Liberal budget response: tax & spend

Yesterday Malcolm Turnbull gave the Liberal Party’s budget response. And their grand plan for the country is to increase tax and increase spending.

But not just any tax & spending. Their plan is to increase one of the most regressive and paternalistic taxes (cigarette excise) and increase spending on middle-class welfare (health subsidies).

I can understand the politics of this. Given Rudd’s massive increase in government spending and the growing mountain of debt the ALP have already alienated people who believe in free markets and small government. So Turnbull presumably decided that he no longer needed to cater for the libertarian vote and decided to reach out to the paternalistic and populist vote.

But whatever the politics, it is poor policy.

Poor people already carry their share of the tax burden. While the lowest quintile (ie bottom 20%) earn only 0.8% of private income, they pay 5.6% of the tax*… in large part because of “sin” taxes on smoking, drinking & gambling. Instead of punishing poor people for their preferences, we need a government that is less involved in social engineering and more respectful of individual liberty. Taxes on smokers and drinkers already significantly exceed the marginal cost of higher health care, and drinkers & smokers deserve a tax break.

The health subsidy is defended as a means to decrease the reliance on the public health system. But this rationale rings hollow once you factor in the effect of the Medicare Surcharge, which effectively forces high-income earners to take out private health insurance. If you are opposed to the $100 billion/year of pointless tax-welfare churn (as I am) then you cannot support continued welfare for high-income earners. We need to reduce the amount of upper- and middle-class welfare in exchange for tax cuts. The Liberal policy of continued universal health subsidies means supporting tax-welfare churn and supporting middle-class welfare.

The Rudd government has been atrocious over the last year, and the Liberal opposition has done well to stand up to Ruddbank, stimulus hand-outs, internet censorship, ETS, alco-pops etc… but this latest position is not a step in the right direction.

* The lowest quintile earn 0.8% of income, pay 0.3% of income tax and 13.4% of other taxes, meaning 5.6% of total tax. This data is from the ABS Government Benefits, Taxes and Household Income report for 2003/04, published in 2007.

18 thoughts on “Liberal budget response: tax & spend

  1. A subsidy for health insurance makes sense as a corrective if we are going to stick with a free public health scheme. It corrects the failue to price health a bit.

    The tax of cigarettes reduces the health costs of smoking – reduces externalities and internalities.

    Both these measures are somewhat regressive – so what. Why should excises and/or externality taxes target income distribution when we have an income tax – that’s the thing you can use to pursue distributional objectives or offsets.

    BTW everytime a tax is introduced someone always bleats that the effect is regressive. even apart from the fact that it doesn’t make sense to use commodity or externality taxes to pursue distributional goals what matters is the overall incidence of the tax system not the effects of individual taxes.

    (In any event here those who pay the smoking tax – the wealthy – will yield income which can potentially compensate the poorer smokers who quit. The poorer smokers receive the incidental benefit of not dying from cancer and emphysema.)

  2. In any event here those who pay the smoking tax – the wealthy – will yield income which can potentially compensate the poorer smokers who quit.

    http://thelede.blogs.nytimes.com/2008/03/21/american-smokers-and-income-charted/

    I think your internaality of this externality is a little off base, Harold.

    Perhaps next time you ought to apply a little less emotion with you personal preferences and a little more research.

    High income groups are the smallest part of the smoking population. Given that the poor and the rich pay equal tax the lions share of the tax falls on the poor.

    How exactly is a tax transfer from the rich to the poor getting churned over?

  3. There isn’t a failure to “price health a bit” for high income earners. There is the Medicare Surcharge. I said that in the post. Please don’t make me repeat myself, repeat myself.

    The marginal healthcare costs of smoking are more than offset by the current cigarette excise. I said that in the post. Please don’t make me repeat myself, repeat myself.

    We know that you value your paternalism so strongly that you’re happy to punish poor people… but not all of us share your distaste for the poor.

  4. The point about the threatened surcharge is understood. It is again unwarranted as it only applies to wealthy individuals. It means health is provided free to lower income earners and at a higher cost to the wealthy. Why use taxes to do this when the way to address income distribution is via the income tax?

    Excises and externality taxes should correct market failures – not address income distribution issues.

    Who says that the marginal health costs of smoking are more than covered by the cigarette excise? I’d be interested to know this as it is a gap in my knowledge. The total health costs of smokers are covered by cigarette excises but I have never seen evidence about the marginal costs.

    How do you know my attitudes to the poor in Australia John? I opposed all the Howard middle class welfare handouts and consistently supported cuttiong taxes at the low end before those of middle income earners. I retain that view today.

  5. Smoker’s burdening tax payers is just another problem created by socializing medicine.

    One thing I discovered recently and I think it’s incredibly scary is the prevalence of discrimination against the elderly occuring in British health care:

    “If the experience of other countries is any guide, the elderly have the most to lose from the adoption of a program of national health insurance. In general, when lifesaving care is rationed to both young and old, the young are more likely to get preferential treatment. Take chronic kidney failure, for example. Across Europe generally, 22 percent of the dialysis centers reported that they refused to treat patients over 55 years of age in the late 1970s. In Britain, in 1978, 35 percent of the dialysis centers refused to treat patients over the age of 55; 45 percent refused to treat patients over the age of 65; and British patients over the age of 75 rarely received treatment at all for this disease.”

    http://www.heritage.org/research/socialsecurity/hl276.cfm

  6. Harry — you’re not making a coherent point. You defended the health subsidy because otherwise rich people wouldn’t take out private health insurance. But there is a Medicare surcharge which basically forces them to take private insurance. So your point was wrong. The end.

    You can address income distribution through income taxes if you like. That’s a different debate. But personally, I don’t think we should have middle-class welfare which involves pointless tax-welfare churn of over $100 billion per year.

    If the cigarette excise covers the entire health costs of smokers, then by definition it covers the marginal health costs caused by their smoking. Source for my claim was Collins & Lapsley (2008) “The costs of tobacco, alcohol and illicit drug abuse to Australian society in 2004/05” and the Commonwealth budget.

    http://www.health.gov.au/internet/drugstrategy/publishing.nsf/Content/mono66/$File/mono66.pdf

    http://www.budget.gov.au

    I’m sure you don’t intentionally want to hurt the poor for fun. But your above-stated disregard for the consequences of sin taxes on the poor seems to show that you are less concerned about their welfare than I think you should be.

  7. Excises and externality taxes should correct market failures – not address income distribution issues.

    ROTFL.

    Cig companies should be making cigs that are expensive. How evil of them to seek efficiency gains over the years. Seeking and finding efficiency gains is externality of course that’s resulted in market failure.

  8. John,

    1. The case for a national free public health scheme is, I agree, open to debate. But given that you have it some private health suppliers are disadvantaged. Second-best policy therefore – subsidise private health insurance. The question is then whether this subsidy should vary by income. My claim – it should not – it is correcting for the free health cover distortion. Nor should there be any tax penalties for non-insuring behaviour.

    Language seems to fail me on ALS but what I was trying to say was that these sorts of measures should target the ‘alleged’ inefficiency not the distribution of income which can (if you want) be addressed directly and with no product market distortions by an income tax.

    2. Your claim that because total receipts from tobacco taxes exceed health costs (internalised or not) that these tax rates fully reflect the marginal damages of smoking is false. Draw a diagram where – as is plausible – marginal damages increase and convince yourself.

    3. John have a pleasant evening and an enjoyable Libertarian boozeup.

  9. I think libertarian booze ups should include people interested in argueing with libertarians. Harry is a good sport in that regard even if there is disagreement.

    I don’t share Johns concerns about churn. Churn isn’t ideal but churn ought to be considered in policy context.

    I agree that what Turnbull proposes is probably good politics. Policy wise it sucks. However so does the Rudd policy on this issue. Turnbull wants to herd us onto private insurance using a subsidy. Rudd wants to use a tax stick. Both are trying to make us use a private product that we might otherwise decline to buy. I’d be one to decline. Private health care is a suckful product. It doesn’t have to be but as it stands it is. I don’t want any private insurance except perhaps for rare health events that might cost me more than a years salary. In other words hardly any. Granted I don’t want public health insurance either if they would give me a tax refund (about 8% points off income tax). I’d prefer to pay cash.

    The policy option that ought to be pursued is a reform to Medicare to make it merely a payment system like HECS. That way you could opt in or out of the system merely by using or not using your medicare card. Those that like Medicare could still have it, but as with those that have HECS debts they would have a higher tax scale (until the debt hit zero). This would give us choice between public insurance, private insurance and no insurance. It would protect the poor. It would not entail all this carrot and stick rubbish. It wouldn’t be a perfect libertarian ideal but it would offer a heck of a lot more freedom with no impact on health care access.

    I hate cigarettes nearly as much as I hate private health insurance. So picking between the policies on offer isn’t so easy. A pox on both their houses.

  10. John:

    the sin tax issue puts the libs in a very illogical policy position. On the on hand they voted against the alcopops tax while on the other they want to tax cigs.

    they really make little sense.

  11. “We know that you value your paternalism so strongly that you’re happy to punish poor people… but not all of us share your distaste for the poor.”
    “So your point was wrong. The end.”
    No one likes a jackass, John.
    In my opinion (if I’m allowed to have one without being condescended to), the political implications far outweigh the policy implications. Supporting private health insurance appeals to the conservatiive base of the Liberals.
    The rebate shouldn’t have been brought in in the first place but means testing it now will cause some people to forgo their insurance. This will cause premiums to rise relative to what’s on offer. Three cents on a cigarette is a lot simpler, though.
    The average price of a pack of 20 cigarettes in Australia is about $10. I’ll be generous and make the tax 4 cents. 4/50 means the average cigarette is 8 percent more expensive. This means for every 11.5 cigarettes a smoker currently smokes, they give up the next one and they’re no worse off financially. Really not that much to ask. Of course, doing so would mean no additional revenue, but like I said the political implications far outweigh the average smoker having to forgo one in eleven cigarettes. Hardly worth such rudeness to one of the forums regulars.
    “To be honest the last comment was actually quite incoherent, even for you. Are you drinking perhaps?”
    I’m starting to see why libertarianism is so unappealing to women. Not the ideas.

  12. hc — I said “marginal healthcare costs”, not just “marginal costs”. Clearly the marginal healthcare costs of any activity is less than the total healthcare costs. The total is the sum of all the marginals.

    Your point about people potentially leaving private health insurance is negated by the Medicare Surcharge, which effectively forces high-income people to take out private health insurance. The Medicare Surcharge means there is no “free health cover distortion” that you’re worried about.

    Mitch — I don’t know if you were trying to be the “nice guy” in contrast to us naughty libertarians… but if so, you failed. Pot. Kettle.

    Your point about high-income people forgoing their insurance is wrong, as there is a Medicare Surcharge that effectively forces high-income people to take out private health insurance. And while every tax increase looks small on their own… if we keep up this approach of tax’n’spend for every problem then the government will forever grow. For people who believe in small government, that is a bad thing.

  13. As if you couldn’t see this coming:

    http://news.theage.com.au/breaking-news-national/tobacco-tax-is-bad-policy-tanner-20090517-b6zt.html

    The Libs deserve this. I hope Turnbull gets realigned with the fact that plenty of people who vote for the Libs are a bit sick of their nanny-state conservatism and actually believe a bit of ‘lean government that minimises interference in our daily lives; and maximises individual and private sector initiative’ might not be such a bad idea.

  14. “But based on Treasury forecasts, the Government has been arguing today that in the longer run the tax increase would not be able to compensate for the changes, as fewer people would be smoking because of the price increase. ”

    This is hilarious. Sir Humphrey is alive and well and working for the ALP. On behalf of Sir Humphrey and Rudd I say thankyou to the smokers of Australia. Left free of further taxes you will balance the budget while at the same time solve the problem of too many on age pensions.

  15. Sir Humphrey: “Notwithstanding the fact that your proposal could conceivably encompass certain concomitant benefits of a marginal and peripheral relevance, there is a countervailing consideration of infinitely superior magnitude involving your personal complicity and corroborative malfeasance, with a consequence that the taint and stigma of your former associations and diversions could irredeemably and irretrievably invalidate your position and culminate in public revelations and recriminations of a profoundly embarrassing and ultimately indefensible character.”
    Jim Hacker: “Perhaps I can have a précis of that?”
    Jim Hacker: “Humphrey, we are talking about 100,000 deaths a year.”
    Sir Humphrey: “Yes, but cigarette taxes pay for a third of the cost of the National Health Service. We are saving many more lives than we otherwise could because of those smokers who voluntary lay down their lives for their friends. Smokers are national benefactors.”
    Sir Humphrey: “Taxation isn’t about what you need.”
    Jim Hacker: “Oh, what is it about?”
    Sir Humphrey: “Prime Minister, the Treasury doesn’t work out what they need to spend and then think how to raise the money.”
    Jim Hacker: “What does it do?”
    Sir Humphrey: “They pitch for as much as they think they can get away with and then think what to spend it on.”
    Jim Hacker: “These figures are just guesses.”
    Sir Humphrey: “No, they are government statis….. they’re facts.”
    Permanent Secretary for Health: “It will be different if the government were a team, but in fact they are a loose confederation of warring tribes.”

  16. I don’t understand what you are saying. 20% of people only pay 5% of the taxes, and this is a ‘fair share’. Keep in mind that the lowest 20% are the ones getting the most welfare (every family in the lowest 20% quintile gets more welfare than they pay in taxes – infact for over 40% of families this is true). So your 5% value is worth pretty much nothing when it isn’t their money to begin with.

  17. What are time bombs of Australia democratic society?

    The Australia historical hung parliament demonstrated the big gap of inequality society between the small educated elite groups who get highest pay by talk feast used mouth work controlling live essential resources of the country in every social platforms against the biggest less educated groups who get lowest pay by hands work squeezed by discriminative policies that sucking live blood from poor/less wealth off?

    Voters’ voices do not hear?
    Voters’ pains do not ease?
    Voters’ cries do not care?

    1. Poverty will not be phase out if no fairer resources to share;
    2. Illness will not be reducing if no preventive measurement in real action;
    3. Agriculture will not be revitalize if urbanization continuing its path;
    4. Housing affordability will not be reach for young generation if government continues cashing from young generation debt by eating out the whole cake of education export revenue without plough back;
    5. Manufacture industry will shrink smaller and smaller if no new elements there to power up to survive;
    6. Employability will not in the sustainable mode for so long as manufacture and agriculture not going to boost.

    Ma kee wai
    (Member of Inventor Association Queensland since 1993)

  18. What democratic societies should learn lessen from Australia election 2010:
    1. What voters crying for reforms not just parliament, but for all department?
    Voter’s pains did not link to high income Politicians and Bureaucracy.
    The Australia historical hung parliament demonstrated the big gap of inequality society between the small educated elite groups who get highest pay by talk feast used mouth work controlling live essential resources of the country in every social platforms against the biggest less educated groups who get lowest pay by hands work squeezed by discriminative policies that sucking live blood from individual poor/less wealth off?

    Voters’ voices do not hear?
    Voters’ pains do not ease?
    Voters’ cries do not care?

    Voter is crying for department reforms over 70 years that resulting a 2010 Hung Parliament?
    An iceberg example of voter’s crying:
    “……it seem to me there was an unfair to treat me when the merit of “Claim for Disability Support Pension or Sickness Allowance” form in detail clearly defy 15 hours classify the cut off point for acceptance, when comparing to my early assessment completed in June this year that it has the merit less than 8 hours (0-7) work capacity due to my long term medical impairment since an injury occurred in 2005”…….
    It was disappointing where the push of Parliament reform that mainly to brink good news to all MPs by the individual MPs during this year historical hung parliament in 70 years, and the reform did not including all Government Departments where it would directly brink good actions to all voters/or people?

    Ma kee wai
    (Member of Inventor Association Queensland since 1993)

Comments are closed.