How to eliminate government budget deficits with some simple efficiency-based tax reforms

I recently became awarec that each year the Commonwealth Government publishes a tax expenditures report that details the tax exemptions, deductions or offset concessional rates as well as deferrals of tax liability.  A colleague told me that state governments publish similar documents for tax expenditures associated with land tax, payroll tax and the non-taxation of non-profits. I have not yet checked these out.

A tax expenditure is a bit of tax the government could grab but it does not - it foregoes the tax. It is just like government spending in terms of its impact on the budget deficit. They increase the deficit. Actually more than a "bit" . Huge amounts of foregonee possible tax revenues arise:

• Exemptions of capital gains-tax on family home $25b
• Exemptions on residences previously lived in  $20.5b
• Concessional tax on superannuation $16.3b

These alone would boost the total tax take by 12% and obliterate the deficit.   These tax expenditures have grown dramatically over the paast few years because of the property booms in our capital cities. Getting rid of housing exemptions would reduce property prices and leave our children better-off.  Over-investment in housing would give way to more productive investments in other areas.

Generally even without adding to tax income the fewer these types of exemptions therec are the smaller are the excess burdens (deadweight losses) of the taxesc that remain. Big taxes impose disproportionatetely large inefficiency costs - roughly they are proportional to the square of the tax size.

Apart from income tax deductions there are also exemptions from the GST - Australia compared to NZ which does have a broadly based GST has  40% less coverage. Some big items here:

• Exemptions of food from GST $6.4b.
• Exemption of education $3.9b
• Exemption of health services $3.6b etc etc.

There are plenty of opportunities to resolve our fiscal difficulties if politicians had the guts and stamina to approve such changes. They won't in the foreseeable future.  We are timid of even modest cuts in childcare benefits! A basic principle of Australian policy (a version of the Pareto Principle) - no policy should be undertaken unless it disadvantages no-one.  There are no such policies so we will do nothing!

Emissions Reduction Fund insufficient to hit Kyoto targets

I wrote a paper with Rob Waschik and Iain Fraser arguing that the ERF would be unlikely to achieve Australia's Kyoto target by 2020 - in fact we computed that the $2.55b in the fund would only hit 50% of the target. (The link is to a preprint - the paper itself is now published but paywalled).

The figures today on the outcome of the first ERF auction do not lead me to reconsider my conclusion despite the assurances of The Australian that the ERF is "within reach" of the 5% reduction target by 2020.

The arithmetic in The Australian is wrong since, to this time, about 1/4 of the $2.55b has been spent but emissions cuts of 236MT are only 1/5th of the 236MT reduction that is targeted.  Not a big deal this error however and the "within reach" conclusion might even be approximately justified.

The difficulty is that the emissions cuts achieved so far are likely to be the cheapest cuts available - the "low hanging fruit".  As cuts continue to be made the cost per tonne of making the cuts is likely to rise well above the average rate paid this round of about $14 per tonne.  The "marginal abatement curve" is always supposed be to be a strongly increasing function of the level of cutbacks.

This is not to say that Australia won't hit its emissions targets.  It might. The economy may go into recession and continuing developments in energy conservation and the use of renewables (solar and wind) may help achieve this objective as might developments in coal burning technology and substitutions toward use of natural gas.  But the ERF itself won't be enough to achieve desired targets with its current budget. 

Insuring quack medical treatments and non-quack useless treatments

A few years ago I had an arthroscopy in my right knee. It followed acute knee pain that resulted from clumsy attempts to climb a locked gate at the Western Treatment Plant.   The pain was intense and "burning" - it lasted several weeks while my GP suggested I rub Voltaren on it which had no effect at all. Finally I went to a "sports doctor" who recommended arthroscopic knee surgery. I was on crutches for a couple of weeks after which the knee went back to normal,  the pain gone I think permanently.

I was intrigued therefore to read in this morning's AFR  ("Rolfing and Rebates", unfortunately pay-walled) that some insurers (NIB) regard arthroscopies as being ineffective so that, like Rolfing, homeopathy, naturopathy, massage and herbalist treatments (and other evidence-free medical practices)  insurance companies should not provide cover for them.

I am not expert on medical issues but I wondered if the claim with respect to arthroscopy is correct true. This article posted online claims they are.  It claims the recovery I experienced would probably be achieved by a placebo procedure.

Two issues occur to me:

(1) Should insurance companies provide cover for treatments that consumers demand - if- like homeopathy - there is no clinical evidence they work.  One insurer in the AFR answered "yes" to this question since insurance companies should reflect consumer preferences and, presumably, not science.  I have problems with this view since providing insurance cover to procedures signals to customers that the procedures are valid. By reducing the effective cost they also increase incentives to use them.

(2) How many more mainstream "respected" treatments (like arthroscopy) are being insured even though there is little clinical evidence they work?  I wonder, for example, about the widespread advocacy of Statin drugs for dealing with claimed cholesterol problems: See here - Statins of concern to me as I have taken these drugs for a decade.  Or the now discredited, but still practised, advocacy of a carbohydrate-based "food pyramid" that has driven millions into obesity, Type 2 diabetes and heart disease.  Ditto the rejection of carbohydrate intake as a treatment for diabetes and obesity.