The following are select media articles from January to March 2011. Return to Archived Media index
We need better taxes, not bigger taxes
Rob Burgess, Business Spectator, 30 Mar 2011
The Australian tax debate is starting to look like my kitchen renovation – a piecemeal approach that promises to finish up looking like a dog's breakfast. But while my kitchen will ultimately be more productive (however it looks), there's no guarantee the Australian economy will follow suit.
The political road block announced yesterday by Bob Brown is just the latest instalment in a sorry tale of politics triumphing over sensible tax policy. The Greens plan to oppose a 1 per cent reduction in the corporate tax rate for any company earning over $2 million per annum, though it now looks as though the Coalition will overcome its aversion to bipartisanship and vote the tax cut through anyway. (How could it not, having taken a 1.5 per cent tax cut to the last election?)
The Greens argument is that this tax cut would wipe out half of the revenue gain flowing from the proposed mining tax – remembering that Brown has argued for the original RSPT tax levels to be reinstated and for the difference to be used to fund public education.
Futhermore, say the Greens, Australia's corporate tax is low by OECD standards if one uses a GDP-weighted average figure, rather than a raw average (read their research paper here).
That's a valid point – countries such as Ireland (12.5 per cent), Iceland (18 per cent) and Slovakia (19 per cent) have pulled the raw average down, but the parlous state of their public finances hardly makes them models of fiscal efficiency.
On the other hand, corporate taxes have been trending down for three decades and, while some OECD countries took this trend too far, that is not an argument to ignore the Henry Tax Review recommendation that corporate tax be lowered ultimately to 25 per cent (from the current 30 per cent).
So the Greens are taking only one half the Henry Review recommendation. The review states: "The company income tax rate should be reduced to 25 per cent over the short to medium term with the timing subject to economic and fiscal circumstances. Improved arrangements for charging for the use of non-renewable resources should be introduced at the same time."
Labor is, to a degree, following the Henry script – a watered-down resources rent tax and a small step towards the 25 per cent corporate tax.
But it is also happy to deviate from the script as political expediency dictates – the 'tax summit' planned for June has been pushed back to October and has been downgraded to a 'tax forum'. The carbon tax won't be discussed. The mining tax won't be discussed. GST won't be discussed.
With their latest policy, the Greens are aiming to raise more revenue to fund an expanded budget by supplementing existing corporate taxes with the MRRT.
But by not allowing corporate taxes to fall as mining taxes rise, the Greens are contradicting one of the thrusts of the Henry Review: "Additional specific taxes should exist only where they improve social outcomes or market efficiency through better price signals."
In the case of the mining tax, the economy-wide productivity gain is that, whenever minerals exports push the dollar up, MRRT revenues are available to shore up weakened tax revenues from other sectors. That provides better funding for public services across commodities cycles and a productivity enhancement through lower corporate taxes (which leave firms more money to invest).
The Henry Review was not designed to squeeze public finances and rule out the kinds of social objectives Bob Brown is calling for – for instance, a national dental care plan. It called for a 25 per cent corporate tax because Treasury economists consider this rate best balances productivity and revenue generation. More productivity means better profits and, ultimately a higher corporate tax take in absolute terms. And isn't that what the Greens want?
Labor is already drifting away from the principles laid out in the Henry Review. It should not be encouraged in this direction by the Greens.
Imagine a tax system that penalised work
Saul Eslake, Sydney Morning Herald, 30 Mar 2011
IMAGINE that you have just become treasurer or finance minister in the government of a newly independent nation. Imagine also that, for some reason, you wanted to create a tax system that encouraged the accumulation of wealth through borrowing and speculating, as opposed to working and saving.
So you hire a consultant, who, based on your previous experience, you anticipate will hand you a voluminous report and a large bill after a period of extensive research, consultation with interested stakeholders and all the other things that consultants do. But, to your astonishment, the consultant comes back the very next day and simply hands you a copy of the Australian Income Tax Assessment Act, and tells you to forget the bill.
Why the treasurer of some hypothetical government in a far-away country would actually want a tax system that encouraged borrowing and speculating, and penalised working and saving, is, of course, rather hard to imagine.
Yet that is precisely what Australia's income tax system does: it imposes the highest rates on wage and salary income - that is, income from working - and on income from the most common forms of saving (bank, building society and credit union deposits).
By contrast, Australia's tax system taxes income from investments (other than deposits) at substantially lower rates than identical amounts of income derived from working. And if those investments are funded wholly or partially by debt, it provides a subsidy that reduces even further the amount of tax payable on the income from those investments.
For most people on relatively high salaries, tax rates aren't as high as they used to be, as a result of the substantial increases in the thresholds at which the top rate becomes payable that were implemented during the last term of the Howard government.
However, for people lower down the income scale, the interaction of the income tax system with the income tests on various forms of social security payments can result in them facing effective marginal tax rates considerably above those paid by those on the highest incomes. These high effective marginal tax rates can - and according to at least some research do - adversely affect the willingness of some people, especially women with children, to enter paid employment.
By contrast, the Australian income tax system provides substantial incentives for people to borrow money to acquire property, shares or other assets with a value they expect will appreciate over time. Unlike most other countries, it has always been possible in Australia to deduct any excess of interest payments on loans taken out to fund an investment over the income produced by that investment to reduce the tax payable on wage or salary income.
Since the Howard government's decision in 1999 to tax capital gains at half the rate applicable to the same amount of wage and salary income, a decision that was supported by the then opposition, ''negative gearing'' has become a means not only of deferring tax, but also permanently reducing it.
In 1998-99, when capital gains were last taxed at the same rate as other types of income (less an allowance for inflation), Australia had 1.3 million tax-paying landlords who in total made a taxable profit of almost $700 million. By 2007-08, the latest year for which statistics are available, the number of tax-paying landlords had risen to 1.7 million, but they collectively lost more than $8.6 billion, largely because the amount they paid out in interest rose more than fourfold (from about $5 billion to more than $20 billion over this period), while the amount they collected in rent ''only'' slightly more than doubled (from $11 billion to $24 billion), as did other (non-interest) expenses.
If all the 1.2 million landlords who reported net losses in 2007-08 were in the 38 per cent income tax bracket, their ability to offset those losses against their other taxable income would have cost more than $4.8 billion in revenue forgone; if (say) a fifth of them had been in the top tax bracket, then the cost to revenue would have been more than $5 billion.
This is a pretty big subsidy from people who are working and saving to people who are borrowing and speculating (since those landlords who are making ''running losses'' on their property investments expect to more than make up those losses through capital gains when they eventually sell them).
And it's hard to think of any worthwhile public policy purpose that is served by this subsidy. It does nothing to increase the supply of housing, since the vast majority of landlords buy established properties. Precisely for that reason, it contributes to upward pressure on the prices of established dwellings, thereby diminishing housing affordability for would-be home buyers.
It's also hard to reconcile this subsidy with the government's stated aim of increasing participation in the workforce, especially when abolishing it could help pay for reducing some of the high effective marginal tax rates faced by those contemplating moving from taxpayer-funded benefits into paid employment.
The revenue forgone through negative gearing could alternatively be used to build nearly 20,000 new ''affordable'' homes each year, making substantial inroads into the massive shortage of affordable housing.
Supporters of negative gearing argue that its abolition would lead to a ''landlords' strike'', driving up rents and exacerbating the shortage of affordable rental housing. They point to ''what happened'' when the Hawke government abolished negative gearing (only for property investment) in 1986, claiming that it led to a surge in rents, which prompted the reintroduction of negative gearing in 1988.
This assertion has attained the status of an urban myth, but it isn't true. Rents (as measured in the consumer price index) did rise rapidly (at double-digit annual rates) in Sydney and Perth, but that was because in those two cities, rental vacancy rates were unusually low before negative gearing was abolished. In other state capitals (where vacancy rates were higher), growth in rentals was either unchanged or, in Melbourne, actually slowed.
Suppose, however, that a large number of landlords were to respond to the abolition of ''negative gearing'' by selling their properties. That would push down the prices of investment properties, making them more affordable to would-be home buyers, thereby reducing the demand for rental properties in almost exactly the same proportion as the reduction in their supply.
And that, of course, is the reason why negative gearing will forever remain untouched - because the negative reaction and loss of votes from people who would experience declines in the value of their properties would outweigh the positive reaction from people who would benefit from lower property prices and would change their votes accordingly.
It's something to remember next time you hear a politician saying he or she is committed to improving housing affordability, or increasing participation in the workforce, or both.
Australia at bottom of VAT pack
Katie Walsh, Australian Financial Review, 26 Mar 2011
A report released by the Organisation for Economic Co-operation and Development shows that Australia languishes behind its peers when it comes to raising consumption tax revenue. The view of tax experts is that the report offers further justification to have GST included in the October tax summit, despite the government’s refusal to do so. CPA Australia general manager of policy Paul Drum says Australia has an over reliance on revenue from direct taxes. Accountants believe a broader GST base will allow the abolition of inefficient state taxes. The OECD report reveals that in terms of GST raised as a percentage of GDP, Australia ranks 30 of 32 OECD countries. While only Japan and Canada have lower collections, Canada has provincial sales tax not captured in the survey and Japan is looking at lifting its 5 percent rate to 10 percent or more.
According to University of Sydney professor of tax law Michael Dirkis, social welfare groups were concerned by the disproportionate impact GST had on lower income households, and that changing the GST rate and base would be politically unsavoury as it was paid to the states.
Download the report from the Tax Policy section.
Read the full article on the AFR website, available via a subscription.
Tax office implementing inspector-general's recommendations
The Hon Bill Shorten MP, Assistant Treasurer, Media Release No. 042, 21 Mar 2011
The Australian Taxation Office (Tax Office) has advanced the vast majority of recommendations made by the Inspector General of Taxation (Inspector-General) to improve the functioning of the Tax office.
The Assistant Treasurer and Minister for Financial Services and Superannuation, the Hon Bill Shorten MP, today released the Inspector-General's report Follow up review into the Australian Taxation Office's implementation of agreed recommendations included in the six reports prepared by the Inspector-General of Taxation between June 2006 and October 2008.
The Tax Office previously agreed to implement (either in part or in whole) 41 of the 45 recommendations made in the six Inspector-General reports this review analysed. In this latest report, the Inspector-General acknowledges the Tax Office has implemented or made significant progress towards implementing 38 of the 41 agreed recommendations.
The Inspector-General notes the Tax Office's progress represents a positive outcome, commenting it has been responsive to the earlier reviews, as shown by the improvements made in its administrative practices and approaches.
This report is the second of two reviews undertaken by the Inspector-General to examine the Tax Office's implementation of the agreed recommendations from all Inspector-General reports provided to Government up until October 2008.
Dowload the report, which including the Tax Office's response, from the Government's website.
No go tax zones, gutless politicians, and the looming fiscal crisis Australia faces
Dale Boccabella, Sydney Morning Herald, 11 Mar 2011
No go tax zones are usually pretty easy to spot. They are tax measures that ''savvy'' politicians rule out supporting well before any detailed economic analysis has been undertaken and before any public debate has occurred. Or they are ruled out even though detailed analysis leads to a strong recommendation in support of the measure.
The number of Australia's no go tax zones, or NGTZ for short, has been steadily increasing since the 1980s. The list includes:
- No death duties, and generally, no taxes on anything remotely related to death;
- No tax on capital gains on the family home;
- An entrenched 50 per cent discount on capital gains tax (CGT) for individuals;
- Capped tax on superannuation, including zero tax on payouts;
- Entrenched negative gearing on investments;
- No goods and services tax on basic food, and;
- The GST capped at 10 per cent.
Very rarely are items taken off the NGTZ list. The hysteria surrounding the resources super profits tax and the flood levy give an indication of the difficulties involved. While some Australians may applaud the presence of NGTZs as examples of democracy at work (wishes of people, usually loud people, reflected in politicians' views), there are numerous problems with our NGTZs.
First, they cut out access to significant sources of public revenue. The term "looming fiscal crisis" appears appropriate in 2011. The demands on federal, state and local budgets in coming years are obvious as the population ages and the ratio of workers in the population decreases. Further, there is continued pressure to cut taxes collected from investments and businesses. All this implies reduced revenues, or at least no growth, from these sources in the years ahead.
Every year Treasury issues a statement of "tax expenditures" and their amount. Tax expenditures are amounts of tax foregone because of the presence of a concession or exemption in the tax law. The big tax expenditures are:
- No CGT on homes, representing $39 billion ''spent'' by the government in offering the concession, or 18 per cent of income tax collected;
- Superannuation tax breaks, representing $27 billion ''spent'', or 13 per cent of income tax, and;
- CGT discounts for individuals, representing $5 billion ''spent'', or 2 per cent of income tax.
From a revenue perspective, it is hard not to lament the presence and sheer size of so many NGTZs. And it is hard to see how tinkering at the edges with the current "go areas" is going to be sufficient to generate the required revenue over the long term.
Secondly, and arguably just as important as the lost revenue, most of the NGTZs are unfair and regressive. The reason is that the most significant NGTZs are open-ended concessions with no caps. Therefore they deliver the greatest benefit to those who need them least.
For example, the CGT exemption on the family home applies to everyone who sells their home no matter how small or large the gain that was made, and no matter how often they use this exemption during their lifetime. I am not suggesting the introduction of CGT on every home sale. Some compromise should be made on efficiency and equity grounds. For example, there could be an exemption for small and infrequent gains. For example, only a gain below $200,000 would be exempt on a home sale, and then only if this gain was made seven years after making the previous home gain.
The current open-ended exemption is offensive on equity grounds. Similar equity observations can be made about the discount capital gain rule, the negative gearing rule and the treatment of superannuation. The social security system contains comprehensive means testing before benefits are provided. It is a mystery why such means testing measures in the social security system are hardly used in the income tax system where NGTZs are involved. It is clear that many NGTZs exist because of a climate of fear: fear of political death.
It is asking too much for politicians to take the lead in raising NGTZs for public debate. The necessary groundwork to properly engage the public in NGTZ discussions needs to be done by others. As things stand, necessity, or perhaps even desperation, seems to be the best bet for opening them up to full public discussion. But waiting for necessity to start the debate means we may end with a fix that carries the least political cost, rather than a fix that will avert future crises.
Dale Boccabella is an associate professor in taxation law at the University of NSW's Australian School of Taxation and Business Law.
System skewed against supply
Nick Lenaghan Australian Financial Review, 16 March 2011
An investigation by Professor Gavin Wood from RMIT University’s Australian Housing and Urban Research Institute has found that the tax system advantages retail investors over individuals or superannuation funds and is a major contributor to the shortage of affordable housing along with negative gearing and land tax. The Henry tax review recommended 40 per cent of net income of property be left untaxed, which would negate the attraction of negative gearing.
Read the full article on the AFR website, available via a subscription
Tax system is killing the country
Sally Patten, Australian Financial Review, 12 March 2011
There is a view by experts that being able to negatively gear into property and shares and gain subsidies for super may not be good for Australia. Well-quoted economist Saul Eslake from independent think-tank the Grattan Institute has a view on negative gearing that would not appeal to his former employer the Australia and New Zealand Banking Group. He says an offshore consultant could just hand you a copy of the Australian Income Tax Assessment Act instead of devising a tax system that penalises the accumulation of wealth through labour and savings in favour of borrowing and speculation to accrue wealth. Treasury Secretary Ken Henry tried to put negative gearing on the front burner in his tax report of 2010 and recommended that 100 percent negative gearing on shares and property be abolished. Chairman of the Australian Financial Forum Mark Johnson says the outcome was disappointing but not particularly surprising.
The Howard government considered axing negative gearing following warnings in late 2003 from the Treasury, the Productivity Commission and the Reserve Bank of Australia that the system of tax breaks was fuelling a property boom. In 1985 there was an outcry when Bob Hawke and Paul Keating watered down the negative gearing concessions and Mr Keating was forced to backtrack after two years due to hysteria in the property industry. The view of chief financial officer of the National Australia BankMark Joiner is that Australia is blessed with a high savings rate but it is the way in which it is deployed that is not helpful for the country. When former treasurer Peter Costello reduced the capital gains tax in half during the dot.com boom to attract more overseas pension funds into high-tech venture capital, locked to an explosion of borrowing for housing after the dot.com bubble burst. Neil Warren, head of the Australian School of Taxation at the University of New South Wales believes the concessional treatment of dividends and superannuation but not cash distorts the allocation of the pool of capital and encourages asset appreciation. According to figures from the Australian Bureau of Statistics, property, including homes and rental housing, accounted for 60 percent of saver’s assets in 2007. Australian nominal house prices grew by 8.8 percent a year between 2002 and 2009, well above the average for large industrialised nations, according to data from the Organisation for Economic Co-operation and Development. Challenger Financial Services chief executive Dominic Stevens also has a view on shares and says the playing field has not been level since the introduction of dividend imputation in 1987 that created an inherent bias and trend to equities. Household savings are rising while bank deposits sourced from business and households are declining. NAB chief executive Cameron Clyne called for massive structural reform to cut bank’s reliance on offshore wholesale money markets. President of the Business Council of Australia Graham Bradley says the government is more vulnerable to the global economy than is healthy. Treasurer Wayne Swan postponed the 50 percent discount on interest income up to $1000 from deposits and other fixed-income products in the budget until next July. Change may only come if the credit ratings agencies continue to take an unfavourable view of Australia’s debt profile, and ratings agency Moody’s warned it may downgrade the credit ratings of the four major banks due to their reliance on wholesale funding.
Should banks pay a super profits tax?
Sydney Morning Herald, 5 Mar 2011
THE COMMENTATOR: RICHARD DENNISS
(Dr Richard Denniss is executive director of the Australia Institute)
Last year Australia's banks made more than $1000 in profit from every man, woman and child in the country. In fact, the underlying profits of the big four banks account for nearly $3 out of every $100 earned in Australia. There can be no doubt that the banks make super profits, and there can be no doubt that we need a banking super profits tax.
But it is not just the size of the bank profits that justifies a special tax: the unique source of their market power must also be considered.
First, in a modern economy it is virtually impossible to avoid bank fees and charges. Centrelink and most employers insist on making electronic payments into bank accounts. While a person who believes restaurants are overpriced can choose to cook at home, customers who believe bank fees are too high can no longer choose to be paid in cash. Not only do the banks have a monopoly over the electronic payments system but we are forced to use that system. Banking has become an essential service and needs to be regulated accordingly.
Second, Australian taxpayers provide explicit guarantees to cover bank deposits. And as we have seen overseas, there is also the implicit guarantee that banks that are ''too big to fail'' will be propped up by governments. It is only fair that if taxpayers face the costs of any catastrophic losses then they should receive a share of the enormous profits.
Finally, the banks have told us again and again that it is pointless to try to regulate their excessive fees and their high interest rate margins. If we try to clamp down in one area, they tell us, they will simply increase their fees and charges somewhere else. If that is indeed the case and we can do nothing to prevent these excess profits, then the least we should do is tax some of the excess profit away.
The banks' final argument is that is what is good for them is good for us. The more profits they make and the higher their share prices the better off we all are, because we all have superannuation. By that argument, the dearer our petrol, the more expensive our groceries and the higher our mobile phone bill, the better off we all are.
THE ACADEMIC: ROSS BUCKLEY
(Ross Buckley is professor of international finance law at the University of NSW)
The four biggest US banks represent 34 per cent of their market. The top five French banks represent 50 per cent of that market. Yet our big four account for a staggering 92 per cent of our market.
During the global financial crisis, our big banks acquired St George, BankWest, Aussie Home Loans, Wizard, Challenger Financial, RAMS and many smaller firms.Financial uncertainty also saw many customers move to a big bank.
This concentration confers two huge benefits on the big banks. The first is the pricing opportunities. Less competition means super profits. Bank profits are almost 3 per cent of GDP. That's right: every time you spend $100 on anything, three dollars end up as profits of a bank. The second benefit is that capital markets know Australia could not now afford to let a big bank fail.
The explicit guarantee introduced in 2008, for which the banks paid a hefty premium, was phased out last year. However, an implicit guarantee remains, and we give it to the banks free. As a result, Australia's big banks, notwithstanding what they say, enjoy distinctly lower borrowing costs abroad because the Australian government assures their solvency.
Just before Christmas the federal government announced that its guarantee of bank deposits was to be permanent, not phased out this year as planned. This was yet another of the free gifts we give our banks.
Our tax system is progressive: high earners pay higher taxes. Company tax rates are flat, because companies are more likely to move if taxed heavily. Yet our banks benefit enormously from being here. They enjoy an implicit sovereign guarantee of their solvency that is lowering their borrowing costs abroad and yet pay nothing for it. They enjoy a low-competition environment and the resulting massive profits.
Such government largesse is unavailable abroad. France, Germany, Britain and US are all imposing sizeable levies on their banks to ensure the sector can bail itself out come the next crisis, and to discourage overly risky behaviour.
Australia is out of step internationally by giving our banks such gloriously generous benefits, and not imposing sector-specific taxes in return. The main argument for an extra tax on mining companies is because of the bounty nature has bestowed on them. It is time for an extra tax on banks because of the bounty the Australian government, at our expense, is bestowing upon them.
THE ECONOMIST: CHRISTOPHER JOYE
(Christopher Joye is a financial economist)
There is no role for a super profits tax on Australian banks, but there is a case for banks to pay a premium for the catastrophe insurance they receive from taxpayers.
We all want highly profitable, competitive banks run by the best private sector managers. Australia has these in spades. Yet we also want to avoid like the plague ''moral hazard'', which is what caused the global financial crisis, and has historically been the catalyst for previous meltdowns. Moral hazard is the problem of perverse incentives whereby one party, in this case the private sector, is given motivation to take on big risks at the cost of another party, such as taxpayers, who wear the downside when things go wrong.
More colloquially, it is the ''heads bankers win, tails taxpayers lose'' dynamic. One finds it in all insurance markets. If you take out car insurance, the provider wants to ensure you are not using it to fix a past ding, or that you will behave more recklessly because you have this protection in place. Since successful banks are a prerequisite for a healthy economy, taxpayers have little choice but to vouchsafe their survival.
To be clear, banks perform a crucial role: they take in our short-term savings and lend out that money as long-term loans that fund critical investments. Yet it is this mismatch between the maturity of short-term savings, which can be withdrawn quickly, and long-term loans that is the source of the banking system's inherent fragility.
Throughout history banks have always failed when the people who fund them suddenly demand their money back. Accordingly, governments have developed a range of protections to underwrite banks during crises. The most visible of these are central banks - in Australia, this is the taxpayer-owned Reserve Bank - which have an explicit mandate to lend to private banks when they face funding troubles. Since the crisis, almost all nations have also supplied ''deposit insurance'', which guarantees the safety of the money depositors lend to banks, and thus minimises the risk that we will unexpectedly withdraw it. Yet neither of these services is currently priced.
When Frank Lowy created his shopping centre empire, taxpayers never offered to save him if he went bust. Lowy took his risks and is entitled to the rewards. In contrast, the government has declared that taxpayers will always back the banks. A premium should be paid in return for this protected species status.
THE SHAREHOLDER: STEPHEN MAYNE
(Stephen Mayne is a shareholder activist and journalist who owns shares in all the big banks)
Ever since federal and state governments privatised various public sector banks in the 1990s, Australians have increasingly suffered the world's most expensive banking system.
Skyrocketing transaction fees, the compulsory superannuation gravy train and a near quadrupling of residential mortgages to almost $1 trillion have helped create a profit bonanza for Australian banks like nowhere else in the world.
The big four have gone from a combined market capitalisation of below $30 billion in 1992 to almost $300 billion today, even after the global financial crisis.
Anyone running a government-licensed business can clearly afford to pay a bit more tax when you consider these latest annual pre-tax profits: Commonwealth Bank: $8.94 billion; Westpac: $8 billion; ANZ: $6.6 billion; NAB: $6.5 billion.
With combined pre-tax earnings of $30.1 billion, it is no surprise that our big four banks are so highly valued by the sharemarket. Most modern economies have a couple of banks in their top 10 companies, although the US has none in its top five. In Australia, banks represent four of the top five behind BHP Billiton, which is now the world's third most valuable company.
But BHP is making profits from genuinely global operations driven by exports. The bigfour banks just gouge long-suffering Australian consumers and businesses. They might dominate the New Zealand banking market but that is the extent of their global success.
Banking is a highly regulated utility business. If the water, gas, electricity or telco industries were pocketing $30 billion annually, consumers would be up in arms.
There are two obvious solutions to this situation. First, competition and regulatory intervention could drive down prices and profit margins for bank consumers. That hasn't worked too well in the past, so why not embrace the second option: a banking super profits tax?
If a Conservative British prime minister can happily embrace a bank tax to help fix his budget deficit, then why not the same in Australia? Who would need a flood levy if bank shareholders were asked to pay another $2 billion to $3 billion a year through a super profits tax?
The British government is expecting to raise an extra £2.6 billion a year from a permanent levy on bank assets that was confirmed only last month. Big bank bosses would no doubt complain, but when you are earning $8 million a year, you can afford to give a bit back.
A tax rise that would solve many problems
Michael R. James, Sydney Morning Herald, 25 Feb 2011
As our population grows and ages, and our cities have passed the size when 19th-century approaches no longer work, it is important that our various governments work better together.
Take the Council of Australian Governments. There seems to be only one lubricant to get progress from COAG meetings. Money. Our state governments seem unable to agree on issues such as health-care reform either in the national interest or even their own best interest. The states are the executive entity for most critical service delivery yet the federal government receives the most funds.
With health the subject of so much focus, a great opportunity has been lost to leverage this public engagement by solving the money problem in one fell swoop. Increase the Goods and Services Tax.
It is almost inevitable that this consumption tax will be increased at some point. Almost all European countries have theirs at close to 20 per cent (France, Germany, Italy; Spain is 18 per cent). In Britain the Tory-Liberal-Democrat coalition increased its VAT from 17.5 per cent to 20 per cent and a decade ago it was 15 per cent. Last year New Zealand increased its from 12.5 per cent to 15 per cent.
The GST yielded almost $40 billion in the most recently reported data (2006-07) so an increase from 10 per cent to 12.5 per cent would produce at least $10 billion extra a year. (A $3.50 coffee becomes $3.60 after rounding up.)
This is a lot more than the current bribe offered to the states by Prime Minster Julia Gillard, so there is a lot of room to address other major issues, perhaps all with a health theme. This could encompass serious programs of prevention, including diet and exercise in school age children. They could take the opportunity to introduce a punitive rate on sugary drinks and processed foods, such as is proposed by Mayor Michael Bloomberg in New York City. There is long overdue investment in public transport and serious provision for walking and cycling modes instead of the half-hearted efforts now in most of our cities.
Politically it may not be as difficult as imagined, especially if the new tax receipts were locked into specified programs. With the states on board and the health focus, politicians may be surprised at the willingness of most Australians to pay a bit extra on purchases. The opposition would scream "great big new tax", ignoring its introduction of the tax in the first place. But some would find it more acceptable if it was allied to reduced income and company taxes.
Some in Labor would worry about it being a regressive tax, and almost all would fret about electoral Armageddon. Instead Labor could think of it is an opportunity to implement such an inevitable tax rise to achieve its preferred outcomes, rather than the Coalition with its lamentable track record of failure on infrastructure after 12 years in power and propensity to useless tax giveaways to win elections.
Not only does this mechanism tie in long-term targeting of funds — since all these state and federal governments would have to agree to any changes — but it is automatically indexed to the economy, largely eliminating year-to-year haggling. It also is a neat mechanism to rebalance the tax take that the states receive to run all those expensive services.
Alas, there is a near total lack of long-term vision at all levels of Australian government. The only high-level politicians or public servants who would have the imagination and courage to contemplate such policy are the likes of Lindsay Tanner and Ken Henry. It is no accident both have left the political arena.
Treasury chief in Senate sign-off
Peter Martin, The Age, 25 Feb 2011
AUSTRALIA'S best-known public servant took good news and bad news to his final Senate hearing... Coalition senators praised him for designing their goods and services tax, while Labor senators praised him for designing their economic stimulus.
Both sides were anxious not to dwell too much on the Henry tax review - its key recommendation opposed by one side and largely ignored by the other. The report of his review was to be put to a tax summit before the middle of this year as part of the agreement between Labor and the independents to form government. But Dr Henry said he had heard the date had been pushed out, although no one had told him.
Asked how he felt about the mix of indifference, hysteria and bungling that greeted his report, he said he was ''very optimistic with respect to the implementation of many of the recommendations, very optimistic''.
The mining resource tax - smaller and more limited than originally proposed - would make more than any of the published estimates if mining prices stayed where they were, he said. ''For prudent budgetary reasons we factor in a very substantial fall in commodity prices over a 10-year period,'' he said. ''That isn't to say that will happen. We don't know that prices really are going to trend down over a 10-year period. If instead they were to remain at their present levels, our revenue estimates would be several multiples of what we published.''
The Treasury secretary released long-term projections under the Freedom of Information Act, because he was obliged to, not because he thought they made sense. ''There's something quite unreasonable about producing 10-year revenue estimates for a tax measure,'' he said. ''The numbers are of such poor quality that I myself was very reluctant to see them in the public domain.''
Asked by former union leader Doug Cameron whether the mining boom would push some industries to the wall, he said some would have to face ''the very real question of whether, with the exchange rate being where it is, they are able to remain in business''. ...
Read the full article on The Age website
Should motorists pay for the congestion they cause?
Sydney Morning Herald, 19 Feb 2011
The debate over whether a levy on drivers would cut traffic jams sparks its own road rage. Four experts look at the options.
THE CAMPAIGNER - GAIL BROADBENT
(Gail is the sustainable transport campaigner for the Australian Conservation Foundation)
ROAD congestion is the inevitable result of too many people wanting to reach jobs and services that are too far away. Sydney is on the verge of becoming dysfunctional, sprawling beyond the limits of one hour travel time. People need to drive further and further to reach their destinations. Typically, governments respond to congestion by building more roads. This offers temporary relief, but after a year or two, so many more motorists are using the new roads that congestion returns to previous levels. The truth is all taxpayers, including people who don't drive, subsidise motorists.
In car-dependent cities such as Sydney, more than 12 per cent of the community's collective wealth is spent on transport, compared with 5 to 8 per cent of community wealth in cities with strong public transport. The suite of taxes and charges that underwrite car use should be reformed to better reflect private motor vehicles' true cost to society and the revenue ought to be used to upgrade and expand public and active transport.
The Fringe Benefits Tax concession rewards company car drivers by increasing the benefits the more they drive and the more they pollute the atmosphere. This senseless tax break should be replaced with a tax adjustment for employees who use public transport to get to work.
...We need to address congestion as soon as possible, so those who do need to be on the road get to their destinations quickly and don't spend their lives stuck in traffic. With better public transport, families might even be able to get rid of the second car and spend the savings on better things.
THE PLANNER - JARRETT WALKER
(Jarrett is an international expert in public transport planning and writer of the blog humantransit.org)
CONGESTION happens when demand for road space exceeds the supply. Building more supply, new or wider roads, may feel like a solution, but it's been tried. The result is more traffic that gradually fills up the new capacity, so the congestion returns. We need to think differently.
...Congestion pricing systems free up enough road space so that motorists and freight can move reliably through the city. They do this by setting a price for driving through a congested area. The price varies with actual demand. In the middle of the night, when there's no demand, the price may be free. At the height of rush hour, when demand is highest, the price goes as high as it needs to go to prevent congestion. You can check the price on your mobile when deciding how to travel.
As the price goes up, some people avoid it by making other choices. They shift their travel to a less congested time, or switch to public transport, or do things by phone or online instead of in person. The price motivates choices that lead to a free-flowing road system. Buses and trams that share the road with cars suddenly become faster and more reliable, and since a faster service is cheaper to operate, they can also become more frequent. Emergency vehicles move faster, too, so congestion pricing can save lives. Obviously, wherever we charge for road use, public transport has to be abundant. That's why congestion pricing often starts with a CBD - as it did in London and Singapore.
As with any new cost for things that are now free, congestion pricing is controversial. Side effects need to be considered and managed. But if you want to reduce congestion permanently, without hurting the economy, it's the only thing that actually works.
THE DRIVER - TONY STUART
(Tony is chief executive of NRMA Group)
MOTORISTS already pay for the congestion they cause - and handsomely. Each year governments collect about $20 billion in taxes from motorists. We are among the most taxed group in our society. The federal government collects almost $14 billion a year from motorists through its fuel excise and this does not include the GST motorists pay on every litre of fuel bought at the pump. ...About $4 billion of the revenue collected from the excise is returned to motorists in the form of infrastructure spending on roads. The remaining $10 billion helps government pay for essential services.
At a state level the NSW government collects about $2 billion through registration costs, stamp duties and parking levies. Further to this Sydney motorists fork out considerable funds to drive on the city's toll roads. For some motorists who have no choice but to get in their cars due to a lack of public transport, the monthly toll bill can be as high as $500. This leads to a crucial issue in the debate that must be addressed: if a congestion tax is designed to change our behaviour, then it will be effective only once we give motorists a viable alternative.
The public transport system in Sydney, and particularly in regional NSW, is not reliable enough to act as a real alternative to the car. Nor can it fill the gap for those countless journeys that require a car, such as shopping, dropping children off at school, visiting family and going on holidays.
We must improve our public transport system, at the same time as upgrading our road network, so that people have the choice to leave the car at home. Until that is achieved the idea of taxing motorists, yet again, for the congestion they cause is both unworkable and unfair...
THE ACADEMIC - DAVID HENSHER
(Professor David Hensher is director of the institute of transport and logistics studies at the University of Sydney)
ROADS are possibly the most underpriced of all public assets. Regardless of whether we believe governments should provide more road capacity to combat traffic congestion, it is an undeniable fact that if we provide more capacity under the existing road user pricing regimes (registration and fuel pricing only), then more cars will use the roads, quickly using up the new capacity.
There is a presumption that we all have rights to enter the traffic and delay all other motorists, yet not contribute to the true cost associated with delay and lost time - the curse of congestion. It is estimated that more than $9 billion a year is wasted in lost travel time or avoidable congestion costs, increasing to about $20 billion by 2020. This results in a predictable ''tragedy of the commons''.
Many motorists argue that they pay enough. But do they? Evidence suggests they do not, for if they were being charged to use the roads at a level that was efficient then we would avoid much congestion. Many politicians still believe (as a result of their actions) that roads should be free (toll roads being the exception); however, "free" roads are not really free - the choice is between paying with time and frustration, or with money. Feel free to oppose an efficient price, but do not complain about the traffic. Opposing efficient pricing means you are choosing to endure congestion.
What we need to do in sorting out the pricing challenge is not to add a congestion charge on top of existing charges, but to overhaul the entire charging regime, with options to replace some of the fixed charges (for example, annual registration) with a usage charge based on kilometres driven by location (and vehicle emissions), so those who obtain the greatest benefits (such as time savings) should contribute proportionally. This would be a fair system in contrast to the current system of registration and fuel taxes. Pundits who claim a congestion charge is not fair should think about the fairness of the existing system. Why should we all pay the same registration fee for a class of vehicle when we all travel different annual kilometres, at locations where congestion varies from nothing to significant?
Read the full contributions on the SMH website
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Tax reform in an era of deficits
Eric Toder, Reuters, 15 Feb 2011
The retirement of the baby boomers over the next 20 years will create enormous pressures on the federal budget. Current tax and spending policies are unsustainable. We will either have to cut substantially benefits for older Americans – the largest component of the Federal budget – or raise more revenues.
There is no political consensus on the correct mix of spending cuts and tax increases, but it is hard to imagine any politically acceptable solution that will not include some increase in revenues as a share of GDP.
Unfortunately, our tax system is too complex, includes within it too much hidden spending and is incompatible with a globalized economy. Simply raising rates on existing tax bases will only make matters worse. If more revenue is to be raised, we need a better tax system. The main components of such a reformed system would be:
Less needless complexity
In a complex economy like ours, it is impossible to have a simple tax system that is also fair and even-handed in its treatment of taxpayers with similar incomes. But our tax law is much more complicated than it needs to be for any rational purpose.
For example, we don’t need multiple and overlapping incentives for higher education and retirement saving and we certainly don’t need to require taxpayers to calculate their taxes two different ways (the regular tax and the alternative minimum tax) just to limit a few tax breaks.
The President’s Economic Advisory Board, the IRS Taxpayer Advocate and others have advanced numerous good ideas for simplification within the existing tax structure. Congress should enact simplification, even if they can’t yet address the larger budget issues.
Fewer tax expenditures
The individual and corporate income taxes are riddled with special tax breaks that favor some forms of consumption, subsidize selected investments, or provide special treatment for favored taxpayers. These provisions represent a form of backdoor spending.
For example, instead of providing a grant from the government for the purchase of hybrid cars, we allow individuals to claim a credit on their tax return and pretend this is a tax cut instead of a form of spending that makes government bigger in reality, while appearing smaller. Some of these tax breaks promote worthy social and economic goals, but if we viewed them properly as spending that makes everyone pay higher rates, we could find plenty of room for cuts.
Taxation of saving and investment.
The United States tax system is not designed for a world in which capital moves easily across international borders. We need to shift more of the burden of taxation from saving to consumption and tax more income based on the residence of individuals instead of where investments are made or where companies incorporate. Doing this will involve some combination of lower corporate and individual income tax rates, elimination or reduction of tax breaks for U.S. individual shareholders, and introduction of a new broad-based tax on goods and services consumed in the United States.
These changes would promote saving and investment and make our tax system more compatible with those of our major trading partners. Through a combination of rebates for low-income taxpayers and closing preferences benefiting high-income taxpayers, we can keep the tax system as progressive as it is today or more so. The President’s Fiscal Commission (without a new consumption tax) and the debt reduction task force of the Bipartisan Policy Center (with a new consumption tax) have recently illustrated two ways to lower rates, raise more revenue, and keep the tax system at least as progressive as it is today.
Tax reform will be hard. But it can be done. The time to start is now.
Eric Toder is an Institute Fellow at the Urban Institute and co-director of the Urban-Brookings Tax Policy Center. The opinions expressed are his own.
Tax breaks can be wasteful spending, too
Seth Hanlon, Reuters, 14 Feb 2011
The new GOP majority in the House says that it wants to cut wasteful spending. But it is poised to vastly expand some of the least effective kinds of government spending: Programs that dole out special tax breaks.
By changing House rules, Republican leaders have exempted newly proposed tax breaks from scrutiny or budget discipline — even as they decry our long-term structural deficits. At a time when we should be scouring the tax code to close loopholes, they have declared it open season for tax lobbyists who want to open up new ones.
The United States will never solve its budget challenges with a tax system that gives away as much money in special tax breaks as it collects in revenue. But that’s precisely what ours does today. And if the proliferation of tax breaks accelerates, we’ll find ourselves deeper in debt, even with devastating cuts to other parts of the budget.
“Most federal non-defense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays,” writes Martin Feldstein, former president Reagan’s top economic adviser. “When it comes to spending cuts, Congress is looking in the wrong place.”
Tax expenditures — the special deductions, credits, and exemptions that steer subsidies to certain businesses and individuals — cost about $1.1 trillion each year. That’s more than twice as much as all non-security discretionary spending, which is the only area of the budget that Republican leaders have targeted for budget savings.
To be sure, it’s not immediately intuitive to recognize that tax expenditures are equivalent to government spending. Anti-tax ideologues contend that any exemption or deduction — even if created specifically for a handful of taxpayers — merely allows people to keep more of their money.
This view is grounded in a fundamentally meaningless accounting distinction between government outlays and special tax breaks. The economic reality is that tax expenditures are the exact same thing as spending. Here’s an example:
The government gives out about $4 billion a year in special tax breaks to the oil and gas industry. Washington could instead write these companies $4 billion in checks. At the end of the day, whether the money is spent through special tax breaks or direct spending, the oil industry is $4 billion richer and the U.S. treasury is $4 billion poorer.
Just because tax expenditures are government spending programs doesn’t mean we should make indiscriminate, across-the-board cuts to them (as the Republican Study Committee in Congress has proposed to do with vital programs in education, health care, and other areas). Rather, it means we should responsibly scrutinize tax breaks provision-by-provision, as we do the overall budget.
We should weigh the effectiveness of each tax break against its budget cost. We should include wasteful tax breaks in any discussion of spending cuts or spending freezes. And we should subject all tax breaks to budget discipline — because every tax expenditure, by definition, adds to our budget deficit.
Republican leaders are proposing deep cuts to programs that are not only effective, but vital: medical research, Pell Grants, federal nutrition programs. At the same time, many wasteful and ineffective tax breaks have escaped scrutiny.
Singling out direct spending programs that are working while leaving ineffective tax breaks off the table will leave us deeper in debt with nothing to show for it.
Seth Hanlon is Director of Fiscal Reform at the Center for American Progress, a Washington think tank. The opinions expressed here are his own.
Tax breaks add up to a big minus
Jessica Irvine, Sydney Morning Herald, 12 Feb 2011
THERE are many ways to skin a cat and even more ways to boost the budget bottom line.
Politicians on the hunt for budget savings could do a lot worse than have a read of an eye-opening document produced by the federal Treasury each year called the Tax Expenditures Statement. It details the size of the benefit to taxpayers of the myriad tax loopholes, concessions and exemptions granted by previous governments.
Admittedly, at 244 pages, it is not everyone's cup of tea. But some of us are perverse like that. Treasury produces the document because, as it says, the revenue loss from granting tax concessions is, in effect, the same as giving cash payments. These so called tax expenditures are just less visible. It is important, therefore, that these concessions are subject to as much scrutiny as government outlays.
A casual glance at the summary reveals that our tax system is like a leaky bucket, punched through with holes to help out all sorts of special groups, be they families, homeowners, businesses or even priests. One of the more bizarre discoveries is that employees of religious institutions are entitled to a tax break on fringe benefits tax, but only provided they are indeed propagating religious belief. Go figure.
All up, the direct benefit conferred on different sections of the Australian community by the concessions has been estimated by Treasury to be $113 billion in 2009-10. That is equal to one-third of total government revenues. That's a big leak.
Admittedly, it is not as easy as saying all these concessions should be stopped. Good luck to the politician that tries to close the $40 billion capital gains tax break on family homes. Some people seek to justify tax breaks on superannuation on the grounds that incentives are needed to get people to save for retirement. You know you're going about it the wrong way, however, when the incentive is strongest for those with the greatest capacity to save in the first place.
It is also not as simple as saying that ending a concession will boost the budget bottom line by as much as the former benefit inferred by the concession. Behavioural changes mean that while people might have done a lot of something when it was tax preferred, like put money in super, they may do less of that activity when the concession is removed, meaning a lower base to which to apply the new tax arrangement.
But these myriad concessions - all 349 of them - do help to illustrate all the ways politicians could potentially make substantial savings before they resort to cutting foreign aid, and/or imposing special levies for increasingly regular events such as floods.
Download the 2010 Tax Expenditures Statement from the Treasury website
Lift property tax to boost revenue, say OECD economists
Paul Hannon, The Australian, 10 Feb 2011
PROPERTY taxes are the best way for governments to raise the extra revenue needed to reduce their debts without hurting growth, a group of economists who work at the Organisation for Economic Co-operation and Development said in a paper published overnight in London.
Five OECD economists, working with Christopher Heady from the University of Kent in Britain, examined the impact of tax changes in 21 developed economies over the last 34 years.
Writing in the Economic Journal, they concluded that recurrent taxes on property, especially homes, were the best option for raising additional revenues, although they acknowledged that such taxes were politically unpopular. As an alternative, they said governments should eliminate widespread exemptions to sales taxes, another move that could prove politically difficult at a time when food prices are already rising rapidly.
“Any necessary increases in revenue after recovery would be least harmful to growth if they were based on increasing recurrent taxes on immovable property and consumption taxes, especially if this took the form of reducing exemptions and rate reductions,” the economists wrote.
The OECD economists said the current favourable tax treatment of home-ownership boosts investment in residential property at the expense of more productive alternatives. “This implies that increasing recurrent taxes on immovable property will shift some investment out of housing into higher-return investments and so increase the rate of growth,” the economists wrote.
Politicians of all persuasions have long encouraged investment in residential property through tax exemptions and other measures, and some economists believe that that very encouragement has contributed to the sharp rise in house prices and increased mortgage-lending that led to the financial crisis of 2007 and 2008.
The OECD economists said the use of recurrent taxes on property vary widely within developed economies. In Britain, they take the form of the annual council tax linked to the value of the property, with revenue going to local governments. “While it is unlikely that those countries with already high levels of such taxes will want to increase them, there is considerable scope for raising them in other countries,” the economists said.
But their recommendations are not entirely bad news for home owners. The OECD economists said taxes on housing transactions - such as stamp duty in Britain, which is charged on home purchases - discourage the best use of housing, and also reduce labour mobility, both developments that hurt growth. "Property taxes in general are likely to be more harmful to growth than recurrent taxes on immovable property,” the economists wrote.
If politicians aren't prepared to risk the wrath of home owners by hiking property taxes, the OECD economists said the next best option would be to remove exemptions on items such as food, childrens' clothing and other goods and services that are deemed to be essentials, rather than discretionary purchases.
The economists acknowledge that the removal of essentials will be criticised for hitting lower-income households particularly hard. "Some of these...reductions are designed to reduce the apparent regressivity of the tax, but they are poorly targeted because rich people spend more than poor people on these goods,” the economists wrote. “From a distributional - as well as efficiency - point of view, it is better to have a uniform VAT on a broad base and use some of the additional revenues to assist low-income households, which would still leave a substantial revenue gain to the government."
The economists said that purely from the point of view of boosting growth, cuts in income taxes and social security contributions for low-paid workers are the best option. But faced with a mountain of debt, few governments are considering tax cuts right now.
View the original article in the Economic Journal
Aussies lukewarm on junk food tax: poll
Danny Rose, Sydney Morning Herald, 9 Feb 2011
Australians want more farmers markets and clearer country-of-origin labelling on fresh produce but they're lukewarm on a junk food tax, a poll shows.
Researchers have tested public support for more than a dozen policies or reforms that feature in debate over the nation's rising rate of obesity or in concern over access to fresh fruit and vegetables. Professor Tony Worsley said the poll of more than 500 adult Victorians showed there was strong support for bolstered local production of fresh food, less so for bans or a junk food tax.
"Some policies had very substantial support ... particularly for clear country-of-origin labelling, subsidies and regulation, and for government promotion campaigns," said Prof Worsley, who is professor of behavioural nutrition at Deakin University.
"Views on food labelling are quite consistent with the recent French government decree that the geographic origin of foods must be displayed in a font that is the same size as the price tag. This is not the case in Australian fruit and vegetable retailing at present."
The research found 95 per cent of respondents supported "clear country-of-origin labelling on fresh produce", while 90 per cent wanted government policies that "encourage farmers markets". Flagged initiatives that received strong or at least majority support were:
- Providing resources for increased production of fruit and vegetables in Australia to be consumed locally – 90%.
- Monitoring the activities of large retailers to ensure fruit and vegetables are competitively priced - 90%.
- Keeping the cost of fruit and vegetable production as low as possible - 88%.
- Spending more money on subsidies to keep the cost of fruit and vegetables down - 84%.
- Creating more small farms or community gardens in residential areas - 80%.
- Providing facilities for growing fruit and vegetables - 78%.
- Banning junk food ads during childrens' TV programs - 78%.
- Introducing maximum prices for fruit and vegetables - 73%.
- Increasing production of fruit and vegetables for export - 62%.
- Prohibiting schools from selling junk food - 56%.
- Banning television advertising of high fat sugar and salt products altogether - 52%.
Only three potential initiatives did not receive majority support. They were banning all imports of fresh foods from overseas (48% in agreement), allowing nature strips to be used to grow fruit and vegetables (42%) and imposing a junk food tax to fund healthy eating campaigns (36%).
The research, recently published in the journal Health Promotion International, also involved VicHealth. VicHealth chief executive Todd Harper said the results would help to "inform government policies to promote healthy eating and make healthy food more readily available".
"The Preventative Health Taskforce report to government in 2009 also strongly recommended policies which protect children from junk food marketing - so it's good to see so many people support this move," Mr Harper said.
View the original research in the Health Promotion International journal
Rental Scheme Cuts A Blow To Battlers
Julian Disney, Australian Financial Review, 2 Feb 2011
The national rental affordability scheme boosts the supply of affordable rental housing by subsidising housing investors if they agree to charge rents at least 20 per cent below market rates. Australia has less affordable housing than any other developed country. So the government responds by weakening its main initiative for boosting affordable housing with the help of private finance. Go figure.
Read the full article on the AFR website, available via a subscription
Canberra All Clear On Pokies
Mathew Dunckley, Australian Financial Review, 2 Feb 2011
Taxation and corporation law would underpin a federal takeover of pokies regulation from the states according to commonwealth government legal advice released yesterday.
Read the full article on the AFR website, available via a subscription
Abbott’s Tax Complaints Won’t Wash
John Kehoe, Australian Financial Review, 1 Feb 2011
Despite Coalition Leader Tony Abbott's constant attacks on the Julia Gillard government over proposed new taxes on mining, carbon and now the flood levy, the tax intake under the Rudd-Gillard administrations has remained, as promised, below the 23.5 percent of gross domestic product which was reached in 2007-08, the last year of John Howard’s time in office. Macroeconomics director Stephen Anthony notes that even the $1.8 billion flood levy will not push the percentage past the 23.5 mark, and will in fact be largely offset by a short-term drop in receipts from miners and other companies affected by the floods.
Labor has been able to introduce new taxes on luxury cars and alcopops and keep the revenue proportion down by following through on personal income tax cuts promised by the Coalition. The Labor government will decide this year whether to pursue a carbon price though an emissions trading scheme or a carbon tax. Revenue raised though an ETS will not count directly as tax revenue under budget rules, according to former Finance Department secretary Stephen Bartos.
Both Mr Anthony and Mr Bartos suggest that rather than the revenue side of the budget, the government now needs to have some courage in addressing the spending side of the ledger to deliver better value for tax payers.
Read the full article on the AFR website, available via a subscription
Call To Put Gst In Tax Summit
Annabel Hepworth and Siobhain Ryan, The Australian, 31 Jan 2011
NEW Treasury figures show that generous tax breaks for the goods and services tax will rise to almost $23 billion annually within four years, sparking fresh demands for the government to include the GST in this year's taxation summit.
Treasury is forecasting exclusions from the GST of $18.3bn this year - of which $5.9bn is because there is no GST on most food - and this will surge to $22.8bn by 2013-14.
The revelation prompted business leaders - including Reserve Bank of Australia director Graham Kraehe, who is the chairman of BlueScope Steel and Brambles - to warn that the tax summit would be incomplete unless it included the GST.
"It's always been the case that a review of a tax system should include the GST, given it's such a significant part of the tax take," Mr Kraehe told The Australian. "When you see this data, it just highlights how incomplete it is to be doing a tax review and ignore GST."
Former Business Council of Australia president, Qantas and BHP Billiton director John Schubert said his personal view was that the tax summit should look at a more broadly based GST, while current BCA president Graham Bradley argued the 1999 GST deal was "riven with political compromise".
A leading economist, Grattan Institute program director Saul Eslake, said the number of GST exemptions meant there was less money available to the states and territories for spending priorities such as schools, roads, health and police services.
He said the government's decision to exclude the GST from the taxation forum agenda would compromise its effectiveness. "Whatever reforms that come out of it would be less optimal than if everything is on the table," Mr Eslake said.
The Howard government removed items such as fruit and vegetables from the GST as part of a compromise deal to secure the support of the Democrats, who were balance-of-power brokers in the Senate at the time.
This financial year, the figures show, there will be GST tax exemptions worth $2.95bn for medical services, $240 million for private health insurance, $430m for medicines, $2.6bn for education and $25m for religious services.
The Treasury figures intensify pressure on the government to rein in the $117bn in tax breaks offered this financial year to avoid worsening inflationary pressures related to $5bn in costs to rebuild Queensland infrastructure and the booming resources sector.
The figures show tax breaks for home owners are set to rise from $40bn this year to $43bn in 2013-14, largely because owner-occupiers do not have to pay capital gains tax when they sell the family home. The review of the tax system by outgoing Treasury secretary Ken Henry recommended curbing some capital gains tax discounts, but the Rudd government ruled out the changes.
Australians putting money into superannuation will receive $28bn this year in tax breaks, rising to $37.98bn by 2013-14. Mr Eslake said the government should make savings by abolishing some of the most "glaring, inequitable and distorting" tax breaks before imposing a new flood levy.
He argued that concessions such as negative gearing for investment housing and for motor vehicle fringe benefits should be first on the chopping block. "Measures like this ought to be on the government's agenda for ensuring the budget returns to surplus in a timely fashion," he said.
ABN Amro chief economist Kieran Davies said he expected Treasury would have tax breaks on its budget hitlist but predicted they would be spared the axe for political reasons. "It's just a mistake people make to think purely in terms of the outright spending that the government does when, really, this document highlights the tax concessions that the government makes is large," he said. "It's just that they're far more difficult to change some of these concessions, particularly with the current environment when they've got to consult more with the independents and Greens."
Treasury's statement on its 349 tax expenditures - which are mostly concessions, exemptions and other benefits - contains the forecasts and was released through the Treasury website on Friday with no fanfare.
Consultation On The Design Of The Tax System Advisory Board
Media Release, The Hon Bill Shorten MP, Assistant Treasurer, 21 Jan 2011
The Assistant Treasurer, the Hon Bill Shorten MP, today announced the consultation details for the Government's election commitment to establish a Tax System Advisory Board (the Board).
On 5 August 2010, the Government announced its intention to establish the Board to advise the Commissioner of Taxation and the Australian Taxation Office's (ATO's) Executive Committee on the general management and organisation of the ATO.
"Establishing the Board forms a key element of the Government's election commitment to reshape the governance of our tax system. The Board will allow the ATO to benefit from a wider range of perspectives and experiences in managing large complex organisations," the Assistant Treasurer said.
In late 2010 the Government formed a panel consisting of David Parker (Treasury's Revenue Group Executive Director), Jennie Granger (ATO Second Commissioner), Richard Warburton (company director and Chair of the Board of Taxation) and Jillian Segal (company director and Deputy Chancellor of the University of New South Wales) to facilitate this consultation. This Consultation Panel will provide advice to the Government about the best way of proceeding with this commitment.
The next stage of this consultation process involves publicly releasing a discussion paper outlining different ways of establishing the Board and seeking submissions from the public. A critical issue will be maintaining the Commissioner's independence to administer the tax laws, whilst providing him with quality, relevant advice on organisational matters.
"The Board will give the community a strong voice in the administration of the tax system to improve its responsiveness, accountability and transparency. I therefore encourage the community to participate in this consultation."
A copy of the discussion paper and information about how to make a submission is available on the Treasury website (www.treasury.gov.au). The closing date for submissions will be 11 March 2011.
The Consultation Panel will consider the submissions and provide its advice to the Government by 30 June 2011.
Download the discussion paper from the Treasury Website
Carbon tax study blind to the risks
Ed Shann, Herald Sun, 21 Jan 011
THE Government has learnt nothing from previous policy disasters and is running a campaign in favour of carbon taxes.It has asked the Productivity Commission to study effective carbon prices in major countries. It hopes to use this study to argue that because other countries already tax carbon, Australian industry would be no worse off than its overseas competitors if we were to tax carbon by similar amounts.
But the study's terms of reference mention only the UK, US, Germany, New Zealand, China, India, Japan and South Korea. These are mainly net resource importers that are our markets. It ignores our competitors, countries and regions such as South Africa, Canada, Brazil, West Africa and Indonesia that are net resource exporters of coal, iron ore and other minerals. The study should also cover our Middle East competitors in LNG and Singapore oil refining.
Minister for Climate Change Greg Combet and the Greens claim the study would allow proper assessment of carbon tax impacts on Australian industry competitiveness and prevent overcompensation of Australian industry.
The study will do no such thing. Unless it analyses carbon policies in our competitors and not just in our major markets, it will be misleading in determining the impact carbon taxes will have on Australian industry competitiveness.
The Government hopes to claim that if our major markets are pricing carbon, so should we. This will ignore our different economic structure. If our resource export competitors are not pricing carbon then early action by Australia will cost us exports, jobs and investment. Carbon emissions will move from here to our competitors, reducing the net fall in world emissions from Australian savings.
The Productivity Commission study should cover more countries and avoid simplistic estimates of national carbon prices. The commission's reputation was built on showing how tariffs benefited individual industries at the expense of the general economy. It risks denting its reputation if it fails to stress how distorting current policies are in favouring only certain, often higher-cost, renewables.
THE Government is mounting a propaganda war in favour of a carbon price, when it should be seeking genuine discussion of the most cost-effective ways of proceeding. Australian competitiveness will suffer if we tax production of carbon when many of our competitors do not.
The solution is to tax carbon consumption rather than production, by excluding exports and including imports, as with the GST. We get a wider tax base to compensate consumers. We avoid having industries lobby for exemptions as they face reduced competitiveness if production is taxed here, but not in competitors' countries.
The aim of a carbon tax should be to change relative prices, while minimising reductions in industry competitiveness and consumers' real incomes. When it introduces a carbon tax, the Government should abolish existing subsidies favouring renewables to ensure we reduce emissions at least cost.
The Government is dreaming if it hopes this study will stop complaints from industries hit by a carbon tax.
Charity turns to bonds for funding
Jennifer Hewett, The Australian, 13 Jan 2011
IT'S an increasingly pressing dilemma. How to make socially productive investments that assist people and worthwhile causes, but still earn a decent return? Brent Cubis is hoping charitable bonds -- a relatively new concept in Australia -- will provide one answer.
Cubis is chief financial officer of the Chris O'Brien Lifehouse charity, which is building an integrated $230 million centre to cater for cancer sufferers and their families in the grounds of Royal Prince Alfred Hospital, in Sydney.
...The centre is scheduled to open in 2013. But despite considerable assistance from the state and federal governments, and from the adjacent university of Sydney, Lifehouse won't have enough funds for several years to build the shell of the second stage of the project.
...Lifehouse wants to bring forward that timing by selling $35m worth of charitable bonds with a minimum term of six years.
...Charitable bonds have been pioneered in the US and Britain. So far, though, the take-up in Australia has been relatively slow, as investors are still learning how the idea would work in practice.
...More widespread use of such bonds could help with the growing and largely unfunded need for such social infrastructure. Governments with scarce capital also have an obvious interest in seeking greater private sector involvement. The debate is over how large the market can really be and how and whether government should encourage such investment through the tax system.
There are no tax deductions on the capital invested, for example, unless the bonds in their entirety are donated to the charity at maturity. But Lifehouse will seek a meeting with Financial Services Minister Bill Shorten to try to persuade him of the broader community benefits of extra tax incentives.
Lifehouse is proposing that 5 per cent of the capital invested, for example, could be tax-deductible each year for the term of the bond. In that way, charitable bonds would be able to offer returns competitive with commercial bonds.
Cubis also has hopes of enticing even a tiny percentage of Australian's superannuation industry funds by reducing or eliminating the 15 per cent contribution tax on the portion devoted to approved social projects controlled by charities. "Just attracting 1 per cent of the funds under management in Australia's super industry would add up to $13bn," Cubis says. That would be a big ask for any government, despite Lifehouse's argument that a relatively modest cost to government in terms of foregone interest on super could deliver far more in potential social investments.
A spokesman for the minister said the Chris O'Brien Lifehouse at the hospital would be a vital part of the government's commitment to a world-class healthcare system and that the government was aware that it was intending to raise additional funds by issuing charitable bonds. The government would be considering the potential of such bonds this year.
...The main immediate question for Lifehouse is how enthusiastically Australian investors will participate over the next few months. It is possible, for example, the organisation will raise less than $35m and need to find the rest of the money from other sources.
But it is already clear that there is a growing interest -- from individuals, from the not-for-profit sector and from governments -- in trying to take advantage of good intentions to achieve better social outcomes through the use of bonds.
This need not just be for capital costs, as in the case of the Lifehouse charity. Nor does it necessarily mean less than market returns for investors. Some people involved in the charity sector have even more ambitious plans to include delivery of services, arguing that being able to promise market returns for private investors will actually reduce the burden on the taxpayer.
The Centre for Social Impact, based at the University of NSW, for example, is experimenting with the idea of social impact bonds to help deliver community programs through the not-for-profit sector. These bonds could raise funds from investors to pay for community and social services normally financed by government indirectly. This could be important for public funding, as the NSW government alone spends about $2.3bn a year on such services through non-government organisations. The NSW government has appointed the centre to advise on a program due to start early next year.
Read the full article on The Australian website
EU May Consider Taxing Energy
Ewa Krukowska, Bloomberg, 14 Jan 2011
The European Union may consider taxing energy resources to curb wasteful consumption and ensure the bloc follows its strategy of low-carbon growth, the EU’s Climate Commissioner said today.
The 27-nation EU is already running the world’s largest carbon market and wants to remain a global leader in combating climate change. “If we tax more what we burn and less what we earn, there’s really room for a paradigm shift there,” Connie Hedegaard told a seminar organized by the Lisbon Council in Brussels. Hedegaard declined to say which resources might be taxed, nor did she specify the type of tax that might be introduced.
The bloc’s cap-and-trade emissions program, known as ETS, covers more than 11,000 installations that must have a permit for each ton of carbon dioxide they discharge. Those emitting more than their quota must buy more allowances. “We need some pricing mechanisms. That’s what the ETS is basically about,” she said. “But we also need them outside the ETS to be able, to a higher degree, to price energy resources.” EU tax laws and changes to them require the unanimous approval of member governments.
The EU is taking steps to meet its target of cutting greenhouse gases by 20 percent by 2020 compared with 1990s levels and has said it is ready to tighten the goal to 30 percent if other countries make comparable efforts. EU governments will debate whether such a move is possible and how it could be made after the European Commission, the bloc’s executive, presents later this quarter a road map for reaching the European 2050 target of reducing emissions by 80 to 95 percent, Hedegaard said.
Read the full article on the Bloomberg website
Work to do on Henry reforms
John Kehoe, Australian Financial Review, 13 Jan 2011
Treasurer Wayne Swan notched up a virtually unnoticed tax milestone just before the Christmas break, with a decision to modernise the outdated and complex tax laws for trusts. This was the 10th recommendation of the Henry tax review. Treasury secretary Ken Henry made 138 recommendations. A new independent board will advise the Australian Taxation Office and the Board of Taxation has received the power to commence its own reviews. Treasury’s post-election brief for the Gillard government states that the government should develop a "narrative" for tax reform. Mr Swan and Opposition Leader Tony Abbott have expressed interest in reforming the tax system to improve workforce participation.
Read the full article on the AFR website via a subscription
Talkfests prove taxing to those arguing for much-needed reform
Richard Gluyas, The Australian, 11 Jan 2011
AFTER Julia Gillard's negotiations with the independent to secure power, there is scant optimism about tax reform.
A plain-speaking Bernie Brookes, chief executive of middle-market retailer Myer, sums up what most people are thinking. "Another reform, another talkfest; the government does a pretty good job delaying any decisions," Brookes says. "They talk, evaluate and hypothesise but nothing much actually happens, so I think this will only create more bureaucracy and more evaluation."
Structural change to the tax system is not easy. While National Australia Bank and Woodside Petroleum chairman Michael Chaney reckons it should be tackled every decade or so, the last time it was seriously attempted in this country was in 1985 under a reformist Labor administration. This time, the momentum for change is coming from business and the community, rather than the other way around.
Corporate Tax Association executive director Frank Drenth recalls a business lunch in May last year, when then-assistant treasurer Nick Sherry said the government had a full tax agenda for its first term as well its second term if it were re-elected, following the release of its limited response to the Henry review. Drenth says the harsh reality about tax reform is that it's all about "buying off the losers".
Timing has therefore been a problem, with the government commissioning treasury secretary Ken Henry's review, called Australia's Future Tax System, in May 2008. At the time, the budget surplus had peaked, but the ripple effects of a dramatic collapse in the overheated US housing sector were starting to be felt.
The global financial earthquake caused by the failure of the US investment bank Lehman Brothers, only months later in September, dramatically changed the environment for Henry. The government would argue that the Lehman crash, and the subsequent deficit spending to avoid recession, meant the prospect of buying off Drenth's tax-reform "losers" disappeared, at least until the budget returned to surplus.
But that overlooks meaningful tax reform in other countries, like the New Zealand government's hike in the GST rate from 12.5 per cent to 15 per cent, which has funded cuts in the top personal tax rate from 38 per cent to 33 per cent, and in the company tax rate from 30 per cent to 28 per cent.
In Britain, labouring under a record budget deficit, the new Cameron government has pledged to cut the company tax rate by one percentage point a year for the next four years to 24 per cent. A reduced reliance on company tax and an increase in broad-based consumption taxes are, broadly speaking, key elements of corporate Australia's tax reform agenda.
Admittedly, the government promised in its response to the Henry review to cut the corporate tax rate from 30 per cent to 28 per cent by 2014-15. It also said it would impose a 40 per cent resource super-profits tax on the mining sector, since scaled back to a 22.5 per cent mineral resources rent tax on coal and iron ore producers, and raise the compulsory superannuation rate from 9 per cent to 12 per cent by 2019-20.
It was Wayne Swan's view, as well, that the government would return to the Henry review and examine issues that were politically unpalatable in the lead-up to the election. While being a sceptic about the feasibility of "big bang" tax reform, the interaction between the tax and welfare systems has been one of the Treasurer's priorities, and before the election he spoke of the desirability of a simpler tax system and further company tax cuts.
Swan, though, banned Henry from considering a GST increase, and has infuriated most of the corporate sector by quarantining the GST from the tax summit.
...Any corporate boss, given half an opportunity, will reel off a list of the tax system's chronic failings, mostly in their particular sector. But for Mallesons Stephen Jaques chief executive partner Robert Milliner, this can add to the difficult politics of tax reform, and is part of the problem with building the broad consensus required for deep structural change.
"This is about getting the right settings for future prosperity," says Milliner, who chairs the BCA's business reform taskforce. "The issues are inter-related and each stage has its difficulties. The past also shows that quick fixes at the cost of one sector over another, or one sector of the community over another, doesn't actually work."
...At this stage, however, even the timing of the summit, let alone its agenda, is unknown. Given the paucity of information from the government, it's little wonder that the opposition is also being circumspect, with one notable exception.
Joe Hockey, in early December, flagged his desire to reduce tax minimisation by removing the incentive to arbitrage between different entities, noting company tax was set at 30 per cent compared with the top marginal income tax rate of 46.5 per cent, including the Medicare levy.
He said the Coalition would have more to say about its tax principles in the new year, and would not comment on how the harmonisation would be achieved. Swan immediately dismissed the idea as Hockey's "latest thought bubble". This, of course, does not augur well for a bipartisan approach to necessary, but unpopular, reforms.
Chaney says the political environment is difficult, and the opposition holds the key. "There's a huge responsibility on the opposition to embrace reform," he says. "It's happened before when (Malcolm) Fraser was in opposition and he supported tariff cuts and floating the dollar, even though many of his natural supporters would have been opposed. But it was the right and gutsy thing to do and it really needs to happen this time."
For his part, Milliner believes the cause of structural change to the tax system is further advanced than in the lead-up to the 1985 summit, which ended on a sour note when business combined with the ACTU and the Australian Council of Social Service to kybosh Paul Keating's plan to introduce a GST.
He notes there has been the Ralph reforms to business taxes, and completion of the wide-ranging Henry review. "The false start with the response to Henry was unfortunate but it doesn't mean you forget about it," Milliner says. “So we should start there and learn the lessons from 1985 -- maintain a broad agenda, resist efforts by various sectors to limit it, and start to build a broad consensus."
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