The Senate committee hearings with testimony from high profile executives from some very large corporations have brought to notice the strategies to shift profits in order to avoid paying taxes in Australia.  The companies claim that they are acting legally.  The counter claim is that such manipulation of the law is unfair – it is not ethical.

I am not competent to deal with the all complexities on tax law or the international agreements that are relevant to this problem.  But even those who are competent do seem to suggest that there are problems largely arising from the failure of the law to keep up with changing technology in relation to the jurisdictional character of a nation state.  Trevor Boucher has provided such a contribution on this blog.

This is not a new problem.  The growth of large corporations in both Europe and the emerging US was greatly assisted by the introduction in law of limited liability for business corporations.  This change enabled the mobilisation of significant capital in order to undertake extensive enterprises.

Limited liability was a compromise on the part of the community in which the corporation was located to limit liability where it would normally have arisen in order to get things done for the benefit of the community.  However the internationalisation of business enterprises in the twentieth century has complicated the nation state basis of the location and operation of corporations.  This has been vastly accelerated with the growth of the internet and of information technology generally. It is not surprising that the IT companies Google and Apple are in the spotlight in the present debate.

Within nation states business corporations have gained significant influence on governments.  To some extent, we see that here in Australia but it is a trend that has advanced to a far greater degree in the US.  The capacity of the US government to secure legislation against the interests of business corporations is now very limited.

There is no ethical reason that should inhibit governments making laws that favour business corporations, or any other organisations such as unions, charities, or a multitude of other corporations as long as those laws serve a discernible good for the community which the government exists to serve.  Such tax concessions are in principle not much different from grants given to organisations or groups in the community.  Enormous subsidies to the car industry over the years have been justified on the basis of a benefit to the community.  That is in essence an ethical judgement.

Similarly grants to private schools, sporting bodies and a host of other community organisations are judgements made on the basis of a benefit to the community.  Not everyone agrees with every decision made by the government or particular ministers.  But that is part of the democratic character of the society in which we live.  People are free to seek to influence such decisions either to lobby for them or to campaign against them.  If they are to make a success of such endeavours they need to persuade either the broad community or those with authority to make decisions that their case is based on the benefit of the community.  That becomes an essentially ethical question – what is for the good of the community.

In the current debate there is some talk about whether the corporation is acting unethically – is the profit shifting for tax avoidance unethical, or in its more usual form in the debate is it unfair.  In a number of senses the corporation has some of the characteristics of a person – it can be sued for example.  It has a corporate memory, it has patterns of internal operating relationships that can be seen to be more or less attractive in ethical terms.  It can be seen to have a corporate memory, though like the memory of an individual that does not mean that that memory will or should determine future actions.  However it is hard to see the corporation as in itself an ethical agent in the same sense in which a human individual is.  Nonetheless it remains the case that the corporation is a complex set of internal and external relationships which are susceptible of ethical appraisal.

The key issue in the present situation is the decision making structure of the corporation, ultimately of the board.  In general board members are required to decide matters in terms of the purpose and well being of the corporation.  They are bound by what we might call an ethical obligation to the benefit of the corporation.  But as individuals they remain ethical agents who are not just board members but also citizens who belong to a community.  Their obligation to the corporation is secondary to their obligation to the community.

An analogous issue applies to the taxation laws of a country.  Significantly these are related to treaties the country has entered into in relation to taxation and trade.  Subverting the operation of those treaties is surely an ethically ambiguous activity.  In this sense the actions of Google and Apple, if they are indeed legal under our laws and treaties then it is difficult not to see them as thereby ethical.  If, however, those laws no longer satisfy the community benefit or fairness test then it becomes an ethical obligation to campaign to change them.

When they seem to us to be somehow unfair our options essentially are to work to reform the terms of operating, the law and the treaties.  Trevor Boucher has shown in his blog that this is not any easy task.

However I think there are two things that can be attempted that might enable a better judgement.  The actual facts of the law (see Boucher) and the details of what the companies actually do should be made transparent to public examination.  That at least would enable clarity of thought. I think it is entirely reasonable to seek to persuade the company to change its practices.  They don’t have to do what they are doing.  So bringing informed pressure on the relevant board members would be an appropriate strategy.

Clearly we need to persuade our government to address these issues and to seek to bring the law and the relevant treaties into line with the changed circumstances. Again there is nothing like exposure to public gaze.

In all this however we would be wise to recognise that Australia is a minnow internationally in this and we should expect the international giants to look after their own interests.

Bruce Kaye is an Anglican Theologian currently an Adjunct Research Professor At  Charles Sturt University. He previously taught a course on the rise and role of the business corporation at UNSW. He was formerly General Secretary of the Anglican Church of Australia. 

I certainly would not want to be seen as an apologist for multinational company groups in the current debate on what to do about profit-shifting tax avoidance activities of groups like Google and Apple.

But there are some significant legal/technical obstacles in the way of solutions.

Like other countries, Australia taxes each company in a group on the basis of where it is resident. An Australian resident is liable here on its worldwide income, but a foreign resident is taxed by Australia only on income with an Australian “source”. Put simply, profits have a source where the activity that generates the relevant income is located.

Our taxing rights are affected by the some 40 legally-binding (but terminable) tax treaties that Australia has with other countries. They are part of a world-wide net of such treaties, based on an OECD model. One key rule is that Australia can’t tax the business profits of a company resident in a treaty country unless it has a “permanent establishment” (PE) here. The concept of “permanent establishment” and the terms in which it is expressed –“ a fixed place of business”- were formulated in pre-information technology “old world” days of bricks and mortar, when there was a clear physical place where income producing activity was carried on.

In defined circumstances an agent in Australia of a foreign company could be a PE of that company, eg if the agent had authority to conclude contracts on its behalf. However with the availability and speed of technology, and no doubt readily available structuring advice, it is not difficult for groups like Apple and Google to so arrange things that their subsidiary that is drawing income from Australia does not have (for them) unwanted PE status.

The OECD /G20 is looking at this, with (as far as can be seen) attention being given to to patching up the agency rules. International consensus on changes, followed by bilateral or multilateral treaties and domestic enabling legislation is likely to be a drawn out affair. I am not holding my breath. How readily will the US sign on to measures that cause its companies to pay more foreign tax?

The UK (with a coming election) is going alone, despite OECD criticism, with its own “diverted profits tax” to address the exploitation of treaty provisions. Is Australia to follow with a similar unilateral approach? If one says that profits are diverted there must be a status from which the diversion takes place. If that status is determined by the existing “old world” tax treaties the UK approach might involve going around in circles. Also, each tax treaty has a standard provision that requires that its rules and limitations apply also to any later substantially similar taxes imposed in addition to the existing taxes.

On a different tack, let’s look at what a customer in Australia pays for an Apple device. We have been given to understand that this dealing is with a Singapore subsidiary that does not have a PE in Australia. Even if it did, only a small part of sales receipts would properly be taxable here. The devices are manufactured in another country and employ foreign- developed technology for which some royalty expense can properly be charged. Achievement of sales does not require a big marketing effort in Australia. We in Australia would think it inappropriate if China were to say that the whole or a substantial part of an Australian company’s receipts from the export to that country of Australian iron ore or coal was a profit made in China.

Turning to Google, if you place one of the ads from which it makes its money you are, apparently, dealing with a Singapore subsidiary that does not have a PE in Australia (see above).Courtesy of the technology you may be interacting with a computer or human being in another country/ countries. These days, that is not all that strange – when we ring up about a phone problem we can find that we are speaking to someone in the Philippines who can deal with it from there. A bank matter may involve use of a person in India. A daily newspaper finds it cheaper to have its sub editing done in New Zealand. In other words, use of overseas-located technology does not in itself speak of tax avoidance.

Coming at it another way, however, Google’s advertising service offered to Australians does have an Australian character. Technically though, it is a business profit shielded from Australian tax by the PE rule. In 1968, faced with a similar inability to tax know-how and other like payments we developed a new definition of “royalty” , gave royalties a statutory “source” in Australia where they are paid by an Australian resident  or are an expense of  a “permanent establishment” here. Without exception, we excluded them from the PE rule in all subsequent treaties.

The US itself, home to major multinationals, is necessarily part of any solution. A US parent is taxed there on foreign subsidiary profits remitted home as income, credit being allowed for foreign tax paid. Profits diverted into tax haven subsidiaries and not paid up to the parent are not taxed , although they are available for group use. In 1962, “controlled foreign corporations” laws were introduced to tax parents on income so diverted. (BHP has said that it pays our CFC  tax on income of its Singapore marketing company.) However, the US protective rules have major loopholes which Congress has not seen fit to close. Seemingly, the US prefers the extra tax-free clout that the loopholes give to their corporations over the contribution to its revenue that effective taxation would achieve.

Were the US to tax effectively, US groups would (because of availability of credit for foreign tax paid) have less incentive to avoid Australian and other foreign taxes.

The Government’s discussion paper would have us believe that a reduction in Australia’s company tax would lessen avoidance incentives. Well, for companies addicted to tax minimisation it would have to be a very big reduction. A reduction in our rate would do two things: for Australian-resident shareholders it would mean smaller imputation credits and thus more personal tax, while for foreign shareholders the benefit would accrue to them or the Treasury of their country.

It’s not easy.

Trevor Boucher was Australian Commissioner of Taxation 1984-93. This was followed by two years as Australia’s Ambassador to the OECD.

Senior executives of companies like Google, Microsoft and Apple have all admitted to the Senate in the last week that they have avoided billions of dollars of Australian tax by a range of devices such as transfer pricing and earnings made in Australia being diverted to Singapore which has a lower tax rate. In every case they have told us that it is all perfectly legal. And apparently it is. Other companies such as Westfield and News Corp have also received earlier publicity because of their massive tax avoidance. But it’s all been legal!

Michael West in the SMH on April 6, 2015 told us that Rupert Murdoch’s US Empire siphoned $4.5 billion from its Australian business, tax free. The Murdoch media complained to the rooftops about this report. It plays hard ball with all its opponents but really squeals when it is under attack.

Heath Aston  in the SMH on 1 April 2015   reported that according to the Australian Taxation Office ‘Australia’s biggest 900 companies claimed deductions and exemptions worth $25 billion last year – enough to wipe out two thirds of the entire Federal deficit.’  Yet many of these companies have been leading the charge that the government needs to show some backbone and fix the budget deficit. The Abbott government seems to prefer fixing the budget at the expense of the sick and unemployed.

Michael West in the SMH, who has been so persistent and effective in revealing tax dodging, told us on Feb. 13 2015 that documents obtained from the ATO under FOI show that ‘Australian corporation taxes are in crisis because of the explosion of tax haven dealings of multinational companies.. one of the most telling FOI finds is a comparison between trade and international-related party dealings. Together Singapore and Switzerland account for 40% of related party trade. That level of related party dealings bears little relationship to real trade’. As Michael West put it ‘In laymen’s terms the purpose of these related party deals is often to siphon profits out of Australia to avoid paying tax’.  Is this fair?

In the SMH on Feb.9 2015 Michael West estimated that Google ‘is making off with at least $130 million a year that belongs to the Australian taxpayer and rising’. Does that sound ethical?

Peter Martin in the SMH on May 13 last year revealed that 75 ‘ultra high earning Australians paid no tax at all in 2011-12’. Is that fair?

Michael West again in the SMH on 20 December 2014 reported that Glencore which has recorded revenues in excess of $10 billion p.a. paid only $400 million in tax over three years.

According to Roman Lanis of UTS the Westfield Empire paid an effective tax rate of only 8% over the last decade. With its chorus of lawyers and accountants, it was apparently able to make this legal. But was it right?

We hear a lot about dole-bludgers and welfare cheats but is all this tax minimisation fair and right?

The Tax Justice Network, in collaboration with United Voice, reported that 29% of Australia’s top 200 companies had effective tax rates of 10% or less. Even worse, 14% of these 200 top companies paid no tax at all. It estimated that these top 200 companies are avoiding tax per annum of $8.4 billion. These figures have not been seriously challenged.

These massive tax avoiders say that is all legal.  They have the benefit of expensive legal and accounting advice that ordinary tax payers cannot afford. Is that fair?

These major tax avoiders in collaboration with the Australian Taxation Office refused to have their affairs disclosed for public scrutiny. We are told it is ‘commercial in confidence’. Apparently the ATO thinks it should cosy up to wealthy companies and they will then hopefully cooperate. Does that same concern for taxpayers extend to ‘ordinary’ taxpayers?   There is a lot of unethical behaviour allowed for the powerful and wealthy which is not permitted for ordinary people and Australian companies, large and small.

We now also know that our four big audit firms are advising these tax-dodgers on how to minimise their tax. It is noteworthy that the European Union has recently enacted legislation curtailing the activities of audit firms who have been giving tax advice. Our ATO is apparently moving in the opposite direction by employing staff from the big four audit firms to replace the loss of experienced ATO staff. Talk about Dracula in charge of the blood bank! Michael West in SMH on 15 December 2014 described this quite bizarre action as follows “The ATO is running a pilot scheme whereby it outsources the duty of tax compliance for Australia’s largest companies to none other than the company auditor….The large taxpayers are to pay their own external audit firms.. read the Big Four… to conduct their compliance work as well as doing the audit’. It is hard to think of a more obvious conflict of interest than this.

The tax dodgers have clearly got many powerful friends amongst the political, business and professional elites. But they are friendless in the community. In March this year, Essential Research asked respondents how they felt about the tax being paid by various groups. They indicated that the following did not pay enough tax.

Large businesses- 60% did not pay enough tax.
People on high incomes- 59% did not pay enough tax
Mining companies- 67% did not pay enough tax
Companies- such as Google and Apple 73% did not pay enough tax.

In a panel of over 1400 readers of the SMH, 83 % agreed that the ATO should be free to name and shame companies suspected of not paying their fair share of tax. (SMH April 11-12 2015)

The same newspaper also reported that in a survey of marginal seats 90 % of people believe that the government has failed to tackle tax dodgers.

The Swinburne Leadership Institute Survey released today said that business leaders ‘are perceived to disregard .. the wider public good’.

The boards and CEOs of these companies have a heavy ethical and moral responsibility and dodging the issue by claiming confidentiality and that it is all legal will just not wash.

Corporations don’t make decisions. It is individuals who make decisions – and those decisions should not only be legal but they should also be fair and ethical.  That responsibility to act fairly and ethically cannot be avoided by individuals or deflected to someone else. Joe Hockey likes to infer that his business chums are ‘lifters’ but is it true of these tax dodgers!

There is difficulty in getting international cooperation to address this tax avoidance. A good start however  would be full disclosure including full disclosure of all subsidiaries, full disclosure of all related party transactions and balances and a breakdown of taxes paid in Australia and other countries. Jeffrey Knapp has outlined this in today’s The Conversation.

How can Tony Abbott seriously expect public support on necessary budged repair when we see such massive tax avoidance by large and wealthy corporations many of which are foreign owned.

Corporations have been given a privileged position in our society. It is called ‘limited liability’ in that shareholders can only be liable for the money they invest in a corporation and no more. That is an enormous advantage that has been conveyed by the community.  If and when a company goes bankrupt, the community, employees and creditors have to pick up a lot of the debts and consequences. But the advantage that we give to companies is obviously not reciprocated by many companies.

Business people should act in an ethical manner and not inflict damage on the nation for the sake of short-term commercial or personal gain.

These companies that are avoiding billions of dollars in tax in Australia take advantage of the infrastructure and services that have been paid for by the Australian taxpayer. They rely on highly trained and skilled Australian staff. Those staff have been educated and supported by Australian taxpayers.  In some instances, these companies have taken advantage of research grants – funded by the Australian government (and taxpayers).

There is also a matter of trust. As a community we need to have trust in our major institutions including corporations. In recent years the media has been full of comment about our loss of trust in politicians, parliament and political parties. But commercial institutions are also critical in our society and a major loss of trust in them has very serious consequences.

Many of our corporations are forfeiting our trust. We are getting into dangerous territory both for themselves and for ourselves.

The Abbott Government has promised a “comprehensive and inclusive” review of the tax system, but appears to have ignored a major issue: rising inequality of income and wealth, writes Mike Steketee.

The Abbott Government committed itself last week to a “comprehensive and inclusive” review of the tax system.

But the tax discussion paper it released to kick off the process does not find space in its 196 pages to canvass some of the major issues.

The rising inequality of income and wealth in developed nations has come into sharp focus in recent years but it does not seem to have made its way on to the Government’s radar, even though it is the tax system that potentially can play the largest role in influencing the trend.

Remember the Occupy movement that staked out Wall Street and spread to other countries? “We are the 99 per cent,” they said, pointing to the 1 per cent of Americans who held 40 per cent of the nation’s wealth. According to Nobel Prize winning economist Joseph Stiglitz, that was a rise from 33 per cent in about 1985.

The trend in Australia is the same, even if it is not as severe. On the latest figures available, the median net worth of Australian households – that is, their assets minus their liabilities – was 54 times higher for the top 20 per cent than for the bottom 20 per cent in 2011-12. That was up from 45 times higher in 2003-04.

If you prefer that in dollars, median household net worth increased from $27,508 to $29,600 over this period for those at the bottom, after taking into account inflation, while at the top it rose from $1.24 million to $1.59 million. That is a $2,100 increase compared to $350,000.

Bear with me for one more statistic: in 2003-04, 2 per cent of households had a net worth of $3 million or more – that is in current dollars, after adjusting for inflation. By 2011-12, that had risen to 3.1 per cent.

What we should do about such a trend is a value judgment. But hopefully the debate will go beyond declamations about class envy.

In his landmark study on inequality, Capital in the Twenty-First Century, French economist Thomas Piketty shows that the rate of return on wealth over most of history has run ahead of world economic growth. Although two world wars and a depression reversed the figures during the last century, he argues that all the signs are that wealth is increasing significantly faster than economic growth during this century and will continue to do so. He estimates 4-5 per cent for the rate of return on capital, versus barely 1.5 per cent for world economic growth.

It is a system that feeds on itself: the more wealth accumulated, the more that can be re-invested at relatively high rates of return. Piketty says world wealth per adult grew at an average annual rate of 2.1 per cent between 1987 and 2013 but at the very top it grew by 6.8 per cent. Bill Gates increased his fortune from $4 billion to $50 billion in the 20 years to 2010, according to estimates by Forbes magazine, while the French heiress Liliane Bettencourt saw her wealth increase from $2 billion to $25 billion.

Piketty calculates that if the top one thousandth of wealth holders achieve a 6 per cent annual return, compared to average growth of 2 per cent, the top’s share of wealth would more than triple over 30 years and represent 60 per cent of the world’s wealth. That is, not the top 1 per cent owning 40 per cent, as in the US now, but the top 0.1 per cent owning 60 per cent of global wealth. Such disparity, he argues, is hard to imagine under existing political systems “unless there is a particularly effective system of repression or an extremely powerful apparatus of persuasion or perhaps both”.

It may be that Piketty’s projections turn out to be inaccurate, as economic forecasts and projections often do. But he has documented in great detail a clear trend in rising inequality and there is little reason to think it will stop in the short term.

Back in Australia, the tax discussion paper argues that our income tax system is highly progressive – more so than most other developed countries and particularly when government payments are included. This is mainly because of Australia’s mean tested welfare system, compared to the flat rate social security contributions levied in many countries.

However, income tax has become less progressive in recent times, due mainly to the succession of income tax cuts during the Howard boom years. According to The Australia Institute’s Matt Grudnoff, only 3 per cent of taxpayers are in the top tax bracket now, compared to 13 per cent 10 years ago.

Nevertheless, the effect of a progressive income tax is to moderate the trend towards rising inequality of incomes. But it is a different story when it comes to rapidly rising wealth inequality. This is an area that is taxed very lightly in Australia.

The capital gain on the family home is not taxed at all, while that on other assets is taxed at half the rate of savings such as bank interest. Superannuation is taxed at a concessional rate that provides the largest benefit to higher income earners. The combination of the 50 per cent capital gains tax and negative gearing makes investment housing an attractive option for many, particularly higher income earners, while lower income earners are increasingly shut out of the market.

Unlike other developed countries, Australia has no wealth tax, inheritance tax or gift duties, although they potentially provide the most direct means of curbing rising wealth inequality. These options are given short shrift in the discussion paper – two paragraphs in 196 pages. “These taxes generate relatively little revenue,” it says. “…Furthermore, such taxes can be difficult to administer effectively.”

Piketty argues that the risk is that inequality in wealth will continue to rise unless there is some kind of global tax on capital. He says that a progressive annual tax on wealth at modest rates – for example, 1 per cent on wealth of between one and 5 million euros and 2 per cent above 5 million euros – would affect only about 2.5 per cent of Europe’s population but raise significant revenue – 300 billion euros, equivalent to about 2 per cent of total European GDP.

He concedes that the risk of evasion is high unless countries share bank information – something governments at least are talking about. But a progressive tax on capital would make it possible to avoid “an endless inegalitarian spiral” that he argues ultimately would undermine democracies.

If governments in Australia are not prepared to contemplate such a move, at least tackling the gross inequity of the superannuation concessions would be a start. Something approaching a political consensus appears to be emerging on this issue, although that is not to say it could not easily be derailed by the inevitable backlash from those affected.

Even agreement that superannuation should be used to fund retirement, rather than as a wonderful way to minimise tax and accumulate wealth to pass on to the kids would be a step in the right direction.

Mike Steketee is a freelance journalist. He was formerly a columnist and national affairs editor for The Australian.

This article first appeared in The Drum on 6 April 2015.

As a result of the lower iron ore prices there is a dramatic shake-up coming amongst our iron ore companies, the largest of which are foreign owned.

These companies conducted a vociferous campaign against the Resources Super Profits Tax. They were successful. As a result of the failures of the Rudd and Gillard Governments to effectively tax the mining companies, the state governments particularly of Western Australia and Queensland stepped in with very large increases in royalties. The Western Australian Government could hardly have believed its good luck in the royalties it extracted from the iron ore companies in Western Australia as a result of the China export boom.

But that has now all changed. The mining companies are stuck with these very high royalties whilst their profits have been reduced or eliminated. There is not much doubt that companies such as Fortescue would be now much better served if there had been a Resources Super Profits Tax rather than the large increases in state royalties that they continue to pay. Professor Flavio Menezes, Professor of Economics at the University of Queensland, said in The Conversation on 7 April 2015 ‘Fortescue Metal Group’s Andrew “Twiggy” Forrest was one of the most vocal opponents of the super profits tax. Fortescue’s financial position is currently under significant pressure due to falling iron ore prices caused by oversupply, and the slowing Chinese economy. Ironically, it would likely be better off today under a well-designed RSPT than under a royalties regime.’

In my blog of 17 October 2013, I pointed out the short-sightedness of the miners and the likely problems that they might face as a result of reduced profits and increased state royalties. See link below.

https://publish.pearlsandirritations.com/blog/?p=827 

I drew attention in that blog to the report of the GST Distribution Review of October 2012 that ‘Well designed rent-based taxes are likely to be more economically efficient than royalties, particularly in periods of low commodity prices or high costs. … Other factors, such as the size, variability and timing of the return received by government, as well as administration and compliance costs are also important considerations when choosing between alternative resource charging regimes.’

Guest blogger, Dr Michael Keating in a post ‘The mining tax debacle’ of 14 September 2014, commented that what was surprising is that the Labor Government did not elect to just extend to all minerals the existing Petroleum Resource Rent Tax (PRRT) which also had a 40% tax rate. This would have been much easier to explain and as acknowledged by the Henry Review, the PRRT can approximate the impact of the Resources Super Profits Tax.  See following link to Michael Keating’s post.

https://publish.pearlsandirritations.com/blog/?p=2424

An appropriate mining tax regime is still a matter than needs addressing in Australia. The efforts of the Rudd and Gillard Governments were clearly in the right direction, but very badly managed. The miners took advantage of their lobbying power. Their action seemed to be of great benefit to them at the time, but many miners now and in the future will pay a heavy price for a failure to set up an appropriate taxation regime for miners in Australia.

The miners are very likely to lament their action in destroying the Resources Super Profits Tax which was levied on profits. In its place, they have been levied with very high royalties by state governments which do not have a direct relationship to profits.

Despite the booming café and restaurant industry, the special pleading by employers on penalty rates and minimum wages goes on and on.

Employers seem to have little appreciation that there is a difference between the market and society. The latter is much more important. The right to a decent wage and time off for recreation and relaxation with family and friends is essential. Markets are important, but they are a means to an end.

Speaking of penalty rates, Peter Martin in the SMH  said ‘This Easter give thanks for penalty rates, they keep us human. Easter has become sacred even for the non-religious and the non-Christian.’

Many employers who call for cuts in minimum wages or penalty rates have little appreciation of the difficulties for low income earners. Attacking the low paid is easy pickings.

Workplace researcher Professor Barbara Pocock warns that cutting weekend penalty rates will erode the time Australians spend on informal relationship building with friends, family and neighbours. As soon as we take that wage premium off we make all time the same and we will see a lot more squeezing of that informal social time on Saturdays and Sundays.

One of Australia’s great achievements in nationhood was in 1907, the living wage. But employers keep pleading that minimum wages are too high and they should be reduced to increase employment and presumably profits! But there is no conclusive evidence to support that proposition. Late last year more than 600 US economists, including seven Nobel Prize winners, signed an open letter to Congress calling for an increase in the minimum wage. They said that the weight of evidence showed that increases in the wage had little or no negative affect on the employment of minimum wage workers.

The Chamber of Commerce and Industry in Australia has recently been encouraging businesses that were closed over Easter to put signs in their window saying that it was because of penalty rates that they could not open. The Small Business Minister, Bruce Bilson, repeated this line of special pleading.

These businesses must have decided to enter business knowing what the penalty rates were. Didn’t they factor that in to their business plans?

I suspect that a lot of special pleading on penalty rates is to divert attention from bad business decisions. It is so easy to blame ‘the system’ rather than acknowledge one’s own business mistakes.

In the last five years, spending at restaurant and cafes has climbed 36%. According to the ABS in 2013-14, the net growth in the number of cafes and restaurants was 7%. For all businesses it was 1%. The café and restaurant business is booming, but still the sector keeps complaining about penalty rates.

Employers who keep up their special pleading on minimum wages and penalty rates should really address the way they run their own businesses, and not always want to get the system changed to their advantage. They need to stick to their knitting.

If the last 20 years has taught us anything about industrial relations, it is that continual change is costly for all concerned. In 1993 the Keating Government abandoned our centralised IR system. In 1996 Peter Reith downgraded the role of IR tribunals. In 2005 John Howard gave us Work Choices. Then in 2009 Julia Gillard gave us the Fair Work legislation. Now the present government wants more changes. But what we really need is more stability in our industrial relations framework because in the end good relations at the work level are necessary to improve productivity, effective local management and employee participation.

The vested interests that want to cut penalty rates claim that we have an inflexible labour market that results in high wage costs. But all the evidence is that the annual rate of wage growth has declined substantially and that our labour market is showing considerable flexibility.

Clearly we need to review penalty rates and minimum wages and all industrial relations from time to time but we seem fixated with the need for change and more change, mainly for ideological reasons or perhaps to hide business failure.

Whilst employers and governments continue with their special pleading on penalty rates, the attitude of the public is very clear. According to Essential Research in January this year, 81% of voters think that people who are required to work outside normal hours should receive a higher hourly rate. 68% said that they would oppose cutting weekend and public holiday rates for hospitality and retail workers.

The public seems to have good sense in these matters, which employers and the government would be wise to heed.

According to the Government its first objective for tax reform is lower taxes. A responsible government would, however, first consider what revenue will need to be raised to efficiently fund the sorts of services that our society expects.

Of course, opinions may differ on what level of service provision is appropriate, and how it should be paid for. Unfortunately the various Intergenerational Reports and the Government’s decision to abandon its own Budget do not install confidence that lower taxes are in fact realistic.

Instead, given our present Budget deficit and the consistent projections of future deficits, it would be prudent to approach tax reform with the objective of restoring the present low ratio of taxation to GDP and even increasing it modestly in the future. Indeed, neither of the previous major tax reform packages in 1985 and 2000 reduced tax revenue, but instead they changed the tax mix, and in reality that is what we probably can expect from any future tax reform package.

In considering any changes to the tax mix, as the Treasury Tax Discussion Paper points out, we should seek to balance the core principles of efficiency, equity and simplicity as briefly discussed below.

A more efficient tax system

The Government’s starting point for a more efficient tax system seems to be that our system relies too heavily on direct taxes on income and not enough on indirect taxes on consumption and other immobile factors of production such as land. But if we allow for various forms of compulsory social security contributions plus payroll taxes then direct taxes in Australia comprises around 63 per cent of total taxation in Australia compared to the OECD average of 61 per cent, which suggests that our balance between direct and indirect taxation may well be sustainable.

However, what probably most concerns the Treasury is that our company tax rate at 30 per cent is higher than many other countries, and with the exception of the United States (whose company tax rate is close to 40 per cent), other countries have been reducing company taxes. Indeed, the Executive Summary to the Discussion Paper (probably written by Mr. Hockey) goes so far as to make the unsubstantiated claim that

‘each additional $1 collected by way of company income tax reduces the living standards of Australian households by around 50 cents in the long run because of reduced investment. This impedes Australia’s productivity and, in turn, reduces opportunities for better paying jobs’.

Living standards are of course determined by productivity and common sense suggests that company tax would cause nothing like a 50 per cent reduction in productivity. Instead Treasury estimates that the marginal excess burden of company tax is 50 per cent, presumably because around half of company tax is passed back into lower wages and forwards into higher prices.  But this ability to pass company tax on makes it less likely to inhibit investment and productivity.

Furthermore, because of dividend imputation, dividends paid by companies are much more lightly taxed for Australian residents than in most other countries. This means that the argument for a lower company tax really is primarily about what is necessary to attract foreign investors. But experience suggests that the returns on investment in Australia are sufficient, and that there has been no problem in attracting foreign investment, notwithstanding our higher company tax rate. Indeed, it is arguable that there has been too much foreign investment, which has pushed up existing asset prices (for example in property), and that this increase in Australians’ wealth has actually led to lower savings and investment by Australians themselves.

A proposal floated in the Discussion Paper is that dividend imputation should be scaled back or even dropped, presumably to help pay for a lower company tax rate. This proposal would effectively mean raising the taxes paid by Australian investors in order to finance lower taxes for foreign investors. But it is hard to see why Australians would want to back that, especially when it appears to be quite unnecessary, and when as Treasury used to believe, there are considerable merits in our system of dividend imputation.

The other major issue of tax efficiency I want to comment on is the taxation of savings. As the Treasury states:

‘Australia’s tax system treats alternative forms of saving differently. At one end of the

spectrum, savings held in the family home are taxed at average effective tax rates

approaching zero.  At the other end of the spectrum, savings held as financial deposits are taxed at full marginal rates, without any recognition for the costs of inflation.’ 

The policy rationale for these differences in the tax treatment of savings is not always clear, and they can distort the allocation of investment. In particular, the real estate market has probably been distorted in favour of investor housing by the incentive provided by the 50 per cent discount on the taxation of capital gains, and some would also argue by the possibilities of negative gearing. Removing that 50 per cent capital gains discount, or at least reducing it, would reduce housing demand, thus releasing more savings for other productive investments, and the lower housing prices would help first-time owner-occupier buyers.

A more equitable tax system

The proposal for improving equity that seems to be gathering support is to scale back the tax concessions for investment in superannuation funds. Some concession is justified because of the compulsory nature of superannuation savings and the fact that they cannot be accessed before retirement age.

But the rate of the superannuation concession is about four times as high for people on the top marginal tax rate as for people on a zero tax rate, and more than half the value of these concessions accrues to the top twenty per cent of income earners.  So some scaling back in these concessions for superannuation and also the concessional treatment of capital gains should be a priority. In addition these changes would improve efficiency of the tax system.

The other change that I suggest will need to be introduced some time to improve equity is a reconstruction of the income tax rate scales to offset the effect of bracket creep as incomes rise over time. As the Treasury Discussion Paper points out unchecked bracket creep affects lower and middle income earners proportionally more than higher income earners. For example, present projections of earnings show that if the present income tax rate scale is maintained over the ten years from 2013-14 to 2023-24, the average tax rates for different multiples of average full-time earnings can be expected to rise as follows:

• half average full-time earnings by 7½ percentage points
• average full-time earnings by almost 5 percentage points
• twice average full-time earnings by less than 4 percentage points.

In addition, someone earning full-time average earnings could expect to enter the second highest tax bracket as soon as 2016-17.

The Treasury Discussion Paper raises the possibility that these projected changes in average and marginal tax rates facing ordinary workers may affect their participation rates and thus the efficiency of the tax system. How far that is an issue is a moot point. Furthermore, the evidence suggests that there are other more important factors influencing workforce participation for those most at risk.

Nevertheless, these presently projected changes in average tax rates would clearly affect the progressivity of the income tax system and for good equity reasons the income tax rate scale should be adjusted in time to maintain the system’s present progressivity. One way would be to index the rate scale, but that does lock in government, arguably to an undesirable extent. On the other hand, if changes to the income tax rate scale are to be discretionary, they should still be factored into future fiscal planning.

A simpler tax system

One indication of the complexity of the Australian tax system is that Australians are more likely to use a tax agent to complete their tax return, and our businesses spend a lot on compliance and also on financial planning to avoid taxation.

A good way to achieve a simpler tax system would be to reconsider many of the present concessions. Indeed one reason for many of these concessions is that they are less transparent and less subject to review than Budget outlays, although their rationale is typically no different. They should be subject to the same level of scrutiny as the outlays.. So given the need for restoring the ratio of revenue to GDP and even a bit more, probably the best place to start would be with a genuine review of the various tax concessions.

Conclusion

One of Australia’s leading tax experts, Greg Smith, argued in an article posted here on 4 April, that Australia has a broadly effective tax system but some tidying up is now needed to restore the performance levels of the early 2000s. I would generally agree with this conclusion, although I might go a bit further if, as I expect, additional revenue will be needed to restore a modest Budget surplus and keep it there over the long run.

The priority for change to achieve the necessary increase in revenue will be to scale back the tax concessions, starting with the superannuation and capital gains tax concessions. In addition, the recent Intergenerational Report assumes more income tax revenue through bracket creep than is really desirable, and avoiding that will most likely require alternative sources of revenue.

The obvious additional revenue resource is the GST, but as recognised in the Discussion Paper, reforms involving the GST raise major questions regarding the future of federalism in Australia. Accordingly I propose to address the issues of fiscal federalism in another future article.

Dr Michael Keating AC was formerly Secretary of the Department of Finance and Secretary, Prime Minister and Cabinet.

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