The appointment of Danielle Wood, current CEO of Melbourne-based think tank the Grattan Institute, as the new chair of the Productivity Commission signals the beginning of the surrender to the left of this government body.
Not that it may make much difference—most of its recommendations are “honoured in the breach rather than the observance” with the Australian federal government not moving to implement any of its recent 72 recommendations from its 2023 Productivity Inquiry.
Out of the 26 recommendations in the previous report, completed in 2017, all were neglected save for part of one recommendation—to change from stamp duties to land tax—which has been partially implemented in New South Wales.
Current Treasurer Jim Chalmers has expressed a desire to “reform” the Productivity Commission and initially appointed fellow alumnus of the office of former federal Treasurer Wayne Swan, Chris Barrett, to do the job.
After being appointed Mr. Barrett decided to return home to Victoria where he had been deputy secretary of the state’s Treasury to be promoted.
The Productivity Commission job must have looked uninviting if the chance to preside over the gradual bankruptcy of Victoria was more appealing.
The Roots of the Grattan Institute
I’ve often remarked that if you want to see where Labor is heading, check out the Grattan Institute. It was initially established in 2008 during the prime ministership of Kevin Rudd with funding from the Victorian and Commonwealth governments, as well as Melbourne University and mining giant BHP.From the beginning, it’s been a source of anodyne left-wing policies which tend to follow The Guardian and Crikey media outlets rather than the other way around.
It is called the Grattan Institute because it sits in a building owned by the University of Melbourne on Grattan Street, and no one could think of a better name. Most think tanks can do better than that, so it got off to an unimaginative and unpromising start.
The first CEO John Daley was a former banker who had a history both as a lawyer and a public servant in Victoria with a keen eye for political wins, but a clear leftward bias.
Mr. Daley was early onto the climate change bandwagon. I remember attending a presentation where he said the costs of decarbonisation were trivial. I quizzed him about heavy electricity users like aluminium smelters only to be assured that most of ours would be fine.
Ms. Wood seems to be cut from a similar soft-left cloth. Under her leadership, Grattan has continued to make soothing misleading noises about the energy transition, and while it was influential during the COVID crisis its advice was mostly wrong.
In her Giblin Lecture, delivered in Hobart two weeks ago, she gives us some ideas about what she will push.
As intergenerational equity is one of the concerns of the Productivity Commission, so far, so good.
A List of Bad Ideas
Ms. Wood quickly got herself into hot water with a number of her prescriptions.She wants to reintroduce death duties; tax retirees at higher rates, including their superannuation earnings; abolish dividend franking; reduce the capital gains discount; and tighten the assets test on the pension.
I’m sure her motivations are good but with one exception, which I won’t outline here, these are all terrible ideas and don’t address the underlying problems, which she analyses in some depth.
She points to the fact that increased interest rates disproportionately affect young people and that their living standards, compared to older Australians, have declined.
Housing affordability is in crisis, and the ability to buy a first home, absent a rich benefactor to help with the deposit, has never been worse.
In addition, government costs, particularly in aging and health are increasing faster than economic growth, and so consuming more and more of tax revenues, which are increasingly paid by the young and not the old.
This leads her to some Pikettian Hell where eventually all the assets of the world will be owned by a concentrated gerontocracy, freezing the young and unconnected out of a secure life and home ownership forever.
(Thomas Piketty wrote “Capital in the Twenty-First Century,” which posited a world where the rich would ultimately accumulate all the capital in the world because the rate of return on assets is higher than growth. It has striking similarities to Thomas Malthus’ discredited work on population growth.)
With this mindset, it’s easy to see why she would want to tax inheritances and redistribute the wealth to lower taxes. Except most of the extra taxes generated would go to pay for the elderly, who are the ones driving the increase in health and age expenditure.
It wouldn’t make it any easier to buy a house for a young person tomorrow than it is today (although it would make some young people who wouldn’t inherit as much, more miserable).
Wouldn’t it just make more sense to make older Australians responsible for more of their aged care?
Here’s the Challenge With an Inheritance Tax
An inheritance is a gift and not dissimilar to winnings in a lottery. You couldn’t tax one without taxing the other, and not just winnings from games of chance. Any gift would have to be taxed.But we have a general approach to these things that you only tax income-earning activities, that is activities that you deliberately engage in to earn an income. Bookies get taxed on their winnings, punters don’t.
Then there is the problem of the family farm.
This would be the biggest boost to corporate farming ever because many properties would have to be sold, and what family enterprise is going to be able to buy them when faced with the same ultimate prospect of inheritance taxes?
I’ve got nothing against corporate farming, but family farms have a place too, and can be some of the most innovative.
At the same time, it would plunge some obstinate operators into subsistence as they clung to debt-ridden properties after paying the tax.
Family businesses would face a similar problem.
There is also a social and financial pay-off to having large aggregations of capital in private hands.
As we can see with The Voice campaign to alter the Australian Constitution—put capital in the hands of professional managers and they’ll devote it to the causes they favour, which don’t necessarily align with the shareholders (ESG).
And if we are talking about productivity and growth then there is an optimal point on the risk-reward curve for profitability, and plenty of economic evidence shows it is not where the superannuation funds and professional money managers are located.
We all benefit from some people having considerably more money than others. Some will earn it in their own lifetime, often by luck. Others will earn it in their parents’ and grandparents’ lifetimes, by winning a genetic lottery. For others, it will be a combination of luck, hard work, and inheritance.
In all cases, these private individuals are in a position to take bets that others can’t, either because these others are fiduciaries, or just because they just don’t have the guts.
Contra Mr. Picketty, not all of those owners will succeed in getting richer, but the financial petri dish they contribute to will produce overall more productive and better outcomes.
Ms. Wood Is Right About Home Ownership
I could go on about her other proposals, but I’ll wait to see whether they emerge from the Commission in her term as chair.One thing she is definitely right about is that home ownership is the key to security. Can I suggest that now she is back working for the Commission (she worked there once before between 2002 and 2007) she resurrects the 2017 Productivity Report?
Of particular interest should be Recommendations 4.5 Apply competition principles to land use policies, 4.6 Better provisions for growth, and 4.7 Implement best practice in development assessment.
One secret to intergenerational equality is lower house prices, and the only real solution is increased supply. Produce policy settings that encourage more land developers and development, and much of the problem will disappear.
Ironically, many of the small developers in the land development industry started with a small inheritance they wanted to make larger.
