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Archive: March 2013

This section provides a selection of media items from March 2013.

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Give and take that taps touchy topic of taxation 
 

Judith Sloan, The Australian, 30 March 2013
 

IT is a common refrain of many left-wing economists that we are all "dying" to pay more tax in exchange for more government services.
Survey data will be trotted out to support this proposition, although many respondents will really be answering on behalf of others. Sure, higher taxes are a good idea, but not for me, for others. Bring on the government services, just don't expect me to pay for them.
The fact that politicians have been reluctant to act on the basis of this seemingly free political lunch - people's willingness to pay more tax - suggests they don't really think the proposition is true.
Think tank Per Capita released its third annual tax survey during the week, and it makes for interesting reading.
According to the report, "Australians' attitudes towards tax and public spending are getting tougher. Increasingly, we see ourselves as paying too much tax in a system that is less fair. Our support for public spending is falling."
Based on a survey of nearly 1500 individuals, more than half believed they paid too much tax, a six-percentage-point increase from 2010. Support for more government spending fell by 10 points over the same period, which is perhaps not surprising given the obvious waste in many recent government programs.
The executive director of Per Capita, David Hetherington, doesn't like the results of the survey. (Note that Per Capita modestly describes itself as "an independent progressive think tank which generates and promotes transformational ideas for Australia".)
In his opinion, "political leaders must explain that, by comparison with similar countries overseas, Australian taxes are at a bare minimum. If we are to sustainably fund the services and infrastructure that we expect, taxes will have to rise."
Hetherington makes much of the fact that the overall tax take in Australia is the fifth-lowest in the 34 OECD countries, "higher only than South Korea, Chile, the US and Mexico." But is this fact good or bad? And is it possible that this fact is misleading?
Nigel Ray, a Treasury executive director, made some important comments last year on this topic. He noted that when comparing countries, "if we measure government in terms of tax revenue, Australia's general government sector is slightly larger than the US and Japan, but lower than in Europe, particularly Scandinavian countries."
But he went on to remark that data on tax revenue "can never fully capture the impact of government on an economy".
He lists state-owned assets, tax concessions and government regulations (included mandated superannuation contributions) as factors that are not picked up in the tax figures.
Take the case of superannuation contributions. In many European countries, retirement incomes policy is based on a contributory social insurance model run by government. The mandated contributions, which are paid by both worker and employer, are included in tax revenue.
In Australia's case, the government directs that employers must pay a fixed (and rising) proportion of workers' wages into superannuation, but these contributions are not counted as tax revenue.
The two cases are essentially the same, however. In the first, the contributions are called tax; in the second they are not.
Peter Whiteford of the ANU has noted that because of the absence of social security contributions in Australia, "income tax takes a higher share of total tax revenue (in Australia) than in many other OECD countries, averaging 55-60 per cent of total tax revenue compared to an OECD average of over one-third". In other words, while Australia's total tax take may be low by international standards, our income tax take is extremely high.
In countries that operate social insurance arrangements - and, note, the vast majority are high taxing - individuals, both rich and poor, must contribute to various social insurance products. In turn, they receive benefits in proportion to their contributions and on the basis of clearly defined terms of entitlement. Unemployment insurance is generally time-limited, but there is no means-testing of entitlements.
These social security arrangements have few parallels with the situation in Australia. As Whiteford observes: "In Australia, payments are flat-rate and financed from general taxation revenue, benefits are also income-tested or asset-tested and payments are not time-limited."
In fact, Australia has the most tightly targeted welfare system in the OECD, according to Whiteford, "relying more heavily on income-testing and directing a higher share of benefits to the lower income groups".
"The poorest 20 per cent of the population receives nearly 42 per cent of transfer spending; the richest 20 per cent receives only around 3 per cent. As a result, the poorest one-fifth receives 12 times as much in cash benefits as the richest fifth, the highest ratio in the OECD, and about 50 per cent more than the next most targeted country, New Zealand."

We should also recall that the top quarter of income tax earners in Australia already pay nearly two-thirds of all income tax revenue. The bottom quarter pay no tax, in net terms.
So here's the bottom line. When you read that Australia is a low-taxing country, be aware of the qualifications that need to be made when making comparisons. In the case of mandated superannuation, what is counted as tax revenue in other countries is not counted as tax revenue here. However, Australia is undoubtedly a high-income taxing country and high-income earners contribute the vast bulk of the revenue raised.
Tightly targeting the system of welfare payments enables a lower tax take - and this is a good thing. If the current tax revenue is not being allocated appropriately, then the government should make the hard decisions and redirect scarce taxpayer dollars to those ends with the highest net social benefits.
In other words, adjust expenditure to fit revenue, rather than the other way round.
Raising taxes is the lazy option. Higher taxes reduce individuals' work effort and the incentives to invest, shrinking national income in the process. Real resource rent taxes aside, all taxes come with high compliance and deadweight costs. We should be doing everything we can to avoid increasing them.
 

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Super breaks inefficient and unfair: tinkering won't help
 

Cassandra Goldie, The Sydney Morning Herald, 29 March 2013
 

Joel Fitzgibbon's claim this week that households on $250,000 annual income are struggling as much as anyone is an unfortunate distraction, particularly when the average wage in Australia is $69,810; and 2,265,000 people - including 575,000 children - are struggling to survive below the poverty line of $39,104 for a family.
The critical debate about superannuation is whether it is achieving its primary goal of helping people to secure their own adequate retirement, rather than relying on the age pension. For the past 30 years governments have tinkered with the tax treatment of super to convert it from a bastion of privilege to a system that works for everyone. Most of their efforts were either reversed or failed. The lesson is that the only way to stop the seemingly endless cycle of changes is fundamental reform.
The basic problem is that half of all tax breaks for contributions go to the top 20 per cent of wage earners, earning more than $83,304, a significant proportion of whom wouldn't be entitled to the pension in any event. There is an inbuilt bias in favour of higher earners. For every dollar contributed by an employer on behalf of an individual earning $200,000 they save 32¢ in tax. A typical wage earner on $50,000 saves 17¢, and before the introduction of the government contribution a part-time worker on $20,000 was penalised for saving for retirement. They paid 15¢ in the dollar more tax on their super than if they have received the same amount in wages.
To put that in the context , the Australian Bureau of Statistics says households earning $250,000 are in the top 20 per cent of households. Individuals earning $110,000 to $130,000 are in the top 10 per cent of earners meaning they earn more than twice the median full-time earnings of $57,200. The reason for this is that contributions from employers - the vast bulk of super contributions - are taxed at the flat rate of 15 per cent.
The same goes for the tax on the earnings of the funds. If the progressive income tax scale was replaced tomorrow with such a tax, there would be widespread outrage. There are only two reasons this flawed system has survived so long. Most of the people who lose - low and middle-income earners - aren't aware of it, and those who gain (those on the top marginal tax rate and their advisers) have no motive to change it.
The system is inefficient, unsustainable and unfair. It's inefficient because most of the tax breaks go to high earners, who will save for retirement with or without tax concessions and won't receive the age pension in any event. It's unsustainable due to its ballooning cost and limited impact on future pension costs. Australia has the most expensive tax concessions for private super in the OECD. In a few years, the Treasury estimates their cost - more than $45 billion per year - will exceed the age pension. It is also politically unsustainable because low and middle-income earners are being forced to save for retirement (a good idea in theory) but receive little or no public support to do so.
The current tax breaks are unfair for most income earners, especially those on lower earnings and women. Not only do women earn less, they spend less time in the paid workforce because of children and other caring responsibilities. Women also make up 73 per cent of people on the single aged pension.
Efforts to improve the tax breaks for low-income earners began with the ''co-contribution'' for voluntary employee contributions, which had limited impact because not many low earners can afford to save beyond the super guarantee. The government contribution announced in last year's budget will have more impact because it removes the 15 per cent tax on employer contributions for those on low incomes. But this means people earning less than about $40,000 receive a tax break for retirement saving of zero, while those earning $180,000 to $300,000 still get a tax break of 32 per cent.
Nevertheless, we have supported the plan in the absence of broader reform. It will particularly make a difference in the gender disparity of retirement savings, ensuring people on low incomes are now at least not penalised by paying more tax on super than they would ordinarily pay. About 65 per cent of workers earning below the tax-free threshold are women. It is disappointing the Coalition plans to reverse this reform if it wins the election.
We need deeper reform to make our super system work for everyone. For many years, the Australian Council of Social Service had advocated turning our ''upside down'' tax breaks for super right side up, so they benefit the majority not the privileged few.
Our proposal is simple: tax employer contributions at individual's marginal rates and replace the half-dozen tax breaks for contributions with an annual capped rebate. This could be done by requiring employers to deduct tax at marginal rates before passing on their contributions to the fund. The outcome is everyone receives a tax break worth (say) 20¢ in the dollar for all super contributions up to an annual cap.
With a few variations, this is the system advocated by the Henry Review, which remains the blueprint for sensible tax reform. Its main purpose would be to make super fairer and more sustainable, not to save the government money in the short term. Yet even if the reform was revenue neutral, it would yield fiscal savings because future age pension costs would be reduced. At least three-quarters of wage earners would be better off.
 

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Slash corporate tax rates? Let's start with ending the business breaks
 

Chye-Ching Huang and Chuck Marr, The Guardian, 29 March 2013
 

Business always makes a strong case for cutting taxes, but where's the public benefit if that just adds to the deficit?
Corporate tax reform could help address two major public policy challenges: unsustainable long-term budget deficits and a tax code that lets corporations avoid taxes and encourages them to invest in ventures that receive the biggest tax breaks, rather than those that can make the economy more productive. Reducing or eliminating the tax breaks that litter the corporate tax code could cut the deficit, reduce tax avoidance, and allow for more productive investments. But poor reforms could set the US back even further.
The tax code – including corporate taxes – should contribute to deficit reduction. Keep in mind that corporate tax revenues as a share of the economy are at historical lows, and they are low compared to other developed countries. Although the top corporate rate is high, the average tax rate – that is, the share of profits that companies actually pay – is substantially lower because corporations use the tax code's many preferences to reduce their government bill.
As corporate lobbyists advocate for slashing corporate tax rates, policy-makers should keep deficits firmly in sight. They should not promise a massive corporate tax cut before considering how unaffordable it may be.
Congress' tax scorekeeper, the Joint Committee on Taxation (JCT), calculated how low the corporate rate could go under a revenue-neutral reform that eliminated nearly all major corporate tax breaks. The answer 28%, well above the 25% for which many lobbyists advocate. But even the 28% figure may be unrealistic in practice.
First, it relies on the dubious assumption that Congress would eliminate nearly all of the corporate tax breaks, including, for example, tax credits to encourage production in the United States and research and development activities, many of which have strong support among lawmakers. Second, the JCT analysis notes that a 28% top corporate rate would increase deficits after 10 years, even assuming aggressive base-broadening. That's because many possible changes to the tax code would save more in the first ten years than in later decades.
For example, eliminating accelerated depreciation, which allows firms to deduct the cost of new investments at an accelerated rate, alone would pay for 53% of the ten-year cost of dropping the rate to 28%, JCT estimates. But JCT also found that the revenue gained by repealing this tax break peaks in 2017 and then falls sharply. That means that the package of base-broadening and a 28% rate would add to the deficit over the long run.
Given that the deficit problem is fundamentally long-term in nature, it's crucial to avoid policies that worsen the long-run outlook. Policy-makers must avoid the trap of promising a low corporate tax rate that's so costly that corporate tax reform wouldn't reduce the deficit – and might even add to it.
The risks of reform are acute when it comes to taxing multinational corporations. Many large US-based multinational companies are lobbying for corporate tax reform to include a "territorial" tax system, under which they would face a zero or very-low tax rate on their foreign profits. A territorial tax system would increase rather than reduce current incentives for US-based multinationals to shift their operations from the United States to low-tax countries or "tax havens", or to artificially shift their profits there using what are known as "earnings stripping" techniques. That risks draining revenues from the corporate income tax and would actually increase deficits.
Corporate lobbyists argue the US could impose a "tough" territorial tax system by including strict rules to prevent earnings stripping. But the experience of the UK and many other developed countries that already have "tough" territorial tax systems is not promising. As the Guardian has recently covered extensively, multinationals are circumventing those structures, shifting profits to tax havens and paying very little tax in any country. Policy-makers are increasingly frustrated by multinationals – including US-based corporations such as Starbucks, Google, and Apple – that do billions in UK business but pay very little in UK tax.
Given the problems that other countries are having with even "tough" territorial systems, the United States should, instead, focus its corporate tax reform efforts on eliminating tax breaks that distort investment decisions, reducing incentives for multinationals to avoid taxes, and directing much-needed revenues toward deficit reduction.
 

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Close Corporate Tax Loopholes, Not Public Schools 
 

Carl Gibson, The Huffington Post, 29 March 2013
 

If you're in a canoe that's got a hole letting in water, do you throw the other passenger overboard who is helping you row, or do you just patch the hole and keep rowing?
Chicago public schools are facing a $1 billion deficit. The corporate media would like you to believe it's due to excessive spending and that Mayor Rahm Emanuel's proposal to close more than 50 schools, most of them in low-income neighborhoods, is the only solution. But the state of Illinois loses $4.8 billion annually in federal tax dollars due to corporate tax loopholes that shift profits overseas. It doesn't take a math genius to see that simply closing these excessive loopholes would save the schools that so many kids in Chicago depend upon for their education.
These corporate tax loopholes cost us over $100 billion a year in federal tax dollars, which results in state and local budget cuts and tax hikes due to a decreased allocation of federal funds. The corporations most known for complex offshore tax avoidance schemes get these loopholes by spending millions on hiring armies of lobbyists and in campaign donations to chairmen and ranking members of tax-writing committees in Congress.
The lobbyists submit draft paragraphs of new gimmicks and loopholes to those committees. The campaign donations continue to flow toward reelection campaigns with the understanding that those who are making the donations get what they want out of their sponsored politicians. Thanks to this corrupt process, the tax code grows longer and more complex year after year, the most recent version topping out at roughly 72,000 pages.
There is already legislation on the books in both the House and Senate to close most of these loopholes and rein in roughly $60 billion a year. A small sales tax on Wall Street transactions would raise roughly $150 billion a year, more than enough to offset the cuts that are closing 50 schools. These aren't radical solutions; they're based on the simple premise that if you hire Americans, sell to Americans, use American public services and infrastructure and make the bulk of your profits in America, you should pay the American corporate tax rate of 35 percent.
Ever since Brown vs. Board of Education, there has been a coordinated right-wing attack on free education. The latest plot is an attempt to close public schools and turn them into low-performing, for-profit charter schools funded by Wall Street bankers and hedge fund managers. The attempts to do this are disguised as "reform," but are really little more than an effort to bust teachers' unions and cede public education over to the authority of big corporations.
Public schools to educate our children aren't a burden to the state, they're an investment. If you want more kids to grow up into responsible, successful adults who contribute to our society, and if you want lower crime rates and prison populations, investing in good public education makes sense. We need our kids to help row the canoe down the river, not throw them out while ignoring the gaping hole in the boat. It's time to stop making our kids pay for their crisis.
 

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France to Tax Companies 75% on $1.3M Salaries
 

Sarah Dilorenzo, TIME, 28 March 2013
 

(PARIS) — French President Francois Hollande may have finally found a way to tax the really rich: by making their companies pay.
In a televised interview Thursday night, he said he wants companies that pay their employees more than 1 million euros ($1.3 million) to pay 75 percent payroll taxes on those salaries.
The proposed tax, which still needs to be approved by parliament, replaces one of Hollande’s signature campaign proposals: to tax individuals who earns more than 1 million euros at 75 percent. France’s highest court has thrown out that plan and the government has been looking for a replacement.
Hollande said he hoped the new proposal would push companies to lower executive pay at a time when France’s economy is suffering, unemployment is soaring and employees are being asked to take pay cuts.
While the president reiterated his goal of stopping the rise of unemployment this year and restarting growth, he offered no specific new economic policies.
“The tools are there. We need to use them fully,” he said on France-2 television.
The new payroll tax would last only two years. On the highest salaries, companies already pay payroll taxes that add up to at least 50 percent of the paycheck.
“What’s my idea? It’s not to punish,” Hollande said. “When so much is asked of employees, can those who are the highest-paid not make this effort for two years?”
Hollande’s original plan for a 75 percent tax on individuals was also conceived as a largely symbolic measure. It was likely to have brought in only about 100 million to 300 million euros — an insignificant amount in the context of France’s roughly 85 billion-euro deficit.
As Hollande’s popularity slides, he has struggled to convince the French that he is doing enough to boost growth — or to redistribute wealth, as his leftist base wants. Going after high-earners may be an easy win for him with voters.
French growth has been stagnant for nearly two years, and unemployment has been rising for 19 straight months and is now at 10.6 percent — a level not seen since 1999. Consumer confidence slipped again in March after briefly starting to rise earlier this year. The national statistics agency, Insee, found this month that the French are more pessimistic about the economy’s prospects for the coming year than they have ever been. (The survey was first taken in 1972.)
But some may wonder if adding another tax on companies as he is trying to encourage growth is the right message to be sending.
Despite the poor economy, Hollande has avoided imposing the deep spending cuts that other European countries like Greece and Spain have imposed. And he said again Thursday that he would not go down that path — even though France will miss its deficit target of 3 percent of gross domestic product this year.
“Prolonging austerity will risk not reducing the deficits and bring the certainty of having unpopular governments that populists will eat alive,” he said.
France has largely avoided the unrest seen in European countries that are experiencing deep recessions, but the layoffs are piling up and have spawned some protests. On Thursday, around 100 workers from a factory that carmaker PSA Peugeot Citroen wants to close stormed the offices of France’s leading business lobby, Medef. Police said dozens were arrested.

 

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Taxes are already low but you wouldn't know it
 

David Hetherington, The Drum Opinion, 28 March 2013
 

Taxes have only fallen in recent years, but still Australians feel hard done by. Whoever wins office in September won't be able to ignore our dwindling revenues, writes David Hetherington.
Aussie kids in Year 9 are worse readers than the Year 8 kids of a decade ago. There hasn't been a major new road built in Sydney in eight years. The entire intake of the NSW Police Academy was cancelled last September.
Why? In each case, governments will say they simply don't have the money to invest. This is usually just a predictable refrain from incoming governments, but in this case, it's true. This is because our national tax take is at a long-term low, having hit 20.1 per cent in 2010-11. We're currently the fifth lowest taxing country in the 34-member OECD.
Yet dare to suggest to punters that they're lightly taxed and you're in for a rude shock. Australians are feeling increasingly overtaxed and their appetite for more public spending is falling.
Per Capita's annual tax survey, released this week, finds that fully half of all Australians believe they pay too much tax, up from 42 per cent three years ago. Support for higher spending, while still high, has fallen by 12 percentage points in health, 21 points in education and 26 points in social security. A stunning 94 per cent of respondents say they would not pay more tax to fund the education investment called for in the Gonski Review.
Why are voters so hostile?
Three factors are at work. First, there is a sense of economic unease in the electorate which doesn't show up in the headline numbers. Insecure work is on the rise with the ratio of full-time workers in the population falling, especially among men. Households have been saving determinedly since the financial crisis, often to pay for things once fully covered by the state - school fees, health insurance, retirement living.
Secondly, voters are responding to recent tightening of government entitlements. The private health insurance rebate, the baby bonus and payments for single parents have all been trimmed in recent years. People are angry that these benefits are bring withdrawn when they're already feeling under pressure. Since they feel they're getting less, the last thing they want is to hand over more money.
The final factor that can't be ignored is the Opposition's relentless campaign against perceived government waste and big new taxes. Tony Abbott's 2010 campaign quartet railed against boats, debt, waste and taxes, and he and his colleagues have been unremitting ever since. The shifts found in the Tax Survey suggest the message has resonated.
Despite all this, the objective facts remain: taxes are low, and spending has been wound back since the GFC stimulus. There is a yawning gap between perception and reality.
This presents a huge challenge for our political leaders. Whoever wins the federal election this year will need to repair a broken tax base. Seven successive years of income tax cuts created a structural gap in tax revenues, which was temporarily papered over by huge corporate tax receipts early in the mining boom.
Now that mining profits have receded, that gap has been laid bare: Per Capita's After the Party report released last year found that it equated to around $75 billion over the peak years of the boom.
If Australia is to turn around the declining performance in its schools, support its aging population, and equip its workforce with the skills to proposer in a rapidly changing economy, we need to ensure we can fund the investment required in these areas.
This will require higher taxes and reduced concessions, a task the Gillard Government has commenced with cutbacks in the private health insurance rebate and the baby bonus.
But this exercise is a political Everest. A difficult task - lifting the tax take - is compounded by the fact that Australians falsely believe they are already highly taxed. Fortunately, both the technical blueprints and the political precedents exist.
The Henry Review mapped out the policy design, with the removal of inefficient taxes and concessions, like stamp duty and negative gearing, and the introduction of asset-based taxes on land and estates that are less volatile than taxes on incomes. All that's missing was a broadening of the GST which was deliberately excluded from Henry's terms of reference.
More importantly, political history shows us that bold leaders can make and win a case for new taxes grounded in the national interest, rather than sectional ones. John Howard won a single-issue election on the GST. Bob Hawke and Paul Keating won multiple elections after introducing taxes on capital gains, fringe benefits and petroleum rents.
Neither side of politics will tackle this before the federal election. But whoever wins will not be able to avoid it.
Across the peak years of the boom, we decided to give ourselves tax cuts rather than reinvest in the public goods, services and infrastructure critical to enduring prosperity. That failure to invest is now showing up in education outcomes and infrastructure quality, and risks flowing through to lower standards of living.
Repairing the tax base can't be left in the too-hard basket any longer.

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Cracking down on global tax rorters

 

Ross Gittins, The Sydney Morning Herald, 27 March 2013
 

You're familiar, I'm sure, with the Double Irish Dutch Sandwich. It sounds tasty - but only to the big multinational companies that use it to avoid tax. According to the Assistant Treasurer David Bradbury in a speech he gave late last year, it's the device Google uses to pay very little Australian company tax on the profit it makes on an estimated $1 billion a year in Australian advertising revenue.
As Bradbury explains it (using media reports, he says, not inside information), the fine print of contracts Australian firms sign with Google says they're buying their advertising from an Irish subsidiary of Google.
Amazon paid no tax in Britain despite about $4.9 billion in sales by routing transactions through Luxembourg. 
Our rate of tax on company profits is 30 per cent, whereas Ireland's is 12.5 per cent. But that's just the start of the sandwich. The Irish subsidiary then pays a royalty payment to a Dutch subsidiary, but it's then paid back to a second Irish holding company of Google's, which is controlled in Bermuda - which has no company tax.
The media usually attribute the invention of the double Irish to Apple, Bradbury says. But evidence given to the British public accounts committee suggests Amazon paid no tax in Britain despite about $4.9 billion in sales by routing transactions through Luxembourg, where it faced an effective tax rate of 2.5 per cent.
The committee also heard that Starbucks had paid no tax in Britain for three years, despite sales totalling about $1.8 billion - in part because of royalty payments for the use of the brand.
With their government busy raising taxes and slashing government spending to get its budget deficit down, the Brits are pretty steamed up about multinationals not bearing their fair share of the tax burden. Governments in many developed countries are deciding tougher measures need to be taken to curb the multinationals' rorting of the system, and ours is no exception.
It's a problem governments have been grappling with for decades, of course, since the early days of globalisation and the rise of companies with operations in several countries. Then, the game was simply for multinationals to shift their profits to countries where taxes were low. One way to do this was for the part of the company where taxes were lower to sell its products to subsidiaries in high-tax developed countries at inflated prices. The big countries developed rules to limit such ''transfer pricing''.
Another trick was for a subsidiary to borrow from head office most of the capital it needed, with head office then charging an interest payment that absorbed most of the subsidiary's profits. Our ''thin capitalisation'' rule limits interest deductions to $3 of debt for each $1 of share capital, and there's talk this may be tightened in the budget.
In a speech he gave this month, Bradbury says you don't need to be doing business on the internet to use something like a double Irish scheme. ''What you do need is the global presence of a multinational enterprise and the ability to attribute a large part of your profits to intangible assets,'' he says.
And we know intangible assets - such as software, databases, patents, copyright and ''goodwill'' or ''brand value'' - play an increasingly important role in the global economy. In the United States, investment in intangible assets has exceeded investment in tangible assets for more than a decade.
Existing international legal arrangements rest heavily on the notion that income should be taxed in the country of its ''source''. When economic activity was dominated by farms, factories and mines, it usually wasn't hard to see that the source of income was where the factors of production were physically located.
But now ''the increasing importance of intangible capital to production challenges the very idea that we can always objectively determine where economic activity occurs,'' Bradbury says.
All this helps explain the emergence of ''stateless income'' - income that's not taxed in the source country of the production factors that gave rise to the income, nor in the ultimate parent company's jurisdiction. It's income that doesn't belong anywhere for tax purposes.
This, in turn, explains how the profits of US-controlled corporations in Luxembourg are equivalent to 18 per cent of its gross domestic product. For the Cayman Islands and Bermuda the proportions are more than 500 per cent and 600 per cent of those countries' gross domestic product.
Stateless income is not simply a product of transfer pricing abuses, but also arises from decisions about where to place financial capital within a multinational group. It involves exploiting differences in countries' tax systems and hybrid instruments treated as borrowings in a country and shares in another.
Tricks like these can place single-country businesses at a competitive disadvantage. They - and individual taxpayers - are forced to bear an unfair share of the tax burden. But many big-business executives reject the notion that paying a fair share of tax is part of a broader social compact. Tax is just another business cost. If dodging it is legal, morality doesn't enter into it.
The Gillard government is working to ensure our transfer-pricing rules are up with world's best practice and the general anti-avoidance provision of our tax act is broadened to encompass the tricks multinationals try on.
It has asked Treasury to study what more can be done, and will work to improve the information multinationals have to make public about profits and tax payments.
The Organisation for Economic Co-operation and Development has had to lift its game in promoting multilateral action to limit tax rorting by global companies.
 

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New York Court Upholds Sales Tax for Online Retailers
 

David Streitfeld, The New York Times, 28 March 2013
 

New York’s highest court rejected arguments Thursday by two Internet retailers that they should be exempt from collecting state sales tax.
Amazon.com, the biggest online store, and its much smaller competitor Overstock.com had separately sued to challenge a 2008 state law that required online retailers to collect sales taxes on purchases made by New York residents. That served effectively to raise prices on the sites by nearly 10 percent, reducing their competitive advantage against brick-and-mortar retailers.
In a statement, Amazon denounced the New York Court of Appeals ruling as conflicting with precedents by the United States Supreme Court and decisions by other state courts. Overstock said it was considering appealing to the federal Supreme Court.
Central to the dispute was the question of affiliates, which are independent sites that link to a retailer in return for a commission. Thousands of Amazon affiliates are based in New York.
“The bottom line is that if a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden,” the appeals court wrote in its decision. The suits had been dismissed by lower courts.
The struggle over Internet taxes has intensified in the last few years. Brick-and-mortar retailers have been increasingly insistent that Amazon in particular was unfairly avoiding its responsibility to make sure its customers paid sales taxes. Other states began debating measures like New York’s.
In response, Amazon struck deals in California, New Jersey and a few other states to build warehouses in exchange for finally agreeing to collect taxes. In states where it does not need warehouses, Amazon has generally refused to budge.
The retailer says it supports a national solution rather than a state-by-state effort. After many years of inactivity, progress is being made on that front, with a majority of United States senators indicating this month that they would support an Internet tax measure. 
 

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Push firms to target super cuts
 

Phillip Coorey and Sally Patten, The Australian Financial Review, 27 March 2013
 

Thus far, Prime Minister Julia Gillard has only ruled out touching the tax-free status of superannuation withdrawals for people aged over 60 and it is all but certain tax concessions on earnings and contributions are in the government’s sights.
The Gillard government will defend its plans to raid superannuation at the May budget by adopting Treasury’s argument that such a move is critical to sustaining the tax revenue base as the population ages.
After again leaving open the option of cutting tax concessions for the well-off on superannuation contributions and earnings, Prime Minister Julia Gillard argued on Tuesday that while Labor would “safeguard superannuation’’, revenue, too, needed to be sustainable. “We’ve always got to make sure that the system is sustainable and is meeting the nation’s needs and the needs of individuals,’’ she said.
This stance was backed by the chief executive of the $60 billion AustralianSuper fund, Ian Silk, who declared that the big tax breaks which have fuelled superannuation savings for decades are unsustainable and will have to be scaled back. “It is inevitable we won’t be able to maintain the current tax settings on super,” Mr Silk told The Australian Financial Review.
“This is not about arguing for more taxes but a recognition that the current settings pose a huge problem for any government.”
The Financial Review understands Ms Gillard was referencing comments made several months ago by Treasury ¬secretary Martin Parkinson in which he said the tax concessions granted on superannuation would become increasingly unsustainable as the population aged and the tax base dwindled.
“With the Commonwealth budget coming under increasing pressure over the next few decades, the fiscal sustainability of all policies, including superannuation, will demand greater public scrutiny,” he said.
Super to outstrip tax revenue foregone on Housing
Dr Parkinson spoke following the release of Treasury’s 2012 tax expenditures statement, which showed tax revenue foregone on superannuation would, for the first time, outstrip that foregone on housing.
For 2012-13, it was estimated the government would forego $31.8 billion in tax revenue related to super concessions compared with $30 billion forgone on housing tax concessions such as capital gains tax and negative gearing. By 2015-16, it is projected superannuation-related concessions will result in $44.8 billion foregone, compared with $30.5 billion on housing.
Sacked cabinet minister Simon Crean, who was a member of the cabinet’s expenditure review committee until Thursday’s botched leadership coup, has urged the government to drop its plans to raid super for high-income earners. Mr Crean, who will not be replaced on the ERC, said targeting super would be “trashing’’ the legacy of the  Hawke-Keating government, which championed super, introducing the compulsory superannuation ¬guarantee.
Ms Gillard campaigned in Perth on Tuesday with her new Resources and Energy Minister, Gary Gray.
On Monday, Mr Gray, who is fighting to hold his marginal Perth seat of Brand, appeared to distance himself from Ms Gillard on foreign workers by emphatically endorsing the 457 visa program for temporary skilled workers. On Tuesday, Mr Gray appeared to defend the right of the states to increase mining royalties, a practice Ms Gillard and Treasurer Wayne Swan have attacked because it gouges the proceeds of their mining tax.
Mr Gray said a combination of the minerals resource rent tax and “the increases in royalties that various state governments have introduced’’ meant the minerals sector was contributing to state and federal coffers “in a way that has never happened before, and that’s a good thing’’.
Tax concessions on earnings and contributions prime targets
Cabinet’s expenditure review committee, which met all day Tuesday, is looking at superannuation concessions to fund the government’s Gonski school funding reforms and its -proposed national disability insurance scheme. Combined, the two policies will require an estimated extra $14 billion in annual revenue by the end of the decade, when they are fully operational.
Thus far, Ms Gillard has only ruled out touching the tax-free status of withdrawals for people aged over 60 and it is all but certain tax concessions on earnings and contributions are in the government’s sights.
Now former resources minister Martin Ferguson, who resigned on Friday in the wake of the aborted coup, listed superannuation as he criticised the government for engaging in class warfare rather than embracing the legacy of the Hawke-Keating government, which “governed for all’’.
Mr Ferguson said Labor had forgotten the concept of the social wage. This included superannuation which, he said, took the pressure off the budget as the population aged because it lessened the demand on the aged ¬pension. This argument runs contrary to that now being put by the government.
Ms Gillard said on Tuesday that Labor was not about to scrap its superannuation legacy.“It is only Labor that will ever safeguard superannuation in this country. It is Labor that brought superannuation to this country for working people,’’ she said.
Gillard campaigns in west as newspoll released
Opposition finance spokesman Mathias Cormann said “Labor’s constant tax increases’’ targeting super “are completely counterproductive because they make it harder for people to save’’.
The government points out that the Coalition, if elected, will scrap the $1 billion low-income super contribution scheme, which offsets tax paid on super contributions by low-income earners.
Ms Gillard campaigned with Mr Gray as the latest fortnightly Newspoll showed Labor had been severely punished for the events of last week in which Mr Crean demanded a leadership spill, Ms Gillard acceded, but Kevin Rudd chose not to run. As a result, five ministers and three whips, all loyal to Mr Rudd, were purged.
The Newspoll showed Labor’s primary vote at a lowly 30 per cent and the Coalition’s a heady 50 per cent. Just two months ago, the Coalition’s two-party-preferred vote was 50 per cent in the same poll.
Ms Gillard said she was not surprised. “I don’t need a poll to tell me that last week the Labor Party had an appalling week,’’ she said. “When we present to the Australian people self-indulgently talking about ourselves, there are consequences.’’

 

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High earners don't realise own wealth, study finds
 

Peter Martin, The Sydney Morning Herald, 25 March 2013
 

Survey shows hardening attitude to tax
The proportion of Australians who believe they pay too much tax passes 50 per cent for the first time, according to a survey by the think tank Per Capita.
Australia's high earners are surprisingly magnanimous when it comes to tax. Many think the rich should pay more. They just don't think that applies to them.
The two apparently contradictory positions spell trouble for Wayne Swan as he tries to wind back tax breaks in the May budget.
''We are talking about the top 4 or 5 per cent of earners,'' says David Hetherington, executive director of the Per Capita think tank.
''People earning more than $150,000 are generally well disposed to the proposition that high earners should pay more. Around four in every 10 thought that in our latest survey, but when we ask about their own situation the overwhelming majority think they pay too much.''
''It's as if they don't realise they are high earners,'' he said. ''When the Treasurer cuts back on their tax breaks they will complain because they don't think they are well off. Their complaints will be amplified in the media, to which they have better access.''
The annual Per Capita survey shows attitudes to tax hardening across the entire population, with the proportion of Australians who believe they pay too much tax passing 50 per cent for the first time.
''While there remains a belief that the well-off should pay more, there is a view that everyone else is paying too much. A lot of it seems to have arisen in the belt tightening that has followed the global financial crisis,'' Mr Hetherington said.
''Pensions, university fees, school fees, health insurance - these are all things that once the government would have looked after. There's a growing view that the government is no longer pulling
its weight and that people can use their money better themselves.''
About 85 per cent of those surveyed believe the government should spend more on health but the proportion has slid from 95 per cent over the past two years.
About 40 per cent believe the government should spend more on social security, down from nearly 70 per cent in the past two years. Support for spending on defence has dropped from 40 per cent to 28 per cent, support for overseas aid has slid from 18 to 10 per cent.
Asked specifically whether they would be prepared to pay more tax to support Gonski-style education reforms, 94 per cent of those surveyed said no.
''I am not saying the government shouldn't fund these things … ,'' Mr Hetherington said. ''But the survey suggests it will have its work cut out making the case. It'll be accused of starting a class war.''
 

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Study finds widespread ignorance about carbon tax
 

Peter Martin, The Sydney Morning Herald, 25 March 2013
 

Australians are so ignorant about the carbon tax that more than half think it has pushed up the price of petrol.
Nine months after its introduction 54 per cent of people believed the tax, which specifically excludes motor fuel, had pushed up prices at service stations. Most people surveyed also estimated that their cost of living had risen by $20 or more a week, while 5 per cent put the increase at more than $100 a week.
The government's modelling came up with $9.90 a week.
Asked about compensation, 49 per cent said they had received nothing at all, whereas the compensation package introduced with the tax applies to 90 per cent of the population.
''The findings point to an extraordinarily poor sales job,'' said David Hetherington, executive director of the Per Capita think tank, which commissioned the study.
''It looks as if people have noticed the tax cuts and the upfront payments at first, and then forgotten about them.''

 

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Restore the family wage by simplifying the tax system
 

Stephen Smith, The Conversation, 25 March 2013
 

Two changes are needed to the taxation and family benefits system to improve efficiency and achieve equity between families. The first step is to replace the current complicated family tax benefit payment schemes with a single lump-sum payment per child. All existing family allowances, childcare subsidies…
Two changes are needed to the taxation and family benefits system to improve efficiency and achieve equity between families.
The first step is to replace the current complicated family tax benefit payment schemes with a single lump-sum payment per child.
All existing family allowances, childcare subsidies, maternity allowances and other concessions for children in the current tax transfer system, should be replaced with a uniform, non-means-tested annual taxation concession, such as a tax credit or a cash allowance. If the payment is uniform, every family will receive the same monetary value per child.
The second step is to adopt an optional family-based taxation system. Income splitting, as it is commonly known, involves pooling family income for taxation purposes, with each family unit submitting a single tax return.
Family-based taxation is currently allowed in numerous OECD nations: the United States, France, Germany, Belgium, Greece, Luxembourg, Portugal, Switzerland, Iceland, Ireland, Norway, Poland, and Spain and the Netherlands. The rationale in each country is the same: the household, not the individual, is the basic economic unit of society, so the family should be treated as a single unit for taxation purposes.
There are several arguments for simplifying the tax transfer system. Firstly, the current means-tested tax transfer system, which is designed to alleviate poverty may actually entrench poverty, particularly at low income levels, where the system imposes large penalties for earning extra income.
Secondly, the current system confuses child rearing responsibilities with welfare. A single universal payment would recognise that the difficult work undertaken by parents to rear the next generation is of great benefit to society. The value of this work does not diminish as family income increases, so neither should payments that recognise that work.
Thirdly, the large bureaucratic structure set up to assess each family’s eligibility for tax transfers only exists because the current system is complex. The amount of Family Tax Benefit received is based on a complicated formula that takes into account both individual and family income and is difficult to calculate.
Other payments, such as childcare benefits, are even more complicated and virtually impossible for individuals to assess. This complexity creates a burden for many taxpayers, particularly those with limited English language skills or poor numeracy. In these circumstances, the operation of government programs is anything but transparent and therefore antithetical to good governance.
Finally, and arguably, most compelling of all, simplifying the tax transfer system will reduce the amount of what is known as fiscal churning, a mutually offsetting tax and expenditure flow, or in plain terms, spending tax revenues from someone to provide income and government funded services ‘back’ to that same person.
The main problems with churning are that it is associated with the development of a welfare mind-set that lowers self-esteem and individual responsibility and encourages political rent-seeking.
Churning also distorts economic behaviour via rules associated with both the tax and the transfer related effects, if the net value of the transfer is zero.
Another problem with churning is it requires significant administrative support at all stages of the process, particularly ones that are intrusive and complicated, for example, those that involve means-testing of payments.
Churning, from a purely economic perspective, is undesirable because it is a deadweight loss in that the transfers destroy resources needlessly while producing nothing that citizens can use or enjoy.
The marginal social cost of transferring one extra dollar in the US system may be as high as $3.50, and there is no reason to expect that transfers in Australia will be close to cost-neutral either.
Computer-based systems can reduce the administrative cost of churning by executing simple repetitive tasks efficiently but, unfortunately, the activities that generate the most cost in any business process are difficult to automate.
These activities include ongoing maintenance of highly complex computer systems, dispute resolution, and debt recovery. Simplifying the tax transfer system will help to eliminate these inefficiencies and therefore reduce both churning and the associated cost of administration.
Simplifying transfer rules and rolling transfers, such as family tax benefits, into the taxation system will cut churn dramatically. The existing family payment system already treats the family as a single economic unit, so administering revenue on this basis will merely simplify the existing system. For example, if revenue is family-based, some existing family-based payments could, in principle be abolished because they would be unnecessary.
From the government’s point of view, simplifying the tax transfer system should not just be cost-neutral, but actually provide significant costs savings. The total cost of the tax transfer system, including health and education, is in excess of $250 billion per year. Eliminating even a small proportion of churn from these programs would save hundreds of millions of dollars.

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Facts on tax defy voters' perceptions


Ross Gittins, The Sydney Morning Herald, 18 March 2013


Is Labor a big taxing, big spending government, as Tony Abbott and his Liberal colleagues claim, or has it been taxing us a lot less than the Howard government did, as Wayne Swan claims? As with many conflicting claims by pollies, it depends on how you interpret the figures.
In truth, the Libs always make such a claim against Labor because it plays into the electorate's deeply ingrained stereotypes about the strengths and weaknesses of the two parties.
Most people believe Labor is better when you want it to spend money helping you, whereas the Libs are better when you want them to keep taxes down.
But we need to come to a more evidence-based conclusion than that. On the face of it, it's easy to believe Gillard Labor is a big taxer when you remember it's introduced two major new imposts, the carbon tax and the mining tax.
But it ain't that simple because both taxes were part of packages where much of the proceeds of the new tax was used to cut other taxes. Money from the carbon tax was used to exempt certain export industries from paying it and to finance a small income tax cut for all individuals earning up to $80,000 a year.
The expected proceeds from the mining tax were used to fund a big instant tax write-off for small business, a refund of the tax on super contributions for employees earning up to $37,000 a year and to cover the loss to the taxman when compulsory super contributions are raised from 9 per cent to 12 per cent of wages.
So that argument doesn't wash. Going the other way, however, the Libs are right when they remind us that much of the cumulative $150 billion worth of ''savings'' Swan likes to boast about constitutes reductions in tax concessions rather than cuts in government spending.
Whenever Swan claims to be a lower taxer than the Howard government, the Libs reply indignantly that tax collections have risen hugely under Labor. As with so many of the claims politicians on both sides make, this is literally true, but calculated to mislead.
It's true that, from the total tax collections of $278 billion in 2007-08 (John Howard's last budget), collections first fell to $261billion in 2009-10 (thanks to the global financial crisis) but, on the latest best guess, are to rise to about $335 billion this financial year. That's a net increase of $57 billion, or 20 per cent, over the five years since Howard's last budget.
Convinced? You shouldn't be. Such a comparison looks worse than it is because it ignores the effect of inflation. If we subjected the Howard government to the same trick, we'd say tax collections increased by $163 billion, or 140 per cent, over 12 years.
No, we should, at the very least, allow for inflation and look at the real increase in tax collections. By my rough figuring, using the implicit price deflator for gross domestic product, the real increase in tax collections is about 10 per cent.
That's not too terrible over five years. But the usual way to evaluate the growth in taxes is to compare them with the size of the economy (measured by nominal GDP) at the time.
This is the way the Organisation for Economic Co-operation and Development and many other official bodies do it and was the way the Howard government was happy to have itself measured.
It represents a way of assessing the burden of taxation relative to the overall economy's capacity to bear that burden.
Doing it this way shows tax collections have averaged about 21per cent of GDP over Labor's five years.
By contrast, they averaged 23.4per cent of GDP over the Libs' 12 years, and a remarkable 24 per cent over their last six years.
This is the basis for Swan's claim to be taxing us more lightly than Peter Costello did, and the numbers are on Swan's side.
The truth is that Costello was our highest-taxing treasurer ever, although for much of his time he tried to hide the fact by pretending the goods and services tax had nothing to do with the feds.
In 2004-05 and 2005-06 tax collection reached a record 24.2per cent.
Of course, although politicians often like to pretend everything that happens in the economy happens because they made it happen, the truth is that much of what happens is caused by factors beyond their control.
A big part of the reason the Libs' raised so much tax is that they presided over the first half of the resources boom, before the GFC. And much of the reason Swan has taxed us more lightly is that some taxes haven't fully recovered from the GFC, the second half of the resources boom hasn't been as lucrative as the first, export prices have now fallen back a long way and, to make things worse for the taxman, the fall in export prices hasn't led to a fall in the dollar.
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OECD Enables Companies to Avoid $100 Billion in Taxes 
 

Richard Murphy, Tax Justice Network, 18 March 2013
 

That's not our headline, but Bloomberg's, at the top of a blistering and important story about the OECD, the club of rich countries that has for decades been responsible for setting the rules and guidelines for the world's international tax system.
"OECD officials “have been digging themselves deeper and deeper into a hole by blindly pursuing a mistaken approach that allows multinationals to avoid taxes,” said Sol Picciotto, an emeritus professor of law at Lancaster University in the U.K."
(Picciotto is a senior adviser to TJN,  and author of a report on unitary taxation that we published a few weeks ago.) The story by the indefatigable Jesse Drucker looks at many things, but one of the most important is the close, even incestuous relationship between the OECD, a quasi-governmental body, and the industry that is making billions out of the broken international tax system, "whose basic structures were devised a century ago," Picciotto's report said.
"The organization has long enjoyed a close relationship with industry. Its three top tax officials left in 2011 and 2012 to join firms that help companies avoid taxes by taking advantage of laws to move profits to locations such as Bermuda and Mauritius."
The revolving door is not limited to the OECD: it happens between Big Four accountancy firms and national governments the world over - but this is a particularly important one to note. And get this:
"While its 34 member nations -- primarily the U.S., Japan and European countries -- underwrite the OECD’s $460 million annual budget, tax-planning firms that advise multinational companies have contributed hundreds of thousands of dollars to sponsor its conferences."
With all this money at their disposal, they still have to compromise themselves financially in this way. It is all a rather shocking state of affairs. It is hardly surprising that our report noted:
"Although many experts do oppose unitary taxation, typically this is for reasons that do not withstand serious scrutiny, and which are largely due to vested interests in the present system. . . the complexity of the current system is highly lucrative for the large tax advice and tax avoidance industry including the Big Four accounting firms, and they naturally prefer to keep what they have."
The Bloomberg article does note that the OECD has recently shown its first signs of willingness to consider serious, deep-rooted reforms, and although we welcomed the spirit of openness to fresh thought in the OECD's recent BEPS (Base Erosion and Profit Shifting) project, we are under no illusions that the vested interests fighting against serious change have multiple hooks into the OECD.

And the Bloomberg story outlines one of those hooks.
"Companies are pushing back. General Electric Co. (GE) has dispatched its top international tax official to lead an effort to change the OECD’s proposed guidelines on mailbox subsidiaries. In November, the OECD hosted public hearings in Paris, where one corporate tax representative after another objected to the plans."
It quotes  Daniel Frisch, an economist at Horst Frisch Inc. in Washington: succinctly stating what we already know:
“Industry successfully leans on the OECD." 
It's also worth noting that blacklists can be useful when trying to figure out how to tackle tax havens. But these blacklists, of course, get gamed by OECD member states, who don't like being on the blacklists and have the political power to get themselves off. So, for example, this commentary by Jane Gravelle of the U.S. Congressional Research Service (CRS) notes:
 "The Organisation for Economic Cooperation and Development (2000) created an initial list of tax havens. . . .The OECD excluded some low-tax jurisdictions thought by many to be tax havens, such as Ireland and Switzerland."
The OECD later emphasised a black, white and gray list system for tax havens, focusing on their secrecy. Look at the latest version, from December 2012. The blacklist is entirely empty. And the gray list contains  . . . the financial giant of Nauru, and nobody else. All the other tax havens are clean!

On the positive side, street-level pressure in many OECD countries appears to be having results, and the possibility of real change now exists for the first time, not just with the OECD's BEPS project for corporate taxation, but also on secrecy, where the OECD has finally (after a lot of prodding) accepted that its next-to-useless system of 'on request' information exchange might not be quite so good as the far better alternative, automatic information exchange.

But progress will only be sustained if the street-level protesters, journalists, non-governmental organisations and other representatives of ordinary taxpaying citizens keep holding their feet, and their indivial governments' feet, and the companies' feet, to the fire.
 

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Can the ATO make tax appeal fair and independent: Analysis

 

Chris Seage, Crikey, 14 March 2013
 

He has only been in the job since January, but new Tax Commissioner Chris Jordan is shaking up the Australian Taxation Office and revamping how it handles disputes with taxpayers. Tax experts have applauded the move, but they remain sceptical of how truly independent the ATO will become.
Jordan, who is a former partner of accounting giant KPMG, has decided after years of political and industry pressure to create a new appeals division to provide taxpayers with an independent review of their cases in disputes to head off costly litigation for both the government and the taxpayer. At the moment, if you object to your assessment it's likely the auditors who made the original decision in your tax bill will have too much of an influence in the determination of the objection.
As Crikey revealed last year, senior ATO lawyer Serene Teffaha instituted proceedings in the Federal Court against the Tax Office. In her statement of claim she alleged a "tick and flick" attitude to taxpayer objections by ATO staff, who were issued with a formal target of ensuring objections to audit decisions were upheld in fewer than 20% of cases -- irrespective of merit.
In a speech to the Institute of Chartered Accountants last year shadow treasurer Joe Hockey said:
"If the taxpayer decides to contest a matter, their objection to the amended assessment will have to be examined by the ATO. It's that reconsideration of the issue at the objection stage that potentially puts the ATO into the situation of investigator and prosecutor. The team that has undertaken the audit and just issued the amended assessment is unlikely to come to a different conclusion when they look at the taxpayer's objection. There should be a completely new team that considers the objection. The perception that there may not have been a fair consideration of the matter needs to be addressed.
"To do that, the function of the audit must be separated from the second stage review that happens when a decision is to be made about an objection. The Coalition's intention is to make sure that this happens in the most administratively effective manner."
Hockey also raised the idea to completely move the appeals section out of the ATO into a different agency, recognising the audit function is different from an independent review.
Actor Paul Hogan and artistic collaborator John Cornell settled their eight-year dispute with the Tax Office over unpaid taxes last year. The pair's lawyer, Andrew Robinson, said any movement to get tax disputes into the hands of an independent body could only be a good thing: "A big problem with current procedures is that historically it has been very difficult to get the Tax Office to change their minds once they take a position despite compelling evidence to the contrary."
Hogan and Cornell reached a settlement following mediation before former High Court Judge Michael McHugh AC QC, who was brought in by both parties to break the impasse. One tax insider told Crikey: "If the Hogan matter didn't get into the hands of a mediator the dispute would still be going."
David Hughes from SMH tax lawyers needs to be convinced the Tax Office will provide a truly independent review, given ATO revenue targets and the fact staff will fall under the umbrella of the new appeals area.
"It looks like it is back to the future, as back in the '80s and '90s there was a separate appeals area and disputes used to drag on for years back then. I think there is also an acknowledgement that the current system is broken, and I think the ATO will need to look at compensating individual taxpayers that they have ruined with their action," he told Crikey.
But: "I think it's a good thing, and I think it shows the new Commissioner is listening and is prepared to come up with a solution to the whole dispute process."
Tony Greco, senior tax advisor at the Institute of Public Accountants, sees nothing wrong with the new approach. "Anything to speed things up and make the process more efficient can only be good. Sometimes the ATO go into battle with a revenue bias, so a fresh look at matters can clear things up," he said.
Teffaha feels vindicated with the new announcement. She told Crikey: "A compromised 'independent review' process was one of the key corporate risks identified in our whistleblower complaints back in March 2011.
"In my role as a senior objection officer, I was particularly concerned about the undue influence exerted over some cases at the objection stage by case leaders and senior technical leaders involved with audit. A big part of our struggle was the lack of guidance, procedures and training on how objections should be undertaken and the undefined boundaries in our relationship with original decision-makers.
"I am pleased that the aspirations set by the Taxpayers' Charter for a proper independent review, free from the influence of original decision-makers, is finally being taken seriously in the ATO."
 

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Gas guzzlers fuelled by shrinking petrol tax 
 

Paul Burke, The Conversation, 1 March 2013
 

An iron law of economics is that people respond to incentives. If the petrol price goes up, it should be of little surprise that consumers alter their choices at both the petrol pump and the car dealership. In a paper recently published in Energy Economics, Shuhei Nishitateno and I examine these responses…
An iron law of economics is that people respond to incentives. If the petrol price goes up, it should be of little surprise that consumers alter their choices at both the petrol pump and the car dealership.
In a paper recently published in Energy Economics, Shuhei Nishitateno and I examine these responses to changes in petrol prices. Our research uses data for 132 countries over the period 1995-2008.
Our results indicate that a 10% increase in the pump price of petrol on average causes a reduction in petrol use of around 3%. Petrol consumption is what economists call “price inelastic”. This means that while higher prices do reduce consumption, the response isn’t as big as it is for some other goods.
Part of the response to higher petrol prices is via vehicle choice. If petrol is more expensive, consumers are less likely to opt for a gas guzzler. A 10% increase in petrol prices typically results in a 2% improvement in the fuel economy of new vehicles. Our findings are similar to most previously published estimates, although are for a more internationally representative sample of countries.
Australia’s gas guzzlers
In the take-up of fuel-efficient vehicles, Australia remains near the back of the pack. Data from the International Energy Agency reveal that new vehicles sold in Australia on average guzzle more gas than new vehicles sold in Europe, Japan, China, or India. Australia performs only slightly better than the home of the SUV, the United States.
There are a number of reasons for Australia remaining in the slow lane in terms of adopting fuel-inefficient vehicles. One is that Australia is less cramped than most other countries: we have enough space to find a park for our four-wheel drives. Another is that, among developed countries, the tax included in our pump price is relatively modest. Our petrol taxes are lower than those for all OECD countries outside North America.
Shrinking excise
In 2001, the Federal Government removed the automatic indexation of Australia’s petrol excise, freezing the excise at 38.1 cents per litre. While we also pay GST on petrol, this decision has meant that the total tax we pay at the pump has not kept up with inflation. Fuel excise collections are expected to continue to fall in real terms.
Our research indicates that our falling fuel tax is slowing our take-up of fuel-efficient vehicles. The 2001 decision has also reduced the revenue available for transport infrastructure and other priorities. Shrinking excise revenues create increasing pressure on the government to look to other taxes to raise the revenue that it needs.
Using taxes to improve incentives
No-one likes paying tax. But almost everyone agrees that some taxes are necessary.
Economists typically argue that there is a special role for taxation of activities involving negative externalities. The congestion and emissions associated with road use are classic examples of negative externalities. As well as being a good revenue raiser, addressing negative externalities has been a part of the justification for fuel taxes both here and overseas.
In this context, there are opportunities to realign our road taxes to improve the incentives that road users face. One option is a return to indexation of the petrol excise. This would prevent the erosion of government revenue and strengthen the incentive to use petrol efficiently.
Another possibility is for the states to reduce stamp duties or annual vehicle registration fees and instead look to raise more revenue from congestion charges. Doing so would mean that those who drive at off-peak times, or who drive less, would make a smaller contribution to the government coffers.
The Henry Review threw its support behind a move to congestion taxes. The Review was less enthusiastic about fuel taxes, but did rate them as more efficient than major revenue sources such as labour and corporate income taxes (Chart 1.5).
Petrol subsidies overseas
Some countries provide large petrol price subsidies to consumers. In Indonesia, more than 10% of government revenue goes to subsidising fuel. Fuel subsidies involve a high cost, as they displace resources that could be used to build schools, hospitals, or roads. By encouraging fuel use, the subsidies also exacerbate Jakarta’s famous traffic jams and smog. The subsidies work against the Indonesian Government’s goal of a transition to more fuel-efficient vehicles.
Where is petrol cheapest? In Venezuela, you can fill up your car for just a couple of cents a litre. The result? Venezuela’s petrol consumption and road-sector emissions are high for a country of its level of economic development, and those who can afford it are more likely to buy fuel-hungry vehicles such as Hummers. It is hard to escape the iron law of economics.
 

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US Senate agrees tax increases
 

AAP, The Australian, 23 March 2013 
 

 

THE US Senate has narrowly passed its first budget proposal in four years as majority Democrats went on record favouring almost $US1 trillion in tax increases over the coming decade while sheltering domestic programs targeted by Republicans in the House of Representatives.
The Democratic plan also proposes to reverse automatic spending cuts that are beginning to strike both the Pentagon and domestic programs. It passed by a near party line 50-49 vote after senators working most of the night approved it in Saturday's pre-dawn hours.
The vote came after legislators considered scores of votes on amendments, many of which were offered in hopes of inflicting political damage on Democratic senators up for re-election in Republican-leaning states.
 

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Why tax reform can help reduce problem gambling
 

Charles Livingstone, The Conversation, 18 March 2013
 

GGambling provides Australian state governments with an average of 7.3% of their own taxes, about $5147 million, according to ABS data for 2010-11. Victoria (10.8%) and New South Wales (8.6%) earn above average from gambling taxes. Poker machine taxes comprise most of this (respectively 61% and 64…
Gambling tax reform should be a part of a gambling harm minimisation tax package.
Gambling provides Australian state governments with an average of 7.3% of their own taxes, about $5147 million, according to ABS data for 2010-11.
Victoria (10.8%) and New South Wales (8.6%) earn above average from gambling taxes. Poker machine taxes comprise most of this (respectively 61% and 64%). This is not because pokie taxes are draconian in their incidence. Rather, there are a lot of poker machines making a lot of money.
In Victoria in 2010-11, pub and club pokies generated net gambling revenue (NGR) of $2.7 billion. These machines provided just over $1 billion in tax, an average tax rate of 37.8%. In NSW, pokie NGR was $5 billion, with tax revenue of $1.1 billion, an average tax rate of 22.7%.
Australia’s gambling problems are overwhelmingly associated with poker machines, which account for over $10 billion p.a., or 55% of total NGR. Of that, about 40% comes from problem gamblers, and another 20% from “at-risk” gamblers.
Gambling revenue thus largely depends on problem gamblers.
The Productivity Commission made two major pokie-focussed recommendations about reducing gambling harm: the introduction of a mandatory pre-commitment system, and the reduction of maximum bets on poker machines to $1 per spin, reducing average losses to $120 per hour from the $1,200 currently averaged with $10 bets. These reforms have a reasonable evidence base (particularly the $1 bet) as the Productivity Commission demonstrated.
Either measure would reduce NGR. The question is: by how much? There has been some research into the effect of imposing a lower bet limit on Australian pokie venues. A 2001 study funded by the NSW poker machine industry estimated the loss at up to 39%. However, the basis for this estimate was that those betting over $1 per spin would suddenly stop using pokies, which is hardly credible.
A Tasmanian Parliamentary committee inquired in 2010 into a bill to impose a $1 bet. Tasmanian Treasury modelling using actual data estimated that the revenue impact would be around 20% on pokies in pubs and about 10% on club pokies. Data indicated that 82% or more of pokie bets were below $1, consistent with Productivity Commission estimates. Problem gamblers are much more likely than ‘recreational’ users to bet over $1, so the measure is well targeted. The Treasury model assumed that bets above $1 would be converted to lesser amounts.
My colleagues and I have adapted the Tasmanian approach to estimate the impact of $1 bets on Victorian NGR. Our adaptation involved dividing venues into low intensity and high-intensity segments, based on whether the NGR per pokie at a venue was above or below the median level of NGR ($83,000 pa). We applied a loss factor of 10% to low-intensity venues, and 20% to high-intensity venues.
About three-quarters of club venues fall into the lower intensity segment, as do about one quarter of hotels.
Our estimate is that the effect of a $1 maximum bet would be an 18% reduction in NGR in Victorian clubs and pubs, from $2.7 billion to $2.2 billion. This would translate into a tax revenue reduction of $235 million.
Former Australian Prime Minister Paul Keating once remarked: “never get between a premier and a bucket of money”. This principle suggests that effective reform will be resisted by Treasuries, wary of losing so much revenue.
Funding harm minimisation is important. It will require state governments to devise new gambling tax arrangements if they want to offset revenue losses. The tragedy is that Victoria recently had an opportunity to do just this – and failed.
From September 2012, the 20-year duopoly controlling Victoria’s pokies ended. Over that period, the duopoly extracted a chunk of the revenue, leaving pubs with 33.3% and pubs with 25% after paying gambling tax. When this ended, pokie entitlements were auctioned to venues, which now operate their own machines.
The auction process was a shambles, managing, in the view of the Auditor-General, to raise about $1 billion instead of the $4 billion the entitlements were reasonably worth.
New gambling tax rates are a bonanza to venues. Pubs now retain, on average, 59.1% of NGR, and clubs 76.6%. This represents an increase of over 130%. State tax revenue didn’t increase.
These windfall gains more than offset any increased operating costs.
The changeover provided the chance for government to maintain tax revenue, while implementing effective harm minimisation. The revenue pie might shrink, but would only have to be divided two ways, ensuring that neither of the remaining parties would lose. Victoria, as it has in the past, would have been a world leader in public health reform.
That didn’t happen. The lesson is that governments concerned about both maintaining state revenue and limiting harm need to carefully consider gambling tax reform as an integral element of any gambling harm minimisation package — and not to miss golden opportunities to improve the health and wellbeing of their citizens.
 

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Tax Havens: A Modest Proposal 
 

The Economist – New York, 15 March 2013
 

THE rampant use of tax havens by large companies to reduce their tax bills has been moving up political agendas. The G8 and G20 have called for action to curb the practice. They worry that the international network of treaties and rules designed to avoid the double taxation of multinationals has instead allowed them to enjoy widespread double non-taxation. The Organisation for Economic Co-operation and Development, which crafts international tax rules and guidelines, recently produced a report on profit-shifting and has promised to unveil firm proposals by the summer.
It is unclear precisely what the OECD will recommend, but it appears to be leaning towards patching up the existing framework rather than embracing an entirely new approach. Many independent tax experts—those who don’t work for multinationals—argue that this would be a missed opportunity, given how easy it has become to game the system.
Since our special report on offshore finance was published on February 15th, dozens of readers have written to us with suggestions for how to fix the problem. One of the most intriguing (and refreshingly straightforward) comes from Jeffery Kadet, a former tax partner with Arthur Andersen, who now teaches at the University of Washington School of Law. Mr Kadet believes the answer lies in adopting a “worldwide full-inclusion” system of corporate taxation, an approach that has received surprisingly little attention, given its merits. Here’s his proposal:
We see in the media almost daily items about the detrimental effects of tax havens in general and corporate profit-shifting in particular. Profit-shifting is the structuring by multinationals of their cross-border operations to minimise taxes imposed in both their home countries and the countries where they actually operate, and the movement of those profits through legal planning into subsidiaries in low-tax jurisdictions. The goal is to achieve “double non-taxation”: no tax in countries where operations and revenues occur and no tax in the company’s home country.
So successful has big business been at achieving this goal—and thus eroding the tax bases of both leading economic powers and developing countries—that the issue has shot up the agendas of the OECD, the G8 and the G20. All are looking for solutions.
Some solutions look like mere band-aids. Countries are urged, for instance, to tighten rules on “transfer pricing” of transactions between subsidiaries in different countries; or to strengthen their “general anti-avoidance rules”. Such rules might make profit-shifting a bit more difficult, but they won’t solve the problem. The same goes for country-by-country financial reporting, which would make profit-shifting easier to identify but wouldn’t eliminate the motivation to seek double non-taxation.
That motivation will only disappear if management knows that the group’s worldwide income will always be taxed, and that no amount of planning or developing complex schemes can avoid it. That is why the only real solution is to force current (ie, non-deferred) taxation on 100% of a multinational’s worldwide income, with no exceptions.
What mechanisms could accomplish this? One that’s sometimes discussed is “unitary” taxation, under which all countries agree to a formula that would allocate the worldwide profits of each company among the countries in which it has operations, employees, assets and revenues. Each country would then tax its allocated share at its domestic tax rate.
This approach has merit. However, it is hard to imagine countries around the world agreeing on an allocation formula, including rules covering details like where to locate valuable intangible property. Then there’s the Herculean effort of implementing the system through domestic legislation in each country. And unless all countries signed up, the system would likely result in some double taxation and some double non-taxation.
Fortunately there is another way forward, and it is one that could work even if adopted by less than all countries and in varying forms that reflect individual countries’ needs. It would require the countries that embraced it to abandon the “territorial” and “deferral” systems that have become popular and instead adopt a worldwide “full-inclusion” system.
It is time to digress briefly, to explain why the territorial and deferral systems have led to a frenzy of profit-shifting. Under the territorial approach, which has been widely adopted, countries exempt their resident corporate taxpayers from home-country tax on some or all income earned through business activities overseas. Under the deferral system, the home country taxes worldwide income, but for foreign subsidiaries the levy is delayed until the year dividends are declared or paid to the parent. And that declaration or payment may never come, meaning that the deferral can be permanent.
A multinational based in a country that uses the territorial or deferral system will find it hard to resist the temptation to employ cross-border tax planning and structuring to achieve two objectives: minimise or avoid tax in the countries where operations occur and/or revenues arise; and maximise income outside the home country (while ducking any measures the country may have adopted to counter erosion of the tax base, such as transfer-pricing or controlled foreign corporation rules). Where successful—and this is very often—the results are double non-taxation, a low effective tax rate, higher reported earnings, a higher share price and nice bonuses for executives with equity-based compensation. The incentive to engage in aggressive tax planning is clear.
So what is a worldwide full-inclusion system? And how would it significantly dampen a company's enthusiasm for profit-shifting?
Under this approach, each company’s home country would impose its normal corporate-tax rate on the group’s worldwide income. Importantly, this would include income earned by foreign subsidiaries, and deferral would not be allowed. A foreign tax-credit mechanism would prevent the double taxation that would otherwise occur from the same income being taxed once in countries where operations occur or revenue is earned and then a second time by the home country.
As a result, 100% of the group’s earnings would be subject to at least the home-country tax rate. Complex structures and schemes to move profits into tax havens would no longer be effective since even these offshore earnings would be swept up and taxed currently as earned by the home country. The motivation for such profit-shifting vanishes.
Can it actually be implemented? I believe it can, even though the trend over the past decade or two has been to move in the opposite direction, towards territorial systems. (Britain and Japan are two recent examples, with pressure to go territorial in America too.)
I'm optimistic for several reasons. First, outrage over the present system has been growing, strengthening the political will to do something to solve the problem. Second, a full-inclusion system only has to be adopted by countries that are home to the multinationals; there is no need for universal buy-in. Third, any country that adopts the system can choose the form of implementation and the tax rate; there’s no need for uniformity. Lastly, and very importantly, with the broadened tax base that such a system would create, there’s room for each adopting country to lower its general corporate tax rate. Such a reduction could help make local enactment politically acceptable.
To be sure, there’s plenty of technical tax mumbo-jumbo that would need to be worked out by each enacting country. Perhaps the biggest concern is that multinationals would be encouraged to redomicile in tax havens so as to minimise or avoid the home-country levy. But is GE really likely to move to Bermuda? In any case, rules can be crafted (and in some countries already exist) to prevent such an exodus. The OECD would need to provide guidance on these and other issues.
Some developing countries that offer tax incentives may have concerns about a full-inclusion system since these incentives may become less attractive to multinationals. On the other hand, with less motivation to shift profits, the multinationals that do business in the developing world will likely be paying more tax there.
Economists may have mixed feelings about a worldwide full-inclusion system. They often point out that taxation systems that focus on the “source” of income have a number of theoretical attractions. Some also argue that “residency” (ie, home-country taxation of everything) is not a great basis on which to build a tax system because place of incorporation and management and control, the most typical determinants of residency, can be easily manipulated. However, it is clear in today’s globalised world that the profit-shifting incentive created by “source”-based taxation systems is so strong that it far outweighs any theoretical benefits these systems might provide.
Moreover, there are other benefits of adopting the full-inclusion system. It should create a more level competitive playing field within each country among homegrown multinationals, foreign multinationals that do business there and purely domestic businesses. The last of these are at a big disadvantage under the present system because they don't have the same opportunities to reduce taxes using offshore structures. Under a full-inclusion system, there would be a more level playing field globally for multinationals from different countries as each would be subject to a minimum level of taxation as imposed by its home country. Competition will not be played out through which multinational is more creative or aggressive in its tax planning.
Another benefit is simplification. While the transition period could be messy, in the long run the new system would be more straightforward than today's tax labyrinth.
Finally, there would be a feelgood benefit. Multinationals stand accused of not paying their “fair share” of taxes. With a worldwide full-inclusion system in place, the home country’s tax rate, which presumably defines “fair share”, would apply to all. So, in the future, big companies could avoid being labelled as “immoral” or “unethical”, at least in regard to their taxpaying habits.
 

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Tax commissioner flags profit-shifting crackdown
 

ABC News, 14 March 2013
 

In his first speech since being appointed, tax commissioner Chris Jordan says he wants the ATO to take a more active role in the debate about profit shifting by international companies.
Speaking at a conference in Perth, he says Australia can learn from recent events which have played out between the British government and cafe giant Starbucks.
He says the ATO is working with treasury and key jurisdictions in the US, UK and Germany to better understand how to manage tax evasion issues.
He says profit shifting is threatening the Australian tax base and placing more burden on local companies.
"Hundreds of millions of dollars are at stake, if not billions, so therefore it's something as a community we need to look at," he said.
"This isn't just a technical issue, Australian businesses are saying to me, 'go and have a good look at this', because ultimately they are of the view that they are paying more tax than they might otherwise need to pay.
"Certain companies that have been spoken about have adopted very aggressive structures.
"So my comment to them is if you are going to have an aggressive structure in Australia, that will have a consequence."
Mr Jordan says he expects to start contacting companies in the coming month.
 

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Cameron calls for new tax to boost dole
 

Samantha Hawley, ABC News – AM with Tony Eastley, 13 March 2013
 

The outspoken Labor Senator Doug Cameron has called for a Medicare style tax to pay for a $50 a week increase to Newstart.
TIM PALMER: Six months from the Federal Election a senior Labor MP has called for a new tax to raise money to boost welfare payments.
The New South Wales Senator Doug Cameron wants a Medicare-style levy to pay for an increase in Newstart. He says Australian children are being forced into poverty because of the Government's decision to move single parents from the single parent payment to Newstart at the start of this year.
Single parents are between $60 and $100 a week worse off.
Senator Cameron also wants the mining tax expanded and a crack-down on the tax treatment of trusts to pay for a $50 increase to Newstart.
From Canberra, Samantha Hawley reports.
SAMANTHA HAWLEY: Canberra woman Beccy Walker is a single mother with two of her three children, a 12 and 11 year old boy, living at home.
Last fortnight she says she earned $699 from her job at a school canteen and received $7.50 in welfare.
BECCY WALKER: It's hard that you just can't sort of provide everything for them that they want.
SAMANTHA HAWLEY: Since being moved off the single parent payment and on to Newstart, Beccy Walker says she's been cutting costs where she can. And now only one of her sons can play football.
BECCY WALKER: Only one's going to play this year since I can't afford both of them to play.
SAMANTHA HAWLEY: An estimated 84,000 single parents are between $60 and $100 a week worse off since they were moved onto the welfare payment Newstart in January.
DOUG CAMERON: Forcing people into poverty is not a principle that I'm comfortable with in terms of the Labor Party.
The News South Wales Labor Senator Doug Cameron says the welfare change is driving Australian children into poverty.
DOUG CAMERON: I'm a bit like, you know, like Bob Hawke in this one - you know, no child should live in poverty. It's a great aspiration. It's a Labor aspiration. It's an aspiration that the caucus should pursue.
SAMANTHA HAWLEY: And you really do think that this policy is driving children into poverty?
DOUG CAMERON: There's no doubt about it.
SAMANTHA HAWLEY: Acknowledging the pressures on the budget, Senator Cameron says revenue could be raised via a Medicare style tax so the Newstart payment can be increased by $50 a week.
DOUG CAMERON: We should have a look at this whole rorting of trusts that, you know, skims, multi-millions if not billions out of the tax system. We should widen and deepen the MRRT. And we should look at some hypothecated taxes.
You know most Australians, if they thought that their taxes were going to making sure that kids are not in poverty, that they would be prepared to look at hypothecated tax, which is simply a Medicare type tax but for one specific purpose: that is to make sure that people can get a decent living on Newstart.
SAMANTHA HAWLEY: Do you think that that is a risky debate ahead of an election? Talking about tax increases ahead of election could be a risky strategy.
DOUG CAMERON: No I don't think it's risky in terms of if the tax is being expended on ensuring that children are not living in poverty, that they are not socially excluded, I don't think that's risky. I think that's a debate that Labor people should be out there having within the community.
TIM PALER: The New South Wales Labor Senator Doug Cameron speaking with Samantha Hawley.
 

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Jordan to set up independent tax appeals
 

Katie Walsh, Australian Financial Review, 12 March 2013
 

Taxation commissioner Chris Jordan will overhaul the way the Australian Taxation Office deals with taxpayer ¬disputes by creating an independent appeals division, a major change to the operation of the agency long sought by business.
Mr Jordan, a former NSW chairman and partner of KPMG, will also expand the Tax Office’s role in the design of tax laws, a step that may help avoid repeating recent bungles. These include the first version of the controversial mining tax and a merger loophole that threatened to blow a $10 billion hole in the ¬federal budget and required an urgent legislative fix.
“These are areas people have raised with me even before I started,” Mr Jordan told The Australian Financial Review ahead of his first major speech on Thursday.
“The main aim is about trying to provide clarity quicker, whether that’s clarity on new types of financial products or business transactions, on how new laws will be administered, or on dispute areas in audits or ruling requests.”
Mr Jordan, who started on January 1, is the first outsider to the head the Tax Office in its 100-year history.
The two main changes, which unwind decades-old Tax Office practices, address a perception that its appeals process lacks independence and it is removed from the federal government’s crafting of tax rules.
The planned changes were welcomed by businesses and advisers, who have long complained that audits take too long and that appeals are not decided by independent officers.
Search for executive to implement changes
Clayton Utz partner Niv Tadmore said the new appeals system would be vital. “It will assist in resolving disputes because independence is critical when you approach a tax dispute after the audit stage,” he said.
Mr Jordan is searching for a public servant or executive to implement the changes. They would become one of the three second commissioners who report to Mr Jordan.
“I want the absolute and clear focus of the new second commissioner for law, design and practice to be on making sure we have the best possible working relationship with Treasury, particularly in the practical design aspects of new law, as well as ensuring we develop timely and clear interpretation of existing laws and have effective and clear dispute resolution processes,” he said.
Mr Jordan wants to improve the Tax Office’s ability to explain publicly at a much earlier stage how it interprets and applies the law, reducing the uncertainty for taxpayers. “I want there to be a much clearer process around getting clarity generally,” he said. “Therefore this role needs to be absolutely focused on the more technical aspects of law design and practice.”
More detail will be announced when Mr Jordan gives his first speech as commissioner at a Tax Institute conference in Perth on Thursday.
Demand for a separate appeals area has escalated in the past year since the Inspector General of Taxation, Ali Noroozi, called for one at Treasurer Wayne Swan’s tax forum in 2011.
At the time, Mr Noroozi said it would “empower the ATO’s in-house legal section to independently assess the evidence and prospects of a case before progressing the matter to litigation”.
Hockey backs separate audit, review functions
He has agitated for one ever since, motivated by complaints from advisers and taxpayers of excessively prolonged appeals and a lack of independence by reviewing officers, who could be from the same team as the original auditors.
Opposition Treasury spokesman Joe Hockey also took up the cause. The separation of the functions of audit and review became one of his key policy promises in November.
Until 1994 the Tax Office had a separate appeals area. It was disbanded and broken into segment-focused compliance teams. The new division will have clear processes for objections and appeals and time objectives to ensure cases move along efficiently. The change would improve the system, Mr Jordan said.
Deloitte partner Ashley King, who worked at the Tax Office for more than two decades, applauded the changes.
“It does put the ATO on a similar footing to tax administrators in the UK and US,” he said.
“If you work in the Tax Office, it’d be a very good career path as well. It’d be interesting work.”
He said the government should create an additional second commissioner position to oversee objections and appeals, in line with Mr Noroozi’s recommendation.
“It would make sense to have them all together under one second commissioner, but to me it’s such a huge task,” Mr King said.
Criticised over excessive delays in law explanations
There is a history of Tax Office involvement in tax law design.
Legislative drafting was stripped from the Tax Office in 2002 and given to Treasury. While the Tax Office remained involved in the design process, it has faced harsh criticism for excessive delays in explaining its position on new laws and sometimes seemed to change its mind, leaving taxpayers crippled with uncertainty and making it appear distant from policy development.
Under the reshuffle of second commissioner responsibilities, the corporate services functions – including finance and internal audit – and Australian Valuation Office will shift to the second commissioner for technology and operations, Geoff Leeper.
The compliance role of the third second commissioner, long-serving Bruce Quigley, will largely remain the same. The new second commissioner for law design and practice is expected to start in July.
 

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ACOSS says close tax loopholes
 

Sally Sara, ABC News – PM with Mark Colvin, 11 March 2013
 

Welfare groups are calling on the Federal Government to close tax loopholes, rather than cut welfare payments for low income families. The Australian Council of Social Service says the Government could save up to $6 billion, by cracking down on tax avoidance and improving the way government welfare programs are targeted.
MARK COLVIN: Welfare groups are calling on the Federal Government to close tax loopholes, rather than cut welfare payments for low-income families.
The Australian Council of Social Service says the Government could save up to $6 billion by cracking down on tax avoidance and improving the way government welfare programs are targeted. ACOSS says steps must be taken to fund priorities, including an increase in unemployment benefits.
The chief executive officer of ACOSS, Cassandra Goldie, spoke to our social affairs reporter, Sally Sara.
CASSANDRA GOLDIE: We are proposing that in the May budget we finally address some of the major tax loopholes that remain in our tax system, private discretionary trusts, some of the very generous tax breaks associated with superannuation, and also capital gains and the tax treatment for some companies that are operating overseas.
We believe we can find in total almost $6 billion if we're prepared to tackle some of these arrangements which benefit people on higher incomes, all of which were touched on in the Henry tax panel.
SALLY SARA: Would these savings be enough to pay for what's regarded in your view as adequate increases in unemployment benefits?
CASSANDRA GOLDIE: It would certainly enable us to pay for the increase we need in the unemployment payment, but we don't believe our proposals today are the end of the story. We need to have an ongoing discussion about tax reform, how do we make sure that we sustain a tax base for the population size and for the kind of country we want to live in.
SALLY SARA: What about the eligibility for things like unemployment benefits. If there is going to be an increase in the payment, what about a reduction in the number of people who are eligible?
CASSANDRA GOLDIE: The unemployment payment right now is very tightly targeted. You almost have to be broke before you become eligible for it and we do believe that it's at its lowest now, that we can't be pulling back on that.
We need to understand that unemployment can happen to anybody and we need to make sure that if it happens to you, that you at least have enough to live on so that you can be out doing your bit to find paid work.
SALLY SARA: Why do you think those loopholes have been left open?
CASSANDRA GOLDIE: Quite clearly both of the major parties have been involved in proposals over the last terms of government which have been providing generous assistance, termination payments, capital gains arrangements for small business, tax breaks for seniors regardless of your asset arrangements.
All of these need to be revisited. We do need to make sure that we've got fairness in the system, simplicity in the system, but also sustainability and we can no longer afford to have the kind of very generous tax arrangements for some people who, despite their income, despite their wealth, are really able to minimise their tax.
SALLY SARA: What about so-called middle class welfare payments for children starting school and those sorts of payments?
CASSANDRA GOLDIE: We are looking at how we can make sure that the income support payments, including family payments and other arrangements, are well targeted. We don't have any proposals in our budget announcements today, but we do think we need to be looking at how should they be targeted to those people who need them the most.
SALLY SARA: Some of these payments electorally can be very popular. How much does politics play into this?
CASSANDRA GOLDIE: Well quite clearly politics, at one level, is everything, but we also think that governments should not underestimate the sophistication of the electorate. I think everybody in Australia understands that if you want services that are adequate, if you want to be secure in knowing that if unemployment happens to you, you'll be looked after, if you become old and you need care that you have care there for you, we need to have the revenue available to fund those kinds of services.
So there is a lot of inconsistency in the system right now. We need to be tackling those inconsistencies, and making sure that the revenue base is strong enough to fund the services that should be universal for everybody and those that are targeted to the people who really need them.
MARK COLVIN: Dr Cassandra Goldie, chief executive officer of the Australian Council of Social Service, speaking to social affairs reporter Sally Sara.
 

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Greens' big bank tax shot down 
 

Judith Ireland, The Guardian AU, 9 March 2013
 

TREASURER Wayne Swan has dismissed a Greens idea to impose a super profits tax on the big banks, saying it was not under consideration by the federal government.
Greens banking spokesman Adam Bandt has called for a mining tax-style levy on the big four banks, in which they would surrender a slice of their profits to pay ''a fair share back to the taxpayer'', in exchange for protection from insolvency.
The policy would mean a 20 basis point - or 0.2 per cent - levy on all bank assets above $100 billion and would therefore apply exclusively to ANZ, NAB, Westpac and Commonwealth Bank, which among them have loan books worth $1000 billion.
Mr Bandt said the plan was similar to levies imposed in Europe, had been fully costed by the independent Parliamentary Budget Office and would raise $11 billion over four years.
On Friday, a spokesman for Mr Swan shot down the Greens' idea. ''As we have said time and again, this is not something under consideration from the government,'' he said.
The spokesman said the Gillard government had introduced a ''comprehensive'' package of reforms to boost competition in the banking sector and empower consumers.
''Since we announced our reforms in December 2010, smaller banks have captured an estimated $21 billion in home lending business from the big banks. Our reforms mean there is a lot more banking competition now with around 2 million home loans to be completely free of unfair mortgage exit fees by the end of this year,'' he said.
Australian Bankers' Association chief executive Steven Munchenberg also hit back at the Greens' policy, saying it would cause banks to cut dividends to small shareholders. 
 

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Greens call for super tax on big four banks 
 

Mark Kenny, The Guardian AU, 8 March 2013 
 

A mining tax-style levy would be imposed on the big four banks under a radical Greens policy to make banks surrender a slice of their earnings in exchange for protection from insolvency.
It comes in the same week that a former Reserve Bank governor, Bernie Fraser, rounded on the big banks for, in effect, penalising customers with high mortgage rates while passing too much money to shareholders.
The Greens will argue that the rate of the proposed levy is in line with a recent International Monetary Fund assessment, which found the big four were ''systemically significant'' institutions which had a price advantage over smaller institutions when raising wholesale funding because they were ''too big to fail''.
The policy would mean a 20 basis point - or 0.2 per cent - levy, on all bank assets above $100 billion and would thus apply exclusively to ANZ, NAB, Westpac and Commonwealth Bank, which among them have loan books worth $1000 billion.
Deputy Greens leader and banking spokesman, Adam Bandt, said the plan had been fully costed by the independent Parliamentary Budget Office which found it would raise $11 billion over four years.
''The big four banks are making more from mortgages, dominating more of the market and enjoying record profits,'' he said. "It is time they paid a fair contribution for the public support they receive."
Ross Buckley, a professor of international finance law at the University of NSW, said while the formal wholesale guarantee during the global financial crisis had ended, the banks still benefited and obtained cheaper money as a result.
''The international markets know that even though there's not
the explicit guarantee of wholesale capital raisings any more … the Australian government is still there behind them,'' he said.
The budget office assessment found the levy would raise $15.8 billion over four years but the banks would pay $4.7 billion less in company tax.
That means their combined liability would rise slowly over the four years from $2.5 billion in 2013-14 to $30 billion in 2016-17.
The Greens proposal will put pressure on Treasurer Wayne Swan who is wrestling with a burgeoning deficit and has made much of getting tough on banks by increasing competition while having only peripheral impacts on the home-lending markets.
The Greens ended their formal alliance with Labor after it was revealed the mining tax had failed to reap significant funds.
Mr Bandt said the levy ''would improve bank competition, going some way to equalising the wholesale funding advantage government policy gives systemic banks over smaller institutions''.
Research director at the Australian Centre for Financial Studies Ken Davis said the levy had merit. ''Because of course we don't want to let them fail so, effectively, you end up with the government giving them an implicit guarantee.''
Professor Buckley said there was logic in directing the policy at the first-tier banks even though smaller institutions would probably be underwritten by the taxpayer.
''The reason to target the big four, and this again is in line with the IMF's reasoning, is the smaller Australian banks do receive a benefit in wholesale capital markets … but it's not nearly as big a benefit because it's not nearly as certain that there will be a bailout,'' he said.
''It's inconceivable that an Australian government would let National Australia Bank or Westpac collapse, because you'd have financial chaos.''
The big four had profits last year of $24 billion with a similar performance expected this year.
 

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Swan dismisses Greens' bank tax plan
 

Colin Brinsden, The Sydney Morning Herald, 8 March 2013
 

A proposal by the Australian Greens to have an additional tax on the profits of the big four banks already appears dead in the water.
Federal Treasurer Wayne Swan said he wouldn't consider such a scheme.
The Greens want a levy of 0.2 per cent on all bank assets above $100 billion in return for federal government guarantees, which the independent Parliamentary Budget Office has costed as raising $11 billion over the next four years.
The plan would only apply to the ANZ Bank, Commonwealth Bank of Australia, National Australia Bank and Westpac.
Greens deputy leader Adam Bandt says the plan mirrored a European Union levy based on International Monetary Fund recommendations.
"At a time when there's pressures on the budget, and the government is looking around for ways of raising revenue, especially in light of the failed mining tax, who can afford to pay it the most?" Mr Bandt told reporter in Melbourne on Friday.
"If we don't stand up to the big banks and the big miners, then Labor is going to come after the rest of us, like they have with single parents, and like they are threatening with the forthcoming budget."
He said everything Labor had done had made it easier for the big four banks to make bigger profits off the backs of consumers.
But a spokesman for Mr Swan dismissed the idea.
"As we have said time and time again, this is not something under consideration from the government," the spokesman told AAP.
He said the government had implemented a comprehensive banking competition package that allowed consumers easier movement between banks if they were not happy with them.
During the 2008-2009 global financial crisis, the government introduced bank guarantees to protect deposits and funding, which are estimated to bring $5 billion in fees for the government.
Similar measures were taken by other countries as a series of banks toppled in the US and across Europe.
The Australian Bankers' Association warned that if the Greens policy was adopted it would effectively amount to a tax on Australian's retirement savings.
The association's chief executive Steven Munchenberg said the majority of bank profits were paid through dividends to mum and dad shareholders and superannuation funds.
"Taxing banks' profits reduces those returns for working Australians saving for their retirement through superannuation accounts and to retirees who are increasingly dependent upon positive business profit growth," he said in a statement.
He said banks paid out a record $19 billion in dividends last year, seven per cent more than 2011, while over the past five years banks had paid out $82 billion in dividends.
Mr Bandt described the banking industry's response as "standover tactics".
"The average Australian pays much more in banks' fees and charges than they get back though superannuation schemes," he said in a statement.
The Greens' banks plan follows its proposal to close loopholes in the government's mining tax after it raised a mere $126 million in its first six months of operation.
Comment has been sought from the coalition, but support for the Greens' plan would seem unlikely given their opposition to the mining tax, which they have said they would scrap in government.
 

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The human cost of the bedroom tax
 

Amelia Gentleman, The Guardian, 8 March 2013
 

Tenants tell of agonising choice between leaving their homes and loved ones and making cuts to already tight budgets
When Dave Ireson, 57, realised he would be hit by extra payments for the new spare room subsidy of around £20 a week, he decided, after 30 years, it was time to move out of his family home. Since he lost his building job two years ago, the £80 weekly rent on the old three-bedroom house was being paid in full by the state.
He was reluctant to leave his home and his garden, but his children had grown up and left and he couldn't see how he was going to be able to meet the new weekly payment out of £89-a-week incapacity benefit, so he concluded downsizing was the most sensible response. Before Christmas he took a flat in what turns out to be sheltered housing 25 minutes' walk away, but because of the inconsistencies of the property market, the cost to the state of his new one-bedroom property is £113 a week. In his case, a policy designed to save money by forcing underoccupying tenants out of homes that are too big for them is costing taxpayers £33 a week more.
Pauline Gregory, 60, a former neighbour on the Bushbury Hill estate in Wolverhampton, is in the process of packing up the three-bedroom house where she brought up her children. Confronted with the prospect of paying a £20-a-week bedroom tax out of a weekly income of around £110 from April, she has also opted to leave ("I'm scrimping and saving as it is," she says); she will move around 100 miles away to Weston-super-Mare on 21 March. Her new one-bedroom flat will cost £97 a week, around £17 more than the rent on the family home where she has lived for 30 years, but this bigger sum will be met in full by housing benefit, since there will be no unoccupied rooms.
Both Gregory and Ireson are distressed at the upheaval that the new "bedroom tax" – which comes into force at the start of next month – has unleashed, and angry that their unwanted moves will end up costing the government more. Across this 1920s estate of 850 yellow-rendered houses, there are more than 150 households that will be hit by the policy. Some people are planning to move; others are calculating how they can meet the extra payments out of their already restricted budgets, so they can remain close to their families and roots. The estate managers have done a detailed audit of how families will be affected and warn that the tax will cause real hardship and an unprecedented churn among the area's usually stable population.
Gregory can understand the logic of freeing up a house which is too big for her, to allow a family with children to move in, but she resents being forced to leave, and is puzzled by how the enormous shift she is about to embark on will end up costing the state more. "It's stupid, isn't it," she says. The new flat has no garden, and she is leaving the vegetable patch she has worked on for three decades for new tenants. "This is what I'm going to miss," she says, examining her rhubarb, beetroot and strawberry plants. She was born on the estate, and is also saying goodbye to neighbours and friends she has spent a lifetime with. She is trying to be positive about the new stage in her life, but says she has been having panic attacks: "Pains across my chest and up my arms, wondering if I am doing the right thing or not."
Part of the problem on the Bushbury Hill estate is the design of the houses, which thwarts the logic of encouraging people to move on from homes that are too big for them. The vast majority of houses here have three bedrooms, around 100 have just two, and there are only 11 one-bedroom flats. Downsizing and remaining in the area is almost impossible. The estate figures high on national deprivation indices: about 43% of children here live in poverty and a high proportion of tenants receive benefits – even those who are working, because there is relatively little full-time work in the area.
Despite this, the estate is a popular place to live, there is usually little turnover of tenants, and rents are low. Once tenants are pushed out into the private rented sector, however, they are likely to encounter higher rents for smaller properties.
Bill Heywood, tenancy manager on the estate, believes this is a policy designed with the London property market in mind, where there is a chronic shortage of family homes and plenty of one-bedroom flats. "It doesn't work here," he says. He has been advising tenants for the past year about how to prepare for the new policy and with just three weeks to go, there is rising anxiety among those families affected. He is concerned that all the effort that has gone into making this a stable community, with little tenant turnover, will be undermined if long-term residents leave.
Overall, across the estate, the policy will save the government money, because for the moment, the vast majority of those affected are planning to stay, and will try to find the extra payments out of already tight budgets. Heywood calculates that if all the tenants stay put, the saving from the estate will be £117,429 a year.
"These are not people who can afford to save, so when the bedroom tax starts they will have to make cuts to other areas of their budget. I'm in no doubt that some of our tenants who do manage to pay their rent will go hungry at times. Others will fall into rent arrears and be at real risk of eviction and homelessness," Heywood says. A food bank has recently opened on the estate and is already busy.
The DWP says the policy makes for a fairer distribution of housing benefit, and a more efficient use of housing stock, freeing up homes for families who need them. It estimates the policy will save £930m over the first two years.
"It's only right that we bring fairness back to the system, when in England alone there are nearly two million households on the social housing waiting list and over a quarter of a million tenants are living in overcrowded homes," a DWP spokeswoman said.
Suzana Birakwiye, 54, has been living in a three-bedroom house with her son and her daughter, a few houses down from Pauline Gregory, since 2005. Her son has recently left home, which means she and her daughter are classified as underoccupying. However, since her daughter, who is 18 and has cerebral palsy, will remain living with her mother for the foreseeable future, and since their house has a through-floor wheelchair lift to take her to her bedroom upstairs, a wheelchair ramp to the entrance, and a wheelchair-accessible bathroom built out the back at a cost of around £20,000, the prospect of leaving the house is very unwelcome. If they stay, Birakwiye will have to pay an extra £11.59 a week, which she thinks will have to come out of her food budget.
She is worried about how she will find the extra money if she stays and how easy it would be to find another flat with similar adjustments. Finding any kind of property in the private rented market will be difficult; according to Shelter, under 50% of private landlords accept tenants on housing benefit.
"We talk about it – is it harder to stay or harder to move?" Birakwiye says. They remain undecided. Their dilemma reflects the difficulties being experienced by the families of 10 disabled and vulnerable children who this week issued judicial review proceedings against the secretary of state for work and pensions, Iain Duncan Smith, challenging the policy on the grounds that the regulations have "failed to take proper account of the needs of vulnerable children".
Around the corner, Peter Inscoe, 46, an unemployed sign-maker, is determined to stay in his house. He has 20 years of experience in the sign-making industry, and is also a talented illustrator, and remains reasonably confident that he may find new work. Born on the estate, he was allocated a three-bedroom house as a single person 12 years ago, at a time when there was little demand for the properties here. His rent has only been paid by housing benefit since he lost his job three years ago. If he finds work, and is able to meet the £80-a-week rent himself, he would no longer be under pressure to move.
Quite how he will meet the £20 bedroom tax out of his weekly jobseekers' allowance of £71 remains unclear. He is already frustrated by requests from his doctor to eat more fruit and vegetables to help combat his diabetes, pointing out that this is hard on his budget. He has decided give up his fortnightly bus pass (£23.30), which will make getting to job interviews more complicated because it is a three-mile walk to town. "I'll be stuck much more at home and I'm already climbing the walls," he says. "I'm going to have just under £51 to pay all the bills and buy everything I need. I'm going to cut down on food shopping. I'm dreading it."
Inscoe would rather eat less than move away from neighbours he has known all his life. He also points out that if he moved, most one-bedroom flats in the area would be more expensive, so the decision could end up costing the state more. "The government would have to pay for it because I wouldn't be underoccupying," he says.
He is also puzzled by why the pensioners who live in the houses around him are exempt from the tax. "If it was really about dealing with underoccupation, the government would be dealing with the biggest group of underoccupiers – the pensioners," Heywood says. "But it would be electoral suicide to start turfing out pensioners. It is politically expedient to tackle this area; it fits the scroungers and skivers agenda."
Another of those affected is Stacey Poulton, 21, a single mother with a two-year-old boy and a three-year-old girl. Nationwide, nearly a quarter of those to be affected by the tax will be single parents, according to government figures indicating that lone parents make up 150,000 of the 660,000 people who are expected to have their benefits reduced, by an average of £13 a week (£676 a year). Poulton lives in a three-bedroom house, and currently each child has its own room, but under the regulations, children of different sexes should share a room until they are 10 so technically they are underoccupying. If she could swap to a two-bedroom house, she would (not least because two and three-bedroom houses on the estate are exactly the same size, but have just been converted differently) but since there are so few two-bedroom houses in the neighbourhood, and since her mother, grandmother and great-grandmother are all neighbours, she has decided to stay put. From April she will be paying £44 a month in bedroom taxes.
The tax is a subject that has been troubling a lot of the mothers at the local children's centre. "Some of the mums are saying that they are going to have more kids just so they don't have to pay. It's ridiculous, but I think there are going to be loads of extra children because of this," she says.
David Scriven, 58, would also like to move to a two-bedroom house, and give up the four-bedroom home where he and his wife, Janet, brought up their six children, but he is also stuck because of the absence of two-bedroom homes in the area. Only their 17-year-old son remains living with them, so they are classified as underoccupying by two rooms, and if they don't move, they will also be charged about £21 a week. The couple are looking at home-swap schemes and are beginning to contemplate how they will dispose of belongings accumulated over 34 years of married life, in order to downsize. Janet is wondering how much it will cost to bubble-wrap all the glass ornaments, and the framed photographs of their six children at various stages of development which cover the wall.
Although both work, they only have part-time jobs; David has not managed to find a full-time job since 2002 when Schneider Electric, a local employer, laid off large numbers of staff, and is working part-time in the freezer department of the local Co-op; he has not been able to increase his hours, despite requests to switch to a full-time role. Janet works as a dinner lady at the local school. Their combined income is low so currently they receive housing benefit.
If they could find the money to stay there for a few years, until retirement age, the couple would no longer be obliged to move because pensioners who remain in the family home once their children have left are unaffected by the policy and can continue to underoccupy. As it is, they hope somehow to stay in the area, allowing them to remain in their jobs and be close to three of their children who still live on the estate.
"How are we going to pay our bills if we're down £84 a month? We have to find the money somehow or another because if we can't find it, we'll be threatened with the courts," he says, adding that the process has made him feel like jumping under a bus.
Dave Ireson, who moved before Christmas, says he has also been made to feel suicidal by the move from the estate where he had lived all his life.
He moved to a sheltered complex for the elderly and vulnerable 25 minutes' walk away. He is by some margin the youngest person in the block and feels so isolated that he has only left the flat five times in as many months. "They say come down to the fun room but you have to sit there with 80-year-old men playing bingo," he says.
He had hoped that the move would be positive, but he hates his new flat, and misses his old house. "It was my home. The house was full of memories for me; all my history was there; my friends and children are nearby," he says. "But I didn't want to be in a situation where I couldn't afford the rent."
He says his mental health has been damaged by moving. He describes Bushbury Hill as a "tough estate, but people are very close. There were people I could go and sit with.
"Here, you haven't got anybody around you to support you. It's not good for me here. I try to spend as much time as I can sleeping in the day, so I'm not sitting in this room all day," he says. "It's costing more for me to be here than when I was in my own home and happy."
 

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Comment: MRRT court challenge 'could backfire on miners'
 

Michael Crommelin, SBS News – The Conversation, 8 March 2013
 

Fortescue Metals' controversial challenge to the Federal Government’s mining tax began this week in the High Court.
Legal counsel for Fortescue argue the tax, which is under pressure for raising just $126 million in its first six months of operation instead of $2 billion originally anticipated, is unconstitutional.
But Professor of Law at the University of Melbourne, Michael Crommelin, explains that there is a possibility that the case may backfire on mining companies.
First what are the main arguments?
A: Two major arguments have been put forward. The first is that the tax is an unconstitutional interference by the Commonwealth with important state functions. The other is really a design argument: that a particular feature of this tax breaches a provision of the Constitution that prohibits the Commonwealth, in the exercise of its taxation power, from discriminating among the states.
Would both these arguments need to be accepted to overturn the tax?
A: No, either one would be sufficient for Fortescue to win, but the consequences that would flow from acceptance of each argument would differ. To understand this better, let’s look at the two arguments in turn.
First, the argument over the design feature of the tax, which is in a sense the narrower argument. The Minerals Resource Rent Tax (MMRT) allows mining companies to obtain a full credit against MRRT liability for state royalties that they’ve paid. The royalty regimes are different from state to state and much has been made in argument about the differences between the Western Australian and the Queensland royalty regimes – particularly relevant in this case.
The argument is that in allowing a full credit against MRRT liability for different state royalties the MRRT Act discriminates between states, because a mining company gets a bigger credit for royalties paid in Western Australia (where royalties are higher) than it would if the same operation were conducted in Queensland.
There are two possible consequences that could flow from acceptance of this argument. One is that this design feature is so central to the Act as a whole that the entire Act is unconstitutional. The other more limited consequence is that only the provision allowing companies to credit royalty payments against MRRT liability is unconstitutional, and the rest of the Act survives. In other words, companies would lose the credit allowance but remain liable to pay the tax…in fact, more tax.
So this argument could backfire on them?
A: Yes, it could, but that depends on whether the royalty credit provision is integral to the MRRT regime, or severable from it.
And the second argument?
This is a wider argument based on the Melbourne Corporation Case, which in 1947 established an important principle that the Commonwealth legislation can’t preclude the performance by the states of their constitutional functions within our federal system of government. The resources subject to MRRT, iron ore and coal, are the property of the states in which they are located and have been since prior to federation. Since the colonial era, the states have been responsible for the management of these resources. Fortescue Metals argues that the MRRT diminishes the capacity of the states to continue to manage these resources, contrary to the Melbourne Corporation principle. This argument is supported by the Attorneys General of Western Australia and Queensland, who have intervened in the case.
If this argument were successful it would be difficult for the Commonwealth to redesign the tax. It’s not a design problem; it’s a more fundamental problem about who has authority to do what within our federal system.
So in essence the mining companies are betting that the constitutional arguments are strong enough to bring down the whole thing, not just the royalty credit arrangements, while allowing the tax to survive.
A: Yes. The arguments are aimed at the entire MRRT regime, but those arguments may fail completely, leaving the regime intact, or may succeed only in bringing down the royalty credit arrangements, leaving the companies exposed to increased MRRT liability.
 

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Berkeley Councilman Proposes Email Tax To Save Post Office 
 

Harry Bradford, The Huffington Post, 8 March 2013
 

If the post office is going to go down, perhaps it should at least go down with a fight.
Gordon Wozniak, a city councilman in Berkeley, Calif., has proposed an email tax to provide much-needed revenue to the ailing U.S. Postal Service, local blog Berkleyside reports. The idea comes amid efforts to avoid the sale of a local post office building due to the service’s flagging revenue, both locally and on the national scale: In its latest budget year, the U.S. Postal Service lost more than $15 billion.
“There should be something like a bit tax,” Wozniak said, according to CBS Berkeley. “I mean a bit tax could be a cent per-gigabit and they would still make, probably, billions of dollars a year… And there should be, also, a very tiny tax on email.”
Wozniak told The Huffington Post that while not his own idea, the bit tax could bring in revenue to help a number of sectors, beyond just the post office.
"The internet being free gives it an advantage which is impacting the post office negatively," he said. "The bit tax is a pretty painless way to help even the playing field."
Wozniak’s proposal comes amid many other ideas to aid the Postal Service’s woes. The Postal Service itself has proposed ending Saturday delivery, while other options include ramping up junk mail delivery, advertising on the side of mail trucks and even a new clothing line.
As of now, there is one large factor standing in the way of the tax on email: It wouldn’t be legal until Congress allows the expiration of the Internet Tax Freedom Act in 2014. 
 

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Tax capital flows to tame dollar 
 

Henry Thornton, The Australian, 5 March 2013 
 

THE Reserve Bank meets today and interest rates will remain on hold. This is because there is no compelling reason to change them. Inflation remains within the target range, unemployment (as measured by the ABS) is low and the dollar is strong. Share prices are rising strongly, company profits are growing and house prices seem to be reviving.
Looked at by people with secure, high-paid jobs and generous defined-benefit pensions, the macro picture of Australia seems glowing.
But come down to the grassroots and the picture quickly seems less rosy. Jobs are hard to get and companies are cutting costs largely by cutting jobs. The cost of living seems to be rising inexorably. Home ownership looks impossible for all but the lucky young people who get one of those precious jobs.
Look a little deeper, if you will. We learn from recent news reports that Australian peach growers are destroying their crops because canners are preferring cheaper imported peaches. Another iconic Australian business, Rosella, is closing its doors/being purchased by a foreign buyer. And Nelson's Honey in Boggabri, NSW, has sold 900 of its 1000 hives because it is unable to compete with the high salaries offered by Whitehaven Mines.
Such stories are a constant part of the news cycle and who, pray tell, cares? Australian businesses, and in particular smaller businesses, are suffering. Competition at work? Yes it is.
But the heavily competitive, global economy, while offering expanded opportunities for gain, is also one where small economies (read Australia) may suffer longer-term negative effects, just as small businesses within Australia suffer from the greater efficiency of larger businesses.
The very strong Australian dollar is great for overseas travel but it is crushing Australian manufacturing and even parts of Australian primary production. There is an avoidable reason for lack of competitiveness of Australian industry, but this is not yet the subject of serious debate.
The powers, including to its credit the Reserve Bank, have at least conceded in public that the Australian dollar is overvalued. The dollar is slightly overvalued, so goes the story, with an implication that if necessary interest rates can be cut further.
The manipulation of interest rates within a deregulated financial system with a freely floating exchange rate is a tool that has been highly successful in achieving low and stable goods and services inflation in Australia. However, manipulation of interest rates cannot simultaneously be effective in both keeping inflation low and stable and controlling the level of the Australian dollar. As Milton Friedman said, "Monetary policy cannot serve two masters."
The purest economists say the answer is renewed micro-economic reform, raising productivity and restraining wages. I strongly agree that such reform is highly desirable, but it is not going to happen and it is certainly not going to happen soon. In the meantime, more jobs will be lost and more businesses will close down or be sold to overseas buyers. And serious economic reform would not necessarily make industry more competitive, as the Aussie dollar might rise as the reforms took hold. This is because relevant and successful microeconomic reform would make Australia an even more attractive place to invest, driving the Australian dollar higher and killing more businesses that cannot make it in a global economy where Australia becomes an even more highly successful player.
I question whether the Australian dollar is only slightly overvalued at present. Australia's productivity is perhaps 80 per cent that of the US. My crude logic says that perhaps the natural or equilibrium exchange rate is 80 per cent of the value of the US dollar. I may be challenged on this, but the standard view of "slight" overvaluation needs a rethink.
I am certain the Australian dollar is overvalued, and that if monetary policy is eased to help reduce the value of the dollar it will create other problems, as it did in the late 1980s, when such actions led directly to "the recession we had to have". Monetary policy is not equipped to get the Australian dollar back to where it should more realistically be, whether this is $US1.00, US90c or US80c.
This is a problem for government. Governments are elected to work in the interests of Australian citizens and it is time for the Australian government to consider alternative options for controlling the Australian dollar.
The global economy remains mired in a growth recession that is likely to be prolonged, making global business increasingly competitive as it makes many of its people miserable.
Last week a mere report that the US Fed was debating how to exit from current super-easy monetary policy caused a mini-panic in which US stocks plunged. The US government has since failed to agree on sensible plans to cut its unsustainable fiscal position, leaving the crude and damaging "sequester" to cut spending across the board. The eurozone is still struggling in recession, China's new government faces many challenges, and another global crunch is looking increasingly likely.
Australia will need to get many things right to do as well in the coming global crunch as it did in 2007-08. But we can do better than simply let market forces impose massive instability and uncertainty. The way to do better is to impose a variable tax on capital inflow. This should be implemented by the Reserve Bank, which would give it the power to maintain firm monetary policy without destroying large swathes of Australian industry.
 

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 Ministers urged to exempt foster carers from 'bedroom tax'


Haroon Siddique, The Guardian, 6 March 2013


Eleven children's charities have urged the government to reconsider the decision not to exempt foster carers from the controversial "spare bedroom tax", currently facing a legal challenge in the high court.
Under the new rules, due to come into effect on 1 April, fostered children will not be counted when assessing the number of occupants in a social housing property, meaning carers will have their housing benefit reduced.
In an open letter to the work and pensions secretary, Iain Duncan Smith, and the chancellor, George Osborne, published on Wednesday, the charities claim some foster carers have reported receiving visits and letters from their local housing department saying they will have to move into smaller properties.
While the government has given £30m to the discretionary housing payment fund, with £5m earmarked for foster carers, to help people deemed to be in exceptional circumstances, the charities say some people have been told they will not have access to it and others will not receive the full amount they lose in housing benefit.
The letter signed by the chief executives of the 11 charities, including Fostering Network, Barnardo's and Action for Children, says: "There is already a recruitment crisis in foster care with 9,000 new foster carers needed across the UK, and the government acknowledges and supports the urgent need to find more foster carers. These new rules will make it even more difficult for people in social housing to become foster carers at a time when we urgently need more to come forward.
"The government proposed these changes to address residential under-occupancy and to provide incentives for employment. Neither of these rationales is relevant to foster carers, who are required to have a spare room in order to provide homes for vulnerable children."
The government is already facing a legal challenge from 22 claimants, including 10 disabled and vulnerable children, who want a judicial review of the new rules, which stipulate housing benefit will only be payable on the basis that children under 16 of the same gender will share a room, and children under 10 will share a room regardless of their gender.
A Department for Work and Pensions spokesman said: "It's fair that we ensure social housing is used appropriately and that the state no longer pays for people to live in homes too big for their needs. However we've provided £30m to councils to ensure that groups like foster carers and disabled people are protected."

 

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OECD discourages tax breaks for pensions


 

Norma Cohen, Financial Times, 5 March 2013
 

Government programmes aimed at encouraging pension savings should steer clear of tax breaks that are most generous to high earners, says the OECD.
The global organisation also says governments should favour policies that offer subsidies in the form of matching grants to low earners who save.
In a report on Tuesday, the Paris-based group of rich nations said the design of private pension savings programmes was becoming increasingly crucial as governments shifted away from taxpayer-financed and employer-financed pension schemes, leaving individuals to shoulder more of the burden themselves.
“Under these programmes, individuals bear the risk,” said Pablo Antolin, chief economist and head of the OECD’s private pensions unit.
“That is why there has been so much of a backlash in most OECD countries.”
The OECD concluded that although member states have made progress towards improving the design of their so-called defined contribution programmes for private saving, there were still significant shortcomings, one of which was tax-related.
Because tax breaks offer generous benefits to the higher paid, they offer savings incentives to those who need them least.
Britain has cut the generosity of its tax incentives for the highest earners, setting what will be a £40,000 cap on annual savings and putting a limit on the size of total pension savings at £1.5m. But tax incentives are worth very little to those on the most modest earnings who are among those most likely to need additional pension savings.
One of the most significant shortcomings in many OECD pension schemes is that they do not encourage or require individuals to save a high enough percentage of pay to deliver a satisfactory income in retirement.
Annual savings of 8 per cent of pay for 40 years, the level set by the UK’s new auto-enrolment scheme, is only likely to deliver a target retirement income of 40 per cent of pay for those on the lowest incomes.
Higher earners need to contribute more in order to be able to replace 40 per cent of pay. Another way to increase the savings pot is to save for longer and to put off retirement.
While auto-enrolment schemes are a good way to encourage savings, the OECD has concluded that the most effective way to get people to save is to make it mandatory.
Other measures include the requirement for very low fee structures, the requirement for purchases of annuities that will protect people against the risk of outliving their savings, and improved financial education.

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It’s time to tax financial transactions
 

Katrina vanden Heuvel, The Washington Post, 5 March 2013
 

Moral of the story: What else is new?
On Friday at midnight, the sequester kicked in, triggering $85 billion in deep, dumb budget cuts that sent “nonessential personnel”— such as air traffic controllers — packing.
Not to worry, though: Wall Street’s day was pretty much like any other. Billions of dollars in profits were made off of trillions of dollars in financial transactions. And the vast majority of those transactions were conducted tax-free.
Crash the economy? Free pass. Prevent planes from crashing? Pink slip.
We don’t need a team of policymakers to tell us this isn’t good policy, or that it needs changing. But on Thursday, we heard policymakers propose exactly that: a change.
Sens. Tom Harkin (D-Iowa) and Sheldon Whitehouse (D-R.I.), along with Rep. Pete DeFazio (D-Ore.), unveiled a bill that would place a light tax on all financial transactions — three pennies on every $100 traded.
The good news is that it’s a tax so small it could be mistaken for a rounding error. It’s so small, Wall Street could easily afford it and the average E-Trade investor would barely notice it. If this were a tax on coffee, it would cost you $1 for every 800 cups you bought at Starbucks.
But there’s even better news. This insignificant tax raises a significant amount of revenue — $352 billion over the next 10 years, or enough to refund about one-third of what the sequester will slash from the federal budget. It’s also enough to put many air traffic controllers back to work, Head Start teachers back in preschools, and crucial government programs back in business.
As the saying goes, “Nothing can resist an idea whose time has come.”
And after years of Wall Street excess, and at a moment when new revenues are badly needed, the time has surely come for a financial transaction tax .
Indeed, support for such a tax has never been stronger — or broader. Many on the progressive left have long favored it . Now, though, another group of bleeding-heart liberals, otherwise known as the American people, is on board. When it comes to cutting the deficit, 6 in 10 Americans prefer taxing the financial industry to cutting social spending.
But this idea doesn’t just have the masses on its side; it has the elites, and even some Republican elites. Once championed by the granddaddy of liberal economics, John Maynard Keynes, the banner of a financial transactions tax has been picked up by conservative economists including Sheila Bair, George W. Bush’s appointee to the Federal Deposit Insurance Corp.
After all, the tax isn’t just a good revenue raiser. It’s smart regulatory reform.
The high-frequency traders that now dominate our markets would be hardest-hit by the tax. A top economist recently concluded that their lightning speed, algorithm-driven trading drains profits from traditional investors. And analysts fear that such mass trading strategies could lead to disaster if markets behave unexpectedly.
The new tax would discourage these kinds of trades, which would be a good thing.
Europe, at least, seems to agree. Eleven nations, led by the conservative German government, are on track to start collecting the tax by January 2014. Expected revenues: $50 billion per year.

 

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Bedroom tax: ministers given 14 days to make case against judicial review
 

Haroon Siddique, The Guardian, 5 March 2013
 

Legal challenge claims disabled people will be disproportionately affected by change to benefit rules.
 

A high court judge has given the work and pensions secretary 14 days to show why there should not be a judicial review of the government's "spare bedroom tax", amid concerns that disabled people will be disproportionately affected by the change in benefit rules.
A legal challenge against the benefit reduction has been launched against Iain Duncan Smith on behalf of 10 disabled and vulnerable children.
The claimants were hoping for a judicial review to take place before the tax comes into effect on 1 April but in the high court on Tuesday, Mr Justice Mitting said that was too short a timescale.
However, he indicated that if, after hearing the Department for Work and Pensions' grounds against the challenge, he was satisfied that the judicial review should go ahead, a full hearing could take place in early May.
At Tuesday's hearing, Edward Brown, representing Duncan Smith, argued the claimants could obtain relief through the £30m discretionary fund provided by the government to local authorities.
But Mitting, who said the case raises "significant questions of constitutional law", suggested the fund might not be deep enough – the National Housing Federation has suggested it is £100m short – adding: "It is deeply unsatisfactory to set out a set of very clear rules and then say in individual cases you may have to depart from them."
The challenge has been launched by 22 claimants – 10 children, seven parents and five other adults.
Under the new rules, housing benefit will only be payable on the basis that children under 16 of the same gender will share a room, and children under 10 will share a room regardless of their gender.
All 10 of the children in the claims fall into one of the categories and are expected to share a bedroom with siblings.
However, all have also been assessed as needing their own bedrooms – either due to disabilities, because they are at risk of violence from a sibling, or because of trauma experienced as a result of abuse and domestic violence.
The children include one who has Down's syndrome and three with autism. One boy has a rare and very severe genetic condition affecting the brain, Joubert syndrome.
Four of the children have been settled in their current accommodation having fled serious domestic violence and abuse. The National Autistic Society and Contact a Family have submitted witness evidence in support of the challenge.
 

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China’s most underrated sector benefits from an undersold tax reform
 

The Economist (Hong Kong print edition), 2 March 2013
 

IN DEMOCRATIC countries the tax code bends to popular pressures. In China it is more of an instrument of economic engineering. In 2006 the government removed the last of its ancient taxes on agriculture, hoping to narrow the rural-urban divide. Now it is reforming the taxation of services, aiming to boost a sector that creates more jobs, less dirt and almost as much output as industry.
The reform extends China’s value-added tax (VAT) to a variety of services (see table). Shanghai was the first city to take the plunge in January 2012. The scheme has attracted only a fraction of the popular attention paid to the city’s property tax, introduced a year earlier, but it has achieved far more significant results.
Unlike the property tax, which remains confined to Shanghai and Chongqing, the VAT on services has quickly spread to other cities and neighbouring provinces. Lachlan Wolfers of KPMG, an accounting firm, says he expects the reform to expand nationwide by the end of this year.
China’s government has long imposed VAT on tangible goods and the tax now contributes a quarter of its revenues. But services are instead subject to the so-called “business tax” (BT). This crude levy is imposed on the value of a firm’s sales. Unfortunately, that value reflects the cost of its inputs, which includes the tax charged by the firm’s suppliers. BT thus obliges service firms to charge a tax on a tax: they must charge it on the taxes already priced in to the supplies they buy.
In principle, VAT avoids this cascade. Firms charge the tax on their sales, as before, but when they hand over the proceeds to the taxman, they can claim an “input credit”, deducting the VAT they have themselves paid on their supplies. The tax falls only on the value added at each link in the chain of production.
China’s finance ministry boasts that the VAT has so far eased taxes by over 40 billion yuan ($6.4 billion). Small companies have enjoyed an average cut of 40%. In some cities firms can even apply for a partial refund if the test scheme raised their tax burden. But if a lighter tax burden was the ministry’s only aim it could have simply cut BT rates. The true test of the reform is not the revenue it forgoes, but the economic distortions it removes.
Unfortunately, the experiment is hampered by its incompleteness. Ever since Deng Xiaoping urged reformers to cross the river by feeling for the stones, policymakers have preferred to start innovations on a small scale. With VAT reform, this made sense. A big bang could have overwhelmed companies, which need to change their invoicing systems, and exposed local governments to unpredictable revenue losses, says Robert Smith of Ernst & Young, an accounting firm.
But VAT works best when it encompasses every link in the production chain. China’s small-bang reform is limited to seven services and a dozen localities. Since firms outside the scheme’s scope do not charge VAT, they cannot claim back any of the tax paid on service inputs. The experiment has, in effect, created cross-border transactions within China. And what if a mix of services—some subject to VAT, others to BT—is bundled into a single contract?
The loudest complaints have come from transport firms. They used to pay 3% business tax (many others paid 5%). Now they must pay 11% VAT (many others pay just 6%). They cannot deduct the cost of road tolls or insurance, says Teresa Lam of Fung Business Intelligence Centre, a research firm. And they can only deduct the VAT paid on lorries when they buy a new one. A trial limited to certain places was always going to create problems for an industry that carries things from one place to another. When VAT is extended to telecoms—perhaps as soon as July—Mr Wolfers hopes it will apply nationwide.
Despite these difficulties, the VAT reform is beginning to bear fruit. The tax’s predecessor encouraged firms to do things in-house to minimise the number of transactions subject to BT. The new tax allows a more natural division of labour. Steel firms are spinning off their transport divisions, according to China’s newspapers, and pharmaceutical firms are creating separate research units. China’s sprawling business groups can now create a single back-office for the entire group. If a company has 50 legal entities in China, it does not need 50 accountancy directors and 50 tax directors. These benefits will encourage the government to expand the scheme further. And the broader the VAT’s scope, the better it will perform.

 

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Heavy tax burdens drag down economic performance
 

Julie Novak, The Drum, 1 March 2013
 

Joff Lelliott's call for a debate about the nature, size and scope of government is welcome, writes Julie Novak. But while Lelliott pushes for a higher taxes, Novak argues that a heavier taxation burden imposes greater distortions upon the economy.
In his Drum Opinion column, Joff Lelliott calls for a better understanding of the relationship between the amount of tax collected by governments and what they can provide.
This does not seem an unreasonable ask at first glance.
However it remains incumbent upon all participants in the debate about the appropriate size and scope of government, including political aspirants in the forthcoming federal election, to state their positions in ways which help fully illuminate the key issues at stake.
Drawing upon OECD statistics as presented in the Federal Treasury's Pocket Guide to the Australian Tax System Lelliott states that Australia has a relatively small government collecting taxation revenues equivalent to 25.6 per cent of GDP, grouping it in a so-called 'super-low tax league' alongside the US, Chile, Mexico, Turkey and Korea.
Even taking the OECD data at face value, it should be noted the OECD comprises only a very limited basket of countries among the nearly 200 countries in the world, and several competitor regions in the Asia-Pacific, including Hong Kong and Singapore, impose lower taxation burdens on individuals and businesses compared with Australia.
There have been a long line of Australian classical liberals over the years publicly expressing their support for this country to move toward the lower-taxing environments of these two Asian powerhouses, and consequently toward relatively greater non-government infrastructure and services provision.
For good measure there are even institutional and policy attributes of our low tax league 'super-friends' that Australia should emulate, for example robust American competitive federalism or Chilean for-profit schooling.
It seems for Lelliott the amount of Australian GDP absorbed in taxation by Commonwealth, state and local governments is insufficient, and he accordingly provides a rough calculation of the additional amount of taxation revenue to be raised if Australia taxed at the OECD average of 33.8 per cent of GDP.
The magic (or should that be magic pudding?) additional tax revenue figure Lelliott estimates is 'well over $100 billion extra for governments to play with,' which could be used to finance proposals such as the NDIS and Gonski and an undefined 'more.'
Intriguingly, Lelliott suggests that Australia's overall taxation burden could be increased by 'far less' than the OECD average to cover NDIS, Gonski and 'more,' but does not provide further detail, presumably preferring that the political class have themselves a bigger economic muck-up day with more taxpayers' money to burn.
If readers suspect that something is amiss with Lelliott's analysis, in particular that higher taxing European nation-states haven't been necessarily travelling well in the economic growth stakes for a fair while, they are onto something.
That is because a larger size of government often reflected in empirical studies through the taxation-to-GDP ratio, or even the ratio of government spending to GDP which has to be financed through taxes anyhow, will harm economic performance even in relatively small-government countries.
An overwhelming number of cross-country studies over the past decade that accommodate econometric innovations and richer data sets, and which often include Australia in the empirical coverage, have found that a larger public sector is associated with slower economic growth rates.
For example, Andreas Bergh and Martin Karlsson in 2010 undertook a study of 29 OECD countries showing a negative correlation between government size and growth, controlling for economic freedom and globalisation.
In the same year two European Central Bank researchers, Antonio Afonso and Davide Furceri, took samples of OECD and EU countries to find, in their own words, that 'total revenue and total expenditure seem to impinge negatively on the real growth of per capita GDP.'
There are countless other peer-reviewed studies which demonstrate that relatively larger public sectors tend to economically bite the hand they feed from.
A related consideration ignored by Lelliott is that implied increases in existing tax rates, or the introduction of new tax technologies, to lift the Australian tax-to-GDP ratio toward the OECD average will have strong disincentive effects.
Politicians of all persuasions, and it seems Treasurer Wayne Swan is among them, often forget that increasing tax rates after a certain threshold will provide less revenue to the government due to Laffer curve effects, and are thus routinely frustrated when their grand taxing schemes do not come to expected revenue collection fruition.
More generally, the heavier the taxation burden the greater the economic distortions imposed upon the economy, as market participants seek alternative, sometimes lower value added, activities to escape the tax burden.
A debate about the nature, size and scope of government is most welcome, in the interests of encouraging an informed choice for voters in choosing between lower taxes and smaller government, or higher taxes and larger government.
However, it is difficult to share Lelliott's enthusiasm in believing that taxes can be increased with economic impunity.
Australians should think carefully about the electoral policy choices on offer and very carefully scrutinise big-spending ticket items, such as the NDIS and Gonski, which risk rendering citizens poorer in the long run.
 

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