April 4, 2016

UOW hosts Nobel Laureate for taxing discussion

The University of Wollongong Sydney Business School hosted a lecture by Nobel Memorial Prize winner in Economics, Sir James Mirrlees.

The lecture was against the backdrop of public debate in Australia about tax reform in the lead up to the Federal Budget and a possible early election.

Professor Sir James Mirrlees was the co-winner of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1996.

He spoke at the lunch gathering of UOW executives, business alumni and business faculty members about his work that led to the 1996 Nobel Prize.

Professor Mirrlees outlined his work on optimal tax theory, where he has explored the relationship between tax rates and income, and how a tax system should be simple to overcome the consequences of irrational decisions people make in the face of complex choices.

For example, and of interest to Australians who face long and often frustrating commutes to work, was Professor Mirrlees’ observation that a simple petrol tax is an inefficient method of influencing people’s travel behaviour.

However, Professor Mirrlees said road-use pricing based on time of travel and distance, the type of vehicle - or a congestion charge as in London - can be more effective ways to influence behaviour because the tax is appropriate to the person’s lifestyle.

For his Nobel Prize, he was also recognised for his contribution to the economic incentives in situations where buyers and sellers in a given market have differing information, which leads to inefficient outcomes.

The concept is known as asymmetric information and an example can be found in the situation where a person selling a house does not know a potential buyer’s capacity to pay and the other party could potentially exploit the information gap to get a better deal.

Professor Mirrlees applied the concept to tackle the problem of designing tax systems that fairly redistribute wealth through income taxation while not creating a burden that is an incentive to avoid work.

The challenge was to solve the problem of optimal taxation rates. Conventional wisdom held that the state should tax high earners more than low; a Robin-Hood scenario where those who earn more subsidise the welfare of those who earn less.

What he found was the opposite: the optimal tax rates flatten or even fall as wages reach the marginal or upper end of income.

The reason being that people are not perfectly rational in their decisions, as many economists had assumed. Instead, as marginal tax rates rise, people find less incentive to work or otherwise avoid high marginal tax rates, and hence productivity, the key to national economic growth, falls.

These conclusions have since become fundamental concepts in microeconomics and contributed to his Nobel Prize in 1996, jointly awarded to Sir Mirrlees and Canadian-born professor of economics William Vickrey.

Sir Mirrlees was born and educated in Scotland and later studied mathematics and a PhD in Economics at University of Cambridge.

The lunch was attended by notable UOW business alumni, UOW  key staff, including Vice-Chancellor Professor Paul Wellings and Associate Professor Grace McCarthy, Acting Executive Dean of the Faculty of Business.

The wide ranging questions following Sir James’ talk explored further the issue of road use pricing, inequality in society, and the question of corporate tax versus income tax.

UOW alumnus and a Director at Westpac Dr Michael Blazic, provided the vote of thanks to Sir James and presented a gift.

Dr Blazic said it was a rare opportunity to be able to discuss important economic topics in such an intimate forum.