I'm a high income earner...and this is why I have NO problem with the Warren Buffett Tax

A few years ago I started writing a whole heap of posts on politics.  It is something I'm really interested in but this wasn't the best venue for it so I swore off it.  My "no politics" rule is still in place but I do talk about tax quite a lot on this blog and I thought today I would focus on why I don't really have any objection to the Warren Buffet rule that politicians are currently considering.

What does the rule say?

Basically the rule says that high income earners should be paying their fair share in taxes.  In the Australian context this has been expressed as anyone earning above $300,000 should have a minimum average tax rate of 35% regardless of any deductions they may have.

Why is it called the Warren Buffet rule?  Well it was proposed by legendary investor Warren Buffet who argued that legally the tax he paid was less than his secretary which seemed crazy and not right to him.  He proposed this rule as a way of plugging a lot of loopholes at once.

This isn't actually as bad as it sounds

In Australia if you were earning $300,000 per annum and had no tax deductions you would be paying tax of approximately $117,000 which is about 39% and you would be in the top marginal tax bracket of 49% (including the medicare levy and the budget repair levy). 

Now it doesn't sound like it would take a lot to get your tax rate down to 35%...but it actually isn't as bad as you think.  For someone earning $300,000 their minimum tax payable would be $105,000.  Under the current tax rates this means they would actually be getting taxed as if they were earning ~$276,000 which still gives you a hefty $24,000 in deductions.

But let's be honest...these measures aren't aimed at people earning $300,000.  Let's look at someone earning $1 million.  If they had no deductions they would be paying $460,000 in tax.  The proposal says that they should pay $350,000.  They are still allowed $224,000 in deductions before they hit the minimum barrier.

Aren't I disadvantaged by a proposal like this?

Honestly the reason I decided to write this piece was not because I think it is the right thing or policy (which I do) but it's because the people that need to speak in favour of proposals like this when it is a good idea are those that are earning high incomes.

Does it disadvantage me?  Honestly...no.  I pay my fair share in tax and I don't try and overly tax plan what I do.  I don't skate close to the line and I just checked my last year's tax statement and I actually did pay 35% of my income in tax (even though I earn significantly less than $300,000).  If I earn less than $300,000 and am paying 35% in tax....why is someone earning more than me entitled to pay less tax?

I'm not asking this question in a legal sense.  Of course if you can legally avoid tax you should do so!  That's the whole point of tax planning and I don't think tax planning is a bad thing. You shouldn't pay more tax than you have to.

BUT there are always going to be loopholes that people miss and that politicians don't want to fix for one reason or another.  A blanket rule helps insure that people can still pay less tax and minimise their tax but not take the system for a ride.

Why do I like the rule so much?

Why do I like the Warren Buffet rule enough to break my 'no talking about politics' rule?  Simply because it is neat, effective policy which is being slammed by those who have a very clear interest in keeping the system as it is.

Why is it neat?  Well everyone is going to have some legitimate deductions and those legitimate reductions are probably going to increase as your income goes up (for a variety of reasons).  The Warren Buffet rule doesn't get rid of deductions, in fact it doesn't really change the tax code at all.

Feel free to use all the deductions you want but there is a cap.  There is a point at which you should still be contributing to the system and a point at which people who are earning significantly less income than you shouldn't be paying more tax than you.

If the rule is designed well you could have unused deductions carrying forward into future periods.  Maybe a high income earner will never pay more than 35% and maybe that's where structuring takes us but at least they are still contributing to society and the system that we are all a part of.

Have I missed something?

Look I'm not claiming to have analysed this situation perfectly.  Maybe I've missed something.  Maybe there is something behind all the furor.  Can you see something I haven't?  Is there some reason why this isn't a good idea?

One reason I've seen touted is that high income individuals will just move overseas.  I don't buy this argument.  Tax rates are already lower in places like Hong Kong and the Middle East.  If people were going to move for tax reasons they would have already done so,.

But is there something else?  I would love to hear what you think!

You May Also Be Interested In

Tax: All Posts

Politics: All posts

I did my own taxes...and it was great!

Equality of opportunity not equality of outcome

Recently when I was trying to avoid actually doing work I was wasting a fair bit of time on Facebook.  I have a strangely diverse group of friends on Facebook some of whom are right wing and some of whom are very left wing and it is always interesting to see the articles that people are sharing.

Recently one of the more right wing people put up a video from a US talk show (I think it was on Fox News) where they were espousing the view that in a fair and equitable society that we should all have equality of opportunity and that equality of outcome is actually inequitable because it does not reward effort and hard work.

I have to admit that at one basic level this is an incredibly tempting point of view - who of us has not hated paying taxes, especially when we see how some of it is wasted?  Especially when we see people mooching of the system and then wanting to tax us more even though we are working stupidly long hours and not really getting to where we want to get to.

However equality of opportunity is not as basic as you may think

The problem with the 'equality of opportunity' mantra that is often spouted by right wing pundits is that if you were truly interested in the 'fairness' of the system and making hard work and effort the primary determiner of outcomes and success you would be most interested in making sure that people started at the same point.

People start at different points and have different advantages and disadvantages due to not fault or skill of their own.  If you live in a first world country you already have so many advantages that others around the world do not have.  Then if you are lucky enough to be within a social structure that allows you all the possible opportunities you are most able to make your effort count.

If you are outside such social structures you are not

Weekend watching: Palmer Drama

In the recent Australian election I was dismayed to see Clive Palmer elected to the Australian senate.  I wrote about it in a post about why you should not trust billionaire politicians with the basic premise that they are self interested and although his public rhetoric may be about 'the Australian people' that I suspected his true motivation lay elsewhere.

About a month ago, 4 Corners, an investigative television journalism show did an in depth report into just the issues I was talking about with respect to Clive Palmer.  I have great respect for the quality of journalism done by 4 Corners (especially the depth of detail they go into - see my Nathan Tinkler post for another example of a quality piece of theirs). When it comes to investigative reporting which relates to business activities, most media outlets dumb down their pieces far too much - what I like about 4 Corners is that they keep the complexity while subtly getting across they message they want to convey.

You can view the video here - it is a fascinating piece and really worth a watch.

Can Palmer do something for his electorate that doesn't benefit him?

The level of ego and self interest

The US Government Shut-Down has me reconsidering my sector allocations

I posted recently that I was rather disappointed that the markets had not over-reacted to the news of the US government shut down and I was hoping that it would go a bit nuts and that there would be a buying opportunity.  It appears that I may have missed some short term gains as the market rebounded significantly in the days following the apparent resolution of the crisis.

Below is a chart of the US share market (represented by the S&P500) and how it performed in the lead up to (in anticipation of) and during the shut down as well as the strong rebound post the shut down.  Although the market did slip early on the market did not really over-react however as outlined before, perhaps people are celebrating too soon.

However...before you think that everything is back to normal...

The solution the US government comes to appears to be a short term solution - i.e. the government is only being funded until January 2014 and the US will once again have to raise their debt ceiling a month later.  Although I try and keep abreast of US politics for financial reasons (and because the drama is frankly more interesting than anything I have in Australia) I do not have a deep understanding of what it would take to resolve the situation.

It seems to me that the US politicians are going to be shooting themselves and the US economy in the foot if they continue to govern and negotiate through crisis tactics. Further it is pretty to easy to see why it is bad for the US economy and share market to continue to do so.

If both domestic and international (e.g. me) investors are unsure about when these types of crises are going to hit again we are going to require a greater premium on our investments (such as interest rates) or demand a higher return on our shares to compensate for the fact that the market seems to blow up every few months based on the newest drama created by US politicians.  This means that borrowing costs for the US government are going to be higher than they would ordinarily be and the share market is going to bake in a discount to account for the fact that there is more short term volatility.

What does this mean for my investment strategy?

Although the share market has responded significantly since the announcement of the short term resolution to the crisis, the US dollar has

The Corporate Paradox: Communism inside a Capitalist Entity

I'm sure there is more extensive research on this out there but I was recently struck by a discussion I had with a colleague about the nature of capitalism and the players that act in it.  The crux of this post is that it is a strange dichotomy where the main players in our capitalist system - i.e. the corporations (especially the large institutionalised ones) work more like a communist economy internally while spouting the benefits of capitalism and free markets externally.

In several posts before I have identified as a 'realist capitalist'.  That is I know and appreciate the benefits of free markets and capitalism however I do not think they are perfect and we add enough distortions to the system which means that rational actors do things and act in ways which are perfectly rational from an economic standpoint (such as forming unions).  I think that accepting the rhetoric of capitalism and ignoring it's shortfalls are dangerous and leads to bad policy outcomes.  Besides which - it can be a fun thought exercise.

Corporate entities often work like communist economies

Most people would call me out for being ridiculous for suggesting that the bastion of free market capitalism - the corporation - is more like a communist government than the free market hero they position themselves at.  They may be a free market hero when they are operating as an entity as a whole but if you look through to how corporations (especially large institutionalised ones) actually work...they are remarkably like a communist economy.

You can take this analogy quite far however at a very high level:

• Like communist countries, corporations are centrally planned
• Corporations have a very strict hierarchy of control and the ability for any part of the corporation to act economically independently of another to maximise their own profitability or outcomes is squashed for the greater good of the corporation
• Like communist countries workers within a corporation rarely have an input into their job function
• There is an allocation of labour in corporations based on where the resources are needed and people find themselves often doing things that they originally didn't come on for because that is where they were needed...a system awfully like that of communism
• I'm not saying that you cannot leave the corporation...just that if you want to stay in it you need to play within these rules
• Ideas and independent initiative are subject to approval of those further up the chain 
• How often have you seen employees of a corporation come up with and implement independent ideas without the approval of their managers and how often can they quickly respond to a need or want without this approval?
• If a corporation acted like the free market bastion it claimed to be there would be a maximising out outcomes within the corporation through things like competition and innovation

You can keep going with this analogy for as long as you want - there is a centralised media strategy, only approved people are allowed to set strategy and to message this strategy to the outside world etc. etc. 

Yet corporations are often the most vocal proponents of capitalism

I find it incredibly ironic that probably the most centrally planned entities within our free market economy are the ones that are constantly calling for deregulation and an ability

Damn! No one seems to be over-reacting to the US Government Shut Down

About a week ago now the US government went into shut down after Democrats and Republicans could not pass a budget.  There are many causes of this - all political and I do not have a good enough understanding about US politics to understand how it is going to end or how long it is going to take.

Similarly, most people know that the likely economic effect will be bad if the shut down goes on for long enough but people do not know how bad or what the impact will be on confidence or markets generally.  There is much speculation and reporting out there on this very fact and it is not something I have a great deal of insight into so won't post about.

Why do I want people to over-react to the government shut down?

You may be wondering why then I am posting about it and why I seem disappointed (from the title of this article) that people are not over-reacting to the news.  The fact is that I am looking for a (personal) silver lining in the shut down.  Markets typically over-react to all news (good and bad alike) and this creates opportunities to buy or sell depending on which way the market goes.

I have posted recently on how the market had run so strongly and I was actually finding it hard to find places to invest.  I am not a short term investor nor am I in need of my invested money in the short term so I would be quite happy for the share market to tank temporarily (or even for a few months) which would give me the chance to invest some of the cash I have been building up.

Interest rates are so low at the moment that having this cash has been really inefficient however I have not found any value in the share market (other than some of my current holdings) so I have been sitting waiting for buying opportunities.

I want people to over-react.  Panic is good if you (as a rational individual) can control your own feelings and invest when others are panicking.

Unfortunately...people seem quite sensible about it this time around

I think one of the reasons that the markets are not over-reacting is that it very much seems like ground hog

Why you should be wary of billionaire politicians

Super rich politicians are not a common feature of the Australian political landscape.  In fact when you talk about this phenomenon most Australians would refer you to the US where this is much more common.  However with the way that preferences are flowing in the 2013 election, it looks like Clive Palmer's Palmer United Party ('PUP') will pick up at least one seat in the lower house and  one seat in the upper house.

Why don't I like the idea of the super-rich being elected into government positions?

There are several reasons that having someone who is super rich in a position of power makes me uncomfortable.  Although there are no doubt exceptions to this the following common traits of the self made super rich make them unsuited to high political office in my opinion.

1. Their primary motivator has been self interest
• Self interest is what drives the capitalist model and all to often the best players in this model are those who are best able to advance their own self interest above the interests of others. 
• Elected officials are their to work for the people they represent.  Although it is possible, I am finding it hard to imagine a situation where a person who has worked for their own interests their entire lives, votes against these interests because it is better for their constituents
  
2. They are not used to being accountable
• When you have reached the levels that many of these super rich have reached, you are not used to be accountable to anyone, least of all a fickle public whose views you need to listen to if you are going to be an effective politician
  
3. I question their motives
• I could have been completely off the mark with my first point and self interest could have been replaced by a sense of civic duty
• If these billionaires cannot evidence this

The 2013 Federal Election is around the corner...and it's about time

The Australian 2013 Federal Election is this Saturday and although the actual election period has been very short (just 4 weeks since it was announced), anyone living in Australia would know that the politicians have been campaigning for much longer.  To my American friends: how do you guys deal with election campaigns as long as yours...don't you get bored of hearing the same message over and over?

In previous posts I had said that I would look at the economic policies of both parties and try to take them apart and analyse the fact from the fiction.  I didn't end up doing this as both major parties drove me nuts on several issues and thinking about politics made my head hurt.

While I'm sure that there are many 'true believers' when it comes to voting for one party or another, I'm also fairly sure that there are others like me.  People who are sick and tired of politicians appealing to the lowest common denominator on a number of issues.  Those who are sick and tired of politicians making populist policy instead of policies that are right for the country.

If you still don't know where you sit 3 days out from an election then this post is for you.

Ignore the media when it is pushing an agenda or publishing any sort of opinion

I have heard about how biased the media can be in the US when it comes to US elections however we had not really seen it here until this election.  Rupert Murdoch's Fox News is notorious around the world for being a biased, right wing, quasi news organisation.  His newspapers in Australia have not been nearly as bad...until this election.

When an newspaper editorialises in support of one candidate or another at the start of an election and then goes on to print stories which bash the other candidate for the whole election then it is no longer news - it is free advertising and you should treat it as such.

If you find the media you usually read doing this overtly or even subtly then switch your reading.  I find that Murdoch's newspapers are terrible, Fairfax's are somewhat better and the ABC gives the most balanced coverage.

You have to vote...so work out what is important to you

If you intentionally switched off during the election campaign...I understand.  But the fact is that you have to vote so work out what issues are important to you and where parties stand on what issues.  I used vote compass which is a non partisan way of working out which parties best suit your view points.  It is not perfect but it certainly helped me.

I have written about it before...but you should vote in a way that also reflects your own self interest because no one else is going to do it for you.  For example, if you are not rich or

Trickle down economics...separating self interest from good policy

I was on Facebook a few days ago when I noticed one of those annoying 'recommended pages' advertisements that look like your friends updates but are actually subtle advertising.  I was surprised to see Gina Rinehart posting a link to her website with what looked like a blog entry entitled "Gina Rinehart is our least controversial celebrity".

I questioned whether even Ms Rinehart would promote herself so blatantly and in such a crude fashion.  I think it is a fan site and I didn't bother reading it - I was much more interested in the comments under the post itself.  What genuinely surprised me was how much support there was for Ms Rinehart on the entries. There was actually far less trolling than I would have imagined and a rather lively debate on whether the policies and views she espouses were good or bad for Australia and how economic policy should work.

Although it was not clearly stated, I was reading a lay discussion about the relative merits of 'trickle down economics'

Trickle down economics is a term which is often used in a negative sense to refer to the idea that if you stimulate the top end of town - e.g. the wealthy and the business community through incentives, tax cuts and other financial means they will be incentivised to expand their business operations.  Although the immediate benefits in the short term go to business owners and those in the wealthier classes, the 'masses' also benefit as businesses are encouraged to hire people which results in job growth, wage growth and everyone benefits.

This is an argument that is seen much more in America than here in Australia and importantly - they have tried it.  During the Regan era policies designed around trickle down economics were introduced.  Here is a good summary from the Rachel Maddow show - the explanation starts around the 2 minute mark.

These sort of economic policies are promoted by conservatives all the time.  However, it is often hard to separate the truth from self interest and this is where my interest in the Gina Rinehart story came in.  A lot of her supporters were big believers in

Negative political advertisements about the economy have ALREADY started

I don't often watch television however happened to have very little to do a few days ago and so noticed something I wouldn't have ordinarily noticed.  The negative political advertisements about the economy have ALREADY started.  They have started before a general election has been called and, like most political advertising, is so biased an inaccurate as to be rather misleading.

For all my international readers, this post will be a complaint about the Australian electoral cycle however you may get some benefit when thinking about advertising in your home districts when you go through election cycles.

What sort of advertisements am I talking about?

I tried to find videos on YouTube which illustrated my point but appears that Australians do not bother enough to put their political advertising on YouTube and thankfully our politicians are not yet internet savvy enough to deploy the full gambit of internet advertising.  Alas, that means that I will need to describe for you the type of advertising I am talking about.

The particular advertisement that got to me was one in which the Liberal party pointed out that the Australian government was running up a deficit of $100m a day in 2009/2010 when Kevin Rudd was last leader of the Australian Labor party.   The implication of course being that with him now back in control, if you vote for him he is going to destroy the economy and pile on the national debt again.

It reminded me of an advertisement a few election cycles ago where the basic argument was that you could not trust the opposition party because every time they were in power interest rates rose, thus if you put them in power again, the interest rate that you pay on your home loan will go up again.

This happens at EVERY election cycle.  And both sides of politics play this game with different issues.  I am particularly concerned about economic policy and the Liberal party is typically the one that runs the advertisements about how the Labor party is going to ruin the economy and look at their past record.  The Labor party does it about other issues such as how the Liberal party cronies up the businesses and sticks it to the ordinary Australian worker.

Why do I hate these sort of advertisements?

I am passionately against any sort of advertising that relies on the fact that your electorate is uninformed and which feeds them a simplistic

Emissions Trading Schemes...why would a conservative party oppose it?

If you live in Australia you will know that the Prime Minister, Kevin Rudd, announced that he wanted to move from a carbon tax to an emissions trading scheme (ETS) next year.  What was baffling to me, was the response of the opposition leader, Tony Abbott who is looking (according to the polls) like almost certainly being Australia's next Prime Minister.

I suggest reading this article for a brief overview on the comments made by both parties and I will do a brief overview of why I think Mr Abbott is just playing politics and assuming the Australian voter is exceedingly dumb.

Emissions Trading Schemes internalise negative externalities

Negative externalities are those outcomes of the 'free market' which are bad, however which are generally not taken into account in the price of the good or service being produced.  In the case of energy for example, coal is the cheapest form of fuel in a private sense (i.e. to dig out of the ground and to burn) however there is a social and environmental cost to this which does not get included in the price of coal.  However there is a very real cost to this which is borne by society in terms of environmental effects which need to be fixed / cleaned up by future governments and taxpayers.  This is what is known as an externality.

Note that externalities can be both positive and negative however they both face the same problem in a market economy - the benefits of positive externalities and the costs of negative ones are not included in the price of that product.

The solution to externalities is to try and internalise the cost or benefit in order to reflect the true cost of the product.  This often has to be done via regulation (especially in the case of negative externalities) as profit seeking enterprises are never going to voluntarily give up the lower private cost / higher social cost item.

An emissions trading scheme is a market mechanism to internalise the cost of carbon for those who pollute and it also offers 'credits' for those who do not pollute (e.g. for those who use or create renewable energy).  It is the right-wing, market method of accounting for a cost where the market fails.  A left wing measure would have been to put a tax on the product which

How will the Australian 2013 - 2014 Federal Budget affect you?

The federal government's long anticipated 2013 - 2014 budget was released last night.  It was always going to see what the government did given:

• It is an election year and the Gillard Government is well behind in the polls
• Tax revenue and income to the government has fallen off a cliff with the slowing economic environment

I confess that although I am not particularly drawn to any political party, I have found the Gillard Government's fiscal policies to be frustrating and spineless.  This is probably a function of the hung parliament they have had to negotiate but it was nonetheless very frustrating.

From my point of view this budget surprised me - it was pragmatic, invests in Australia's future and does not do the pork barrelling and vote grabbing that most election year budgets do.  We are all going to be a little worse off but I do appreciate having a government that is willing to acknowledge that we are in a worse economic position now than we were a year ago and that does not spend just to grab votes.

So how will the 2013 - 2014 Australian Federal Budget affect you?

Like all things...it depends.  There isn't really something for everyone in this budget.  From an individual point of view there are not a great deal of positives and some negatives but it really has to do with how much you are already getting from the government (or not getting).

The benefits in the budget for individuals

• $14.3 billion in funding for the national disability insurance scheme
• If you have a disability this will definitely benefit you
• If you do not have a disability you may be disadvantaged through the increase in the medicare levy - see below
• Increased funding for public schools and education
• This will benefit the quality of educational institutions but there will be no hand outs to individuals like in the past
• I'm not against this at all - I think a good system is much better than giving people choice about where to spend their education dollars
• Note that this is for primary and secondary only...tertiary education did not get the same level of funding benefits
• Seniors funding
• $112.4m to help seniors who are downsizing their homes

The rest of the benefits do not really impact individuals at all - they are all about nation building.  It is about infrastructure (roads, rail) and other measures that only a government can fund.  If you're going to try and improve a country and an economy in the long run this is are the types of things that need to be funded.

Personally I got no real benefits from this budget but I'm just glad that we finally have a government that is thinking about the long term.

The downsides for individuals

• The baby bonus

Melbourne's Myki system doesn't work and costs you money

This will be a very quick post from me today on how much the new Melbourne public transport system's Myki ticketing system actually ends up costing you as a customer.

It is billed as a way to save you money because the system only charges you the minimum amount required to travel.  However unless you have a very predictable travel pattern then this is not the case.  Further the fact that it does not work means that you constantly have to fork out an extra $6 for replacement cards while your old card is being replaced.

Myki is inferior to the system it replaced

Myki was an attempt to move Melbourne's public transport system into the 21st century by replacing an old paper based ticketing system (which were dispensed from machines and put through barriers) with a card like system that you see in many other parts in the world (such as London, Hong Kong, Seoul etc).

However, unlike those other systems, the cards totally replace the paper ticketing system.  In Hong Kong and Seoul for example, if you are not a regular traveller (or a tourist as I was) you could buy a one trip single ticket or a multi trip ticket without having to pay the fixed price with no credit for the card system.  Melbourne scrapped their paper ticketing system so that anyone, even a person just taking a single journey has to buy the (relatively) expensive card and a ticket on top of that.

While the above is annoying I confess that I didn't think about it much because it did not affect me personally.  However what does affect me is that the technology is terrible.  Putting credit on your card at a station takes an inordinate amount of time - the lines that you see now to add credit at peak times are much longer than what you used to see under the old paper ticket system.  I overheard some computer programmers talking about how it was a terrible system and how each of them could have designed a better / faster interface.  They raised the very valid point that it should take no longer than using an ATM as it is essentially doing the same task but it actually takes much longer.

Finally - and this is the big problem.  The cards simply stop working after a period of time.  I was an early adopter of the Myki system and I am currently on my 5th card because they just stop working.  I got used to this happening and so carried both my regular Myki and a backup with a bit of credit just in case.  Yesterday - BOTH of my cards stopped working.  I called the information centre to find out if I was doing something wrong (by keeping it in my wallet etc) however they said that this should not cause an issue.

Myki does not save you money...AND you lose flexibility

The signs promoting the Myki system said that you could save up to $1 per trip.  This is very misleading but to understand why you need to understand how the ticket works.  You have a choice of two types of cards whenever you buy a Myki

• A Myki Money Card:  These are basically cash on your card and deduct the lowest possible fair amount up to a daily ticket
• A Myki Pass Card:  These are for tickets longer than a daily (i.e. a weekly, monthly etc.)

As you buy longer and longer tickets the cost of the ticket gets cheaper (the same way the old metcard system used to work).  However if you do not have enough certainty around your travel for the foreseeable future then you get stung.  

You can't opt for your card to be a Myki Money card this week (when you are only travelling once or twice) and a Myki Pass card next week (when you have to travel every day).  The amount you save is only applicable if you travel the same pattern all the time.  I travel fairly regularly and I do not have a set pattern!

While a new system was needed...it was not this one

Melbourne's public transport ticketing system was ageing and did need updating.  However this was a system that was ill conceived, over priced and doesn't work.  Further customers get screwed and the fines for travelling without a ticket because yours stopped working are unbelievable.

I was a big fan of the system when it was first introduced however after experiencing all the downsides I no longer think it is worth it.  The old system worked better, saved you money and headaches.  If you are bothered by this send an email to your state government representative and get some interest going in this issue!

You May Also Be Interested In:

Tips on how to motivate yourself after leaving college / university

Yellow Brick Road's 1.15% discount is good...but not a game changer

Playing the lottery - is it your ticket to dream?

Cinema membership cards - they really do make sense

Election Cycles: Voting is about self interest

In the midst of the US election cycle combined with the early shots fired in what is looking like being a very bitter and contentious Australian election cycle in 2014 I thought I would write a post on elections, voting and self interest. 

Politics is something I find particularly interesting, however being neither particularly left-wing (due to my blue collar upbringing) nor right wing (due to my current job and position) I find myself often torn between the various political parties.  This post will not be about who I think should run different countries but rather is a collection of thoughts about why people vote the way they do and perhaps how you should think about voting.

Voting is all about self interest

I have this core belief that voting is purely about self interest.  People vote for whomever they think will give them the best possible outcome.  It is unsurprising therefore that lower income earners tend to vote for the left leaning parties and higher income earners tend to vote for the right leaning parties.

There are of course exceptions to this - a commonly used term for a high income person voting left is a 'champagne sipping leftie' being a person who votes left but would vote right if they were voting in what would be perceived to be their traditional roles.  These people are not, however, exceptions to the rule - I think they are also voting in their self interest - you just have to define self interest a little bit broader

Self interest is more than just economic self interest

If you define self interest in a purely economic sense then you are going to have outliers like the one I described above.  Self interest however, is broader than this.  I believe there is 'utility' associated with doing what one perceives as social good.  This is why we give to charity - because it makes us feel good.

A quote that sums this up best in a political sense was when Gracchus,  Roman Senator in the movie Gladiator says

I do not pretend to be a man of the people...but I do try and be a man for the people

I think that altruism hides self interest though.  If the

The Australian Energy Regulator's insurance dilemma with respect to SP Ausnet

In the last week we have seen a fair amount of controversy raised in Australia (and Victoria in particular) over the Australian Energy Regulator's (AER) proposal that SP Ausnet be able to recover funds that they have to pay out (above their insurance cover) to the Black Saturday bushfire victims through higher charges no the Victorian electricity network.

This is the way SP Ausnet (an ASX listed company 51% owned by Singapore Power) described the proposal by the AER:

This further draft decision deals with the insurance pass-through event, which had not been finally determined. Under the draft decision, there may be circumstances in which liability which exceeds insurance may be recovered by SP AusNet as regulated revenue. The AER’s consultation on this draft decision closes on 12 September 2012.

I admit when I read this I could not believe it - on first read it seemed like a private operator was getting immunity for harm that they cause and the burden would need to be borne by rate payers.  The media's response was particularly ferocious.  This article by Michael West of Fairfax Media is just one of a host of articles ridiculing the proposal.

The Victorian government has announced that they will also be opposing this proposal and will lodge a statement with the AER.  However I think this was only in response to community misunderstanding and the flames whipped up by the media.

However I do not think that the issue is as simple as the media makes it out to be

In fact I think that the media does not understand what this proposal is truly saying.  This is pretty ironic because they have, probably without knowing it, been beating the drum on both sides of this debate.

If you go back through the articles written by Michael West of Fairfax Media (the same author as above) you will find this article which expresses outrage at the high price that consumers have to pay for electricity because of the gold plating (over spending) on the networks which consumers then have to reimburse.  To be fair to the author - this was an excellent article which raised very valid considerations.  He does not seem to link this to the article that he wrote opposing the AER's decision though.

Victorian transmission networks have not been gold plated unlike other states and there has been limited overspend compared with states such as New South Wales and Queensland.  This is largely a function of the privatised nature of the Victorian distribution network.  When you 'over-spend' or 'gold plate' a network it means that you spending to get that last (expensive) 1% of network reliability.  To get this last 1% it is very expensive and as outlined in the article above, probably not worth it.

However this 1% also adds to things like safety of the network.  When you spend these excessive amounts of money the probability of an event like Black Saturday happening also decreases.  Regulators, governments and in the end consumers need to work out what is the appropriate balance and what risk (there is always risk) is acceptable.

To mitigate the consequences of this risk the regulator requires (and provides an allowance for) insurance to cover these events

In the regulatory determinations (you need to read a fair few to get the hang on them) the AER allows operators a certain amount to take out insurance to cover the risk of an event happening.  This is because, in an efficient system you can never have 100% reliability.

What the regulator is proposing in this case, which the media does not seem to grasp is that, if the operator (in this case SP Ausnet) has spent this insurance money efficiently and appropriately and this is still not enough (i.e. implicitly the regulator did not give them enough in the first place) then they should be reimbursed

This actually makes a lot of sense in the regulatory context.