The following are select media articles from April to June 2011. Return to Archived Media index
Carbon tax fine for some
Tom Arup, Sydney Morning Herald, 23 June 2011
A CARBON tax will only have a marginal impact on the profits of almost all of Australia's top 100 companies, with most able to absorb the costs, a study to be released today has found.
The review of company profits and emissions by consultants Connection Research says if a $20 carbon tax had been imposed over the past four years, it would have on average only impacted company profits by 2.95 per cent.
The impact on profits modelled in the report does not include expected industry compensation under a carbon price.
Labor has signalled compensation will be based on the former emissions trading scheme, under which trade-exposed industries would have got up to 94.5 per cent of their carbon permits free.
The report also shows a carbon price will take a greater toll on some industries over others, with BlueScope Steel and Qantas identified as struggling the most with the costs of a carbon tax because of the lower demand they experienced during the global financial crisis.
Connection Research chief executive William Ehmcke said that "most ASX100 companies will comfortably be able to absorb the extra cost of a carbon tax, even assuming they do not receive free carbon permits".
The study compares the carbon emissions of all ASX100 companies with their revenues and net profit.
The report is available to purchase from the Connection Research website.
Tax evasion now harder for wealthy
Mark Kenny, The Advertiser, 23 June 2011
TAX evasion for high-rolling entrepreneurs as well as sports and entertainment stars just got harder. It's because the tiny European country of Liechtenstein agreed to open its books to the Australian Tax Office.
Assistant Treasurer Bill Shorten told The Advertiser that Australia has signed a deal for greater transparency and information-sharing between the two countries.
Pressure has been building in the G20 and OECD to force tax-haven economies to tighten their rules and kick the secrecy habit.
Liechtenstein has been high on that list because it has been used by wealthy people around the world to park money and avoid tax.
Among the provisions of such jurisdictions are company secrecy rules which allow effectively bogus companies with undisclosed cash holdings and unnamed directors.
Mr Shorten said the new "Tax Information Exchange Agreement" was the latest of 28 similar arrangements Australia had signed with low-tax jurisdictions around the world.
The agreement would provide the legal basis for an exchange of information about taxpayers thus making it more difficult for them to transfer income for which they would have an Australian tax liability.
"The signing of this TIEA demonstrates the commitment of Liechtenstein to international tax standards and is indicative of the progress that is being made worldwide to improve transparency in the financial system and prevent offshore tax avoidance and evasion," Mr Shorten said.
He said tax evasion was a significant cost to governments and penalised honest taxpayers to the tune of billions of dollars every year.
In recent years, high-profile sports, entertainment and business entrepreneurs have been found to have used the more favourable tax rules of certain countries to hide their wealth and evade significant tax liabilities.
Prosecutions have been hampered when foreign jurisdictions have been unco-operative in supplying details.
Read the Government’s media release.
Download the Tax Inforamtion Exchange Agreement.
Super rate rise 'would hit families'
The Australian, 22 June 2011
An increase in compulsory superannuation would reduce the rate of wage rises for Australian workers, the opposition's assistant spokesman for superannuation says.
Senator Mathias Cormann said the government's proposed increase in the compulsory superannuation guarantee would hit Australian families.
The government has proposed to lift the rate of the superannuation guarantee from nine to 12 per cent of an individual's salary in increments between 2013 and 2020.
"Minister (Bill) Shorten once again refused to explain why a three per cent cut in take-home pay for Australian families is a good thing at a time of increasing cost-of- living pressures," he said today. "The coalition supports Australia's three-pillar retirement income system with the age pension, compulsory superannuation guarantee payments and incentives for voluntary savings."
Senator Cormann said the Henry Tax Review, released in May 2010, recommended against lifting compulsory super from nine per cent. "The Henry Tax Review stressed that the burden of any further increase beyond the current nine per cent limit would impact 'most heavily on low- and middle-income earners'," he said. "Why should families with a mortgage not be allowed to use the extra income Bill Shorten wants to force into superannuation to pay off their mortgage faster or deal with increasing cost-of-living pressures?"
Compulsory superannuation was introduced by the Keating government in 1992 at three per cent, with the rate rising incrementally to nine per cent 10 years later.
Society faces a high price if we take the 'free' out of education
Lynne Kosky, Sydney Morning Herald, 20 June 2011
As a parent with two children attending a government school, I have watched the debate prompted by the federal review of school funding with great interest, but also with rising concern at some proposals that if adopted would undermine fundamental and long-held views about the role and importance of free public schooling.
In April, the headmaster of Sydney's Kings College, Tim Hawkes, submitted that high-income parents who send their children to government schools were a source of untapped funds and should pay an extra education levy for poorer schools. Last week, Brian Caldwell, former dean of education at Melbourne University, recommended that all parents who send their children to government schools, other than poor parents, should make a financial contribution to the capital spending at their child's school just like parents of students in private schools.
The Hawkes/Caldwell line of reasoning goes that middle and higher-income parents who send their children to public schools are saving money compared with the parents of students in non-government schools, and this should cease. That is, a new education tax should be applied on those more financially comfortable families who choose to stay public. Underlying these proposals is the provocative contention that government should not provide free education for all. They are arguing that future public provision of schooling should be means tested and would remain free only to those in most need.
The history of the provision of public education in Victoria is a good place to start to assess the real policy and practical implications of these arguments. When the Victorian Education Act 1872 was legislated, Victoria became the first of the Australian colonies to set up a central public school system based on the principles of free, secular and compulsory education. Education was deemed so important to the future of all our citizens that attendance was compulsory between the ages of six and 15. Education was seen as a key to the common good, and educated citizens were essential to self-government. The provision of compulsory free education was celebrated as a major social and economic achievement, and Victoria led the way for the other states in Australia and other British colonies.
When the act was rewritten in 2006, the foundation principles of free, secular, compulsory education were confirmed and the leaving age raised to 16, such was deemed the importance of public education to the individual, society and the economy. Access to free education in Victoria would continue to be provided by government as a basic right, not a privilege.
It is a hallmark of every developed country that education is freely provided to school-age children. Most developing nations strive to provide free education to all children so they can participate in their country's social, cultural and economic growth. Participation in schooling is used by the OECD as a measure of prosperity.
So why are some Australians in significant leadership positions challenging this important principle behind much of our social and economic growth and prosperity? Why suggest we turn our back on such a ground-breaking history, in preference for one where free education would be available only to those who cannot afford to pay? Put simply, the ''free'' would be taken out of our free, secular and compulsory education system.
Such arguments are based on the notion that schooling should be means tested, and that those better-off parents who elect to send their children to a government school - which, unlike non-government schools, must remain open to all potential students - should effectively be treated the same way as those parents who elect to send their children to non-government schools.
Parents choose to send their child to either a government or a non-government school for a whole host of reasons, not just financial. But it is not the choice between school types that is at issue here. Rather, it is the continuation of a free and generally accessible public good as distinct from a private one.
Taken to its logical conclusion, the Hawkes/Caldwell argument would mean that compulsory schooling would no longer be provided free through the government system. Instead, a HECS-type system, or a double tax, would be applied to parents with children at government schools, and compulsory schooling would cease being a public good except in limited instances.
Parents sacrifice a lot for their children, including the money they outlay on essential school costs in both private and government schools. While respecting the rights of families to choose to send their children to a public or a private school, we should not lightly abandon our historical provision of free, secular and compulsory education.
Those in leadership positions who advocate turning our collective back on free public education should explain where the public interest lies in dismantling our strong, robust, secular, compulsory and free system of government schools. Especially since parents of children in public schools already contribute to the funding of government and non-government schools through their taxes.
Lynne Kosky was minister for education in the Bracks government.
Ditch deductions to lower the tax rates
Adam Creighton, Sydney Morning Herald, 20 June 2011
GET out your shoe box of receipts; the end of the financial year is near. Australian workers rely on tax deductions to save as much of their income from Canberra's clutches as they can. We make about $32 billion of personal tax deductions each year, more than half of which are ''work-related expenses''. Who doesn't have a ''home office'' with a computer that is used ''for work''?
But tax deductions are the fool's gold of the tax system. For every tax deduction, income tax rates are higher for all, with all the illiberal expropriation and incentive-sapping inefficiency that entails. Moreover, the complexity of tax deductions makes them a tax on the busy - who can't be bothered spending hours at night with a Tax Pack - and the low-paid, who generally can't afford to hire an accountant.
About three quarters of Australian taxpayers offload their tax affairs to an accountant, more than in any other country bar Italy. In Spain and New Zealand, where very limited or no work-related expenses are allowed, only about a quarter of taxpayers use accountants. Yet Australian accountants should not fear a world without tax deductions. With an Australian tax code that has blown out from about 500 pages in 1975 to about 6000 today, they won't struggle to find work.
Many of the tax office's 22,000 staff could be better employed in the private sector too, if they weren't otherwise occupied administering tax-breaks. Interminable tax office guides or costly court judgments accompany every available deduction: look out for the 3000-word ruling that distinguishes a ''home office'' from a ''private study''.
Tax deductions stem from the idea that expenses necessarily incurred to keep your job should be deducted from your income before income tax is calculated. As the Henry review into Australia's tax system notes, ''people with the same level of income may incur different costs in earning that income''. That sounds fair but the rules we have do not live up to the principle. Ordinarily you can't claim the cost of getting to work. But you can if you are carrying a cello or a ladder, or if you write a few substantive work emails at home before setting out.
You can claim union fees but not social club dues. Nurses and chefs can deduct the costs and cleaning of their coats, but professionals can't even claim a capped amount to buy their suits and ties, which for many, are compulsory attire. Rather than maintain our Byzantine system, Australia should abolish all work-related tax deductions.
We could abolish the deductibility of managing one's tax affairs too, which lops $2 billion off Australians' taxable income. A simple system would not need a subsidy to alleviate complexity. All the extra revenue should be used to cut income tax rates.
Let's assume that taxpayers making work-related tax deductions pay the second-highest marginal tax rate on average: 38.5 per cent. The government could raise an extra $7 billion or so in revenue by canning them. Provided all the money was used to cut income tax rates, and I can't stress that proviso enough, all taxpayers could get a tax cut of about $800 a year. For instance, the government could cut the 15 per cent income tax rate to 12 per cent - a permanent and politically irreversible tax cut that enhances incentives to work for the lowest-paid. All this without the government having to cut a dollar of spending.
Tax deduction addicts might be worse off financially but they might also value freedom from shoe boxes of receipts, accountants' fees or copious hours of reading the Tax Pack. In the long run, wages and salaries would adjust to reflect the costs of employment that had been foisted onto staff. Or employers would simply come to pay them directly.
Based on advice in the Henry review, the government is proposing to give taxpayers a ''standard'' $500 tax deduction beginning in July 2012 and ramping it up to $1000 a year later. Even if you have nothing that actually warrants deduction, you can still mindlessly claim one. None of the old mess will be cleaned up. Taxpayers can still elect to make deductions as before if their work-related expenses and tax affairs exceed these thresholds.
This is a marginal improvement at best. Government revenue will fall about $800 million a year, as the volume of ''deductions'' increase dramatically. And Treasury reckons welfare costs will jump $300 million a year, as family tax benefit and baby bonus recipients get an automatic fall in their taxable income - and hence an increase in their payments. So much for tax cuts and incentives to work.
Surely having lower tax rates is better than ticking a box marked ''deduction''? The government's plan assumes taxpayers are too stupid to see that a ''standard'' deduction of $1000 is exactly the same as having no deductions and paying less income tax, but with more opacity, bureaucracy and inequity.
Complexity is the enemy of freedom and fairness, but the friend of big government. Taxpayers who can easily see how much tax they pay and how they pay it, will scrutinise government spending more carefully.
Adam Creighton is a research fellow (economics) at the Centre for Independent Studies.
Let’s Bribe Taxpayers To Give Up Tax Breaks
Len Burman, Tax Policy Centre Blog, 17 June 2011
Sensible budget wonks of all political stripes understand that a solution to our looming budget crisis will require more tax revenues. The aging of the baby boomers and rising health care costs will push up government spending. Yes, I know that we have to slow the growth of health spending and we definitely should look for wasteful or ineffective programs to cut, but spending will go up.
Of course, not a single House Republican is willing to publicly acknowledge this obvious fact. They’re all in the thrall of Grover Norquist’s no-tax pledge, which Lori Montgomery reported he dreamed up as a 14-year-old boy. Fact is, most of the ideas that pop into the adolescent male mind would be a poor guide for public policy and none more so than “the pledge.” Then again, male politicians of both parties seem particularly prone to adolescent behavior. (But there are 24 Republican women in the House. Surely, they’re immune to male adolescent fantasies…)
But I digress.
As Lori discusses, at least in the Senate, some Republicans are open to the idea of cutting “tax expenditures”–the tax credits and deductions designed to subsidize particular activities. In fact, just yesterday, the senate, including most Republicans, repudiated Grover by voting to end ethanol tax breaks. It’s a small step, but suggests that perhaps the dark lord’s death grip on sensible budget policy is weakening.
Cutting tax expenditures is appealing because revenue would rise without requiring higher tax rates. Conservative economist Marty Feldstein has proposed limiting the value of tax expenditures to 2 percent of income. Since the value of tax breaks tends to rise with income, the proposal would be progressive. And it would raise a lot of revenue. Feldstein estimated that a fairly comprehensive cap could cut the deficit by almost half over time.
The obvious problem with cutting tax expenditures is that people like their tax breaks. They include popular items like the mortgage interest deduction, tax-free health insurance, and the charity deduction.
Another problem is that even if voters could somehow be convinced to support big cuts, raising taxes (or cutting spending) significantly right now could thrust the fragile economy back into recession.
There may be a solution to both challenges. We know that Americans are impatient. Why not bribe them to give up their tax breaks? For example, suppose that individual income tax breaks are worth about 10% of adjusted gross income. (This is probably not a bad approximation, but I haven’t crunched the numbers.) It’s unrealistic to assume that all could be eliminated, but we might be able to cut the cost of tax expenditures by half.
We could phase in a version of Feldstein’s plan by offering a “tax break credit” of 10% of AGI for tax year 2011 in exchange for eliminating tax breaks worth 5% of income. The credit rate could be phased down to 2% of AGI over 5 years. For the first three years, this would be a tax cut compared with current law and provide a needed economic stimulus . To make the stimulus even more effective and help those most in need of aid, the first $5,000 for joint filers could be made refundable ($2,500 for single returns). That amount could also be phased down over time. This would raise taxpayers’ incomes by roughly half a trillion dollars in 2011, and smaller amounts in 2012 and 2013, providing a helpful prod to the economic recovery.
The bottom line is that this plan would boost the economy in the short term, substantially reduce the deficit over the long term with tax rates, and significantly simplify the tax system.
Since I’m a tax geek, I want to get into some technical stuff below. Non-geeks can stop reading now.
Unlike Feldstein’s plan, which caps tax breaks at 2% of AGI, a simpler approach would be to simply deem tax breaks equal to that amount. Set a floor on the credit equal to 15% of the standard deduction and then the standard deduction can be eliminated also. (In Feldstein’s plan, taxpayers have to decide whether to take the standard deduction or itemize subject to the AGI cap.) In addition, the AMT should be eliminated. It wouldn’t cost much if major “preference items” like the state and local deduction were also eliminated.
Some provisions would have to be phased in. For example, part of the plan should be to cap or eliminate the tax exclusion for employer-sponsored health insurance. There’s a near consensus that this exclusion is poorly targeted and contributes to rising healthcare costs. However, it wouldn’t be possible to limit the exclusion in 2011 because employers are not required to measure and report the value of health insurance benefits until 2012.
Also, it would be unfair to prevent taxpayers from taking tax breaks they had counted on this year. Thus, they should be allowed to elect to claim all of their tax breaks in 2011 in lieu of the credit. Most taxpayers would not make this election, but this transition rule is probable necessary.
Tax carbon with no exemptions
Martin Feil, Sydney Morning Herald, 17 June 2011
Climate reduction policies and procedures should not create consumer risks, costs or complexities that open the door for speculation by financial sector smarties or that require complex accounting. Such issues have nothing to do with the fundamental objective of reducing global carbon emissions.
That position is a repudiation of the policies pursued in Australia - policies that will inevitably use taxpayer money to enrich a range of beneficiaries who will provide climate change-related goods and services to the rest of us. The government will mandate that we buy those goods and services.
Why are we moving into an environment where the carriage of the climate change debate is being sponsored by those who will benefit from a carbon tax or an emissions trading scheme, or those who want to pay only part of what they should pay?
I know that privatising government functions is a shibboleth for many of our intellectual economic glitterati but sometimes, dare I say, it is not a good idea. There is no doubt that some people will gain an enormous amount of business and money from a carbon tax. The same people - plus a considerable number of speculators and derivatives traders - will gain even more from an emissions trading system.
This sectoral and individual bonanza is the Tyrannosaurus rex in the carbon trading tar pit. No one mentions the profits or the speculation. No one talks about the relative inefficiencies of the carbon tax alternatives.
The climate change debate in Australia's Parliament over the past five years has been confusing, shrill, abrasive and emotive. We have watched both sides shift their positions 180 degrees.
The Coalition began with a commitment from its then leader, Malcolm Turnbull - who had been the Howard government minister responsible for the early stages of debate on the issue - to legislate for tackling climate change.
When John Howard lost government we moved to Prime Minister Kevin Rudd and his watershed backdown after the Copenhagen fiasco. This spineless approach to an issue of major principle, in all likelihood, cost him his job.
We have now seen Julia Gillard promise, before the last election, not to introduce a carbon tax, then reverse her position after winning government by the narrowest of margins. The opposition is defiantly opposed to this ''great big tax''.
It's time to stop the emotive, political rubbish. Impose a tax and be stringent about exemptions. No one is exempt from taxes on cigarettes, alcohol and poker machines. None of the manufacturers or retailers of those products have been given tax concessions because their profits are being reduced or their businesses are no longer viable. More importantly, we should create a climate change tax collection office.
Don't privatise the calculation and collection functions. A carbon tax should not be a new business opportunity for the finance sector and the derivatives salespeople. We should drive the carbon money changers from the temple of the Australian economy. They will not reduce carbon emissions. They will merely create the opportunity for emitters to substantially avoid the tax consequences of their actions.
Even if we believe in climate change we don't have to accept that some people should have the opportunity to make a fortune out of our carbon-reduction commitment. The prospect of excessive profits for a few should leave a bad taste in the mouth of the most fervent climate change believer.
Belief in climate change already has a massive price tag; believers shouldn't have to pay an additional price to the money changers in the climate change temple. There has been no explanation of the merits or economic case for an emissions trading system or for an external audit process that will cost plenty and affect the accounting relationships of many businesses.
Why is such a scheme being presented as a fait accompli? How much would it cost to implement and then dismantle a short-lived carbon tax? How much disruption and uncertainty would that create for Australian business?
In a free market the government has no role in supporting the financial sector. It can look after itself. The government's role is to prevent the finance sector from exploiting the economy without adding economic value, and to create certainty in the market.
Martin Feil is a tax and industry policy consultant and former director of the Industries Assistance Commission.
Forrest's argument on tax does stack up
Sydney Morning Herald, 16 June 2011
The West Australian entrepreneur Andrew Forrest may have a variety of motives for his turbo-charged campaign against the government's new mining tax. He has certainly been in lobbying overdrive since the draft legislation was released last Friday.
Perhaps he cares about the broader national interest or whether there is enough money for Perth nurses and police, but he definitely cares about the financial well-being of his company, Fortescue Metals. He wouldn't be making all this fuss and threatening to challenge the legislation in the High Court unless the tax was going to do Fortescue some damage.
It is. The MRRT does put smaller and prospective iron ore and coal miners at a disadvantage relative to the big players like BHP Billiton, Rio Tinto and Xstrata. The logic is irrefutable. And this is why the Resources Minister, Martin Ferguson, was able to take a potshot at Forrest this week, claiming he just wanted a tax tailor-made to suit Fortescue's situation.
In doing so Ferguson was all but admitting that Forrest was correct in his claims that Fortescue would be penalised by the tax more than others. Forrest's claim does have merit. And here is how. The big companies with hundreds of billions invested in older and highly profitable projects get a fresh tax start with this new legislation.
They get to revalue their asset bases (as of May last year). They are then able to effectively nominate the period over which the assets can be depreciated (using the life of the asset/mine). This makes for a very hefty tax deduction - large enough to potentially wipe out almost all profit that would be subject to the MRRT.
But for the smaller miners, which had little or no earnings from their mines when the ground zero tax day was declared last year, the value of their leases was minimal. They had little or no tax shield.
This is why the big miners fought so hard against the original super tax on the mining industry proposed by the Rudd government - they did not want to be caught by what they called retrospectivity.
The other reason Forrest is kicking up such a stink is that the MRRT does not allow deductions on financing costs. The smaller miners are almost wholly reliant on debt financing, while the big established players can fund new projects out of cash flow. This also discriminates against the smaller players.
Those in the government who devised the MRRT are aware of this. At the least it explains why the revenue receipts from this tax are so much smaller than the original super tax and have been revised down at least once by Treasury.
Thanks to the architecture of the tax system, the companies will be provided with a second shield from investing in new projects as these will be tax deductable.
Right now in the main iron ore-producing region in Australia, the Pilbara, the big miners and Fortescue are undertaking massive investments on new projects. This explains why on Treasury estimates the tax revenue from the MRRT will decline in 2014.
There are obvious inequities in this new tax, and it is also a pretty lame attempt at generating revenue. But to date Forrest has been largely ineffective at finding support to change the minds of those who put forward this piece of legislation.
He is right that the MRRT was a hastily drafted policy designed to stop the anti-government advertising campaign waged by the big miners last year. It also provided Julia Gillard and her supporters an excuse to take a successful shot at the prime ministerial title.
The rationale for the tax has flaws. This is not because it disadvantages Forrest but because it tilts the playing field against the smaller miners and more importantly it fails to collect much revenue. Gillard and her supporters probably understand this but cannot take the risk of upsetting BHP, Rio and Xstrata.
Forrest and his band of junior miners have to work on convincing the Greens and the independents who hold the balance of power that the MRRT works only for the shareholders of BHP and Rio and Xstrata, rather than the broader industry. Failing this, he must be prepared to back a High Court challenge.
State taxes long overdue for reform
Tony Rumble, Australian Financial Review, 16 June 2011
The founder of Alpha Structured Investments opines in this guest column that inefficient imposts have the potential to ruin our economy. Without precise removal of inefficient state taxes, our housing and banking industry will be pushed to the brink of collapse, long-term employment prospects will decline and state governments will increasingly be unable to deliver key services.
State government budgets are under pressure from rising costs and revenue from the goods and services tax and stamp duties that are lower than expected. While the states are expected to boost infrastructure spending, it is the federal government whose tax revenues have benefited most from the mining boom. Coupled with massive planning and developer levy distortions on housing, it's entirely unsurprising that our house prices are overvalued in international terms.
Business should push to liberate the tax summit in October and focus on the abolition of inefficient state-based taxes, within an overall social policy setting that does not seek to be re distributive (either way). The real tax policy debate should be about promoting our national sovereignty, and now is the time to do so.
Read the full article on the AFR website, available via a subscription.
Queensland's reputation as a low tax state under threat with stamp duty discount scrapped
Michael McKenna, The Australian, 14 June 2011
Hidden away in the middle of Treasurer Andrew Fraser's budget speech is a passing mention to the abolition of a decades-old stamp duty concession on the sale of property.
With days of leaks over cost of living relief and the resources-led rebound in the economy, Fraser has obviously wanted to play up the sweeteners on offer for voters ahead of the looming election, due early next year.
But there is no getting around the fact the Treasurer - hamstrung by an already struggling bottom line sent into freefall with the summer's natural disasters - is robbing Peter to pay Paul in the biggest election pitch of the budget.
The $10,000 grant for anyone buying new property over the next six months is a well-targeted sugar hit for the beleagured housing market in Queensland.
With another $7000 on top of the grant, if you are a first home buyer, the measure is aimed at the young and those struggling to realise the dream of getting out of the rental market. But funding the short-lived scheme is the permanent removal of the stamp duty concession, one of the trademarks of Queensland's long-lauded claims to being a low tax state.
The numbers - not detailed in Fraser's speech - are simple, stark and will hit the pockets of Labor's low and middle-income base. On the sale of an average $400,000 home, the current $5,250 stamp duty will more than double to $11,825, with the bill rising from $8750 to $15,535 on a $500,000 home. It is a big enough impost to price some strugglers out of the market.
Fraser, under questioning at his budget press conference, sought to head off the likely outrage over the move by insisting Queensland was still the lowest taxed state - about $500 less than the national average - and had the lowest stamp duties. That will give little comfort to voters.
Since the Bjelke-Petersen government, Queenslanders have lived under the mantra of having the lowest taxes and, especially with the second resources boom on the horizon, they expect nothing less. But already they have had increases in utilities, drivers' licences and, in 2009, the removal of the once-sacrosanct 8.75c-a-litre fuel subsidy. And those increases followed the first mining and property boom.
In his budget, Fraser is trying to focus people on the future rather than the now, with predictions that the current stagnant economy will hit five per cent growth next year. But he is also asking voters to entrust the next boom in Labor.
After a failure to invest in water, electricity and health during the past boom, and the recent raking back of tax concessions to catch up on infrastructure, it will be a forgiving electorate that gives Labor another chance.
Taxing the taxes
Patrick St George, Sydney Morning Herald, 14 June 2011
After disasters such as the Queensland floods, there are usually complaints about insurance companies and, occasionally, governments have been known to have a bit of a whinge about unethical practices.
However, going on my latest bill, both the state and federal governments would appear to be the biggest insurance rip-off merchants of the lot.
The total amount due on my latest property insurance bill is $5160.68. The actual premium is $3295.08 then added to this is the fire and emergency services levy of $1009.06. GST is then calculated on the premium plus the fire levy ($430.41). Then stamp duty is calculated on the premium plus the fire levy plus the GST. When this extra amount of $426.13 is added, the bill is $5160.68.
I've a few questions to ask.
First, the state government charges a fire and emergency services levy. Does this mean that if Fred's uninsured house next door catches fire, the fire brigade will not turn up to put it out? If they do turn up will they send him a bill? I have no problem paying for a service if I receive one. If my place catches fire and the fire brigade comes and puts the fire out then send me a bill for whatever it costs. I haven't got a problem with that because, being insured, I presume that cost would be included in the insurance policy.
Second, why am I paying GST on the fire and emergency services levy? GST stands for goods and services. The levy is certainly not a physical thing so I presume it is not a ''good''. It is certainly not a service because I haven't received one yet. If my house burnt down and the fire brigade was called and I was charged for the service then sure, I would have to pay GST on the amount I was charged.
As it stands it appears that only insured property owners are paying for the maintenance and upkeep of the fire and emergency services people. If a charge could be added to council rates then every property owner, not just those insured, would have to chip in. If everyone contributed then the cost per property should be considerably less than it currently is because there would be a lot more people contributing.
Third, the stamp duty is being levied on an amount that includes the GST. In other words I am paying a tax on a tax. No wonder ordinary people take a risk and opt out of home insurance when a $3295.08 bill becomes $5160.68 after the government extras.
How US Tariff Policy Undermines Other Tax Policy Goals
Elaine Maag, Tax Policy Centre Blog, 14 June 2011
As someone who spends her time thinking about how taxes affect low-income families – and ways to make it more rational – I can’t say that I’ve ever gotten my feathers in a ruffle over tariff policy. Why bother, I suppose, when there are so many opportunities for reform in the income tax system?
Apparently, this was a mistake. A recent analysis from Edward Gresser, director of the Progressive Economy project at the GlobalWorks Foundation, shows that some aspects of tariff policy seem misguided in ways that could hurt the poor. Surprisingly, while the tariff on leather dress shoes is 8.5 percent, for trail running shoes it’s 20 percent and for cheap sneakers 48 percent. A cashmere sweater faces a 4 percent tariff, while its wool cousin gets hit with a 17 percent tariff. For their second-cousin, the acrylic sweater, make that 32 percent. All in all, Gresser points out multiple categories of goods that a typical low-income family buys that face higher tariff rates than similar goods designed for higher income families.
Tariff policy joins payroll and excise taxes in imposing a larger burden on lower income families than it does on higher income families. And perhaps that’s why advocates for low-income families ought to take note of them.
Gresser calculates that a typical single-parent faces annual tariffs, hidden in the price of goods, of almost $400 a year. This goes against such policies as the Earned Income Tax Credit and the Child Tax Credit, both of which aim to assist low-income families. Here, one tax policy conflicts with another. In effect, tariffs can claw back a substantial amount of a single parent’s EITC, effectively undermining the EITC’s goal of supplementing wage income.
Senator Ron Wyden (D-OR) is trying to kick-start that discussion with the U.S. OUTDOOR Act. Introduced earlier this year in the Senate, the bill would scrap tariffs on shoes, sneakers, hiking shoes and several types of outdoor clothing – products not often made in the United States, but taxed through the tariff system at rates of 20 to 60 percent. That should reduce prices on these goods for consumers.
Poverty policy wonks haven’t thought much about tariffs in recent decades, but these burdens on low-income families ought to be in the mix when tax reform finally percolates to the top of the agenda.
Council rates to soar ... for years
Matthew Moore, Sydney Morning Herald, 11 June 2011
Residents in some of Sydney's wealthiest suburbs will be hit with rate rises of up to 13 per cent a year after the pricing regulator agreed that 17 councils could increase rates more than the minimum of 2.8 per cent.
In its first determination since the previous government gave it control over rate increases last year, the Independent Pricing and Regulatory Tribunal considered applications from 23 of the 152 councils to increase rates above the cap. It approved the applications in part or full, including allowing Waverley Council in Sydney's east to lift rates by 14.5 per cent next financial year, 13.5 per cent in 2012-13 and 12.5 per cent in 2013-14. The increase will average 10.56 per cent on top of the rate cap rise for each of the next three years.
Councils are now allowed to apply for rate increases for from one to seven years, although the tribunal refused all seven-year requests, except that of North Sydney Council which can now lift rates by 5.5 per cent every year until 2018. It had wanted bigger rises - 12.93 per cent in 2012 and 15.43 the year after.
Other councils to win big increases include Pittwater (7.8 per cent, 7 per cent and 6 per cent over three years); Lane Cove (10.24 per cent next year); Woollahra (9.82 per cent and 10.41 over two years); Port Macquarie (10.1 per cent next year) and Great Lakes Shire (8 per cent for each of the next three years).
The chairman of the tribunal, Rod Sims, said councils were required to provide evidence from surveys or consultation that their communities supported increases above the cap before he approved them. ''Usually there was 55 or 60 per cent support. You will find on most occasions they had community support,'' he said.
While he agreed it was highly unusual for most people to support any form of tax increase, Mr Sims said he had been convinced by the evidence from councils, including the results of statistically valid surveys, that people could see the need for more money to be spent on facilities. ''I started out as a sceptic but because this is very local, people can see their roads need more maintenance … a large number of councils wanted money to spend catching up on maintenance on roads,'' he said.
While he approved most applications, some were at a reduced level, including that of Waverley, where requests for rises of 11.5 per cent in 2014, then 10.5 per cent, 8.67 per cent and 2.2 per cent were refused. ''Waverley did get majority support for the seven years [of increases]. We judged, and it was on balance, that the increases were so large the community needed to be retested. That's a judgment call but that's the call we made,'' he said.
The mayor, Sally Betts, said there was strong community support for rises - needed to maintain infrastructure - even though the tribunal refused the council's request for increases for the last four of the seven years. ''I think they will be happy with the compromise IPART has put up … and council now has to relook at our long-term plan, make some savings and re-evaluate our priorities because I don't want to go back to IPART,'' she said.
Although Waverley had the biggest percentage increase, Ms Betts said it was on a very low base. Average rates in Waverley, which has more apartments than any other council in Australia, were only $750 a year - $100 less than in Randwick and $200 less than in Woollahra.
Almost half of Waverley ratepayers paid the minimum of less than $400 a year, which had left roads and other infrastructure ''in desperate need of fixing up''.
A resources tax by another name
Robert Gottliebsen, Business Spectator, 9 Jun 2011
Let’s strip away all the carbon tax political rhetoric. It is becoming clear that the looming carbon tax is simply a disguised resources tax on gas and coal exports. It’s the Ken Henry-Wayne Swan first mining tax all over again but without iron ore and copper.
I reached this conclusion by moving around some of the major players in all aspects of the electricity industry. They explain that the tax will have a marginal effect on carbon consumption and that Treasurer Wayne Swan these days no longer emphasises carbon abatement. To make a significant difference to carbon, the tax would either need to be much higher or be combined with direct action.
And today’s amazing Liddington-Cox graph derived from ABARE material shows that the new resources (carbon) tax embraces the output from about three quarters of the advanced new energy export projects. While some of those energy projects will be non-carbon (mainly uranium), the tax is going to be enormous long-term revenue raiser from exports.
The electricity and gas companies supplying the local market will also receive a tax but the proceeds of that tax, and perhaps a bit more, will be recycled back to the Australian community via lower income taxes and direct aid to some of the enterprises affected.
The most effective way to reduce carbon emissions in Australia is to shut down one or two Latrobe Valley power stations. But the tax would need to be around the $60 a tonne – three times the likely level – to justify a new major gas-fired power station in the Latrobe. And that would also require Queensland gas coming to Sydney so that the Bass Strait gas currently being sent to Sydney would be available for Victoria. The federal government is not even contemplating these sort of strategies – they are after the money.
Currently the Latrobe Valley power stations run flat out for most of the time. There is spare capacity in NSW black coal and several gas stations. Because the NSW stations have a lower carbon content, under the proposed carbon tax black coal power will suddenly be cheaper than brown coal power, so NSW will go flat out and the Latrobe Valley will generate less power. This will lift Latrobe costs and lower profitability. Because it only affects part of the output the carbon change is not really significant. The NSW power sector is not so sure the Latrobe people have it right and want a bigger share of compensation.
Australian and overseas banks are owed around $6 billion by the Latrobe stations. They will need to write off a big chunk of the debt unless they receive help as what happened in the Rudd carbon trading scheme. It is potentially a huge loss to the banking sector. The banks will probably leave the current power station owners in charge but will pull the strings. Given that Latrobe power will be the carbon sourced “power of last resort” the Latrobe power stations may increase the price substantially to cover the higher costs. The big winners will be Snowy Hydro Power and gas-fired stations.
One way or another we will cobble together a compensation scheme that will spend all the local money and a bit more leaving the export tax as the big money spinner.
The new carbon resources tax is a massive blow to the energy export sector. In the original Henry-Swan mining tax the projects had not been announced, so a capital strike took place. This time, by accident, Canberra is much smarter and the exporters are stymied because they have since announced the projects. They may have to take it on the chin and to some extent the tax is offset on the capital side because the higher Australian dollar has slashed the costs of all the projects.
If Australia was serious about reducing carbon instead of just being interested in raising money and using the tax as a resources tax the Gillard government would combine the tax with some of the Abbott-style plans. And indeed we would use the money raised by the carbon resources tax to fund those carbon reduction plans. By combining the government and opposition plans we would achieve real carbon abatement
But nothing could be further from treasury’s mind. They are intent on balancing the budget and the energy resources (carbon) tax is their secret weapon.
Government releases Exposure Draft of Minerals Resource Rent Tax Bill 2011
Australian Treasury, Media Release, 10 June 2011
The Treasury has today released for public comment draft legislation for the introduction of the Minerals Resource Rent Tax (MRRT).
The preliminary exposure draft legislation is based on the recommendations of the Policy Transition Group and establishes the framework for the operation of the MRRT.
The draft is not exhaustive and is intended to provide stakeholders with an early overview of the legislation. The Government intends to release a second and final exposure draft for public consultation later in the year.
We encourage stakeholders to make submissions on the preliminary draft. The Government values the constructive consultation it has been having with the mining industry and tax professionals, and these submissions will play an important role in informing the detailed design of the new resource tax arrangements.
We thank the Resource Tax Implementation Group (RTIG), which comprises representatives of industry and the tax profession as well as government officials, for their substantial input to date on the draft bill. Consultation with the Group has identified some technical issues in the legislation that the Treasury and RTIG will continue to work on. These issues will be covered in the second exposure draft release.
The Treasury will release exposure draft legislation relating to amendments to the Petroleum Resource Rent Tax (PRRT) in the near future. The introduction of the MRRT and changes to the PRRT, which were announced last year, will come into operation from 1 July 2012.
These reforms will ensure Australians receive a better return from their non-renewable resources and will help strengthen our economy through increased superannuation, new and better infrastructure, and business tax cuts. These initiatives are crucial to maximise the opportunities presented by Mining Boom Mark II, and will ensure all Australians receive a fair return from the nation’s resources.
Consultation on the preliminary draft closes on 14 July.
Visit the Treasury website for copies of the Exposure Draft and details for making submissions.
Government called to tax electric cars
Stephen Ottley, Sydney Morning Herald, 9 June 2011
Forget incentives for electric vehicles, the federal government should consider a new tax on them instead. That's the recommendation from a parliamentary committee that recently handed its report into alternative fuels to the government.
The House of Representatives Standing Committee on Economics said electric cars should not be exempt from the excise other alternative fuels pay. "Treasury and other relevant agencies commence consultations with industry with a view to developing an excise-equivalent tax for the electricity used by electric vehicles in the medium term," the report said in its recommendations.
Australia is one of the few major automotive markets in the world where there are no government incentives offered for motorists to buy an electric car.
A CSIRO report showed that countries including the United States, China and much of Europe offer financial or other incentives for electric cars and have set targets for their adoption. "Australia is lagging in EV policies, seriously lagging," said Mitsubishi Australia's vice president of corporate strategy, Paul Stevenson.
The news of the government recommendation is bad timing for Mitsubishi, which announced it will be the first major manufacturer to put a fully electric car on sale to the public this week. The Mitsubishi i-MiEV will be available from selected Mitsubishi dealers from August. But it won't come cheap thanks to the high cost of batteries and the government's failure to offer consumer incentives. Pricing for the four-seater city runabout will start at about $50,000, triple that of similarly sized hatchbacks.
Stevenson said the company remained hopeful the government would begin incentivising electric cars, despite its unwillingness to offer support to date. "I think the government has to get through this carbon pricing issue first," Stevenson said.
The government's focus has so far been directed towards local manufacturing jobs. The majority of the Green Car Innovation Fund grants direct towards supporting locally made cars, all of which require fossil fuels. Stevenson admits it is a challenge for the government to decide who best to support local jobs while helping low or zero emission vehicles. "It's a very difficult balancing act, but I do believe they need to do more," he said.
SA Budget: Treasurer refuses to gamble
Greg Kelton, The Advertiser, 9 June 2011
FAMILY man Jack Snelling has handed down his first Budget as Treasurer, outlining a new direction for the State. In a contrast to last year's horror Budget, Mr Snelling has outlined modest spending - mainly aimed at the most vulnerable in the community - while cutting public sector jobs and leasing the state's lotteries to underpin his expenditure program, including $3.1 billion on infrastructure projects.
Presenting a much softer style than his predecessor, Kevin Foley, Mr Snelling said his approach to the Budget was to look at the state's finances in the same way as families would look at theirs and "spend only what we can afford. Families have their own household budget day every payday," he said. "They do the sums, make ends meet, find the money for what they need today and borrow only for what will be productive tomorrow."
In a bid to try to bolster the state's finances and, as it turned out, to successfully protect the AAA credit rating, there will be a cut to the $8000 first-home owner grant as well as new liquor-licensing fees and increased motor registration fees.
Major ratings agencies Moody's and Standard & Poor's both kept the state's credit rating at AAA, although they warned it could be downgraded if the Government did not meet savings measures or spent more than could be matched with revenue growth or additional savings measures. Mr Snelling welcomed the decision, saying it confirmed state finances were in good shape and "South Australians can have confidence about the direction of our state".
While business leaders welcomed the infrastructure spending and agreed the Government had been restricted in what it could deliver, Opposition Leader Isobel Redmond said that the Budget had delivered "debt, deficit and deceit" to SA families. "Labor has also delivered an extra $1.1 billion in taxes and charges through the next four years," she said.
Despite former treasurer Kevin Foley predicting the Budget would return to a $55 million surplus this year, the deficit will be $263 million. The Budget will not return to surplus until 2012-13, when it will reach $114 million before rising to a massive $655 million in 2014-15. This will give Mr Snelling and the Government plenty of financial room to manoeuvre leading up to the 2014 state election.
Mr Snelling said it was a Budget for mums and dads who wanted to be confident that SA would be the place their children would want to raise their families. "It's a Budget that delivers confidence to those who are looking to invest in our state and create jobs," he told Parliament. "And it's a Budget that provides for those most in need of our support."
Key elements include:
- • An extra $133.3 million over the next four years on health care.
- • An extra $69.1 million over four years to boost child protection.
- • $37.5 million to meet the needs of SA people living with disability and their carers.
- • An extra $19.3 million for breast cancer screening and $10.8 million for equipment for people with a disability.
Under the Budget, the Government will invest more than $3.3 billion in its infrastructure spending and over the next four years that will reach $9.1 billion. This includes work on the Adelaide Oval, the Southern Expressway duplication, the Seaford rail line expansion and the Flinders Medical Centre redevelopment.
Mr Snelling said there would be a further 400 job losses in the public sector, with most of these coming from health and environment. The cuts, which come on top of the more than 3700 set out in last year's Budget under Mr Foley, will deliver savings of $31 million a year.
The Government will introduce an annual liquor licensing fee to recover the cost of regulating the liquor industry. This will raise $3.6 million a year and be indexed.
Registration fees for motor vehicles will increase slightly above the inflation rate to raise an extra $2 million every year to fund extra road resurfacing and rehabilitation for SA's regional road networks. Kangaroo Island will be the first beneficiary.
SA Lotteries will be licensed to a private operator, although the Government will continue to collect gambling taxes of about $60 million. That money will still be paid into the hospital and recreation and sport fund. Mr Snelling said the SA Lotteries brand would remain under government control. He could not say how much the lease agreement would raise, or how long the lease would last, although it has been estimated that the lease could be worth at least $200 million over 10 years.
The first home bonus grant, now $8000 for first-home buyers who build or purchase a newly constructed home, will be gradually phased out. It will be reduced to $4000 from July 1, 2012, and abolished from July 1, 2013.
Another move will see spending on at least four infrastructure projects - rail revitalisation, the Oaklands Park road capacity improvements, the QEH redevelopment and the Noarlunga Health Service redevelopment - either deferred or delayed.
Mr Snelling said state debt was forecast to peak at $4.2 billion in 2013-14 and then decline to $3.6 billion in 2014-15.
Alcohol floor 'a hit on elderly and poor'
Sue Dunlevy and Milanda Rout, The Australian, 9 June 2011
PENSIONERS, those earning less than $40,000 a year and rural Australians would be the hardest hit by a floor price on alcohol, which would increase the cost of cask wine by up to 400 per cent.
Health Minister Nicola Roxon has asked her National Prevention Agency to model how a floor price on alcohol would work to combat binge drinking. No decision has been made to go ahead. A global and domestic wine glut has sent prices crashing to as low as $2 a bottle, less than the price of bottled water, Curtin University's Mike Daube says.
Experts have proposed imposing a floor price of $1.20 per standard drink, the price of a full-strength beer, to end the sale of cheap wine casks where a standard drink costs as little as 30c. "It's just about making sure that extremely cheap alcohol cannot be sold," Ms Roxon told Brisbane radio yesterday.
University of Adelaide researchers Simone Mueller and Wendy Umberger found a floor price would hit pensioners hardest, because people over 55 purchase a higher-than-average share of cask wine. Those with an annual household income below $40,000, living in rural areas and without a tertiary education are also more likely to buy cask wine.
National Seniors chief Michael O'Neil said a floor price was a "blunt instrument" that would hit pensioners already struggling with the cost of living and deny them "one of life's small pleasures that they have a tipple of wine of a night time".
Winemakers Federation of Australia chief Stephen Strachan said research had found increasing wine taxes to the beer rate would result in 10,000 job losses in the industry. Coles and Woolworths would profit because they would still purchase cheap wine and sell it at a much higher price.
A target of the floor would be binge drinking in indigenous communities, but Indigenous Affairs Minister Jenny Macklin refused to back the proposal saying she wanted to discuss it first with Aboriginal communities. "I want to look at the facts, look at what works with dealing with alcohol abuse, but I want all the options to be on the table," Ms Macklin said.
Wine is cheaper than beer and spirits because it attracts a much lower tax rate. The Henry tax review called for alcohol taxation to be based on the volume, which would push up the price of wine. It will be discussed at the government's tax summit later this year.
Voters in Trade Minister Craig Emerson's Brisbane electorate of Rankin -- such as Rachael and Jamie Clarke-Smith -- said yesterday people would continue to buy alcohol regardless of the price. But none said it would affect their votes.
In the Labor electorate of Rankin -- held by Trade Minister Craig Emerson -- silicon sealer Rachel Clarke-Smith, 32, questioned where the money would go. "It's the same as cigarettes, they put all the prices up. It's okay if they're going to invest it into fixing something, but otherwise what is the point," she said.
Budget moves hurt long-distance drivers
Alexandra Cain, Australian Financial Review, 8 June 2011
Changes, announced in the budget, to the fringe benefits tax applying to salary packaged cars could see some drivers who cover a lot of kilometres paying thousands of dollars more each year. Cars purchased after May 10 will be subject to a flat FBT rate of 20 percent, whereas drivers doing over 40,000 kilometres a year before payed as little as 7 percent.
Adrian Raftery from ARW Chartered Accountants said the change arose in part from observations in the Henry tax review that some drivers were putting extra kilometres on their vehicles in order to qualify for lower FBT brackets. He notes that long-distance drivers such as sales representatives, for whom limiting their kilometres is not an option will demand salary compensation for the extra FBT imposition.
John Sullivan from PwC casts doubts on the environmental motivation for the change, saying people will only change their driving habits where viable alternatives are available. Even recent spikes in petrol prices have not thinned the numbers of vehicles on the roads.
Elizma Bolt from Deloitte has done some sums to show that an employee on $80,000 could be $2700 worse off when they move from the 7 percent FBT rate to 20 percent. Raftery points out that the value of the vehicle also affects the FBT calculations.
Read the full article on the AFR website, available via a subscription: http://www.afr.com/p/budget_change_hurts_long_distance_3j8YCxOsK5Qf7YenUy7GCL?hl
Abbott needs reality check on repeal of carbon tax
Peter Van Onselen, The Australian, 8 June 2011
NEW taxes are never loved by anyone but businesses and investors quickly adapt. Of course, removing new taxes, especially a carbon tax that could easily be back on the agenda in the future -- leading to more implementation pain -- might end up being a greater evil for business. That is a line Labor is using as one of the reasons to oppose Tony Abbott's campaign to vote for the Coalition at the next election because it will repeal the carbon tax and the mining tax.
Threats to business certainty are usually threats to business prosperity, which is one of the reasons the Coalition is pushing so hard for an early election. Apart from wanting to take advantage of the current bad polling for Labor, Abbott and his minders recognise that winning government without the twin taxes having already been legislated will create easier governing circumstances than winning after they are in place (with a pledge to repeal them).
Of course, federal Labor is in trouble and if it can't find a way out of its woes Abbott will be prime minister in just over two years' time. Assuming that we aren't thrust into an early election, the mining tax and the carbon tax will be legislated before that happens.
The question then becomes: will the Liberals really repeal the twin taxes? I know Abbott claims that they will; he has staked his political reputation on it. But I also know some of his senior colleagues don't think that doing so is realistic. And then there is the question of what Labor would do in defeat. Having undergone so much political pain legislating such taxes, will they allow them to be unwound? Perhaps not, and you can bet the Greens would oppose repealing them.
That would leave Abbott needing to call a fresh double-dissolution election to roll back the laws, with a joint sitting of the parliament. I wonder whether he would be prepared to do so. Fighting back-to-back elections isn't fun, for anyone, and from the perspective of business it just creates more uncertainty and a loss of consumer confidence.
If Abbott repeals both taxes, savvy heads inside the Coalition realise that he would be punching a massive hole in future budgets. It's one thing for the current Coalition costings (notwithstanding the supposed $11 billion hole Treasury discovered) to find alternative funding for its plans without the twin taxes now. It's another thing entirely for that to stay the case two years down the track as circumstances change.
Labor continues to hope that, once the taxes are legislated, Abbott's negative campaigns against them will be hard to sustain, especially if the business community's angst dies down. And Labor questions whether Abbott will be able to continue to argue against the taxes as well as the compensation measures in voter land. People don't like tax cuts (read compensation) being reversed, even if doing so would be part of repealing a carbon tax.
Wayne Swan told the National Press Club yesterday the national income will keep rising even with a carbon tax. If that is right, the longer its attendant compensation is in place the less likely the public will be to support removing it. Abbott would need to find a fiscally sound way to get rid of the carbon tax while maintaining the compensation. That's a hard script to follow, but Coalition MPs are already urging the leadership to find a way to make it happen.
As vigilant as Abbott and his colleagues must be to plan for how they will campaign if the twin taxes are legislated, they will need to also consider how they will govern if victorious at the next election. Oppositions tend to focus more on getting into power than what they would do with power.
If the lessons out of Victoria and NSW at state level have taught us anything, it is that being prepared for government is important. Ted Baillieu's government didn't expect to win and it shows months later. In contrast, Barry O'Farrell knew he would win the recent NSW election, and he had plans in place for after that happened. O'Farrell's first two months in the job have been surprisingly impressive.
Abbott's favouritism for the next federal election means the business community and the public won't give him any slack if he doesn't start well in government. If they don't, they will quickly find themselves in the same hole the Labor government is in.
Greens MP calls for bank levy
Eric Johnston, Sydney Morning Herald, 7 June 2011
GREENS MP Adam Bandt has called for a ''too big to fail'' levy to be imposed on the big four banks to increase competition in the industry. Implicit government support of the big banks through discounted access to the wholesale funding guarantee scheme, combined with the ''four pillars'' policy, has reinforced the dominance of the big four lenders, Mr Bandt says. His comments are part of his speech to be made to an Australian Bankers Association forum on regulatory changes in Sydney this morning.
Mr Bandt also points to the planned introduction of covered bonds as entrenching the dominance of the large banks, as it represents only a marginal funding benefit for smaller banks. Covered bonds, which allow bank bonds to be secured by mortgages, could potentially shift the risk to the public purse, he says. ''It is time to ask whether we in fact have an implicit too-big-to-fail policy in Australia,'' Mr Bandt says. ''And if that is the case, isn't it time the financial beneficiaries of this policy be asked to provide something in return?''
While global regulators are pushing for some of the world's major banks that are considered too big to fail to hold more capital, these rules in their current form are unlikely to extend to Australian banks. Still, Treasury has been resisting efforts by some global policymakers to strengthen too-big-to-fail proposals in a way that would impact on Australia's big four banks.
There is a push within the G20 for all large domestic banks to hold even higher levels of capital to protect the financial systems of their home markets. This would result in Australia's big banks facing a modified version of the too-big-to-fail proposals, despite none of them being considered a threat to the global system.
Such a levy for local banks should be on the agenda of the tax summit planned later this year, Mr Bandt says. ''When banks earn $5 billion a year from households in fees on top of the other taxpayer-backed support, it is our view that there is a strong case to be made for a return to be given to the taxpayer for the regulatory and policy support given to the big banks,'' he said. But Treasury officials argue there is little need for too-big-to-fail rules in Australia as there is already ''much greater vigilance and supervision'' of large banks.
Paying per kilometre good for regional drivers
Bronwen Wade, Australian Broadcasting Corporation, 6 June 2011
Taxing the kilometres you drive rather than the fuel you use could make travel cheaper for regional motorists, according to the RACV.
As vehicles become more fuel-efficient governments are generating less revenue from fuel tax, which in turn means less money invested in road improvements and public transport.
A solution posed at a transport summit in Germany last week would remove the tax on fuel and replace it with a tax on kilometres driven.
General Manager of Public Policy with the RACV, Brian Negus, told ABC Goulburn Murray's Joseph Thomsen that despite the long distances travelled in regional areas, a tax on kilometres could actually be cheaper for country drivers than the current system.
"You would pay for the kilometres you drive, congestion if it applies, and an environmental charge (like) the carbon tax. If anything, the actual cost for a motorist travelling longer kilometres in uncongested conditions with a fuel-efficient car is going to be less than now."
The approach is already on the Australian government's radar following similar recommendations in the Henry Tax Review.
Brian Negus would like to see the switch to a distance-based tax finalised within the next three years.
"I think it is inevitable that it will come in at some point in time. It really is a matter of how we transition out of the current system of excise and fixed charges into a kilometre-based charge."
Charity begins at policy level
Justin Howes, Australian Financial Review, 6 June 2011
The tax system clearly has a role, within a package of government social policies, to support entrepreneurship, innovation and growth in the not-for-profit sector.
The government’s proposed reform of tax laws relating to not-for-profit organisations will affect some 600,000 organisations, requiring them to rethink their funding and capital arrangements.
The removal of concessions makes sense in situations where they are being subverted by profit-making activities but they need to be balanced so that they do not discourage innovation and entrepreneurial initiatives.
Swiss 'still wanting' on tax evasion laws
Sydney Morning Herald, 2 June 2011
Switzerland is still not up to international standards on combating tax evasion but is determined to enforce new rules adopted in the fallout from the global financial crisis, the OECD said on Wednesday.
The Global Forum on Transparency and Information Exchange for Tax Purposes, set up under the auspices of the Paris-based Organisation for Economic Cooperation and Development, welcomed Switzerland's rapid progress in meeting the new norms. At the same time, the Forum, meeting in Bermuda, noted that recent tax information agreements agreed by Switzerland do not fully comply with the regulations.
In 2009, at the height of the global financial crisis sparked by the collapse of US investment bank Lehman Brothers, Switzerland was singled out with several other tax havens for its tradition of bank secrecy and lack of transparency. Secret flows of money, as well as cheating the taxman, were also seen as destabilising and having contributed to the crisis, sparking calls for radical reform, chiefly involving full transparency and information sharing.
As a result, Switzerland was put on an OECD list of countries failing to meet standards for full disclosure and required to become more open which it has since done by negotiating a series of information exchange accords with its partners. The Forum noted, however, that requests for tax information from Switzerland must be made in great detail, with identities established, rendering a cooperative exchange more difficult.
Switzerland has agreed to modify its response to information requests but will have to do more if it is to be cleared and go on to the next evaluation phase in the second half of 2012, it said.
The Forum examined some 35 countries, finding that France, Italy, New Zealand and the United States generally met standards but Paris, Rome and Washington could be quicker in responding to information requests. The Philippines and Singapore, who were also targeted initially, were judged to have made progress but also still had to do more, the Forum found.
The Forum meanwhile announced the coming into force of a new convention on tax evasion which OECD Secretary-General Angel Gurria urged all countries to adopt. "The updated convention, which incorporates internationally agreed standards for exchange of information in tax matters, is the most comprehensive multilateral instrument available for tax co-operation," the OECD said in a statement.
Let's lay a floor under public health
Peter Martin, Sydney Morning Herald, 1 June 2011
SO, CATE Blanchett is a bad look for an advertising campaign. I can think of a worse one: piles and piles of $100 notes parading themselves as reasons why we should feel warm towards the tobacco companies. As an exercise in winning us over, the mobile billboards picturing the stacks of money British American Tobacco says it will use to take on the government when it legislates for plain packaging are sad rather than persuasive.
That an industry once so tuned in to the psyche of Australians (and schoolboys - I remember) should be reduced to threats against a government with more lawyers, more billions, much more power, the support of the opposition and much more legitimacy than it will ever have speaks volumes about how the world around it has changed.
If piles of money had been the chief tactic adopted by the mining industry it would be facing the originally designed super profits tax forevermore. But amid the pathos of a once-mighty industry boxing from memory lies an impressive idea.
The head of British American Tobacco in Australia, David Crow, set the ball rolling. He said that with nothing but price to compete on manufacturers would cut cigarette prices until they were perhaps only half what they are today.
Cheap prices ''basically means more people will smoke - more kids will smoke'', he said, in an implicit acknowledgement that this would be a bad thing, and also an implicit acknowledgment that he and his mates have been overcharging by a wide margin.
Anti-smoking campaigners responded by saying the government could react by increasing the tobacco excise. But that wouldn't directly fix the problem Crow identifies. The increases would come into force after the event and would do nothing to stop shops selling cigarettes as loss-leaders, as Coles and Woolworths tried to do earlier this year with beer.
Cigarette makers might even help them if they saw it as a way to stay in business. And it is low prices, not low excise, that do the damage.
US economist Gary Becker won the 1992 Nobel Prize in part for his revolutionary development of the theory of rational addiction. It had previously been believed that addicts were not much influenced by price because they were hooked. Becker suggested instead that addicts rationally decided to become hooked, often on the basis of price, and could rationally decide to give up, also on the basis of price, as long as they thought a new price would last.
Measurements to support the theory suggest that a 10 per cent increase in the price of cigarettes cuts sales by about 4 per cent, a 10 per cent increase in the price of alcohol cuts sales by about 5 per cent.
Because a lot of the heavy drinking is done at low price points and lot of the take-up of smoking is done at low price points, an increase in the minimum prices is likely to have a much more powerful effect than an increase in the average price. Even better, the pay-off from increasing the minimum price is extraordinarily steep.
The University of Sheffield has told the Scottish government a minimum retail price of 25 pence per unit of alcohol would cut consumption 0.2 per cent; a minimum price of 35 pence would cut consumption 1.3 per cent, and a minimum price of 55 pence an extraordinary 10 per cent.
In September Scotland legislated for a minimum price of 45 pence per unit of alcohol, in whatever form it was sold. Completely separate from and unrelated to alcohol taxation the law has made it illegal to sell alcohol cheaply. It has made no difference to the price of most drinks and, according to the British Institute for Fiscal Studies, stands to net the supermarket chains an enormous windfall as they are forced to pocket the benefit of low prices they would otherwise have passed on. University of Aberdeen researchers reckon alcohol manufacturers will make more money too, while selling less product.
In Australia alcohol is sold for about half that. For as little as $10, a poor or desperate addict can obliterate themselves with a cask containing 30 standard drinks.
The streamlined system of alcohol taxation recommended by the Henry review would help but, in the meantime and as a backup, the obvious solution is to quickly impose a minimum price of at least double the effective minimum now and to impose a minimum price per stick of tobacco as well.
When a restriction of alcohol consumption was trialled in Tennant Creek in 1995 a university study found it cut sales by 19 per cent, cut hospital admissions for alcohol-related conditions 29 per cent, cut admissions to the women's shelter, and turned pay-day Thursday from one of the busiest days in the police lock-up to the second quietest. A legislated minimum price would be an act of humanity.
Christopher Pyne seemed to suspect so. Quietly, in 2006, the then assistant minister for Health and Ageing in the Howard government commissioned the Flinders University National Centre for Education and Training on Addiction to conduct a feasibility study. Letters went out addressed to ''Dear Hotel, Bar Club and Liquor Industry Staff'' in 2008 after the government had changed.
When I and another journalist got wind of the proposal the newly elected Labor Health Minister Nicola Roxon disowned it, saying Labor had no plans to introduce a floor price on alcohol. She has since returned to the idea and this time the National Health and Medical Research Council will size it up. It's about time.
Tax me more, by all means, but make it a voluntary contribution
Julie Novak, Sydney Morning Herald, 1 June 2011
With the stresses and anxieties of tax-return time fast approaching, Gavin Mooney and Alex Wodak, writing in yesterday's Herald, would have us believe that higher taxes are good for our health. My first reaction was to check the date to establish if this was an April Fools' Day joke. Alas, the proposition that higher taxes promote well-being is drawn from The Spirit Level: Why More Equal Societies Almost Always Do Better by British epidemiologists Richard Wilkinson and Kate Pickett.
Wilkinson and Pickett's analysis should be taken with a grain of salt. They exclude high-wealth countries from their published data sets, for example, and their credibility has been diminished by the thorough critical analysis of researchers including Peter Saunders, Christopher Snowdon, Roger Kerr in New Zealand and, if I may say so, myself.
The experience of modern history shows that the best way to ameliorate poverty is to promote economic growth by freeing up markets. Perhaps the best case study of this is the largest reduction in human history in the number of people living on less than $US1 a day as a result of pro-market reforms in east Asia, including South Korea and China.
By contrast, no country has become wealthier, or more equal for that matter, as a result of higher taxation. This is because higher taxes reduce the amount of disposable income available for people to feed, house, clothe, transport and entertain themselves and their families, which keeps poverty at bay. Higher taxes also distort consumption and production decisions, reducing the capacity of the market economy to generate the growth needed to scoop people out of wretched poverty.
An insidious effect of progressive income taxation is to substitute leisure for work and, combined with a large welfare state, to impose high effective marginal tax rates that punish individuals financially for supplying more labour.
There has been much community discussion since the federal budget about the merits of a large welfare state. The higher tax burdens needed to fund a large welfare state promote a sense of dependency on the state. And we know by now that there are significant health and social-inclusion costs for those people, including the unemployed, who are stuck on the low road to welfare.
The truth is that the primary beneficiaries of big welfare are the middle-class bureaucrats who administer the welfare state in fine detail. To get a sense of how much welfare-state funding is being misdirected, consider this: based on an upper estimate of 13 per cent of Australians living in poverty, the Commonwealth's social security and welfare budget of $117 billion could have been evenly shared among the poverty stricken with a $40,817 payment.
While there are difficulties in making comparisons between countries, there is also no clear and simple link between higher public expenditure on health and better health outcomes. Singapore, which has 70 per cent of its health expenditure channelled through the private sector, has a level of life expectancy similar to that of other Asian economies, achieved at a parsimonious 3.5 per cent of its gross domestic product.
While the US is criticised for its relatively high health spending, available indicators suggest that the quality of care is very good, even accounting for lifestyle-related diseases.
Mooney and Wodak suggest that Australians should be prepared to pay more taxes to promote the ideal of the ''fair go''. With cost-of-living pressures affecting many low- to middle-income families, and with likely new federal carbon and mining taxes in the next couple of years, the call for even more tax is going to be a hard sell. But there are two ways out for those who wish to donate more to Treasury's coffers, on whatever grounds they may choose.
First, governments can establish ''tax me more'' funds for those who wish to make gift contributions to the consolidated revenue fund. Such a system exists in the US, but unsurprisingly it does not secure great bucketloads of money for government.
Second, if some people are so keen to pay more for health and social equality, they could volunteer extra payments to the Tax Office as part of their tax-return assessment. In this way they can pay more, without obliging the rest of the population to cough up as well.
Julie Novak is a research fellow at the Institute of Public Affairs.
Tax just the medicine for making Australia a healthier place
Gavin Mooney and Alex Wodak, Sydney Morning Herald, 31 May 2011
Tax affects more than Australians' hip pockets – it affects their health. Most obviously, increasing taxes can help to reduce poverty, and poverty is a real killer. Such help can be in cash or kind, raising the incomes of the poor or providing better social and health services.
Second and less obviously, taxation can be used to reduce income inequality, which also has big health effects. Research by the British social epidemiologists Richard Wilkinson and Kate Pickett reported in their book The Spirit Level shows that countries that are less unequal tend also to be healthy.
It is also true that countries with big populations of poor people are prone to problems such as TB, which can then pose a risk to people with whom they come into contact, including doctors, nurses and correctional officers. And many of the sick poor will end up using the health system a lot, and who is going to pay for that?
What then to do about taxes, for a healthy nation? Raise them. We are a low-taxed country compared with most others in the Organisation for Economic Co-operation and Development and we are low-taxed compared with the past.
The total tax take the treasurer received in 2008, the latest year available for comparative purposes, was 27.1 per cent, leaving Australia near the bottom, 29th out of 33 OECD countries. The average for the OECD was 34.8 per cent. Denmark tops the tree with 48.2 per cent. The US is just below Australia in 30th position at 24 per cent, while Britain is pretty much in the middle, close to the OECD average.
One particular tax, corporation tax, is to be reduced from 30 per cent to 28 per cent in 2013-2014. This is part of a long-run trend that began with corporation tax at 46 per cent in 1985.
Such figures put a different perspective on the budget compared with the criticisms we have heard about class warfare. But on this theme, some comments from the “legendary investor” Warren Buffett, one of the world's richest people, are interesting. He has said: “I think that people at the high end – people like myself – should be paying a lot more in taxes. We have it better than we've ever had it.” And again: “There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning.”
In Denmark the quality of healthcare – almost all public – is very high; the quality of education – almost all public – is very high, and so on. Part of the reason is that few of the well-off Danes opt out of the public systems. They then push for high quality and help to maintain high standards for all. They are paying good money in taxes, so they want value for it.
In contrast, in the US, where taxes are even lower than in Australia, the healthcare system is poor. Australian men live two years longer than American men, and Australian women one year longer on average. Americans spend almost twice as much of their income on health as we do. But so much of that is in the private sector.
How we pay taxes also matters. Income tax is generally progressive, with the well-off paying not just more but proportionally more. A consumption tax such as the GST tends to be regressive, with the poor paying proportionally more.
So how much we raise in taxes and how we raise it affect the nation's health. One of the easiest ways to make us a healthier nation is to raise tax. The revenue can do wonders for the disadvantaged in our society. The impact on health from reduced inequality can be significant. There are also non-health benefits. For example, more equal societies suffer from less crime.
If Australians really want to live in a country of the fair go, we should all be prepared to pay more for it. It was the American jurist Oliver Wendell Holmes who said: “I like to pay taxes. With them I buy civilisation.” How civilised a nation do we want to be? How healthy?
Gavin Mooney is a health economist and honorary professor at the University of Sydney. Alex Wodak is director of the alcohol and drug service at St Vincent's Hospital in Sydney.
No carbon tax? Europe will make us pay instead
John Birmingham, National Times, May 31, 2011
At some point in the next few years the EU will impose general sanctions on those nations that don’t measure up to its standards on carbon control. There’ll be some fine and filthy politicking over it, of course. Economic superpowers like the US and China will either muscle up, impose their own retaliatory sanctions, or simply make life so difficult that Brussels comes to an arrangement that accommodates their raw power.
Smaller and middle power players, however, countries like ours, they’ll get bent over the negotiating table for some rougher than usual handling. If Tony Abbott is PM at that point – and he is convinced he can ride Gillard and Brown’s carbon tax back into office – he’ll huff and he’ll puff but in the end he’ll drop trow and take it, because the pain imposed by Europe will far outweigh any pain he needs to impose via a carbon price to avoid their sanctions.
Don’t believe it? Potential EU sanctions are why we have the privacy legislation we do. The Howard government, of which Abbott was a member, made wrenching changes to Australian privacy law to avoid being penalised when doing business with Europe.
Next year, Qantas air fares will increase because of a 15 per cent penalty imposed by the EU on carriers from countries that have not introduced a carbon tax. Abbott can fume and rage all he likes, but his posturing will count for nothing in Europe. And that’s just the beginning.
In the end climate change and carbon pricing is a debate we will have, in spite of Rupert Murdoch’s trained orcs and trolls scaring the bejesus out of people like Dick Smith.
Smith yesterday admitted he hadn’t joined Cate Blanchett in her pro-carbon tax ad, because he was scared of being vilified by the Murdoch press. Not just the Piers Boltbrechtson hive mind, but the journalists, and headline writers, the photographers and moderators and serried ranks of deniers and abusers who have gone to war with science and the future on Rupert’s whim.
I must admit, I think less of Smith for that, and a lot more of Blanchett. After all, her career and livelihood arguably depends more on maintaining a happy, unconflicted public image than his. And she would have known, as he did, what was coming when she shot that advert.
But she probably knew much worse was coming anyway, if Abbott and Murdoch’s goon squad get their way and this debate becomes less about science than it is about thuggery and wilful ignorance
OECD discussion draft on tax treaty issues related to trading of emissions permits
OECD, Media Release, 31 May 2011
The OECD Committee on Fiscal Affairs (CFA) invites public comments on its preliminary analysis of the tax treaty issues related to the trading of emissions permits. This analysis addresses the application of the provisions of the OECD Model Tax Convention to the cross-border trading of emissions permits.
The effort to limit emissions related to global warming has led to an increased use and interest in emissions trading programmes as a mechanism to achieve reductions in emissions of carbon dioxide and other greenhouse gases in an economically efficient manner. These emissions trading programmes present both domestic and international tax issues, including tax treaty issues.
The CFA has examined the tax treaty issues related to the cross-border trading of emissions permits. This public discussion draft includes the preliminary conclusions reached on these issues. It discusses the extent to which different Articles of the Model Tax Convention could apply to profits or gains arising from such trading. The CFA invites interested parties to send their comments on this discussion draft before 30 October 2011.
Read more about making a submission on the OECD website.
Download the discussion paper.
Cut the deficit? Go after tax breaks. Yeah, tax breaks
Donald Marron, Tax Policy Center, 24 MAY 2011
Here's a shocker: America can cut government spending by eliminating tax breaks.
I know that sounds crazy. Everyone usually talks as if spending and tax breaks are distinct. Spending is what the government gives out or uses for purchases; tax breaks reduce how much revenue it collects.
Reality, however, is a lot blurrier. Hundreds of billions of dollars of spending are disguised as tax cuts.
It's not hard to see why. Voters like tax cuts more than spending increases. Politicians understand that, so they convert spending into tax breaks.
The ethanol tax credit is a perfect example. Fuel producers qualify for a 45-cent tax credit for each gallon of ethanol they blend into gasoline. Blenders calculate their income taxes like other businesses, then deduct the value of the credit before they send their check to the Internal Revenue Service (IRS).
The ethanol subsidy thus looks like a tax cut, but it's really government spending in disguise. The Department of Energy could accomplish the same thing by sending out subsidy checks. The same is true for dozens of other tax provisions, such as the business credit for research and development and personal tax breaks for mortgage interest, health insurance, and charitable giving.
Politicians act as if those provisions are tax cuts. That seems plausible. Businesses and families send less money to the IRS because of them.
But think about it. These tax breaks don't let you keep your money. They pay you for doing what government wants, whether that's taking out a mortgage, giving to charity, or investing in R&D. What you pay the IRS equals the taxes you owe minus the payments for which you've qualified. Those payments are no different from spending; they just happen to be netted against your tax bill.
That doesn't mean all tax preferences are bad policy. Some support important goals, and the tax system is sometimes the best way to administer a program. The income tax, for example, provides a natural structure for benefits like the earned income tax credit that should vary with income.
It does mean, however, that these provisions should get the same scrutiny as traditional spending programs. Social Security, health care, defense, and domestic spending must all go under the budget knife if we want to avoid unsustainable debts. The middle-class entitlements, business incentives, and social programs embedded in the tax code shouldn't escape that surgery just because they're designed as tax breaks.
That's why many budget hawks believe that cutting these preferences is essential to deficit reduction. The president's fiscal commission, for example, proposed dramatic cuts to "spendinglike" tax preferences as a way to reduce future deficits while lowering – not raising – income tax rates.
That approach has great merit, but has not yet been universally embraced. When Sen. Tom Coburn, a conservative Republican and budget hawk from Oklahoma, recently introduced legislation to eliminate the ethanol tax credit, he drew fierce opposition from some advocacy groups that favor lower taxes. Both Senator Coburn and the advocates favor smaller government. Where they differ is that Coburn recognizes that spending can hide in the tax code.
Trimming tax preferences won't be painless – many businesses and families would send more to the IRS. But the result would be a fairer, more honest tax code and a broader, more solid base of revenue to pay for government services.
Let consumers carry the can on carbon
Tim Colebatch, The Age, 24 May 2011
Labor is losing the carbon tax debate. It is pressing on, hoping that once the tax is in place, the fearmongering will die away, and Australians will accept it reluctantly, as they accepted the GST. They might. But it is equally likely that the Coalition will keep riding the issue, win the 2013 election, dismantle the tax, and we will end up much worse off than we started.
Is there a better solution? Yes. What matters most - for anyone who wants to see Australia and the world take effective action to stop climate change - is not to press on regardless, but to stop right now and ask if there is a politically more acceptable way to achieve that goal. And there is an alternative: not perfect, but politically more acceptable, in Australia and in other countries - such as the United States and China - that have been cowed by the same problems and refused to put a price on their carbon.
Labor plans to tax carbon emissions produced in Australia, following the model set by Europe. But its task would be easier if it were to tax carbon emissions on products consumed in Australia, wherever they were produced. This would make its carbon tax easier to sell here. But more: it would make it easier for any country to put a price on carbon - because this gives them a model that does not disadvantage local producers.
It is global action, not Australian action, that will decide if carbon emissions stop heating the world. Globally, taxing production of carbon emissions has proved too hard for key countries. But if we tax consumption of them instead, it could unlock the door to global action. Why? Look at what is happening in the debate here.
Labor is losing the debate for many reasons. But a key one is that it has to fight on too many fronts. Most Australians want action on climate change, but don't want it to make them worse off. Their wishes could be met, but only if the money raised by a carbon tax is returned to households by cutting taxes and raising welfare payments - as happened with the GST. But companies exposed to global competition are also fighting a plan that would tax them but spare their overseas rivals. A carbon tax would threaten key industries that Australia will need once global supply of minerals expands, and prices go back to normal.
The government plans to compensate industries it sees as ''internationally exposed''. But it can't compensate industry and fully compensate households. And last time, its list of industries was arbitrary, leaving out many that would lose from a tax on domestic producers only.
Bluescope Steel, rated in the top third of global steel makers for carbon efficiency, estimates that in year one it faces a tax of up to $39 million, while its Asian competitors go tax-free. A study by PricewaterhouseCoopers for the Federal Chamber of Automotive Industries concludes that the Australian car industry could pay between $30 million and $84 million a year, up to $412 per vehicle. That shouldn't worry us if all car makers faced the same tax - but they won't. In Labor's model, only Australian car makers would pay the tax. Tell me, what is the benefit of that?
Geoff Carmody sees no sense in it. A respected economist who left Treasury in 1990 to co-found Access Economics, he argues that, rather than follow Europe in taxing producers of carbon emissions, we should set the world an alternative model by taxing consumption of them. How does that make a difference? Carmody put it very simply in a recent interview on ABC radio's Late Night Live: ''A production tax hits all our exports, and none of our imports. A consumption tax hits all our imports, and none of our exports.''
In practical terms, that means there is no need for any compensation of industry: none at all. All of them would be facing the same taxes as their overseas competitors. The whole issue of unfair burdens on business would disappear, and all the revenue from carbon tax could be divided between compensating households and investing in renewable energy.
There are two problems with the Carmody model. First, any estimate of the carbon content of an imported product will inevitably be arbitrary, approximate and bureaucratic. How much carbon is there in a frying pan from China, a ream of paper from Indonesia, a car from Korea, or a machine tool from Germany? Australia would be the first mover on this form of carbon tax, so we would have to work it all out, for every product. That would take time and money, to deliver rough justice.
Second, it gives no advantage to more carbon-efficient producers. There's no incentive for producers to reduce carbon use, because for simplicity, all frying pans and paper reams would be taxed the same. In the long term, when the whole world uses carbon pricing, the Carmody model should give way to emissions trading or a global carbon tax.
But it makes a global carbon deal more likely. The governments of the US, China, Russia, Japan and the rest have put off carbon pricing because they fear it would disadvantage local producers. If Australia, one of the largest emitters of greenhouse gases, adopts a model that is politically acceptable, it would open an easier path for them.
Three years ago, I thought the flaws in the Carmody model outweighed its strengths. Now, with key countries hanging back from carbon action, no global deal likely, and the high dollar forcing Australian industries to the wall, it seems to me the best option. It could give us a carbon tax that works - and the world, a way to break the impasse.
Time to dump expensive GST
Colin Hargreaves, Australian Financial Review, 23 May 2011
The Australian Taxation Office has revealed that collecting the GST has proven to be approximately 75 per cent more costly when taken as a whole compared to other taxes. The revelation signals how little debate occurs regarding the costs associated with tax in Australia and is further proved by the small mention it rated in the Henry tax review. The form of tax that has proven to be the most administratively friendly and significant both in the European Union and Australia has been PAYG on individual income. One major reason behind the added cost of collecting the GST is the low rate it employs with only three countries associated with the Organisation for Economic Co-operation and Development (OECD) using a rate which is less. Even the carbon tax would be more workable if it was paid at source. Despite Wayne Swan rejecting a financial transaction tax it is being considered by the OECD.
Read the full article on the AFR website, available via a subscription.
Family trusts in the frame over loopholes
Annette Sampson, Sydney Morning Herald, 21 May 2011
The recent budget crackdown on trust distributions to minors may have suggested the government had tax minimisation through trusts in its sights but it has merely closed down one of the more blatant loopholes in the system. The more tricky problems, such as how to align the archaic trust laws with modern tax laws and the need for taxpayer equity, will present a much bigger headache and the wrangling over how that will be done is just starting.
For those who don't spend their time swotting up on tax vehicles, a trust is simply a structure through which individuals (or other entities such as companies) can hold assets. In its simplest form, Joe and Mary Bloggs might set up their dry-cleaning business through a family trust so that, in time, their children can take over the business without the need for a change of ownership.
Each year, the trust receives income from the business and distributes this income to Joe and Mary, who pay tax on it at their marginal rates. A trustee runs the trust and determines how much income Joe and Mary receive each year. Penalty tax rates apply if the trust does not distribute all its income to its beneficiaries.
So far, so good. But where trusts have an advantage over other structures - such as companies or owning the assets directly - is that most trusts are discretionary, which means the trustee is able to vary who gets the income and any other trust benefits from year to year. In one year, the income may go entirely to Mary; in the next, it may be split evenly. This is often used to direct income to the beneficiary who will pay the least tax on it.
While this ability certainly isn't available to people without trusts (imagine the Tax Office's response if you decided to give your non-working partner some of your salary for tax purposes), there's no suggestion the government wants to change that. But what it did do in the budget is limit the income that can be distributed to children each year before they pay tax.
The measure, which will also affect investments held directly by children, will stop minors from being able to receive the low-income tax offset on unearned income - such as interest, dividends, rent, royalties and trust distributions - from July 1. Currently, the $1500 offset allows children to receive up to $3333 from such sources before paying tax. The new rules will limit them to $416.
Exemptions will apply to the unearned income of orphans, disabled children and where the income is earned from compensation or inheritances. It is clearly intended to target income-splitting, where investments are put into the child's name to reduce tax or paid to the child from a trust for the same reason.
While there are inevitable critics, many people admit closing off this loophole is fair enough. Under the current arrangements, Joe and Mary are even able to direct income from their dry-cleaning business to their three- and five-year-olds to save on tax. That's clearly not what the low-income tax offset was intended for. But that's as far as the ''crackdown'' goes. On another front, the government is actually acting to consolidate the tax advantages of trusts through proposed measures on trust ''streaming''.
Trusts, like the rest of us, don't receive just one sort of income. Depending on the assets held within the trust, the income can include things like capital gains and franked dividends. Streaming enables the trustee to direct specific types of income to particular beneficiaries. The national tax director of Crowe Horwath, Tristan Webb, uses the example of a family trust that receives franked dividends. Two of the three beneficiaries are living overseas and can't use the franking credits. Therefore the trustee could distribute all the franking credits to the resident beneficiary.
Streaming came under attack from two court decisions which, to oversimplify things greatly, held that trust income should be proportionate. That is, if a beneficiary was entitled to one-third of the trust's income, he or she should receive one-third of any capital gains, franking credits and so on. The problem, according to the tax experts, is that these court decisions set up a conflict between trust law (which goes right back to British common law) and modern tax law. As well as streaming, problems also arise because of differences in the accounting and tax income of trusts, which can lead to beneficiaries being assessed on income they have not received.
The current proposals are intended as a quick fix for these problems. But over the next year, a working group will be trying to find a way to reconcile the differences between trust law and the modern tax system. Trying to make any changes to trusts is a complex and politically dangerous path. Just ask Opposition Treasury spokesman Joe Hockey, who was quickly slapped down earlier this year for reviving the suggestion of taxing trusts as companies.
A tax counsel for the Institute of Chartered Accountants, Yasser El-Ansary, says the bigger debate is whether there are other, more modern, structures that could be used to deliver the flexibility and legal protection of trusts without the complexity. Models overseas (where trusts are not widely used) include forms of limited liability companies and ''flow-through'' entities, where tax is paid by the underlying beneficiaries.
The government's challenge will be to tread the fine line between maintaining the legitimate benefits of trusts while stamping out their abuse. Cracking down on tax-free income to minors was the easiest step in that process.
Treasury against online GST deal
Clancy Yeates, Sydney Morning Herald, 21 May 2011
TOP economic advisers have warned the government against trying to shield retailers from foreign online competition amid suggestions local shops might not have passed on the full savings of a high dollar.
Internal documents released last night under freedom-of-information legislation show Treasury has urged the government to be sceptical of retailers' calls for the goods and services tax to be imposed on all imports. Overseas purchases of less than $1000 are exempt from GST, but retail giants such as Myer and Harvey Norman are lobbying for the threshold to be removed.
A November brief told the Treasurer, Wayne Swan, that retailers' main problem was not the GST but the high dollar making overseas purchases more attractive. Trying to protect domestic businesses could spark inflation, which might lead to higher interest rates, it said. ''The fact that a high exchange rate shifts spending from domestic to foreign sources, and increases [foreign] competitive pressure on business … is an integral part of its role in dampening inflationary pressures,'' it said.
The brief also said: ''It has been suggested that local retailers have not generally passed through the price benefit to local consumers, and have instead taken the opportunity to increase margins.''
In response to retailers' claims the GST change would create a ''level playing field'', Treasury said removing the threshold would impose ''significant costs'' on importers who had to collect it.
The FOI documents reveal several meetings between ministers and retail lobbyists. The assistant Treasurer, Bill Shorten, met the head of Premier Investments, Solomon Lew. Treasury has provided the government with undisclosed options for dealing with the GST issue and the government has initiated a Productivity Commission inquiry.
View the documents released under F-O-I on the Treasury website.
Turn carbon price into a GST with tax cuts
Arthur Sinodinos, The Australian, 19 May 2011
Tony Abbott has established his ascendancy in the polls by sticking to a few clear messages. He is addressing matters that are salient to voters. The government does itself a disservice to dismiss this as mere sloganeering. To the punters, that comes across as a government that is not listening.
...Overshadowed by a broken election promise and lack of detail, selling the carbon tax has become virtually impossible. Abbott is happy to fill in the scarifying detail.
Gillard will be hoping the release of her compensation package next month will mollify the punters. She should apologise for breaking her promise and redesign the policy, embedding it in more coherent tax reform.
Because it is designed to tax a negative externality -- carbon pollution -- the carbon tax is not analogous to a broad-based indirect tax such as the GST, which raises general revenue. However, unlike sector or industry-specific taxes on externalities, the carbon tax is all-pervasive and economy wide in its effects.
It most resembles that ramshackle indirect tax system that preceded the GST. Indirect taxes fall on production and, by cascading through the supply chain, result in magnified price effects at the retail consumer level. One of the advantages of the GST is that it avoids such distorting effects on production and prices. The structure of the GST means the tax is rebated at every link in the supply chain and consumers face a price rise of 10 per cent or less, depending on the taxes being replaced.
Purists will argue a carbon tax sends the right relative price signal to replace carbon-intensive energy sources with more greenhouse gas friendly ones. True, but on the evidence to date a carbon price of $40 to $60 or more is required to do that. The government is contemplating $20 to $25, which is enough to raise substantial revenue but will not induce significant switching of energy sources.
Geoff Carmody, a founder of Access Economics, has long argued the carbon tax should be replaced by a national consumption tax on emissions. Given the difficulty of tracing carbon in final goods and services, a rough and ready approach would be to raise the GST by the required amount and hypothecate that to measures to reduce emissions, including development of new technologies. It could fund direct action and match Abbott in this area.
Imports would be taxed on the same basis as domestic industries. Exports would be zero-rated, removing the need for costly assistance to exporters. The cost of living would increase as it did with the GST. But as with the GST, compensation could be in the form of reduced income tax and other measures to improve the tax-transfer system.
The tax summit slated for October might need to be put off to accommodate this tax work. The states would need to agree to raise the rate of the GST, which might be purchased by offering to fund the abolition of distorting state transaction taxes. A thorough reform would include payroll tax -- a poor man's GST -- which is riddled with inconsistencies.
Abbott has vowed to repeal the carbon and mining taxes if elected. The government is licking its lips at the prospect of wedging him. The mining revenue is baked into the budget. It improves the bottom line and underpins lowering the company tax rate. It also eases pressure on small business, required to raise the superannuation guarantee charge to 12 per cent.
Unfortunately for the government, the mining tax is unlikely to pass before the new Senate takes effect from July 1. The Greens, holding the balance of power, may already be threatening to carve up the mining tax if the government does not agree to their demands on the carbon tax. Gillard should take Ross Garnaut's advice and put off the mining tax until the fate of the carbon tax is determined. Otherwise the mining industry faces a double whammy.
Gillard should also review the surplus target set for 2012-13 of $3.5 billion, slender enough to be wiped out by changes in economic parameters. A more prudent target would be 1 per cent of gross domestic product. The mid-year economic and fiscal outlook could incorporate this change and a revised tax package. This would give the government new ground to fight on and shift the agenda. It also would give the Reserve Bank greater confidence in fiscal policy settings and reduce pressure on prices and interest rates.
Commentators who dismiss achieving a surplus in 2012-13 are wrong. In today's volatile world, having a reasonable budget balance is good insurance.
Henry hits road as review comes to pass
Peter Martin, Sydney Morning Herald, 18 May 2011
Ken Henry had a good budget. The wombat-loving bureaucrat turned nomad spent some of that week at the Sydney caravan and camping show, his thoughts road miles away from the process that used to consume him. In his Treasury office, amid half-packed cardboard boxes as he was preparing to leave, he told me he didn't know what he would do with the rest of his life. At 53, he had never not had another job to move to.
It was a good budget because it confirmed that the painstaking work he and his colleagues had put in on the Henry tax review was not wasted. He had never expected his recommendations to pass into law from day one.
Australia's only previous broad tax review, conducted by Kenneth Asprey as the Whitlam government was falling apart in 1975, did not have all of its big recommendations written into law until the end of that century - a generation later. The then treasurer, Paul Keating, won the battle for fringe benefits tax and capital gains tax in 1985. John Howard and Peter Costello gave us a goods and services tax in 2000 - 25 years after Asprey lit the way. Asprey won because ideas once committed to paper become powerful. They lie on the shelf, waiting to be picked up.
John Maynard Keynes famously observed that ''practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist''. They are the slaves of long-dead economists because economics is not their specialty. When looking for ideas they are forced to reach out for ones already on the shelf.
Wayne Swan did it again in this year's budget. One year on from adopting Henry's recommendations for a mining tax and a lower company tax rate, he breathed life into a further 12 of Henry's recommendations dealing with the design of the fringe benefits tax, the anachronistic tax offsets for dependent spouses and defining what is and what is not a charity. Sure, he could have done more. But at this rate Henry will not have to wait a generation to see his package come to pass. He certainly will not have to wait until he is dead.
The October tax summit will not make decisions that will be implemented straightaway. It will do something more important: refine ideas and test Henry's package in a way that will add to a sense of inevitability.
Henry's biggest recommendation, his first, has become the template for future changes. Most taxes - the small ones - should not exist unless they improve social outcomes or market efficiency through price signals. While naturally reluctant to give away income, state governments are already using this to guide their general thinking. Henry wanted most of what was raised to come from four broad simple taxes without exemptions: on personal income; business income; rents for the use of land or resources; private consumption.
His second recommendation has already been claimed as an aspiration by the government and the Coalition. He wants personal income tax to be progressive, but not as a result of using the stepped system of different rates we have now. All personal earners would pay no tax on their first, say, $25,000 of income after which they would face a flat 35 per cent rate until, say, $180,000. Tony Abbott gave a nod to it during his election policy launch. Swan has talked about it since.
Philosophically, tax should be paid by individuals rather than by couples as has become the creeping trend over recent decades. Labor took a step back towards individual tax in the budget by moving to end the dependent spouse tax offset. Swan is hastening slowly, but listening. The only exception is Labor's blind spot, superannuation. He has already moved towards taxing income from savings more lightly and has moved towards cutting company tax to 25 per cent. And he has taxed mining. Whatever the Opposition says, it is safe to guess it will let the measure stand. That Henry has not won every battle - yet - should not worry him. He will win well before he ends his love affair with the great open road.
Property-based tax replaces Vic fire levy
Michelle Draper, Sydney Morning Herald, 14 May 2011
All Victorian property owners will contribute to funding the state's fire services under a new tax from next year.But exactly how much each owner will pay is yet to be determined by the government, although concessions are likely to be available to people on low incomes.
Victorian Deputy Premier Peter Ryan announced on Saturday a new property-based tax would replace the current Fire Services Levy from July 1, 2012. Currently, the fire service levy is charged on insurance holders' premiums, funding the Country Fire Authority (CFA) and Metropolitan Fire Brigade (MFB) to the tune of almost $600 million a year.
Mr Ryan said the new levy would be phased in over one year, allowing a transition from the insurance-based tax. The new tax will be fully implemented by June 30, 2013, he said. Mr Ryan said the current levy was an unfair tax, particularly for people living in regional and rural Victoria.
"The unfairness of it is highlighted by the fact that it's only those who choose to insure who actually pay the fire services levy," he told reporters at the Victorian Nationals state conference. Those who do not insure at the moment ... still expect that the fire truck is going to turn up."
The government will next month release proposals for key aspects of the new levy including its structure, concession eligibility and methods to phase out the insurance-based model. The Victorian Bushfires Royal Commission recommended a new fire services tax be paid by all Victorian home owners to fund the state's firefighting effort.
Treasurer Kim Wells told a Public Accounts and Estimates Committee hearing on May 6 that the new levy would not impact on the budget bottom line. Mr Ryan also announced that $40 million toward Victorian flood relief outlined in the recent state budget would be split between local government and the small business sector.
About $30 million would be provided to local council to upgrade parks, walkways and sporting grounds while $10 million would assist small businesses to establish or expand in flood-affected regions.
Comment: Fringe benefits tax
Toby Hagon, Sydney Morning Herald, 14 May 2011
It's not often our on-a-knife-edge federal government does something sensible when it comes to drivers and the automotive industry (green car "innovation" fund, anyone?) but the move to simplify fringe benefits tax charges for those leasing a car is a step in the right direction. It takes away the incentive to drive further than you otherwise would have to ensure your tax rate is lower.
As well as obvious environmental benefits, there is the potential to reduce congestion, although it's unlikely to make much of a dent on the peak-hour grind. Plus, it's not going to change our roads overnight. Those already on a lease will be able to see it out under the old tax rates, meaning there are still plenty of drivers looking for excuses to rack up kilometres to keep the tax man happy.
Sure, I can understand those who do travel longer distances for work may be miffed at having to pay more tax but in some small way it may encourage them to choose a more fuel-efficient vehicle to offset the hike.
As a broader measure, though, we're heading in the right direction. What next? Maybe the government could do something radical, such as offering the occasional incentive to drive a fuel-efficient car. Or ditch the ludicrous luxury-car tax.
Builders slam tax crackdown
Ben Schneiders, Sydney Morning Herald, 12 May 2011
A LARGE-SCALE crackdown on tax avoidance by contractors in the building industry has been attacked by employer groups who have accused the Gillard government of using it to back a union campaign.
Assistant Treasurer Bill Shorten said some contractors in the industry appeared to be either unaware of their tax obligations or deliberately under-reporting their tax.
The budget papers show the crackdown, which takes effect from July 2012 and increases over the coming years, would raise nearly $300 million in 2014-15. It would reap $513 million over four years.
Mr Shorten said some businesses would be required to report annually on payments made to contractors in the building industry including the contractor's ABN. The data would then be cross-matched.
There are estimated to be about 330,000 contractors in the construction industry and there is an Australian Building and Construction Commission inquiry under way into the extent of ''sham contracting''. The Construction, Forestry, Mining and Energy Union has been separately campaigning against the abuse of contracting in the industry and how it affects wages and conditions.
Master Builders Australia chief executive Wilhelm Harnisch said the changes would ''impose an additional red tape burden'' on contractors and raised fears that it was really about attacking the legitimacy of contracting in the industry. ''Builders are also fearful that commercially confidential information will be accessed by building unions as part of their industrial and wage bargaining campaigns.''
CFMEU construction national assistant secretary Frank O'Grady attacked the master builders for ''imagining a union agenda'' in what he said was a measure recommended by the Board of Taxation. ''The MBA should explain to their own members who employ building workers why they are supporting other companies who undercut them by engaging in tax avoidance through sham contracting arrangements.''
Independent Contractors of Australia executive director Ken Phillips claimed the Gillard government was ''moving to destroy independent contractors''.
Progress on subsidies, but federal budget falls short on environment
Australian Conservation Foundation, Media Release, 10 May 2011
The federal budget has begun the important job of cutting subsidies that encourage fossil fuel use, but the money allocated to protect and restore our natural environment is inadequate to stop its continued decline, the Australian Conservation Foundation said.
"The reform of the Fringe Benefits Tax (FBT) subsidy saves the budget money and curbs greenhouse pollution from company cars, but the missed opportunity to adequately fund the protection and restoration of our natural environment will prove costly to all Australians in the future," said ACF CEO Don Henry. "The Budget is steady-as-she-goes on the environment, right at a time when we need to redouble our investment in protecting and restoring our precious natural environment."
We set three key tests for the 2011 federal budget - here's how it performed:
TEST 1: Reform and restructure tax incentives that encourage greenhouse pollution
ACF commends the Federal Government for reforming the Fringe Benefits Tax concession so it doesn’t reward excessive driving of company cars and pollution.
The government should now turn its attention to other subsidies that promote pollution and wasteful consumption, like the Fuel Tax Credits scheme, which costs Australian taxpayers $5bn a year, around $1.7bn of which goes to big mining companies.
Every household in Australia is contributing about $200 a year so companies like BHP Billiton and Rio Tinto don’t have to pay a single cent in tax for the diesel they use in their off-road mining operations. This subsidises pollution and must change.
TEST 2: Invest in environment protection and restoration
Major national environment programs, such as Caring for our Country, remain static at a time when a major injection of funding is needed to stem Australia’s environmental decline. Continuing the Environmental Stewardship Program ($84 m) and the establishment of a National Wildlife Corridors Plan ($10m) are steps in the right direction.
The allocation of $300,000 in 2011–12 to support a resolution to the Tasmanian forest conflict is inadequate. We urge the government to find the funds necessary to help close this historic deal and implement the principles being negotiated by environment groups, unions and the forestry industry.
The additional $9.7m to help continue the a network of regional marine planning program falls well short of the $350m needed to meet our international responsibilities to protect the oceans around our coastline.
TEST 3: Invest in the clean economy
The $10m to develop Australia’s sustainability indicators and the $29m over three years for strategic assessments in areas of high population growth are important previews to the coming sustainable population policy.
The election commitment to establish an Emerging Renewables fund has been increased from $40m to $100m, however the Connecting Renewables program (of $1bn over 10 years) remains a pipe dream of the future with only $1.4m over the forward estimates.
Disappointingly, tax breaks for green buildings have been deferred and the National Solar Schools program has been cut by $156m. Major reforms urgently required for Australia’s economy are a price on pollution and a big boost to investment in renewable energy and energy efficiency.
Tax breaks to attract infrastructure investors
Louise Dodson, Australian Financial Review, 6 May 2011
The federal budget is expected to introduce tax incentives designed to encourage private sector investment into government infrastructure projects. Deductions for tax losses from long-term infrastructure projects, an issue raised by Infrastructure Partnerships Australia and the Institute of Chartered Accountants in their Henry tax review, are being considered. This could be done through a reimbursement of early stage tax losses from the Australian Taxation Office. Infrastructure Australia is also set to receive additional funding. However, the opposition’s proposed infrastructure bonds, may not be included. Recently, Opposition Leader Tony Abbott said the Coalition wanted the Australian Office of Financial Management to consider infrastructure bonds.
Read the full article on the AFR website, available via a subscription.
Serious threats to tax revenue
Australian Financial Review, 5 May 2011
The Australian Taxation Office’s Project Wickenby tax probe has rightly shown that offshore tax havens represent a real risk to the taxation system. The announcement that 500 more audits will occur and the levelling of criminal charges against some high profile Australians have shown it is a real problem, although perhaps not as large as elsewhere in the world. The government will need to decide whether to extend funding for the taskforce beyond 2013 or to embrace the new global defensive measures’ against tax havens.
Read the full article on the AFR website, available via a subscription.
Behind stamp duty cut is a sting in the tail for property sector
Simon Johanson, The Age, 5 May2011
Buried in Baillieu's budget papers was a sting in the tail for the property sector. The large fall in stamp duty revenue that is expected to punch a $135 million hole in the state's finances next financial year will be clawed back by a crackdown on ''rich land duties'' targeting companies and trusts.
In an attempt to lighten the property revenue blow, the status of Victorian companies and unit trusts currently not seen as ''land rich'' because their property holdings represent less than 60 per cent of their total assets will change for stamp duty purposes from July next year.
While the threshold value has not been finalised - in NSW it's set at $2 million land value - the clampdown is likely to result in more share and unit transfers being subject to stamp duty, generating up to $203 million in the next three years. It's an easy way for the government to make up property revenue shortfall.
Stamp duty is expected to drop by 3.5 per cent next financial year to $3.7 billion, the result of fewer people buying homes in a sluggish property market. Overall, property taxes account for more than a third of Victoria's tax income, contributing nearly $5.6 billion to the state's coffers last financial year. And it's not the only property related shortfall the budget will generate.
Treasurer Kim Wells was firmly focused on delivering November's election promises to cut stamp duty for first home buyers, pensioners and young farmers.
Critics such as Grattan Institute economist Saul Eslake have long expressed the view that giving cash to would-be home buyers in the belief that it does something positive for home ownership is one of the longest running policy failures in Australia's history. But that didn't stop Wells handing out the $400 million stamp duty largesse.
From July, struggling first home buyers will get a 20 per cent cut, with further cuts up to 50 per cent phased in by September 2014. In the first year, this will put $3274 into the average buyer's pocket spending $400,000 on their first home.
Farmers younger than 35 buying their first property will also be exempt from stamp duty for land valued up to $300,000, with further concessions above that, up to a ceiling of $400,000. And pensioners and concession card holders are set to benefit too. They will get full stamp duty relief on property up to $330,000, and partial relief on dwellings up to $750,000.
Ever mindful of the sensitivity towards property prices in Australia's mortgage-belt suburbs, Baillieu has followed Brumby's footsteps to placate struggling home buyers. The First Home Owners Boost - which puts up to $26,000 in home buyers' pockets depending on their circumstances - will also be extended until June next year at a cost of $95 million. Whether the measures are enough to stimulate the almost-dormant first home buyer demand in today's real estate market - FOB numbers dropped by a third after November's rate rise - is the big unanswered question.
Not surprisingly, industry groups welcomed the cuts. ''The commitment to help first home buying farmers will be welcomed in regional areas,'' REIV chief executive Enzo Raimondo said, and Master Builders Association director Brian Welch said the cuts would reduce barriers for first home buyers. "Victorians currently pay the highest rate of stamp duty in Australia,'' he said.
Sanguine Treasury officials are not particularly concerned about the increasing uncertainty facing the property market or the potential dent it may put in their bottom line. ''The combination of interest rate rises beginning in the second half of 2009, an easing in first home owner demand and concerns about affordability are expected to depress volumes,'' the budget papers say. ''However, the cooling property market is offset partly by an upturn in the commercial and industrial property sectors.''
Despite yesterday's pick up in home sales, most commentators believe the housing and residential construction sector will be slow for some time to come even with continued population growth. Housing finance - a good indicator of future home sales - has come off the boil, and property prices had their biggest quarterly fall in years over the March quarter.
It may be the Treasurer had more on his mind than concerns about productivity across the state when he said: ''It is totally unrealistic to rely on population growth to underpin economic growth.''
Download the Victorian budget papers from the Victorian Government website.
Government coffers to be bolstered by 100,000 additional fines
Ashley Gardiner, Herald Sun, 4 May 2011
Government coffers will be swelled by up to 100,000 additional fines expected to be dished out over the next year. And though Ted Baillieu's Coalition was a critic of the previous Labor government's attachment to speed camera revenue, there's no sign this is about to change.
There's also no move to wind back Labor's congestion levy - a tax on inner city car parks - which the Coalition had condemned when it was in opposition. In 2008, Liberal MP David Davis said it was a "massive tax slug, pure and simple".
Despite a review into the state's speed camera system, it's expected cameras will generate an extra $14 million in revenue during 2011-12. But the biggest growth will be seen in fines for toll evasion, which will soar by 7.5 per cent and deliver $110 million to the State Government.
Overall, the Government will rake in $24 million extra in fines, bringing in a total of $545 million over the coming year. Fines revenue, which raised just $137 million in 1999-2000, has soared over the past decade. Treasury officials said this was mainly because of automatic rises in fines in line with the Consumer Price Index.
"Traffic camera and on-the-spot fines are expected to increase in line with the impact of indexation and increased patronage," the officials said.
The congestion levy, or car park tax, was expected to raise $49.8 million during 2011-12, or $1.4 million more than in the current year. That tax is currently set at $880 a year per parking space, or $400 for a defined area outside the city.
Officials said the amount raked in by the congestion levy would rise in line with inflation. But they said the lower $400 levy, in place in parts of Port Melbourne and Southbank, was under question as part of a wider review into parking.
There was no indication that the levy would be lifted.
NT budget taxes rich, subsidises poor
Larine Statham, Sydney Morning Herald, 3 May 2011
The minority Northern Territory government denies its record-breaking budget plan for 2011/2012 was developed solely with an eye to the next election. Touted as the Robin Hood budget, the fiscal plan is the NT's largest ever at $5.3 billion. So is the projected deficit of $387 million. Education, health, child protection, emergency services and infrastructure will all receive record outlays in the budget handed down on Tuesday.
NT Treasurer Delia Lawrie also announced a range of subsidies and tax measures to create employment and help families enter the property market. Among them, the payroll tax rate will be cut from 5.9 to 5.5 per cent as of July 1, while stamp duty will be raised for top-tier property transactions.
"Budget 2011 continues to deliver the most generous concessions and subsidies in the nation," she said. Ms Lawrie denied the blueprint was an "election budget". "There are no pork-barrelling announcements in here. This is a tight budget," she told reporters. "We are sticking to delivering on election commitments. We are sticking to that critical infrastructure spend to support jobs and drive economic growth ahead of major (private-sector) projects. There are no bells and whistles in this budget."
NT Country Liberal (CLP) opposition leader Terry Mills, whose party will face the NT government at an election on August 25 next year, said it was a "budget of deficit, debt and deceit". "This deceitful government has only next year's election in mind," he said. "We have a $400 million increase in borrowings just for this year, just to make them look good up until the next Territory election," he told reporters. He criticised Ms Lawrie for failing to indicate how she intended to return the budget to surplus.
Ms Lawrie said the NT's general government net debt-to-revenue ratio would be 32 per cent in 2011/12, making the deficit "absolutely manageable". "Our ability to manage deficit and debt is absolutely sustainable. Compare that to the 61 per cent net debt-to-revenue ratio we inherited from the CLP in 2001. It would have been irresponsible to step into surplus when the private-sector investment has yet to return as a result of the global financial crisis (GFC)."
Ms Lawrie blamed the "tight budget" in part on a $200 million shortfall in GST revenue from the level forecast before the GFC. But GST, which accounts for 57 per cent of the NT's revenue, will rise from $2.48 billion in 2010/11 to $2.65 billion in 2011/12. "We're behind the eight ball when you look at where we would have been in GST receipts," she said.
Ms Lawrie said she would not be apologising for taking the budget further into deficit. "You have a responsibility to deliver (promises to your voting public), even if the prevailing budget position alters, but you tighten up in areas where you can and should."
While taxes for "the bread and butter fuellers of the economy" were reduced, wealthy property owners were hit with a stamp duty increase of 0.50 per cent for the transfer of residential and commercial properties worth more than $3 million. The stamp-duty measure is projected to save about $2.3 million in 2011/12.
In a bid to save $81.5 million over two years, the government has tightened the public service's belt, applying a three per cent efficiency dividend to all government agencies. The newly created department of Children and Families will be exempt from a two-year public service staffing cap that was announced last year.
Mr Mills, who last year failed to outline where his party would make savings if they were in government, said the government was making hard-working public servants suffer to make up for Labor's economic management failures. He said the government should scrap its plan to build a new prison, for which $27 million in headworks has been allocated in this budget. Mr Mills will deliver his budget reply speech in the NT parliament on Wednesday.
Download the Northertn Territory budget from the Northern Terrirtory Government website.
Chewing the fat on taxes
Michael Baker, Sydney Morning Herald, 27 April 2011
Former Louisiana senator Russell Long used to sum up the public's attitude towards taxes with the following quote: “Don't tax you, don't tax me, tax that man behind the tree". It means we all know taxes are necessary but believe it's the other, invisible guy behind the tree who should bear the burden. Another taxation formula has long been taught in Economics 101, and is becoming increasingly popular because it seems to work and seems to be fair – it involves taxing social “bads” in order to move people away from bad behaviour towards “good” behaviour.
Theoretically, when the tax is applied properly it should result in people who perpetrate certain behaviours coughing up the cost to society of those behaviours. This also usually results in their exhibiting the bad behaviours less frequently. Thus, cigarette taxes reduce cigarette consumption, liquor taxes moderate booze consumption, sulphur taxes reduce emissions from power plants, petrol taxes reduce tailpipe pollution, and congestion taxes reduce driving at peak hours. Lately, carbon taxes have been placed on the public policy agenda.
What's next?
Fat taxes, or taxes on junk food aimed at reducing people's intake of too many “bad” calories are becoming a genuine contender. This is an idea that has waxed and waned over the years, but recent political developments have elevated it to an unusually high profile. It is slowly but surely gaining traction as a genuine policy alternative.
Franchisees of fast food chains, independent burger flippers and purveyors of fine pies and fries should be on notice. In Australia, state governments are already following the lead of countries overseas and implementing schemes to make fast food chains post nutritional information on their restaurant menus.
Now, with the newly launched Australian National Preventive Health Agency, things are moving up a notch. The agency has been charged with providing policy advice to the government on obesity prevention. Taxing unhealthy foods is one of the cutting-edge tools on its fat-fighting agenda.
One factor accelerating moves worldwide towards fat taxes is a growing body of evidence that suggests such taxes are far more effective at changing behaviour than simply telling people that too much junk food is going to get them an earlier appointment with the heart surgeon.
Another new study adding fuel to the fat-tax fire has now been published by a research team at Maastricht University in the Netherlands. The study involved 178 US college students and found that the students chose fewer calories as the taxes were raised on calorie-rich foods.
The Netherlands' neighbour, Denmark, already has a fat tax and the Danish Heart Foundation claims that obesity is now falling among its youngsters.
Support for fat taxes also gets stronger as evidence mounts that just putting information about the nutritional content of food on menus doesn't do the job of deterring people from eating less of the high-calorie stuff. Surveys suggest that when people go out to eat they are looking for food that tastes good, with healthiness a secondary consideration.
But fat taxes have many people feeling queasy. A vocal alliance of naysayers including anti-tax and libertarian types is busying itself to squash the idea. Others simply see it as another example of a nanny state. Small businesses won't be impressed with being forced into the role of fat-tax collector just as they were with the GST.
Yet the economic cost to society of obesity is phenomenal. According to recent estimates the cost to Australia is more than $58 billion annually, while the cost to the US is US$147 billion. In these circumstances it's hard to justify forcing the non-obese to cross-subsidise the obese by paying for their coronary bypasses through higher income taxes.
As command-and-control types of regulation fall out of fashion because they are intrusive and heavy-handed, exerting pressure on the pocketbook represents a more subtle approach to changing behaviour. A fat tax may leave a bad taste in the mouths of some, but to others it's just what the doctor ordered.
Henry full of untapped gems
Katie Walsh, Australian Financial Review, 12 April 2011
Productivity can be improved through focus on the Henry tax review and the suggestions made therein. Chief executive of the Australian Industry Group, Heather Ridout, considers that an individual approach to staying focussed and not distorting taxes is a useful approach. Ms Ridout considers that far too many inefficient and unneeded taxes remain.
Read the full article on the AFR website, available via a subscription.
Tax system ‘out of step’ globally
Katie Walsh, Australian Financial Review, 11 April 2011
Business pays costs associated with the complex Australian tax system that are much higher than those in peer economies, such as the United States, Britain and Japan, according to PwC. According to Tim Cox, PwC partner, "The Australian tax system remains out of step with those of our international competitors." According to former Treasury secretary Ken Henry’s review of the tax system, the system was unduly complex and "unsustainable". The Australian Taxation Office is increasingly closely looking at large businesses to gain access to tax affairs on a continuous basis.
Read the full article on the AFR website, available via a subscription.
Tax system hurts local firms: study
Business Spectator, 11 Apr 2011
Australian businesses are being unfairly burdened by a complex and uncompetitive tax system, a new study says.
Consultant PwC's fourth total tax contribution report released on Monday said tax compliance and administration costs were not internationally competitive.
"Australia is not as competitive as it could be due to over reliance on income tax and the complexity of our federal system," PwC partner Tim Cox said in a statement.
The 45 companies taking part in the survey incurred $15.8 billion in taxes, including $9.9 billion (63 per cent) in corporate tax, which compared to a global average of 38 per cent. The 45 participants collected $28.2 billion in taxes from employees and customers. For every $1 of tax paid, the respondents said they collected an extra $1.78 on behalf of the government, the report said.
Mr Cox said the national tax forum to be held in October placed comprehensive reform of the system on the agenda.
"By consolidating and simplifying the taxes Australian businesses pay, governments can improve the nation's competitiveness at a time when many Australian businesses are struggling to emerge from the global economic downturn."
The report said there was an inverse correlation between the size of the business and the relative cost of compliance for companies, with Australian firms spending more relative to the amount of revenue raised compared to other nations. "The study makes it clear that the complexity of the tax system is particularly onerous for smaller businesses, with some smaller participants experiencing compliance costs of over 10 per cent of their taxes paid," it said.
Read PwC’s overview of the report.
Download the report from the PwC website.
Sacred cow herd tramples tax sense
Sydney Morning Herald, 9 Apr 2011
IT WOULD be nice to have a sensible debate about tax. Opposition Treasury spokesman Joe Hockey thought so, for all of one day this week, when he suggested taxing Australia's 663,000 trusts at the company rate. In 2001, then treasurer Peter Costello took aim at trusts, only for John Howard, political antennae twitching, to pull the reform rug out from under him. Mr Hockey got the same treatment.
In the past decade, Australians were promised a ''new tax system'' - the Howard government's GST selling point - and a ''root and branch review'' to deliver a simpler, fairer tax system - the Rudd government's Henry review. As Mr Hockey says, the complexity is worse than ever (he also likes the Henry review recommendation of a two-tier personal tax system). High-income earners use trusts to minimise tax by distributing earnings to family members on low incomes. The 1999 Ralph review put the tax lost at $700 million a year (about $2 billion today), but Assistant Treasurer Bill Shorten's purely political response to Mr Hockey was to defend trusts as a ''legitimate tax tool''.
That response is consistent with Labor's handling of the Henry review. Of 138 recommendations, it adopted four. The mining tax battle sapped the government of any remaining ambition after it killed 27 recommendations at birth, including a long-overdue restoration of fuel excise indexation, worth at least $3 billion a year. A spinoff from the mining tax, to be legislated before October's tax summit, is a cut in company tax from 30 to 28 per cent (the review suggested 25 per cent).
Six months out from the summit, neither side of politics appears willing to act on the tax system's glaring imbalances and inconsistencies. Prime Minister Julia Gillard and Treasurer Wayne Swan are haggling with the states over $50 billion in GST revenue, but that's not on the summit agenda. Budget papers, though, show that a decade-long shift in the tax base exposes the Commonwealth to a structural deficit made worse by countless loopholes and electoral bribes. Revenue from indirect taxes is down from 29.1 per cent in 2002-03 to a projected 24.5 per cent in 2012-13. The share from income tax is up from 65 per cent to 69.3 per cent, but less is from personal tax and more is from company tax. That commodity boom had better keep booming. The proliferation of levies - one idea this week was to slug well-off parents to boost school funding - can't paper over the cracks.
While Opposition Leader Tony Abbott targets the jobless, despite an unemployment rate of only 4.9 per cent, he and Ms Gillard seem deaf to the Henry review's critique of the two-tier family tax benefits. Effective marginal tax rates of more than 60 per cent punish people who return to work or increase hours. Nor do they want to hear about the money-in-money-out churn of uncapped middle-class welfare such as private health rebates. Debate on negative gearing, which distorts housing prices and the tax base, is also taboo. Sensible ideas are treated as political madness or, in Malcolm Turnbull's case, as tilts at the leadership. The Coalition communications spokesman is almost alone in pushing for a sovereign wealth fund, which is widely supported outside Parliament. He says he ran the idea past Mr Hockey first, but Ms Gillard and Mr Abbott appear to have no appetite for comprehensive reform. This week's fleeting ''tax debate'' confirms that policy conviction and consistency are vanishingly scarce commodities.
OECD slams hostility to foreign investment
David Uren, The Australian, 8 Apr 2011
AUSTRALIA is too hostile to foreign investment, the OECD says in its annual review of policies that promote economic growth. Just two days after Wayne Swan flagged he would block the Singapore takeover of the operator of the Australian Securities Exchange, the Paris-based think tank said Australia needed to spell out more clearly the criteria used by the federal government and the Foreign Investment Review Board to judge investments.
The OECD's view is that there is little reason for international investment to be blocked on anything other than national security grounds. It also said the threshold above which investment proposals must be submitted to FIRB for clearance should be raised from the current $231 million to $1 billion.This is the level offered exclusively to the US in Australia's free-trade agreement. It said investment liberalisation offered as part of free-trade agreements should be extended to all countries.
The OECD set out a broad reform agenda for Australia, including tax, infrastructure, workforce participation and improvements to early childhood education. It said the country's company and personal tax levels were too high and its GST was too low. The organisation also called for a rationalisation of state government taxes, particularly stamp duty on house sales. Although it backed the mining tax and plans to lower company tax rates, the OECD said the federal government should push tax reform harder.
Workforce participation would be improved by raising the tax-free threshold on personal tax, the think tank said, echoing the recommendation of the Henry tax review last year. Infrastructure was another area that required more assertive government action."There is a shortfall of infrastructure harming investment and a lack of policies to ensure its efficient use," the OECD said. It also suggested that public infrastructure projects should be submitted to rigorous and public cost-benefit analysis. There was also support for the Henry tax review's call for the introduction of congestion charging in the cities and for better pricing of water and transport services.
The policy review called for the government to improve access to early childhood education. It said childcare benefits should be made more conditional on employment and job search, while they should also be restructured to be more generous for families with very young children. It said over the longer term, as the budget allowed, there should be greater provision of quality childcare up to the age of three.
Why change our fiscal system?
Ken Wiltshire, The Australian, 6 Apr 2011
AUSTRALIA'S approach to our GST carve-up is the envy of the world. Other countries have beaten a path to our door to see how the most comprehensive fiscal equalisation system in the world operates to achieve nationhood through diversity. Julia Gillard's review threatens this rich heritage, which has been a hallmark since 1933 when the system was introduced precisely because Western Australia and other states had threatened to secede, and the new system sought to compensate any state experiencing difficulties beyond its control.
Gillard, like certain state premiers and many in the business community, does not understand the principles on which the system is founded. It is not about rewarding efficiency as she has asserted. It merely seeks to give each state or territory the capacity to achieve the Australian state average in taxation and expenditure. It operates on internal standards, not arbitrary politically determined performance benchmarks. Most important, it is policy neutral. It equalises on the basis of what states do, and so does not judge them, although it reveals each state's behaviour for all to see.The Commonwealth Grants Commission, which oversees the process and recommends the carve-up, is an expert body, non-political, and each member has to be acceptable to every commonwealth, state and territory government.
So if the Prime Minister and premiers want to introduce a stick and carrot system for state and territory governments, the fiscal equalisation system is not the place to do it. Far better to have the Productivity Commission do it.
The composition of Gillard's review team is also disturbing. There is no person from the smaller states and territories yet they are the ones with the largest stake in this exercise. It is dangerous to appoint former premiers of only the two largest states to conduct this review, when NSW and Victoria have sought to abolish the system and blame it for their own ills. Any findings will be greeted with mistrust in Hobart, Adelaide, Darwin, Canberra and probably Brisbane.
True, the system could be more transparent. The CGC has never issued a clear explanation of the methodology nor outlined its role. It is also true the needs of resource states such as WA are difficult to accommodate in a fiscal equalisation process because it is difficult to assess the capital (infrastructure) needs of a state, as opposed to its recurrent needs. More thinking on this aspect would be welcome.
Finally, if the GST carve-up is suddenly so important why won't Gillard and Wayne Swan place the GST itself on the agenda for the tax summit? Many of these problems would be mitigated if the vertical fiscal imbalance in our federation were addressed; this should be the No 1 item at the summit. As long as states and territories have to go to the national government for funding, the distribution of that very big sum of money among them will be an issue. However, remember the fiscal equalisation payments have generally been only about 7 per cent to 8 per cent of total transfers each year.
The principles of nationhood are at stake here and are too important for a quick-fix solution.
Mining opens the way for genuine tax reform
Michael Stutchbury, The Australian, 2 April 2011
JULIA Gillard's "full-scale" review of the states' $50 billion GST carve-up has appeased Western Australia's Liberal Premier Colin Barnett. But her move dares a bigger hope: a new economic reform push on state government taxing and spending. That's the import of Gillard's review panel, including two reforming ex-premiers - NSW's Nick Greiner and Victoria's John Brumby - to scrutinise Australia's unique model of full "horizontal fiscal equalisation".
These are the driving assumptions. Fair-go fiscal federalism has been pushed to political breaking point by the mining boom. Its "equalisation" of state finances undermines Ken Henry's tax agenda because any state government that absorbs the political costs of difficult policy loses much of the financial benefit to the other states. And it is blunting the incentives for states to spend their money efficiently.
It has been brought to a head first by WA, which loses one-third of its per capita GST money to the other states and second by Victoria, which is penalised for leading on economic reform and dealing with big-city congestion, a flow-on from the mining boom. And, third, federal equalisation threatens to undermine Gillard's health agenda to reward states with more efficient hospitals. Economist Ross Garnaut says it's a "mess". But financial federalism's academic top gun, economist Neil Warren, has coined a reform path slogan. "We need competitive federalism as well as co-operative federalism," he says.
Gillard unveiled her GST review in Perth, four days after the humiliating rout of NSW Labor, the serial anti-reform offender among modern state and federal governments.
Since 1901, Australia's federal pact has become more vertically imbalanced: Canberra collects most of the tax money, much of which it then hands down to the states to spend. But, in dividing up this money, it also has become more inclined to horizontally equalise the states' "fiscal capacity" to provide comparable public services. Since 2000, the mechanism has been John Howard's GST, now the biggest revenue line in state budgets.
The GST carve-up redistributes much of WA's booming mining royalties to the other states. In the mid-2000s, WA received slightly more than its per capita GST share, making it a mendicant. This changed dramatically as its allocation caught up with its boom. This year, its GST "relativity" dropped to a record low 0.68298, giving Western Australians 68c of each dollar they would get on a uniform per capita basis. Barnett reckons WA's share could fall to 40c as the boom heats up, stiffening the west's opposition to Gillard's mining tax and hospital policies. In Perth, Gillard said equalisation was "not properly dealing" with WA's mining boom growth. She said Barnett had posed the question: "What have we done wrong apart from being successful?" Her review would canvas Barnett's demand for a 75c floor on how far strong states could fall.
Barnett said he had "achieved something" with Gillard's review of a policy that was "destabilising" the federation. He would accept a phase-in of the 75c floor: the main issue was about reducing WA's revenue uncertainty. "We can accept that we share this prosperity, particularly as for most of the post-war period the other states subsidised WA," Barnett said. "So this is a time for WA to pay some of this back. But we just want a floor of 75c. I believe that is a fair number."
But putting a floor under WA threatens to shrink the mendicants' shares. Next year they'll get much more than their equal per capita GST share. South Australians will get $1.27, Tasmanians $1.60, and Northern Territorians $5.36. So the agitation is coming from the big four donor states: in order, WA, Victoria, Queensland and NSW. Improbably, they all suggest they would be winners from change. Queensland Treasurer Andrew Fraser reckons more of his mining royalties end up in Victoria than in Queensland. Victoria maintains the system doesn't properly recognise that it doesn't have a mining boom, that the strong dollar is squeezing its manufacturing base and that Melbourne is a magnet for migrants.
But the biggest effect would be felt by the less populous mendicants: the NT, Tasmania, SA and the ACT. They would scream that their hospital, education and even child protection services were falling behind the national standard. The Mercury in Hobart reported that Gillard's GST review would let "rich states get richer" at Tasmania's expense. Premier Lara Giddings warned it would be "fundamentally unfair" to poorer Tasmania to reward the mining boom and big population states. She had "grave concerns" that Greiner and Brumby came from states pushing for a bigger GST share.
It poses big questions. Amid concerns about the two-speed economy, do we want to spread the mining boom wealth evenly across the nation? Or should we allow the strong states to offer better services and lower tax rates? Should Australia follow the resource-based Canadian federation, which allows western provinces such as Alberta to prosper much more than Atlantic provinces such as Newfoundland?
Internationally, Australia's fair-go federalism is seen as dulling efficiency. And Gillard argues that equalisation has entrenched federalism's zero-sum game by "punishing economic reform and punishing success". It has become a roadblock to better education, health and other services, she says.
The GST review will be run by the federal Treasury, which has told Wayne Swan that fiscal equalisation "does not promote reform". This includes the Henry review agenda for the states, which levy "some of the least efficient and worst designed taxes" such as stamp duties on insurance, housing, commercial property and motor vehicles. Treasury wants them abolished.
The NT's huge GST share reflects the costs of servicing a remote indigenous population. But it doesn't actually have to spend its inflated allocation on Aborigines and so it doesn't. It might even lose GST money if it ended indigenous disadvantage, Warren suggests.
Warren's reform principle would keep equalising much of the states' average financial capacity. But spending and taxing decisions beyond this would be excluded, thus sharpening efficiency incentives. Mendicant states could be guaranteed a base level of equalisation but be encouraged to make their own spending and taxing decisions outside Grants Commission redistribution. In Canada, individual provinces can keep half their mining royalties, leaving the other half to be equalised.
"The fundamental thing is you have got to stop what the Grants Commission is doing," Warren says. "Nobody says HFE should disappear. I am never going to say that. But you don't want it to destroy efficiency." The Grants Commission says it is simply following its riding orders to fully equalise the federation. At any time, the Treasurer can direct it to exclude certain areas from equalisation. But Swan refused Victoria's calls to do this for its federal infrastructure stimulus money.
Gillard is on to something, even if some of her colleagues worry it will kick open a state hornets' nest. But it needs to be linked to Swan's October tax forum, which in turn needs to overturn Labor's refusal to consider lifting and broadening the GST. This would drive a genuine tax reform package that gave the states more responsibility for raising their own revenue and made them more accountable for spending it.
Read the full article on The Australian website.
Wimpy gambits in tax loopholes
Charles Berger, The Canberra Times, 1 Apr 2011
'I'll gladly pay you Tuesday for a hamburger today,'' was the pitch of the character Wimpy from the old Popeye cartoon. Of course, any country bumpkin who was foolish enough to give Wimpy a hamburger never saw his dollar or his hamburger again.
Certain Australian industries have turned the Wimpy gambit into a successful business model, at least when it comes to tax reform. Their mark is the Australian Commonwealth, which seems to fall for it every time and keeps coming back for more. Take, for instance, the sad tale of capital allowances, the somewhat arcane rules that determine how quickly a business can depreciate its capital investments. The faster a business can depreciate an asset, the better for it and the worse for the public purse.
In 2001, following the Ralph Review of Business Taxation, a grand bargain was struck between the Commonwealth and the business sector. Company tax would be cut from 36 per cent to 30 per cent, and in return business would lose the extraordinarily generous accelerated depreciation provisions for many categories of capital assets. The company tax cut took effect in 2001, while the reforms to depreciation rules were meant to follow a rolling series of reviews by the tax commissioner to determine the real effective life of various kinds of assets. The commissioner started doing this job, with oil and gas assets and aircraft among the first cabs off the rank. After proper process, the commissioner determined that oil and gas platforms should be depreciated over 30 years, pipelines over 50 years and most aircraft over 20 years. These were substantial rises, but clearly justified on the long economic life spans of these assets.
This is where the Wimpy gambit comes in. Big petroleum and the airlines realised they could renege on their side of the tax reform bargain if they could persuade a few parliamentarians to override the commissioner. And that's just what happened. Industry lobbyists found open ears in the Coalition, which was apparently willing to subvert their own tax reform before the ink was even dry. Labor didn't stand in the way and these industries' generous tax breaks were preserved. They got the benefit of the reduction in company tax and retained their special depreciation perks.
Heads, big business wins; tails, the taxpayer loses.
In 2005, transport was up for review. Again the commissioner sought to increase the depreciation schedule this time for many categories of commercial vehicles and again industry intervened to preserve the generous status quo. This time the then opposition noted the corruption of process and loss of revenue that was occurring. Labor's Joel Fitzgibbon asked, ''One wonders what comes next. Is it the mining industry next? Is it a return to the attractive and generous capital allowance regimes the industry enjoyed in the past? We shall wait and see.'' His words were prescient but despite this Labor supported the special tax breaks.
In 2007, agricultural equipment was reviewed. The commissioner determined an increase in the schedule was warranted for tractors and harvesters. But a drought was on, and ... well, you already know how this ends. Labor noted that the practice risked ''undermining the integrity of the Ralph reforms'', but again it didn't oppose the deal. The poor tax commissioner must wonder why he even bothers to show up for work some days.
No doubt heartened by the success of these industries in cutting special deals, others are lining up to press their own interests. Shipping companies have been lobbying for reductions to the effective life of ships, and the mining sector has advocated an across-the-board 20-year cap on all assets.
According to Treasury estimates, these special tax breaks have cost about $3.6billion to date far more than the home-insulation program and the green-loans scheme combined. Yet they have been subject to no scrutiny by parliamentary committees, no attention in the press, no cost-benefit assessment or economic modelling, no reviews by the auditor-general, and only the thinnest of debate on the floor of Parliament. And their cost is only rising: Treasury estimates the current price tag at $1billion a year, or roughly as much as all Commonwealth spending on climate change combined.
The damage is not just to Commonwealth revenue. With the exception of the bus industry, the businesses that benefit are all pollution-intensive, so these self-interested tax loopholes have made it harder for Australia to shift to a low-pollution economy. They've also made our economy less efficient, by distorting investment decisions in favour of these activities. By comparison, cleaner technologies do not benefit from accelerated depreciation. To give just one example, a solar water heater is depreciable over 15 years, while the more polluting gas and electric heaters can be depreciated over 12.
In this way, our tax rules systematically penalise investment in cleaner and more durable assets. It's time to end this rort, and hold industry to its side of a bargain struck a decade ago. Treasury has acknowledged that these statutory effective life caps on pollution-intensive assets are wasteful and inefficient. Treasurer Wayne Swan should heed this advice and do away with them in this year's budget. Such a reform would increase the efficiency of a price on carbon, and provide additional revenue to apply to the transition to a cleaner economy. That's surely a better deal for the taxpayer and the Commonwealth than industry's Wimpy gambit.
Charles Berger is director of strategic ideas at the Australian Conservation Foundation.
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