Andrew Leigh

THE EQUITY-EFFICIENCY TAKEOFF

MELBOURNE INSTITUTE 2018 ECONOMIC AND SOCIAL OUTLOOK CONFERENCE, MELBOURNE

THURSDAY, 11 OCTOBER 2018

I acknowledge the Wurundjeri people of the Kulin Nation on whose lands we meet today and pay my respects to their elders past and present. My thanks to organisers Abigail Payne and Paul Whittaker and their hardworking teams. I also recognize our distinguished session chair David Ribar, my sparring partner Kelly O'Dwyer - she and I go back to our early time in Parliament where we had a double header on Sky News and got to know each other so well that I think we could probably have done each other's speeches if need be - and to thank the many friendly and familiar faces in this room. The Outlook Conference really is a true national institution, bringing together the social sector, the media, economic policy makers, business, the community sector and more. It is to policy wonks what fairy bread is to preschoolers.

I've certainly been attending the Outlook Conference since I was an Australian National University professor and have continued to be back since entering Parliament in 2010, including since becoming Shadow Assistant Treasurer in 2013. Chris Bowen told you this morning that he is the nation's longest serving Shadow Treasurer. I've got this funny coincidence for you: it turns out I'm also the nation's longest serving Shadow Assistant Treasurer. Like Chris, I've enjoyed the role but I could do with a change next year.

We haven't spent the last five years throwing bombs. We've spent this period in Opposition crafting the most comprehensive economic policy that any opposition in a generation has taken to an election. Voters are sick of the insults, they're sick of the hyper partisanship. Whether I go to Townsville or Darwin, whether it's Launceston or Nowra, people want solutions, not slogans. You don't need to be a former Liberal Treasurer to see the failure of the current government to develop an economic narrative. You don't even need to be a former Liberal Treasurer to see it as a bit weird to promise tax changes in 2026. A time when, as Kelly O'Dwyer's former boss puts it, the Coalition are not going to be in government.

Labor has been focused on developing a clear plan. We're not holding it back from the voters until the weeks before election day. Our plan doesn't involve saying all of the things we'd spend money on without saying a word about how we would raise the revenue. These difficult choices allow us to achieve the trifecta: investing more on schools and hospitals than the Liberals, paying down debt faster than Liberals and giving a more generous personal income cut for most Australians than the Liberals. We can do that because we made a succession of hard choices. As you've seen with Bill Shorten and Tanya Plibersek releasing Labor's Fair Go Action Plan last Sunday, we are seeking from the Australian people at the next election a clear mandate. If we win we intend very clearly to keep our promises. The Australian people have had enough of governments that say one thing before the polls and do another thing afterwards.

This session is about equity and fairness, topics that are dear to my heart. I'm very pleased to hear Kelly O’Dwyer talking about the importance of equity. Indeed, I was somewhat surprised to hear a Liberal cabinet minister praising the idea of literally putting lead in the saddlebags of the fastest performers. You don't hear that every day. The fact is that inequality matters. You can go right back to great conservatives such as Teddy Roosevelt to find those on the right as well as those on the left talking about the importance of egalitarianism. The simplest argument for equity is what economists call ‘diminishing marginal utility of income’, or in simple terms, the idea that the dollar brings more happiness to a battler than to a billionaire. There are instrumental reasons to care about inequality too. Excessive inequality can reduce mobility, locking children's life chances into the postcode in which they're born. Too much inequality can undermine community, making us a society of ‘I’ rather than a society of ‘we’. Excessive inequality through its impact on campaign contributions can undermine an egalitarian democracy, in which one vote gets one value, in favour of a kind of shareholder democracy in which each dollar gets a vote.

We do have an inequality problem in Australia and simply to say that our inequality problem isn’t worse than that in the United States is a bit like saying ‘well, carbon emissions have risen in the United States and the United Kingdom, therefore we shouldn't be worried about them rising here in Australia’. Inequality is a global challenge, as scholars from Tony Atkinson and Thomas Piketty have pointed out. We need to tackle it here in Australia. Since 1975, we've seen real wage growth three times faster for the top tenth as for the bottom tenth. Indeed if cleaners and checkout workers had enjoyed the same proportionate wage gains in the last generation as financial dealers and surgeons, they'd be $16,000 a year better off. In the late 1970s, we had what economists called a real wage overhang. After a period in which wages had outstripped productivity, the answer was the Accord with its real wage moderation and the social wage trade-off. Today we've got the reverse problem - a real wage underhang. With real wages flatlining for the last five years despite a solid productivity growth, with one in seven workers in a union, labour hire running rampant and cuts to penalty rates, Labor believes we need to tilt the power balance a little back towards employees.

Now one of the themes of this session is asking us to consider the balance between growth and equity. It’s an idea that goes back to Lyndon Johnson's chair of the Council of Economic Advisers, Arthur Okun, who after he returned to academia in 1975 proposed a trade-off between economic performance and income equality, or equity versus efficiency. He called this ‘the big trade-off’ in economics and he explained it for the metaphor of the leaky bucket. He said ‘the money must be carried from the rich to the poor in a leaky bucket. Some of it will simply disappear in transit, so the poor will not receive all the money that's taken from the rich’. And sure, there can be instances in which there is an equity-efficiency tradeoff that policymakers like Kelly and myself must confront. But it's surprising in the real world of politics how often there are chances to implement policies that are good for equity and good for efficiency, that are pro-growth and pro-equity. Sometimes, you can have an equity-efficiency takeoff.

In education, Labor has announced an evidence institute for schools, bringing to bear the best possible evidence on education decision making. We've announced the proper funding of needs based school funding for all schools, ensuring children get the resources they need in order to adapt with the technological changes we know are coming. We've announced an extension of early childhood for three and four year olds, ensuring that every child gets what the evidence tells us is the best start in life.

In the area of competition policy, we know that Australia has a competition problem. Whether it’s beer or banking, whether it's baby food or telecommunications, we have an economy with too few big firms, too many mergers, too few startups. That's not just bad for equity - that's bad for growth as well. So we've announced that we would give the ACCC a market studies power. We'd ramp up the penalties for anti-competitive conduct and we'd provide better access to justice for small businesses wanting to take on anti-competitive conduct but scared off by the threat of an adverse costs order.

I think of dozens of other policies too which can be implemented in a way that's good for equity and good for efficiency:

• family violence leave;
• climate policies that decouple emissions growth from economic growth;
• fixing fund raising for charities, so they don't have to fill in unnecessary paperwork to raise money online;
• boosting employment rates for Indigenous Australians;
• making sure independent mechanics get the data they need to fix modern cars;
• ensuring directors have a director ID number to prevent dodgy phoenix directors from ripping off honest businesses, workers and taxpayers;
• requiring firms to report on their gender pay gap and on the pay gap between their CEO and the median worker (as is done in Britain and the United States);
• fair access to finance for co-ops and mutuals; and
• reducing homelessness, an issue that I know our session chair David Ribar has written extensively about.

But another critical part of this, another area in which we can find that sweet spot of growth and equity, is in closing unjustified tax loopholes. This is an issue that I came to when studying graduate public finance under Martin Feldstein. Feldstein, like Art Okun, was a chair of the Council of Economic Advisers, but he worked for Republican President Ronald Reagan. He wasn't one of Harvard's most progressive economists. But as you well know, you can learn a surprising amount from someone of a different ideological persuasion. Among the things that I learned from Feldstein was the importance of reducing what he called tax expenditures, what we call tax loopholes. Doing so, as he points out, raises revenue more efficiently than increasing tax rates. But in addition, tax expenditures tend to be much less fair than budgetary expenditures, so closing loopholes is much more equitable than cutting spending.

That approach has informed Labor's tax philosophy over recent years, as our economic team has made a number of politically challenging decisions to close tax loopholes. We’ll prospectively restrict negative gearing to new built homes, ensuring that that particular tax concession helps add to housing supply. We’ll prospectively halve the capital gains tax discount from 50 to 25 per cent. To address unfair income splitting, trust distributions to adult beneficiaries will attract a minimum tax rate of 30 per cent, building indeed on reforms instituted by John Howard a generation ago. We’ll end the unique situation of Australia being the only country in the world to provide cash refunds of dividend imputation credits for people who paid no tax. In the company tax system, we will prevent multinationals using excessive debt deductions to unfairly lower their tax burden. Firms doing business in a tax haven will have to disclose that fact to their shareholders as a material tax risk.

We're concerned about the impact on equity and efficiency of tax havens. International research suggests that around $600 billion of profit every year are shifted to tax havens, representing almost 40 per cent of multinational profits. Tax havens are used by drug runners, extortionists and money launderers. Kleptocrats in Eastern Europe and the regime in North Korea are stashing their money in tax havens. They’re used to hide the proceeds of fraud corruption and tax evasion. Gabriel Zucman, an economist at the University of California Berkeley, estimates that around four-fifths of the money in offshore bank accounts is they're in breach of other country's tax laws. So it's both equitable and efficient to close them and on top of that, we need to properly prosecute those who mastermind schemes to evade tax including in tax havens.

So today I am pleased to announce that a Shorten Labor Government would protect the fairness of Australia's tax system by putting a higher price on the heads of promoters who package the tricky tax schemes that cheat the tax system. Tax avoidance has severe consequences for growth and equity in Australia. When individuals or companies don't pay their fair share, they increase the tax burden on honest individuals. They undermine services and they ramp up our national debt. Some of the most egregious forms of tax avoidance are available to those who can enlist a brain behind the operation - a tax promoter. Promoting tax avoidance drains away revenue and erodes public confidence in the tax system. But our current penalties don't match up to the scale of the offence. A Shorten Labor Government would double those penalties, increasing the promoter penalty regime to allow courts to impose maximum fines of up to $2 million for individuals and $10 million for body corporate.

In conclusion, across advanced nations, healthcare systems are amazingly effective at saving people in the emergency room. What we're not so good at is addressing chronic problems like obesity and inactivity. Something similar can be said for the Australian economy. When the global financial crisis hit, Australia's pre-emptive fiscal stimulus package of one off cash bonuses and infrastructure spending was described by international experts as one of the most effective in the world. It helped ensure that we were essentially the only advanced economy that avoided recession.

But now, a decade on from the global financial crisis, we've had a five year period in which wages have barely kept pace with inflation. Just last year, we saw the pay for the top 100 CEOs jump 9 per cent. We saw the total wealth of the top 200 rise 21 per cent. In just a single year, the number of Australian billionaires went from 60 to 76. The top handful of Australian billionaires hold almost as much wealth as the poorest 5 million Australians. Whether you want to look at income inequality or wealth inequality, whether you want to use tax data or surveys, it is unambiguous that over the past generation inequality has risen. Sure, some approaches to tackling inequality will suffer from Art Okun’s leaky bucket problem. Most taxes do have a deadweight cost and as economic policy makers we must always be careful to minimize that cost. But we shouldn't always assume that there must be a tradeoff. When it comes to investing in education, smarter competition laws, helping charities, closing tax loopholes, improving gender equity, tackling Indigenous disadvantage, we can boost efficiency and improve equity at the same time. There can be an equity-efficiency takeoff.

ENDS

Authorised by Noah Carroll, ALP, Canberra.