Taxation and social security system reform

General observations The case for reform of the taxation and social security systems, together with reform blueprints, were provided in the Henry Review released in May 2010. To the Henry Review reform proposals should be added a more comprehensive and higher rate GST, and the option of no-bars reform of the taxation of superannuation, both of which were excluded from the review’s terms of reference. A comprehensive taxation reform package could involve any one of, or a combination of, the following: A comprehensive income tax base which removes current exemptions, such as the concessions for remuneration taken as fringe benefits and superannuation, and a simple progressive tax rate schedule which is automatically indexed for inflation; Greater neutrality of the effective tax rates on different saving and investment choice options, and a low rate on the taxation of capital income to reflect the relatively high elasticity of supply of capital to Australia; Increased taxation revenue from comprehensive tax bases on the economic rent earned on land, mineral and energy deposits (to replace current royalties), and other natural resources; Greater revenue from a comprehensive GST base along the NZ model, and at a higher tax rate; Reform of special taxes on selected products to correct market failures associated with motor vehicles, alcohol, and carbon and other forms of pollution; Remove all state stamp duties; and Simplify the social security system as proposed by the Henry Review

A Tax Mix Change to Reduce Greenhouse Gas Emissions

Placing a price on greenhouse gas emissions using an emissions tax or auctioning tradable permits provide the least cost government intervention to reduce pollution. Initial effects of the charge on pollution include an increase in the relative prices of greenhouse gas intensive products and production processes to reduce pollution, and a net increase in indirect taxes with a windfall boost to government revenue. There are at least three overlapping sets of economic efficiency, equity and political acceptance reasons for returning most of the windfall revenue gains to households as compensating income tax reductions and increases in social security payments as a tax mix change package. Most of the indirect tax increases will be passed onto consumers as a higher cost of living, albeit with changes in relative prices. With a likely regressive incidence, some compensation in a close to lump sum form has both equity and political acceptability claims. With no changes in market wages and nominal interest rates, the higher cost of living will further distort the effects of existing income taxes on labour and capital market decisions and their associated efficiency costs. Or, the cost of living increase will provide a catalyst for compensating increases in market wages and nominal interest rates, with the added risk of initiating an inflationary cycle. A tax mix change package has the potential to neutralise the negative effects of the associated increase in indirect taxation. Given the expected time path of increases in the pollution charge on greenhouse gas emissions, and of the windfall increase in indirect tax revenue, the details of new tax mix change package will need to be renegotiated every few years.Resource /Energy Economics and Policy,

Tax reform and the natural resource industries

Tax reforms passed by Federal Parliament in June 1999 include rationalising indirect taxes, a tax mix change, and a smaller fiscal surplus. The impact or first‐round effects on the natural resource industries indicate large gains. Important second‐round reactions, particularly a real currency appreciation, erode most of, and in some cases more than all of, the first‐round gains. A complete assessment requires the use of general equilibrium models.Resource /Energy Economics and Policy,

Trends in regional specialisation in Australia

No Abstract

Hours of Work: A Demand Perspective

In Australia, and in other countries, we observe at any one time a wide distribution of hours worked per week. We develop a cost-minimising model to explain employer choices over the number of employees and their hours of work. An important finding is that hours of work and the number of employees are not perfect substitutes. We show that this has important implications for the way economists model labour demand and measure productivity. We show that estimates using total hours worked as the measure of labour input implicitly assumes perfect substitution of persons and hours and results, inter alia, in an overestimation of the rate of labour and multifactor productivity growth in Australia and especially in the period prior to the so called ‘productivity slow-down’.Employment, Hours, Production Function, Total Factor Productivity

Water rights for variable supplies

The relative merits of different systems of property rights to allocate water among different extractive uses are evaluated for the case where variability of supply is important. Three systems of property rights are considered. In the first, variable supply is dealt with through the use of water entitlements defined as shares of the total quantity available. In the second, there are two types of water entitlements, one for water with a high security of supply and the other a lower security right for the residual supply. The third is a system of entitlements specified as state-contingent claims. With zero transaction costs, all systems are efficient. In the realistic situation where transaction costs matter, the system based on state-contingent claims is globally optimal, and the system with high-security and lower security entitlements is preferable to the system with share entitlements.property rights, state-contingent claims, water, Resource /Energy Economics and Policy,

Generic advertising without supply control: implications of funding mechanisms for advertising intensities in competitive industries

Producer profit‐maximising rules for generic commodity advertising programs and associated funding levies are derived. Lump‐sum, per unit and ad valorem levies, and government subsidy funding arrangements are compared and contrasted. The initial single‐product competitive market model is extended to incorporate international trade, government price policies, and multiple commodity interactions.Marketing,

Regional Beveridge Curves: A Latent Variable Approach

It is important to understand how labour markets in different regions are affected by ‘common’ or ‘national’ shocks including national macroeconomic, monetary and fiscal policies. This paper applies a new econometric approach - involving an unobserved components model - to identify the direction and timing of the shifts in regional Beveridge Curves. The method allows for the presence of common national factor(s) and region specific factor(s) in the determination of activity in labour markets including regional specific loadings on the common factor. The method is applied to Australian data. The results show that equilibrium unemployment rate vary by region and over time. In terms of implications for policies to reduce unemployment, these results suggest a key potential role for regional policies.

State & Territory Beveridge Curvesand the National Equilibrium Unemployment Rate

Shifts in the ‘national’ equilibrium rate of unemployment relevant for determining national economic policy settings, we contend, are those shifts which are ‘common across states & territories’. One way to identify these is to identify the common shifts in state and territory Beveridge curves in Australia over time. When we do this we recover a national equilibrium unemployment rate series which is similar to, but at the same time different enough from, other measures to make it interesting. In our view it is this, or some other “national” equilibrium rate series, a series which ‘by construction’ will capture national (nation-wide) factors based on common shocks or common trends across states and territories, that should be the basis for policy and not an ‘aggregate series’ which does not do this. We estimate the value of the equilibrium unemployment rate for 2006 to be 3.7%, which may be compared with the actual unemployment rate for that year of 4.8%, indicating that even as recently as 2006 the actual rate was at least 1 percentage point above the equilibrium rateEquilibrium Unemployment Rate Beveridge curve Australia