The following are select media articles from July to September 2011. Return to Archived Media index
It's not that taxing - we can do better
Tony Nicholson, The Sydney Morning Herald, 29 September 2011
TAX SUMMITS and forums raise visions of conservative economists arguing for reductions to company tax and the top income tax rate in the name of competitiveness and productivity - which would be fine if the claimed benefits actually trickled down to the rest of us. All too often, they don't.
Tax reform should be about much more than this. Former Treasury secretary Ken Henry in 2009 declared the tax and transfer system to be our principal means of expressing societal choices about equity, making it ''a reflection of the kind of society we aspire to be''.
Ken Henry is right. We should aspire to more. We can make next week's Tax Forum something that benefits the vast majority of Australians by ensuring it promotes equity, opportunity and workforce participation. The forum should aim to encourage a far more inclusive vision of growth than that offered by ''trickle down''.
So what should the forum consider? I believe four major changes to our tax and transfer system provide much of the answer.
The first is to ensure that it encourages workforce participation. Our current social security laws are inflexible, based on the outdated assumption that the only options are full-time work or full-time unemployment. Some people will for a time need to build their lives around the best combination they can find of casual, part-time or infrequent work and social security benefits. Currently such people lose so much income when they get a job that work is not worth it.
Instead of working some of the time, they end up working none of the time.
Two reforms that could help are letting people keep more of their benefits if they work, and allowing the retention of concession cards for 12 months after starting a job. We need to ensure the tax and transfer system supports people through the major transitions in their lives: from unemployment to work, and in and out of caring roles, education and training.
The second change would be to ensure that benefits provide a decent standard of living for everyone. While employment always is the best way out of poverty, too many of Australia's most disadvantaged citizens spend too long on the Newstart Allowance, which at $240 a week - $130 less than the Disability Support Pension - is pitiful. A modern social security system needs to recognise that periods of unemployment will be a fact of life in an open, flexible economy. Today Newstart Allowance provides a single unemployed person with 20 per cent of the average male wage. This is not the sort of divided society we want. The Newstart single rate should be increased.
The third reform is to ensure that disadvantaged Australians have the opportunity to save and build assets. Through tax concessions, mainly for housing and superannuation, the Australian government provides billions of dollars to encourage asset building, but this strategy is poorly targeted, benefiting mainly the top fifth of income earners. Those applying for Newstart Allowance, Sickness Allowance and Austudy who have ''liquid assets'' above $2500 must wait up to 13 weeks before accessing benefits, forcing them to run down their savings, yet no such requirements apply to people with significant share and property portfolios. This liquid assets test waiting period is inequitable and should go.
The fourth reform is to make sure that childcare subsidies provided through the tax system support the development of an early childhood education and care system that works for disadvantaged children and their families. While investment in early childhood education has increased - particularly through the commitment to 15 hours of free preschool for four-year-olds, it could yield greater returns if this were extended to children at three. United States researchers estimate that a national two-year program of quality early education commencing at three could reduce poverty by between 5 and 15 per cent.
The other beneficiaries of affordable, quality childcare are women who want to work but find childcare too expensive or unavailable. Many countries provide universal early education and care from three. Shouldn't this be something a wealthy country such as Australia should aspire to as well, when the benefits for children and families are so clear?
So now the big question: how do we pay for all this?
The first thing any reformer should do is to look at tax breaks. Tax exemptions and concessions in Australia totalled more than $110 billion in 2008-09. This, in itself, is fine, but about 55 per cent of this went to concessions on housing and superannuation, benefiting many people who don't really need it. While tax concessions that support families to purchase a first home might be understandable, the use of the tax system to subsidise property investors with multiple properties is unjustifiable. Clearly, the discount rate on negative gearing for investment properties needs to be reduced, as does the discount rate of capital gains tax on investment properties.
These sorts of measures were first put forward by the cautious reformers from the Department of Treasury and are in the Henry Review. They deserve to have powerful champions at the forum. I believe most Australians, who will benefit directly in their wallets and indirectly through a more dynamic and equitable society, will support them.
Tony Nicholson is the executive director of the Brotherhood of St Laurence.
Time to take Topsy out of tax
Stephen Matchett, The Australian, 29 September 2011
CHRIS Evans knows what Australia needs from next week's tax forum, “a system that looks like someone designed it.'' But on the basis of the Henry Report, it's unlikely this is what we will get.
For all Dr Henry’s emphasis on simplifying the system “close scrutiny reveals much of this may be little more than rhetoric,” the University of New South Wales tax academic argues.
Which worries Evans, who says we have one of the most complex tax systems in the world.
“Australia has more than 100 taxes, some of the lengthiest and most illegible tax legislation of any country, high and regressive compliance costs, that are not decreasing over time, and the world’s second-highest tax agent-dependency,” he says.
To demonstrate just how devilish the detail is Evans has a new ARC linkage grant to report on the causes and costs of tax complexity and set out simplifications.
And ensuring as much media as he can manage when a core aspect of his inquiry is complete, Evans intends to develop the world’s first Tax System Complexity Index which will compare countries.
So how did we get ourselves into such a state that only the Italians exceed us for the number of income earners (70 per cent) who need a professional to complete their tax return (and not all Italians are required to file)?
Evans says federalism has not helped “but the main problem is the way the tax system has grown like Topsy. We have layer upon layer of complications to a system where changes look like they make sense when they are made but later look like patchwork.”
He has the scary statistics to show it. An analysis by Evans and colleague Binh Tran-Nam illuminates what a mess we have made. The Australian Tax Office administers 125 taxes, many of which are hard to understand. Both the Income Tax Assessment Act (7000 pages) and the Goods and Services Tax Act (850 pages) require a university education to grasp. ATO administrative costs account for 1 per cent of collections and compliance costs for business taxpayers amount to 18 per cent of revenue collected.
And despite 10 major reform proposals in a bare 20 years tax continues complex still, “because of the trade-off between simplicity and other socio-economic policy objectives, the need to secure revenue in the face of population ageing and globalisation, powerful interest groups that can exert considerable influence on representatives of the government, the growing complexity of the economy, and the cumulative effects of past, incremental policies,” Evans and Tran Nam argue.
Nor do they expect anything to improve, “as a result, meaningful progress on simplification at the tax policy level has not been (and is most unlikely to be) achieved in Australia.”But Evans is still game to have a go, arguing abolishing some taxes (he nominates the GST) and the efficiency dividends flowing from simplifying others can reduce compliance costs without cutting collections.
“We need a citizen-centric approach,” he says.
Bite the bullet on tax, or debt will be a burden
Opinion, The Sydney Morning Herald , 28 September 2011
ONE peculiarity of Australia retaining the venerable post of treasurer is that Wayne Swan, not Finance Minister Penny Wong, has been dubbed world's best finance minister. And while Mr Swan was in Washington advising his G20 colleagues on how to avert a double-dip recession, Ms Wong was warming up for next week's tax summit by warning of the need to cover unavoidable future budget costs. The plight of Europe, the US and Japan should ring alarm bells.
Unlike the privately inspired global financial crisis, this crisis is driven by government debts. Some critics of the Gillard government are guilty of alarmism about a debt less than a tenth of developed nations' average. They also conflate economic management with the state of the budget. Indeed, the Coalition's 1995-96 campaign against mostly privately held foreign debt mutated in office into paying off government debt (most of it covered by one-off asset sales) as a measure of economic management. Foreign debt grew unchecked. Although Mr Swan now expresses only ''determination'' to deliver a promised surplus in 2012-13, politically Labor cannot afford more deficits.
Ultimately, what matters most is fixing structural imbalances. A decade ago, the US and Australian budget outlooks were similar. It was largely political folly that created a US debt equal to a year's economic production - about 16 times the level of Australia's federal debt. The US is hostage to an ideological stand-off that prevents tax rises, despite revenue being at a 60-year low, or unpopular spending cuts.
While the gap between Australian taxes as a share of GDP and the higher OECD average has been about 5.5 percentage points since 1965, simply lifting taxes is not the answer (debt-burdened Greece and Italy have higher rates). However, according to Treasury, of nine nations most comparable to Australia, only the US and Japan have lower tax-to-GDP ratios and both run huge deficits.
The Henry review offered a comprehensive guide to reform. The goal was a simpler system based on four efficient tax pillars: personal income, business income, private consumption and natural resources and land rents. Many other taxes would be abolished - especially those that inflated housing prices and discouraged productivity, investment and workforce participation. It was, apparently, all too much for Labor, especially once Julia Gillard found herself leading a minority government. Her mining tax was a cherry-picked recommendation compromised almost beyond recognition.
Future governments, as Ms Wong warns, are little closer to covering the costs of pensions, health services and disability and aged care as the ratio of retirees to workers grows. By 2050, the shortfall could hit $80 billion. Mr Swan's predecessor, Peter Costello, raised the alarm years ago, but neither side of politics has heeded the message either by tightening spending - the Coalition, for instance, defends excessive benefits for middle and high-income households - or fixing the revenue base.
The Howard government courageously delivered the GST, but a decade on, adjustments are taboo. The government's timidity has been exploited by an opposition that, like US Republicans, aggressively opposes any new tax. Budget receipts, which topped 25 per cent of GDP for seven years of the Howard government, fell to 21.9 per cent in 2010-11, recovering slightly to 23.2 per cent this year then settling around 24 per cent. Payments are 24.5 per cent of GDP this year, then fall below 24 per cent, the Howard-era average.
The revenue base has to be fixed to cover future costs that both sides of politics say governments must meet. Australia has low taxes, albeit many inefficient and damaging ones, coupled with too many costly programs that pander to voters. If political leaders do not act on this budgetary reality, Australia could follow Europe, Japan and the US down the path to the point where sovereign debt can sink economies.
Wong to tell summit the need for taxes to increase will be inescapable
Peter Martin, The Sydney Morning Herald, 27 September 2011
THE Finance Minister, Penny Wong, has a blunt warning for delegates attending next week's tax summit: we'll need more tax.
Going beyond instructions from the Treasurer, Wayne Swan, that anything proposed at the summit should be revenue neutral, Senator Wong says, in a paper prepared for delegates, that the government will be tens of billions of dollars short by 2050 unless it raises more.
The shortfall by the middle of the century should amount to 2.75 per cent of gross domestic product, which by then will be about $3 trillion in today's dollars.
The reason for the $80 billion shortfall will be the relentless rise of pension payments, which increase with male earnings, a doubling of the number of people over 65, and a quadrupling of aged care spending.
Senator Wong's calculations understate the need for more tax because they apply only to the Commonwealth, not to the states, which will also need more revenue.
Many of the increased federal costs will be hard to avoid. Unless pensioners accept twice-yearly increases more in line with their living costs, pension payments will climb from 2.7 per cent of GDP to 3.9 per cent in the next four decades. They are already the second-largest federal expenditure after grants to the states. Aged care spending is expected to climb from 0.8 per cent of GDP to 1.8 per cent.
The federal government has agreed to lift its share of public hospital funding from 45 per cent to 50 per cent within the next decade. Population growth, ageing and climbing private health insurance premiums will push up cumulative spending on the private health insurance rebate by $100 billion in the next four decades unless Parliament passes stalled means-testing legislation.
The $6.5 billion-a-year national disability insurance scheme, agreed to by both sides of politics, will add to funding pressures.
In launching the paper, Senator Wong said discussion at the tax summit needed to be mindful of more than the government's plan to return the budget to surplus.
''Any proposals for change need to be affordable and fully funded, not just in the next couple of years, but also into the future,'' she said. ''Participants advocating tax cuts need to think about how those cuts will be funded.''
Senator Wong and the cabinet were briefed by Mr Swan on global economic developments yesterday in a call that took place at 2am, Washington time.
Before the briefing Mr Swan told reporters in Washington that the government remained determined to bring the budget back to surplus in 2012-13 but that ''commonsense says conditions have changed and that task gets more difficult because of global economic conditions''.
Senator Wong reiterated the government's commitment to a surplus but said Australia was ''not immune from what we are seeing globally''.
The game's up - pokies reform not so taxing for footy
Tim Costello, The Sydney Morning Herald, 27 September 2011
I know Eddie McGuire and I like him. He has fine social justice instincts. But Eddie - as well as all AFL presidents - needs to answer these questions since he is opposed to the Gillard/Wilkie reform of a pre-commitment card on the high-loss poker machines.
Eddie, how is a pre-commitment card on this dangerous product a tax on footy?
Players will only need a card on those high-loss machines where you can easily lose $1200 per hour or more. No card is needed for the low-loss $1-maximum-bet machines. The Productivity Commission found 88 per cent of people do not bet more than $1 spins. The recreational punter will not even notice these changes. Other parts of the world have these low-loss recreational machines. In Britain, you can lose $30-$40 an hour. In contrast, Australia has the greatest number of high-loss pokies. We have the greatest number of high-loss machines in the world and they are the crack cocaine of pokies. We have the highest per capita gambling losses and highest per capita levels of addiction.
Eddie, who pays $1200 for an hour's entertainment?
The answer, according to the Productivity Commission, is problem gamblers. These are people who, by definition, have no freedom to choose because they are hooked. Their children go hungry, they go bankrupt and often to prison and the crime they commit is second only to illicit drugs, according to the Victorian Justice Department.
Why do you call this a tax?
The pre-commitment card is not a tax nor is it a licence as the clubs misleadingly describe it. The government won't know what limits punters set on their card nor does it or anyone else tell them what limit to set. Yet it is an important tool in the punter's pre-play sober moment that requires them to think, ''Can I face my partner and kids tonight if I lose more than, say, $300? I will set a limit and then when I hit it, I will be locked out from playing on.''
Why do you say this pokies tax on footy came out of nowhere? There has been more than a decade of debate and recommendations to curb the damage. This is why the public overwhelming supports this reform (67 per cent, according to the Essential poll). The public is sick of the crime and social damage.
In 1999, the Productivity Commission showed that more than 40 per cent of pokies losses came from problem gamblers. John Howard responded and said ''he was ashamed'', but that it was a state matter.
In 2010, the Productivity Commission found the same proportion of profits (40 per cent) came from the addicted - that is almost $5 billion of the $12 billion lost annually on pokies. So it recommended pre-commitment cards and $1 maximum bets. These reforms did not come as a surprise or out of nowhere. Eddie, as I say to clubs and pubs who cry we will go broke (they won't), what responsible business depends on 40 per cent of its profits from addicted people?
I love my AFL, but with the $1.2 billion over five years in TV licence fees, the AFL does not need to depend on addiction and destroying lives to run the game. Remember, Eddie, that WA has no pokies outside Burswood Casino - none in suburbs and rural towns and it has plenty of clubs, community functions and footy teams. Footy and community clubs should not be hooked on pokies and their devastation.
Tim Costello is chairman of the National Churches Gambling Taskforce.
Tax ideas must be fully funded: govt
Colin Brinsden (AAP Economics Correspondent), The Sydney Morning Herald, 26 September 2011
Ideas put forward at next week's tax forum on how to improve Australia's complex tax system will only be considered if they can be fully funded well into the future.
The federal government released a paper on Monday outlining its budget strategy over the short, medium and long term to provide the backdrop for the tax forum to be held in Canberra on October 4 and 5.
"That of course doesn't just mean the return to surplus and the fiscal rules the government has laid out," Senator Wong told reporters in Canberra on Monday.
"It also means understanding the longer-term pressures, pressures in health, pressures in social security, pressures that will have to be dealt with by governments of all political persuasions in the decades ahead."
The paper - Tax Forum: The Fiscal Context - says significant fiscal challenges lie ahead, and that contributors to the forum need to consider how their proposals can be implemented in a manner that is sustainable.
"This requires proposals to be fully funded, not just in the next couple of years, but also into the future," the paper says.
It says a softer economy stemming from the impact of natural disasters and the strong dollar, as well as the legacy effects of the global financial crisis and heightened risks to the international growth outlook, are making for a challenging budget environment.
Treasurer Wayne Swan, speaking from Washington where he has been attending the World Bank and International Monetary Fund annual meetings, said economic problems in Europe and the United States will affect Australia and the Asian region, making a return to a budget surplus by 2012/13 harder.
"There's no doubt that recent events ... impact on global growth, that flows through to domestic growth, that flows through to budget revenues, and that does have an impact," he told Sky News.
Senator Wong said Australia does face current global turbulence from a position of significant strength.
But Opposition Leader Tony Abbott doesn't believe the government will ever deliver a surplus.
"This is going to turn out to be yet again another Labor broken promise," Mr Abbott told reporters in north east Tasmania.
The paper outlines some of the challenges facing the budget with many social security and welfare programs expected to increase strongly over the next 40 years.
Spending on the age pension is estimated to increase from around 2.7 per cent of gross domestic product (GDP) currently to around 3.9 per cent by 2049/50, while aged care spending is expected to rise from 0.8 per cent of GDP to some 1.8 per cent over the same time frame.
At the same time, the 2010 Intergenerational report indicated that healthcare spending per person could triple by the middle of the century, while spending on education will expand as the population of five-to-18-year-olds grows in the next 10 years at nearly double the rate of the previous decade.
Senator Wong said the government had already implemented 30-odd recommendations from the Henry Tax Review.
"But ... tax reform is never finished. It is something you have to keep continuing, and it is very important when one does that the fiscal context if very clear."
Australian Green senator Bob Brown said both parties should adopt a more flexible position on budget policy and interest rates.
"(Opposition finance spokesman) Andrew Robb has got it wrong in trying to strong-arm the Reserve Bank, compounding the coalition's position of weakness in trying to argue for fiscal responsibility while presiding over a $70 billion black hole," Senator Brown said in a statement on Monday.
He said the government should question its "politically charged" return to a budget surplus in 2012/13 if the global economy turned south.
"I note that the government's own fiscal strategy outlined today in Tax Forum: The Fiscal Content says 'once the economy was growing above trend, return the budget to surplus'," Senator Brown said.
"If the world economic outlook continues to worsen Australia's growth would undoubtedly be affected, and the push for a surplus in 2012-13 would become even more questionable."
A slump in the global economy would hinder the commonwealth's taxation revenue and put the government's forecast budget surplus of $3.5 billion in 2012/13 in jeopardy.
Giant wine companies blame tax for the glut
Mark Metherell, The Sydney Morning Herald, 26 September 2011
BIG brand wine companies have called for reform of the tax system, contradicting the federal government's reasoning for its refusal to consider a change in wine tax.
The government has rejected appeals from health groups for tax reform to curb the sale of very cheap wine, citing the grape glut and industry restructuring.
But the current wine tax system is fuelling the glut, say two companies whose labels include Jacob's Creek and Penfolds.
In submissions to next month's tax summit, Premium Wine Brands and Treasury Wine Estates call for the abolition of the Wine Equalisation Tax. They say it has distorted the market. They call for a modified version of volumetric taxation - the alternative system recommended by the government's Henry tax review and by health groups to discourage problem drinking of wines that can cost less than bottled water.
''The structural oversupply of Australian wine and the dumping of excess wine into both our domestic and export markets is causing immeasurable damage to the Australian wine industry and threatens its long term sustainability,'' Premium Wine Brands said in its submission.
The companies' stance has led the publicly funded Alcohol Education and Rehabilitation Foundation to call for the government to reconsider the issue.
But a spokesman for the Treasurer, Wayne Swan, said yesterday: ''The government's position remains that we are not changing alcohol tax in the middle of a wine glut and while there is an industry restructure under way.''
However, Treasury Wine Estates said the current tax rebate system ''is effectively preventing consolidation and sustaining uneconomic production, at a time when the industry urgently needs to retire excess supply and rebuild value in the Australian wine category''.
The stance of the two companies is at odds with the Winemakers Federation of Australia, which disputes evidence that changing tax in a way that would increase the price of cheap wine would reduce problem drinking. The federation has said the grape glut is a global problem and the present system ensures small vineyard owners survive.
But the chief executive of Treasury Wine Estates, David Dearie, said the Wine Equalisation Tax rebate must be scrapped or reformed. ''It is untenable to have a tax mechanism that inhibits restructuring and works against the long term best interests of our industry, whilst also costing Australian taxpayers more than $200 million a year.''
The chief executive of the Alcohol, Education and Rehabilitation Foundation, Michael Thorn, said the companies' views underline the need for the government to re-examine calls for reform.
Despite recommendations by former Treasury secretary Ken Henry that the wine tax be reformed, the government has not selected any representatives of the alcohol health policy sector to attend the tax summit.
Tax break on nannies will lift job equality
Editorial, The Sydney Morning Herald, 25 September 2011
CHIEF Executive Women (CEW), a new lobby group bristling with heavily influential members, deserves encouragement in its initiative to promote debate on the issue of women in the workforce.
The group wants the federal government to consider making payments for childcare, including nannies, tax deductible.
The suggestion has a lot of merit and bears scrutiny. At the moment working parents who place their children in approved care childcare centres receive a set rebate that can be paid as often as weekly.
The 50 per cent rebate is not means tested, and is capped at $7500 a year, per child.
This rebate is a step in the right direction but obviously much more needs to be done, particularly as Australian women's participation rate in the workforce lags at 44th in the world.
The Sun-Herald has consistently supported measures that will encourage more women to join the workforce and more women to stay in the workforce.
Quite apart from the issue of gender equity, it's vital Australia does not deny itself the best possible talent pool from which to draw workers and leaders.
In an increasingly competitive business world Australia must not be handicapped in any way.
So the extra flexibility that claiming childcare costs as tax deductions would provide could be a significant move towards increasing the number of women contributing their training, skills and experience to the ranks of workers.
And surely both the government and the opposition will lend an attentive ear to the proposals of CEW, whose members include prominent Australians including Ita Buttrose, Jillian Broadbent, Elizabeth Broderick, Kate Carnell, Heather Ridout and Janet Holmes A Court. They and fellow members know what they are talking about.
Employment of nannies by working couples is not uncommon but it's almost exclusively restricted to high-income earners who can afford the cost, which can be upwards of $200-a-day.
It would be wonderful if more women could afford nannies, particularly in big cities where co-ordination of jobs and childcare can be challenging. Waiting lists in some centres are long particularly for children under the age of two, and drop-off/pick-up arrangements can be a logistical headache.
Being able to hand over children, particularly very young ones, to a nanny would go a long way to easing the anxiety that accompanies delegation of childcare.
The government's tax summit next month will give groups such as CEW a chance to put forward their ideas. Their proposals warrant an open-minded hearing.
Flat tax leads to fairness
John Roskam, Australian Financial Review, 23 September 2011
The most simple, efficient and fair way to raise revenue and cut budget deficits is a flat tax.
Read the full article on Australian Financial Review website via a subscription.
Swan’s agenda for business tax
Laura Tingle, Australian Financial Review , 22 September 2011
Treasurer Wayne Swan has raised the tax treatment of losses and deductions for corporate equity as two areas of tax reform to be discussed at the Tax Forum.
Read the full article on Australian Financial Review website via a subscription.
Bankers want more tax breaks for parents
The Business Spectator 21 September 2011
Bankers are asking the federal government to consider more tax breaks for parents who want to work but are put off by high childcare costs at next month's national tax forum.
The Australian Bankers' Association (ABA) has released a position paper sent to Treasury ahead of the forum to be held at Parliament House in Canberra on October 4 and 5.
Read the full article on The Business Spectator website via a subscription.
Cut tax to break financial gloom
Christopher Russell and Colin Brinsden, The Advertiser, 20 September 2011
COMPANY tax should be cut to 25 per cent as part of a reform package to strengthen the economy, the Australian Industry Group said last night.
Addressing the organisation's annual dinner, national president Lucio Di Bartolomeo said it would be a "lost opportunity" if next month's Tax Forum failed to deliver clear reforms.
The former head of Thales and member of many of the country's leading boards, Mr Di Bartolomeo said as well as cutting the tax rate from 30 per cent, there needed to be simplification of the system - as recommended by former Treasury head Ken Henry - and greater tax support to encourage innovation.
"Our tax system needs to be re-shaped to support the economy of today and tomorrow," he said. "Tax is a crucial lever affecting investment and has a big role to play in helping to re-balance our lopsided economy."
Mr Di Bartolomeo said the AiGroup welcomed the focus from both sides of politics on seeking ways to build competitiveness into the stressed sectors of the economy - especially manufacturing.
"The times are complex and there are deep uncertainties," he said. "We are an economy of paradoxes - a boom and gloom economy. We have record prices, production and investment in our resources sector."
"Against this there is a slowing of activity and an absence of confidence in large parts of the rest of the economy. This is particularly so in the non-mining trade exposed sectors. As a nation we have . . . solid income growth and low unemployment. At the same time, we have ongoing consumer caution."
"There seems to be a disconnect between what is really happening on the ground and the official view of what was expected to happen."
...
Speaking earlier to the AiGroup, Treasury Secretary Martin Parkinson warned manufacturers against pushing for a return to protectionism.
There was also no point hoping problems brought on by the strength of the Australian dollar would go away in a hurry, he said. However, Dr Parkinson also also believes there are "phenomenal" opportunities as the Asia-Pacific's middle class grows to be larger than the rest of the world's by 2020.
"China could have a middle-class market that surpasses the US in dollar terms," he said. By 2030, if India follows China, two-thirds of the global middle class, or about 3.2 billion people "will be in our backyard".
"That is a phenomenal opportunity," he said. Dr Parkinson said the outlook for the world's major economies had become "markedly uncertain" but Australia's "starting point could not be more different".
Its public balance sheet was in an enviable position compared with the rest of the developed world, and its financial institutions were well regulated and capitalised.
See full article here
China angered by mining tax: Barnett
Sydney Morning Herald, 19 September 2011
Western Australia has ''hitched its rail cart to China'' by signing a bilateral agreement to boost trade and investment, Premier Colin Barnett says.
Mr Barnett said the willingness of Asian economic powerhouse to deal directly with WA was a sign of China's anger and resentment towards the federal government over its proposed mining tax.
On a two-day visit to China last week, Mr Barnett signed an unprecedented memorandum of understanding with China's peak economic planning body.
It is the first time China's National Development and Reform Commission has signed a trade and investment co-operation accord with a state government.
''There's no doubt this is hitching our rail cart to China,'' Mr Barnett told Fairfax Radio on Monday.
Mr Barnett said the agreement was not about going behind the federal government's back and interfering in foreign relations or defence issues.
But China - the biggest buyer of Australia's iron ore and coal - was ''certainly very unhappy'' about the federal government's Minerals Resource Rent Tax targeting those two commodities, Mr Barnett said.
''China sees that as a tax directed at them, and are extremely resentful about that,'' he said. ''They certainly are very angry over the mining tax and they raised that repeatedly at the meetings over the last few days."
''I think they're making a point here ... that they understand that WA does not support the mining tax and therefore are getting closer to the WA government in dealing with that and all other issues that affect their trade.''
The WA-China agreement covers a broad range of sectors including resources, energy, agriculture, food and infrastructure. Mr Barnett said the memorandum of understanding could lead to more local workers and content being used on major projects being built by Chinese proponents.
He said it would also help Chinese companies enter long-term contracts with farmers for purchases of grain and produce and as a result would ''stop the angst'' about China buying farmland.
AAP
Call for deeper cut to corporate tax and reduce personal taxes
Scott Murdoch, The Australian, 19 September 2011
LABOR is being urged to make deeper cuts to the corporate tax rate to ensure Australia remains internationally competitive, and to reduce personal tax rates to encourage more saving.
A range of submissions to the government's October tax forum has argued that comprehensive changes are needed to remove the duplication between existing state and federal tax laws.
Wayne Swan earlier this year said that the forum, to be held in Canberra on October 4 and 5, would help direct the government's future tax reforms.
The government has said that changes to the GST will not be contemplated. But Australian Chamber of Commerce and Industry chief executive Peter Anderson said an increase in the GST could help the government cut a range of other tax rates.
The government plans to reduce the 30 per cent corporate tax rate to 29 per cent in 2013-2014 and to 28 per cent the following year. The cut was ordered to help fund the phased increase in the superannuation guarantee from 9 per cent to 12 per cent.
"ACCI welcomes the proposed reduction in the company tax rate (but) it is considered necessary to further reduce the current high rates of personal income tax to better align with the company rate," Mr Anderson said.
"GST reform, either broadening the base or increasing the rate, should be canvassed in the government's tax reform agenda.
"However, it is important to ensure that increases in the GST rate or broadening of the base are not used to increase government revenue to fund higher government spending."
Mr Anderson said greater reliance on "consumption-based" taxes would allow the government to cut personal income tax rates and remove "inefficient state-based taxes".
ACCI also argued that the government should scrap its plan to raise the superannuation guarantee or offset the costs with increased tax reform.
The Australian Bankers Association argued the government should cut the corporate tax rate to 25 per cent to keep Australia competitive and reduce the risk of "income shifting".
Business Council of Australia chief executive Jennifer Westacott said that the government needed to order major spending cuts to stabilise future revenue growth.
"This system should be focused on achieving a better mix of taxes and getting more out of existing tax bases rather than introducing new taxes," she said.
"There is a delicate balance between attempting to fine-tune the existing system and reforming it to get the incentives right so that sufficient tax revenues are generated from a stronger economy."
In a submission, Property Council of Australia chief executive Peter Verwer said that the government needed to abolish inefficient state taxes and reduce the complexity in the tax system.
"Australia is weighed down by an inefficient and overly complex tax system," he said.
"State governments are over-reliant on inefficient taxes that reduce productivity improvements and the enhanced wellbeing of citizens."
Workplace reform 'not the only answer' on productivity, says Treasury boss Martin Parkinson
Lanai Vasek, The Australian, 19 September 2011
TREASURY boss Martin Parkinson says boosting productivity will require more than a simple focus on industrial relations, urging an emphasis on innovation, tax reform and training to lift national output and prosperity.
As Opposition Leader Tony Abbott promised a workplace relations policy based on “solving problems not ideology”, Mr Parkinson said it was not solely the commonwealth's responsibility to bring about productivity reform.
In an address to an Australian Industry Group forum today, the Treasury secretary said industrial relations was only part of the productivity picture. “If we think that all that is needed is to reprise what's been done beforehand - which appears to underlie some of the comments on industrial relations - then we have completely misjudged the magnitude of the transformation underway,” Mr Parkinson said.
“Let's be clear. As competition intensifies, as the global economy transforms, and as our population ages, we will need to look to further improvements in productivity to lift Australian living standards. Productivity is not about working harder or longer but about working smarter with what we have."
“This requires quality infrastructure, a competitive tax system, a highly skilled and flexible labour force and top-notch management skills able to innovate and capture opportunities.”
The Treasury boss also strongly rejected a return to protectionism, saying it would result in inhibited resources and opportunities for consumers.
“In short, responding to these calls would fly in the face of the lessons from our history, lessons learned the hard way,” Mr Parkinson said.
Mr Parkinson's speech followed that of Mr Abbott, who opened the Ai Group event. The Opposition Leader said there was a fundamental workplace relations problem in Australia and the Coalition would introduce significant reforms to the sector if it won government at the next election.
“The Coalition will have a strong and effective workplace policy that will be based on solving problems, not ideology,” he said.
Mr Parkinson said many productivity improvements would be found in new areas, especially in the services sector.
Others would come from reforming market structures and the taxation system.
Mr Parkinson said reform was the responsibility of the states and territories, as well as the commonwealth. “The commitment of the states and territories is critical to delivering on the productivity challenge,” he said.
Labor has been hit with a wave of calls for reform to its industrial relations policy, with many business sectors pushing for an overhaul to the Fair Work Act.
The Ai Group's chief executive Heather Ridout has called for several key planks of the policy to be removed, saying it is stifling productivity.
Prime Minister Julia Gillard is due to speak at tonight's Ai Group forum closing dinner.
Carbon tax will define our politics
Paul Kelly, The Australian, 17 September 2011
THERE is a brave fatalism about Julia Gillard - from the weakest ever position of any prime minister she introduced this week the complex carbon pricing bills, the reform that will make or break the current Labor generation.
Australian politics now moves with a grim inevitability. For Gillard, sinking on a 27 per cent primary vote and doomed in her alliance with the Greens, this is a heroic moment for Labor.
Speaking to the historic Clean Energy Bill 2011, Gillard told parliament the vote of every MP would be judged before history. Invoking the tradition of Labor reformism and mocking the negativism of Tony Abbott, she said: "The final test is not: are you on the right side of the politics of the week or the polls of the year? The final test is: are you on the right side of history?"
Her words capture Labor's crisis. Confronting defeat on the politics, Gillard appeals to the judgment of history hoping debate on the policy merits can grab victory from the jaws of defeat.
Labor is now committed. Gillard will remain PM to legislate the scheme and try to stage a revival. If she is replaced later any new Labor leader inherits the policy. For better or worse, Labor has made its generation-defining policy decision. The story of the Rudd and Gillard governments is dominated by the climate change saga and, above all, how the 2007 bipartisan Labor-Coalition support for carbon pricing fell apart in one of the most spectacular and least understood transformations of public opinion in Australia's history.
In the parallel universe of current politics Abbott's reply to Gillard was ferocious, almost frightening, in its intensity. He offered an opposing story: this was "a bad tax based on a lie". Gillard was "on the wrong side of truth" and her bills were "the longest suicide note in Australian history".
Abbott intends to win the next election opposing the tax. It is now the core of his political persona. He must repeal the bills in office, otherwise he would be destroyed as prime minister. This is his bond with the people and it will drive any Abbott prime ministership. It means a two-election strategy if needed, a first election followed by a double dissolution. Abbott is thinking along these lines.
If Labor tries to support carbon pricing post-election from the opposition benches, Abbott would intensify his campaign with the prospect of destroying Labor as a viable political force for many years.
Is Gillard's legislation the beginning of carbon pricing? Or is it the beginning of its end?
Australia has been heading towards carbon pricing since the late 1990s. In 2003 the Howard cabinet debated and rejected a scheme. In 2007, in the biggest reversal of John Howard's prime ministership he embraced the idea based on a committee report chaired by his departmental head, Peter Shergold. The team of bureaucrats that advised Howard also advised Kevin Rudd and Gillard on the same sort of market model.
As incoming PM, Abbott would find himself having to check and reverse one of the deepest policy convictions in the senior ranks of the public service: that carbon pricing is far superior to his own direct action agenda.
Read the full article here
Jurisdictions move towards full tax transparency
OECD Centre for Tax Policy, 12 September 2011
Furthering efforts to fight against international tax evasion and bank secrecy, members of the Global Forum on Transparency and Exchange of Information for Tax Purposes have issued 12 new peer review reports.
Reports on Andorra, Anguilla, Antigua and Barbuda, Austria, Bahrain, the Virgin Islands (British), Curaçao, Liechtenstein, Luxembourg, Saint Kitts and Nevis and the Turks and Caicos Islands focus on their legal frameworks which allow for transparency and exchange of tax information. The review of the United Kingdom also considers the exchange of information in practice.
In addition, two supplementary reports - for Belgium and the Cayman Islands - show that they are swiftly amending their domestic legislation to address recommendations made by the Global Forum in previous reviews. More details on all the reports are provided below.
The reports describe each jurisdiction’s rules for ensuring that information is available to the tax authorities, how it can be accessed by authorities and the mechanisms in place to exchange information with foreign tax authorities. They also identify deficiencies and make recommendations on how to improve co-operation in international tax matters.
In all 12 new reviews, the most common deficiencies relate to: the lack of available ownership information as regards trusts and bearer shares; incomplete accounting information for some forms of trusts and partnerships, including foreign or international entities; and some limitations in the international agreements allowing for exchange of information.
...
“The Global Forum’s peer reviews have produced real change. Global Forum member jurisdictions are implementing the international standard, signing hundreds of agreements and negotiating many others. Over recent years numerous countries have adapted their legislation to ensure the effective exchange of information. This will improve tax compliance, benefitting all countries. While progress is still required in a number of jurisdictions, for some the speed of change, prompted by the peer reviews, is such that supplementary reviews are already being triggered in order for new progress to be recognized”, said the Chair of the Global Forum, Mike Rawstron of Australia.
Read full media statement here
GST needs review, but not a rate rise
Colin Hargreaves, Australian Financial Review, 16 September 2011
It is great to see that finally the Treasury has realised just how inefficient the GST is. The GST needs reviewing but raising the rate is not the answer.
Read the full article on Australian Financial Review via a subscription.
Breaking the bank: what are the lessons from Britain’s housing market?
Mark Stephens, The Conversation 15 September 2011
Mark Stephens is a guest speaker at 'Improving housing affordability through tax reform: Australia and the UK in comparison' seminar in Sydney, organised by the Australian Housing and Urban Research Institute. The UK’s boom-bust housing cycle has led to knee-jerk government policy. Like Australia, the United Kingdom accords a particular value to home ownership that extends beyond the mere provision of housing.
We British like to think of ourselves as a “property-owning democracy” and our politicians saw the rise of the tenure throughout the last century as evidence of widening opportunities and the spread of wealth. However, allowing house prices to rise faster than earnings will price more and more people out of housing. And that is precisely what has happened in the UK.
British Department of Communities and Local Government figures show house prices in the mid-1990s were some 3.5 times average earnings. Now, even after some falls, they stand at seven times earnings. So it’s no surprise that ownership has been falling among the young – and now not so young.
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Taxation reform
The Taskforce also suggested that the reform housing taxation could be used to tackle the boom/bust cycle.
The UK has a form of property taxation called the Council Tax which is used to finance a minority of local government services – most funding now comes in the form of a grant from central government.
Properties are placed into eight bands according to the property’s value – in 1991! It is unfair because the banding system is designed to ensure that cheaper properties are taxed more heavily than expensive ones. It is also regressive between regions, with the highest priced areas being less heavily taxed than the low cost ones. It is not counter cyclical because it essentially raises a fixed sum to pay for local services. Thus during the long period of rising house prices until 2008, Council tax as a proportion of property values fell from 0.7 per cent to 0.5 per cent. But the Council Tax could be reformed to overcome these deficiencies to turn it into a tool with which to counter house price volatility. This could be achieved gradually over time.
First the number of bands in the Council Tax could be increased, and revaluations take place more frequently. We could then shift to a ‘point value’ system based on property values in place of bands. This would increase the relationship between property value and tax liability. Third, the central government grant to local authorities could be adjusted so that it falls in areas where prices rise and rises in areas where prices fall. Eventually the link between the tax and local government could be broken and the tax become a national property tax allowed to rise and fall according to price movements.
Rebate system
A rebate system would need to be established to protect the “income poor but asset rich”. As Oxford economist John Muellbauer has argued, such a system would provide a counter-cyclical balance to the housing market cycle, as the tax would represent a higher proportion of the cost of housing services as prices rose and a smaller proportion as they fell. The Taskforce concluded that more work would need to be done to establish the benefits of such as system, but it seems likely that a property tax is likely to form a part of any serious anti-volatility strategy.
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Sector in the Taxman's Sights – Opinion
Myles McGregor Lowndes, ProBono News, 15 September 2011
The taxation environment for community sector organisations may change significantly in the immediate future after a decade of incremental administrative reform and two decades of inquiries that have spawned many disregarded recommendations.
It is yet unclear whether the real driver for the mooted reforms is the revenue authorities’ desire for greater regulation and compliance, leading to a constriction of concessional treatment, or to ensure the benefits which the community sector brings to Australian society and general community well-being. At present, the rhetoric oscillates between these motives and it is not inconceivable that different policy actors are pursuing different purposes for taxation reform for the community sector. This article reviews recent reforms for the sector, identifies reforms currently proposed and then looks to possible future taxation reform.
REFORMS SINCE THE GST
The introduction of the Goods and Service Tax (GST) marked an increased focus on taxation of the community services sector by the Australian Tax Office (ATO), with the need to identify charitable and deductible gift recipient status accurately, for certain GST concessions and treatments. This required registration of all such entities through an endorsement process. Together with selective audits, this has reduced the number of organisations eligible for such concessions. Very few minor categories of income tax exemption have been added; for example, closed religious orders and selfhelp groups. Fringe Benefits Tax (FBT) concessions were capped to either $30,000 or $17,000 per employee and left unindexed, resulting in erosion of their value over time.
During this time there was an inquiry into the suitability of the common law definition of charity (the Charities Definition Inquiry) which recommended expanding the definition of charity by amending federal legislation. While a draft bill was prepared, only a few minor issues were eventually legislated because of concern over various features of the bill, including advocacy and the treatment of unrelated business income. One of the drivers for the Inquiry’s recommendations was the lack of cases considering the common law definition of charity taken to the High Court. However, subsequently, three High Court cases have in fact advanced the common law treatment of issues surrounding charities’ unrelated income, advocacy, and performing overlapping government functions. All three cases were decided in favour of the charity leading to advancement or clarification of the law of charity.
The Howard Government sought to increase philanthropy through a combination of awareness campaigns and taxation incentives for gift donations. New taxation incentives included averaging of gifts over a period of income years and deductibility of conservation covenants; but the most significant was a private foundation vehicle – Private Ancillary Funds – to allow tax deductibility of gifts from private families or businesses. Tax deductible gifts have risen rapidly: from $744 million in 2000 to over $2 billion in 2009.
IMPENDING REFORMS
The 2011 Budget included plans for a number of reforms which concern the community sector:
- introduction of a statutory definition of ‘charity’ for federal purposes by 1 July 2013; this will take its lead from the Charities Definition Inquiry which recommended a wider definition of charity than was achieved through legislative amendment;
- consultation with states and territories to develop and adopt a uniform definition of charity;
- establishment of an Australian Charities and Not-for-Profits Commission (ACNC), which will re-assess the charitable status of organisations on the basis of the new charity definition;
- establishment by the ACNC of a general reporting framework for charities through a public information portal by 1 July 2013; and
- removing tax concessions from income generated by and retained in new unrelated commercial activities commencing after 10 May 2011 (Budget night). Initially only applying to new commercial activities, existing activities will be phased in over time after consultation. Treasury subsequently released a Consultation Paper about reforming the use of tax concessions by businesses operated by not-for-profit (NFP) entities. It broadly proposed that NFP entities pay tax on any retained earnings (i.e. income not remitted and applied to the purposes of the tax concession entity) and that existing input tax concessions such as FBT and GST would not be available for unrelated commercial activities.
Further, the Government has indicated that it intends to amend the taxation laws to prevent community sector organisations transferring untaxed funds overseas, by requiring tax exempt organisations to operate and pursue their objectives principally (more than 50 per cent) in Australia.
From 1 January 2012 the Government also intends to reform the regulation of Public Ancillary Funds (often known as ‘community foundations’). These funds seek donations from the public and then distribute the funds only to other deductible gift recipients. The reforms include a minimum annual distribution of 4 per cent of net assets; requiring funds to have a corporate trustee; and requiring them to file audited financial returns.
FUTURE REFORMS
There are many recommendations yet to be actioned by the Government; the most controversial is likely to be that involving the FBT concessions. The Australia’s Future Tax System Review, led by Ken Henry, recommended that
FBT concessions enjoyed by the sector should be reconfigured. This was supported by the Productivity Commission’s research report on the NFP sector. The recommendation included a 10 year phase-out period, with the concession reduced gradually and replaced with direct government funding. The rationale for this reform is that the FBT concession gives community sector organisations a competitive advantage in mixed sector markets (e.g. hospitals and nursing homes) contributing to wage inflation and exacerbating labour shortages. In its place, direct government funding would be available to all tax concession community sector organisations, for funding specific projects or to assist with the cost of recruiting specialist staff. The report did note that removing FBT concessions where there was no direct for-profit competition may result in downsizing or closure of programs.
The Productivity Commission Research Report also drew attention to the FBT meal entertainment benefit – which, through a twist of the law, is presently uncapped – and noted that there was a strong case to limit or eliminate this concession. Further, the Productivity Commission suggested that the common law of mutuality which applies to machine gaming clubs might be ripe for reform on competitive neutrality grounds and that the scope of gift deductibility should be widened progressively to include all endorsed charitable funds and institutions.
CONCLUSION
After years of inactivity in both the legislative and judicial arenas, the community services environment is facing a relatively active phase in taxation reform. Most of the proposals before Parliament are clearly aimed to increase regulation on, and enhance compliance of, the community sector. Arguably, improved accountability should boost the community’s trust of the sector, through better governance and sustainability, leading to increased donations and volunteerism. Widening the scope of community organisations that will qualify for charity status, reducing the red tape costs of achieving that status, and streamlined financial filing may also be realised. The devil will be in the detail, and the outcome affected by whether the dominant motive is to restrict concessional treatments or to facilitate a robust and sustainable community organisations sector.
Professor Myles McGregorLowndes OAM is the Director of The Australian Centre of Philanthropy and Nonprofit Studies (ACPNS) at the Queensland University of Technology.
GST rise not the answer: Wong
Fleur Anderson, Australian Financial Review, 15 September 2011
A rise in the nation’s healthcare costs worries the Gillard government but increasing the GST is not the way to pay for it, Finance Minister Penny Wong says.
Read the full article on Australian Financial Review via a subscription.
No reform or tax cuts 'for years', says Greg Smith
David Uren, The Australian, 14 September 2011
THERE is little chance of any serious tax reform or personal tax cuts until late this decade, according to one of the members of the Henry review panel. Greg Smith, who was in charge of tax policy at Treasury until 2004, said there would be no money in the budget to support tax reform until 2017-18 at the earliest.
Mr Smith yesterday told a Canberra conference on federal funding that households faced a tax squeeze on their incomes while Australia's business tax system was destined to become ever less competitive. "For the next three or four years, you're not going to see huge reform. We're in a period of preparation for more structural reform for when there is more fiscal capacity later in the decade," he said.
Inflation meant that taxes would be taking a rising share of household income every year. "In the past we have given back that fiscal drag in tax cuts, but there is none for the next period," he said. The position of the householder would be made worse by the rise in the superannuation guarantee levy as the cost of this would be borne by the household, not the employer, Mr Smith said.
In 2000, when Australia's company tax was cut to 30 per cent to make it more competitive with the rest of the world, it was leap-frogged by the EU, which cut its company tax to 23 per cent. In China, the tax rate is 25 per cent, while it is less than 20 per cent in Singapore and Hong Kong. Australia is one of the last countries with dividend imputation, which reduces the burden of company tax for domestic shareholders, but it is increasingly uncompetitive internationally.
Mr Smith said he expected pressure from business and households to create a climate for structural reform later in the decade. Mr Smith said that the most significant reforms to state taxes included in the Henry review were abolishing payroll tax and insurance taxes, and replacing them with consumption taxes.
It also recommended that property transfer taxes be replaced with a broad-based land tax. Replacing vehicle fees with road-user charges was also a larger structural reform, to be considered alongside rethinking the way cities are planned.
Robert Manne throws truth overboard
Paul Kelly, The Australian, 14 September 2011
THE key to understanding the 40,000-word attack by Robert Manne on The Australian is to grasp the framework he adopts to analyse journalism and politics.
There are four themes in Manne's essay that deserve to be highlighted. First, he claims The Australian has damaged the country and undermined journalism by publishing material and conducting debates that he feels should be repressed.
Second, his focus is largely on editorials. With the exception of his attack on foreign editor Greg Sheridan, Manne makes no serious critique of the stance of any of The Australian's senior political analysts. He believes the paper has damaged our democracy but cannot identify the "guilty" journalists who have perpetrated this crime.
Third, Manne assumes the paper's coverage of numerous issues is invalid, notably stories critical of the Rudd government, yet he fails to mount an intellectual case showing how and why such stories were unjustified.
Finally, despite an interview of nearly two hours with editor-in-chief Chris Mitchell and me, where replies were offered point by point, Manne fails to publish such responses, a strange position for an academic preaching fairness.
This article analyses Manne's essay for its perspective on journalism and then politics.
Paul Kelly is the Editor-At-Large at the Australian
Treasury slams inefficient GST
Fleur Anderson, Australian Financial Review, 14 September 2011
Federal Treasury has warned the Gillard ¬government that the GST has become less robust and increasingly inefficient as it leaks $15 billion a year due to tax breaks on items such as private health insurance, private schooling and existing housing.
Read the full article on Australian Financial Review via a subscription.
Old talk on tax and jobs
Michael Stutchbury, The Australian, 13 September 2011
THE first week of October will include a two-day "tax forum" with a program that excludes the obvious next step in tax reform. It will be immediately followed by Labor's one-day "future jobs forum" that shows no sign of recognising the pressing need for more labour market flexibility.
Both forums have been forced on the government. Wayne Swan is holding the October 4 and 5 tax forum at the insistence of balance-of-power independent MP Rob Oakeshott.
After botching the mining super profits tax and bleeding badly from the mooted carbon tax, the Treasurer has shown little stomach for the Henry review's tax agenda, such as increased consumption tax to finance sharper work incentives or more use of congestion charging to ease urban infrastructure bottlenecks.
The October 6 jobs forum announced by Julia Gillard and Swan on the weekend aims to head off Labor backbench and trade union demands for an inquiry into manufacturing after the mining boom's strong dollar forced BlueScope Steel to mothball its export business.
The unions don't mean a fair dinkum Productivity Commission inquiry into the costs of propping up uncompetitive industries or imposing new inflexibilities on how manufacturers can more productively employ their workforces in response to the strong dollar squeeze.
Instead, they mean the sort of inquiry Kevin Rudd got former Victorian premier Steve Bracks to do for the car industry in 2008. That predictably found reasons to extend heavy "transitional" government subsidies to Victoria's car industry out to at least 2020, past the previous 2015 cut-off.
So a one-day talkfest is better than an inquiry into how to make big mining projects buy more higher cost Australian steel. Yet the manufacturing focus is odd because manufacturing employment has been falling for decades. Gillard suggested in question time yesterday that the "jobs for the future" forum was about ensuring that Australia would "continue to make automobiles".
It's all part of the protectionist tease Gillard is playing with Tony Abbott. Choosing his words carefully, Abbott is flirting with government support for the steel industry to maximise the political pressure on Gillard's carbon tax.
In return, Gillard is making it awkward for Abbott by pointing to his planned budget cuts to car industry subsidies, proposed when government debt was politically more potent than manufacturing job losses. In turn, it has taken the BlueScope job losses for Abbott to mention winding back Gillard's labour market reregulation, thus exposing himself to charges of wanting to revive John Howard's Work Choices.
Amid what should be a side issue of boatpeople, it's all defensive and small-minded. The political debate is being wagged by claims that Australia is gripped by a nasty dose of Dutch disease that is poisoning the source of our jobs and wealth.
Yet what actually is happening is that Australia has grabbed global first-mover advantage in supplying the Asian surge in demand for raw materials. In less than a decade, mining's share of the economy has doubled from 5 per cent to 10 per cent, now matching the scale of manufacturing. And this doesn't account for what Port Jackson Partners director Angus Taylor suggests is Australia's emerging "cluster" of world-class natural resource-based service companies.
The observation follows the work of US economist Michael Porter, whose influential 1990 book The Competitive Advantage of Nations explained how "related groups of successful firms and industries emerge in one nation to gain leading positions in world markets".
Porter examined the Germany chemical and printing industries, Swiss textile equipment and pharmaceuticals, Swedish mining equipment and truck manufacturing, Italian fabric and home appliances and American computer software and movies. Taylor suggests that Australia is building a cluster of globally competitive service and supply companies around our natural advantage in mining, energy and agriculture, just as Haliburton and other US oil and gas service companies developed on the back of Texan oil reserves.
Already, nearly 70 per cent of the value of the Australian stock market is comprised of businesses fully or partly engaged in commodities or supporting services, Taylor estimates in a report for the ANZ Bank reported in this newspaper last week.
The cluster includes contract mining, engineering services, explosives, fertiliser and pesticides, freight transport, IT and technology research and development. It extends to firms providing finance, accounting and legal services.
Think Leighton Holdings, the world's largest contract miner; Orica, the chemicals and mining manufacturing company operating in about 50 countries; Incitec Pivot, a global chemicals company in agriculture and mining; and Worley-Parsons, which supplies engineering, procurement and construction management services to the global energy industry.
"The strength of Australian natural resource industries has meant that many of these service providers have developed successful global strategies, and are growing rapidly on the back of their global businesses," Taylor concludes. "Australian natural resource players are increasingly outsourcing specialist skills to dedicated suppliers. These organisations are following their customers offshore and are now exporting their expertise to the world".
This is how Australia's business economy is being reshaped by our China boom. Yet this new growth cluster is not easily captured by the traditional industry statistics, allowing the Australian Manufacturing Workers Union to diminish the scale of resource-based job opportunities. Mining site jobs typically pay more because they are capital intensive. And mining services jobs require a range of skills that are globally in demand.
However, making the most of these China boom opportunities will require massive investment, Taylor cautions. And the sort of tax, industrial relations and other policies required to justify this investment are being crowded out by the whingers in the old protected industries.
Workers at Toyota's Victorian plant are exploiting Gillard's pro-union industrial relations laws to reportedly plan another 48-hour pay claim strike this week, even though their jobs are subsidised by Australian taxpayers, Australian car buyers and Japanese shareholders. They don't sound like jobs of the future.
Michael Stutchbury is the Economics editor at the Australian.
Fat tax may soon be reality
Breanna Tucker, Canberra Times, 11 September 2011
FAT AND sedentary people should be taxed to encourage the uptake of a more active lifestyle, a university professor has suggested.
Charles Sturt University academic Robert Robergs says decades of government campaigns to address unhealthy eating and exercise habits have failed and it is time to take more drastic action.
In his inaugural speech to the School of Human Movement in Bathurst, the professor of exercise science suggested unhealthy lifestyles were just as addictive as tobacco and alcohol.
He said the associated rise in lifestyle-related diseases such as diabetes, cancer, hypertension and cardiovascular disease were costing the Australian Government $1.5billion a year. But governments could not be expected to continue covering those costs.
''We've done it to the tobacco industry, we've done it to the alcohol industry,'' he told the Sunday Canberra Times yesterday. ''We decided we needed more tax dollars to overcome the increasing health care costs of treating people with diseases related to these products and the fast food industry is really no different.''
Mr Robergs said food manufacturers were engineering their products to become more addictive, including creating mixes of high-carbohydrate, fat and salt products that enticed consumers to crave more.
This meant those companies should take some responsibility for the nation's eating problems, particularly as Australians continued to ignore warnings of negative health effects associated with a sedentary lifestyle.
Mr Robergs said the nation's ''she'll be right'' attitude meant many people were not concerned about their unhealthy lifestyles. Taxing people for a sedentary lifestyle, or providing rebates for those shown to be healthy, might be the kick up the backside we need.
''This isn't my idea. I have Australian government documents showing this is already being considered by the Government and its affiliates as a form of disease prevention,'' he said.
''It may not happen, but it is being discussed, and there is logic behind it that shows the question should be asked.''
Australia Plans Shipping Tax Reform
Enda Curran, Wall Street Journal, 9 September 2011
SYDNEY—Australia will introduce major tax breaks for shipping companies and a new international register for the 200 billion Australian dollar (US$213 billion) industry, the world's fourth-largest shipping market by volume.
Some 10% of the global sea trade is managed in Australian ports, employing more than 14,000 people. But although 99% of the Pacific nation's trade is sea-borne only a tiny fraction is carried in Australian flagged vessels.
At the core of the shipping plans are tax breaks for companies and employees, an Australian international shipping register, a new licensing regime and steps to boost skills development, all set to be implemented from July 2012.
Currently 22 Australian-registered major trading ships operate in the country's waters, down from 55 in 1995. Just four of these vessels, gas tankers, are dedicated to international trade.
"If we do not act now the Australian shipping industry will be lost forever," said Anthony Albanese, infrastructure minister in a keynote speech here, citing national security, the economy and environment as key themes behind the reforms.
In the tax changes, Australian resident companies with locally registered vessels won't pay company tax, qualifying income from shipping and royalty withholding tax will be exempted. In an effort to speed up renewals of an ageing fleet the depreciation rate will be cut to 10 years from 20 years. Roll over relief will also be offered and tax offsets will be available to Australian employers of resident seafarers who work in international trade.
But to qualify for the tax breaks, vessels must be Australian flagged and meet other conditions, including staying in the regime for at last 10 years.
A new International Shipping register will be established to attract companies to boost the number of ships carrying the Australian flag and a range of changes will be made to the existing licensing rules on access to the coast.
Other measures include boosting the skills of sea hands and a new deal between employers and unions.
"We think it's a pretty good package," said Llew Russell, chief executive officer of Shipping Australia, a representative body for Australian and international shippers. Unions also backed the proposals. Paddy Crumlin, national secretary of the Maritime Union of Australia said the measures will boost Australian based shippers competing offshore.
Vote in doubt as miners confirm Wilkie's tax concerns
Joe Kelly, The Australian, 9 September 2011
LABOR'S revamped mining tax has been thrown into jeopardy, with key crossbencher Andrew Wilkie demanding changes and Greens leader Bob Brown strengthening calls for a comprehensive review.
As Senator Brown yesterday warned that the mineral resources rent tax would result in an increased federal deficit and the loss of more jobs, Mr Wilkie indicated that his vote to pass the mining tax legislation could not be guaranteed.
Mr Wilkie, who visited Western Australia for four days from Sunday on the invitation of WA National Tony Crook, told The Australian the tax remained "unsatisfactory" and disadvantaged junior players.
He said the government had not adequately consulted with the smaller miners and the trip had confirmed his initial concerns, which he intended to convey to Julia Gillard next week.
"The MRRT as is currently is unsatisfactory . . . I do believe that the smaller miners still have not been heard. They don't feel they've been adequately consulted," he said. "My position is that we need to see changes to the MRRT. There certainly needs to be at least changes to what's on the table."
During his four-day trip, Mr Wilkie met with mining executives to investigate the impact of the MRRT, and visited BC Iron and Integra Mining operations. He said yesterday he believed the threshold at which the tax kicked in -- $50 million -- was too low, the depreciation arrangements favoured big miners, and he would raise with the government the planned 6c a litre cut to the diesel fuel rebate because it would hurt smaller operators.
Association of Mining and Exploration Companies chief executive Simon Bennison yesterday called on the government to redesign the tax and encouraged independent MPs to push for a review of the measure.
"We would encourage the government and any other independents to push hard on reviewing the MRRT in the context of the overall tax reform initiative," he said.
An angry Senator Brown included the MRRT in a broader attack on the government yesterday, having previously slammed Labor for watering down Kevin Rudd's resource super-profits tax.
The Greens leader released an economic analysis last month suggesting the tax could raise up to $115 billion less than the RSPT by 2020-21, and yesterday strengthened his call for a total rethink of the MRRT.
"There needs to be a complete review in light of the emerging and blatantly clear evidence now that mining is not good for the rest of the economy," Senator Brown said. "The way the (mining tax) is working is seeing more money fly out of the Gillard government's coffers than into it."
The tax negotiated by Julia Gillard with Xstrata, BHP Billiton and Rio Tinto cut the effective rate of tax from 40 per cent to 22.5 per cent and narrowed its scope to capture only iron ore and coal.
Australia’s productivity: what can be done?
Saul Eslake, The Conversation, 9 September 2011.
What is to be done about Australia’s deteriorating productivity performance? It’s by no means inconceivable that the answer to this question could be “nothing”. Historical precedent strongly suggests Australians and their politicians will feel no great compulsion to embrace a program of productivity-enhancing economic reforms as long as the mining boom delivers continued growth in incomes and high levels of employment.
It is also possible that the difficulties now being encountered by sectors of the economy adversely affected by some of the side-effects of the mining boom, (in particular the rising exchange rate) will prompt those businesses to prioritise productivity as a matter of survival, without any need for public policy changes.
But if Australian policy-makers were to seek public policy solutions to the problems posed now or for the future by Australia’s deteriorating productivity performance, what might those look like?
At the outset, it is important to keep in mind that productivity improvements occur as the result of decisions taken by and implemented in enterprises and workplaces, not as the direct result of public policy initiatives. Still, there are a number of ways public policy initiatives can contribute to improving Australia’s productivity performance. T
hey can increase the incentives for the owners or managers of enterprises (including government agencies themselves) to make productivity-enhancing changes, either to goods and services, or production. They can increase the ability of owners or managers to implement changes or alternatively, reduce the barriers and obstacles. Or they can facilitate the movement of factors of production from existing uses to new combinations that result in higher levels of overall productivity – that is, foster innovation.
As Treasury Secretary Martin Parkinson has commented: “we do ourselves, and the nation, a disservice if we target reform efforts only on the same areas as we have in the past”.
Many of those past reforms were, intrinsically, once-offs: tariffs, once reduced to minimal levels, can’t be cut again; government monopolies, once privatised, can’t be privatised again (unless they’ve been re-nationalised in the meantime); markets, once de-regulated, can’t be de-regulated again (unless the de-regulation has been only partial, and there’s a good case for going further).
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Taxation reform
Tax reform could play an important role in improving Australia’s productivity performance. Australia’s personal and business income tax systems (and state land and payroll tax systems) are littered with exemptions and concessions conferring favourable treatment on particular groups of taxpayers, particular forms of business organisation, or particular types of economic activity at the expense of others.
The Henry Review of Australia’s tax system urged that “Australia should configure its tax and transfer architecture to promote stronger economic growth through participation and productivity”. Unfortunately, many of the review’s recommendations to that end were promptly ruled out – by both sides of politics – for transparently political reasons.
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Read Saul Eslake’s full report here.
LNP URGES QLD LABOR TO OPPOSE CARBON TAX
Chris O'Brien, ABC News, 7 September 2011
The Opposition has used the federal carbon price debate to attack the Bligh Government in the Queensland Parliament. The LNP says public opinion is largely against the new tax.Opposition Leader Jeff Seeney says state Labor should fight it.
"There is no greater issue where Queenslanders need their Government to stand up for their state - and for their families," Mr Seeney said. "Tonight we give them one more chance to join with us and to oppose Julia Gillard's carbon tax."
Treasurer Andrew Fraser says the State Government supports a carbon price but has asked for Commonwealth compensation. "The State Government supports the need for action on climate change and acknowledges that the overwhelming majority of economists agree that pricing carbon is the most economically efficient way to deal with climate change," Mr Fraser said.
"We call on the Federal Government to provide further assistance to Queensland to facilitate the transition to a cleaner energy economy."
Power prices
Meanwhile, the Queensland says the State Government has the wrong approach to electricity prices.Parliament last night began debating a new method for calculating power bills.
The LNP's Steve Dickson says the changes will not help struggling families and should be scrutinised by a Parliamentary committee. "Take it in your mind, take it in your heart, and really think about the mums and dads, the grandmas - everybody that's even related to you," he said. "I'm sure that you've got a family member doing it a bit tough - think of them before you move forward in what I believe would be the wrong direction. Forwarding it to the committee is the right thing to do - give it a go."
Energy Minister Stephen Robertson says the Queensland Competition Authority is already studying the changes and will release a report early next year. "We will all have the opportunity to analyse what that means," Mr Robertson said. "There will be further amendments brought to this house under the new committee system that would allow for exactly what you are attempting to do."
LABOR WOEFUL ON ECONOMIC REFORM, SAYS ARGUS
Peter Ker and Ben Schneiders, The Sydney Morning Herald, September 6, 2011
THE Gillard government has been attacked by one of its most trusted business and taxation advisers, former BHP Billiton and National Australia Bank boss Don Argus, who has accused the ailing government of being lazy on economic reform.
His attack came on the eve of devastating new poll figures for Julia Gillard, with Newspoll showing she trails Kevin Rudd as preferred Labor leader by 24 per cent to 57 per cent. The government has also fallen further behind the Coalition, trailing 41-59 on a two-party basis, while Ms Gillard trails Tony Abbott as preferred prime minister 34-43.
Barely a year after he was appointed by Labor to advise on delivering its mining tax, Mr Argus said there had been too little thought devoted to how to spend the proceeds of the tax. In a wide-ranging lament over the state of economic reform, Mr Argus said productivity growth was ''woeful'', industrial relations had gone backwards under Labor and there were grounds for concern over inflexibility in the labour market.
He saved his strongest salvo for Labor's carbon tax, which he said was ''imprudent'' given the fragile state of the economy and the absence of similar action in other nations. He said he accepted the science of climate change but was worried the government was motivated more by politics than science in choosing how to combat emissions growth.
Mr Argus cited the exclusion of carbon capture and storage from the $10 billion clean energy funding package, and said he was ''bemused'' that large sums of money were being dedicated to risky and expensive renewable energy projects instead of gas.
This highlighted how '' politically expedient'' the government's tax reform agenda had been, he said. It had rushed into proposals ''simply designed to navigate the political landscape of the day, and not in the best interests of our country.
''There are similar problems with the [mining tax], where there has not been enough critical evaluation about how the proceeds will be spent. We have a unique opportunity to use these funds for infrastructure that is much needed.''
PYNE OUT TO THWART 'RUSHED' CARBON VOTE
Samantha Donovan and staff, ABC News, 6 September 2011
The Opposition says it will use whatever means necessary to thwart the Government's ambition for a vote on its carbon tax legislation next month.
Anthony Albanese, the Government's Manager of Business in the House, has confirmed 13 carbon tax bills will be introduced into Parliament next week. The Opposition has consented to starting earlier on Tuesday and the Government wants the debate to start the next day.
But the manager of Opposition business, Christopher Pyne, is not happy with Labor's timetable. Mr Pyne has written to Mr Albanese pointing out that parliamentary rules require that after its introduction the debate of a bill must be adjourned to a future sitting.
He says the Opposition will not agree to the carbon tax bills being debated immediately.
"What normally happens is a bill is introduced and then sits on the table for about a week while members get the opportunity to study it," Mr Pyne said. "There might also then be a committee process, which reports, and then it can be some time before the bills get their second reading or they start the actual debate.
"What he [Anthony Albanese] is doing is ramming the bills through the Parliament, probably out of embarrassment because of the Government's poor standing, and their view that if they push this carbon tax through now, it would be a better distraction from their border protection policies."
Scrutiny or tactics?
Mr Pyne says the Opposition will resist the Government's plan for a swift vote in any way it can, but he says it is a matter of proper scrutiny, not delaying tactics.
"I mean, how can people debate legislation before they've heard from the committee about its particular import and some of its twists and turns?" he said.
Mr Albanese would not say if the Government would guillotine or gag the debate to end any Opposition delaying tactics. "We're determined to get this legislation through. There's no ambush. We're letting people know. I rang the Opposition and gave them the courtesy of letting them know," he said.
The Greens are siding with the Government, with deputy leader Christine Milne saying she does not think a vote on the carbon tax legislation by the end of October is too ambitious.
"We've clearly been talking about exactly what is in this set of bills for some time; the exposure drafts have been out there, the community knows what we're discussing," she said. "What will be required here is the Coalition to engage this legislation in a constructive way. Clearly they engaged in a long filibuster on the carbon farming initiative, opposed the bill, and then said they wouldn't repeal it when they move into government.
"It's now going to be up to the Coalition not to filibuster but to actually engage the bills appropriately."
GILLARD SHOULD GO FOR BROKE
Alister Drysdale, Business Spectator, 5 September 2011
The floundering Gillard government is dead. That’s the overwhelming take from the nation’s media since the High Court delivered its decision on Australia’s obligations to asylum seekers.
Until that point, last Wednesday, the government was barely hanging on. The carbon tax, the Craig Thomson shenanigans and Tony Abbott’s disciplined negativity and his control of the political debate had the government in open survival mode. Abbott’s telling mantra of an “incompetent" government was resonating. And the Labor brand itself was putrid, as recently published state polls numbers in Queensland, Tasmania and Victoria attest.
The media was playing its part with gusto. Rupert Murdoch’s organisation was, and remains, hell-bent on regime change – whatever the cost. His tabloids are not reporting news. They concoct fear and demand and promote loathing. A couple of days before the court ruling, Murdoch’s national daily was forced into an abject apology after running a story that gleefully misreported on Gillard’s private life from 20 years ago.
Other media outlets played catch-up. The commentary on Gillard remained personal. The shock jocks were threatening and bullying, showing contempt for ordinary standards of decency and fairness. Over the past few days, speculation about Gillard’s hold on the prime ministership has swamped our media.
Mostly the talk is confined to unnamed sources, although the notoriously self-centred and shallow former ALP power broker Graham Richardson went on record to predict her demise within months. Adding to the maelstrom, ministers have been forced to defend her in every interview on any subject.
As expected, Gillard has remained unmoved. After all, she is the prime minister in a functioning parliament, presiding over the passing of more than 185 pieces of legislation, a decent budget and a soon-to-be passed law on a carbon price and an overdue MRRT.
But she’s operating in an almost unprecedented toxic political space. The Opposition, prominent media figures – as well as sections of a divided and factionalised union movement and employer organisations – are on a single course.
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She should also go for bold – as she has with the health agreement with the states and the NBN – on meaningful and far-reaching tax reform at next month’s summit. She should go bold on foreign investment rules, and on government and business relationships with China which former ambassador Geoff Raby predicts will have an economy four times its current size within just 20 years. What an opportunity.
There’s absolutely no point in Gillard shrinking, swallowing or taking the low road on any issue. She simply stares down the backbench critics, plays hard-ball with the Independents and Greens, ignores the media cycle and its incessant demands and sits behind her desk and governs.
Julia Gillard has just two years left and can still leave her august and important – but always temporary – job with a strong, positive and lasting Keating-like policy legacy.
There’s now no excuse.
Alister Drysdale is a Business Spectator commentator and a former senior advisor to Malcolm Fraser and Jeff Kennett.
INVESTING IN UNIS COULD REAP BILLIONS
Breanna Tucker, The Canberra Times, 5 September 2011
A new focus on universities as the key driver of Australian productivity growth could raise the nation an extra $325billion by 2040, a new report shows.
Universities Australia will today issue a report that suggests increased investment in the sector will produce more jobs, higher salaries and greater social and health benefits than any other publicly identified and costed reform. A Productive Country also suggests such investment could solve the nation's problems of a ''patchwork economy'' and now would be the perfect time to act. Universities Australia chief executive, Glenn Withers, said the report focused on the benefits of implementing the Bradley review into Higher Education reforms, particularly a recommendation to increase public funding of universities by 10per cent.
He cited KPMG Econtech modelling which estimated full implementation of the Bradley review concepts would add an extra 5.6per cent to national productivity and 6.4per cent to Australia's gross domestic product by 2040. This compared to a GDP pay-off of 0.02per cent for the Henry tax reform and 2per cent for the National Broadband Network.
This was consistent with research showing the rate of return for investment in education and research was 15 to 25 per cent compared to just 10per cent for investment in business.
WE NEED A TAX SYSTEM THAT REDUCES INEQUALITIES
Jeff Lawrence, The Canberra Times, 2 September, 2011
Warren Buffett, the third-richest man in the world, thinks that the American tax system is skewed in favour of the wealthy at the expense of everyone else. He thinks there are too many loopholes that allow him and his fellow billionaires and millionaires to avoid paying their fair share of tax, and believes that taxes should rise on high-income earners.
Although there are a lot of differences between the American and the Australian tax systems, there are a lot of similarities, too. Loopholes and exemptions allow the well-off to avoid their full responsibilities, pushing more of the tax bill on to ordinary wage and salary earners.
New research issued this week by the ACTU shows that Australians share Buffett's views about the tax system. Surveys show that Australians want to reduce the level of inequality, and to do so partly by increasing the taxes paid by the most well-off.
Research also shows that Australians have become more likely to favour increased social spending on vital services like hospitals and schools, rather than tax cuts, over the past two decades. Despite this, the public debate about tax reform tends to proceed from the assumption that taxes are a burden, that taxes are too high, and that Australians are clamouring for tax cuts at any cost.
The problem is that this isn't true. Australians actually pay less tax than the citizens of almost any developed country. Out of each dollar of national income, Australian governments (federal, state and local) take 27.1c. This ratio is well below the OECD average of 34.8per cent, and below many comparable countries like Canada (32.3per cent), New Zealand (33.7per cent) and Britain (35.7per cent).
In fact, we barely pay more in tax than Americans, where 26.1per cent of GDP is paid in total tax revenue. American governments actually spend more than our governments, running up large deficits to make up the gap between revenue and spending. Contrary to the impression that you might get from listening to some politicians and business advocates, the total size of Australian governments' tax revenue hasn't been rising, either. The tax-to-GDP ratio has been more or less stable since the mid-1980s.
On this page yesterday, the Institute of Public Affairs' Julie Novak criticised the ACTU's discussion paper on a number of grounds, all of which are fairly flimsy. First, she suggests that Australia shouldn't be compared with other developed nations like Canada, New Zealand, Britain and the rest of Western Europe. Instead, she suggests that we should compare ourselves with East Asian nations that lack our quality public education and health systems as well as a robust social safety net. We disagree with Novak - public policy should be directed towards trying to boost all Australians' standard of living, not by racing to the bottom.
Novak also claims that superannuation should be treated as a ''tax'', even though the OECD disagrees with her. Super contributions are compulsory, but they remain the property of each Australian worker; they are not a tax. She is similarly disingenuous in suggesting that our fiscal deficits and tax expenditures should be taken into account when comparing ourselves with the rest of the world, but takes no account of other countries' deficits and tax expenditures, leading to a distorted comparison. These are the sort of misleading claims that we are trying to dispel by releasing research related to tax.
In the coming months, in the lead-up to the national Tax Forum in October, tax will be a hot topic. It's important that participants in the tax debate acknowledge a few facts: that we're a low-tax country, and we've been a low-tax country for a long time, and that Australians want a tax system that is progressive and fair, to pay for vital public services. As Ken Henry has suggested, the tax system should reflect ''the kind of society we aspire to be''. The ACTU and the union movement will be taking the opportunity of the Tax Forum to advocate for real tax reforms that help to make Australia a fairer, more productive place. ''Reform'' should not imply an unending series of cuts to business tax and tax rates for high-income Australians. It should strengthen, not weaken, governments' ability to provide the high-quality public services and social security that Australians want, need and deserve.
As Buffett has recognised, the low road of cutting taxes for the well-off while cutting services for everyone else is no way to run a country.
Jeff Lawrence is Secretary of the Australian Council of Trade Unions.
UNION TAX PLAN A RECIPE THAT WILL WEIGH US DOWN
Julie Novak, The Canberra Times, 1 September 2011
The ACTU's recipe for national taxation reform will merely serve to weigh down our future economic growth prospects.
In research released this week the ACTU has outlined the results of a survey of 1000 people finding that a majority of respondents favour higher tax rates on high-income earners.
On the basis that ''real tax reform is reform that is directed towards satisfying Australians' needs and preferences'', the ACTU uses these survey results to commend to governments a more progressive taxation system.
The idea behind this notion is that an increase in the degree of tax progressivity will generate more revenue to fund government services. The ACTU suggests that there is significant scope for increasing taxes because Australia is a ''low tax country'' in comparison with its OECD counterparts.
According to data presented by the ACTU, taxation revenue as a proportion of GDP for Australia was 27.1 per cent in 2008-09, the sixth lowest tax to GDP ratio for 33 countries sampled. By contrast the OECD average of taxation revenue to GDP was 34.8 per cent in the same year.
Such favourable comparisons are often used by interests seeking a greater role for government in economic activity, however they tend to mislead the general public about the true size of Australian government. Accepting the figures as presented, they do indeed reveal that Australia is a tax-competitive nation state compared with small, distant European nations.
A more accurate reflection of Australian taxation competitiveness is presented, however, when we compare our tax-to-GDP ratio against our East Asian neighbours. The comparison is less than flattering. The latest available data shows that Hong Kong has a tax-to-GDP ratio of 13 per cent, while Singapore and Malaysia have shares of taxation revenue to GDP of 14.2 per cent and 15.5 per cent respectively.
The OECD statistics, as presented by the ACTU, tend to obscure Australia's true degree of tax competitiveness since various off-budget items are excluded from measures of taxation burden.
Australia imposes a compulsory superannuation scheme requiring employers to contribute to superannuation funds on behalf of their employees, which effectively acts as a tax. Based on an update of previous estimates, compulsory contributions in 2008-09 were roughly equivalent to 3.4 per cent of GDP lifting the Australian tax burden to 30.5 per cent of GDP.
Governments also impose a range of tax expenditures which reduce the headline tax burden. Incorporating the $102 billion in tax expenditures reported by the Commonwealth in 2008-09 alone adds about another 8per cent to the Australian tax-to-GDP ratio, giving an overall figure of 38.5 per cent. Adding to this the grab-bag of tax expenditures reported by the mainland states, totalling some $13.7 billion in 2008-09, adds another percentage point to the overall taxation revenue to GDP ratio.
Given that federal, state and local budget deficits represent future taxes, it is also necessary to add the 2 per cent of GDP general government fiscal deficit. Australia now has a tax-to-GDP figure of 41.5per cent. When these and other quasi-tax arrangements, such as those affecting the take up of private health insurance, are factored in, it is no longer clear that Australians live the charmed life of low taxation as the ACTU and other groups would have us believe.
The ACTU has dismissed recent episodes of Australian tax reform as being little more than an ''unending series'' of tax cuts. This is not quite true, as governments engaged in tax swaps that purport to be ''revenue neutral'' in theory but practically deliver more revenues to facilitate increases in public spending.
But taxation burden reductions, wherever they may be found, are desirable in that they deliver benefits for residents and businesses that remain in Australia, and present this country in a more favourable light amongst global investors.
Flatter and lower income tax rates encourage greater workforce participation, including for the benefit of growing sectors of the economy in which labour shortages are said to exist.
Lower taxation also reduces impediments for entrepreneurs to generate the additional economic wealth and, for that matter, job creation that this country needs, especially outside of mining activities. More generally, flattening and lowering tax scales reduces the economic deadweight losses providing an important basis to enliven economic activity across the board.
Therefore it is a surprise that the peak body of a movement, claiming to represent workers' interests, should oppose tax cuts that would prove so beneficial on numerous fronts. The Australian economy is presently on its knees due to post-GFC economic stagnation, poor productivity, cost of living pressures, and the impending threat of new mining and carbon taxes.
The sensible resolution to this impasse is through reducing government intervention, with a focus on taxation reductions, and not pursuing the ACTU path toward distortionary progressive taxes that would punish private sector entrepreneurship and hamper productivity improvements.
Julie Novak is Research Fellow, Institute of Public Affairs.
EXPAND NATIONAL TAX SUMMIT, SAYS OAKESHOTT
Susannah Moran, The Australian, 1 September 2011
NEXT month's tax summit should be expanded to include contentious areas of reform, such as the GST, the carbon tax and the mining tax, according to independent MP Rob Oakeshott. Mr Oakeshott made the comments at The Great Tax Debate, an event organised by the Tax Institute.
Mr Oakeshott said his starting point for next month's tax forum was that "it's all in unless there's a compelling case it's out", including the possibility of a congestion tax, despite the fact that Treasurer Wayne Swan has already ruled out discussing key issues -- such as GST reform, the carbon tax, and negative gearing -- at the summit.
"I want the process leading into this conversation in October to matter. Let's stop looking at the bottom of our schooner glass and whinging about everything. Let's get into it," he said. Mr Oakeshott said a congestion tax was a good example of something that might be "ugly politically', but that should be part of a "full and frank discussion" around tax reform.
Senator Mathias Cormann, the shadow assistant treasurer and opposition spokesman for financial services and superannuation, appeared alongside Mr Oakeshott. Senator Cormann said he was against a congestion tax, or any new taxes.
He also said the mining tax had "no resemblance" to what Ken Henry had recommended in his report. "In my view every Australian should be outraged by the way the Gillard government negotiated the design of a multi-billion-dollar new tax with significant implications for the budget, the economy, jobs, investment in an important industry, and so on," he said, adding it had been negotiated it "exclusively and in secret".
PROTECTIONISM WILL REMOVE THE INCENTIVE TO INNOVATE: BCA
Mathew Franklin, The Australian, 1 September 2011
THE Business Council of Australia has warned against taxpayer-funded help for the manufacturing industry, backing Julia Gillard's rejection of protectionism but calling for tax reform and less rigid industrial relations laws.
The BCA has also endorsed the Prime Minister's faith that the future of manufacturing lies in innovation to lift productivity, not special support measures. The comments by BCA chief executive Jennifer Westacott follow warnings of a crisis in manufacturing after steelmaker BlueScope announced last week it would end steel exports at the cost of 1400 jobs.
Unions and employer group the Australian Industry Group have called for government action to lift the use of Australian-manufactured steel in big mining projects. Writing in The Australian today, Ms Westacott urges the government to promote innovation and avoid any action that would support inefficiency. "What we do not need is to step backwards in time and reintroduce protectionist policies that remove the incentives to innovate," Ms Westacott writes.
She argues that Australian manufacturers have already undergone significant change in recent years and that while there have been 60,000 job losses over the past decade, output has increased in real terms, reflecting greater efficiency and a switch to greater competitiveness. "Introducing policies now in the light of the terms of trade impacts that act against this innovation would be detrimental to the sector and the broader economy," she writes.
Union leaders challenged the approach, warning that there were limits to the benefits provided by greater innovation. Australian Workers Union national secretary Paul Howes said yesterday that, traditionally, driving innovation in downstream, high-end manufacturing operations did not deliver major job opportunities.
"Innovation can be the key in many sectors and that's very good but, in many areas of the manufacturing industry, innovation isn't going to be the solution because it's not required," Mr Howes said. "A couple of thousand years ago, human beings discovered if you extract oxygen from iron ore, you can make steel. I don't know how you can do it any other ways."
Australian Manufacturing Workers Union boss Dave Oliver warned that the government's focus on expanding opportunities for high-tech manufacturing outfits should not come at the expense of more traditional low-wage mass producers.
THE BIG SCARY LABYRINTH AT THE HEART OF THE TAX SYSTEM
Robert Jeremenko, The Punch, 30 August 2011
If the people looking after the nation’s bank account can’t estimate what it costs to take wealth with one hand and re-distribute it with the other, we are in trouble. Millions of Australians interact daily with a system of swings and roundabouts called the Transfer System. It’s a complex network of welfare payments, concessions and benefits that involves all three tiers of government.
Retirees and families with children receive 63 percent of this pie so the changes that are inevitably made around Federal Budget time have a broad impact. In 2008, then-Treasury head Dr Ken Henry took a deep dive into the Transfer System. Although he found it accounts for seven percent of GDP and a quarter of all government spending, he was stumped when it came to working out exactly what it cost to run.
That probably won’t change when Treasurer Wayne Swan summons many of the nation’s best and brightest minds to his Tax Forum in Canberra in October. A discussion paper issued as a thought-starter for the forum poses questions about specific welfare payments and asks whether the transfer system can be made fairer for individuals.
There’s one more question The Tax Institute wants to ask: Can we make the system less complicated and cheaper to run? It’s one reason we’re staging our own free Great Tax Debate in Sydney tomorrow, a month before the government’s forum. Attendance is open to anyone with an interest in taxation reform and features some high-powered speakers.
Independent MP Rob Oakeshott - who is the reason the government is having its tax forum - is first cab off the rank. Also speaking is Cassandra Goldie, the CEO of welfare peak body ACOSS, so the Transfer System will receive some much-wanted attention. ACOSS told the Henry review that the Transfer System should be completely re-built. It advocated ongoing separation from the income tax system, with family payments being retained and tax and social security arrangements simplified for older Australians.
While everyone accepts that there’s an administration cost in running our welfare and benefits system, we should ask if we need so many forms of payment. No-one is advocating taking benefits from people who need them. This is about reducing both the number and complexity of transfers. As Dr Henry pointed out, the people who are the worst off in a complicated system are usually the disadvantaged. In the words of American academic Professor Michael Graetz: “Simplicity always seems to be the forgotten stepchild of tax policy.” This applies to the administration and collection sides of the equation.
Overly-prescriptive tax laws that chase every cent ultimately produce concessions that are so complex that few take them up. But if we have more transparency in administration and less of the nation’s wealth tied up in an endless Tax-Welfare Churn, we’ll all be better off.
AUSSIES WANT RICH TO PAY MORE TAX: ACTU
The Sydney Morning Herald, 29 August 2011
Most Australians want high-income earners to pay more tax, union research says. An ACTU-commissioned survey of 1000 people found 60 per cent of those surveyed supported raising taxes for people earning more than $200,000 and cutting taxes for people in the $36,000 and $79,000 tax brackets. The union released the survey results alongside discussion papers on Monday aimed at giving workers a stronger voice in the tax reform debate, ahead of the Gillard government's October tax forum.
ACTU secretary Jeff Lawrence said the survey results showed Australians want a fairer system. "It does show that people are interested in a more equal society and a more progressive tax system," he told ABC Radio. The survey also showed more people supported extra spending on social services rather than tax cuts.
Mr Lawrence said there was a myth that Australia was a high tax country. He said he hoped the forum in October offered a broader view than "some of the pro-business agendas that have dominated the tax debate". "We must not allow the tax debate to be hijacked by a business agenda, but to reflect the type of society the majority of Australians aspire to be," he said.
AUSTRALIANS WANT GREATER EQUALITY IN WEALTH SHARE
Peter Martin, The Sydney Morning Herald, 29 August 2011
WHEN it comes to wealth, even the richest people think the rich have too much - but few Australians have any idea of how skewed the distribution really is. A study prepared by Empirica Research and the Harvard Business School for the trade union movement as part of its planning for the October tax summit finds Australians of all incomes believe the richest 20 per cent have about 40 per cent of the wealth.
Australians think that's too high. They would prefer a more egalitarian society in which the top 20 per cent have about 24 per cent of the wealth. They would also like the poorest 20 per cent to have 15 per cent, which is a good deal more than the 10 per cent we think they have. The survey finds the nation oblivious to the far more skewed truth that the best-off 20 per cent have 60 per cent of the wealth and the worst-off 20 per cent a mere 1 per cent.
The Australians least in touch with reality were the very richest and the very poorest, each believing the richest 20 per cent had 40 per cent of the wealth and the poorest had 9 per cent. Those most in touch with reality were the second-richest group who believed the best-off 20 per cent had 45 per cent and the worst-off 8 per cent. Presented with two unlabelled charts showing the actual Australian distribution of wealth and the more unequal distribution in the US, only 22 per cent wanted to live in the US. Among Coalition voters the proportion preferring to live in the US was 24 per cent, among Labor and Greens voters, 20 per cent.
"Australians apparently favour a significantly more equal distribution than they believe currently exists and a dramatically more equal distribution than actually does exist," the researchers conclude. Asked how much tax Australians on a range of incomes actually paid, the survey group overestimated every one.
Those on $200,000 were thought to pay an average of 38 per cent instead of 32 per cent. Those on $79,000 were thought to pay 27 per cent instead of 22 per cent, and those on $36,000 were thought to pay 18 per cent instead of 12.9 per cent. The group wanted all tax rates cut, but curiously wanted them cut from the high rates they imagined to near the actual rates. People on $79,000 were felt to deserve an average tax rate of 21 per cent, close to the actual rate of 22 per cent. Those on $36,000 were felt to deserve 12.1 per cent, close to the actual rate of 12.9 per cent.
The researchers were perplexed by the finding. "While people strongly favour increasing wealth within the lowest 20 per cent of households, they do not spontaneously translate these attitudes into support for policy mechanisms that could realise that goal," the report concludes. The ACTU secretary, Jeff Lawrence, said the survey showed tax reform need not mean an unending series of tax cuts. "Real tax reform is directed towards satisfying Australians' needs and preferences. It must reflect the type of society the majority of Australians aspire to be," he said. Separately, the National Alliance for Action on Alcohol has complained the October 4 tax summit will have no public health representative. Its co-chairman, Todd Harper, said it showed the government had "taken alcohol tax off the agenda - even as an issue for discussion".
TAX LEVY 'THE BEST WAY TO FUND ANY DISABILITY SCHEME', SAYS THINK TANK PER CAPITA
Stephen Lunn, The Australian, 29 August 2011
AUSTRALIANS should pay the $6.5 billion a year needed for a national disability insurance scheme through a 1.3 per cent disability levy on top of their Medicare levy, rather than the federal government funding it from general revenue, a study recommends.
The report, by progressive think tank Per Capita, says the levy, which would cost $15 a week for each taxpayer, is the best way to ensure a no-fault disability scheme was not hollowed out over the long term by other budgetary pressures. Towards a Fair Go: Design Challenges for a National Disability Insurance Scheme, to be published today, challenges the Productivity Commission's view that a future NDIS should be funded from general taxation revenues. And it goes further, warning that the commission's proposal for a separate national injury insurance scheme to cover catastrophic injuries risks losing the benefits of some already strong state-based systems.
"We think there's a high risk the coverage of a national disability insurance scheme would be eroded over time if it is funded from general revenue," Per Capita executive director and report author David Hetherington told The Australian. "It will be subject to the internal competitive processes of the annual budget. While at the outset it will be fully funded, over time as it becomes less of a headline issue there is a risk that both the eligibility and generosity of the scheme, its breadth and depth, will be reduced. If the money isn't quarantined through a levy, we think you run risk of what has happened a couple of times in New Zealand's scheme, where the liabilities have blown out and the government hasn't been able to cover them so they've had to cut their coverage."
The Council of Australian Governments has agreed on the need for nationwide reform of disability services through an NDIS, and committed to starting the process proposed by the Productivity Commission in its report released earlier this month. Mr Hetherington said an NDIS would be a hard political sell, with the public having to accept that an extra $6.5bn was going to have to come from somewhere to pay for it.
"They've got to make the political case, make a strong and visible public argument, and ensure that the funding is fully future-proofed," he said. And the commission's NDIS proposal, where all catastrophic injuries would be handled through a no-fault system run federally, risked a states' backlash, he said.
"We think states with good schemes -- look at Victoria and its Transport Accident Commission scheme as an example -- are unlikely to want to hand over to a commonwealth pooled scheme," Mr Hetherington said. "And the commonwealth is not set up to run large-scale services delivery programs; you saw that during the pink batts program."
ACTU PUSHES FOR TAX REFORM
Sabra Lane, ABC, 29 August 2011
Sixty per cent of Australians support raising taxes for higher income earners and the same proportion want lower taxes for middle income earners, according to new research commissioned by trade unions.The Australian Council of Trade Unions (ACTU), which commissioned the research, will use the figures to help make the case for tax reform at the Federal Government's tax forum in October. "People support a more progressive tax system and they support a tax system which is adequate for the public sector," ACTU secretary Jeff Lawrence said. "All the evidence shows that people have become less and less enamoured of tax cuts and more and more supportive of adequate social and public spending."
Mr Lawrence says he hopes the summit will consider views beyond big business, claiming the Henry tax review excluded the voices of workers. The Henry tax review, formally known as Australia's Future Tax System Review, was commissioned in 2008 by the Rudd government to guide tax reform for the next 10 to 20 years. "I think the Henry tax panel was quite narrow and I made that point at the time," Mr Lawrence said. "It was dominated by tax experts and by business and the broader community, and the union movement wasn't represented. This tax forum though is broader and I do expect it to be a more balanced discussion."
Mr Lawrence says the research gives the ACTU a chance to dispel myths about the tax system in the lead-up to the forum. "There are some myths that Australia is actually a high-taxed country, when in fact it is a low-taxed country," he said. "There are myths around the size of government in Australia, when in fact the size of government actually is quite small compared to other countries. So what we wanted to get out there was some facts and a perspective in the lead-up to the tax forum. [It is] really about the need to make sure that that gathering is one which focuses on a broader perspective than some of the pro-business agendas that have dominated the tax debate over the last year or two."
STATE TREASURERS URGE GST REFORM
Annabel Hepworth, The Australian, 25 August 2011
STATE treasurers are staring down the Gillard Government's push to dump stamp duties on property sales and other inefficient state taxes at the October tax summit, declaring such moves impossible unless the GST is reformed.
Tasmanian Premier and Treasurer Lara Giddings said she expected the GST " to be part of this conversation" about the states reforming inefficient taxes, reported The Australian.
Wayne Swan has ruled out changes to the base or rate of the GST and left it off the summit agenda. "It is unfortunate that the GST is not on the agenda because it provides an efficient source to replace revenue lost through the reduction of inefficient state taxes," Ms Giddings told The Australian. "In fact this approach has already proven itself when states originally signed up to the GST and agreed to abolish a range of other taxes."
Ms Giddings vowed to use October's tax forum to push for national leadership on state tax reform "and we would expect GST to be part of this conversation". Canberra has flagged that it wants the summit to consider replacing stamp duties on property sales with reformed land tax and to consider scrapping insurance taxes.
The Henry tax review concluded that state taxes were some of the most inefficient levied in Australia.
CCI CALLS FOR TAX CUTS TO BOOST LOCAL MANUFACTURING
ABC, 24 August 2011
The Chamber of Commerce and Industry is calling on the State and Federal Governments to reduce business taxes to boost local manufacturing industries. This follows investment firm Bank of America Merrill Lynch predicting that Australian unemployment could rise to six per cent over the next six months.
Unions are warning that jobs will go because West Australian manufacturing companies will continue to be overlooked in favour of cheaper foreign goods and labour. The WA Chamber of Commerce and Industry's James Pearson says governments should fund innovative strategies to bolster the local sector.
"The challenge facing a lot of local manufacturers is how to reduce the high cost of doing business and one of the ways you can do that is with new technology and new work practices," he said. "We need to make sure we reduce the cost of doing business and that means cutting taxes, not coming up with new ones and cutting red tape wherever possible."
Innovation
The Treasury secretary Martin Parkinson says the manufacturing industry would benefit from greater innovation. He made the comments at the University of Western Australia after the Australian manufacturer Bluescope Steel announced it is to cut 1,000 jobs from its operations in Victoria and New South Wales. Dr Parkinson says Government handouts are not the way to save Australian manufacturers.
"You don't do that by handouts, you do that by investing in innovation, creating the sort of flexible markets they need and by bringing those kind of people, the innovative edge to the manufacturing community," he said. Dr Parkinson said small sectors of the economy are benefiting from the mining boom and growing quickly. But, he said the forecasts show outside that, three quarters of the economy is expected to grow by only one per cent over 2012 and 2013.
"A large proportion of the economy will record weak growth for at least the next two years, that's a direct consequence of the impact of the terms of trade on the exchange rate and competitiveness and the lingering after effects of the global financial crisis," he said. BHP Billiton has said it will take applications from the Bluescope workers for 600 vacancies it has in the Pilbara at its iron ore operations and 750 coal jobs in Queensland.
The Minister for Jobs Senator Chris Evans has announced the Government is offering relocation grants of up to $6,000 and an additional $3,000 for those with dependent children. BHP says the Government offer is on top of the company's relocation package for workers.
SOME ASSET SALES JUST WON'T WASH WITH TAX OFFICE
Tony Negline, The Australian, 24 August 2011
Rugby union coaches often teach their players to look for attacking opportunities near the edges of a defending team's defensive line, enabling the team to advance more easily because it is not trying to get past an opponent's strongest defensive area. Financial advisers often operate in a similar way. They spend many years developing the necessary skills to test the edges of any rule. Their purpose is to look for advantages and opportunities for their clients. This is happening with the new pension ruling.
One nasty feature of this draft pension ruling is the potential for capital gains tax to be payable in a super fund before a death benefit lump sum is paid from assets that had been used to pay a pension. To limit the potential for capital gains tax, many advisers and investors are contemplating recycling their portfolio. In short, they're looking around the edges of the rules to find a suitable solution, much like a rugby union coach.
For example, suppose my super fund owns some BHP Billiton shares, which it bought for $11, that are now worth about $38. If those shares were being used to pay a pension then technically my fund could sell these shares for $38 and purchase a new batch of the same shares for a similar price. Because my fund is paying a pension there is no CGT payable when the shares are sold. The portfolio hasn't changed but, importantly, the cost base of these shares has been altered so that if they're sold to pay a lump sum death benefit, the CGT will be a lot lower with a $38 cost base rather than an $11 cost base.
Anyone thinking about this sale and repurchase strategy should give careful consideration to the wash sale rules that stem from an ATO ruling issued in 2008. If a transaction is deemed to be a wash sale then the ATO might apply the income tax anti-avoidance penalty laws. What does the ATO mean by wash sale? The ruling says that it is the sale and purchase of an asset where these two transactions cancel each other out so that there is no effective change in the economic exposure of the owner to the asset. It is interested in sell and buy transactions that occur over a "short period" without defining a specific timeframe.
The 2008 ruling specifically pinpoints certain types of transactions that may cause problems. Many of these transactions are frequently conducted by super funds. The following examples could easily apply to self-managed super funds looking to limit the CGT on the death of a pensioner member by using the sell and buy strategy mentioned above: A taxpayer sells an asset and a short time later purchases the same asset or substantially the same asset. Just before selling an asset a taxpayer had acquired the same or substantially the same asset.
A taxpayer enters into an arrangement to sell an asset and to re-purchase it at a price "substantially the same" as its sale price. Just before, or at the time of, the sale of an asset a taxpayer purchases financial instruments that deliver the same risks and opportunities that arise from the recently ceased direct ownership. When an asset is sold, a taxpayer arranges to continue to be entitled to the future income or capital appreciation produced by the recently sold asset.
A taxpayer who is a beneficiary of a trust, or controls the trust or is the trustee or appointer of the trust, sells an asset to that trust. When there is significant overlap of individuals who have direct or indirect interests in an asset before and after it is sold. A taxpayer sells an asset to a family member and an arrangement or understanding exists between the parties that the taxpayer will purchase the asset or the taxpayer continues to fully benefit from the asset's income and capital appreciation.
Assume an SMSF owns BHP Billiton shares and decides to sell them at a loss and purchase Rio Tinto shares. Are these two international mining conglomerates considered to be "substantially the same"? Similarly, are two Australian share-managed funds "substantially the same"? The short answer is no. The ATO's ruling says it is concerned primarily with those arrangements that create a loss. It is these that may be subject to the anti-avoidance rules that would strip away all tax benefits of a transaction. However, if there are "demonstrable non-tax advantages" then the dominant purpose of a transaction may not be the loss created by the tax benefit. Unfortunately, none of the examples discussed in the ATO's wash sale ruling deal with superannuation or self-managed super funds in particular. Hopefully the final version of the ATO's ruling on pensions will address this in an example and some additional explanatory text. In the meantime, investors looking for certainty should consider obtaining a private binding ruling from the ATO on the tax aspects of any questionable transaction upfront.
LET’S ALL DANCE TO EUROPE’S TUNE AND IMPOSE A FINANCIAL TRANSACTIONS TAX
Ross Buckley, The Conversation, 23 August 2011
French President Nicolas Sarkozy and German Chancellor Angela Merkel have announced a plan to impose a financial transactions tax (FTT) for the Eurozone, as part of an effort stem the bloc’s worsening debt crisis. The policy would introduce a tiny tax on wholesale financial transactions – something long supported by European Union members Austria and Belgium. EU heads of state are expected to discuss the proposal at a meeting in October, ahead of the G20 summit in France in November.
The European Commission threw its support behind this tax in June, saying it could raise up to 50 billion euros a year by imposing 0.1% tax on stocks and bonds and 0.01% on derivatives. The commission has even included potential funds raised by such a tax in its long-term budget forecasts for 2014-2020.
The tide is clearly turning in Europe and leaders are getting behind this idea.
I spoke at a forum on the tax at the European Parliament in March last year. Every seat was taken – and this most certainly was not people wanting to listen to me. Meanwhile, the debate in Australia is basically non-existent. On one hand, this is fair enough – as Australia most certainly could not impose a FTT all by itself. The risk of stock, bond and derivative trading moving offshore, if we were to go it alone, makes the idea a political impossibility.
Despite this fear, it is clear that Australia needs to pull its head out of the sand. We have a seat at the G20, and the deliberations on this tax at that forum will be important. We have so far opposed the tax simply because the Americans have, which has become our default position on most foreign policy matters over the past 15 years. Australia needs to examine the evidence and take a more informed view in the G20 forum. Because of the scale of modern financial market activity, a tiny FTT would raise somewhere between $75 billion and $500 billion annually, if applied globally.
Civil society is campaigning vigorously for this tax around the world, because it sees in it a source of revenue to address global poverty and fund the climate change adaption that is much needed in poor countries. These civil society campaigns have had considerable impact in Europe, but very little here. The great attraction of this idea is that it’s clearly rarest form of tax – a tax you should want irrespective of the revenue it might raise. Keynes recommended such an impost in his seminal work, and 40 years ago the Nobel Laureate in economics, James Tobin, proposed the tax as a way to make markets more effective.
The idea is that an FTT would dissuade purely speculative short-term transactions and shift the balance of trading towards investors who are more focussed on the underlying value of the asset being bought and sold. Since Tobin promoted the idea, there has been a sea change in market trading that makes the need for it much greater. In 2009, computer-driven trading accounted for at least 60% of equity market trading, 40% of futures trading in the US and 30% to 40% of European and Japanese equity trading.
This high-frequency trading is driven and executed by computer programs aimed at exploiting minor price fluctuations. The assets are often bought, held and sold in less than a second. No human mind is brought to bear on these individual trades, and the underlying real economic value of the asset being traded rarely influences the trade.
There is considerable evidence that the proliferation of this sort of trading has made markets less effective at their core function – setting prices. Markets these days deviate for sustained periods from the prices that would be indicated by economic fundamentals. They are now driven by a tsunami of ultra-short-term trades.
An FTT would make such trades uneconomic, and the resulting markets would be able to perform their real functions of setting prices and allocating capital more effectively. The United States has not supported an FTT, which is evidence of the power of that country’s banking lobby. Barack Obama supported an FTT as a presidential candidate, but the oval-office perspective is obviously different.
Could the introduction of a tax in Europe prompt US policymakers to reconsider their position? Once foreign exchange transactions between euros and US dollars are taxed in Europe, with none of the revenue going to the US, the incentive for the US to follow Europe’s lead will be massive. But the pivotal nation in this debate today is not the US, for Europe can impose such a tax with little fear of any significant amount of trading moving to the US. The pivotal nation is the UK.
While continental Europe could impose this tax on foreign exchange transactions in euros, which clear and settle in Europe, applying the tax more broadly would risk trading in other asset classes moving to London. Britain under Gordon Brown supported the tax, but not under the current government. So the scene is set for some interesting horse trading as Sarkozy and Merkel try to persuade David Cameron of the merits of, and need for, this crucial tax.
A SALES TAX ON WALL STREET TRANSACTIONS
Nancy Folbre, The New York Times, 22 August 2011
Most of us pay state and local sales taxes on most things we buy, and most casino gambling is subject to state taxes ranging from up to 6.75 percent in Nevada to 55 percent on slot machines in Pennsylvania. But speculative purchases of stocks, bonds and other financial instruments in the United States go untaxed but for a tiny fee (less than a half-cent) on stock trades that helps finance the Securities and Exchange Commission. In Britain, by contrast, a 0.5 percent tax on stock transactions raises about $40 billion a year. President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany recently announced plans to introduce a similar tax in the 27 nations of the European Community.
It is variously called a “transactions tax,” a “financial transactions tax,” a “security transaction excise tax” or a Tobin tax (after the Nobel Prize-winning economist James Tobin, who famously argued for its application to foreign exchange purchases in the late 1970s). By any name, Wall Street hates it, because it would cut into trading profits. But proponents like Dean Baker, co-director of the Center for Economic and Policy Research assert that it would primarily affect short-term “noise traders” and discourage speculation rather than productive investment.
Less speculation could lead to less volatility in prices, encouraging long-term investors. Further, a sales tax on Wall Street of 0.5 percent could raise up to $175 billion in tax revenue a year, even if, by discouraging frequent trades, it cuts the total number of transactions in half.
A small financial transaction tax proposed by Representative Peter DiFazio, Democrat of Oregon, and supported by Senator Tom Harkin, Democrat of Iowa, the Let Wall Street Pay for the Restoration of Main Street Act (with specific details of a co-sponsored bill still being negotiated) is likely to raise less revenue.
Plenty of highly respected economists support the basic concept, and plenty disagree. In a recent review of the literature, Neil McCulloch and Grazia Pacillo of the Institute of Development Studies in Britain conclude that it is unlikely to reduce speculation but nonetheless represents a relatively good source of tax revenue. A recent report by Thornton Matheson, published by the International Monetary Fund, expresses negative views. An engaging summary of the pros and cons can be found in a videotaped debate sponsored by the Center for the Study of Responsive Law on July 8 as part of its “Debating Taboos” series.
My University of Massachusetts colleague Robert Pollin argues in favor, while James Angel of Georgetown argues against. Professor Angel insists that short-term traders are not primarily speculators and describes them as a healthy part of the financial ecosystem that might be killed off. Professor Pollin’s view, with which I agree, is that short-term trading has increased enormously in recent years, with no positive impacts on economic efficiency. In any case, I don’t think a 0.5 percent tax on transactions will cause serious fatalities.
Professor Angel also points out that a tax on financial transactions will be passed on, at least in part, to all investors, with negative consequences for retirement savings. But all taxes are passed on, at least in part, to consumers. I agree with Professor Pollin when he argues that the effect of a financial transactions tax on most people would be very small compared with other sales taxes. Economists point out that sales taxes discourage consumption, which is better than discouraging investments that can pay off in the future. But many consumption decisions that ordinary people make have important consequences for future productivity.
As Professor Pollin points out, current sales taxes bite those who buy materials to increase energy conservation in their homes or purchase a more fuel-efficient car. My own research emphasizes that parental expenditures on children, as well as public spending on health and education, represent a form of investment in human capital. Most state and local sales taxes are very regressive, with low-income families paying more as a percentage of their income. A proposed national sales tax, or a value-added tax, would have an even more negative impact on families at the bottom.
Our current tax policies favor speculative investment in financial instruments over productive investments in human capabilities. This imbalance helps explain why nurses’ unions in the United States have been particularly outspoken advocates of a financial transactions tax. As they put it: “Heal America. Tax Wall Street.”
BUILDERS' FURY AT TAX REPORTING CHANGE
Ewin Hannan, The Australian, 22 August 2011
Under the new system being developed by Assistant Treasurer Bill Shorten, construction and building businesses must report annually to the Australian Tax Office on payments to contractors. Employers have accused Mr Shorten, a former Australian Workers Union leader, of "doing the bidding of unions" and unduly increasing the paperwork and costs of 150,000 businesses. Master Builders Australia said its testing of the system, due to start next July, showed compliance costs for businesses were much higher than stated by the government.
MBA chief executive Wilhelm Harnisch said while the government had estimated the cost to an individual business of setting-up the system was $300 his organisation had found it would be at least $1500 for each participant. He said the annual cost of running the system would be $380 compared to the government estimate of $90 a year. "This is a cost burden that is being shifted from the ATO to business," he said. "Each business is being required to become a mini tax office." Mr Harnisch said he would continue to pressure the government to modify the scheme. "We are very concerned that there is a pattern developing in terms of attacking the legitimacy of sub-contracting," he said. "The industry is just coming to the view that the government is doing the bidding of the unions."
Ken Phillips, executive director of the Independent Contractors of Australia, accused the government of bowing to union pressure. "The construction unions exercise huge influence within the government," he writes in The Australian today . "They hate profit-earning self-employed contractors. Unions want wage-earning unionised employees. This new tax reporting system will make it more complicated to use contractors. This'll make unions happy. It looks . . . like the government is conducting a back-door attack against self-employed people in an anti-small business crackdown."
The Construction, Forestry, Mining and Energy Union rejected the claims. Dave Noonan, the national secretary of the union's construction division, said some employer representatives preferred to put the interests of "rorters and tax evaders" ahead of those who employed people legally and paid their entitlements.
A spokesman for Mr Shorten questioned the accuracy of the extra costs estimated by the MBA. "We have issued a discussion paper and Treasury has undertaken consultation with industry to minimise compliance costs," the spokesman said. "The Regulation Impact Statement estimates these costs for business to be just over $300 for set up and $90 annually. "As the reporting payment regime will require businesses in the building and construction industry to provide information that they should currently record and collect as part of their normal business practices, we are puzzled how high the MBA estimates of compliance costs are particularly as these haven't been outlined in their submission in response to the discussion paper."
He said the government was not making any changes to the rules about how much tax a person should pay, but requiring greater reporting to ensure that everybody paid their fair share of tax. "By helping to improve compliance, this will also help create a level playing field for the building and construction industry," he said. "The only additional requirement will be to provide that information to the ATO once a year."
NEGOTIATING INHERITANCE'S DEATH AND TAXES
Bina Brown, The Sydney Morning Herald, 21 August 2011
BEING the beneficiary of an inheritance can be both a blessing and a curse, depending on how you handle it. After all, it is not every day people get handed large amounts of money or valuable property they can use as they wish. Dealing with an inheritance is a growing problem but still a good one to have. "We are at the beginning of a wave where retirees who own their own property and with share portfolios bought before 1985 are starting to move on," director of BFG Financial Services, Suzanne Haddan, says. "It opens up the need for a lot of financial decision making for the beneficiaries."
Decisions like whether to sell the inherited assets, use the money to pay down the mortgage, invest the money, fund the children's or grandchildren's education, top up your own superannuation or blow it all on a long holiday. What you do with any assets, and when you do it, can make a difference to the amount of tax you pay as well as your own life going forward. "The source of the money doesn't change the decision-making process that you need to go through," Haddan says. That means focusing on your goals and the time you have to achieve them.
The taxman comes for us all
While Australia doesn't have death duties, capital gains tax is often seen as being very close to it. If you inherit either shares or an investment property, CGT will almost certainly be an issue at some point. The family home is one of the most common inheritances. As long as the property was the main residence of the recently departed, all tax can be avoided if it's sold within two years, a partner and tax expert at Matthews Steer Chartered Accountants, Anthony Flapper, says.
How other inherited assets are taxed will partly revolve around when the asset was purchased - there are different rules pre- and post-CGT, which was introduced in 1985. If your parents bought a property in 1960 for $5000, pre-CGT, and it passes to you and is now valued at $500,000, the market value at the date of death becomes the value on which any CGT is calculated. The $500,000 becomes the new cost base.
Here, no tax will be payable but any increase in value above $500,000 will be subject to CGT (provided the beneficiary does not move into the property as a main residence). If the property was purchased post-CGT then the rules are different. A house bought in 1990 for $150,000, which is then passed on to you, would have a cost base of the initial purchase price. So if the property is now worth $500,000 and your cost base is $150,000, you have a gross capital gain of $350,000.
If you are the non-financially dependent (that is, not a spouse or someone under 18) beneficiary of a payment from the deceased's superannuation fund then you may be up for a substantial tax hit. With death benefits on super, the tax that may be payable depends on whether the super fund member received a tax concession on their original contributions. The head of wealth management at HLB Mann Judd Sydney, Michael Hutton, says a superannuation payout to a financial dependant, such as a spouse or child under age 18, is tax-free. But if superannuation is paid to non-financial dependants, the proportion of the pay out that is deemed to be from the contributions where a tax concession was received will be taxed at 16.5 per cent.
No arguments, please!
Unfortunately, there is little that can be done about the problems that arise when a family or holiday home is left to multiple beneficiaries who then can't agree on how to use or dispose of the property, the principal of O'Dwyer & Bradley Solicitors, Tim O'Dwyer, says. "Some of my clients ask 'no arguments, please!' to be added to their wills," he says. The other prime area for disagreement is when someone is living in the house that then passes to beneficiaries. "Any provision in the will allowing someone to live in your home before it passes to other beneficiaries should be drafted very carefully," O'Dwyer warns.
Joint executors give it a fair go
Chris Warren counts his blessings that he got on with his two brothers well enough to divide an inheritance amicably. "We were joint executors of my father's estate and he left his house to the three of us,'' he says. ''There was never any issue about what might happen." Chris and a brother bought out the other brother and rented out the house for a couple of years before selling it. "I thought it was a good investment at the time,'' Chris, a real estate agent with Remax Colonial in Brisbane, says. ''It was also about hanging on to something. One brother just wanted the cash and to move on, so we had the property valued and went from there."
After a few years he and his brother decided they could probably do better elsewhere and sold the house. Because it was used as a rental property and was kept for more than two years after his father's death, the property sale became subject to capital gains tax. A property that was the principal place of residence of the deceased is capital gains tax-free in the hands of the beneficiary, provided it is sold within two years. "We had the place revalued and there was no real gain in it so we just split the amount payable and then the proceeds. It was all very amicable," Chris says. "Being in real estate, I come across a lot of deceased estates and can't believe the acrimony in some cases between family members and how greedy some people can get. I see now that our situation was the exception."
DESIGNING A NATIONAL CONSUMPTION TAX
Felix Salmon, Reuters, 17 August 2011
The US government, when it taxes individuals, taxes only what they earn, and not what they spend; this is one big reason why we have a gaping budget deficit. Every other developed country in the world has some kind of consumption tax, as indeed do many US cities and states. If the US is serious about getting its fiscal house in order, a consumption tax of some description is likely to be necessary.
Bloomberg has come out in favor of a value-added tax of the kind familiar to those of us from Europe. It’s a tried-and-tested solution, and it’s superior in just about every way imaginable to the flat sales taxes that Americans are used to right now. It’s spread along the supply chain instead of being back-loaded at retailers; it is much more adaptable to an economy based on services rather than goods; and it easily captures online activity from places like Amazon.com which current sales tax regimes find hard to deal with.
There would also be a reduction of tax-collecting bureaucracy: rather than having to operate their own sales-tax regimes, states and cities could simply use the national one instead.
Any sales tax, of course, is regressive, and would therefore need to be combined with some kind of income-tax credit. But if you take that as a given, then there are real advantages to consumption taxes: for one thing, they provide an incentive to save and invest rather than to spend. That might be bad for the economy in the short term, but it’s good in the long term: we need to get our national savings rate up. And there could even be a short-term benefit, as Bloomberg points out:
The time needed to implement a VAT — as much as two years — could even provide a much-needed economic stimulus. If people knew the tax was coming, they would probably make big purchases now.
Count me in with the idea of a national consumption tax, then. But there are other ways of implementing such a thing, and it’s also worth resuscitating the progressive consumption tax idea that Robert Frank laid out very clearly in 2007.
Under such a tax, people would report not only their income but also their annual savings, as many already do under 401(k) plans and other retirement accounts. A family’s annual consumption is simply the difference between its income and its annual savings. That amount, minus a standard deduction — say, $30,000 for a family of four — would be the family’s taxable consumption. Rates would start low, like 10 percent. A family that earned $50,000 and saved $5,000 would thus have taxable consumption of $15,000. It would pay only $1,500 in tax. Under the current system of federal income taxes, this family would pay about $3,000 a year.
As taxable consumption rises, the tax rate on additional consumption would also rise. With a progressive income tax, marginal tax rates cannot rise beyond a certain threshold without threatening incentives to save and invest. Under a progressive consumption tax, however, higher marginal tax rates actually strengthen those incentives.
Frank laid out his tax as an alternative to the income tax; my feeling is that given how-do-we-get-there-from-here problems and also diversification benefits, it’s worth keeping them both at some level. We should keep the income tax, at a lower level than it is now, and increase Frank’s standard deduction to say $40,000 a year. Anybody spending less than that pays no consumption tax at all, while consumption of hundreds of thousands of dollars a year could be taxed at say 20% and consumption in the millions could be taxed at a higher rate still.
All of this could conceivably be done in a revenue-neutral way, with income taxes falling to make up for the new consumption taxes. But that would defeat a large part of the purpose, which is to get US incomes and expenditures roughly in line with each other. Up until now, the federal government has essentially been taxing with one arm tied behind its back. If we want to get serious about the deficit, then it’s time to free up as many new sources of tax revenue as we can find — including such things as a carbon tax, a wealth tax, a financial-transactions tax, and, yes, a consumption tax.
Tobin Tax, Still a Bad Idea, Is Back on the Agenda: The Ticker
Paula Dwyer, Bloomberg, 17 August 2011
For two years, European leaders have sought to tax financial transactions as a two-fer: simultaneously to raise revenue and to tame speculative market behavior. French President Nicolas Sarkozy and German Chancellor Angela Merkel emerged from a meeting in Paris today backing the idea.
The Tobin Tax lives.
The tax was first championed by John Maynard Keynes during the Great Depression. Another economist, James Tobin, revived the idea in the 1970s as a way to counter currency market speculation. The levy, sometimes known as a Tobin tax, was revived in 2009 as a Robin Hood effort to reclaim money from the bailed-out financial sector to compensate taxpayers in the U.S. and Britain. Others suggested the tax could be used to transfer money from wealthy to poor countries struggling in the backwash of the 2008 financial crisis.
The concept was briefly considered -- and dismissed -- by U.S. Treasury Secretary Timothy Geithner and Democratic lawmakers in the fall of 2009. Geithner concluded the tax wouldn’t work unless it was adopted globally, an unlikely event. If just one safe-haven country -- say, the Cayman Islands -- did not impose the tax, transactions would quickly move offshore to the Caribbean redoubt.
Similarly, if only stock and bond trades were taxed, the action would move to derivative instruments, like futures and options. And if they were taxed, deals would soon drift into opaque over-the-counter markets. Geithner also noted that the tax could ensnare less sophisticated investors, instead of the large firms it's mostly aimed at hitting.
But the Europeans aren't giving up. The London-based Institute of Development Studies in June concluded that a transaction tax could work. The study said the levy wouldn't likely stabilize volatile financial markets, but it wouldn't increase market distortions, either. That's damning with faint praise.
A tax on currency exchange could work even if implemented only within the euro zone, the IDS study said, raising $11 billion a year just in the U.K., where most foreign exchange is conducted. And if taxed worldwide, currency transactions could raise $25 billion.
Who would end up paying the tax? The IDS study said wholesale traders would bear the initial cost but, in the long run, a significant proportion could end up being passed on to consumers.
COMMUNITIES CAN'T AFFORD TO LOSE SO MUCH ON POKIES
The Age, 8 August 2011
WHAT spending freeze? While retailers lament their worst 12-month sales figures in 50 years, one kind of bricks-and-mortar business is coining it. As The Saturday Age reported, poker machine losses in Victoria rose to $2.65 billion last financial year - the second-highest level of losses in a decade. As Prime Minister Julia Gillard contemplates how to deliver on a political agreement to enable gamblers to cap their losses, venues in her own electorate of Lalor recorded some of the biggest player losses. The losers are ordinary people - and all the other businesses that could have sold them a product or service instead.
Nationals senator Barnaby Joyce and this newspaper are not habitual allies in public debate. While the Coalition opposes mandatory pre-set loss limits, the outspoken senator's remarks last week on ''the pokies'' were right on the money. ''They are an addiction. Stop calling it anything else. It is an addiction that people profit out of, that means people are profiting out of other people's weaknesses,'' he said. This view is shared by experts such as Monash University's Charles Livingstone, who notes that addiction defines the difference between spending by problem gamblers - who suffer about 40 per cent of losses - and discretionary consumer spending. ''In a recession I am sure heroin sales hold up quite well.''
Gambling addiction explains the ability of the venue responsible for the second biggest single annual loss of $20.6 million, Werribee Plaza Tavern, to lift takings by more than $1.4 million, about 7.4 per cent, while retail spending slumped. The business looks even better when one considers that in last year's government auction the operator paid $3300 a year for entitlements to each machine. The average loss on each of the machines - which are permitted to run from 9am to 5am the next day - exceeds $250,000.
It is true the industry employs many people, but it grossly overstates any other community benefits, as The Age has reported in the past. Many Australians would question whether the financial and social harm caused by poker machine addiction and losses is worth the benefits. Certainly, everyone who loses on the pokies, whether they have a gambling problem or not, suffers immediate buyer's regret. Victorian pokie players have nothing to show for their $2.65 billion loss. Had that been spent instead on real services or products, the result would have been better for everyone - except the poker machine operators and the state government, which is unhealthily dependent on gaming tax revenue of $1 billion a year.
Retailers complain that Australians' online spending, which hit $13.6 billion this year, or about 5.7 per cent of total retail turnover, is hurting them. At least consumers can hope to get value for money online. Australians lose a comparable amount on gaming machines - the Victorian losses amount to about 4.3 per cent of the state's annual retail turnover. Why do the big retailers not complain about that? Could it be that they have a big stake in the gaming industry? The Woolworths-controlled Australian Leisure and Hospitality Group operates Victoria's top five venues for gaming losses. The industry's campaign against more protection for gamblers has tried to present this as a battle for community businesses and individual choice. Instead, powerful industry interests are at stake, which helps explain why governments have been so unresponsive to community concerns about problem gambling.
Now Ms Gillard's minority government needs the support of independent MP Andrew Wilkie. The price of that support is a scheme that requires poker machine players to pre-set limits on their losses. They are still free to choose to gamble as much as they like - only they must do so while in a rational state of mind rather than in the addictive rush that grips problem gamblers. This is a reasonable requirement, not the onerous administrative burden that the industry claims. Many venues already use loyalty cards that track how much people are spending. As Senator Joyce asked, ''If you are collecting all the information for so-called loyalty points, why can't you collect information to advise you who has a problem?''
As Prime Minister, Ms Gillard must deliver this reform to continue in government. But she and other MPs should also feel compelled to represent the majority of their constituents' wishes; communities across the country want to see much more done about problem gambling. For all the industry and political resistance, it's a safe bet that local communities and businesses would be the big winners from limits on the losses.
GOODS TAX ON INTERNET SALES WON'T SAVE SHOPS
Phillip Coorey, Sydney Morning Herald, 5 August 2011
THERE are strong in-principle grounds to apply the GST and other taxes to overseas internet purchases worth $1000 and less, says the nation's peak economic advisory body.
But it would be expensive to do immediately, would take some years to implement effectively, and have only a minor effect in reversing the alarming decline in domestic retail sales.
''Other factors such as much lower prices, greater range of products - that is, choice - and convenience available online, appear to be far more important drivers [of overseas internet shopping],'' the Productivity Commission said in its draft report into the retail sector released yesterday.
The commission acknowledges the pressure ''bricks and mortar'' retailers are facing but recommends broader structural changes to help them compete with domestic and overseas online sales, which now account for 6 per cent of sales annually, worth $12.6 billion.
These include changes to the industrial relations laws, with the commission saying the Fair Work Act, which replaced Work Choices, was too inflexible, and award modernisation had increased wages and penalty rates.
It also recommends the complete deregulation of trading hours by all states, and an overhaul of planning and zoning laws, which restrict competition by prescribing which types of businesses can be established in existing business zones.
It suggests zoning changes would increase competition among shopping centre landlords, making them reduce the sometimes crippling rents that exclude smaller retailers.
The commission said the use of ''adverse impact tests'' to restrict new developments and preserve existing businesses was common in the planning system but ''unjustifiable''.
The government will not formally respond until the final report is released in November but it is understood it is looking at working with the states to make changes to zoning laws and retail tenancies to help small businesses.
The assistant Treasurer, Bill Shorten, commissioned the inquiry in December after big retailers complained that the online purchase from overseas of goods worth $1000 or less was hurting sales because they were exempt from GST and Customs duty. They are demanding that the threshold be lowered.
But the commission found the cost of checking millions of packages would result in a ''deadweight loss'' because it would cost more than the extra revenue collected, would cause ''undue delays in delivery'' and clog up Customs.
In 2010-11, 45 million purchases under the $1000 threshold entered Australia through the mail system and another 10 million came by courier.
Of the 45 million, the commission estimated 33 million were worth less than $100. If the threshold was cut to $20, an extra $500 million in revenue would be collected but it would cost $1.6 billion to check the parcels.
A $100 threshold would raise an extra $470 million but cost $715 million. A $900 threshold would raise an extra $15 million and cost $8.6 million but would not be worth the effort.
The commission suggests the government establish a taskforce to reform the ''manual'' and ''clunky'' Customs process or find another way to levy the tax on purchases.
Mr Shorten was lukewarm about changing the threshold and said that given the revenue implications, it would be ''crazy'' to do it straight away.
The executive director of the National Retail Association, Gary Black, condemned the commission, saying that while it considered the ''deadweight loss'' of lowering the threshold immediately, it ''completely ignored the cost of doing nothing'' - which would be widespread business failure and jobs moving overseas.
ONLINE NOT TO BLAME FOR RETAILERS' WOES: PRODUCTIVITY COMMISSION
Chris Zappone, Sydney Morning Herald, 4 August 2011
A productivity commission report dismissed claims that GST-free online shopping is harming the local retail sector and instead blamed the sector's woes on high labour and real estate costs, and low productivity. “Government's role is not to shield the industry from competition but to remove constraints which restrict the industry in responding to this heightened level of competition,” said Philip Weickhardt, presiding commissioner in a statement.
“The current exemption from GST and duty for imports valued below $1000 is judged by the Commission to be only a minor contributing factor to online offshore purchases by consumers,” the report said. The draft report into the state of Australian retailing suggests that states and local governments reform planning and zoning regulation and retail trading hours restrictions as a way to foster growth. “The Australian Government also needs to review any constraints imposed by workplace relations regulations which may impede retailers in improving their productivity and lifting customer service levels,” the report said.
Mr Weickhardt said that “intensified retail competition is a boon for consumers, but it is challenging for a retail industry which, overall, has lower levels of productivity when compared internationally and, in many cases, faces higher costs.” The inquiry into the retail sector, announced at the end of last year, came after major retailers such as Harvey Norman and Myer lambasted the government for allowing consumers to purchase goods online from overseas for up to $1000 without incurring the 10 per cent GST fee. Retailers then launched an advertising campaign the next month to make their case with the public.
Their complaints provoked a backlash by consumers who criticised local retailers for their own troubles, arguing that poor service, high prices relative to those overseas, and the lack of choice in many categories of goods were to blame. The traditional "bricks and mortar" retail sector has slumped in recent months, as consumers, armed with a strong dollar, diverted their spending to internet purchases, many from businesses overseas.
Official retail sales – the Australian Bureau of Statistics does not count sales by online only business - posted a surprise 0.1 per cent fall in June, taking the annual increase to the lowest in half a century at a reported 2.6 per cent pace. The higher cost of living and falling home prices have also hastened the change in consumer behaviour, analysts say. The sector collectively employees about 1.2 million people in businesses that generate revenues of about $240 billion a year, according to the Australian Retailers Association.
Exemption cut option
The Productivity Commission’s draft report did not rule out a reduction in the $1000 tax-free threshold for import exemptions if the process became more efficient. “For reasons of tax neutrality, the level of the low-value threshold should be reduced, but only once this can be done cost-effectively,” said Mr Weickhardt.
The report also announced plans to form the taskforce to “investigate lower cost approaches to processing in both the mail and courier systems, with a reporting deadline in 2012.” Local retailers face higher shipping costs compared with international competitors, particularly from the UK, where many shops offer free shipping to Australia. The current tax and duties collection process are “not efficient” the commission said, with a very low threshold of $20 pushing the cost of collection above the tax revenue by more than a ratio of three to one. “Such a cost impost on both importing businesses and consumers is unacceptable even without considering additional costs such as delays,” the report said.
The report recommended the ABS should track both domestic and overseas online spending by Australians with surveys that distinguish between types of businesses doing the selling.
Retailers respond
The Australian National Retailers Association, welcomed the in-principle support for lowering the GST threshold and the reform on trading hours. “ANRA is disappointed there are no specific recommendations on customs duties and removing parallel importing restrictions, which would be straight forward changes that would have an immediate impact on the retail sector – particularly for book and entertainment retailers,’’ said chief executive Margy Osmond.
Russell Zimmerman, Executive Director of the Australian Retailers Association said: “There is no doubt retailers need to respond to current consumer demand by including online eCommerce offerings in their business mix.’’
eBay Australia vice president Deborah Sharkey said, "Today’s guidance from the Productivity Commission outlines a clear message for Australian retailers; they must embrace online in order to remain competitive and relevant to consumers."
Since first lamenting the GST disadvantage, both Harvey Norman and Myer have launched low-cost online shopping sites since their initial complaints. However, their offerings lag so-called pureplay outfits such as DealsDirect.com.au and CatchofTheDay.com.au. James Packer’s Ellerston Capital took a share of Deals Direct, while Catch of the Day landed private equity backing in June. Public hearings are scheduled for next month with a final report to government due in November.
States thrown in the spotlight
Siobhan Ryan, The Australian, 29 July 2011
CANBERRA has pushed the states to the front and centre of national tax reform, asking whether state insurance levies should be abolished, stamp duties replaced, payroll taxes harmonised and public housing rents reviewed.
The discussion paper proposing the overhaul was released on the same day as a new report estimating households would be up to $12 billion better off each year if state taxes were scrapped in favour of broader-based taxes.
The federal government's latest foray into cross-border tax affairs drew mixed reactions from the states. West Australian Treasurer Christian Porter said some state taxes had their problems, but he saw few solutions in the federal government's proposals. "The discussion paper is neither bold nor imaginative, which is disappointing, particularly for a federal government that talks constantly about economic reform," he said.
Victorian Treasurer Kim Wells backed the federal push to tackle inefficient stamp duty and insurance taxes and to harmonise payroll tax across borders. However, he said Canberra's existing GST-sharing deal with the states worked against those reforms -- for example, by indirectly penalising Victoria for moving faster than other states to abolish inefficient state taxes in the past.
NSW Treasurer Mike Baird said he wanted the tax forum to tackle the vertical fiscal imbalances that had left Canberra in control of the purse strings and stripped back the states' powers to raise revenue. But he had his doubts as to whether the forum, with its focus on abolishing or reforming state taxes, would leave NSW better off.
"Our view is we continue to want a constructive relationship with Canberra but this is another example on how this is becoming increasingly difficult," he said. Yesterday, Deloitte Access Economics outlined six options for abolishing a range of state taxes and replacing them with other revenue sources.
The research, commissioned by the Finance Industry Council of Australia, found the largest welfare gain, of $11.9bn, arose from an increase in the GST rate to offset the loss of revenue from abolished state taxes. Queensland Treasurer Andrew Fraser said reform of state tax bases needed to tackle ways to finance infrastructure and service delivery.
South Australian Treasurer Jack Snelling said he had an open mind on tax reform but wanted to ensure any changes did not leave his state worse off.
Families weigh up work or benefits dilemma
Stephen Lunn, The Australian, 29 July 2011
THE opaque and complex relationship between the tax system and government support payments makes it too difficult for families to decide whether it is financially sensible to be a two-income household, Wayne Swan's tax summit discussion paper admits.
With improved productivity a key goal of any tax reform, and increased workforce participation an ingredient of that, the Treasurer yesterday flagged a review of transfer payments such as family assistance as a major component of the summit. The paper, Tax Reform: Next Steps for Australia, notes that "secondary earners considering part-time work are likely to be particularly responsive to the rate at which their family benefits are withdrawn. In addition, the interaction between the tax and transfer systems is complex and can lead to a lack of transparency in the transfer entitlements and tax obligations of individuals and families. This can make it more difficult for people to make informed choices and calculate the possible benefits of additional work."
The summit will also look at ways to further engage older workers to remain connected to the workforce, a sector with the potential to deliver considerable productivity gains to the economy.
"In the future it is likely there will be more people earning some income post-retirement, and the tax and transfer system will need to take this into consideration," the discussion paper says.
In his tax review delivered more than a year ago, former Treasury secretary Ken Henry called for a fundamental overhaul of family payments to recognise that parents needed additional support early in their children's lives before being more available to return to the workforce when their kids were older. "The (Henry) review recommended a single family payment, comprising a per-child component to recognise the direct costs of children, and a per-family component to recognise the impact of children on the household and work, subject to a single income test on combined family income," the discussion paper notes.
Adelaide childcare worker Jaimie Bevis, 29, recently returned to her job three days a week after taking maternity leave, and says it was no easy task to work out whether it was, financially, the right way to go."I'd be lucky to come out $40 a fortnight in front, so there is a question about whether it's worth it," Ms Bevis says. But I am re-energised by working, I can bring my son Jaxson with me so I don't miss that important time not seeing him when he's so young, and I want to make sure I keep my skills up. If you stay out of the workforce too many years, there's a danger you'll find it hard to get back in without a lot of retraining, and also there's the confidence factor of 'Can I still do it?'."
Australian Council of Social Service chief executive Cassandra Goldie said employment participation and social security were critical components in any tax review. "For many years, ACOSS has been calling for a fairer social security system for people of working age that encourages employment, in which levels of payment are based on living costs and need rather than judgments about whether people are unemployed or unable to work," Ms Goldie said. “Our top priority must be to implement the Henry review's proposal to reduce the gap between pensions and unemployment payments, now $128 per week and growing every year."
Costs of climate tax ‘could drive farmers from the land’
Rosanne Barrett, The Austrailan, 27 July 2011
Carbon tax costs could push farmers off the land and raise the price of agricultural productivity, a Senate committee has been told.
Sitting in Brisbane, the Senate select committee on the scrutiny of new taxes heard that the Queensland government would forgo $1 billion in royalties in the coming decade because of the tax. Queensland Farmers Federation chief executive Dan Galligan said the extra costs would put more pressure on farm profits, and called for industry-specific economic modelling. "The analysis is too broad to give us a clear understanding of how many farmers this will affect to a point where they may well leave the industry," he said. "That may well happen for many farmers -- that loss in profit margins, associated with a number of other issues, will be enough reason for them to leave the farm."
Under questioning from Labor senators, Mr Galligan acknowledged the government exemptions on agriculture emissions and fuel were helpful. He said the Coalition's direct-action plan to pay $10 a tonne of soil carbon abatement would be insufficient. But he said the Gillard government's carbon reduction scheme could have the "perverse effect" of stalling farm productivity because improvements relied on power use, which would be more expensive under the carbon tax. "The mitigation options under the carbon farming initiatives may in fact further constrain a farmer's ability to increase productivity, which would be their usual mechanism to fight against a reduction in margins," he said.
Also appearing before the Coalition-dominated committee, Queensland Resources Council chief executive Michael Roche said taxpayers could be forced to compensate the $1.7 billion asset writedown in state-owned coal-fired power generators. He queried why the Bligh government had not highlighted an estimated $1bn in lost coal royalties between 2012 and 2021. "I would have thought the Queensland government would see the risk for their single largest source of revenue outside of grants from the federal government," he said. But Queensland Premier Anna Bligh said the coal industry had a "very strong future", with almost $60bn worth of mining applications in the pipeline. Next week, the committee will visit the northern NSW town of Tamworth, in Tony Windsor's federal electorate, before moving to the Queensland coalmining centre of Bowen.
GST cut would bring a little relief for retailers: experts
Clancy Yeates, The Sydney Morning Herald, 25 July 2011
RETAILERS would receive little relief from an option considered by Canberra to halve the GST-free threshold for imported goods, figures suggest. It was revealed last week that the government had last year examined cutting the threshold from $1000 to $500 amid complaints by retailers about competition from foreign online stores. But two of the biggest players in online shopping, eBay and PayPal, say such a move would only affect a small minority of their online transactions. A tax expert also said this type of cut would do little to address the woes afflicting the retail industry.
PayPal, a leading online payments company, said cutting the threshold to $500 would affect less than 10 per cent of Australians' purchases of overseas goods. "A very low single-digit percentage of PayPal Australia's overseas transactions are priced in excess of $500," the company said. A spokesman for online giant eBay, Daniel Feiler, also also said the bulk of overseas purchases by Australians were worth less than $500. eBay would not break down its sales according to price, but Mr Feiler said the proportion was "definitely not the majority". "As e-commerce grows people generally purchase the smaller priced items, and then move on to larger and larger items," he said.
The Productivity Commission has also said the average value of parcels arriving in Australia that exploit the GST-free threshold of $1000 is less than $100. Online stores – one of the few segments of the retail industry that is growing – are fiercely opposed to cutting the GST threshold, which they say will add unnecessary burdens for customers. "Bricks and mortar" retailers, who are battling weak spending by consumers, counter that the threshold gives overseas online stores an unfair advantage.
The tax counsel at the Institute of Chartered Accountants in Australia, Yasser El-Ansary, said the extra compliance costs of cutting the threshold would ultimately lead to higher prices being passed on to consumers. "I think moving from $1000 to $500 would really represent a symbolic change but in practical terms it would result in very little change by consumers," he said. "Retailers shouldn't look to the tax system as the silver bullet that's suddenly going to shift consumer spending patterns." The Productivity Commission will hand down its draft report into the competitiveness of Australian retailers next month.
The Keynesian economists keen on Gillard's way
Ross Gittins, The Sydney Morning Herald, 23 July 2011
They say if you laid all the economists in the world end to end, they still wouldn't reach a conclusion. In truth, though they do tend to be an argumentative lot, there's a fair bit of agreement between them - as you can see from the Economic Society of Australia's latest survey of its members' opinions. Much of the agreement is on things you'd expect but there are a few surprises. If you judged professional economists' views by the articles you see them writing in the press, you'd conclude most were pretty libertarian, opposed to high taxation and government spending and suspicious of governments.
But the survey reveals them to be still quite Keynesian in their attitude towards managing the macro economy and quite willing to support government intervention in the economy to correct instances of market failure. The survey also reveals their views to be more consistent with the policies of the federal Labor government than those espoused by the opposition. Almost three-quarters of respondents support the levying of a national tax on the excess profits of the mining industry, for instance. And 79 per cent believe ''price-based mechanisms'' rather than direct regulation are the more appropriate way to cut greenhouse gas emissions.
But price-based mechanisms could include the subsidies that are part of Tony Abbott's direct action plan. So a different question was asked of just those people attending the first session of the annual conference of economists last week. This showed 59 per cent agreeing Julia Gillard's carbon tax package was ''good economic policy,'' with 26 per cent disagreeing. By contrast, only 11 per cent agreed Abbott's direct action approach was good policy, with 62 per cent disagreeing.
Returning to the main survey, it had more than 570 respondents, 86 per cent of whom hold at least a bachelor degree with honours. More than 37 per cent have PhDs. Of those employed, 37 per cent are academics, 34 per cent work elsewhere in the public sector and 26 per cent in the private sector. If you want agreement, try this: 85 per cent agree that an independent cost-benefit analysis should be published before any major public infrastructure project is approved. Almost three-quarters support congestion pricing of road use, indexation of the income-tax scale and abolition of the first home buyers grant (which harms rather than helps first home buyers by raising house prices).
More than 70 per cent want to abolish the baby bonus, 65 per cent the stamp duty on the conveyancing of homes and 64 per cent want increased skilled migration. About 60 per cent oppose continuation of the government guarantee of bank deposits, support unilateral reduction of industry protection and believe there is a ''natural rate'' of unemployment to which the economy tends in the long run.
No surprises there. Now try these. Only 45 per cent are confident lowering the minimum wage would reduce unemployment. Only 42 per cent believe lowering marginal rates of income tax would increase work effort. A narrow majority supports increasing the rate of compulsory superannuation contributions. About 58 per cent believe restrictions on capital flows into countries would significantly improve the stability and soundness of the global financial system. A third agree large trade deficits are bad for the economy but 38 per cent disagree.
Economists turn out to be great believers in using regulation to reinforce competition. Two-thirds say competition laws should be enforced vigorously to reduce market power from its present level. And three-quarters support the use of jail sentences for executives guilty of price fixing. Here's a surprise: 62 per cent disagree with the contention that consumer protection laws reduce economic efficiency. Almost two-thirds oppose suggestions that Australia reduce its spending on overseas aid. And almost three-quarters say governments should provide greater economic incentives to improve people's diet.
If you think that makes them sound terribly politically correct, note this: 60 per cent oppose requiring companies to have a minimum number of women directors. And they narrowly favour basing income tax on family rather than individual income - 41 to 38 per cent - an idea no feminist would accept.
Another sign of lack of political correctness is they're pretty much equally divided on the use of nuclear power in Australia.
Now a question for you: how do you think they divide on whether increasing federal government power relative to the states would increase economic efficiency? Only 32 per cent agree, 35 per cent disagree and 33 per cent ''neither agree nor disagree''. Turning to management of the macro economy, more than three-quarters agree a substantial cut in interest rates is an appropriate response to a severe recession. That says they believe governments should attempt to manage the economy through the business cycle. What makes them pretty Keynesian in their approach to macro management is that three-quarters believe a substantial increase in government spending is an appropriate response to a severe recession, while only 43 per cent support a substantial tax cut.
Just less than half believe the Reserve Bank should focus on low inflation rather than on employment or economic growth, with 35 per cent disagreeing. (I'd have been in the neither agree nor disagree category since, in practice, the Reserve focuses on both, as it should.) What I don't understand is how all this can be true while an amazing 79 per cent believe inflation is caused primarily by growth in the money supply. Huh?
It's also clear economists are stronger supporters of the redistribution of income than you might expect. More than 44 per cent believe the government should adopt policies to make the distribution of income more equal than it is at present. Two-thirds believe the government should cut middle-class welfare and increase the help given to the disadvantaged. And they're equally divided on the proposition that the goods and services tax be increased to cover cuts in income tax and company tax.
If you think economists are mindless supporters of the Labor Party - as one leading libertarian has concluded - consider this. Less than a third back abolition of the private health insurance rebate and 46 per cent oppose it. And they're equally divided on the proposition that all Australians should have access to fast broadband at a uniform wholesale price. Clearly, they're not all the way with Labor's sacred national broadband network.
Plans to cut tax-free threshold
Clancy Yeates, Sydney Morning Herald, 20 July 2011
GOVERNMENT departments have examined the feasibility of halving the $1000 tax-free threshold for imported goods, amid complaints from retailers about the threat of foreign online stores. Documents released under freedom of information laws show Treasury and Customs officials investigated last year how quickly the threshold could be cut to $500 and what administrative costs would be.
At present all imports of less than $1000 are exempt from the GST but domestic retailers have argued for the threshold to be cut or removed, saying it gives overseas online stores an unfair advantage. Internal emails from customs staff sent last November, made public after a request from the Fair Imports Alliance, a retail lobby group, said cutting the threshold to $500 would have increased administration costs by $38 million over four years.
Asked by Treasury to identify the earliest possible date of reducing the threshold, Customs said it could have made the change by July 1, this year. Treasury has previously estimated the government misses out on $460 million a year in forgone revenue due to the threshold and this will steadily rise as more shoppers head online. The government said yesterday more extensive work completed since November had found administrative costs would be ''significantly'' more than $38 million.
A spokesman for the Fair Imports Alliance, Brad Kitschke, said the documents showed the government had been planning to reduce the threshold for imported goods in October last year. ''The government has always claimed a lower threshold would be administratively unfeasible but these documents reveal otherwise,'' he said. ''They show that it could be done, that plans were in place to reduce the threshold and advice was sought as to the earliest possible start date.''
Soon after the documents were prepared, the issue became more politically contentious when retail giants including Myer and Harvey Norman launched an unpopular advertising campaign for a lower GST threshold. The government is now awaiting a Productivity Commission inquiry into the competitiveness of Australia's retailers, which will release a draft report next month. The government has signalled it is wary of the extra administrative costs of cutting the threshold and Customs said a $500 threshold could increase the number of products that required processing by up to four-fold. The office of the Assistant Treasurer, Bill Shorten, said work undertaken since November had revealed the full cost of implementing the change would be higher than $38 million.
Tax crackdown could have black lining: HIA
Siobhain Ryan, The Australian, 19 July 2011
The Australian, CANBERRA is under pressure to extend its $513 million tax crackdown on building industry contractors to home renovators and owner-builders who take on tradespeople.
But the Housing Industry Association has warned that the taxman's targeting of construction businesses that use contractors could backfire by shifting the problem, boosting cash-in-hand payments from householders to tradespeople.
"A very large part of the so-called 'cash' or 'black' economy will still operate intact, and may even expand as a result of the introduction of transaction reporting," its submission to Treasury cautions. "The complete failure to address this area casts serious doubt on whether the new measures are appropriate."
In the May budget, the government announced the tax office would claw back more than half a billion dollars over forward estimates by forcing building companies to report annually on their payments to contractors.
"Some contractors appear to be unaware of their existing tax obligations or (are) deliberately under-reporting their tax," it said.
ATO continues clamp-down on GST fraud and those not reporting cash income
ATO, Media Release, 19 July 2011
Tax Commissioner Michael D'Ascenzo said the outcome of yesterday's case of WA director Joanne De Hollander sends a clear message to the community: if you deliberately do the wrong thing you will face serious consequences. De Hollander was sentenced yesterday to three years jail, with non-parole period of 20 months for understating cash business sales by over $5.6 million and intent to underpay GST obligations by some $514,000 for two companies that she was the sole director of. "Not declaring cash income and making fraudulent GST claims is illegal," Mr D'Ascenzo said. "Doing the wrong thing towards your obligations insults those in the community including other businesses who do the right thing; and that is just not fair. "If you deliberately do the wrong thing you will get caught."
Last financial year:
- 28 people were prosecuted for over $17 million worth of GST-related fraud offences
- The ATO's verification checks of taxpayers Business Activity Statements resulted in over 30,000 statements being adjusted to reflect correct circumstances
- The ATO received over 44,000 'contacts' including calls, letters, faxes and emails from the community relating to those who may be doing the wrong thing towards their obligations via ATO Tax Evasion Referral Centre
- The ATO increased scrutiny of businesses deliberately not reporting cash income, with over 1.4 million small businesses evaluated against our sophisticated risk detection systems.
"A key part of our Compliance Program is increasing our focus on non-complying taxpayers in the GST system, with $337 million provided in last financial year's budget for this purpose. We are also focusing on those who fail to report some or all cash transactions. While it is not illegal to trade in cash it is illegal to not report it," Mr D'Ascenzo said. "If you are having trouble understanding or meeting your obligations I encourage you to give us a call and discuss your circumstances." Further information about the ATO compliance focus including areas that are attracting the ATO's attention can be found in the ATO Compliance Program 2011-12, which is available for download from www.ato.gov.au
Further information around ATO prosecutions including statistics can be found at www.ato.gov.au/prosecutions
http://www.ato.gov.au/corporate/content.aspx?doc=/content/00286722.htm
Tax helps push sales of alcopops down but nation still thirsty, whatever the flavour
Mark Metherell, Sydney Morning Herald, 18 July 2011
THE alcopops tax has ''probably'' reduced heavy drinking by young people but Australia's overall alcohol consumption still remains marginally higher than five years ago, fuelling expert calls for wider liquor reforms. The latest available statistics on alcohol consumption show that alcopops sales have continued to fall in the wake of the 70 per cent tax increase imposed in 2008 on the pre-mixed spirit drinks.
In an article in The Medical Journal of Australia published today, a group of experts say new statistics challenge the finding of a Victorian survey last year that suggested the tax increase had not changed secondary students' preference for alcopops. However, the article cites recent Australian Bureau of Statistics figures showing a drop of about 40 per cent in the sales of alcopops between 2008 and 2010. ''Although sales for other spirits increased, the rise accounted for less than half the decrease in ready-to-drink sales,'' states the article written by a team headed by Dr Steven Skov, the chairman of the alcohol advisory group of the Royal Australasian College of Physicians.
The fall in alcopops was associated with a modest drop in overall alcohol sales between 2008 and 2010, but intake last year still remained higher than earlier in the decade. Per capita consumption expressed in terms of pure alcohol was recorded by the ABS at 10.37 litres last year, above the 10.31 litres recorded in 2004-05. The tax had the positive effect of reducing alcopops consumption but increasing the price of one group of beverages only, and not having a minimum price for alcohol, ''allows the alcohol industry to maintain profits by promoting or discounting other products to encourage drinkers to switch to cheaper beverages'', the article says.
The college of physicians and groups such as the Public Health Association of Australia favoured a more comprehensive approach to deal with the price and availability of alcohol, to regulate its promotion and to educate people about the risks of drinking. ''The alcopops tax … was by no means enough. In the face of thousands of deaths and over $15 billion in social and economic costs each year, our political leaders need to do more to address the unacceptable harm that alcohol continues to cause our society,'' the article says. The latest call comes amid rising pressure on the alcohol industry. Health groups are demanding the government support serious debate at the October tax summit on proposals for alcohol tax reform. They say new health warnings for alcohol introduced last week by the DrinkWise industry group are unclear and weak.
A middle-class welfare corrective
Rob Burgess, Business Spectator, 11 July 2011
It is slowly dawning on Australia what actually happened on 'Carbon Sunday'. Besides announcing a hybrid approach to gradually reduce the nation's carbon footprint – cushioned by substantial amounts of protection, compensation, and 'transitional support' for power generators and trade exposed industries – Labor broke the strangle-hold on our economy of middle-class welfare. The reforms to marginal tax rates and family tax benefit payments, when considered alongside the price rises implied by the $23 per tonne starting price, push the benefits of working lower down the socio-economic scale to encourage workforce participation in the nation's lower-paid jobs.
The tax-free threshold will be trebled to $18,200, meaning that around a million working Australians will no longer pay any tax at all – they won't even have to submit a tax return. Is that fair on the rest of us? Yes – the productivity gains to the economy will be large, and the drag of large numbers of Australians not saving for their retirement on contributing to the burgeoning health-care costs of our ageing population will be eased. While the low paid won't be earning enough to do either of these things, the jobs they fill will allow other workers to move 'up the food chain' into more productive jobs.
There are around 2 million 'work ready' Australians not looking for work, many because they know the benefit of doing so is small. After Sunday's announcement, any back-of-the-envelope calculation will make it obvious that this has now changed, and a flow of workers into the lower end of our drum-tight labour market will be the result. There is a downside to this increased participation – the incentive for mothers (or, less commonly, stay-at-home fathers) to remain in the home nurturing children is diminished. This is because, although Family Tax Benefit payments are increased in the package, so are the prices of goods and services across the economy. The decision to go back to work to address this becomes much clearer.
John Howard and Peter Costello wanted Australians to have the option of being stay-at-home parents, and many families (my own included) took advantage of the tax cuts and family tax benefit increases that they engineered on the back of 'mining boom mark I' in the first half of the last decade. The ending of that opportunity is a pity, but the reality of 'middle-class welfare' is that its biggest beneficiaries were not true 'battlers' – the genuinely 'middle' middle-classes – but the upper end of the middle classes. The recent debate over whether $150,000 is 'rich' or not shows how deluded we have become about our incomes. The ABS puts average full time weekly earnings, including overtime, at $69,732. Average earnings for all workers (including part timers) are $52,208.
That makes $150,000 – the figure at which Labor is 'pausing' the indexation of family tax benefits – pretty rich. Appeals to the 'cost of living' or 'cost of housing' as reasons why it 'isn't rich' cannot hide the fact that most Australians live on incomes well below this level. The adjustments contained in yesterday's announcement are complex. The revenue lost by raising everyone's tax-free threshold is being recouped by raising the tax rates for higher tax brackets. From July 2012, income between $18,201 and $37,001 will be taxed at 19 per cent, with income between $37,001 and $80,000 being taxed at 32.5 per cent (currently it's 30 per cent). That middle bracket tax rate will then increase to 33 per cent in 2015. Tax rates above $80,000 remain the same.
The Coalition was quick to jump on these figures – at his press conference yesterday, Tony Abbott contrasted the string of tax cuts made by the Howard government with Labor's shock decision to raise marginal tax rates. It is unlikely that line will be much use in his planned campaign against the carbon tax, because taken together, the raised tax-free threshold and higher marginal rates do not increase the tax burden – they actually decrease it for two-thirds of Australian taxpayers. This is the main mechanism by which carbon tax revenue is being returned to the nation.
The fact that this reform so strongly incentivises workforce participation at the lower end of the jobs market is a big plus for this policy package. It goes a long way to correcting personal income taxes in the productivity-enhancing way suggested by the Henry tax review. In the long term, by shrugging off the dead weight of upper-middle-class welfare, it may play a far more important role in Australia's future prosperity than the carbon tax itself.
CSA criticise tax reform proposals
Australian Financial Review, 8 July 2011
Chartered Secretaries Australia has slammed proposals to introduce tax changes before a Not-for-profits Commission regulator was appointed, arguing that the move will not be in line with the objectives of the Australian Charities. CSA chief executive Tim Sheehy said new tax measures will undermine the new NFP reforms.
Read the full article available onthe AFR website via a subscription.
Read the Treasury exposure draft on 'In Australia' Special Conditions for Tax Concession Entities.
Switzerland mulls abolition of stamp duties
Ulrika Lomas, Tax News, 7 July 2011
Switzerland’s federal tax administration has recently examined the potential impact of abolishing stamp duty in the Confederation, and published a study in which it analyzes the three types of levy in terms of their effect on the attractiveness of Switzerland as an economic location and in terms of their efficiency.
In its study, designed to establish a means and timeframe for abolishing stamp duty in Switzerland and to examine the shortfall in revenues arising from such a move, the administration recommends that the stamp duty on shares and bonds should be abolished first.
According to the administration, the study provides details of two possible alternatives for abolishing the tax. The first solution provides for the progressive removal of stamp duty by 2018. Under the proposals, from 2017, the removal of the tax would be financed by subjecting financial services commissions in the Confederation to value-added tax (VAT) and by maintaining the temporary rise in VAT, initially intended to finance the country’s disability fund, without, however, maintaining the flow of monies to the fund. In order to adhere to the country’s debt brake requirements, the administration also recommends the introduction of additional measures.
The administration’s second proposal provides for the rapid abolition of stamp duty by 2015. To finance the resulting shortfall in fiscal revenues, the administration advocates increasing the existing carbon dioxide tax currently levied on fuel in Switzerland or increasing VAT. Alternatively, the government could consider introducing federal inheritance, gift and wealth taxes, or raising the direct federal tax imposed on individuals.
Since 2002, the amount of stamp duty yielded annually for the state has varied between CHF2.6bn (EUR2.15bn) and CHF3bn (EUR2.5bn).
Alcohol on tax FORUM agenda
Fleur Anderson, Australian Financial Review, 7 July 2011
The reform of taxes on alcohol will be pursued at the government’s tax forum in October and Federal Health Minister Nicola Roxon has supported calls for such. The National Alliance for Action on Alcohol, which includes the Royal Australian College of Surgeons and the National Drug Research Institute, is proposing volumetric tax, with Cancer Council Victoria chief executive Todd Harper noting that the current scheme allows wine to become cheaper than water. However, the Winemaker’s Federation of Australia is not in favour of volumetric tax as it would increase prices.
Read the full article available onthe AFR website via a subscription.
Read a related article in the Australian.
Taxman fires on phoenix
Ben Butler, Sydney Morning Herald, 6 July 2011
The taxman is to get sweeping powers to recover unpaid superannuation from business people who deliberately liquidate their companies to avoid their liabilities. Under laws proposed by Assistant Treasurer Bill Shorten, the Tax Office will also be able to claw back income-tax credits fraudulently claimed by directors of failed companies.
Mr Shorten said the changes, foreshadowed in the May budget, were designed to protect workers' superannuation from ''phoenixed'' companies.
Phoenixing involves deliberately liquidating a company to avoid tax, superannuation and other creditors. The business is transferred to another entity, controlled by the same people, which carries on free from the liquidated company's obligations.
The new legislation, released for public consultation yesterday, bolsters one of the ATO's most fearsome weapons, the director penalty notice. At present, the ATO can issue a company director with a notice ordering payment within 14 days of outstanding tax collected from workers under the pay-as-you-go scheme. Under the new rules, the ATO will also be able to issue director penalty notices covering superannuation-guarantee payments that are more than three months late.
The new rules are also designed to end a scam where company directors claim a personal credit for income tax that the company is supposed to have withheld from their pay cheque. However, the tax has not actually been withheld by the company, which is then put into liquidation, robbing the ATO of revenue.
Under the new rules, the ATO may disallow such credits for company directors, their spouses and children.
The Tax Institute, which represents tax accountants and lawyers, said it welcomed any crackdown on phoenix activity but would carefully examine the proposal to make sure it did not hurt people doing their best to comply with the law.
Tax forum to amount to little more than backwash
Robert Jeremenko, The Australian, 6 July 2011
It has been more than a year since the release of the Henry review of the Australian tax system. Even before receiving Ken Henry's 138 recommendations for reform, the Labor government's view was that any changes could take a decade or more to take effect. Considering the report was a whopping 1000 pages long and policy reform is generally a measured and complicated task, a decade is a fair call.
So why, when the government announced its long-awaited tax forum, did it assign only two days? There are six areas for discussion when the tax forum convenes in Canberra on October 4: personal tax, transfer payments, business tax, state taxes, environmental and social taxes, and system governance. On the face of it, this is a comprehensive and wide-ranging list. Pity, then, that the plan to consider all these issues probably won't do it justice.
Budget papers reveal the event is costing us $900,000. For the price, I hope we get some solid outcomes and a process for taking the tax reform agenda forward.
Last year, the Tax Institute suggested the government convene expert committees, well in advance of the forum, to examine specialised areas of tax policy and bring considered recommendations forward. It's an idea that still has currency with key independent MP Rob Oakeshott, whose support for the government is one of the reasons the forum is going ahead. Instead, the preferred course is for the government to release (another) discussion paper and invite all to upload their thoughts to a website.
The government is being very careful to pitch its forum as one step in a long journey, and everybody in the tax profession understands that. Unfortunately, much of the thinking around the politically charged carbon and mining taxes will be a "done deal" by then.
GST also is on the table, just as long as we don't think about actually changing it. The GST is one of the biggest revenue raisers for the federal government, which it hands it to the states, dragging in more than $50 billion a year, yet is constantly ruled out-of-bounds.
The government says while it won't be changing the GST rate, "we still expect and welcome a broad and constructive discussion". That's code for: "Talk among yourselves but it's a political hot potato and we won't allow it to be the subject of the mother of all political scare campaigns in the run-up to the next federal election."
And it's not just about the rate. The GST was supposed to be the mechanism for doing away with scores of messy and inefficient state taxes. The GST is the states' revenue lifeline. They have precious few alternatives to raise cash. So if the GST remains untouched, most of those badly designed state taxes seem sure to be spared the axe.
At the same time, there are about 40 cash transfers paid to Australians by the federal government in the form of welfare payments, family benefits and the like, and they turn over about $70 billion. This churn represents more than one-quarter of government spending. Henry looked at them in detail and, although he couldn't guess what they cost in administration, he flagged that savings through simplification would have to be made.
Before you think reform equates to cutting back on welfare, Henry found that the cost of a complex and inefficient tax transfer system was disproportionately borne by the most vulnerable. Tax cuts have been flagged as a trade-off for a carbon tax system. The tax forum could consider this . . . if we have enough time to talk about it.
With a stronger fiscal position predicted for 2012-13, there is a greater prospect of significant tax reform. The government needs to start the heavy lifting now, to ensure there is a medium-term plan for reform in the coming years.
By any measure, the Gillard government has made only modest progress on tax reform. It has been a ripple of change, not a wave, and something tells me the froth and noise around the forum will amount to little more than backwash.
For the sake of the 150 forum participants, I hope they remember to bring sunscreen. They'll all be trying to get their feet wet but there seems little chance of anyone catching a wave.
Robert Jeremenko is senior tax counsel for the Tax Institute.
UK Adult Care Report Suggests Tax Hike
Robert Lee, Tax News, 6 July 2011
The UK's adult care system is in need of a substantial overhaul, according to a newly released commission report, but changes would need to be funded by a tax hike on those feeling the benefits of such measures.
The Commission on Funding of Care and Support, headed up by Andrew Dilnot, has published its final report, "Fairer Care Funding". This independent commission, set up in July last year, was charged with recommending a fair and sustainable funding system for adult social care in England. The report, released on July 4, suggests a cap on individuals' lifetime contributions to social care costs, after which the state would "kick in". However, in order to pay for such state involvement, a tax rise would be likely.
The number of those in England aged 85 and over is expected to double over the next 20 years, to 2.4m. Under the current system, first introduced in 1948, individuals with assets of over GBP23,250 have to contribute to any social care costs they require. Were Dilnot's recommendations to be implemented, this means-tested threshold, above which people are liable for their full care costs, would be increased to GBP100,000.
In addition, lifetime contributions would be capped. The report argues that, once the cap is reached, individuals would become eligible for full state support. It suggests a cap at between GBP25,000 and GBP50,000, with a specific recommendation of GBP35,000 as "the most appropriate and fair figure". Based on a cap of GBP35,000, the report estimates costs of GBP1.7bn a year.
The Department of Health has said that currently one-quarter of those over 65 can expect care costs of over GBP50,000, with one in ten experiencing costs of GBP100,000. Dilnot's reforms aim at ensuring that no-one going in to residential care would have to spend over 30% of their assets, in contrast to the extreme of 90% sometimes seen today.
Such sweeping changes would, of course, need to be paid for. Three recommendations are made for potential ways in which the government could fund these reforms. One is that it may choose to prioritize existing expenditure, but the other two focus on tax measures. On the one hand, the government could raise additional revenue through general taxation, or, on the other, it could introduce a specified tax hike.
According to the report, it would "make sense" for any such increase to be paid, at least in part, by those benefiting directly from the reforms. In addition, at least part of the burden should fall on those over state pensionable age. However, the report stresses, were the government to pick this option, it should raise a tax, rather than impose a new one.
If the government were to use taxation to fund the reforms, the report argues that it would then have to consider the impact of any tax hikes on different income and generational groups.
Dilnot said of the report: “The current system is confusing, unfair and unsustainable. People can’t protect themselves against the risk of very high care costs and risk losing all their assets, including their house. This problem will only get worse if left as it is, with the most vulnerable in our society being the ones to suffer. Under our proposed system, everybody who gets free support from the State now will continue to do so and everybody else would be better off. Putting a limit on the maximum lifetime costs people may face will allow them to plan ahead for how they wish to meet these costs. By protecting a larger amount of people’s assets, they need no longer fear losing everything.”
Download the report from the UK Government website.
Tax reform is different from tax increases: Republicans
Jessica Naziri, CNBC, 6 Jul 2011
House Republicans are willing to discuss closing tax loopholes with President Obama in exchange for lowering tax rates, House Budget Chairman Paul Ryan (R-Wisc.) told CNBC Wednesday.
"I can simply say tax reform and tax increases can be two different things," Ryan said in a live interview. "We have always said let's go after corporate loopholes in exchange for lowering the tax rates. But that's not a tax increase. What we've said all along is for every dollar the president wants to raise the debt limit, let's cut more than a dollar's worth of spending."
Earlier Wednesday, the White House said it believed there were enough Democrats and Republicans in Congress who would support eliminating some tax breaks in order to pass a broad deal to cut the deficit.
The White House is locked in a dispute with congressional Republicans about how to cut the deficit and reach a deal to raise the U.S. debt limit before the United States runs out of borrowing capacity on Aug. 2.
Obama has called a meeting at the White House on Thursday with top congressional leaders to discuss the issue. Republican House Speaker John Boehner, who met with Obama to discuss the deficit standoff on Sunday, said the upcoaid
House Republican leader Eric Cantor also said Wednesday that party could agree to close some tax breaks in a trillion-dollar budget deal as long as they offset with tax cuts elsewhere.
Tax office to face greater scrutiny
David Crowe and Katie Walsh, Australian Financial Review, 5 July 2011
The Australian Taxation Office has been warned by the Joint Committee of Public Accounts and Audit that it will come under greater scrutiny. Rob Oakeshott, independent MP and chairman of the committee, said that the integrity of tax administration needed more supervision. Concern was expressed in the report about the government’s consultation with the ATO after tax officials confirmed they had not been consulted over the carbon tax’s design. Mr Oakeshott said he would have preferred to hear testimony from the Australian National Audit Office, the Commonwealth Ombudsman, and the inspector-general of taxation at public hearings. Yasser El-Ansary from the Institute of Chartered Accountants said the report contained insightful recommendations. Dick Warburton, former chief of the Board of Taxation, and ASX director Jillian Segal sat on the board. Robert Jeremenko, senior tax counsel at the Tax Institute, said the Tax Office was one of the most heavily monitored departments.
Read the full article available onthe AFR website via a subscription.
Finally, a reaction to our inaction
Sydney Morning Herald, 5 July 2011
A damning report suggests Australia's attitude towards infrastructure needs to change:
- ''This report is quite deliberately expressed in stronger terms than previous reports. ...Whilst governments have invested a significant amount on infrastructure, they have made little progress in responding to a number of issues raised in previous reports, e.g. the need for improved planning, and the need for reforms in the areas of pricing, demand management and funding. 'In that context, Infrastructure Australia urges governments to embrace the need for reform, to lead necessary change, and to commit to action on a range of fronts. 'Ultimately, most of these problems and challenges have developed and intensified because of shortcomings in leadership. Governments, business leaders and opinion leaders have avoided a range of difficult debates and choices. That cannot persist.''
- Infrastructure Australia, Communicating the Imperative for Action
Sir Rod Eddington and his board at Infrastructure Australia have had enough. After sitting politely on the sidelines, watching good ideas get derailed by partisan fights, they are not going to take it any more. They want action - and they are willing to make waves to get it.
Their fourth report to the Council of Australian Governments released yesterday, Communicating the Imperative for Action, does not beat around the bush. Australia, it says, has invested too little in infrastructure for many years, and has seen productivity growth slump as a result. We have too many governments and government bodies with fingers in the pie, getting in each other's way instead of collaborating, often for partisan reasons.
We are not making the best use of the infrastructure we have, not evaluating infrastructure choices properly to ensure we spend our money where it will give the best results and, perhaps most importantly, not confronting the impasse on how on earth we are going to fund all the infrastructure we need.
They're not just angry with governments: they're angry with us. Australians, the report argues, do not understand the real choices we face on infrastructure. If we want better roads, rail, water and electricity, we will have to pay for it and adjust our values to accept that burden in some form - whether by increased taxes, charges, tolls, asset sales or whatever.
The report puts the problem squarely. ''As a country and a community'', it says, ''we:
- Are reluctant to increase government debt (although our national debt levels are among the lowest of any developed country).
- Baulk at raising taxes to pay for better infrastructure and services.
- Are uncomfortable with the 'user pays' concept (as seen in opposition to the use of tolls to fund some roads or increases in utility charges to pay for necessary capital investment and maintenance).
- Are against recycling capital, i.e. selling poorly performing infrastructure assets that could be better managed by the private sector and using the proceeds of those sales to fund other infrastructure.
''Yet we are concerned about congestion, we are concerned about the health and security of our water supplies, we are concerned about the prospect of electricity 'brownouts' and we recognise the need to modernise our telecommunications. 'There is a profound disconnect here.''
The report declares this a crucial issue for ''our prosperity and future'' and promises that ''communicating the need for a more mature debate about our infrastructure and how we pay for it will be a core part of Infrastructure Australia's agenda.''
The Rudd government set up IA in 2008 to advise it on priorities for infrastructure investment. This report does that, naming as its three top priorities the reconfiguring of urban freeways to give priority to public transport, plans to remodel High Street through Northcote and Thornbury to speed up tram travel, and the Brumby government's plan to build an underground rail link from Footscray through the city to Caulfield as the start of a Melbourne metro network.
But the focus of this report is not individual projects, but systemic issues. It wants us to confront the big question: how we do we want to pay for the infrastructure we need? It wants governments to act instead of endlessly putting off decisions, or commissioning yet another report to substitute for action.
(Michael Kilgariff of the Australian Logistics Council was savage yesterday on the latest example: news that the Productivity Commission will be asked to report on road user charges on top of the pile of reports already delivered by the Henry tax review, the board of COAG's road reform plan and many others. ''What could the commission possibly look at that hasn't already been examined?,'' he asked.)
Sir Rod too is fed up. He said reforms by government were ''frustrating slow'' when action was imperative. ''Productivity has slowed as a direct result of infrastructure shortfalls - time lost in travel, delays at ports, lost production due to water restrictions.'' Australia, the report points out, is below the OECD average in infrastructure investment, productivity growth and the ratio of capital stock to GDP.
His four biggest concerns are systemic. Governments are not tackling reform with the urgency it needs. They (and us) are not facing up to the need to make tough choices to finance the First World infrastructure we want. They are not selling the case for those reforms and tough choices. And they are not using pricing to make the most of the infrastructure we already have.
Infrastructure Australia (whose board includes Mark Birrell of Infrastructure Partnerships Australia) recently set up a working group to identify new ways of financing infrastructure projects, such as attracting investment from superannuation funds; selling old infrastructure assets to pay for building new ones; finding a way to tax the infrastructure-driven rise in land values; and tackling the problem of demand risk, which has sent so many recent PPPs underwater.
And if all that fails, there's the toll option. The report proposes that the east coast national highway, at least from Melbourne to the Sunshine Coast, be turned into a toll road, like highways in the United States - with the funds earmarked for new infrastructure projects.
Extracts from the report regarding taxes on roads:
- "...[D]espite various inquiries (including the 2006 review of urban congestion, which was initiated by the Council of Australian Governments and found that some form of pricing was required to manage demand), there has been no substantive progress with, or even trial or urban road pricing. Unfortunately, no jurisdiction is prepared to canvass the propositions, much less take any action. The prospect of securing agreement on these matters at the Tax Summit later in 2011 seems as remote as ever.”
The role of government in a changing economy
Treasurer Wayne Swan, Economic and Social Outlook Conference address (extract), 30 June 2011
...At the same time we need to ensure the opportunities of the boom are spread to all corners of our economy. This is one of the driving forces behind our tax reform agenda. It's why, through the Minerals Resource Rent Tax, we are funding a company tax cut and tax cuts to small business. This is vital policy recognition that not all businesses are in the mining boom fast-lane, and indeed many face major challenges associated with the boom.
We are also boosting national savings, by lifting the superannuation guarantee from 9 to 12 per cent. Since our initial response in May last year, I've announced a further 12 measures that deliver on reform directions identified by the tax review.
I'm also looking to the upcoming Tax Forum helping to identify the next steps in the decade-long process of making our tax system stronger, fairer and simpler. I'll be releasing a framing paper next month to help encourage debate within the community on options for tax reform. It will point to the key principles that drive us when it comes to tax reform: making our economy stronger by rewarding hard work and promoting investment, productivity and international competitiveness; ensuring the system is fair; and making tax time simpler, especially for individuals and small businesses. But given our commitment to fiscal discipline, any tax reform proposals also need to be revenue neutral.
I've delivered four budgets now, and over that time I've had a lot of interest groups walk through the door and tell me why they should get a tax cut and how someone else should pay for it. Having everyone in the one room at the Tax Forum should bring into sharp focus the point that people can't simply pitch up a tax cut and expect someone else to pay for it. If participants work from this basis, then I'm confident we can get some really good progress out of the Tax Forum.
On top of our ambitious tax reform agenda, we're also investing in the skills and the infrastructure needed by our economy, so that we are better placed to take advantage of the opportunities presented by the middle classing of Asia...
Read the full address on the Treasury website.
GST distribution review releases issues paper and calls for submissions
Media Release, 1 July 2011
The Review Panel today released an Issues Paper and called for submissions from interested parties. It is the first instalment of the Review which was announced by the Prime Minister and Treasurer earlier this year. The Review Panel comprises the Hon Nick Greiner AC, the Hon John Brumby and Mr Bruce Carter.
The Review is considering whether the current approach to sharing the GST amongst the States will ensure that Australia is best placed to respond to structural and other challenges and to maintain public confidence in the financial relationships within the Australian Federation.
"The principle of equalisation is largely accepted and the approach to it has evolved over time. But issues of concern exist for some states, while others are comfortable with the current system" said the Panel.
Australia is now facing several challenges such as the rise of China and India, and the resulting growth in the mining sector is increasing the discrepancy in the amounts of revenue raised by States and Territories, as well as making it more difficult to anticipate GST distribution from one year to the next. Concerns have also arisen about the complexity, efficiency and equity of the current system.
"Now is an appropriate time to examine the current approach as well as consider alternates to see if there is a need for change" the Panel said.
The Issues Paper describes Australia's current equalisation system from a factual and analytical perspective and provides guidance for submissions. This paper is not intended to be exhaustive, nor is it intended to limit discussion to the issues canvassed in this paper. It also raises some questions that may open the way for equalisation stakeholders and the community to tell the Panel what they regard to be the key issues for the Review. For example:
- Has the fiscal equalisation system evolved to effectively operate in an open economy subject to global volatility?
- Is the fiscal equalisation system a passive and reactive mechanism? Should it, or can it, be a more active and dynamic policy tool?
- Does the current fiscal equalisation process complement, encourage or discourage productivity enhancing reforms by the States?
- Do the outcomes of the current process result in an appropriate level of predictability and stability in the determination of GST shares?
- Is full fiscal equalisation required or is there a form of partial equalisation that can sufficiently recognise underlying differences amongst the States?
The Issues Paper and information about the Review is available at www.gstdistributionreview.gov.au. Submissions are due by 14 October 2011.
Why we should put an inheritance tax back into the spotlight
Frank Stilwell, The Conversation, 28 June 2011
The concept of death duties reared its controversial head publicly recently, with Greens Senator Lee Rhiannon quizzed on party policy by the ABC’s political editor Chris Uhlmann. Greens leader Bob Brown has previously said it was not a priority. Certainly the tax has been considered politically unpalatable.
But such a tax is not without its supporters – including former Treasury Secretary, Ken Henry – and with a promised Tax Summit months away, it’s probably not a bad time to revisit some of the issues.
Inheriting inequality
Firstly, this year’s BRW Rich 200 list reminds us of the importance of inheritance in perpetuating economic inequalities.
Topping the list as Australia’s wealthiest person is Gina Rinehart, daughter of wealth mining magnate Lang Hancock. In fourth place is Anthony Pratt, son of businessman Richard Pratt. James Packer and Lachlan Murdoch are also familiar names among the top wealth holders – just like their dads.
So is this just a matter of “choosing your parents wisely”? Or is the transmission of massive inherited wealth an obstacle to achieving the liberal ideal of equality of opportunity? Should there be a tax specifically designed to tap into the transmission of wealth inequities?
‘Un-Australian’ and the ‘fair go’
Some would say any inheritance tax would be “un-Australian”. To be sure, any new tax is unwelcome to those who would have to pay it. But don’t “Australian values” include social mobility and the “fair go”? And shouldn’t the tax burden reflect ability to pay?
Of course, some people make it to the BRW rich list without inherited wealth, but their descendents will also be able to afford to pay an inheritance tax, won’t they? And such a tax won’t deter people from getting rich, will it?
Supporters
Support for an inheritance tax comes from many serious analysts of public finance. Henry’s tax review gives support for the principle of an inheritance tax, although this is buried in just a few lines in the huge report.
Henry rather quaintly calls it a bequest tax – a tax that would be levied on the accumulated wealth of people at the time of their death. His review gives it a thumbs-up, saying it would be economically efficient, but then drops it because of its “controversial history”.
Indeed, inheritance taxes used to exist in Australia until the late 1970s. They were levied by both state and Commonwealth governments. In 1978, Joh Bjelke-Petersen, the idiosyncratic Premier of Queensland, decided to abolish inheritance tax. Not surprisingly, the governments of other states followed.
Prime Minister Malcolm Fraser then quickly eliminated the federal inheritance tax, probably thinking that this would boost his flagging electoral popularity. That decision was crucial because it is only at the national government level that an estate tax could sensibly be created now.
The international experience
National inheritance taxes exist in many other countries, such as the United Kingdom, Germany, Italy, Belgium, the Republic of Ireland, France, the Czech Republic, Canada and some states in the USA. In the UK, for example, inheritance tax is imposed on assets with value in excess of £325,000, at a rate of 40% of the value of the estate above that threshold.
Inherited wealth is unearned income. It differs in this respect from wealth generated through thrift, enterprise or sheer hard work. So the ethical basis for taxing inherited wealth is quite distinctive.
The social equity argument is also strong. Inheritance perpetuates economic inequalities inter-generationally and therefore obstructs egalitarian ambitions. Income thereby begets wealth and wealth begets income. Taxing inherited wealth would create a less unequal distribution of income and produce a more ‘level playing field’ within the society.
‘Strong case’
Even orthodox economists concede that there is a strong case for inheritance taxation. This is because it does not have the adverse economic consequences that they commonly say results from some other forms of taxation. Income received from inheritance is a windfall gain. It has no relationship to the economic efforts of the recipient/s. So inheritance tax is unlikely to adversely affect economic productivity.
Inheritance tax can also produce a good revenue stream for the government, taking the pressure off other forms of taxation and/or financing socially desirable government expenditures (such as public housing provision, the education of young people, child care services or hospitals). The amount of revenue that would be generated by a new tax on inherited wealth in Australia would depend on its precise form, of course.
The question of the appropriate threshold is particularly important is this regard. There is a trade-off between politics and economics here – between the political acceptability to a broad ‘middle class’ within the electorate and the economic goal of raising substantial tax revenue.
A threshold set at $5 million, as the Australian Greens currently propose, is at the politically cautious end of this trade-off.
If the threshold were set at $2 million, the inheritance tax would still apply to only about 5% of households but, set at a rate comparable to that in the UK, for example, it could generate sufficient revenue to finance free tertiary education, for example, or a very substantial boost to public housing to address the ongoing crisis of housing affordability.
The politics of an estate tax
New taxes, although never popular, can be made more palatable if they address major social problems and injustices. Political acceptability is also enhanced if there is a link between the tax revenue and specified socially desirable expenditure.
Unequal societies tend to be unhappier societies. They generally have a higher incidence of mental and physical illness, violence, crime and incarceration. Taxing wealth inheritance does not solve all these stresses, of course, but it helps to create a sounder economic foundation.
The first step is to get the issues talked about: hopefully, October’s Tax Summit will provide the opportunity to get the necessary conversations started.
Frank Stilwell is a Professor in the Department of Political Economy at University of Sydney.
Listen to a subsequent radio interview with Professor Frankstillwell on the ABC website.
Read the relevant section of the Henry report.
Read a related article on the Greens’ position.
Perk street is not as one-way as employed, childless renters think
Adam Creighton, Sydney Morning Herald, 1 July 2011
If you are working, renting and childless, you might feel Australian democracy neglects you. For a start, you are not one of the ''working families'' - that cosseted cohort of propertied Australians with young children whom politicians love to pamper.
The government puts your money where its mouth is. Taxpayers foot a yearly bill of $30billion for the smorgasbord of child-based payments and subsidies, equivalent to about one-quarter of income tax. The baby bonus, which costs about $1 billion a year, is a mere tip.
Add the first home owner's grant and the huge tax breaks for owner-occupiers, and it does appear childless renters are among the great benefactors of Australian democracy.
More than one-fifth of Australian households rented privately in 2006, up more than 10 per cent from a decade earlier. With a median age of 37, renters are 15 years younger than homeowners and less likely to have children. Only 20 per cent of couples with children rent.
But not all renters are shortchanged by government. The cliched analysis ignores the NSW government's taxes and subsidies. In fact, if you rent, have no dependents and avoid driving and gambling, you pay almost nothing directly to the NSW government.
The state government relies on Canberra for about half its revenue, but its own taxes raise more than $20 billion a year, more than enough to pay for public transport, law and order and basic hospital services, for instance. These taxes fall more heavily on homeowners with children.
Homebuyers bear massive stamp duty every time they buy a house. Say a family buys an average-priced Sydney house and upgrades to another in 10 years as the children grow in number and size. Macquarie Street makes about $60,000 in tax.
Then there are local government rates. In the Sutherland Shire, for instance, this comes to about $1200 a year on an average block of land valued at $400,000. Sydney's cutthroat rental market means landlords can struggle to pass on rate increases to their tenants.
''Working families'' in the suburbs are more likely to have cars to ferry their children around and commute. Motor vehicle taxes, on new and used cars, make up about 10 per cent of NSW's tax revenue. Inflated vehicle registration fees and the 5 per cent tax on car insurance premiums add hundreds of dollars to the total tax bill of families.
NSW taxes home and contents and life insurance premiums, too. And this is distinct from the $600 million levy imposed on general insurance premiums to pay for the state's fire and rescue services.
NSW graciously exempts hospital and medical benefits insurance from duty, through which childless renters might have coughed up a little tax. Uniquely among the Australian states, its health insurance levy does, however, extract about $65 a year per policyholder from health insurers. But health insurers charge the same for basic cover in other states as they do here.
Not only do renters tend to avoid taxes, but their prevalence around bus and train hubs ensures they get a subsidy as well. NSW props up CityRail to the tune of about $2 billion a year. Seventy per cent of Sydneysiders use CityRail less than once a month or not at all, and you can bet homeowners with children in the suburbs feature disproportionately.
So childless renters should be less indignant as they ponder Australia's tax-transfer system on the 380 bus from Bondi Junction or the 7.15am train from Newtown. The Commonwealth might fleece them but NSW, especially if they can afford to live in the more salubrious parts of Sydney, is their friend.
But state taxes, even more than federal taxes, require wholesale overhaul. Their obscure and arbitrary incidence is inimical to fair and efficient government.
A more transparent and equitable tax system would emerge if the states abolished their archaic duties and levies and the federal government dramatically reduced its income tax and let the states impose their own.
One thing is clear, however. Those childless renters with low-paying jobs who cannot afford to live near the city, and who gamble a little and need a car, pay a lot of tax to subsidise the lifestyles of richer homeowners and inner-city renters, with or without children. They are the forgotten people in Australia today.
Fuel subsidy trade-off in climate deal
Marcus Priest and Louise Dodson, Australian Financial Review, 1 July 2011
The Federal Government has agreed to ask the Productivity Commission to conduct a review into fossil fuel subsidies and fuel taxes. The agreement comes out of negotiations over the Government’s proposed carbon emissions scheme. The Greens are seeking to have fuel taxation based on carbon content, while independent MPs are understood to have sought fuel concessions for farmers although at this point the Multi-Party Climate Change Committee hasn’t reached any agreement. The timing for introducing an emissions trading scheme (ETS) has been decided with Greens leader Bob Brown confirming it would come into effect in 2015. Prime Minister Julia Gillard previously claimed that any ETS wouldn’t be established until a carbon tax had been operating for five years. During 2010 a total of 17 federal fossil fuel subsidies were indentified by the Department of Resources and Energy and Treasury with an annual price tag exceeding $8 billion.
Elsewhere National Australia Bank chief executive Cameron Clyne threw his support behind the approach being adopted to climate change while James MacKenzie, chairman of Mirvac and Gloucester Coal, disputed claims by the Australian Coal Association that the carbon tax would decimate 4000 jobs. The government’s initiative also gained the support of Foster’s Group chief executive John Pollaers who said If the benefit case includes that we are going to create a green tech sector in Australia that gives leadership then let’s get moving.’ Meanwhile Wayne Swan has taken aim at the Chicken Littles’ saying that modelling carried out on a carbon price indicated there would be a slowing in wage growth but it in no way threatened mining growth with its impact being virtually non-existent in the manufacturing and service sectors.
Read the full article on the AFR website, available via a subscription.
US Senate Returns To The 'Tax Gap'
Mike Godfrey, Tax-News.com, 1 July 2011
The United States Senate Committee on Finance has hosted a discussion on the linkage between cutting the current complexities in the country’s tax code, to make tax compliance easier and, consequently, also to reduce the size of the 'tax gap'.
According to the latest Internal Revenue Service (IRS) estimates, the number of tax dollars that are owed but remain unpaid – the so-called 'tax gap' – is USD345bn each year. This is the equivalent of nearly 20% of the US forecasted deficit for this fiscal year.
While Committee Chairman Max Baucus suggested that part of the tax gap is due to deliberate tax evasion, he observed that a portion is as a result of taxpayer confusion and unintentional errors.US taxpayers and businesses spend more than six billion hours each year complying with the filing requirements of the tax code. As the Taxpayer Advocate’s 2010 annual report has pointed out, if the hours Americans spent on tax compliance were instead spent on an industry, it would be one of the largest in the United States.
Baucus asked whether the confusion surrounding the complexities of the tax code has led to non-compliance, and whether the tax code is so confusing “because we have patched up loopholes and written new rules in an effort to prevent non-compliance.” One solution, says Baucus, is to increase information reporting and withholding. Studies suggest, he noted, that compliance rates rise to as high as 95% when individuals and businesses provide substantial information about spending and incomes. However, such measures, when proposed in the past, have proven to be deeply unpopular and Baucus acknowledged that recent experience suggests that requiring American taxpayers to file additional information reports or withholding taxes is simply too burdensome.
Baucus also asked whether the IRS could use new technology to do more with the same resources. He has seen proposals from the IRS Commissioner Doug Shulman for changes that would help the agency process tax data more quickly. The upgrades would ensure the IRS has the information it needs to check the accuracy of tax returns immediately after they are submitted.
Finally, he felt that the government should also consider ways that the tax code is so complex that it actually discourages compliance. In 1987, a year after Congress passed major tax reform legislation, the instruction book for the primary individual income tax form was already 56 pages long, but, by 2009, that figure had grown to 174 pages. “This complexity makes it hard for taxpayers who honestly want to pay their taxes to figure out what they actually owe, and as a result, they often overpay or underpay,” he concluded. His target would be a voluntary compliance rate of 90% by 2017.
Orrin Hatch, the Committee’s Republican Ranking Member, in his statement to the hearing agreed that the complexity of the US tax code has been worsening, causing the two separate, but related, problems of non-compliance, where taxpayers are left “guessing their tax liability”, and the tax gap, which he called “the great white whale of deficit reduction.” However, Hatch considered that it would be "a mistake" to put too much deficit reduction hope into that the tax gap basket. "As an empirical matter, it is impossible to completely eliminate the tax gap. For example, some taxpayers legally owe a significant amount of money, but do not have the assets or income to pay off their tax debt," he observed.
Hatch is convinced that the federal government "is often its own worst enemy.” He pointed, for example, not only to the complexities in the tax code introduced recently by the health care law alone, but also the provisions for a 3% withholding tax on government contractors – itself introduced in an attempt to reduce the tax gap – but whose effective date has been delayed, as a result of the compliance burden that it has created.
Hatch professed to being guided by President Reagan’s three criteria for tax reform – that it should promote economic growth, fairness and simplicity. “The ever-increasing complexity of the tax code, which is only heightened by the temporary nature of many provisions, needs to be improved upon in tax reform,” he concluded. “We need a tax system with a more streamlined set of permanent provisions that is easier to comply with and less complex.”
Testimony from the United States Government Accountability Office, given by Michael Brostek, Director, Tax and Strategic Issues, stated that “achieving high levels of voluntary compliance is made more challenging as the tax code expands. Tax expenditures—preferential provisions in the code such as exemptions, exclusions, deductions, credits, and deferral of tax liability—have expanded the tax code, more than doubling in number since 1974.”
The GAO concluded that, while no single approach is likely to fully and cost-effectively address the tax gap, several strategies could improve taxpayer compliance. “These strategies could require actions by Congress or IRS. For example, Congress can simplify the tax code by eliminating some tax expenditures and by making definitions more consistent across the tax code. IRS and Congress could take steps to enhance information reporting by third parties or expand compliance checking before refunds are issued.”
China lifts tax-free threshold for low paid to blunt impact of inflation
Liu Li, The Wall Street Journal, 1 July 2011
China’s legislature approved a measure to increase the threshold at which workers must pay income taxes to 3500 yuan ($505) a month from 2000 yuan a month, part of efforts to address low-income earners' concerns about inflation and help ensure social stability.
The new threshold, effective from September 1, is 500 yuan higher than the 3000-yuan level the government had proposed earlier, which the public criticised as being too low. The new threshold is higher than China's average wage last year of 3096 yuan per month in the non-private sector and 1730 yuan per month in the urban private sector, according to National Bureau of Statistics data.
Under the bureau's definition, private-sector companies include only small companies. Listed companies and foreign-invested companies, including those under private ownership, come under the "non-private sector" category, which includes government agencies and state-owned enterprises.
Changes to other tax rates will result in higher-income earners paying more in taxes. "The tax reform aims to reduce the taxation burden of medium- and low-income earners, while appropriately increasing taxes on high-income ones," Wang Jianfan, vice director of the Ministry of Finance's taxation department, said at a news conference held by the Standing Committee of the National People's Congress. General lower tax burdens reflect compensation from the government for higher residential living costs due to factors such as price rises," he said.
After the revision, only 7.7 per cent of earners will need to pay personal income tax, down from 28 per cent, Mr Wang said. The change will reduce the government's tax revenue by about 160 billion yuan per year, he added.
The changes to the tax system will also reduce the number of marginal tax brackets to seven from nine, while the lowest tax rate will be cut to 3 per cent from 5 per cent and expanded to cover a bigger group of taxpayers. Two brackets, with rates of 15 per cent and 40 per cent, will be eliminated, Mr Wang said, without giving more details on the changes.
The tax cut was called "the first real thing that we will do for residents this year" by Premier Wen Jiabao in an online interview in February. Mr Wen said at the time that "achieving fairness on earnings is the target of the government".
The tax cut was widely expected as a response to inflation, which has accelerated, keeping real deposit rates negative. The country's consumer price index rose 5.5 per cent in May from a year earlier, up from April's 5.3 per cent rise and the fastest pace in nearly three years. Economists widely expect June's CPI rise to be about 6 per cent. Despite high inflation, China's one-year yuan deposit rate is 3.25 per cent after two rate increases so far this year.
Property tax planned to fund fire services
John Ferguson, The Australian, 1 July 2011
A new property-based tax system is set to be introduced in Victoria to fund fire services in a move that will hit high-value home owners but force more people to pay for the emergency services effort. The Baillieu government last night released an options paper that proposes dumping the existing fire services levy on insurance premiums for a broad-based tax.The tax will need to raise well over $500 million and was prompted by the Black Saturday royal commission, which recommended the existing, insurance-based system be dumped.
The key argument for taking the levy away from insurance policies is that not everyone pays insurance, but many of these people will have the benefit of a rural or metropolitan fire service. The options paper favours a levy, at an unspecified rate, imposed on land and improvements. There is a tax base of $1.3 trillion, according to the Valuer-General.
Victoria's Deputy Premier, Peter Ryan, said the consultation paper was the first step in the reform process. "The Fire Services Levy should have been scrapped by the former Labor government years ago," he said.
The option of a property-based levy on improved value has been favoured because the government believes the owners of the higher-value assets stand to receive a greater potential benefit from the fire services. The options paper advocates a single levy rate because it would spread the cost of funding rural and city fire services across the broadest possible property base. Low-income earners are expected to receive concessions.
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