Monday, 20 April 2015

Their master's voice has spoken. Where to now for tax reform under Abbott & Co?

On 30 March 2015 the Australian Treasurer Joe Hockey released a tax reform discussion paper titled Re:think, which is supposed to mark the start of a conversation about how we bring a tax system built before the 1950s into the new century.

Presumably this is to be a step towards the 'lower, simpler, fairer' revenue raising system Prime Minister Tony Abbott was banging on about during the 2013 election campaign.

The problem for the Abbott Government is that the propaganda power behind Abbott's 'throne', the ubiquitous far-right think tank pressure group the Institute of Public Affairs (IPA), is increasingly disenchanted with the federal government's approach to both taxation and superannuation.

So where to now for tax reform in the face of the slump in iron ore prices and company tax receipts that the prime minister and treasurer complain about.

Well, we know that Abbott has ruled out changes to company tax, intends to leave the superannuation loopholes in place for the rorting rich and will go ahead with tax cuts for small business in the face of that projected falling government revenue.

Capital gains tax breaks and negative gearing on investment properties also appear to be exempt from review.

Hockey is now promising no new taxes at all when he talks to the media, despite recently announcing the proposed 'Google' and 'Netflix' taxes.

This is a mixed bag for the very rich and comfortably well-off.

They will not like the federal government abandoning its promises to cut the company tax rate and reduce 'bracket creep'.

However,  Abbott & Co are obviously not going to take tax perks away from those same very rich and comfortably well-off Australian citizens and would have a weather eye out for the irritable mood of its right-wing backers.

 So that leaves it with limited options for cost savings in the 2015-16 Budget.

All of which indicates more bad news may be coming for vulnerable sections of society, because those sections are where Abbott in particular likes to hunt.


IPA in The Drum, excerpt, 7 April 2014:

The plan, as far as we know, is that small business will get a tax cut of about 1.5 per cent. Big business will be left paying the standard rate of 30 per cent.
The Coalition has long had a romantic attachment to small business as a sort of moral heart of Australian private enterprise, but this policy is the worst sort of small business fetishism.
It threatens to further undermine an already complicated corporate tax system, confuses the sources of economic growth, and will distract policymakers from the much more fundamental task of opening protected areas of the economy up to competition.
Let's take these one at a time.
It beggars belief that while the political class is banging on about the convoluted the tax code, "unfair" tax concessions, and clever corporate tax minimisation, the Government is planning to increase the complexity of the corporate tax system.
How long before we see the first exposé in Fairfax business pages about large corporates rearranging themselves to take advantage of the concessional small business rates?
The proposed small business tax cut would make the Australian corporate tax system explicitly progressive. Just as we pay a higher rate of income tax according to our wealth, firms would pay a higher rate of corporate tax depending on their size. The United States has a progressive corporate tax. Ours is flat - 30 per cent no matter what.
Now, in practice, firms don't pay the same 30 per cent rate. As my Institute of Public Affairs colleague Sinclair Davidson has documented, all those deductions, offsets and credits mean the effective tax rate - that is, the amount of tax paid - hovers about 25 per cent. On top of this, small businesses tend to have much more variable profitability, so they tend to pay less than big business already.
Even with this caveat in mind, progressive corporate taxes are a terrible idea.
IPA in the Australian Financial Review, excerpt, 13 April 2015:

The corporate tax profit shifting debate is a classic example of moral panic. First, it's incredibly complicated. How many Australians could explain how company tax is calculated, let alone what business practices a "double Irish Dutch sandwich" refers to?
Second, it's driven by hyperbolic and simplistic reports of companies paying little to no tax. These stories pivot on even more complicated scandals, such as "Lux Leaks", and the technicalities of foreign tax systems.
And third, it's wildly overstated. The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.
It's true that earlier estimates in the 1990s were much more than that. It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue. But the firm- and affiliate-level evidence is better now. It's pointless to scrutinise a moral panic for the clarity of its claims. But the corporate tax debate is missing the point.
As a society we don't value firms for the money the government extracts from them. We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.
We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs. Any attempt to tackle profit shifting that raises uncertainty or lowers Australia's investment climate would be a disaster.
The corporate tax is not a good tax. As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments. The burden of the corporate tax is scattered and obscure.

IPA, media release, April 2015:

"The government's proposed 'Google tax' is nothing more than a tax grab and will damage Australia's investment reputation," says Chris Berg, Senior Fellow with the Institute of Public Affairs.
Treasurer Joe Hockey announced yesterday that the government has drafted legislation to go after companies accused of "profit shifting" across international borders to reduce their taxes.
"Companies should pay tax for economic activity in the countries in which that activity occurs. However to follow the United Kingdom's lead and introduce a Diverted Profits Tax would be to damage the integrity of our corporate tax system for little revenue benefit," says Mr Berg.
Mr Berg and Professor Sinclair Davidson put a submission into the Senate Inquiry into Corporate Tax Avoidance in February 2015.
"Institute of Public Affairs research has found that the profit shifting problem has been vastly overstated," says Mr Berg.
"There is little evidence to suggest the existing system is broken. Large firms are responsible for the vast bulk of Australia's corporate tax revenue. And past inaccurate Treasury forecasts of future corporate tax revenue are due to changing commodity prices, not corporate tax avoidance."
"Joe Hockey has a spending problem, not a revenue problem. If the government wants to get the budget back into shape it needs to focus on the size of government, not penalise successful companies for investing in Australia," says Mr Berg.

IPA, excerpt from media release, 30 March 2015:

The government's Tax Discussion Paper released today fails to address the need to reduce the size of government in Australia, says the free market think tank the Institute of Public Affairs.
"Australia does not need new or higher taxes. The Abbott government should immediately rule out the idea of a bank deposits tax, and reverse its previous tax increases," says Dr Mikayla Novak, Senior Research Fellow at the Institute of Public Affairs.
"The Tax Discussion Paper rests upon the false assumption that Australia is a low taxing country."
"But superannuation contributions, health insurance premiums, and workers' compensation premiums effectively act as taxes, since non payment of these obligations carry tax penalties," says Dr Novak.
IPA research shows that if these payments are added to the OECD tax statistics, the Australian tax to GDP ratio increases from 27.3 per cent to 34.3 per cent in 2012, above the OECD average of 33.7 per cent.
"There's no doubt that Australia would benefit from tax reform. Urgent problems that need fixing include the threat of bracket creep which is exacerbated by a steeply progressive income tax system. The compliance costs borne by tax complexity also needs to be substantially reduced," says Dr Novak.
"Australia needs to radically reduce and simplify the overall burden of its taxation regime, to unleash entrepreneurship, innovation, and investment for growth and prosperity."
"The best way forward is to very substantially reduce government spending, helping to provide room for tax cuts right across the board," says Dr Novak.

Institute of Public Affairs in The Canberra Times, excerpt, 6 March 2015:

Since the Keating government, the Commonwealth has forced people to forgo higher salaries for the sake of contributing to super funds that cannot be accessed until later in life.
Given the inconveniences of this financial policy paternalism, not to mention endless superannuation policy tinkering, tax biases against long-run savings patterns, and the existence of welfare programs, there are disincentives for individuals to save even more for retirement, which would seem to justify at least some sort of concessional treatment for super.
The rates of tax applicable to super contributions and earnings serve as a role model for the lower, flatter general income tax regime that Australia should aspire to, but, in the final analysis, the concessions would not garner such political discord if we abandoned compulsory superannuation altogether.
To do so would likely increase take‑home pay for workers, ease financial repression experienced by lower income earners, reduce skewness in asset holdings such as housing, help deflate a boated financial sector, and treat Australians as adults who can confidently come to their own trade-offs between consumption and savings.
Ending compulsory superannuation would be a much more durable reform than a shameless revenue grab aimed at tax‑captive superannuants.

IPA, January 2015:

Following recent direct and indirect tax increases, there has been speculation that the Abbott government is considering extending the GST to low value imports of $1,000 or less.
Putting a GST on low value imports is unlikely to revive Australian retailing in the face of intense online shopping competition, given the significant price differentials for many popular consumer products.
There are several important drivers of high retail costs in Australia, including a highly regulated labour market, severe land use restrictions, and trading hour conditions, which are not being addressed by governments.
Available estimates suggest that the administrative costs of ending the GST exemption threshold would greatly exceed actual revenues collected, violating a basic principle of tax policy if implemented.
If the GST low value import exemption is abolished, there can be no assurances that governments will spend the additional revenue in ways that give good value to taxpayers.
The Abbott government should rule out the anti consumer and anti taxpayer proposal to extend the GST to low value imports.

IPA, excerpt from media release, December 2014:

The Abbott government should publicly reject the OECD's recommendation to slug Australians with higher taxes, according to free market think tank the Institute of Public Affairs.
"The latest OECD economic survey of Australia explicitly calls for Australians to bear an even heavier tax load," says IPA Senior Research Fellow Dr Mikayla Novak.
"This call for higher taxes to bring Australia more in line with the OECD average is misleading. IPA analysis has clearly demonstrated that Australia is not a low taxing country."
"The IPA has shown our 2012 tax-to-GDP ratio of 33.5 per cent (including superannuation and health insurance contributions) is now virtually level with the OECD average of 33.7 per cent."
"The tax recommendations, such as raising the GST to 15 per cent, higher land taxes, road user charges, and withholding future income tax cuts through a stabilisation fund, are an invitation for economic disaster if implemented."
"OECD calls for higher Australian taxes are precisely the wrong policy prescription for our budget overspending problems, and must be rejected by government in favour of more vigorous expenditure savings."
"If the government is to change Australian taxes, they should make our overall tax burden lower," says Dr Novak.

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