When I decided to write this a couple of days ago I had the impression that the Australian tax commissioner had sent a letter to Dick Smith, a successful Australian businessman and aerial adventurer, threatening him with dire consequences if he did not refrain from use of legal tax avoidance measures. As I gathered information together, however, a rather different story emerged.
The best place to begin is with the late Kerry Packer, who was the wealthiest person in Australia. When asked by a government member about his company's tax minimisation schemes (during a public inquiry in 1991) Packer famously replied:
"Of course I am minimising my tax. And if anybody in this country doesn't minimise their tax, they want their heads read, because as a government, I can tell you you're not spending it that well that we should be donating extra!"
A couple of weeks ago it seemed that Dick Smith had finally decided to follow Kerry Packer’s lead. Smith wrote, in a letter to the tax commissioner, that he didn’t agree with Packer’s statement at the time it was made “but I certainly do now”.
Smith’s letter to the tax commissioner was in response to a brochure sent to 1200 wealthy Australians. Having just looked at the brochure, merely out of curiosity, it seems to me that there is nothing particularly objectionable in it. The main message seems to be that it is important for wealthy people to get good advice about tax matters.
However, in his letter Smith made clear that what had led him to change his mind was a particular instance of waste and mismanagement in relation to defence procurement. It seems that the tax commissioner was just a convenient target for Smith’s letter.
When I first read the newspaper articles suggesting that Dick Smith had become a convert to Kerry Packer’s views on government spending and tax minimisation I thought this meant that he was about to put his considerable skills in capturing public attention to use in making the case for smaller government and lower taxes. I was wrong.
An article in “The Australian” on Monday indicates that Smith has now told the tax commissioner that he will not be “entering into any scheme to legally minimize my tax”. What did the commissioner do to get Smith to change his mind? It seems that he just appealed to Smith not to do anything that could reduce community confidence in the tax system.
So, how did Smith respond? Well, it seems to me that Smith’s response was the human equivalent of a puppy that whines until it gets attention and then rolls over onto its back and asks to have its tummy tickled. Smith asked the tax commissioner to publish a list of Australia’s 100 top taxpayers in order to give them recognition for their efforts. His reasoning seems to be that anyone in the list of Australia’s 100 top taxpayers must be a particularly virtuous person who deserves recognition for, in effect, volunteering to pay more tax than he/she is legally obliged to pay.
What nonsense. Some wealthy people who take advantage of opportunities legally available to avoid tax, in their efforts to maximise post-tax income, might still be included among the top 100 taxpayers. Moreover, it is possible for wealthy people to minimize their tax as a consequence of altruism rather than selfishness – people pay no income tax if they donate all their income to registered charities.
Wednesday, July 9, 2008
Wednesday, July 2, 2008
What was Alan Wood's final message as economics editor of "The Australian"?
At the end of his column in “The Australian” today, Alan Wood told readers that this was his final column as economics editor.
So, what message did Alan view as sufficiently important to be the subject of this column?
I quote what seems to be Alan’s main point:
“If Australia moves ahead of the rest of the world to curb carbon emissions, there will be no benefit to Australia or the world but a potentially very high cost to us, involving extensive restructuring and transfers of wealth within Australia and from Australia to emerging economies.”
I think that message is worth repeating. The rest of the column can be read here.
So, what message did Alan view as sufficiently important to be the subject of this column?
I quote what seems to be Alan’s main point:
“If Australia moves ahead of the rest of the world to curb carbon emissions, there will be no benefit to Australia or the world but a potentially very high cost to us, involving extensive restructuring and transfers of wealth within Australia and from Australia to emerging economies.”
I think that message is worth repeating. The rest of the column can be read here.
Tuesday, July 1, 2008
What does happiness research tell us about the trade-off between inflation and unemployment?
The best place to begin is with the misery index. What is the misery index? No, it isn’t a measure of the average happiness level of economists. The misery index is the sum of the inflation rate and the unemployment rate. The concept was apparently created by Arthur Okun in the 1960s (see here) but it wasn’t the best idea he ever had. (Arguably, Okun’s best idea was the ‘leaky bucket’ metaphor. Redistribution of income from the rich to the poor is like carrying water in a leaky bucket. Some of the contents of the bucket is lost in transit. More information can be found here.)
The problem with the misery index is that it assumes that a percentage point increase in inflation creates just as much misery as a percentage point increase in unemployment. That assumption might make some sense if we had no information about the relative amounts of misery caused by inflation and unemployment, but that is not the case.
The results of happiness research suggest that unemployment has large negative effects on satisfaction with life. Research suggests that an increase in annual income of over $40,000 (over and above unemployment benefits) would be required to give Australian males who are unemployed the same probability of experiencing high life satisfaction as someone who is employed. The corresponding income increase for women was estimated to be about twice as large (for reasons unknown). Larger required income differences have also been estimated for other countries (see Nick Carroll, ‘Unemployment and psychological well-being’, Economic Record, Sept. 2007).
Happiness research suggests that although inflation has significant negative effects on satisfaction with life these effects are smaller than the effects on unemployment. Using a large European data base, Justin Wolfers has estimated that a percentage point of unemployment causes about 5 times more unhappiness than a percentage point of inflation (‘Is business cycle volatility costly’, International Finance, 2003, here).
If we can assume that a similar ratio applies in Australia, would this mean that the Reserve Bank would have to be crazy to contemplate policy action that would reduce inflation by a percentage point if this was likely to result in an increase in unemployment of 2 percentage points? No. In order to do this calculation properly it is necessary to take into account the duration of these expected effects of policy actions. If the reduction in inflation is expected to be permanent and the increase in unemployment is expected to last for only one year, the policy action would make sense. A clever politician might even be able to sell such an outcome to the public as “the recession we had to have”.
The obvious point is that if the Reserve Bank is able to demonstrate its resolve to prevent inflationary expectations from taking hold it will be able to avoid resorting to the unpalatable option of inducing a recession in order to reduce inflation. Unfortunately, the Bank is under pressure from some economists to view recent increases in inflation as having been “imported” and hence to take no action against them. I don’t know how anyone can argue that inflation can be imported in a country that has a floating exchange rate - but that may not mean much because I still count myself among those who think that “inflation is always and everywhere a monetary phenomenon”.
The problem with the misery index is that it assumes that a percentage point increase in inflation creates just as much misery as a percentage point increase in unemployment. That assumption might make some sense if we had no information about the relative amounts of misery caused by inflation and unemployment, but that is not the case.
The results of happiness research suggest that unemployment has large negative effects on satisfaction with life. Research suggests that an increase in annual income of over $40,000 (over and above unemployment benefits) would be required to give Australian males who are unemployed the same probability of experiencing high life satisfaction as someone who is employed. The corresponding income increase for women was estimated to be about twice as large (for reasons unknown). Larger required income differences have also been estimated for other countries (see Nick Carroll, ‘Unemployment and psychological well-being’, Economic Record, Sept. 2007).
Happiness research suggests that although inflation has significant negative effects on satisfaction with life these effects are smaller than the effects on unemployment. Using a large European data base, Justin Wolfers has estimated that a percentage point of unemployment causes about 5 times more unhappiness than a percentage point of inflation (‘Is business cycle volatility costly’, International Finance, 2003, here).
If we can assume that a similar ratio applies in Australia, would this mean that the Reserve Bank would have to be crazy to contemplate policy action that would reduce inflation by a percentage point if this was likely to result in an increase in unemployment of 2 percentage points? No. In order to do this calculation properly it is necessary to take into account the duration of these expected effects of policy actions. If the reduction in inflation is expected to be permanent and the increase in unemployment is expected to last for only one year, the policy action would make sense. A clever politician might even be able to sell such an outcome to the public as “the recession we had to have”.
The obvious point is that if the Reserve Bank is able to demonstrate its resolve to prevent inflationary expectations from taking hold it will be able to avoid resorting to the unpalatable option of inducing a recession in order to reduce inflation. Unfortunately, the Bank is under pressure from some economists to view recent increases in inflation as having been “imported” and hence to take no action against them. I don’t know how anyone can argue that inflation can be imported in a country that has a floating exchange rate - but that may not mean much because I still count myself among those who think that “inflation is always and everywhere a monetary phenomenon”.
Thursday, June 26, 2008
How important is the right to choose?
This is a story about Mathew and Mark, identical twins, who were separated at birth and still do not know of each other’s existence. My story begins when both felt a little unhappy most of the time – not depressed, just not happy. In terms of the objective circumstances of their lives there was no obvious reason why they should be unhappy. Jill, who happened to meet Mathew and Mark by chance and figured out that they must be identical twins, felt that their unhappiness was largely genetic. Jill actually had the expertise to make such a judgement because she was a neurologist who conducted research on happiness.
Jill decided that rather than arrange a meeting between Mathew and Mark she would keep them ignorant of each other and use them as subjects in her research on the electrical stimulation of certain parts of the brain to induce feelings of pleasure. So, she befriended both men and arranged to have apparatus for electrical stimulation of their brains installed in their favourite chairs without their knowledge. (Don’t ask me how this might work. I don’t know.) Without asking their permission Jill stimulated the brains of both men while they were relaxing in their favourite chairs.
After this, both men spontaneously reported to Jill that something wonderful had happened to them. From out of nowhere, they said, they had begun to experience pleasurable feelings that were better than any feelings that they had ever felt before – better than the pleasure of fine food or wine, better than the esteem of friends and even better than the pleasure of sex.
As she had planned all along, Jill told Mathew that she had caused his pleasurable feelings through brain stimulation, while suggesting to Mark that what had happened to him must be “just one of those things”.
When Jill told Mathew that her experiment was the source of his pleasure, he was not amused. He said that he felt that he had been manipulated and that his trust had been betrayed. Even though he would have readily participated in the experiment if asked to volunteer, he viewed Jill’s failure to ask an inexcusable breach of his autonomy. He told Jill to leave and not return, and she did as she was asked. After a week or two Mathew’s life returned to normal and he became his old unhappy self once again.
By contrast, Mark continued to receive the brain stimulation and never learned about the source of the pleasure he experienced. You could say he lived happily ever after – because he remained in ignorance that the pleasure he continued to experience was the result of Jill’s surreptitious intervention.
It seems to me that this story, which I have just made up, demonstrates that freedom to choose is more important than happiness. Mark is unquestionably happier than Mathew, but it is reasonable to predict that if he knew that his happiness was the result of Jill’s manipulation he, like Mathew, would make an informed choice to be unhappy rather than to continue to be manipulated by a person who does not respect his autonomy.
I made up the story after reading an article by Yew-Kwang Ng, who taught me just about everything I know about welfare economics in 1971. Yew-Kwang suggests that the technology of electrical brain stimulation to increase happiness is well known and that its widespread use would increase happiness enormously. He wonders why this technology has not already been developed for common use. Yew-Kwang also contemplates the use of genetic engineering to increase happiness. (‘Happiness studies’, Economic Record, June 2008).
It seems to me that the crucial point is that people should be free to choose whether to use such technologies. It is not clear, however, that those who put happiness ahead of everything see the right to choose as having a great deal of importance. Yew-Kwang Ng writes: “The satisfaction of my (even if informed) preferences as such has no normative significance for me; it is important only because, in most cases, it makes me (and/or others) happier, directly or indirectly” (“Efficiency, Equality and Public Policy”, 2000, p 53). This makes me wonder whether Yew-Kwang would consider that Mathew in my story acted irrationally by foregoing his chance of greater happiness in order to get the manipulative Jill out of his life.
Jill decided that rather than arrange a meeting between Mathew and Mark she would keep them ignorant of each other and use them as subjects in her research on the electrical stimulation of certain parts of the brain to induce feelings of pleasure. So, she befriended both men and arranged to have apparatus for electrical stimulation of their brains installed in their favourite chairs without their knowledge. (Don’t ask me how this might work. I don’t know.) Without asking their permission Jill stimulated the brains of both men while they were relaxing in their favourite chairs.
After this, both men spontaneously reported to Jill that something wonderful had happened to them. From out of nowhere, they said, they had begun to experience pleasurable feelings that were better than any feelings that they had ever felt before – better than the pleasure of fine food or wine, better than the esteem of friends and even better than the pleasure of sex.
As she had planned all along, Jill told Mathew that she had caused his pleasurable feelings through brain stimulation, while suggesting to Mark that what had happened to him must be “just one of those things”.
When Jill told Mathew that her experiment was the source of his pleasure, he was not amused. He said that he felt that he had been manipulated and that his trust had been betrayed. Even though he would have readily participated in the experiment if asked to volunteer, he viewed Jill’s failure to ask an inexcusable breach of his autonomy. He told Jill to leave and not return, and she did as she was asked. After a week or two Mathew’s life returned to normal and he became his old unhappy self once again.
By contrast, Mark continued to receive the brain stimulation and never learned about the source of the pleasure he experienced. You could say he lived happily ever after – because he remained in ignorance that the pleasure he continued to experience was the result of Jill’s surreptitious intervention.
It seems to me that this story, which I have just made up, demonstrates that freedom to choose is more important than happiness. Mark is unquestionably happier than Mathew, but it is reasonable to predict that if he knew that his happiness was the result of Jill’s manipulation he, like Mathew, would make an informed choice to be unhappy rather than to continue to be manipulated by a person who does not respect his autonomy.
I made up the story after reading an article by Yew-Kwang Ng, who taught me just about everything I know about welfare economics in 1971. Yew-Kwang suggests that the technology of electrical brain stimulation to increase happiness is well known and that its widespread use would increase happiness enormously. He wonders why this technology has not already been developed for common use. Yew-Kwang also contemplates the use of genetic engineering to increase happiness. (‘Happiness studies’, Economic Record, June 2008).
It seems to me that the crucial point is that people should be free to choose whether to use such technologies. It is not clear, however, that those who put happiness ahead of everything see the right to choose as having a great deal of importance. Yew-Kwang Ng writes: “The satisfaction of my (even if informed) preferences as such has no normative significance for me; it is important only because, in most cases, it makes me (and/or others) happier, directly or indirectly” (“Efficiency, Equality and Public Policy”, 2000, p 53). This makes me wonder whether Yew-Kwang would consider that Mathew in my story acted irrationally by foregoing his chance of greater happiness in order to get the manipulative Jill out of his life.
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