The Left Was Wrong about Unemployment Insurance

Over the past several years, I’ve repeatedly argued that you get more unemployment when the government pays people to be unemployed. But I’m not just relying on theory. I’ve cited both anecdotes and empirical research to bolster my case.

You won’t be surprised to learn that many politicians have a different perspective. They say it is compassionate to provide unemployment insurance benefits. And they say it is cruel and heartless to put a time limit on those payments.And if you believe Nancy Pelosi, unemployment handouts actually are good for the economy!

You might think this is one of these never-to-be-resolved Washington debates, but we actually have two natural experiments over the past year that show one side was right and the other side was wrong.

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The Inevitable Collapse Of The Welfare State

Dr Tom Palmer, Executive Vice-President of the Atlas Economic Research Foundation, and a Senior Fellow at the Cato Institute,  was in Australia recently at the invitation of the Australian Taxpayers' Alliance, and conducted a number of talks in conjunction with our good friends at the Institute of Public Affairs on the unsustainable of the welfare state.

His warning was chilling – Australia is just 20 years behind Greece. True, we are better placed than many countries, but we must change course now before it is too late.

I would encourage you to take the 40 minutes to watch this very important video of a lecture delivered in Melbourne entitled: after the Welfare State where he discusses the challenge we face – and also the solution.

Macklin sets new 2013 benchmark for ALP spin

With rotational force greater than an outback willy-willy, the shrill parliamentary fishwife minister Macklin says she could live on $35 per day despite living on $903 per day. However, her silly-silly remarks were erased before release to the public. GC.Ed.

Visiting a Melbourne hospital to promote the government's Dad and Partner pay scheme, which also began on Tuesday, Ms Macklin was asked whether she could survive on the $246-a-week payment. She responded ''I could'', but the question and her answer were described as ''inaudible'' in a transcript of the press conference later issued by her office.

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Can We Foster Innovation By Creating A Smarter Tax System?

Krish Krish Patel proposes we scrap our current tax and welfare systems, and replace them with a Negative Income Tax and a GST:

The United States and Europe are startling reminders of the type of ‘legacy’ an uncontrolled welfare bureaucracy, extensive civil service and generous welfare aid will leave for generations to come.

In the global economy, with fast growing Asian tiger economies, ‘innovation’ is the key weapon not just to stay ahead, but to stay afloat. The question is how do we foster innovation?

One way to foster innovation is to create a smarter taxation system.  For example, consider what would happen if the government scrapped all Federal & State taxes and benefits (including company tax, government grants, minimum wage and welfare payments) and instead introduced one rate of Negative Income Tax and GST – set at 20 percent.  

The Negative Income Tax concept is a proposal to create one basic level of income for all workers, which no one can fall below (thus ensuring a minimum standard of living). It would guarantee a level of income to all workers through supplementing the earnings of workers who didn’t meet the ‘minimum income threshold’, with payments. Thus those who actually paid taxes would make above the minimumincome threshold and with their payments would provide the money for supplementation of a minimum income to others.

The basic way that the Negative Income Tax system might work is that people would report their income and pay no taxes, receive money or pay taxes, depending on where the minimum income level was set. Therefore, under such a system, rather than paying income tax, those workers that earn below a certain (i.e. minimum) threshold would be entitled to a payment from the government.  

For example, if the threshold for a family of four was, say, $40,000, a family with only $36,000 of annual income would, given a negative tax rate of 20 percent, receive a check from the ATO worth $800 (20 percent of the $4,000 difference between its $36,000 income and the $40,000 threshold). A family with zero income would receive $8,000. 

In summary, under Negative Income Tax, a family of four with a minimum income threshold of $40,000 would pay/receive:

  • $0 earnings:                  ($8,000)
  • $36,000 earnings:          ($800)
  • $40,000 earnings:          $0
  • $100,000 earnings:         $12,000
  • $140,000 earnings:         $20,000
  • $200,000 earnings:         $32,000

Hence, those on a low wage would have an incentive to earn more (or seek employment) as there would be no restrictions on those receiving welfare (for example, earn nothing to keep receiving welfare/grants or reduced payments for every extra dollar earned). Conversely, those seeking a higher wage are not penalised as all taxpayers would be subject to one rate.

Negative Income Tax is simple to implement and cost effective to administer as the large bureaucracies responsible for administering taxation, welfare systems, numerous thresholds and deductions would be substantially reduced. These savings could then be ‘spent’ on more productive and innovative government activities.

A Negative Income Tax would not impact low-wage market sectors, whereas a minimum wage makes certain very low end jobs near impossible, as the revised system would increase the availability of ‘cheap’ labour, which would enable businesses to do domestically some of the work which they would ordinarily outsource to other countries.

The access to ‘funds’ (be it welfare or grants) has created a nation of grant getters and not innovative and entrepreneurial risk-takers that we need as a nation going forward. In addition, productivity within the workforce should improve as you would have a motivated workforce.

Further, Negative Income Tax should be implemented side-by-side with a more simplified and streamlined GST system (for example removing GST on most Business 2 Business – B2B – transactions), albeit at a higher rate. At present, GST is collected at each stage of production and distribution rather than just from retailers/end consumers. From an economic point of view, it is a highly efficient tax - once simplified. It's essentially a flat consumption tax, and its collection ‘method’ minimises compliance issues. 

Overall, ‘net’ tax revenues should not be reduced but could in fact be enhanced. This coupled with a more efficient and innovative business culture does not seem to be a bad idea at all, does it?

This is Krish Patel’s personal view only. His background is in the Indirect Taxes field and he is an Alumni of the London School of Economics (LSE).

Mutual Responsibility takes a step forward in the UK


Recent welfare reform in the UK will encourage more people in to work, writes Stephan Knoll.

In recent times, the coalition government in the UK has taken significant steps forward in reforming the nation’s welfare sector.

Work and Pensions Secretary Iain Duncan Smith, an active and outspoken member of the new government has announced a ‘claimant contract’ for those receiving benefit payments. A sliding scale of penalties is to be implemented for those who refuse offers of employment, do not actively seek employment or who simply fail to turn up for mandatory work placements.

In doing so, Smith is attempting to address and rectify much of the moral hazard that has existed in the British welfare system for decades. The idea that someone can be financially or socially worse off for having gone to work as opposed to staying home is quite simply perverse and unjust.

In Australia by and large we have a welfare system that promotes preferred outcomes. Significant assistance is given to those seeking employment, ‘work for the dole’ and training programs are available for those in between work and penalties do apply for those unwilling to comply.

All care must be taken to ensure that we never create a situation where delinquency is incentivised. The outcomes of such a situation would be bad for both individual and society. In many cases, work can and does provide a sense of purpose and achievement, and in a first world country such as Australia, paid employment often surpasses its original purpose of simply providing the necessary finances with which to live, and rather provides the individual with the means to achieve personal self fulfilment – acting as a tool for profound personal growth.

Iain Duncan Smith, although a conservative, has provided a significant reformist and progressive influence on the UK’s new coalition government. Years in opposition have readied him for the challenges of governing, which he has managed to meet head on. His willingness to stand up for reform in the face of stiff opposition from varying sectors of the community is a credit and is in stark contrast to the political cowardice witnessed in Australia’s current government.

After the great reformist governments of the past two decades this government does not do justice to the hard work of its predecessors and further diminishes public respect for political office.  The sooner this is rectified by either a complete change in approach or at the ballot box, the better.

Stephan is General Manager of family meat and smallgoods business Barossa Fine Foods. He is also heavily involved in the Young Liberal movement in South Australia.

Why students aren’t better off with Youth Allowance

Dominic-Bohan Dominic Bohan argues why Youth Allowance doesn't necessarily benefit students.

As a student who receives Youth Allowance (which I qualified for through the noble achievement of earning an arbitrary amount of money in an arbitrary amount of time) I used to believe that I was better off as a result of this policy, despite disagreeing with welfare on principal. Today, I believe I can discredit the idea that most students who receive Youth Allowance are better off as a result of government policies. I will show that in the absence of any government interference, an average student with some drive and initiative could actually afford a better standard of living by working reasonable hours, without needing welfare.

Let’s look at some of the expenses faced by students, and how they are inflated by the government.

First, the easy ones; the GST means everything is overpriced by 10%. Since students spend almost all of their income directly, this is equal to a 10% loss, even for student on Youth Allowance.

Next, compulsory superannuation. That’s another 9% of any income earned that students can no longer use. You may think contributing nothing to super sounds foolish, but using the money while studying is actually a very sensible investment if you expect to do well in your degree. The higher your income, the less you have to work and the more you can study. Therefore, you can earn a higher future income and have more to contribute towards your retirement once you secure a “real” job.

Then there’s income tax. Let’s construct a very conservative estimate of a student’s earning potential. Working 20 hours per week at the minimum wage of $15 an hour equates to $300 a week or $15,600 per annum. Remember a student need not work 20 hours every week to achieve this average. You could work 10 hours a week during semester and 30 during holidays. Bear in mind also that most students make above minimum wage. I don’t know anyone who makes less than $15 an hour. Based on these calculations, our low income student is paying $1440 a year in tax, or a further 9% of their total income.

So already the working student is getting slugged almost 30% of the little money they make. But that’s just the beginning. Let’s examine the expenses typically faced by students. One of the biggest is housing, especially housing in prime areas close to transport and university campuses.

Height restrictions, heritage listings (even for dilapidated shacks), floor to area ratio requirements and general red tape that stifles new development keeps prices in areas where students want to live artificially high. Furthermore, public housing in the inner city limits the supply of housing available to people who want to work and study, and instead allocates it to unproductive people who will gain less from living near these amenities.

But perhaps the most grossly inflated expense for students, is the price of drugs; by which I mean alcohol, tobacco, illegal drugs and popular “study aids” such as black market amphetamines. While these are by no means a necessity, the reality is that on average, students spend a significant proportion of their income on these substances and their demand for them is highly price inelastic.

Alcohol prices are hugely inflated by taxation, with spirits which young people tend to choose being taxed astronomically more per unit of alcohol than beer and wine. A 700ml bottle of spirits is taxed $18 from excise tax alone, plus 10% GST and in most case 5% import duty. Students also spend a considerable amount of time in bars. The expensive of buying liquor licences, complying with illogical laws and the reduced competition the licensing scheme creates also drives up the price of drinks in bars even more.

Then approximately half the cost of cigarettes is tax. As for other drugs, their cost is inflated by an enormous factor due to criminalization and the exorbitant risk premium that dealers must charge.

Finally, Youth Allowance is not sufficient for a student to live comfortably on, and is highly punitive towards those who work. Now back to our student trying to get by on $300 a week, or $600 a fortnight, which will be more useful for our calculations. If he is eligible for Youth Allowance he is entitled to $377 a fortnight. But as soon as he earns over a paltry $62 a week, his payments are reduced by 50%, and 60% for income over $250. The result is that our working student only benefits from Youth Allowance by a pitiful $79.20 a fortnight, or 13% of their income. Note that the Youth Allowance money is taxable income which reduces this gain even further. I could ramble on about how increased competition and the elimination of corporate and income taxes would reduce prices further across the board, but I think I’ve made my point.

Sure you may not agree with all of my assertions about the benefits of removing government, but even a student on a very low income who doesn’t use drugs only needs to be 13% better off due to getting rid of government taxes and price increases to be better off.

Please feel free to check my calculations using the links provided.

Income tax rates:

Excise Rates:

Centrelink Rates:

Dominic is an Economics student currently undertaking his final semester. He enjoys poker, martial arts, and occasionally having a few responsible beverages. Dominic is an ardent believer in individual liberty and personal responsibility.

To increase infrastructure spending reform welfare spending


There are other ways to manage infrastructure funding if we reform other areas of government spending, writes Ralph Buttigieg.

Infrastructure and its requirement for capital seems to be on everyone's mind at the moment. Most recently the Sydney Morning Herald reported a Price-Waterhouse study which claims we can not meet expected infrastructure demands due to a lack of capital. It demands we give up our cars, live in smaller homes and generally change our life styles. Drastic measures indeed but what about other options?
Well, a better option may be to increase our savings so we can have more capital. Now, having a government that collects in taxes about 30% of our GDP limits what we can save. Especially since so much of that tax is used to fund a social welfare system that discourages saving. Our welfare system is mostly income redistribution (the exception being the Superannuation Guarantee) it takes money from ordinary working mugs and gives it to people who aren't working or who the government thinks don't earn enough. A lot of this is just income churning, over your life time you get about the same amount back as taken. The main beneficiaries are the public servants who administer the schemes and the politicians who promote them. The last budget allocated $110,884 million for social security and welfare so if a reasonable percentage of that could be converted to savings there would be no lack of capital for infrastructure.
So how can we do this? How can we convert our welfare system to a “wealthfare” system, one based on savings and investment?
We could expand the Superannuation Guarantee into an Australian version of Singapore's Central Provident Fund. That depends on compulsory savings to provide Singaporeans with welfare benefits and capital for national development. However the compulsory saving rate is up to 34.5% (ouch) and I don't like compulsory anything nor do I trust government officials with my money. We need more liberal alternatives.
Back in the good old days of John Howard and budget surpluses Peter Saunders from the CIS proposed Personal Future Funds. All Australians would have such funds funded by the budget surpluses. Eventually the personal savings would replace unemployment benefits and allow voluntary medicare opt-outs. The days of budget surpluses are now over but perhaps there is still room in the budget to introduce such a scheme which could be expanded once the budget is back in the black.
Another option is to replace Income Tax with an Expenditure Tax. There are only two things people can do with their money, spend it or save it. An Expenditure Tax would allow the deduction all savings from income and what’s left over, expenditure would be taxed, preferably at a single rate. Combine the Expenditure Tax with welfare reforms that encouraged the replacement of state benefits with the extra personal saving and investments and we can start hacking into that $100 billion welfare bill.
I'm sure there are other alternatives but surely cutting taxes, reducing welfare expenditure, increasing savings and investment makes more sense then living in smaller houses and giving up our cars.

Ralph Buttigieg's professional career has included a couple of decades in government and management, proprietor of a Science Fiction & Fantasy bookshop, a stint in direct marketing and now finds himself in the finance industry. He joined the Liberal Party in 2008 and considers himself one of those right  wing bogans who voted in  John Howard in 1996.

Public Housing Going Private

Keith-TopolskiBy giving people with no assets an opportunity to build a capital base, we might be able to reduce dependence on welfare, writes Keith Topolski.

There is no question that the issue of housing, both in terms of supply and pricing, poses major questions to all levels of government, which are yet to properly address these questions.
Hailing from the once great state of NSW, I have wondered what the best solution is to sorting this issue out. Having read recently of some rather interesting solutions put forward from Barry O’Farrell, effectively stating that if elected, the NSW Liberals will offer to jointly purchase properties with first homebuyers, and then later give the opportunity to those homeowners to purchase the government’s equity share back.

This got me thinking: Why should this only happen when dealing with private housing schemes? Why should this not also apply, in a different manner, to public housing tenants.

Now, before the libertarians jump into me as promoting public ahead of private housing, and the conservatives whack me around for promoting laziness instead of hard work, let me explain this idea.

Public housing tenants are entitled to apply for, and then occupy, housing owned by the government. In exchange for this accommodation, the government allows tenants to pay lesser rental rates. This can be based on the fact that tenants may be unemployed, on disability pensions, or just in jobs that pay painfully low wages.

If those public housing tenants do not meet minimum tenancy standards by way of property maintenance, then they are evicted. If these tenants meet these standards, they stay – just as it is in the private rental markets.

Now, this is where my idea becomes controversial. In exchange for a minimum tenancy term, most likely twenty to twenty five years, representing your standard mortgage duration, the tenants would be eligible to pay their weekly rents and then, at the expiry of the tenancy term, be entitled to purchase the property in their own right, for a lump sum payment which represents a percentage of the average price of properties in the area, possibly five percent.

This is how it works:

Mr Smith pays $200 a week in rent for a 3 bedroom house. After 25 years, he would have paid approximately 1300 weeks rent (25×52) of $200 a week, totaling about $260,000. If this house was located in an area where the average house price was $300,000, he would then have the option of paying a lump sum of $15,000 in order to buy the property outright, meaning he would have paid $275,000 for his own home where the average price is $300,000, a good buy.

Whilst this scheme does seem unfair to those who have to pay the $300,000 plus interest payments for their own home, this allows Mr Smith to build his own capital base. If his family is a 3 or 4 generation welfare family, this is something they never would have had.

This selling of public housing would result in reduced levels of public housing available to government. Such a lack of housing would force government to either build new housing developments in dilapidated areas without real chance for redevelopment or release more housing land.

As any political follower knows, market forces of supply and demand will mean that such an increase of housing supply will see housing prices either stabilise if demand continues to increase, or drop if demand remains stagnant.

Just like work for the dole, housing tenants would need to demonstrate a minimum maintenance standard to be eligible for such a purchase.

Families which have experienced 3 or 4 generations of welfare dependency would now have a capital base to draw on. Less welfare, more housing, more home owners. Now THAT is classical liberalism at work.

Keith Topolski was raised in Sydney’s Hills District, where the median housing price stands at $750,000. Having grown up with his parents paying double digit interest rates and fought for the Liberal Party in Blacktown for the last 6 years, his policy focus is on lowering living costs for the average family.