over defining events like the English Civil War and the Glorious Revolution in silence.  It is also silent on the English Reformation, the Norman conquests, and English and British political and institutional history in general.

Not so long ago, such a thing would have been unimaginable.  Few academics would have disagreed that British history is key to understanding Australian society.  In the early 1970s, British history was a major component of tuition in schools and most history courses across Australia.  At the University of Melbourne, for example, early modern British history was almost a core part of the undergraduate history major, being one of the three first-year subjects available.

Since then, a great deal has changed.  Although British history is occasionally mentioned in the National Curriculum for history, it certainly isn't a major component of it.  As an overview of the history of Australia and its institutions, it leaves much to be desired.

For example, the entire history of mediaeval England is squashed into a single "elaboration" in the Year 8 history overview, which lists the Anglo-Saxon invasions, the foundations of the English language, and the roots of mediaeval parliament in a short paragraph.

While this is certainly better than nothing at all, the Year 8 overview misses a number of events that should be rather important for any overview of this period — for example, the Danelaw, the Norman conquests, the Plantagenets, Magna Carta, the baronial revolts and the Hundred Years War — and usually translates to two or three equally-as-deficient glossy pages in the textbooks designed for the curriculum.  The curriculum has nothing to say of the Reformation or the Tudor era, save for one elaboration in which it refers to the "spread of Renaissance culture to England".  It then skips over the seventeenth century altogether.

Of course, the British Empire is alluded to in the context of the slave trade, the industrial revolution, the British Raj, imperialism, the second world war and the colonisation of Australia.  But overall, British history is only sparsely and selectively mentioned.

None of this is to suggest that British history is the only kind of history worth studying, nor that other areas of history are not important.  This is far from the truth.  However, the fact remains that Australia's political system, legal institutions, and only major language are products of Britain's history.

It does not matter where we have come from or what our background is — it is impossible to understand how our own society came to be without looking at its roots, and many of its political, legal, linguistic, and cultural roots must be traced back to the British Isles.

History allows us to see our existing institutions in historical perspective — as a product of many centuries of history — and can illuminate both their inherent values and their shortcomings.  If we are ignorant of British history, then we risk failing to understand how our own society functions, and becoming ignorant of ourselves.

Unfortunately, given the absence of British history in our National Curriculum, it seems that we are headed that way.

Lowering GST threshold on imports would deprive consumers

Extending the GST on imports of low value would harm taxpayers, and do nothing to revive Australian retail fortunes.

As if a broken record, the policy advocacy tune for extending the base of the Goods and Services Tax in Australia has been on repeat these last few weeks.

A clear target for those looking to extend the GST into even more nooks and crannies of our lives is the exemption threshold for low value goods imported into this country, presently set at $1000 and under.

It is asserted the GST exemption is hurting the High Street "bricks and mortar" retail business model, as customers increasingly look to buy items from websites maintained by overseas retailers and other suppliers.

The argument goes that if inexpensive, yet GST-exempt, imports can be taxed, then there would be greater equity in tax treatment and governments could gain a revenue windfall to spend.

But Australians should look askance upon arguments that broadening out the GST capturing our favourite imported books, dresses, shoes, laptops and the like, would be advantageous to consumers and taxpayers alike.

For a start, as my recent research has noted, it is not the case that simply slapping GST on low value imported items will necessarily eliminate price differentials between expensive domestic retail goods and their cheaper overseas equivalents.

Some Australians do choose overseas online shopping on account of price differences, and surely it is their right to do so, especially when they're seeking to stretch their limited disposable incomes further.

Indeed, the global e-commerce market has been a welcome boon for lower and middle income earners, who can now access cheap product varieties formerly the preserve of rich airline travellers accessing duty-free goods.

As the Productivity Commission and other economic researchers have noted, the Australian retail sector is beset with high costs, from an internationally comparative perspective, which a new tax just won't fix.

The burdens of prescriptive regulations, applied to labour markets and land use, means that the high costs of penalty-rate wages and exorbitant commercial rents, respectively, pass onto Australian consumers in the form of higher, uncompetitive prices.

Ignoring the effects of domestic regulations inflating retail costs and prices, the vigorous retail industry campaign to extend the GST is ill-conceived strategy and needlessly antagonises the cashed-up Australian consumers the industry needs most.

However, to excuse the pun, we would be selling Australian buyers short if we simply conceived them to be voracious low-price seekers only.

Retail trading hours legislation, for instance, limits the times that domestic retailers can keep their doors open, meaning online shopping genuinely provides 24/7 retailing that many time-poor people prefer.  And so removing byzantine regulations that keep domestic retailers closed, when customers would prefer otherwise, could help the industry.

During the course of the present debate, some policymakers have been inclined to ask why some countries with value-added taxes impose much lower import tax-free thresholds than we do.  For example, Canada and the United Kingdom imposes exemption thresholds for imports valued between $A20 and $A30.

But it may be that rather unique circumstances facing revenue collection authorities, in both of those countries, have had some motivational influence in maintaining low VAT thresholds.

Canada shares a border with the United States, one of the largest economies in the world not to impose a federal VAT, and so Canadian authorities have imposed a very low import exemption threshold for its federal GST to wrangle as much revenue as they can.

The UK, on the other hand, has several "tax havens" domiciled under its jurisdictions including low-taxing islands in the British Channel.  On some accounts, the current British VAT import threshold was instituted in response to complaints by High Street retailers of a loss of sales to sellers with an online presence in the tax havens.

But to solely contemplate the revenue implications of lowering tax thresholds for imports would ignore a wider range of factors that must be considered when establishing good tax policy.

The father of modern economics Adam Smith, no less, enunciated a range of taxation principles, and one of those was that taxes should not be overly expensive to collect in the first place.

Reviews undertaken in Australia, and in other countries, have investigated the administrative costs of collecting additional taxes on low value imports and have mainly concluded it is not worth the effort to do so.

The Productivity Commission in 2011 modelled the effects of radically lowering the GST exemption threshold, and found "in most scenarios estimated, total collection costs would still exceed additional revenues or generate net efficiency losses for the community."

It is true our near neighbour, New Zealand, also imposes a lower import GST exemption threshold, estimated at about $A360.  However, a recent New Zealand Customs review similarly concluded "a lower de minimis would not produce worthwhile net gains in Crown revenue and would increase compliance costs for importers".

The high-tax protagonists in this particular GST debate appear to forget there are sound economic reasons why governments would, in fact, select a high tax exemption threshold for imports.

As evidenced by the progressive lowering of customs tariffs over the last 30 years or so, Australia has forged a reputation as a more open trading destination and, so, a high GST import exemption threshold happens to be consistent with such policies.

Let there be no doubt that cheap, GST-exempt imports have benefited consumers in terms of accessing more abundant goods and product varieties, but also by keeping a lid on domestic price inflation.  The relatively high Australian GST exemption threshold on low value imports has also exempted shipments of minimal value from the inconvenience of customs formalities, a trade-friendly regime especially valuable to smaller sized importers.

Also considering the fact that extending the GST burden would simply aggravate Australia's lack of tax competitiveness, lowering the GST import exemption value would be detrimental to the interests of the taxpaying public.

In the end, slashing the $1000 GST import threshold is nothing more than a protectionist ploy to discourage global online shopping and privilege domestic retailing, using the general tax system rather than selective tariffs to do the dirty work.

If policymakers cave into the calls for an extended GST on imports this would be a major step away from the pro-consumer, trade facilitation policies Australia has worked so hard to institute.

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When is tax ''reform'' actually just a tax grab?

The worst thing about the Abbott Government's newfound interest in reforming the GST is that it makes Kevin Rudd right.

During the 2013 campaign one of Rudd's biggest attacks on the Coalition was that Tony Abbott was desperate to increase the GST.

The sole hook for this claim was the fact that the Coalition had promised a tax review that, unlike Rudd's Henry Review, was supposed to scrutinise the GST alongside everything else.

On that basis any attempt to study Australia's tax mix could be assumed as a plan to increase any and every tax.

Rudd's GST attack was deliberate, disingenuous fearmongering — based on virtually nothing, used to fill out a campaign desperate for anything.

Yet now here we are, in 2015, and the Coalition can't help itself talking about changing the GST.

Rudd would be feeling pretty good about his ability to predict the future.  The great sage of Griffith.

There are apparently two proposals on the cards.  The first is lowering the threshold at which consumers can import goods without paying GST.  The idea is that local retail doesn't compete on a level playing field against foreign websites.

The second is the perennial one of broadening the base.  The GST should be applied to things like fresh food — things that were specifically excluded when the tax was first introduced by the Howard government at the turn of the century.

Both interesting ideas.  It's nice to chat about policy.

Incidentally, these proposals will raise the government quite a bit of money.

It's painfully obvious that the main reason we're talking about the changing the GST is because of the Government's dire budget and political situation.

There's a big difference between tax reform and tax grabs.  The sudden interest in the GST looks everything like a tax grab.

But there's another reason for the GST gabfest:  the Coalition's search for a "narrative" that will push them through to the next election.

Folk political memory recalls how John Howard won his first re-election on the GST — the same new tax that had sunk John Hewson just a few years before.  Even more impressively, Howard pulled off this trick after an unfortunate and unhappy first term.

So you can understand why trying to replicate the master's 1998 success might have some appeal.

But the GST was a grand program, not a technical adjustment.  When Howard and Peter Costello announced the GST they described it as "not a new tax, a new tax system".

The idea was not that the GST would simply replace the sales tax but would reduce taxes across the board.  Howard claimed "the heart" of the system was "the largest personal income tax cut in Australia's history".  And the GST was supposed to allow states to abolish stamp duties and transaction taxes, and a host of other inefficient taxes.

Despite some superficial similarities, Howard was in a very different political space to Abbott.  Howard had much more political capital.  Budget repair was on track.  There was a sense in the late 1990s that we had prosperity in our future — a sense somewhat lacking today.

And, most of all, Howard's "non-core" promises did nowhere near as much damage as Abbott's policy backflips have done.

One of the most credibility damaging moves this Government made was its introduction of the deficit levy on high income earners in the 2014 budget.

Not only did it destroy the promise that "taxes (will) always be lower under the Coalition", but it raised the marginal tax rate on high income earners to 49 per cent — just under that morally dubious rate where more marginal income goes to the government than to the earner.

The Abbott Government's approach to taxation thus far has been almost exactly the same Labor's.  They've been trying to quietly bump up taxes and tax rates at the edges without causing a stir.  In August last year the indexation of the fuel excise resumed.  In April the Fringe Benefit Tax rate is going to be bumped up as well.

Then of course there's bracket creep, which steadily and inexorably raises everybody's tax rate without the Government having to lift a finger.

You might object that possible changes to the GST should be treated on their own merits.  They're either good ideas or bad ones, regardless of what else is going on in the broader economic or political sphere.

As I have pointed out, lowering the import threshold is in the not-a-good-idea category.  It won't fix the problems of the retail sector, and it would be prohibitively expensive to impose.

And as for broadening the base?  Well, a broad tax is better than a narrow one.  But unless this change is matched by wider reform, imposing the GST on food would be simply soaking the poor.

But the Government isn't thinking about efficiency, or fairness.  It's thinking about politics.  Let's hope parliament doesn't use the GST for a short-term budget fix.

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Do not fear the rise of the machines

Australians have little to fear from a rise in automation.  If anything, replacing manual labouring with machine production will continue to improve our well-being.

The seemingly rapid pace of technological change and process innovations occasionally leads to reports, and sensationalist newspaper headlines, that humans will soon become redundant as robots and other machines take over the economy.

Last month, the federal Industry Department released an Australian Industry Report, providing an overview and analysis of major issues affecting Australia's main industries.  It included a synopsis of the effects of automation on the labour market, and arrived at several conclusions regarding which job occupations could be most threatened by the increasing automation of production process.  According to the study, machines are said to not only be substituting for labour in performing more lowly skilled, repetitive tasks but they are "increasingly replicating the tasks of medium and high-skilled workers".

Some examples of more intensive uses of technology can now be found in occupations, and industries, perhaps previously considered to be immune to the march of the machines.  Computing systems are increasingly being used in the healthcare sector to diagnose diseases and other ailments, and automated dispensing systems accurately measure medicinal dosages for patients.

In the legal profession, automated processes are helping to draft simple contracts, sift through reams of case law, while in some cities, such as New York, there has been some testing of the likes of online parking ticket adjudication systems.  There have even been reports of complex computer algorithms used by some media houses to write some newspaper stories, which relate to more matter-of-fact issues such as financial market fluctuations or the outcomes of sporting events.

It is generally agreed that the efficient and effective use of capital has vastly improved our lives, even since the spinning frames and power looms of the 19th century transformed the global textile manufacturing industry despite the destructive protests of the Luddites.

But these views seem to be heavily shadowed by a great sense of pessimism about the long-term effects of automation for human employment, in particular.  In a speech last year, shadow treasurer Chris Bowen did point out that "technological advance is a good thing".  But he soon qualified that statement by raising the spectre that continuing automation means "employment growth no longer automatically accompanies economic growth", and that machines will hollow out the lower-paid end of the job market "meaning stagnant average real wages growth and increasing economic inequality".

Our culture is infused with many a dystopian image of human impoverishment, or even slavery, at the hands of the machines we ourselves have created, but are these pessimistic narratives well grounded in reality?

I would doubt it.

It must surely be recognised, at the outset, that the process of automation we, in fact, embrace, is a consequence of our own innate desire to maximise the benefits from any exertions we undertake, with the least effort expended.  Our nomadic ancestors hunted prey more expeditiously by "automating" foot traffic by inventing the wheel;  our mediaeval forebears disseminated knowledge more efficiently by "automating" handwriting with the printing press;  and, today, computer software is "automating" manual filing previously performed by an army of unhappy, beige-attired clerks.

It is quite true that some uses of human labour have been redefined, or even rendered irrelevant altogether, by automated production processes, and for those directly affects by such change there is an obvious period of time needed for them to find new working roles.  But inasmuch as automation has destroyed some jobs, we have discovered many new uses for labour, and often in previously unforseen roles that involve far less manual hardship, or even danger, for workers than previously.

Perhaps the greatest manifestation of the greater comfort and ease experienced by labourers over time has been the long-run growth and development of the services sector, particularly the professions which provide well-paying, mentally stimulating roles in often comfortable office environments.

The relatively growing importance of women in the services sector is, in itself, a testimony to the role of automation, which has liberated them, though not entirely in all cases, from the drudgeries of household production such as cleaning and cooking.

And the growth in services employment has been fuelled, in part, by the outgrowth of technical service roles, including the ubiquitous "IT worker", whose very role in the labour market has been defined by the onset of automation.

While some economists have harboured the concern that a rise in automation will lead to an increase in inequality, it is not exactly clear cut that this would be an eventuality.  If trends up to the present are any guide, and they probably should be, wages will keep rising as workers become more efficient when working in tandem with machinery and automated processes.

Another trend which should be noted is that the real prices of many goods produced, either predominantly or in smaller part, automatically have tended to decline dramatically, providing consumers with a powerful boost in their purchasing power.  These price reductions have come about because automation helps to reduce the unit costs of production, and not to mention bolstering the production of goods and services compared against more time-consuming, error-prone manual processes.

There is no sound reason to think this declining-cost trend will come to a halt any time soon.  It is true that cost reductions have occurred unevenly with the costs of labour-intensive products, for example education, been kept at inflated levels.  But this has been influenced, in some instances, by other factors, such as labour unions and policymakers resisting attempts to reduce costs including through automation and technology uptake.

Even within the optimistic perspective concerning the fate of workers in an automated world, there can still be a role for policy reform to ease any labour market pains associated with structural adjustment.  There would still be an important role for human capital investment, particularly for high-end skills, with more competitive and diverse educational options needed so that students can more flexibly navigate future working options.  If the relative importance of labouring as a source of income is in decline as a result of automation, then that suggests reforms to encourage greater capital ownership, for example by eliminating income and capital taxes.

But whatever we do, policies should not be grounded in actually trying to prevent greater automation from taking place, as this would surely guarantee stalling economic growth and a reduction to our future living standards.

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No to the GST tax attack: Why the exemption for online purchases should stay

EXECUTIVE SUMMARY

• Following recent direct and indirect tax increases, there has been speculation that the Abbott government is considering extending the GST to low-value imports of $1,000 or less.
• Putting a GST on low-value imports is unlikely to revive Australian retailing in the face of intense online shopping competition, given the significant price differentials for many popular consumer products.
• There are several important drivers of high retail costs in Australia, including a highly regulated labour market, severe land use restrictions, and trading hour conditions, which are not being addressed by governments.
• Available estimates suggest that the administrative costs of ending the GST exemption threshold would greatly exceed actual revenues collected, violating a basic principle of tax policy if implemented.
• If the GST low-value import exemption is abolished, there can be no assurances that governments will spend the additional revenue in ways that give good value to taxpayers.
• The Abbott government should rule out the anti-consumer and anti-taxpayer proposal to extend the GST to low-value imports.

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INTRODUCTION

In recent years Australians have borne the brunt of frequent tax increases, including as well as the introduction of new taxes.  These have merely served to reduce disposable incomes and distort economic activities, without making any meaningful contribution in resolving the systemic problem of budgetary overspending.

During its six years in office the Rudd-Gillard government introduced over 40 new or increased taxes (including the carbon and mining taxes belatedly abolished last year).  These initiatives had have contributed to a lifting of the overall Australian tax burden in recent years, with my research indicating in 2012 that our tax-to-GDP ratio of 33.5 per cent (including compulsory superannuation payments by employers, and premium incomes raised under health insurance mandates) was comparable to the OECD average of 33.7 per cent.

Despite pre-election commitments to not increase taxation, in the space of little over a year in office the Abbott government has, among other things, increased tobacco excise rates by 12.5 per cent, imposed a budget deficit levy of two per cent for high income earners, and reintroduced fuel excise indexation arrangements.

This listing does not include the numerous increases in state or local government taxes and charges since the 2008-09 ʻglobal financial crisis.ʼ

The problem for taxpayers is that the political clamour for claiming even more taxes from the Australian public has shown no signs of letting up.  A primary example of this has been the repeated calls for federal and state governments to agree to eliminate the exemption from goods and services tax (GST) of overseas purchases valued at $1,000 or less.

It should come as no surprise that lobbyists for the Australian retail industry should seek to nobble their overseas competitors - especially those who operate in a low cost, online fashion - and, by extension, the consumers who engage with them, by seeking to scrap the low-value import exemption.

The previous federal government, in conjunction with the states and territories, flirted with the idea of extending the GST base in the way described, but ultimately shied away from implementing the proposal, partly on the basis of the hefty compliance costs associated with collecting GST from low-value imports.  But if recent public comments from Abbott government ministers are any guide, moves to extend the GST are threatening to become a federal bipartisan political project. ⁽¹⁾

This paper makes the case against extending the GST to products purchased overseas costing less than $1,000.

The proposed tax policy is likely to be ineffective in achieving its policy goals of supporting the Australian retail sector in light of flexible and intense global competition.  Therefore, it will merely represent yet another revenue grab by governments at the expense of consumers, especially those on lower incomes who are rightfully seeking to stretch their limited purchasing power even further.

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THE EXTENT OF THE ONLINE RETAIL MARKET:  A BRIEF SUMMARY

An obvious reason why traditional Australian ‘bricks and mortar’ retailers are demanding the removal of the GST exemption on low-value imports is that online shopping from overseas is a significant component of e-commercial activities by Australians, and is projected to keep growing over time.

The National Australia Bank undertakes a monthly survey of online retail sales (both from domestic and international sources), showing significant growth in online retail sales, in seasonally adjusted terms, since the survey series commenced in early 2010. ⁽²⁾  In effect, sales from online retail sources have more than doubled from January 2010 to November 2014.

It is estimated that Australians spent $16.3 billion on online retailing in the year to November 2014.  This is equivalent to approximately seven per cent of spending on traditional retailing establishments, as measured by the Australian Bureau of Statistics.  The fastest growing category of products being sold online during the period were electronic games and toys (39.4 per cent).  Other products exhibiting strong online retail growth included books, movies and music (8.7 per cent), and items sold by grocery and liquor stores (7.4 per cent).

Increasingly, Australian shoppers are purchasing their items using smartphones and other mobile devices.  Some estimates suggest that 30 per cent of internet users aged between 15 and 65 purchased goods using a smartphone, and 19 per cent undertook purchases using a tablet.  People are also using these devices to compare prices prior to the act of shopping for items. ⁽³⁾

The available evidence suggests that the extent of online shopping from retailers and suppliers based overseas is widespread.  Based on a survey of 1,000 online shoppers, market research consultancy Frost & Sullivan found that 79 per cent of Australians who shop online purchase from overseas websites to some extent, and an estimated 45 per cent of Australian online expenditure is directed towards international online sites. ⁽⁴⁾

There is some suggestion that most of the individual products purchased online from overseas providers are of relatively low value, and hence not liable to GST (Table 1).  According to the Productivity Commission, over three-quarters of goods purchased between June 2008 and February 2011 from overseas, where the credit card was not physically present, were valued at under $100. ⁽⁵⁾  Furthermore, the average value of goods purchased online internationally was $112.

Table 1:  Distribution of domestic and international purchases where credit card was not physically present, value of transaction, June 2008 to February 2011

Value of transaction/s ($)	Domestic share (% of total)	Overseas share (% of total)
<$100	73.4	76.5
$100-$199	14.7	12.8
$200-$299	4.8	4.1
$300-$399	2.1	2.0
$400-$499	1.1	1.1
$500-$999	2.2	2.1
$1,000-$1,999	1.0	1.0
$2000-$2,999	0.3	0.2
$3000 and above	0.4	0.2
Total	100.0	100.0

Source:  Productivity Commission, 2011, Economic Structure and Performance of the Australian Retail Industry, Report No. 56, Canberra.

There is a widely held expectation that online retail activities, and e-commerce more generally, will continue to expand over the next few years.  In some quarters it has been projected that total online retail spending by Australians (both domestically and overseas) would grow by about 14-16 per cent annually over the course of this decade, to reach a total of $41 billion in expenditure by 2020. ⁽⁶⁾

All of the trends cited here suggest that the Australian retail sector has certainly experienced significant structural change.  In these circumstances, it would seem the best response to the online winds of ‘creative destruction,’ being felt by bricks and mortar retailing firms, would be to perform their own Schumpetarian acts of innovation that offer discerning consumers compelling product value and exemplary service.

In sharp contrast, demanding that government imposes a new tax hike to try to deter Australians buying online from overseas would be counterproductive to future innovative efforts by the domestic retail scene, and thus be against the long term best interests of Australian retailing.

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PUTTING GST ON LOW-VALUE IMPORTS IS UNLIKELY TO REVIVE AUSTRALIAN RETAILING

As indicated in consumer surveys, there are a number of motivations underlying the increasing inclination of Australians to purchase goods online (including from overseas retailers and others suppliers).  The available survey evidence suggests it is not reasonable to reduce all of the often complex and multi-dimensional motivations down to just one factor (e.g., price).

For some purchasers the decision to buy may indeed hinge upon a price differential between identical or similar items provided both domestically and internationally, in favour of the imported product.  But for others, purchasing decisions are primarily informed by the availability of products, the speed and ease of goods delivery, or the ability to buy online from overseas during a time of day or week in which domestic retailers are closed.

A 2013 survey of Australian online shopping habits by Choice magazine, for example, indicated that the major reason why those surveyed shopped online was to purchase during hours which suited them, followed closely by the convenience of products shipped to their residences or preferred delivery destination. ⁽⁷⁾

The same survey suggested that 12 per cent nominated saving on ʻpaying duties and taxes by purchasing on overseas websitesʼ an important factor in purchasing commodities online.  That the GST-free threshold on low-value imports may not be a decisive factor for many purchases is reinforced by the fact that, according to Choice, most online retail sales in Australia are made through Australian websites whose products (regardless of value) are liable to GST.

Other surveys have suggested that prices do, indeed, represent a key driver for online shopping by Australians.  A consultancy study indicated that about three-quarters of Australians shopping online make purchases from offshore overseas websites, and that ʻby far the main consumer reason for shopping through international sites is to obtain lower prices than available locally.ʼ ⁽⁸⁾

Whilst not paying GST on low-value imported goods was cited by a small share of respondents (about three per cent of the total) as their main reason for purchasing from overseas online shopping websites, other factors may have played a more important role in influencing people to purchase mainly on the basis of price.

Most notably, the study referred to the strength of the Australian dollar, relative to the US dollar, as one factor influencing online shopping patterns.  This has probably been a major influence in consumer decisions to purchase various goods online from overseas, at least until relatively recently.

Other things being equal, imposing the GST on imported items valued at $1,000 or less may encourage some consumers to switch from overseas to domestic shopping options, but a comparison of selective popular sales items would suggest that a GST on low-value imports would, by no means, dissipate the price advantages presently enjoyed by overseas retailers (Table 1).

Given the significant price differential between domestic and imported products of like character, as illustrated here, imposing a GST on low-value imports would be unlikely to encourage significant switching by price-sensitive consumers toward products sold by Australian retailers.

Table 1:  Price comparisons of identical goods, Australian dollars

Source:  Michael Petrut

Categories sourced from NAB Online Retail Sales Index (except separate categories of cameras, books and shoes).  Specific items selected.  Calculations in final two columns are absolute values of percentage changes.  Prices for identical goods collated on the same day.  Delivery charges (including free shipping) based on cheapest option available.  US dollar conversions to Australian dollar as of 9 January 2015.

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DEBATING THE GST DIVERTS ATTENTION AWAY FROM THE HIGH COSTS OF RETAILING, AND DOING BUSINESS, IN AUSTRALIA

The emergence of e-commerce activities on a global scale has firmly trained the spotlight on the performance of the Australian retail sector, traditionally shielded from international competition due to its primary role in servicing domestic customers as well as our distance from major Asian, European, and North American markets.

Fluctuations in the business cycle, such as the more subdued economic growth record in Australia since the 2008-09 ʻglobal financial crisis,ʼ have added to the perceived pressures faced by retailing businesses.

A number of major studies by the Productivity Commission in recent years have pointed to a relatively high-cost environment under which local retailers conduct their business, compared against overseas counterparts.

For most traditional bricks and mortar establishments, labour costs would represent the major component of retailing expenses.  In Australia, these costs not only include base rates of pay allocated to staff, but penalty rates and loading, other allowances and entitlements, the costs of hiring, firing and training, as well as on-costs including payroll tax, workersʼ compensation premiums and superannuation contributions.

Figure 1 provides information on the wage costs incurred by various retailers in Australia, the United Kingdom and the United States.  In general, wage costs are higher in Australia than in other countries, with some retailing segments (especially clothing and footwear) facing substantially higher costs than their overseas peers.

Figure 1:  Wage costs as a share of revenue for different retail categories, Australia, UK and US

Source:  Productivity Commission, 2014, Relative Costs of Doing Business in Australia:  Retail Trade, Research Report, Canberra.

Another major element of the retailing cost structure are occupancy costs, or the costs associated with maintaining a shop space (such as rent, fit-out costs, and shared expenses relating to security, cleaning, electricity, insurance, etc.).  The costs of occupying space tend to account for a significant proportion of overall costs faced by many retailers, especially traditional enterprises, in Australia.

Despite differences in cost structures due to operating practices and location, and so on, it has been found that commercial rents, as a share of revenue, in Australia is higher than that found in the United Kingdom and United States (Figure 2).  For the retailing of some products, such as clothing, footwear, and furniture, the share of rent is much higher than the Australian average and in other countries.

Figure 2:  Rent costs as a share of revenue for different retail categories, Australia, UK and US

Source:  Productivity Commission, 2014, Relative Costs of Doing Business in Australia:  Retail Trade, Research Report, Canberra.

The assessment from the Productivity Commission found that ʻthe cost of doing business in the Australian retail sector is inflated by unnecessary regulations.ʼ ⁽⁹⁾  Many industry participants in recent years have noted that centralised workplace relations regulations, including penalty rates and high minimum award wages, are a factor inhibiting the cost competitiveness and productivity of retail operators.

Land use planning and zoning regulations enforced by state and local governments restrict the commercial uses of land in certain locations, diluting the effects of competition within the retail sector with some adverse flow-on effects for costs and prices.

A longstanding problem affecting traditional retail establishments in Australia is the continuing imposition of retail trading hours by governments.  Such regulations obviously tend to restrict consumer choices, but they also prevent retailers from trading to the extent that they would wish hence depriving them of potential sales revenues to cover their relatively high costs (from an international perspective). ⁽¹⁰⁾

There are other aspects of the business operating environment which adversely affect the retail sector, such as the costs associated with distributing parcels and other packages of goods directly to consumers within, and to, Australia.

Some anecdotal accounts suggest that delivery and freight charges have made it increasingly infeasible for some Australian retailers to send small parcel consignments to consumers.  Several local bookstore proprietors, in particular, have noted that delivery charges are considerably lower for consumers to receive books from overseas.

For example, a senior Australian Booksellersʼ Association representative has stated it costs ten times more to send a book from Mosman to Penrith (both Sydney localities) than to post the same book from the United Kingdom to Sydney. ⁽¹¹⁾  One bookshop owner indicated they would pay $11.70 in postage to send an $8 paperback book, whereas UK booksellers could send the same book to Australia for about $3. ⁽¹²⁾

Another important issue deserving of more attention in the current policy debate is the effect of parallel import restrictions in driving up the cost of goods for Australian retailers.  My previous analysis has shown that parallel book import restrictions restricts available titles on sale through retail stores, and thus unnecessarily raises the price of these items for consumers. ⁽¹³⁾  In effect, parallel importing restrictions acts effectively as a trade barrier and should be liberalised.

Finally, as noted above, government taxes and charges will also play some part in raising the prices of goods offered by retailers.

It is not straightforward to quantify how the compliance and economic burdens of these, and other, regulations and taxes flow through to higher costs for retailing establishments, which then have an effect on relative prices.  In a complex, evolving economy there are a myriad of factors which affect final product prices, and in an increasingly open trading environment for consumer goods exchange rate movements should also be borne in mind.

Although Australian retailers continue to respond to high and rising costs - including by increasing their online shopping presence - the underlying drivers of retail costs, cited here, are mainly outside the control of individual retailers, or even associations of retailers, to influence and adjust.

To the extent that prescriptive regulations and heavy taxes imposed by governments contribute to cost pressures, extending the GST to low-value imports would serve as an ill-directed and meaningless solution in tackling the deep seated problem of high-cost retailing in this country.

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ENDING THE ONLINE PURCHASING EXEMPTION IS NOT WORTH THE EFFORT

One of the key questions surrounding the present debate is whether the expected increase in administrative compliance costs merits the imposition of the GST upon low-value imports.

The most authoritative analysis of this issue to date, undertaken by the Productivity Commission (PC), suggests that the compliance costs associated with collecting the GST on low-value imports would exceed the actual revenues collected.

On the basis of the scenario developed by the PC, reduction of the low-value threshold down to $100 whilst retaining the current Customs, and other, processing systems would have raised about $495 million in 2010-11.  This estimate is calculated on the basis that the goods contained in an additional 12.6 million international mail parcels and 3.4 million air cargo parcels would be liable to the GST.

However, the costs of collecting taxes is typically not miniscule with a range of bureaucratic and other procedures needing to be put in place to ensure tax collection and enforcement.  The PC estimates that businesses, consumers, and the government itself (mainly through Customs) would bear the costs of collecting the extra GST revenue, and this was estimated to amount to about $1.2 billion.

The PC summarised its analysis by stating ʻin most scenarios estimated, total collection costs would still exceed additional revenues or generate net efficiency losses for the community.ʼ ⁽¹⁴⁾

Others have similarly suggested that the costs surrounding the proposed GST extension may not warrant its implementation.  Economist John Freebairn stated in 2013 that

ʻif the threshold is lowered and current administrative arrangements remain in place, the high costs to government and businesses of collecting GST on a very large number of parcels from all over the world mean the net revenue gains are likely to be small, if not negative.ʼ ⁽¹⁵⁾

To be sure, there are some doubts over the reliability of estimates concerning a hypothetical tax policy change of this nature.  The imposition of a GST on low-value imports would elicit some behavioural response on the part of Australian consumers, as well as by importers, which could alter the total value of consignments entering Australia and subject to the extended GST.

Despite these uncertainties, it would seem that some weight should be put upon the estimates of potential net revenue losses from eliminating the low-value threshold.  This is because a high proportion of imported items tend to be valued at below $100 - according to a Low Value Parcel Processing Taskforce established under the Rudd-Gillard government, 75 per cent of international mail items, and 65 per cent of air cargo items, were $100 or less. ⁽¹⁶⁾

Centuries ago, the moral philosopher Adam Smith enunciated several principles of taxation which policymakers should routinely apply.  One of these is that taxes should not be overly expensive to collect.  Given the best available estimates suggest that the costs of extending GST to low-value imports would exceed the revenues transferred from taxpayers to government, proceeding with this proposed tax increase would violate a basic principle of good tax policy.

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TAXPAYERS CANNOT BE ASSURED OF GOOD VALUE FOR MONEY FROM EXTRA GST RAISED

A neglected aspect of taxation policy is the need to consider the efficiency and effectiveness with which governments will spend the resulting revenue collected.  Considering this question applies just as much to the proposal to abolish the GST low-value import threshold to any other idea in the contemporary tax policy discourse.

As is well known the proceeds of the GST (less administration costs incurred by the ATO) are redirected from the commonwealth to the states, in the form of untied general revenue grants.  From that point the states have the ultimate discretion concerning the uses with which the funds are put. ⁽¹⁷⁾

The public finance literature makes it plain that the separation of revenue raising and expenditure responsibilities across levels of governments dilutes the capacity of the taxpaying public to keep the public sector accountable for its budgetary and fiscal performances.

With the extent of ʻvertical fiscal imbalanceʼ already severe in Australia, by international standards, a further entrenchment of the intergovernmental grants system, by virtue of extending the GST base, is unlikely to facilitate a greater modicum of political accountability to the taxpayer.

A related aspect of this matter is that Australia has devised an elaborate ʻfiscal equalisationʼ system for distributing GST revenue grants amongst the states and territories, with funds distributed on the basis of differential revenue capacities and public service costs among jurisdictions.

Any additional revenues from abolishing the GST low-value threshold would be subject to this arrangement meaning, for instance, that GST from inexpensive overseas online goods purchased by a person residing in NSW or Victoria, say, would be received by the Tasmanian, South Australian or Northern Territorian governments.  In these circumstances, it becomes even more difficult for taxpayers to monitor individual governments and ensure they are spending tax revenues wisely.

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CONCLUSION

Extending the GST, which is already estimated to raise over $50 billion for the eight state and territory governments, to imports valued at $1,000 or less would be an ill-conceived manoeuvre on the budget policy front.

The fiscal challenge for governments is abundantly clear.  What is required of commonwealth, state and local governments is that they reduce wasteful spending, to both repair their budgets and boost long term economic growth, rather than lift taxes.

Increasing taxes is simply a recipe for constricting the freedom of individuals to keep and use their own monies as they see fit, and a program to subdue economic growth and improved living standards in the longer term.

The proponents of extending GST to low-value imports have been obfuscating the fundamental policy rationale for this idea, suggesting that it is necessary to protect local retailers or to help shore up Australiaʼs international trading position.

The analysis presented here suggests that extending the GST would achieve none of those objectives, but would simply be an anti-consumer policy that would hurt hard-working Australians, especially on lower and middle incomes, who are taking great lengths to stretch their buying power further during a period of intense cost of living pressures.

In the best interests of Australian consumers and taxpayers, the Abbott government should immediately rule out any suggestion, including from internal sources, that it would impose GST on low-value imports.

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ENDNOTES

1.  This view appears to be shared by some Australian financial commentators, for example Michael Smith, 2015, ‘Dynamics shift in GST debate’, The Australian Financial Review, 9 January.

2.  National Australia Bank, 2014, ‘NAB Online Retail Sales Index’, November.

3.  Frost and Sullivan, 2013, ‘Online shopping to Australia to account for nearly 10% of total retail sales by 2017’.

4.  Ibid.

5.  Productivity Commission, 2011, Economic Structure and Performance of the Australian Retail Industry, Report No. 56, Canberra.

6.  Urbis, 2011, ‘Unravelling online retail’;  Urbis, 2013, ‘Retail Trends, Drivers & Outlook’.

7.  ʻSurvey:  GST loophole has little to do with the decision to buy onlineʼ.

8.  PwC, 2012, The rapid growth of online shopping is driving structural changes in the retail model - Australian online shopping market and digital insights, p. 4.

9.  Productivity Commission, 2014, Relative Costs of Doing Business in Australia:  Retail Trade, Research Report, Canberra, p. 5.

10.  Productivity Commission, 2011, op. cit.

11.  Claire Heaney, 2014, ʻAustralian bookshops ʻlosing businessʼ because of high postage costsʼ, Herald Sun, 21 July.

12.  Sarah Whyte, 2013, ʻPass the parcel as backlash hits Australia Post over price increasesʼ, The Sydney Morning Herald, 9 April.

13.  Richard J. Wood, 2009, Unbinding book barriers:  Why Australia should scrap parallel import restrictions on books, Backgrounder, June.

14.  Productivity Commission, 2011, op. cit., p. 169.

15.  John Freebairn, 2013, ʻStatesʼ push for GST on online shopping is just small changeʼ, The Conversation.

16.  Low Value Parcel Processing Taskforce, 2012, Final Report, Department of the Treasury, Canberra.

17.  That said, there is an element of moral suasion exercised by commonwealth politicians concerning how the states should administer their own expenditure affairs, including in politically sensitive areas such as education, health care, and transportation infrastructure.  These have even materialised, on occasion, in the form of veiled or actual threats by the commonwealth to claw back GST revenue from the states.

Charlie challenges the Coalition

Charlie Hebdo changes everything and nothing.

The cover of the latest edition of the magazine features a caricature of Muhammad.  That cover has been reproduced thousands of times around the world.  A week ago it would have been unthinkable.

The murder of cartoonists who poked fun at religion demonstrated the threat to our values posed by Islamic fundamentalism in a way that sadly no number of atrocities in Syria, Iraq, or Afghanistan ever could.

In Australia, Charlie Hebdo re-opened the debate about whether there should be laws prohibiting offensive and insulting speech.  It started to dawn on people that the murderers of Paris used terrorism to enforce the censorship of free speech, while in this country censorship of free speech is enforced by law.  Regardless of whether censorship is the outcome of terrorist ideology or the product of well-meaning democratically elected politicians who have a heart-felt desire to promote community harmony, the end result is the same — censorship.

At the same time Charlie Hebdo has changed nothing.  The Labor Party, and Muslim and Jewish community groups continue to defend the existence of section 18C of the Racial Discrimination Actwhich bans offensive speech.

And the Greens are as as sanctimonious as ever.

Greens senator Richard Di Natale claimed "What is really disappointing here is that we are seeing crass opportunism from those people who support changes to the law that would allow individuals to vilify other people on the basis of race, and using a human tragedy to advance their argument."  He's wrong.  What's crass opportunism is Australian politicians talking about the importance of freedom of speech while at the same time supporting legislation which would have much of the material published in Charlie Hebdo declared unlawful.

Something else that hasn't changed is the Abbott government's attitude to freedom of speech.  In August last year the government reneged on its election promise to repeal section 18C.  On Wednesday the PM refused to change his position saying he wouldn't attempt to change the current law because argument over it continued to generate "a lot of division in the community".

Warren Mundine, the former national president of the ALP and now the head of the Coalition's government's Indigenous Advisory Council, said this week changes to section 18C were "dead as a dodo".  "This government doesn't need another thing out there to stir the pot, because they've got enough problems," he said.  "Just look at the polls."

Mundine's half right.  The government does have more than enough problems.  That's obvious from the polls which have the Coalition behind Labor, 46 percent to 54 percent.

But the cause of the Coalition's problems is not because the government is stirring the pot too much.  On the contrary, the government is struggling because it's not stirring the pot enough.  And one the few occasions when it does try to stir the pot, it does so for the wrong reasons.  The government is more than willing to stir the pot to expand middle-class welfare through its Paid Parental Leave scheme.  And if the PM wanted to avoid creating disunity he wouldn't proceed with his plan to enshrine permanent racial division in Australia through indigenous "recognition" in the Constitution.

Coalition MPs, Coalition supporters, and the community are waiting for the government to do something beyond stopping the boats and repealing the carbon and mining taxes.  They're good achievements, but an entire first term in office can't rest on them, and they're not an agenda for a potential second term.

The government says it wants to debate "tax reform".  But if it really wanted to stir the pot on tax the Coalition would declare that the objective of tax reform must be to reduce the tax burden to give people more choice about how they spend their own money.  So far the only stirring of the pot on taxes the government has done is to raise taxes and introduce the deficit levy.  When it comes to industrial relations there's no stirring of the pot whatsoever.

Maybe this year the Coalition will stir the pot to achieve something worthwhile.  It is a pity, though, that one of the things the Coalition won't be achieving in 2015 is the securing of freedom of speech in this country.

Give cigarette pack laws the chop chop

Tobacco plain packaging laws have been an expensive, illiberal waste of time.  It has restricted the right of companies to market legal products and turned more smokers onto illegal tobacco.  This creation by public health zealots must be repealed.

Plain packaging was introduced by the Gillard government in 2012.  Since that time it's true to say that smoking rates have fallen.  But smoking rates in Australia have been falling for more than five decades.  The decrease in consumption following the introduction of plain packaging continues to follow that trend.

And even if there had been a significant departure from that trend the Gillard government significantly increased the tobacco excise just one year after the introduction of plain packaging laws.

These massive tax ­increases — 12.5 per cent per year for four years — makes it almost impossible to ­determine whether changes in consumption patterns are due to plain packaging or increased prices due to higher taxes, or something else entirely.  That's not to say plain packaging hasn't had any impact on tobacco consumption.  It clearly has.  One of the most significant changes during the ­period of plain packaging has been the growth of the illegal tobacco market.

A KPMG report into ­illicit tobacco released in October last year found that the prevalence of illegal tobacco or "chop chop" is on the rise.  Between July 2013 and June 2014 KPMG recorded an increase from 13.5 per cent to 14.3 per cent of total tobacco consumption.

Most tobacco consumption rates don't take illegal tobacco into account.  ­Although rates may be ­decreasing in line with the long-term trend it appears that some consumers are switching to chop chop, meaning that the actual consumption rate has ­remained relatively stable.

Further analysis showed that this growth in illegal tobacco consumption was driven by higher volumes of unbranded consumption, from 0.8 million kilos to 1.1 million kilos.  Notably, the illegal importation of tobacco has increased substantially over recent years, from 0.5 million kilograms in 2012 to 1.3 million kilograms today.

The legal retail market has felt the pinch.  The Australian Retailers Association noticed a significant impact just 12 months after the introduction of plain packaging laws.  ARA Executive Director Russell Zimmerman said back in November 2013 "the change to plain packaging has been a waste of retailers' time and resources."

If the Abbott government is serious about its red tape reduction agenda, here's a good place to start.

Plain packaging laws are also an attack on intellectual property rights.

Tobacco companies are selling a legal product to willing consumers.  But this market has been singled out for special treatment.  Restrictions on marketing and sale are more significant than for the majority of legal products on the market.

This is an ongoing problem.  Figures released by the US-based Property Rights Alliance show that protection of property rights in Australia is in steady ­decline.  Tobacco plain packaging laws are perhaps the most obvious recent contributors to the parlous state of property rights protection.

When the laws were challenged in 2012, the High Court ruled that plain packaging amounted to the extinguishment of the intellectual property rights of ­tobacco companies.

Meddling public health professionals have been spruiking the benefits of plain packaging for years.  But it's time they admitted that they got this one wrong.  Plain packaging has failed to reduce tobacco consumption rates, while giving a leg up to the tobacco black market and stripping away commercial and intellectual property rights.

A new year, a clean slate.  In 2015, let's kick the tobacco plain packaging habit.

Beware Google tax grabs

Last month, Treasurer Joe Hockey ­announced the government had "embedded" auditors in 10 ­unnamed multinational corporations to ensure they pay tax on profits earned in Australia.  And the government is "contemplating additional legislative action" to ensure multinationals pay their "fair share".

The government should tread carefully.  This obsession with multinationals and corporate tax looks like the Rudd government's mining tax debacle.  In 2010, Wayne Swan said foreign-owned mining companies were paying only 13 per cent tax in Australia.  Tax office data told a different story but the government ploughed ahead.  As we learned, populism made for poor policy.

Last month, the British government announced a "Google tax" to tax 25 per cent of the profits earned by multinational firms in Britain that are "profit-shifted" to other jurisdictions.

As the London-based Institute of Economic Affairs pointed out, the British proposal is a "retrospective and arbitrary tax change designed to attack a particular small set of well-identified businesses that are not popular with the public."

This financial year, the Australian government is budgeting to collect $71.6 billion in company tax revenue.  Hockey says just 10 targeted multinationals could contribute up to another $3bn in revenue.  This doesn't seem plausible.  Indeed, the entire corporate tax debate is a cloud of confusions and misconceptions.

There is a big difference between tax minimisation, which is legal and tax evasion, which is not and properly so.  Hockey has made no allegation of illegality.  Perhaps they are not paying as much tax as the government would like but there is no evidence that multinationals are not paying their correct tax liabilities.

Australia has some of the strongest tax avoidance laws in the world.  Every government ­announces a "tax crackdown".  The idea that the powers which successive governments have granted the tax office are insufficient to deal with any problem in the tax system is ludicrous.

Governments have defined their own domestic tax base and established rules to define the international tax base.

The British Google tax is a big change to the principles of taxation.  Countries can either operate a residency-based tax system or a source-based tax system.  Many high-income countries ­operate residency-based systems and then enter into double taxation agreements to avoid (or minimise) double taxation.

The Google tax looks like a shift to a source-based tax system — or worse, an arbitrary hybrid of the two, designed on the run to meet temporary political goals.  The British general election will be held within six months.

Politics aside, the question is how big is the problem of profit-shifting?  The evidence isn't as clear as governments and tax ­bureaucracies would like it to be.

In the past, academic studies suggested the amount of forgone tax revenue from profit-shifting was substantial.  Shocked by those estimates, the OECD launched a broad campaign against profitshifting and tax competition.

Yet in recent years, economists have gained access to far more ­detailed data sets that offer a better picture of what happens within multinational firms.  Now the story looks very different.

In a recent survey paper, Dhammika Dharmapala of the University of Chicago concludes "the estimated magnitude of (profit-shifting) is typically much smaller than that found in earlier studies".  Estimates of the amount of shifted profits are now between 2 per cent and 4 per cent.

This is not enough to justify undermining Australia's relatively effective and coherent corporate tax system.  Or risk damage to our investment reputation.

There's another reason for Hockey to be careful.  When all the dust had settled from Swan's tax crusade, the mining tax raised almost no money anyway.

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The inability to handle criticism shows weakness

In his discussion of religion in Dialogues Between ABC, the great French writer Voltaire makes a simple point about freedom of speech.

"If a country's religion is sacred," says Voltaire, then "a hundred thousand volumes written against it will do no more harm [than done] to rock-solid walls by a hundred thousand snowballs.  How can a few black letters traced on paper destroy it?"

One must now add:  or a few coloured cartoons.

The Charlie Hebdo massacre was supposed to demonstrate Islamism's strength.  It revealed the opposite:  the weakness inherent in any ideology that is unable to handle criticism with anything but force.

The Islamist radicals who committed this terrorism — and those who would support it in the West and around the world — are contemptible.  They war against a modernity they cannot control or change.

Why?  Freedom of speech is really a misnomer for the liberty we really care about.  The speech isn't the point.  Charlie Hebdo's cartoons aren't the point.  What really matters are the ideas that underpin the speech.

It is one thing to kill a speaker.  But the beliefs of Charlie Hebdo's readers are what matters.  And this terrorist attack does nothing except confirm pre-existing views on the irrational sensitivity of Islamism and even a concern that Islam does not fit in a pluralistic, irreverent society.

So the debate over whether the Charlie Hebdo cartoons are satirical or just offensive completely misses the point.  Either way, they were expressing an idea.  Who cares whether that expression was done cleverly or not?

Yet apparently many do.  In free speech debates there are always people who want to pontificate over the tone of the speech that has been censored or punished.  We read that it was not reasonable, or civil.  That it was unbalanced.  That it was deliberately provocative.  A Financial Times writer was quick to condemn editorial foolishness and Muslim "baiting" at Charlie Hebdo.  One leaked Al Jazeera email said "insultism is not journalism".  If only they'd been more responsible, like real journalists.

Such journalistic boundary-policing does the profession no credit.  Journalism isn't special.  It is just a form of expression.  It deserves no more or less speech protection than any other form.  Yet boundary policing always follows incidents like this.  And we hear it from the same sort of people who have that quote that journalism is "printing what someone else does not want printed" on the wall of their cubicle.

In his memoirs, Salman Rushdie writes of his disdain of the earnest debate over his literary ability conducted after he was forced into protective custody for insulting Islam in The Satanic Verses.  Everyone piled on.  Even Prince Charles called Rushdie a "bad writer".  Putting aside that sort of critical dubiousness, so what?  What relevance does quality have when protecting speech?  Why criticise a victim if not to blame them?

In a liberal democracy the state is supposed to have a monopoly of force.  Only the state has the lawful ability to conduct violence in the pursuit of its agenda.

The Charlie Hebdo massacre shows that not all threats to free speech come from the state.  But it helps illuminate the basic contest in free speech.  On the one side there are those who accept the plural society, and can tolerate the sometimes offensive cacophony that involves.  On the other side there are those who would punish ideas with violence, whether that punishment is the violence of state power or murder.

This is why there is nothing more cynical than the politicians who have jumped on the Charlie Hebdo solidarity bandwagon yet impose force against speech at home.

The Egyptian foreign minister attended the Charlie Hebdo unity rally over the weekend, while Peter Greste languishes in an Egyptian jail.  Almost every Western nation whose leaders announced their moral support for protecting offensive speech in the wake of the massacre also has laws against "hate speech".

Whatever those politicians are protesting for, it is not the sanctity of freedom of expression.

Over the weekend Tony Abbott said in defence of Charlie Hebdo that "from time to time people will be upset, offended, insulted, humiliated ... but it is all part of a free society."  This is a curious choice of words.  Just a few months ago his government declined to remove the words "offend, insult, humiliate and intimidate" from section 18C of the Racial Discrimination Act.

Nevertheless, there is politics on both sides of the conflict.  In both the Rushdie affair and the 2005 Danish cartoons crisis (when the newspaper Jyllands-Posten published a series of cartoons depicting the prophet Mohammed, leading to a diplomatic crisis and violent protests in the Muslim world) it later became clear many Islamist radicals were using their offence to pursue personal political agendas:  to bolster support in Muslim countries or in their expat communities.

As Jytte Klausen writes in her 2009 account of the Danish crisis, The Cartoons that Shook the World, "Anger and pride certainly influenced the behaviour of some of the main actors, but so did deliberate political calculation and motives other than the public ones."

The audience for these attacks on the West are not solely in the West.  But the message they broadcast, domestically and internationally, is not that radical Islamism is strong, but that it is a weak, ideological dead-end.

The Government can revive its ''freedom agenda''

The promise to repeal or reform Section 18C of the Racial Discrimination Act may have been shelved, but it is not too late for the Government to revive its "freedom agenda".

In opposition Tony Abbott and George Brandis made much of their commitment to freedom, arguing that the Liberal Party was "freedom's bulwark".

Unfortunately, this agenda is looking a little sad after they dropped the 18C promise, not to mention all the other stuff that's happened in the last six months.

Yet one of the less heralded parts of the freedom agenda could set up a program of serious liberty-focused reform.

Sometimes the most important reforms are those that are done slowly and quietly.

In the first few months of the Abbott Government, Brandis asked the Australian Law Reform Commission to inquire into Commonwealth laws that encroach on what he described as "traditional rights and freedoms".  The ALRC produced an issues paper and a request for submissions in December.

The genesis of this inquiry is significant.

It was born in the contest over the Gillard government's Human Rights and Anti-Discrimination Bill 2012.  Remember that?  This was the bill that would have made it unlawful to offend someone on the basis of their political opinion in the workplace.

The 2012 bill wasn't really a "human rights" bill at all, as I argued on The Drum at the time — it was a consolidation of existing anti-discrimination law, symbolic of the capture of almost all human rights discourse by anti-discrimination.

The irony was that the bill was itself the remnant of Kevin Rudd's grandiose dreams of a statutory bill of rights for Australia, yet it restricted human rights in some very important ways.  For instance, it placed the burden of proof on the person accused of discrimination, and restricted the right to legal representation.

This correctly got Brandis and the Coalition fired up about Labor's hostility to traditional legal protections.

For Brandis, and consequently for the ALRC, what constitutes "traditional rights and freedoms" is extraordinarily broad.

It includes things like freedom of speech, religion, association, and movement.  Property rights are in there for good measure.

Then there are rights we exercise in the course of legal proceedings:  the right to a fair trial, the right to appeal, the privilege against self-incrimination, and procedural fairness.

To top it off the ALRC is looking at broader governance principles like limiting the delegation of executive power to bureaucracies or regulators and maintaining judicial review of legislation.

This is a pretty comprehensive set of the tenets of liberal governance.  The ALRC is going to find it very hard to do justice to just a small fraction of its inquiry.

But, on the other hand, it's hard to imagine a more important inquiry for this Government, or any government, to pursue:  a serious audit of the state of Australian law.

Debates like those over section 18C and the Human Rights and Anti-Discrimination Bill come and go, but Australia's legal framework is the accumulation of decades of legislative busy-work.  We look at laws individually as they are introduced or reformed but rarely do we step back to survey the full legal landscape.

We're all familiar with commissions of audit for government spending.  Wouldn't it be nice to have periodic audits of our liberties?

In December I released a report into just one facet of the ALRC's traditional rights and freedoms:  the rights that protect us while interacting with the legal system.

I looked specifically at the right to silence, the presumption of innocence, the privilege against self-incrimination and what's called "natural justice" — which constitutes things like the right to a trial, to appeal, to know what is alleged against us.

I found an astounding 262 provisions in Commonwealth law alone that breach these legal rights.  Everything from the Telecommunications Act to the Agricultural and Veterinary Chemicals Code Act in one way or another abrogates these basic legal principles.  The labyrinth Fair Work Act violates all four.  So does the Competition and Consumer Act.

I suggest these breaches of principle have been increasing in recent decades.  If so, they've been increasing alongside the more general increase in legislative activity since the 1970s — governments are passing more, and longer, legislation than ever before.

Brandis asked the ALRC to look particularly into rights breaches within commercial and corporate regulation, environmental regulation and workplace relations law.

Breaches of fundamental legal rights in these sorts of acts tend to be ignored by Australia's human rights community.

Indeed, the scope of the ALRC inquiry reveals how myopic and narrow the Australian Human Rights Commission has been, which appears to focus almost exclusively on anti-discrimination.

Things like the extraordinary powers granted to the Australian Securities and Investments Commission seem to be outside their frame of reference.

The people whose rights are violated by ASIC tend to be business types:  managers, board members and executives.

That is, unsympathetic capitalists.

But, as the ALRC will hopefully conclude, even capitalists deserve attention for their traditional rights and freedoms too.