Miners pinch company tax-cut kitty

Let me make a fearless prediction: big business will get no cut in the rate of company tax in Tony Abbott's first term, and probably not in a second term, either. What you see before you now is all you're likely to get.

I doubt whether Abbott will break his promise to cut the company tax rate by 1.5 percentage points to 28.5 per cent from July 2015. But, of course, big businesses will get nothing from that. They'll be paying the new 1.5 per cent levy on big company profits to help finance Abbott's more generous paid parental leave scheme.

On Joe Hockey's own figuring, the levy will claw back 90 per cent of the cost of the company tax cut, leaving most listed companies no better off. The losers will be the Australian shareholders of those companies, who'll have 1.5? in the dollar shaved off their dividend franking credits.

The point to take away from these ins and outs is that, though the cut in the company tax rate yields no net benefit to big businesses, it still represents a $4 billion-a-year hit to the budget because Abbott effectively excused big business from bearing any net cost to cover the additional budgetary cost of souping up parental leave.

So Abbott's already done his dash on cutting the company tax rate. He's already made a cut he can't afford and it looks like being a mighty long time before budget finances return to being healthy enough - and the surplus fat enough - for him to afford another rate cut.

This is why more realistic proponents of a lower company rate accept that some explicit source has to be found to cover the cost of the cut. So any rate cut would have to be part of some give-and-take package that left the budget no worse off in net terms.

This, in turn, is why any rate cut would be part of a tax reform package that emerged following yet another major review of the tax system (as if the Henry report became useless on September 7).
But there's no magic in this process. The potential sources of higher taxation to cover the cost of a company rate cut are obvious and limited.

Many business executives dream of the goods and services tax being increased to cover the cost, but Abbott's repeated election promise that "there will be no change to the GST, full stop, end of story" puts paid to that. In any case, the premiers have a much stronger claim on any increased collections from the GST.

The other potential source is base-broadening: using the reduction of sectional tax breaks to pay for a cut in the rate of the tax. Julia Gillard attempted to get agreement to such a deal from the business lobbies in 2011, but no industry wanted a rate cut badly enough to be prepared to give up concessions.

Only to be expected? Such is the growing rapaciousness of the industry lobbies that you're probably right. But get this: all previous rate cuts (and we've come down from a rate of 49 per cent in the late 1980s) have been funded by government-imposed broadening of the company tax base.

Above all, remember this: Labor did come up with a package that would have financed a 2 percentage-point rate cut, but dopey big business let it slip through their fingers.

What was paying for the rate cut? The original resource super profits tax, of course. But business sat around with its eyes, ears and mouth closed while the largely foreign-owned big mining companies conspired to escape paying any specific tax on their huge resource rents.

Abbott is about to play out the last act in that monumental exercise in legal tax evasion by abolishing the mining tax before the exhaustion of accelerated depreciation allowances turns it into a much better earner.

Equally remarkable was the rest of business' inability to see it was they who were being ripped off by the miners, not some hated Labor government. It never crossed their tiny minds that the budget isn't a bottomless pit or a magic pudding; that if the miners get in first, there's not much left for everyone else. It's called opportunity cost.

It's time business woke up to the crude facts of fiscal life: the two most hugely profitable parts of our corporate sector are banking and mining. The more their economic rents are adequately taxed, the easier it is to afford to cut the company tax rate for everyone.

Abbott's abolition of the mining tax is the last nail in the coffin of the case for a lower company tax rate.

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Governments should be pro-market, not pro-business

A fundamental question facing the Abbott government is whether it will succumb to the General Motors syndrome: what's good for big business is good for Australia. Does its slogan that Australia's now "open for business" actually mean open slather for business?

Will it run the country to please its business backers or to benefit all of us? Because the notion that what big business wants of government always coincides with what's best for the rest of us is a fairytale only a chief executive could believe.

Another way to put it - to clarify the choice Tony Abbott faces - is whether the government will be pro-business or pro-market.

The economic side of our lives is about producing and consuming; you can't have one without the other. To be pro-business is to favour producers, making life easier for them when they ask for help, whereas to be pro-market is to favour consumers, the people market economies are meant to serve.

As Adam Smith put it: "Consumption is the sole end and purpose of all production and the welfare of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer."
It's easy to tell yourself that by helping an industry you're helping its customers, though it's more usual to tell yourself you're saving workers' jobs. Business people lobbying to protect their profits almost invariably hide behind their workers' jobs, often making greatly exaggerated claims (claims they're rarely asked to substantiate) about how many jobs will be lost if their demands aren't met.

When you think it through, however, you realise that giving business people the easier life they seek isn't the way to maximise the benefit going to consumers, nor to maximise total employment. You may imagine - as does everyone on the left - that capitalist economies are designed to benefit the owners of capital above all others. In fact, in an efficiently functioning market economy the suppliers of capital get little more than a reasonable return on their investment, with most of the benefit going to consumers in the form of an ever-expanding range of reasonably priced goods and services.

The magic ingredient that brings this about - shifting the benefit from producers to consumers - is competition: competition between the producers but, just as important (and often lacking in our busy lives), competition between consumers and producers as consumers seek out the best deals and the best service.
When industries lobby governments for favours, what they're usually seeking is a reduction in the competition they're facing or about to face - all in the name of protecting their workers' jobs, naturally. They're seeking an easier life than the rough and tough life the capitalist system would otherwise serve up to them.

Often they're seeking protection from competition with imports. In the old days protection was achieved by imposing a tariff (import duty) on imported goods; these days a similar effect is achieved by granting the industry a subsidy from the taxpayer. Either way, the protection comes at the expense of the public.

But does it save jobs? It may save them in the particular industry being protected, but only at the expense of employment in the rest of the economy. How so? Consumers are left with less money to spend on the products of other industries. People in the protected industry don't care about that, of course, but the rest of us should.

Longer-term, protection involves keeping your head in the sand and pretending the rest of the world isn't changing. This is unsustainable. When the world we live in changes, we have to adapt to that change or become an industrial museum.

The way to maximise employment for everyone who wants to work is for us to pay the world price for everything and produce those goods and services where we have an advantage, and leave it to others to produce stuff where we don't have an advantage.

So being pro-market means examining requests for help from particular industries from the perspective of the economy as a whole. This avoids another problem: often one industry's request involves being favoured against rival industries.

Give in to one and the others redouble their screams of pain. You can't help 'em all, and if you try to you end up with a mollycoddled, inefficient economy.

Complicating things for the Abbott government is that its Labor predecessor didn't know how to say no to the business lobbies. And the more it said yes to particular industries the more dissatisfied, demanding and contemptuous the rest of business became.

Lobbying has become a way of life for big business, and no doubt the whole of business is expecting a bonanza now their own side is back in power.

If Abbott has any sense, he'll get the business lobbies back in their box from the start, telling them the era of rent-seeking is over. He'll stand up to big business the way Labor never could because, unlike it, he need have no fear of losing business's support.

The first place to stand up is against the unending blackmail game General Motors and the other global car makers are playing so successfully against all national governments.

And when he and Joe Hockey start delving into the budget, they'll find quite a few areas of hidden protection, starting with the plan to continue paying a fortune for faulty submarines to be made in Adelaide when much cheaper, better-working subs could be bought off the shelf in the US or Sweden.

Then there's the protection for local pill-making companies (not to mention retail chemists) hidden in the pharmaceutical benefits scheme.

And coming up is a bid by manufacturers to be exempted from paying the world price for gas when the eastern states become part of the world gas market in the next year or two. We'll hear a lot more about this one.

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Gas lobby working a scam on NSW citizens

The gas industry is working a scam on the people of NSW, in collusion with other business lobby groups and federal and state politicians. It's trying to frighten us into agreeing to remove restrictions on the exploitation of coal seam gas deposits. Failing that, the various parties want to be able to lay the blame for an inevitable jump in the price of natural gas on the greenies and farmers.
According to the gas lobby, the manufacturing lobby, the Business Council, federal Industry Minister Ian Macfarlane and former Labor minerals and energy minister Martin Ferguson, we have a looming gas supply crisis in NSW and must unlock our local coal seam gas resources if we're to avoid shortages and the price hikes they bring.
NSW Minister for Resources and Energy Chris Hartcher, at whom most of lobbying is aimed - his government boasts of "the toughest coal seam gas controls in Australia" - must fully understand the deception, but seems reluctant to expose the dishonesty of his Coalition and business mates.
The problem, we're told, is NSW produces only about 2 per cent of the natural gas its households and industrial users consume. And when facilities for liquefying and exporting gas start operating within a year or two, producers in Queensland and Victoria will switch to exporting their gas to gain the higher foreign prices.
So NSW is facing a massive shortage of gas, which will cause a big jump in gas prices and threaten the jobs of thousands of people working in gas-dependent industries. The obvious answer, we're told, is for NSW to fill this supply gap and avert the price hike by urgently developing its own supply of coal seam gas.
There's just one problem with this neat story: it reveals - or exploits - an ignorance of how markets work. The lobbyists' faulty logic is ably exposed by the Australia Institute's Matt Grudnoff in his paper, Cooking up a price rise.
For many years, the prices paid for natural gas by consumers on Australia's eastern seaboard have been a lot lower than prices paid in other countries. The absence of plants to liquefy the gas so it could be exported meant our market was cut off from the world market.
We had no liquefaction plants because we didn't have enough gas to make them profitable. What's changed is the advent of fracking, which has enabled us to begin exploiting our extensive deposits of coal seam gas.
The development of "unconventional" gas in Queensland has progressed to the point where it's become economic for three liquefaction plants to be set up near Gladstone. When those plants start operating in a year or two, the barrier that separated our eastern seaboard gas market from the world market will disappear and the era of low gas prices will end.
Grudnoff estimates the wholesale price of gas will double or treble from between $3 and $4 a gigajoule to the world "netback" price of $9 a gigajoule. "This is because Australian gas producers will have the option to sell to the Japanese, who are willing to pay $15 a gigajoule," he says.
The difference between $15 and the netback price - also known as the export parity price - is the cost of liquefying the gas and transporting it overseas. If you're as ancient as I am, this should remind you we've already been through a similar process of the low local price rising to the high world price when the Fraser government introduced export-parity pricing for oil in the late 1970s.
The percentage rise in retail gas prices paid by households will be a lot smaller than the rise in the wholesale price. Estimates by Hugh Saddler, of the energy consultants Pitt & Sherry, suggest Sydney retail prices will rise by 11 per cent to 18 per cent - roughly twice the rise caused by the introduction of the carbon tax.
The point is, wholesale and retail prices will rise to the new export parity price throughout the eastern seaboard. In Queensland where the frackers have had an easy ride, and in Victoria where the present moratorium on fracking seems likely to give way to an unrestricted regime, just as much as in NSW where the frackers are given a hard time.
Because of pipelines between the states, how much gas a state produces has nothing to do with the prices its households and businesses pay. According to the gas lobby's logic, the coming ability of producers to get much higher prices by exporting their gas should produce shortages of gas for local users in Queensland and Victoria, not just NSW.
In truth, there will be no shortages of gas in any state, just a requirement to pay the higher, netback price. There's no reason producers would prefer to sell to foreigners if locals are offering to pay the equivalent price.
With the advent of fracking and access to higher prices, it's not surprising gas producers are desperate to extract as much coal seam gas as possible as soon as possible. But their argument that increased production in NSW could hold down NSW gas prices is economic nonsense.
Any new gas producers in NSW won't be willing to sell to locals for anything less than the equivalent price they could get by selling to foreigners. That's the scam.

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Our ever-rarer elixir: restraint

There's a paradox at the heart of modern capitalist economies: if they really worked the way economists think they work, they wouldn't work for long, they'd seize up. And as the Yanks have been busy demonstrating, it's a similar story for modern democracies.

Economists believe the motivating force driving market economies is self-interest: businesses and consumers do what they do purely for their own benefit. But the "invisible hand" of market forces transforms all this selfishness into a system by which everyone benefits.

Although most economists prefer the euphemism "self-interest", Professor Paul Frijters, of Queensland University, prefers to call it "greed" in his path-breaking book written with Dr Gigi Foster, of the University of NSW, An Economic Theory of Greed, Love, Groups and Networks.

Frijters argues that a variety of "institutions" is required to ensure individuals' greed doesn't prevent the operation of free markets. If people will do anything to increase their material wealth, as implied by the Homo Economicus view of humanity, why would they simply pay the prices traders wanted to charge? Frijters asks.

"Why would they not, for example, steal products or production technology, kill competitors, or in some other way seek a market advantage through dishonest or immoral behaviour?" he asks.

Because of the existence of formal and informal institutions. Formal institutions include parliaments that pass laws prohibiting certain behaviour and police and courts that enforce those laws.

But ask yourself this: is your knowledge that it's illegal and that you risk being punished the only reason you don't steal from shops, your employer or your neighbours? Do you adhere to contracts only to avoid having to defend your behaviour in a court case with the other side?

Of course not. Even where we're confident of not getting caught, almost all of us refrain from doing those things because we don't believe they're the right thing to do. And there is any number of perfectly legal things we could do, but choose not to. So our behaviour in the marketplace - or in politics - is also constrained by a host of informal institutions, such as notions of fairness, conventions, customs, rules we've internalised and other norms of socially acceptable behaviour.

"Formal and informal institutions in combination are important in the running of societies, as together they form the rules of the game to which people adhere. They constrain the possibilities for opportunistic behaviour in human interactions," Frijters says.

This isn't the first time the US Congress has refused to pass the budget and thus shut down the US government, but it's rare. The Financial Times' Martin Wolf, doyen of the world's economics editors, observes that if President Obama's political opponents are prepared to inflict such damage on their own country, "the restraint that makes democracy work has gone".

Dr Chris Caton, of BT Financial Group adds: "Thank god that couldn't ever happen in Australia!" Not half.

Just as we need social norms to restrain our instinctive selfishness and so keep the economy functioning smoothly, we need restraint among the players in the political game to ensure we don't descend into impasse and policy impotence. But as the Americans' appalling predicament reminds us, restraint isn't a given, and can't be taken for granted. Our selfishness does propel the economy onward and upward, but when voluntary restraint breaks down - almost always egged on by competition - we can end up with greedy bankers causing the devastation of the global financial crisis.

Similarly, we need our adversarial two-party system of democracy to keep a check on the corruption and incompetence of governments, but when personal ambition and party rivalry become unrestrained, government suffers.

The sweeping economic reforms of the Hawke-Keating era were made possible by John Howard's principled restraint in providing bipartisan support. But bipartisanship in the interests of good government ended with Labor's opportunistic scare campaign against Howard's GST.

Tony Abbott returned the favour with his ruthlessly dishonest scare campaigns against the carbon tax and the mining tax. Now how do you think Labor will react should Abbott propose a controversial reform in this term or the next?

The self-seeking, short-sighted, rivalry-fanned lapse in restraint by both sides makes further major economic reform highly unlikely until, by some hard to imagine means, the former norms of acceptable political behaviour are restored.

But don't blame it all on the politicians. That's too easy. As Professor Ross Garnaut observed in May, the past dozen years have seen "interest groups" - I'd say industry lobby groups - become less inhibited in pursuing private interests at the expense of the wider public interest, ferociously resistant to reform proposals involving private costs to them, and willing to pursue their private interests by costly ad campaigns and party donations.

Less restraint, less reform.

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Economist proposes a socio-economic model

What can economists tell us about love and power, why people are loyal, how groups form and how they get their members to abide by the group's norms of acceptable behaviour? Not much.
Everyone knows conventional economics is built on a stick-figure conception of humans and the way they work.
 
Until now. An economics professor at the University of Queensland, Paul Frijters, has attempted the remarkably ambitious project of developing a unified theory of human behaviour, turning the mainstream model of the economic system into a model of the socio-economic system.

With help from Dr Gigi Foster, of the University of NSW, he's set it all out in the book An Economic Theory of Greed, Love, Groups and Networks. We'll find out soon enough what the rest of the economics profession makes of it.

He starts with the principles of mainstream economics, then adds and integrates selected ideas his research has determined have considerable power in explaining human behaviour.

The bit he starts with, which comes straight from the mainstream, is the assumption that humans are carefully calculating maximisers of their personal benefit. Or, as Frijters prefers to put it, ''humans are mainly motivated by greed''.

This conception of ''homo economicus'' - economic man - emerged in the Enlightenment period. In the early Middle Ages, by contrast, materialism was seen in society as strongly immoral, Frijters explains.
Even so, it's a quite one-dimensional conception of human behaviour. We're a lot more complicated than that. This assumption accounts for much of the criticism of conventional economics (including from yours truly).

So the ''core concepts'' Frijters adds to the conventional assumption of ''greed'' aim to broaden the model's explanation of human motivations and behaviour.

The first concept he adds is ''love'', by which he means love for other humans, but also love for one's beliefs. ''Love is defined as a form of unconditional loyalty, and will be said to be present whenever a person would be willing to help advance the interests of the object of his love, even if the object of his love would not notice the help and even if the loving person would receive no observable reward,'' Frijters says. So love includes the ideas of altruism and loyalty.

''Selfish materialism is extremely powerful in explaining many of our laws, our customs, our politics, and our choices as consumers. Yet selfish materialism alone cannot lead to the kind of human organisations we see in reality.

''I expect to see love as a major player involved in almost every facet of an individual's decision making ? Love within companies should be an integral part of how teams of people actually get things done within organisations.''

Another major criticism of the simple model of conventional economics is its assumption that each of us acts only as an individual, unaffected by the behaviour of those around us. This means no ''economic actor'' has more power than another.

In truth, humans are a group animal whose self-image is inextricably linked to the groups of which they are part. And the reality is that the dominant power relations in modern societies aren't between one individual and another, but rather between individuals and groups.

So the second feature Frijters adds to the mainstream view is groups and the power they generate. Each of us is a member of any number of groups, affecting our family life, social life and working life. Beyond that, our religion, ethnicity and nationality make us members of more, often powerful, groups.

It's because groups generate and exercise power that they need to be added to the model. Power is the ability to influence the behaviour of others. Part of this power comes from the development of norms of acceptable behaviour within the group. Many of us feel considerable loyalty to the groups we're in, which partly explains why we confirm to group norms.

Frijters argues there are five basic types of social groups: small hierarchies, with a clear leader, a few of high rank and a group of underlings totalling no more than a few dozen individuals in all; small circles of reciprocity, with people who are equals and share a common goal; large hierarchies, where members don't know each other; large circles of reciprocity; and networks.

Networks are his third addition to the mainstream view. They are facilitators of exchange - of goods and services, or just information. They exists because of the need to overcome ''frictions'' in markets arising from the information and transactions costs the simple mainstream model assumes away.
Individuals search for goods, buyers and suppliers within networks of small size or large anonymous networks such as the internet.

So how does Frijters' model improve on the answers to questions from the mainstream model? What questions does it answer that the mainstream can't?

On the common questions of whether international trade should be encouraged or protected against, what governments should do about monopolies and how to discourage firms from polluting, his model doesn't much change the conventional answers.

But it can answer some questions the conventional approach can't. With its assumption of calculating, self-interested behaviour, the old approach can't explain why people go to the bother of voting when the chance one vote will change the outcome is minuscule.

Frijter's model says people vote because they're idealistic and identify with the group that is Australian voters.

Nor can the old approach explain why people don't avoid or evade paying tax a lot more than they do. Rates of ''voluntary compliance'' are, in fact, surprisingly high (though not as high as in the old days).
Frijter's model says people feel loyalty to the group of fellow Australians and conform to the social norm that paying taxes is a form of reciprocity that's reasonable to expect of members of the group.

And this is no idle question. He says getting people to pay taxes is probably the single most important ingredient supporting our system of governance.

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THE POLITICAL ECONOMY OUTLOOK FOR REFORM

Australian National Conference on Resources and Energy, Talk to conference dinner, Canberra, Wednesday, October 3, 2013

I suppose I should start by warning you I’m an adherent to the Paddy McGuinness school of public speaking, which holds that there’s no point in speaking to an audience unless you say something that makes them sit up, challenges their comfortable assumptions and gives them something uncomfortable to think about. This has become, I admit, a terribly unfashionable way to engage an audience. The fragmentation of the media that’s occurring in the digital age is increasingly allowing consumers of the media to customise their news and opinion, selecting those items they’ll find congenial and reinforcing, and selecting out anything that jars with their long-held view of the world. And it’s certainly the case that the main organs of business news have switched to a strategy of only ever telling the captains of industry what they want to hear, of echoing their own opinions back to them.

Sorry, but I’m too close to retirement and too comfortably off to be bothered abasing myself in such a way. In Paddy McGuinness’s heyday the business bible saw its role as being devil’s advocate to business and that’s a role I’m much more comfortable with. And since I didn’t ask to be paid to talk to you tonight, I’m going to do it my way. So I imagine many of you won’t enjoy what I’ve got to say and may even heartily disagree with some of it. Feel free to think of some disparaging label to attach to me and use as an excuse to close your mind to the challenging things I say. I’ll still bother saying them in the hope at least some of you are bosses who don’t want to be surrounded by yes-men and do want to be challenged to rethink some of your more comforting beliefs.

Perhaps among all the labels you could use to dismiss my views the least abusive is that I’m ‘anti-mining’. I assure you I’m not. I’ve spent the past decade singing the praises of the resources boom to my readers, arguing staunchly that this reinforcement of Australia’s comparative advantage in the provision of minerals and energy to the rest of the world is a blessing, and that the rest of our economy has to cop the painful structural adjustment this new stroke of good fortune makes necessary.

What I’m not, however, is pro-mining. I’d like to think I’m not pro any particular sector of industry. When I got into the economic commentary business 40 years ago it was the farmers and the manufacturers who were always trying to tell us they were special, that the rest of the economy rode on their back and that this entitled them to special consideration. It was self-serving self-delusion then, and it still is. What’s changed is that, these days, we also have the miners trying to tell us they’re special, that the rest of the economy rides on their back and that they’re entitled to special consideration. Sorry, not buying that one, either.

With the change of government I’m sure you’re a lot happier about the prospects for the economy and its management, and a lot more confident of a sympathetic hearing from the new government. I wouldn’t be so sure. I suspect the mining industry’s lobbying success is reaching its zenith as we speak. It won’t surprise me if, looking back on the life of the Abbott government, you come to realise the big gains the industry made actually occurred under the Labor government. They occurred no thanks to Labor, and all thanks to the Coalition, but they occurred in reaction to the policies of Labor as part of Tony Abbott’s successful four-year campaign to fight his way back into office. Why did Abbott immediately oppose the mining tax and promise to repeal it? Because he genuinely believed it would wreck the mining industry and do great damage to the wider economy? I doubt it. He did it primarily because he saw opposing the tax as a popular cause and was hoping for a lot of monetary support from the big miners in the 2010 election campaign. Why did he set his face against the carbon pricing scheme? Because it was the price of getting the backing within the party that allowed him to wrest the Liberal leadership from Malcolm Turnbull and because he could see what a popular cause it would be to oppose this ‘great big new tax on everything’.

Now, I have no doubt that keeping his promises to get rid of the mining tax and the carbon tax - delivering on the commitments he made as a result of policies pursued in Labor’s term - will be among his highest priorities. But my point is this: Having delivered so handsomely for the mining industry, I doubt if he’ll feel in any way indebted to the miners. Indeed, he may well feel he’s the one that’s owed. Certainly, he’ll feel the miners have had enough favours to be going on with. And it won’t surprise me if that’s the attitude other industries take: that the miners have had their turn and it’s time to give other industries a go. I suspect the mining industry’s lobbying power has just reached its zenith.

Does this analysis shock you? Does it seem extraordinary cynical? Sorry, it’s just being brutally realistic. We all pursue our self-interest, but we all cloak our self-interest in arguments about how this would be in the best interest of the economy. All I’m doing is stripping away the bulldust.

Most people in business are hoping that with a more enlightened government in power with a big majority in the lower house and a reasonably workable Senate after July, we’ll now see some major economic reform - if not in Abbott’s first term then certainly in his second. I think this is an idle hope.

In a prophetic speech he delivered in May - and which he’s in the process of expanding into a short book - Professor Ross Garnaut argued that our political culture has changed since the reform era of 1983 to 2000, in ways that make it much more difficult to pursue policy reform in the broad public interest. ‘If we are to succeed, the political culture has to change again,’ he said. Policy change in the public interest seems to have become more difficult over time as interest groups have become increasingly active and sophisticated in bringing financial weight to account in influencing policy decisions, Garnaut said. ‘Interest groups have come to feel less inhibition about investment in politics in pursuit of private interests. ‘For a long time, these past dozen years, it has been rare for private interests of any kind to be asked to accept private losses in the interests of improved national economic performance. When asked, the response has been ferocious partisan reaction rather than contributions to reasoned discussion of the public interest in change and in the status quo,’ he said.

I would remind you that, though John Howard’s introduction of the GST is a notable exception, the many reforms of the Hawke-Keating era were achieved with bipartisan support - something that’s unthinkable today. Much of that reform, particularly in the area of taxation, involved packages of measures in which particular interest groups suffered some losses, offset by other gains. As Garnaut argues - and I’m about to demonstrate - this kind of co-operative give-and-take between interest groups willing to accept reforms in the wider public good simply isn’t conceivable today.

My way of making Garnaut’s point is that since the reform era of the 1980s and 90s we’ve regressed to a culture of rent-seeking. You can see this at the level of the political parties and at the level of the industry lobbies. When Howard had the courage to propose introducing a GST, Labor saw its chance to regain office by running a populist scare campaign against it, and came within a whisker of winning the 1998 election. At the time it professed to be righteously opposed to such a regressive tax, but when it finally regained power seven years later, the idea of doing something about that supposedly abhorrent regressivity never crossed its mind. When, in turn, the Rudd government - in its own quite ham-fisted way - attempted the risky reforms of installing the ‘economic instrument’ most economists recommend for responding to the challenge of climate change, and rebalancing the tax system by reforming the taxation of mineral deposits and using the proceeds to reduce taxes elsewhere, Abbott lost little time in deciding to take advantage of Labor’s vulnerability.

Do you really think the events of the past three years will have no bearing on the Labor opposition’s attitude to any controversial reforms Abbott might propose in the next six years, or that Abbott’s foreknowledge of this attitude will have no bearing on his willingness to propose such reforms? The truth is the nation has fought itself to an impasse on controversial reform - of the labour market as well as taxation - and, among the industry lobbies, the miners have played a more destructive role than the rest.

Now, you can respond that the miners did no more than what you’d expect them to do: oppose two new taxes they perceived to be contrary to their industry’s interests. But this is making my point: the reason the outlook for major economic reform is now so bleak isn’t solely because the two sides of politics have regressed to short-sighted, self-interested advantage seeking, it’s also because the industry lobby groups have done the same thing. There’s nothing new about industry lobbying but, as Garnaut says, in the past dozen years it’s become far more blatantly self-interested and far more willing to devote large sums to advertising campaigns to oppose whatever government reforms an industry sees as contrary to its interests.

What hasn’t yet occurred to many business people - but you can be sure is well understood by the politicians and their advisers - is that when industries lobby governments for favours or in opposition to new imposts, the various industries are in competition. It’s easy to imagine the government’s coffers are a bottomless pit but, in fact, there’s only so much rent to go around. As an economist would say, all concessions have an opportunity cost. It’s easy to believe all industries could pay less tax if the pollies would only make households pay more tax, but I wouldn’t hold my breath waiting for it to happen. I doubt either side of politics would see that as consistent with their own self-interest. The truth is, when one industry gets in for a big cut, there’s less left in the pot for the others.

That industries don’t understand this simple point about opportunity cost - don’t realise they’re in competition with each other - is easily demonstrated by the demise of Labor’s mining tax package. Think about the original package: the big three miners were going to pay a lot more tax on their resource rents, but pretty much the whole of the proceeds was going to be distributed to other industries. In particular, all companies (including miners, big and small) were getting their company tax rate cut by 2 percentage points, small miners were getting a resource exploration rebate, small business was getting instant write-off of most assets, the banks were getting more concessional taxation of their depositors’ interest income and the financial services industry was getting its great dream of having compulsory super contributions jacked up from 9 per cent to 12, a one-third increase in contributions. So three big miners had a lot to lose, but the rest of industry had a lot to gain. So what was the rest of industry’s attitude to the resource super profits tax? Didn’t like the sound of it. And what did they do when the miners sought to scuttle the new tax? Precisely nothing. What happened then? The exploration rebate was to first thing to disappear and, in several stages under Labor, the cut in the company tax rate got whipped off the table. Now, with Abbott’s plan to abolish the cut-down mining tax, the small business concessions are being withdrawn and the phase-up of compulsory super contributions has been deferred for two years. With all the pressure on the Abbott’s budget, and the super industry extracting a promise from Abbott not to make any further savings on the concessional taxation of super, I’m prepared to bet the two-year deferment will become permanent.

Thus did the rest of business allow the miners to screw them over. And thus did the miners destroy faith in one of the techniques tax reformers believed made major tax reform possible: put together a large package with a mixture of wins and losses and the various industry lobbies keep each other on board in the wider interest.

But it doesn’t stop there. When the miners and the rest of business dream of further tax reform under the Abbott government - perhaps after yet another root-and-branch tax review - what do they have in mind? Mainly, a big cut in the company tax rate. Do you really see the Abbott government daring to fund such a cut by increasing the GST? Had the minerals resource rent tax survived and got past its accelerated depreciation phase, the fact that the most highly profitable part of the corporate sector (along with the banks) was paying a lot more tax on its profits, would have greatly strengthened the argument for a general cut in the company tax rate (this is particularly so because mining is so heavily foreign-owned). So the absence of the resource rent tax makes a cut in the company tax rate a lot less likely. One way a cut in the rate could still be afforded is if was covered by a broadening of the base by the removal of sectional concessions. But the bitter experience of the demise of the mining tax package makes it less likely any government would risk proposing such a compromise.

We can continue going down the road of ever-more blatantly short-sighted and narrowly self-interested behaviour by political parties on the one hand and industry lobby groups on the other, but while we do so it’s idle to dream of major, controversial reform. What we can do - as the miners have shown - is veto any reform we don’t fancy.

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Abbott should repeal great big 'Australia tax'

When government changes hands, it s possible for important issues to fall between the cracks and useful work to be lost. In late July, a Labor-constituted parliamentary committee issued a report about the Australia tax . It drew a fair bit of media attention at the time but, coming so close to the election campaign, was soon forgotten.

But the report made some important recommendations recommendations the Coalition members of the committee were happy to support on measures the government could take to reduce the Australia tax and it s important the new government takes up those recommendations.

The report was an inquiry into the prices of information technology hardware and software sold in Australia, conducted by the House of Representatives standing committee on infrastructure and communications. It found, unsurprisingly, that Australian consumers and businesses must often pay much more for their IT products than their counterparts in comparable economies. Hence the term Australia tax .

Evidence presented to this inquiry left little doubt about the extent and depth of concern about IT pricing in Australia. Consumers are clearly perplexed, frustrated and angered by the experience of paying higher prices for IT products, the report says.

Submissions to the inquiry compared the prices of more than 150 professional software products and found an average price difference usually between Australian and US prices of 50 per cent. The median price difference was 46 per cent for Autodesk products, 49 per cent for Adobe products and 67 per cent for Microsoft products. Submissions compared the prices of more than 50 IT hardware products and found a median price difference of 26 per cent. Comparisons of 70 music products found a median price difference of 67 per cent. For 70 games products it was 61 per cent and for 120 e-books it was 13 per cent.

How can such differences be justified? A lot of possibilities spring to mind. Taxes might be higher in Australia. For physical products, freight and handling costs would be higher. Australian companies may face higher rent and wage costs. And our much higher dollar has greatly improved the comparison between the prices of imports and local prices.

Obviously, the inquiry needed a lot of help from the representatives of the global IT companies to explain these puzzles and possibilities. It didn t get it. The big companies repeatedly declined to appear before the committee, sometimes saying they d be represented by their industry body while the body said it couldn t represent the views of individual members.

So in February the committee took the unusual step of summonsing Apple, Adobe and Microsoft. The evidence they gave was incomplete, conflicting and unconvincing.

It s hard to see how claims of higher costs in Australia can account for the price differences, particularly in the case of content that s delivered digitally. And when the same overseas site puts up its prices for such content as soon as it discovers you re from Australia, it s hard to avoid the conclusion there s something funny going on.

The inquiry concluded that many IT products are more expensive in Australia because of regional pricing strategies implemented by major vendors and copyright holders .

Just so. To anyone with any training in economics it s obvious what s going on: global IT companies are engaging in price discrimination by charging different prices for the same product in different parts of the market. They maximise their profits by charging what the market will bear in each market segment, taking advantage of differences in customers willingness to pay .

Economists have long studied this phenomenon and regard it as perfectly normal profit-maximising behaviour. Global companies charge higher prices in Australia than in the US because they know Australians have a higher willingness to pay than Americans have. Why? For no reason other than that we re used to paying higher prices than the Yanks are used to.

As the inquiry s report acknowledges, there s nothing new about international price discrimination. It s been going on for decades. What s new is the digital revolution. The internet has made it much easier for us to see what s going on and get around it.

Economists know that for price discrimination to succeed, you have to be able to keep the two markets separate. Otherwise people will switch to buying in cheaper markets or some middleman will make a quid by doing it for them.

To keep national markets separate in the old, physical world, many governments used legislative bans on parallel importing , where companies buy in the cheaper market and sell at a discount in the local market.

To keep national markets separate in the digital world, big companies use various forms of geoblocking the use of internet addresses, credit card numbers or other means of electronic identification to block internet sales and downloads of electronic products ... based on the geographic location of the consumer .

There are ways around geoblocking ask any teenager to show you but it s not certain all the ways around are strictly legal.

So the committee recommends the government remove the few remaining parallel importation restrictions in the Copyright Act and also secure consumers rights to circumvent measures supposedly intended to protect copyright, which are being used to impose higher prices on honest customers.

And it should amend the Competition and Consumer Act to render void consumer contracts that seek to enforce geoblocking.

Let s hope Tony Abbott is still listening.

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