If you want to buy a car and pay more than $57,000 for it, the government’s luxury car tax is set to rise next week from 25 to 30%. Malcolm Turnbull says that this will raise the price of all cars. I don’t think so. When it comes down to it, most luxury cars are imported. Indeed, because of the exchange rate rise, there surely is a ton of pressure downward on the prices of those cars. So car buyers may not even notice this (except if they anticipated a ‘but for the tax increase’ price). But in any case, it shouldn’t effect the price of other cars and only the differential price between luxury and non-luxury vehicles. Competition will keep the non-luxury car prices down.

Indeed, even in the luxury car market, dealers will face a dilemma. With the Aussie dollar high, they might be more tempted to price the lower end luxury cars below the threshold. In this case, more cars might fall out of the taxed bracket.

So currently, if you earn more than $50,000 you get charged an extra levy if you don’t take out private health insurance. That income threshold is set to double next week. Suffice it to say, that will reduce the incentive for many households to take out private health insurance. It is like a tax cut except that some households will also be deciding to save themselves insurance premiums while the government will have to deal with some extra costs from them.

The interesting thing is why it was done? Clearly, for the households affected, to not have a levy held to their wallet when they make insurance purchase decisions is valuable. But there doesn’t seem to be a huge amount of political capital in this. Unless of course you were thinking of reforming the entire health insurance system in the future.

In that case, one thing you would want to know is: what is the elasticity of demand for private health insurance? By increasing the income threshold, you can pretty much calculate that for every household you identify that drops private health cover. If it turns out that that number is small, then maybe bigger reforms are possible. If it turns out that that number is really large, maybe bigger reforms are too costly. So this could all be about gathering information to pave a path to future reform; something I, for one, think is long overdue.

A great bit of dialogue from a recent episode of House.

Dr. Cuddy: All I ask is that you tone it down for a few days.

Dr. House: I want that TV.

Dr. Cuddy: We’re not bargaining.

Dr. House: You want something. Either you’re bargaining or you’re begging.

Dr. Cuddy: Me keeping my job is good for you.

Dr. House: Yes, but it’s better for you. I just want us to be equally happy.

This is an excellent illustration of bargaining with non-transferable utility (that is, when money can’t change hands). Just because two people want the same thing doesn’t mean there isn’t an issue over who gets what.

To recap, the goal of parental support policies is the ability to move between work and home life frictionlessly. However, in evaluating whether the market is failing in this area points to possible problems to do with the indivisibility of work life, externalities associated with child development, discrimination and liquidity constraints. To be sure, when a person has lots of bargaining power (as much arise when there are skill shortages), firms will have an incentive to address parental support issues in order to retain those people. Thus, there exist many jobs out there for which parents’ desires are being met but for possible discrimination that might still be present.

And before I move on to various policies in this space, let me clarify one thing about indivisibility. It is not just work that has this but home too. For starters, there is work at home. Having kids increases the amount of housework to be done. And much of the stuff from washing, cooking to chauffeuring can be outsourced but, once you are taking care of the kids anyhow, may be difficult to justify or afford when one parent is away from (paid) work.

Because the PC inquiry is about parental leave support and not other forms of parental support, I am going to focus on that. However, as will become clear, the system of policies matters alot and I will touch on that where necessary.

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Think you have a better punchline for a comic, on Dilbert you can just add it. Although today’s comic is a classic and it is hard to see how it can be improved.

By the way, I did this for another comic a little while back.

Apparently, when it comes to science, luck. Malcolm Gladwell looks at where the big ideas come from and demonstrates that they are a function of time and place as they are of a unique mind; precisely because unique minds aren’t hard to find. His description of how brainstorming sessions for ideas might work makes me wonder what the 2020 Summit could really have achieved had we been more ambitious.

But then, in August of 2003, I.V. held its first invention session, and it was a revelation. “Afterward, Nathan kept saying, ‘There are so many inventions,’ ” Wood recalled. “He thought if we came up with a half-dozen good ideas it would be great, and we came up with somewhere between fifty and a hundred. I said to him, ‘But you had eight people in that room who are seasoned inventors. Weren’t you expecting a multiplier effect?’ And he said, ‘Yeah, but it was more than multiplicity.’ Not even Nathan had any idea of what it was going to be like.”

Next week (Wednesday 14th May) I am presenting in the lunchtime seminar series of the Economic Society of Australia (NSW Branch). The talk is on “Choosing Birthdays” and goes through my research with Andrew Leigh. It is at 12:30pm at the RBA. (Registration is $20 for non-members, click here for the form if you are interested in attending).

The new ACCC petrol commissioner is claiming that Coles Express Petrol Stations have higher petrol prices than others and is blaming shopper dockets.

The ACCC said buyers in the habit of using shopper dockets may not realise that other outlets are much cheaper - even after using their discount voucher.

“We have been monitoring over the past few weeks and have found Coles Express to be the predominant price hiker,” Commissioner Pat Walker told the Herald Sun.

Mr Walker said at 9am yesterday Coles outlets were charging up to $1:55.9 cents a litre compared with the average Melbourne price of $1:41.8.

Hmm, for a 4 cent discount prices are 15 cents higher! That seems surprising although I always thought that there would be some price difference but less than 4 cents. In any case, the ACCC had the opportunity to actually look closely at these schemes during the petrol inquiry and I urged it to do so. But it didn’t and seemed to come out with the conclusion that the shopper docket schemes were not a problem. I guess Pat Walker wasn’t around then.

Yesterday I argued that when it comes to parental support what people seem to want is a frictionless ability to transition between work and home lives. Specifically, the ability to give birth to a child, take care of that child away from work for a period of time and then to return to work with the same prospects and opportunities as the day they left. That said, there is the issue of whether it is feasible to return to work in a frictionless way given possible depreciation in human capital and also whether there has not been a change in the way parents want to work when they have children (e.g., they may not want or it may not be socially desirable to want them to put in the same level of hours or not).

Today, in order to evaluate policy rationales for parental support, I do the usual economic thing and ask whether the market, left to itself, will get it right or not. Of course, that leads to a natural question: what does getting it right look like?

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Scott Adams makes the case for a political party based solely on sound economics. I can’t argue with that although getting agreement on the policies will be another matter. And as to electability …

Update: Stephen Colbert — apparently, economists are the new elite and that is why they should be ignored.

Colbert on Petrol Tax Holiday

Australian Broker has a couple of pieces related to AussieMac. This one looks at the overall proposal and also includes a discussion of the housing lifeline policy. Of interest are the comments at the end of the article from industry participants.

The second piece reports on our rebuttal of S&P’s arguments against government sponsored enterprises in this market.

So I have made a couple of posts on the issue of parental support (here and here) and I have been asked for more. Indeed, I would like to make a submission to the Productivity Commission inquiry into all of this (they are due 2nd June) but I find that my own views still remain up in the air. What is more, the debate is frustrating. On the one hand, pretty much every proposal put forward looks bad economically — in the sense, of distorting incentives or creating inequities. On the other, many countries have put in schemes of paid parental leave (e.g., Canada, Sweden) and have hardly collapsed. So there must be some solution to all of this.

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Vodafone Australia has actually announced it will release the iPhone in Australia. No confirmation as to whether it will be the only one. This time it looks like more than the usual rumour.

My partner tries every year to see if she can surprise me with my birthday present. Usually, the kids spill the beans. This time, it was this conversation, taking place in the car on my mobile speaker …

CALLER: Professor Gans? This is the bank calling about an abnormal Star Wars transaction on your credit card.

ME: Abnormal Star Wars purchase? I have no idea …

PARTNER: … yes, yes, yes, it is OK. It’s legitimate.

ME: Oh you mean my birthday coming up …

CALLER: OK, I’m sorry. We just have to check these things. [Hanging up]

PARTNER: Damn. What does it take to keep things from you? It is a conspiracy!

Now, of course, what sort of Star Wars transaction can possibly be labelled abnormal? Especially on our credit card. From the amount, I know it is definitely not this. That would be rather extravagant. What could it be?

Reported in the news today, former senior public servant, Julia Perry, is arguing to the Productivity Commission that Australia adopt a paid parental leave scheme that allows for 28 weeks paid maternity leave, 4 weeks paid paternity leave and 4 weeks pay to employers for replacement employees. It looks like it is for full pay. So how will it be funded? The answer a payroll tax on employers of 0.5% and an increase in income taxes of 0.5% (I think, as it is stated in the form of a wage tax). Oh yes, and the baby bonus would remain to take care of those who didn’t have a job previously.

Some things need to be said about this. First, the division of taxes between employers and employees is arbitrary and doesn’t matter. That is Economics 101. So we are really talking about a 1 percent increase in taxes to fund this. Second, watch those wages rise during pregnancy. There is a massive incentive to increase pay during the last trimester. Every dollar increase during that time is a two dollar benefit to the employee. Third, there is a big incentive for the highest earning parent to avail themselves on this unless you say it is for mothers only. Finally, the calculations assume that 20 percent of new mothers will not avail themselves of this scheme. With incentives like this, surely that is way overstated.

What this example demonstrates is how hard it is to enact a system of paid parental leave. In this case, it is a large tax on the non-parents and also on the lower-income segments of society. Think about it, if you have a 50 year working life with an average pay of 100,000 per annum and have two children amount to 1 of those years coming back for free that is a $50,000 tax in return for $100,000 of payment. The difference is coming from the non-parents, spouses and somewhere else. How do we justify that cross-subsidy?

[Update: Actually, it is worse than all that. This type of scheme puts a massive incentive for parents to delay having children by many years until their income is high enough. Have them too soon and you are not getting your money’s worth]