Labor can stop beating the inequality drum

The Labor Party's new Inclusive Prosperity Commission is driven by the principle that "equality itself is a driving force for economic growth", in the words of Wayne Swan.

It is a lovely idea.  Inequality is a bad thing.  Growth is a good thing.  Wouldn't it be great if by reducing inequality we would also be boosting economic growth?  A true win-win.  For Labor, it would be a win-win-win, given that it would align with their philosophical interest in redistributive tax and welfare policies anyway.

Unfortunately for Labor, this is voodoo economics — ideological wish-fulfilment dressed up as analysis.  The proposition that equality and growth are intrinsically linked is weak.

Two extremely high-profile documents published last year made the economic case for action against inequality.  The first, "Redistribution, Inequality, and Growth" was published by the International Monetary Fund (IMF) in February 2014.  The other, "Trends in Income Inequality and its Impact on Economic Growth", was published by the Organisation for Economic Co-operation and Development (OECD), in December.

(There was of course another other major inequality document of 2014:  Thomas Piketty's Capital in the Twenty-First Century.  I looked Piketty's book on The Drum when it was published.)

Now, there are lots of reports published every year by these and other bodies.  The IMF and OECD have been talking a lot about inequality recently.  But it was these two papers that most clearly spelled out a causal relationship between reducing inequality and boosting growth.  It helped that they came from the IMF and OECD — two apparently neoliberal, conservative organisations.  It wasn't so long ago that the IMF was protested as a bastion of anti-poor plutocracy.

Hence the prolonged press coverage.  This Guardian story on Labor's new Commission cites the IMF paper.  A piece breathlessly citing the OECD report was published in The Age this week.

Yet there were less to these reports than the media coverage suggested.

The IMF report is actually a staff discussion note with the usual "does not necessarily represent IMF views" caveat.  It found a correlation between less inequality and growth.  That's not new.  Remember that correlation does not equal causation.  The real question is:  what is the economic impact of policy designed to reduce inequality?  The IMF paper concluded that income and wealth redistribution does not harm growth.  This was the finding that made global headlines.

But there's an important qualification in the paper.  The IMF authors were only willing to say that redistribution is "generally benign".  In "extreme cases" they found that redistribution does harm growth.  So what is an extreme case?  As the economics journalist Tim Worstall points out, what the IMF paper calls extreme redistribution is the exactly sort of redistribution many first world countries indulge in.

You can see the key chart in figure 7 on page 23.  According to the IMF paper's findings, the United States could afford to do a little more redistribution without harming growth.  Countries like France and Germany do too much — that is, if they're worried about growth.

Australia is dead on the line between extreme and benign.  If this is right, any more redistribution would hurt our economy.  Is this really the story that Wayne Swan and Labor want to tell right now?

So much for the IMF report.  It shows exactly the opposite of what is claimed in the Australian press.

The story contained in the OECD report is a little more complicated.  Again, it's not a report — it's a working paper with the standard caveat ("should not be reported as representing the official views of the OECD" etc.).  This paper says that increasing inequality has a causal effect on growth, and "it follows" that reducing inequality is necessary to sustain long term growth.  That's all well and good, as far as it goes.

But the paper also has some strange findings.  For instance, its modelling finds that investment in human capital — that is education — has no positive effect on economic growth.  (They write:  "the results ... do not point to a positive effect of human capital on growth.  Those findings are in fact hard to reconcile with the large amount of evidence on the positive consequences of education on individual productivity ... and on the significant contribution of human capital to aggregate growth".)

Huge, if true.  All the money we put into skills and education as individuals and as society as a whole does little to grow the economy.  If that's not strange enough, the economist Eric Crampton observed that the OECD paper nonetheless calls for greater spending on education.  Huh?  If the authors don't believe the own findings of their own model, why should we?

Yet despite these issues, the OECD and the IMF papers are Exhibits A and B for political action on inequality.

Let's be fair.  Comparisons between countries are fraught.  Untangling the relationship between inequality and economic growth is complicated.  The mechanisms by which one affects the other are controversial and unclear.  Thomas Piketty's book was one attempt, and a very idiosyncratic one at that.

Still, politics rarely waits for scholarship to come to a conclusion.  What one New Yorker writer recently said about the British election could stand in for the entire inequality debate:

While [John Maynard] Keynes was being unceremoniously booted out the front door of Labour's headquarters, Thomas Piketty was being ushered in through the side entrance.

It's obvious that the Australian Labor Party needs a new agenda — particularly after the grubby politics of the Rudd and Gillard years.  And they probably think focusing on inequality is a nice counterweight to the Coalition with its rich mates and its unfair budget.

But it's not obvious that tackling inequality will grow the economy.  If Labor is looking for an agenda, it would be wise to look elsewhere.

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Conservative voters blindsided by Coalition tax increases

What exactly is the point of a Coalition government if it offers the same sort of tax increases as voters expect from Labor and the Greens?

It's disturbing how quickly the Abbott government has turned its attention to boosting government revenue rather than reducing government spending.  It's only been in power 18 months.

First, there's the planned deposit tax, a levy imposed on all our bank accounts purportedly to pay for the deposit insurance introduced by Labor during the global financial crisis.

When Kevin Rudd proposed the deposit tax in August 2013, Joe Hockey, then shadow treasurer, said it showed how "Australians end up paying for Labor's waste and mismanagement".  So what does it say now the tax is being mooted by the Coalition?

Then there are all the possible changes to the GST.  The GST-free import threshold of $1000 might be lowered.  The government is drawing up legislation to impose GST on digital downloads — the so-called Netflix tax.  There's even been discussion of broadening the GST base to include things like fresh food, health and education.

There's also a Google tax on the horizon.  Hockey said last month companies that do not pay the "legitimate level" of tax are "thieves".  But tax minimisation is perfectly lawful.  We all do it when we fill out our tax forms.  In fact, firms have an obligation to their shareholders to minimise tax.

To change corporate tax law as Hockey wants wouldn't be recouping money that is rightfully the Treasury's.  It would be increasing the corporate tax burden, and increasing investment uncertainty while it's at it.

Likewise, the government wants to tackle what is described as the superannuation tax "concession".  Here it is on a virtual unity ticket with Labor.

Don't be fooled by the word concession.  It is a euphemism.  The issue here is that while income is taxed progressively — rich people pay proportionally more than poor — superannuation is taxed at a flat rate of 15 per cent.  The government thinks wealthy people are putting too much money into super, avoiding high marginal income tax rates, and depriving Treasury of money.  Let's be blunt:  to eliminate superannuation concessions would be just another tax increase.

But there is a more fundamental point.  Superannuation is taxed at a lower rate to counterbalance the income tax system's bias against savers.  All those so-called loopholes and thresholds and concessions exist for a reason.  Many of them exist to prevent perverse and unfair taxation, to treat different assets equally, to avoid double taxation, to encourage saving.  And all of them were instituted as part of a democratic bargaining process.  Eliminating a loophole is the same as raising a tax.

The Coalition should know this instinctively.  Liberal parliamentarians campaigned under the slogan "Our Plan:  Lower Taxes".  When he became leader Tony Abbott declared "there will not be any new taxes as part of the Coalition's policies".  Now his team are lining up alongside Bill Shorten and Christine Milne to push for new and higher taxes.  Let's hope they're embarrassed.

I haven't even mentioned bracket creep, the process whereby inflation slowly pushes wage-earners into a higher tax bracket without making them wealthier.

The tax system is full of little revenue-scrounging tricks like that, tricks of language and mathematics and perspective that hide who pays and how much.

Funny how those tricks always work in Treasury's favour.  Bracket creep could be done away with once and for all by indexing income tax to inflation.  Malcolm Fraser's government experimented with such a policy, but abandoned it.  It is in the government's political interest to let bracket creep work its subtle expropriating magic.

The government's problem is spending, not revenue.  The public spat this month between Hockey and Peter Costello was revealing.  If you missed it, Costello criticised Hockey's desire to raise tax.  Hockey responded that he wished he had the sort of revenue Costello enjoyed in government.

But hold on:  Hockey does have that sort of revenue.  If we adjust the figures for inflation, Hockey has $18.6 billion more revenue than Costello received in his last budget.  (The most recent reported figures appear in the December Mid-Year Economic and Fiscal Outlook.)

The government's other budget excuse — that the iron-ore price is bottoming out — isn't convincing either.  Yes, iron ore could go as low as $US36 ($46) a tonne.  It was nearly $US200 a few years ago.  But that was under Labor.  Costello hadn't been so lucky.  Iron ore only lurched above $36 after the Howard government left office.

Hockey said he was kicking off a national conversation about tax and efficiency when he launched his tax discussion paper last month.  Economists — particularly the sort of economists that populate treasury departments — spend a lot of time thinking about what is the most efficient tax system.  The discussion paper reflects a lot of that thought.  It judges taxes on how much they distort our incentives to work and produce.

However, efficiency isn't the only thing we want in a tax system.  Too often politicians use the word efficiency as a synonym for ingenious.  The 17th-century French finance minister Jean Baptiste Colbert famously described the art of taxation as "plucking the goose as to get the most feathers with the least hissing".  You can understand his view.  For a treasurer the most important thing is maximising revenue.

But it's not obvious why we should be pleased the government wants to pluck more of our feathers.  A Coalition government, no less.

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People, not governments, will end poverty

It is currently fashionable among the international community to claim they need to help countries like Uganda prevent multinational corporations from engaging in "profit-shifting" and "tax minimisation".  This has the reform agenda back to front.

If developing countries like Uganda want to fight poverty, they should fix the institutional malaise that prevents billions of individuals and small businesses globally from entering the formal economy.

The thinking behind the campaign to help countries in Africa and elsewhere to collect more tax from multinational companies is straightforward.

According to some estimates, profit-shifting and tax minimisation by multinational corporations cost developing countries between $35b and $160b annually.

Given that global foreign aid totals to $135b a year, it is thought that helping developing countries tighten tax loopholes will provide them with increased funding.  It will also enable developed countries reduce foreign aid spending.

Putting aside the questionable logic of increasing taxation on a valuable source of jobs and income in developing countries, tackling profit-shifting is far from being the top reform priority.  Indeed, developing countries and the development community should be looking down, not up.

According to the Institute of Liberty and Democracy (ILD) in Peru, two thirds of the world's population is excluded from the formal economy as a result of not possessing adequate formal property rights.

This means they own assets such as houses or operate businesses that are undocumented and not legally recognised.

Laws and records that document property rights enable human beings to form more valuable economic aggregations.

They allow people to trade, exchange, combine and share with others beyond their family or local community.

Without a formal property right that is documented and legally recognised, entrepreneurs cannot borrow money from banks.  Families cannot buy or sell a house with any certainty.

And yes, opening the gates to the formal economy will expand the tax base of developing countries.

According to the ILD, the world's poor own $10 trillion worth of assets and enterprises, currently outside the formal economy.

The economic potential of unlocking this value by bringing it "onto the books" is almost unimaginable.

As Peruvian economist Hernando de Soto argues, poor people are not the problem, but the solution to poverty.

Typically, private property rights exist in developing countries, but the process to acquire them is too complicated, expensive and corrupt to be worth the while of those in the informal economy.

In Uganda, it takes 32 days and costs almost two thirds of an average yearly salary to register a business.  The result is that Uganda has 1.8 million informal businesses.  This means millions of small Ugandan entrepreneurs have difficulty acquiring in bank loans, selling or expanding their businesses.

It would be achievable and inexpensive for the Ugandan Government to streamline this process.

The benefit for those living and working in Uganda's extra-legal sector — which the World Bank estimates makes up 20% of Uganda's GDP, would be enormous.

In Hanoi, Vietnam, a sample and cheap form of property titling has meant that it is one of the few towns in the developing world without slums.

This system could be easily replicated in Kampala and other Ugandan cities, where approximately five million people live in slums.  Indeed, researchers are only just beginning to quantify the benefits of opening up the formal economy.

The international community's call to prevent profit-shifting is a product of the prevailing philosophy that the solution to poverty is enlarging and empowering developing world governments.

The development community and the developing world must divorce themselves from this notion.  It is people, not governments, that will end poverty.

Formal property rights just document the relationships between human beings.  Once these relationships are documented in a simple and stable environment, poor people will work with each other to lift themselves, their families and their communities out of poverty.

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Mike Baird should abolish the ICAC

The NSW Independent Commission Against Corruption is Australia's biggest kangaroo court.  It is adept at taking down political figures who fail to declare bottles of wine on the pecuniary interests register.  But it is comparatively incompetent at uncovering cases of serious corruption.  This is despite the fact ICAC is given coercive powers and routinely flouts the rule of law.

ICAC should be abolished.

This week, ICAC released a statement in response to the decision handed down by the High Court of Australia.  The case hadn't gone ICAC's way and it lashed out at the highest court in the land, demanding retrospective laws to effectively reverse the court's decision.

The crux of the decision was an interpretation of section 8 of the Independent Commission Against Corruption Act 1988, which defines corrupt conduct.  The provision is couched in broad terms and includes a lengthy list of matters that the corrupt conduct could "involve".

Deputy Crown Prosecutor Margaret Cunneen was investigated by ICAC for an incident in late 2014, where Cunneen allegedly counselled her son's girlfriend on how to avoid taking a breath test.

Cunneen sought a declaration in the NSW courts that ICAC did not have the power to conduct an inquiry, as her actions did not amount to "corrupt conduct" under the ICAC Act.

The High Court agreed, finding that the definition of corrupt conduct does not extend to conduct that merely affects the efficacy of the exercise of an official function by a public official.

It is worth pointing out that the High Court was merely interpreting the legislation that gives ICAC its power to conduct investigations into alleged corrupt conduct.

ICAC is a statutory authority and it is limited by the terms of the legislation which authorises its creation.

The statement released by ICAC on Monday reveals a deep malaise within the organisation.

For too long the commission has operated with extraordinary and coercive powers.  ICAC runs roughshod over some of our most deeply held legal rights.

ICAC is given the power to extinguish the right to silence by forcing witnesses to answer questions or produce documents under section 24, and it is given the authority to override the privilege against self-incrimination under section 26.

Perhaps the coercive powers bestowed upon the commission have helped to shape a culture within the organisation that makes the individuals within it feel they are above the law.  Perhaps it's the belief they're going after the bad guys.

Whatever the reason, the demand for retrospective legislation is a shameful attempt to smash the pillars of justice that support our legal system.  ICAC has taken it up on itself to revisit 800 years of English common law.

Apparently the giants of the common law such as jurist and judge Sir William Blackstone, leading constitutional theorist AV Dicey, and barrister and judge Sir Edward Coke got it wrong.

Government agencies aren't created by parliament so they can turn around and lobby the parliament for more power.  ICAC should always have been operating within the limits of the law rather than skirting the line only to be reined in by the High Court.

Not only should Premier Mike Baird and the NSW government ignore ICAC's desperate and illegitimate demand to increase its own powers, they should hear the alarm bells and abolish the commission entirely.

The Creative Victoria Taskforce is not the worst idea, and here's why

The Victorian state government has set up a Creative Industries Taskforce that will, as the media release explains, "steer the future of Victoria's A$22.7 billion creative industries."

At least they didn't say "plan the future".  And somehow Victoria's creative industries are now bigger than Australia's creative industries.  But hubris and mathematics aside, more worrying for those of us who get nervous when industry insiders are invited to make recommendations to politicians about what the inside of the (mostly private sector) industry should look like, is that the Taskforce seems to be mostly made up of high-ranking industry insiders, many on government sinecure.

But I'll let that go too — the expert reference group (that includes Nicholas Gruen and Marcus Westbury) looks a lot grittier and should keep things reasonably honest.

Rather, what is most interesting about the Taskforce is the level at which it occurs — namely that it is prosecuting creative industries policy at the level of the state rather than federally.

This is apropos of two things:  first, this is a retreaded version of the federal Labor Party Creative Industries policy that was subsequently dumped by the incoming Abbott government.

And second, it coincides with the old Arts Victoria portfolio being junked and rolled into a broader creative industries focused super-portfolio called Creative Victoria.  Let me suggest this is all a good idea if combined with a third imperative — namely, to abolish federal income taxes entirely and replace these with state income taxes.

So why is it better for all Australians (and not just Victorians) if creative arts policy (and income taxes) are done at the state rather than federal level?  The reason is an economic model developed by Charles Tiebout in 1956.

Tiebout wondered whether there could be market rather than political solutions to the problem of efficient provision of public goods.

Government spending on arts, culture and creative industries is a public good that mostly benefits those who live in the region in which it is produced.  If it is also paid for at that level with state-based taxes then each jurisdiction can propose its own level of public provision and taxes, and then Australian citizens (including creative producers) can sort themselves over the different state offerings based on their preferences and willingness to pay.

This is called "voting with your feet", and it harnesses the mechanism of competition between states (called competitive federalism) to arrive at an overall efficient level of creative arts policy spending and taxes.

But for this to work, spending needs to be connected to the ability to raise revenue, which could best be met by shifting the income tax to the states.  So state-based creative industries policy needs to be connected to a state-based funding model.

A second theme I want to consider here is this:  what should the Taskforce be doing?  This question obviously directs us to different terrain than whether arts spending should be within the remit of federal or state governments.  The problem with insider panels, even very smart and illustrious ones — as is manifestly the case here — is that you tend get recommendations that don't stray far from calls for more funding to basically do what is already being done, but better.

This is of course not unexpected when those receiving the benefit are disconnected from those paying the costs, and when advice is drawn from those seeking to do things they already do, but that require more funding.

What, then, might an "outsider" panel suggest?  The new economics of innovation and economic growth can offer some suggestions here.  Economists have increasingly realised that a major barrier to industry development is detailed, timely local information about the cost and demand conditions associated with new ideas.

Entrepreneurs need this information to figure out whether there is an opportunity to invest, or not.  Whoever goes first incurs the cost of the experiment, but if successful whoever goes second can copy the model without incurring the cost.

The result is market failure in investing in going first, and thus too few new avenues for industry development.

The basic suggestion, then, is support for entrepreneurial experiments — what in technology and industry sectors would be called R&D, and what in entrepreneurial studies is called "opportunity discovery".  The UK's Nesta provides a good model of this in relation to R&D in the digital arts.

So rather than seeking funding to do things that are already being done, but that people don't seem to want to pay for (i.e. the market failure justification), perhaps the Taskforce might seek to propose a model to experimentally generate useful information that can be used by Victoria's arts and cultural entrepreneurs to evaluate opportunities that may then be privately developed.

The panel will deliver its report in October.  Here's hoping it's not just a call for more funding for more of the same.

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A single drink puts media over the limit

Tony Abbott skolled a beer this weekend.

The Australian press made sure this skol received the hyperbolic, wall-to-wall coverage it deserved.

No doubt you read about it in the Herald Sun, The Australian, the Canberra Times, the Sydney Morning Herald, the Courier Mail, the Guardian, the Adelaide Advertiser, or the West Australian.

You would have read that the Prime Minister was cheered on by a football team at Sydney's Royal Oak Hotel.  You would also have read that the act took him about six seconds, although whether this is a fast or slow pace for drinking a schooner in one go has unfortunately been left un-analysed.

And finally, you would probably have read that this was a bad example for a prime minister to set to young people.  The Foundation for Alcohol Research and Education expressed concern that it sent the wrong signal.

Journalist Judith Ireland said Abbott was "supposed to be a vocal advocate against binge drinking", and that this sort of macho behaviour seemed to go against his claim to be "also the Minister for Women."

Another writer, Andrew P Street, immediately connected this single skol with the binge drinking "scourge that's destroying Australian society, turning our young men into animals."

It would be hard to invent a better symbolic clash between the Australian self-image as larrikin and the po-faced posturing of the media than Abbott's drink.

It is now apparently impossible for any public figure to stray outside the incredibly tightly prescribed rules of behaviour — prescribed, not by the public, but by the press, who of course would be horrified if those standards were applied to them.

The idea that a politician's personal behaviour influences the behaviour of the public is pretty dubious.

Nevertheless, Abbott violated no cultural norm, his actions pose no ethical dilemma, they were neither reckless nor self-harming, and they had no political, economic, or social consequences.  It was one beer.  Abbott is a fitness fanatic.  He's famous for having once ordered a light beer shandy with 60 per cent lemonade.  The weekend's skol would be barely worth mentioning in a colour piece.

Yet once we hear from earnest prognostications of public health lobbyists, downing a single drink in one go becomes symbolic of a deeper, dangerous, threatening moral panic about alcohol consumption.

Alcohol consumption and risky drinking has been steadily declining, as the statistics from the Institute of Health and Welfare have consistently shown.  The proportion of Australians drinking daily is at a 20-year low, and young people are taking up drinking at a later age than ever before.

These facts contrast with the frenzied, and well-funded, anti-booze movement who pop up in the bottom half of every news story tangentially related to alcohol.

Take the suggestion aired over the weekend that the Abbott Government might make a step towards volumetric alcohol taxation in the May budget.

If you were designing an alcohol tax from scratch, you'd want it to be volumetric — that is, levied on the alcohol content, rather than the type of drink.  But we're not designing a tax system from scratch.  In the middle of a budget crisis what is really being proposed is a simple tax increase on one specific good.

Yet the story was quickly filtered through a paternalist prism:  "Cheap cask wine is a serious health issue in many communities," one public health activist said.

Thus the Government might be able to dress up a tax hike that disproportionately affects poorer Australians as if it were a compassionate health measure.

Last week the NSW Bureau of Crime Statistics and Research (BOSCAR) released research suggesting the Sydney liquor licence lockout had achieved its stated goals by dramatically reducing the number of assaults in Kings Cross.

Determining cause and effect in a complex system is incredibly hard.  But BOSCAR found that one of the possible reasons that the assaults declined is because the number of people visiting Kings Cross declined dramatically.  Business groups say revenue in Kings Cross is down 20 to 50 per cent.  The City of Sydney says footpath congestion in Kings Cross is down 84 per cent.  And BOSCAR says foot traffic at night from Kings Cross station is down too.

Obviously shutting down Kings Cross was going to reduce assaults in Kings Cross.  But this is an extraordinary disproportionate response to what was a policing problem.

HL Mencken thought that one of Australia's best contributions to the English language was "wowser".  The word's origins are obscure but some wowsers at the start of the 20th century liked to say it stood for "We Only Want Social Evils Remedied".

Yet in going after social evils, Australia's wowsers have rarely been able to avoid attacking the harmless, knowing choices of people who are perfectly capable of making decisions about their health, and who can distinguish between a prime minister having a joyful, boisterous single drink and serious alcohol abuse.

New Zealand's ''rock star economy'' shows the way

New Zealand's recent elevation to "rock-star economy" status should be the catalyst for Australia to get its own economic and fiscal houses in order.

Australia may have recently vanquished New Zealand in cricket's World Cup, but in more recent times our plucky little neighbour is increasingly prevailing over us by way of comparative economic and fiscal achievement.

Growth in the New Zealand economy (3.3 per cent) was higher last year than Australia's (2.7 per cent) and, indeed, New Zealand's growth rate over the past 12 months exceeded that of other OECD member countries.

This faster rate of economic growth contributed to a slightly lower Kiwi unemployment rate (5.7 per cent) compared to Australia (6.1 per cent).

Improving economic conditions in New Zealand appear to have exerted a powerful effect upon Trans-Tasman migration rates, with emigration to Australia from New Zealand slowing to a trickle in recent times from 33,652 in 2013 to 2,024 in the year to January 2015.

There are also anecdotal reports of growing numbers of Australians settling in New Zealand seeking a more relaxed lifestyle with a lower cost of living, if not new economic opportunities in the growing Kiwi economy.

To add insult to injury, the Key government is planning to deliver a return to budget surplus more swiftly than Australia under the Abbott government, and there are elaborate plans to hold "parity parties" across the ditch in the event of the New Zealand dollar pegging level with ours.

On the presumption that Australia would ordinarily trump New Zealand by way of economic performance, it seems that our politicians, business leaders and even workers are now training their minds to developments across the Tasman and asking themselves "what is going on?".

Answering this question becomes more intriguing when two factors are taken into account.

The New Zealand economy may be growing at a faster rate than Australia's, but the gap in gross domestic product per capita, a common measurement of economic wellbeing, remains firmly in Australia's favour.  That said, there is some disagreement about the extent to which New Zealand's GDP per capita is below that of Australia.

Drawing upon International Monetary Fund statistics, GDP per capita for New Zealand in 2013 ($33,626 in purchasing power parity terms) was about 26 per cent lower than the Australian figure ($45,138).  Removing general government expenditures from the GDP figures, in order to obtain a rough estimate of the level of "private gross product" produced in both countries, the gap closes to about 21 per cent in Australia's favour.

If we accept the assessments of former Reserve Bank of New Zealand Governor Alan Bollard that New Zealand's economic performance has been statistically underestimated against Australia's, correcting this might further reduce the Trans-Tasman private GDP per capita gap to between 10 and 15 per cent.

Whatever the size of the gap in comparative economic performance, it does exist, and Australians are on average also endowed with better material living standards when measured in terms of house sizes, motor vehicle ownership, and mobile phone and internet usage.

Another issue to be considered is that on average Australians still earn more than New Zealanders in their respective home countries, with average wages being roughly 30 per cent higher here than in New Zealand.

The tendency has been for Kiwis to flock to Australia in great numbers and accumulate a higher average income — not to mention better living standards — over their working lives compared with their peers who stayed put in the North or South Island.

That such a migration trend is much less prevalent now certainly deserves an explanation, in the face of continuing income and living standard discrepancies.

In the wake of the devastating Christchurch earthquakes in 2010 and 2011, and with strong residential housing demand in Auckland, New Zealand has experienced a "construction boom" which has contributed to the strong economic growth recorded in recent times.

By contrast, Queensland had its own flood crisis in 2010 and 2011, leaving behind a significant property and infrastructure repair task, but in relative terms these natural disasters had much less impact upon the Australian economy as a whole.

Both Australia and New Zealand are aptly characterised as small, open economies, and accordingly their economic performances are heavily influenced by international demands for their abundant resource endowments.

Australia is facing a heavily discounted price for the iron ore it sells to China and other international markets, and this is contributing to flagging national income growth and tightening constraints upon Australian governments in their quest for more revenue.

While international prices for dairy products, a mainstay of New Zealand's export industries, have likewise moderated in recent months, dairy export volumes from New Zealand continue to trend upwards thanks in part to the increasing preference of Chinese consumers for milk.

Some commentators have also referred glowingly to the contribution of New Zealand's National government, led by John Key, in ushering a new wave of Kiwi prosperity by embarking upon welfare reforms, part-privatisations, and tax mix switches.

Key has even been labelled in some quarters in Australia as a radical reformer, although if one asks any self-respecting New Zealand classical liberal they would, rightly, suggest the Key government has only undertaken marginal reforms at best, whose full economic dividends will unfold over time.

As incremental as Key's reforms have been so far, his success in implementing reforms stands in contrast to the increasingly reform-shy style of modern Australian public governance.

In fact, over the last few years Australia has embarked on increasing the fiscal size of its government and allowing regulatory interventions to continue unabated.

These state experiments have exposed Australia as a high-cost, slow-growing economy and the resulting economic underperformance, magnified by the cyclical economic factors as mentioned previously, is starting to invite unfavourable comparisons even with New Zealand, let alone the rest of the world.

There is certainly no guarantee that New Zealand will continue to outpace the Australian economy, but the recent Kiwi economic improvement could serve as the wake-up call we need to free up our own economy and return our government budgets back to good shape.

If Australia uses the threat of a resurgent Kiwi economy to reform itself, it could be the greatest contribution New Zealand has ever made to Australian life, aside from Crowded House, Russell Crowe, Phar Lap, and the pavlova.

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Keeping to the law is fair in tax

There are so many things wrong about the current tax debate it's difficult to know where to begin.  For a start, Australia is not a low-tax country.  Second, the wealthy don't in fact get any special treatment from the country's tax system.  And third, the suggestion that multinational companies should pay tax, not according to what the law requires but according to the personal interpretation of politicians of what's "fair", is ludicrous — and dangerous.  When the policy debate is populated with notions that are so wrong it's no wonder the only solution that politicians appear to be able to come up with is higher taxes — as Peter Costello so trenchantly said this week.

The claim that Australia is a low-tax country isn't just repeated by the left.  It's in the government's own tax discussion paper:  "Australia's overall tax burden is relatively low compared to other developed countries".  The reality is that the average tax-to-gross domestic product ratio across Organisation for Economic Co-operation and Development countries in 2012 was 33.7 per cent.  If compulsory superannuation and health insurance payments are counted as taxes, Australia's tax-to-GDP ratio was 33.5 per cent.

Then there's the issue of so-called tax "concessions" for the well-off.  Somehow the idea has taken hold in Australia that if the wealthy pay the same rate of tax as everyone else, the wealthy are getting some sort of benefit.  Such thinking applies especially to superannuation.

NO SUCH THING

Two weeks ago the ABC headlined a story "End high-income retirement tax breaks?  Super idea!"  In fact, there's no such thing as "high-income retirement tax breaks".  The rules governing the tax treatment of superannuation apply to everyone equally — rich, poor, and all those in between.  The Association of Superannuation Funds of Australia got lots of publicity recently when it called for an end to "tax concessions" for "higher income earners".  The association was targeting superannuation accounts of more than $1 million.  Given many of the association's members are trade union-dominated, industry superannuation funds and given that 140,000 of the 210,000 people with more than $1 million in superannuation have a self-managed fund, the association's attitude isn't surprising.  Yet the association acknowledged that "the same tax framework" applies to large superannuation balances as to small ones.

Finally, there's the question of what's "fair".  Senators like Labor's Sam Dastyari and the Greens' Christine Milne are demanding that multinational companies should pay "their fair share of tax".  Exactly how much is "fair" no one can say.  Dastyari and Milne are wrong.  Multinational companies, just like individuals, have no obligation whatsoever to pay a "fair share of tax".  The obligation of companies and individuals is to obey the law — nothing more and nothing less.

What's happening is that politicians are demanding first that companies do more than obey the law, and second that companies satisfy a criterion of "fairness" for which those politicians have no democratic or parliamentary mandate.

RELEVANT PRINCIPLES

Two of the relevant principles of the rule of law are that laws must be understandable and they must be able to be obeyed.  Because everyone's definition of "fair" is different, it's impossible for any company executive to ever know whether they have complied with the Labor/Greens specification of "fairness".  If Labor and the Greens want to change the tax laws affecting multinationals, by all means they can try.  But in the meantime politicians should not be expecting anyone to obey their personal whims.

The former Labor minister Craig Emerson said in these pages a few days ago that the Senate hearings against multinational companies "involve an element of rough justice, since some of the corporations making invited appearances might have done little or nothing wrong".  What's happening is worse — it's a breach of the rule.  If we're now prepared to accept our elected representatives handing out "rough justice" the country is in even more trouble than we've realised.

On June 15 we'll be celebrating the 800th anniversary of the Magna Carta.  The achievement of the Magna Carta was that it began the process that replaced the arbitrary rule of kings with the rule of law.  The recent behaviour of senators Dastyari and Milne isn't very different from the "rough justice" that once upon a time King John handed out.

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New bullying watchdog takes nanny state too far

Two weeks ago a new bill was passed into law that gives a government bureaucrat the power to force children to apologise to one another.

The new powers are part of an attempt by the Abbott government to tackle the very real problem of cyber-bullying.  But the idea that it is the role of government to compel a child to say "I'm sorry" to another child is one of the most disturbing ideas this parliament has debated.

The extraordinary powers of the Children's e-Safety Commissioner are the latest example of the role that the state has acquired for itself in matters that rightly belong in the realm of civil society.  In the case of the new cyber-bullying regulator, the state has inserted itself into the relationships between children and between parent and child.

At the heart of the cyber-bullying regime is a power to censor social media content that is "seriously threatening, seriously intimidating, seriously harassing or seriously humiliating" of an Australian child.  These vague terms allow for subjective interpretations and the chequered application of the law.

Part 3 of the act outlines the complaints procedure, during which an investigation can take place.  In conducting an investigation, the Children's e-Safety Commissioner can compel the production of documents and conduct oral examinations.  Such powers remove the right to silence.

Part 4 contains the primary censorship power.  Under this part, if a complaint is made out the commissioner may order the removal of the offending content from the social media service.  Freedom of speech is as important for children as it is for adults and this new regime is an attack on that fundamental civil liberty.

Section 42 of the Enhancing Online Safety for Children Act 2015 is incredibly dangerous.  The new commissioner can serve a notice requiring that the offender "apologise to the child ... for posting the material;  and do so in the manner, and within the period, specified in the notice".

Parents tell children to say sorry.  Teachers tell children to say sorry.  But a government acquiring this role for itself moves down a path where children are becoming wards of the state.  This is the velvet gloved hand of the state manipulating parents and children who — so the argument goes — would be helpless without government intervention.

This is utter nonsense.  Cyber-bullying is already being dealt with by parents, teachers, principals and schools, in conjunction with software companies and NGOs.  The vast majority of primary and secondary schools have developed detailed codes of conduct and practices to combat cyber-bullying.  The Catholic Education Office Sydney, for instance, has a detailed anti-bullying policy which is implemented in Catholic schools across NSW.  And the best thing about the approach being taken by schools is that cyber-bullying is being tackled within the framework of a broader focus on bullying in its totality.

I released a report into cyber-bullying entitled "A social problem, not a technological problem".  My research found that cyber-bullying is a subset of bullying, and that children who are cyber-bullied are also the victims of traditional forms of bullying.

The new Children's e-Safety Commissioner will undermine the vital bonds of the family and restrict the free speech of children.  Bullying is a significant problem deserving of a serious response.  But that response should come from parents, children and teachers, not a government bureaucrat.

No place for laws aimed at race

The idea all people are equal and must not be divided by their race, their religion or their gender is the legacy of liberal democracy and the foundation of our freedoms.

As well-intentioned as advocates of indigenous recognition in the Constitution are, they have difficulty overcoming the fundamental and principled objection that a country such as ours should not embed notions of racial difference in the law.

This is the "liberal" objection to constitutional recognition.  The "conservative" objection is that changing the Constitution will have unintended and unforeseen consequences.

The emerging consensus this week from advocates of recognition, such as Noel Pearson and Graham Bradley, that constitutional recognition is fraught with risk is welcome.  Constitutional conservatives are right to point out that while all acts of government are susceptible to unintended consequences, they have the potential to be doubly serious when enshrined in a nation's foundational legal document.

The change Australia should make to its Constitution is to remove all references to race.  The so-called "race power" in section 51 (xxvi), which gives the parliament the power to make laws for "the people of any race", has no role in our modern, tolerant and diverse democracy.  Section 25, which governs how to deal with state governments that restrict eligibility to vote on the basis of race, should also be removed.

A referendum to agree to a declaration of recognition outside the Constitution may be well-meaning but it will do nothing to improve the lives of indigenous Australians.  The strongest argument its proponents make is that it will be non-binding and have no legal force.  At best, it will recite historical facts no one disagrees with and contain aspirational platitudes everyone supports.

Advocates of indigenous recognition are right — symbolism is important.  Entrenching in either the Constitution or in legislation special provisions for people according to their ancestry symbolises not that all Australians are equal but that we're different.

Pearson's proposal for a new indigenous body that the parliament would be required to consult when passing legislation that affects Aboriginal and Torres Strait Islanders is in some ways even more radical than constitutional recognition.  It would foster the idea the national parliament does not represent all Australians.

If it is to be representative, indigenous Australians would choose an extra set of representatives in an election that no other Australian could participate in.  It could result in competing mandates that would undermine the legitimacy of laws that are passed by one parliament but rejected by the other.

The energy and the effort devoted to constitutional recognition would be better devoted elsewhere.  The worst outcome would be for a referendum on constitutional recognition to proceed and be defeated.  Defeat would likely be portrayed by some as proof that the majority of Australians are racist, when in fact defeat would demonstrate Australians believe we should not be divided on the basis of race.

Our attention would be better directed to more practical questions that will make a real difference to the lives of all Australians.

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Shorten must start thinking about life after opposition

One of the unsurprising consequences of Tony Abbott's modest poll recovery has been the new focus on Bill Shorten.

If you've read one column on Shorten, you've read them all.  The Opposition Leader doesn't stand for anything.  He promised a year of policies but hasn't yet offered any policies to speak of.  And (for a certain type of commentator) he's abandoning the Hawke-Keating legacy of reform and so forth.

All this is obviously true.  But come on.  Would you do any different if you were in his shoes?

Almost every incentive Shorten faces is telling him to stay quiet about his plans for government — to avoid making any potentially divisive statements or holding any potentially controversial positions.  (I'll return to the word "almost" later.)

This is perfectly rational.  No matter what the opposition does — no matter how opportunistically or rashly it acts — popular dissatisfaction with the economy or society will be directed towards the government of the day.  The opposition's job is to gently fan the flames, confident they are unlikely to be caught in the backdraft.

The last thing Shorten wants to do is get caught up in a debate about the specifics of what he would do in government.  Detail is death.  Better to keep the attention on Tony and his unfair-out-of-touch-just-don't-get-Aussie-mums-and-dads Tories.

Oppositions that have tried an alternative strategy — outlined detailed policies, even transformational agendas — have been torn down by incumbent governments, who have the entire bureaucracy at their disposal to fact check and nit-pick anything the opposition throws up.

Think John Hewson, Mark Latham.  Whatever your view of their political philosophy, they both tried the big-picture, year-of-ideas, stand-for-something strategies people are urging Shorten to pursue.  And look at them today.

So now tell me you'd do anything different.  Don't blame Bill for Labor's fecklessness.  He's just a company man.

In the simple model of political competition outlined in Anthony Downs' seminal 1957 book An Economic Theory of Democracy, political parties will delay announcing any policy for as long as possible.  The winner will be the party that announces last.

But incumbent governments can't put off making choices forever.  They can't fully participate in this game of policy chicken.

The best strategy is the one that wins government, and maximises longevity in government, and allows the most flexibility to implement policies.

The need to govern benefits the opposition.  Government policy announcements helpfully identify what the electorate hates.  So the simplest opposition strategy is to copy the government's popular policies and oppose the unpopular ones.

Abbott was an especially talented opposition leader.  He didn't just oppose unpopular policies.  He managed to make policies unpopular, seemingly through sheer force of will.

Shorten as Opposition Leader looks as if he's trying to mimic Abbott's example.  Yet Shorten is drawing the wrong lesson.

Remember that "almost"?  The optimal opposition strategy isn't just the one that wins government.  It's the one that wins government, and maximises that party's longevity in government, and allows them most flexibility to implement their policies.

The Abbott team has learned — apparently to its surprise — that strategies adopted in opposition constrain what can be done in power.

Voters expect some promises to be broken, as I argued in the Drum last year.  Yet this is only true within a certain range.  The public wants to know what they are buying, even if they have a reasonable tolerance for products that do not exactly match the packaging.  Expectations still matter.

The Coalition forgot this.  The Coalition did not prime the electorate for the sort of policies it introduced within its first six months.  Having pared its campaign message down to the most memorable essentials, voters were surprised to learn that End The Waste and Cut The Debt actually involved large-scale policy change, not just swapping one party in power for another.

Even in government the Coalition tried to hold back the policy reckoning as long as possible.  It disavowed the Medicare co-payment when it was first discussed in Christmas 2013.  It delayed the Audit Commission until the eve of the budget.

I won't bother recapping how everything has played out since.  But the legacy of that opposition strategy has left us with a badly denuded Coalition government.  It is shell-shocked and weak.  It is unable to pursue its own agenda.  Now it grasps at whatever it thinks will keep it stable and in power until the next election.

A year ago the question was whether the Coalition was bold enough to tackle industrial relations head on.  Today the question is whether the Coalition will ever feel confident enough to tackle the deficit it was elected to reduce.

No doubt Bill Shorten likes to imagine he can win the 2016 election.  It's not impossible.  But winning is only half of it.  He needs to start imagining how Labor's small target strategy might harm him if he does win.

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Moral panic overlooks real company tax problem

The corporate tax profit shifting debate is a classic example of moral panic.  First, it's incredibly complicated.  How many Australians could explain how company tax is calculated, let alone what business practices a "double Irish Dutch sandwich" refers to?

Second, it's driven by hyperbolic and simplistic reports of companies paying little to no tax.  These stories pivot on even more complicated scandals, such as "Lux Leaks", and the technicalities of foreign tax systems.

And third, it's wildly overstated.  The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.

It's true that earlier estimates in the 1990s were much more than that.  It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue.  But the firm- and affiliate-level evidence is better now.  It's pointless to scrutinise a moral panic for the clarity of its claims.  But the corporate tax debate is missing the point.

As a society we don't value firms for the money the government extracts from them.  We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.

We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs.  Any attempt to tackle profit shifting that raises uncertainty or lowers Australia's investment climate would be a disaster.

The corporate tax is not a good tax.  As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments.  The burden of the corporate tax is scattered and obscure.

Greens leader Christine Milne has been running around this week accusing companies of not paying their "fair share".  But that fair share is always and inevitably passed on to someone else.  The literature on the incidence of corporate taxation suggests the burden of corporate tax is worn in the short term by investors, and in the long run by a combination of investors and workers.  Of course, under our superannuation system every worker is an investor as well.

BIG, BAD BUSINESS AN ILLUSION

Few of the standard justifications for the existence of corporate tax — particularly in a small, open economy — are compelling.  One fear is that company owners might divert their personal income into the company.  But they'd still have to pay capital gains tax on the way out again.  Another argument is that corporate tax is an easy way to get money out of multinationals.  Absurd, we know.

That's why there are academic tax papers with titles such as "Why is there corporate taxation in a small open economy?" and "Can capital income taxes survive?  And should they?"

For the political class, the corporate tax has one great advantage:  it's unclear who ultimately pays.  It's easy and comfortable to beat up on corporations, just as long as you stay mum about who actually ends up paying corporate tax.  The whole system rests on this clever one-two trick.  Who could sympathise with big bad business?

But even if the government wishes to keep the corporate tax fiscal illusion going, there's hope.  For all the handwringing about the double Irish Dutch sandwich, one point often missed is that Ireland has been very clever.  That country's low corporate tax rates have brought in multinationals, and with them jobs and investment.

It's not obvious those low rates have come at a cost to the Irish budget.  Corporate tax revenue as a percentage of total revenue in Ireland is almost exactly the OECD average.  There's no reason we couldn't copy the Irish example — get in on the Irish-Dutch sandwich ourselves.  The Irish make their own luck.  So should we.

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This small business fetish has gone too far

As part of its back to basics campaign, the Abbott Government has telegraphed a small business tax package for the 2015 budget.

The plan, as far as we know, is that small business will get a tax cut of about 1.5 per cent.  Big business will be left paying the standard rate of 30 per cent.

The Coalition has long had a romantic attachment to small business as a sort of moral heart of Australian private enterprise, but this policy is the worst sort of small business fetishism.

It threatens to further undermine an already complicated corporate tax system, confuses the sources of economic growth, and will distract policymakers from the much more fundamental task of opening protected areas of the economy up to competition.

Let's take these one at a time.

It beggars belief that while the political class is banging on about the convoluted the tax code, "unfair" tax concessions, and clever corporate tax minimisation, the Government is planning to increase the complexity of the corporate tax system.

How long before we see the first exposé in Fairfax business pages about large corporates rearranging themselves to take advantage of the concessional small business rates?

The proposed small business tax cut would make the Australian corporate tax system explicitly progressive.  Just as we pay a higher rate of income tax according to our wealth, firms would pay a higher rate of corporate tax depending on their size.  The United States has a progressive corporate tax.  Ours is flat — 30 per cent no matter what.

Now, in practice, firms don't pay the same 30 per cent rate.  As Sinclair Davidson has documented, all those deductions, offsets and credits mean the effective tax rate — that is, the amount of tax paid — hovers about 25 per cent.  On top of this, small businesses tend to have much more variable profitability, so they tend to pay less than big business already.

Even with this caveat in mind, progressive corporate taxes are a terrible idea.

Corporate taxes are very different from income taxes.  Income taxes are ultimately paid by the people whom the tax is levied upon.  The money comes out of the pocket of the person who fills in the tax return.  I'd prefer our income tax to be flat.  But progressivity for income tax at least has its own internal logic.

Corporate taxes are very different.  The cost of corporate tax is ultimately paid by someone other than the corporation — passed on to consumers through higher prices, or to shareholders, or even to the company's employees.

After all, companies don't pay corporate tax, people do.

It's not at all clear why we would want to tax people who buy products from large firms more than those who buy from small firms.  Unless, of course, the small business tax cut is a form of primitive industry policy to prop up small business and make it artificially competitive.

Large firms exist for a reason:  to take advantage of economies of scale.  Large scale manufacturing is more efficient than small scale manufacturing.  Big is beautiful.  All else being equal those big multinationals that everyone hates have given us cheaper products and higher living standards.

This hints at a much deeper confusion underlying the Government's small business fetishism.  Joe Hockey likes to describe small business as the "engine room of the economy".  Funnily enough Wayne Swan used to say the same thing.

Of course, no single sector is the engine room of the economy.  That's just rhetoric.  (Anyway, what happened to mining?)

But the Government seems to be attributing the economic characteristics of entrepreneurship onto small business.  Entrepreneurs bring new products to market, put competitive pressure on existing firms to do better, undercut monopolies, and keep not just the economy going but our living standards improving.

All those giant firms that dominate the 21st century economy — Google, Apple, Microsoft, etc — were originally garage start-ups.  Why would we want to penalise the next Google for growing by taxing them at a higher rate?

Obviously by definition entrepreneurs start as small business owners.  But not all small businesses are equally entrepreneurial.  The defining characteristic of an entrepreneur is that they do something new.  They are driven by an idea.  We hear from Canberra that big business is a threat to small business.  Well, entrepreneurs are a threat to big business.  Paper beats rock.

If the Government wants to help entrepreneurs, it shouldn't be looking first at the tax code.  It should be looking at the sorts of things raised by the Harper review into competition policy last week.  That is, the regulatory restrictions on entering markets, like the taxi or retail pharmacy markets, which hold back entrepreneurs from exerting competitive pressure on incumbent businesses.

It's true that the small business tax cut is a lot less objectionable than the tax increases being proposed, like the bank deposit tax and an increase in the GST.  Maybe it's churlish to criticise a tax cut when the real risk is tax increases.

But the Abbott Government says it understands the importance of free enterprise and the market economy.  It should want to reduce corporate tax on all firms — not just small ones.

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Tax burden would shrink with smaller government

The tax reform process needs to be carefully managed to avoid the larger government that Australia can ill-afford for a prosperous future.

With much fanfare the Abbott government this week released its long awaited discussion paper on tax reform, which it envisages will represent a start of a process in which it will take reform to the next election.

Much like the early stages of the Henry tax review under the previous Rudd-Gillard government, this discussion paper canvasses a well-worn narrative that makes the case for changing our taxation regime.

The paper especially refers to Australia's reliance on a centralised, direct taxation regime, with high and complex corporate and personal income taxes compromising economic growth by sapping incentives for greater labour supply, entrepreneurship and innovation.

So, according to the discussion paper as devised by federal Treasury, we need to alter the composition of our taxation arrangements away from direct taxes and toward indirect taxes, including the GST, to capture more revenue for government.

Market-led reforms to business structures and technologies, particularly low cost computing and online communications, have economically emancipated ordinary Australians from being forced to buy expensive and low-quality products from domestic bricks-and-mortar retailers.

The rest of us see the freight containers of imported cheap books, clothing, computers, and the like, as a massive saving of disposable income, and a friend in the fight against price inflation.

On the other hand, the Australian Taxation Office and Treasury see freight containers filled with imports as a tax grab going begging and want to put an end to it.

The tax discussion paper also makes the preposterous case that the imposition of state land taxes and council rates already represents an efficiency gain to the economy, and so what seem to us as residences and factories appear to the taxman as revenue-raising goldmines.

The authors of the tax discussion paper assert that Australia can readily bear a heavier tax load, especially on goods and services, and on land, with little economic consequence, because we supposedly are a low taxing country.

If only this were true.

As former Treasury deputy secretary Greg Smith noted in a paper written in 2007, common international tax comparison statistics provide a misleadingly low impression of the Australian tax burden.

This is because taxation laws have been imposed that effectively force people to spend their money in particular ways, such as employers compulsorily contributing to superannuation and workers' compensation schemes, or using the tax system to encourage people to purchase health insurance policies.

From an economic perspective these measures effectively act as taxes and should be incorporated into Australian estimates of taxation burden in internationally comparative perspective.

Contrary to the tax discussion paper assertion that "Australia has a relatively low tax burden compared to other countries", including compulsory superannuation, workers' compensation and health insurance mandates raises official estimates of our tax-to-GDP ratio.

In 2012 it is estimated by the OECD that our aggregate tax burden stood at 27.3 per cent, but inclusion of these obligatory payments raises the Australian tax-to-GDP ratio to 34.3 per cent (compared with the OECD average of 33.7 per cent).

And spare a thought for the much lower overall tax burdens imposed by East Asian nations, which are increasingly competing against us for increasingly mobile and specialised capital and labour.

In the final analysis, what this tax reform process does is attempt to soften Australians up for a ratcheting up of the overall tax burden, off an already high base, to validate the excessive government spending undertaken over the last few years.

By no means do we have a "revenue problem", since the ABS shows commonwealth taxation revenues rising from $286 billion in 2007-08 to $338 billion in 2012-13, and the mid-year fiscal outlook estimates a further tax increase to $354 billion this financial year.

The states and local governments have also been experiencing overall growth in taxation revenue since the global financial crisis.

It may be true that altering the bias of the taxation structure from direct toward indirect taxes would yield some marginal improvements in economic efficiency, but the deadweight loss estimates shown in the discussion paper illustrate there will still be efficiency costs substituting income taxes for the GST.

But the great problem with this tax discussion paper, as with most other tax reviews of the past, is that it looks upon tax reform issues in isolation, and without due consideration of expenditure efficiency matters.

As Australian economist Geoffrey Brennan reminded us nearly 30 years ago, tax reform in its conventional guise would only make it easier for governments to confiscate revenue from taxpayers, for subsequent spending on initiatives which rank poorly on efficiency grounds.

If a tax mix switch still imposes efficiency costs upon the economy, since every tax distorts economic behaviour in certain ways, and if government spending yields fewer benefits than that obtained if taxpayers were able to otherwise retain their proceeds, it is difficult to see how people get ahead through tax reform.

To put this in another way, we wake up, post-reform, with heavier GST and land tax burdens, a somewhat lower income tax burden that is still internationally uncompetitive, and still inefficient public sector spending with a built-in impetus for further expansion.

There is no question that there are certain deficiencies with our taxation system which require specific remediation efforts.

These include a personal income tax regime with steep gradated rates and a lack of indexation forcing average wage earners onto higher tax rates, a company tax system with a headline 30 per cent rate which is too unattractive to foreign investors, a lack of taxing powers for lower levels of government, and far too much tax complexity.

But the tax reform debate today, as it has been in the past, is informed by a central underlying question:  is the present size of government too big, or too small?

Much of the tax policy orthodoxy seems informed by an underlying presumption that taxpayers must pay for whatever expenditure commitments have been previously committed politically, even if they are intrinsically unaffordable in a small, open economy such as ours.

But if we think that the present size of government is too large, that sets the policy stage for reforms focused upon reducing the burden of public sector spending which, consequently, provides room for substantial tax cuts across the board.

Let there be no doubt:  the final menu of tax reform options presented by the Abbott government will, for better or worse, unambiguously inform the Australian electorate which direction it thinks the tax load, and ultimately public sector size, should go.

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