Dick Smith’s manifesto flies in the face of sound economic policy
Good on Dick Smith for taking an active role in the discussion of public policy. And good on him that he is prepared to put his own money where his mouth is.
The funding will cover an advertising campaign laying out Smith’s agenda as well awarding a total of $2 million to political candidates who sign up to limiting Australia’s population growth.
But this is where the good news ends because Smith’s policy prescriptions are, with one exception, unsubstantiated, ill considered and bizarre. They are close to being complete tosh and will have the reverse effect on what Smith claims to care about: improving the living standards of all Australians.
One of the fundamental flaws in the Smith manifesto is the confusion between population growth and economic growth. It is entirely possible to favour restricting population growth while advocating measures that will increase per capita gross domestic product (or national income). I happily confess to being in this camp.
Smith claims that our intake of migrants is too high and he does have a point. The migration program that covers permanent migrants in the skill and family categories is set at 190,000 entrants a year for this year and for the three years after that.
A figure closer to 100,000 is, in my view, much more sensible. Economists have always known there are limits to the degree to which an economy can absorb new migrants and this is made worse in Australia because more than 85 per cent of recent migrants have settled in Melbourne or Sydney. The loss of urban amenity, congestion, pressure on infrastructure and accommodation all mean that a lower migrant intake is in order.
But this is where Smith begins to run off the rails. He wants only 70,000 new migrants each year, but within his total intake he wants to increase the numbers entering under the humanitarian program.
If the economy is the issue, this is a really bad idea because we know recently arrived refugees struggle to get a foothold in the labour market and have high rates of welfare dependence.
But this is the high point of Smith’s agenda; it descends rapidly at this point into economic farce. He is convinced that immigration is causing greater inequality in Australia and that cutting it will improve the economic outcomes for poorer members of the community. But here’s the thing: it is not clear that income inequality is deteriorating in this country.
The most reliable dataset, the Household, Income and Labour Dynamics in Australia, is telling us that income inequality has reduced somewhat in recent years. Internationally, Australia is somewhere in the middle of the pack when it comes to income inequality.
It is possible that migrant flows affect relative wages and therefore income inequality. But because our migrant intake is relatively skewed towards the skilled end of the labour market, the local workers who are likeliest to be adversely affected by immigration are the better paid. In other words, incomes may have become more equal because of immigration.
Even so, immigration is likely to have been a relatively insignificant factor bearing on the distribution of incomes. There are many developed economies where income inequality has risen sharply but they have relatively small migrant intakes.
To be sure, wealth inequality is a different matter and rising housing and asset prices have meant the distribution of wealth in this country has become more unequal. This could constitute a case for trimming the migrant intake, but there are other more proximate causes of rising housing and asset prices such as excessively low interest rates and available credit.
But it is at this point that Smith goes seriously off the rails. He wants the company tax rate lifted from the present figure of 30 per cent for large firms and 27.5 per cent for small ones to 45 per cent. He is surely kidding.
This would put us as the country with one of the highest company tax rates, in the context of a country that requires foreign investment to finance the capital account deficit and to spur new investment.
There is no point harking back to the days when Smith was lucky enough to make a lot of dough because pretty much everything has changed since then, including the deregulation of the financial system, the internationalisation of the economy and the restructuring of the tax system, including dividend imputation.
But it gets worse. Smith wants to impose a top marginal income tax rate of 65 per cent on high-income earners — no, I am not making this up — and to legislate for the public disclosure of the taxes paid by these high-income earners.
He also wants an inheritance tax imposed on the richest 1 per cent of the population because that would work well. Let’s face it, the top 1 per cent would be out of here as fast as I can say Christopher Skase.
And to complete what would have to be the worst ragbag of policies dreamt up, Smith wants to eliminate the capital gains discount and remove all tax concessions for negatively geared assets. Presumably he is not advocating any grandfathering of these changes either.
Where does one start on the foolishness — nay, madness — of these ideas? The capital gains tax discount exists to offset the impact of inflation and the bringing to book of a capital gain in one year on an asset that may have been held for many. It is there to encourage investment in assets, not discourage it.
And to remove all negative gearing concessions would lead to huge disincentives for individuals to invest in income-producing assets, particularly in the context of a capital gains tax at full marginal tax rates, while potentially imposing substantial capital losses on those who hold assets.
If there were ever any hope that a band of entrepreneurial investors might choose to launch and operate in this country, think again. At that point we simply will be taking in each other’s washing.
But maybe at that point Smith would have achieved his dream: zero economic growth. Mind you, negative economic growth is the likelier outcome.
The real tragedy in Smith’s wacky intervention in the discussion of public policy issues is that he has a point about restricting the migrant intake to a smaller annual number.
This is a relatively sensible and modest idea that probably would have many supporters among ordinary Australians.
But the rest of his package is crazy economic illiteracy. For someone who has had a business career and who presumably has had the time to read about and observe the real world, his off-the-wall proposals are difficult to fathom.
What we need is a tax system that encourages hard work, risk-taking and investment. We won’t make the poorer members of society richer by taxing high-income earners even more. At some point, these high-income earners, many of whom have spent years in education and training, will simply decide to take their bat and ball and go home — to another country or into semi-retirement.
Hey, semi-retirement is something Smith does know about.
Maybe it’s time for his complete retirement after this reckless and zany contribution to public discussion.
Read the original article HERE.