14/04/2015 - 04:55

Talk is cheap; tax reform mistakes are not

14/04/2015 - 04:55


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We need to be careful we understand the detail when debating tax changes.

Talk is cheap; tax reform mistakes are not
DRIVING BUSINESS: Fuel is a mandatory input for farm machinery. Photo: iStockphoto

We need to be careful we understand the detail when debating tax changes.

Taxation is an emotive subject and the language surrounding it is frequently subject to misuse to serve the purposes of the speaker.

A couple of years ago, when a special tax on miners was the subject of a major political battle, I was surprised to see how often the unrelated diesel fuel rebate was referred to as a ‘subsidy’.

Those opposed to the mining industry’s point of view – be it the then Labor government, which wanted to extract more money from the sector, or environmentalists who are simply opposed to mining as an activity – wrongly used the subsidy label to paint the resources sector as being less of an economic driver than it really was.

The point is (I have written this before) that taxes on fuel were created to encourage car drivers to seek more efficient transport. It was primarily aimed at urban dwellers, as they typically have a choice in terms of alternatives to what were then very inefficient cars. They had public transport, heavily subsidised by the taxpayers (including miners and farmers) or could choose smaller, less powerful vehicles without significantly affecting their travel times.

Those in mining or on farms had no such choices. Machinery is simply part of the production process and fuel is a mandatory input. Unlike urban commuters, additional operational efficiencies were gained by using the most powerful machines available. Diesel also had advantages in the outback and could not be as easily replaced by alternatives (as, for instance, leaded fuel was previously) in the cities. In addition, fuel was already a high cost to business, so it was always seeking the most fuel-efficient vehicles it could; and still does.

Finally, governments of various persuasions extracted tariffs, levies, royalties and taxes on many other sorts of these outback businesses that didn’t hit the average car driver or even many urban businesses.

So a tax directed at the driving behaviour of urban dwellers was never intended to be imposed on outback businesses, which already had efficient behaviour, lacked alternatives and paid their way by other means. That is not a subsidy.

With this in mind, I enjoyed reading a Centre for Independent Studies report entitled ‘Right or Rort? Dissecting Australia’s Tax Concessions’ by Robert Carling, released last week amid much talk of tax reform.

In his report, Mr Carling highlights the language of tax reform, which we all ought to get used to.

He highlights the term ‘tax expenditure’, which is used now to describe any amount of money calculated to have been forgone because it doesn’t get the full tax treatment applied by some benchmark – invariably income or company tax.

“One thing that should be clear is that whether or not a concession is classified as a tax expenditure, its removal results in someone paying more tax, and this represents a tax increase,” the report states.

“Any suggestion it is a reduction in expenditure rather than a tax increase is word-play by those eager to see an increase in the tax burden, for whatever reason.”

With this in mind, Mr Carling looks at several major taxes that are being subject to reformist rhetoric and critiques the simplistic view that increasing such taxes’ headline rates would necessarily raise additional funds. Guess what, raising taxes tends to change people’s decisions.

He relates this very clearly with regard to capital gains tax, which has changed significantly since it was introduced 30 years ago.

“CGT has typically made a minor contribution to revenue,” the report states. Even a decade after its introduction it was still raising less than 0.4 per cent of GDP, and on average since the mid-90s it has raised about 0.6 per cent, albeit with considerable volatility broadly in line with the fortunes of the share market.

“Significantly CGT has raised more revenue, on average, since it was eased in 1999 than before. Any attempt to raise more revenue would face the strong disincentive that a higher CGT would place in the way of realisation of accumulated gains.”

Mr Carling points out that while the headline rate dropped after 1999, so did the mechanics of the CGT calculation; so it is not as simple as just using the rate like a lever or comparing directly with the income tax rate as it was in the past.

“It is now part of the folklore surrounding CGT that the Ralph reform ‘halved’ taxation of capital gains,” the report said.

“It did no such thing, as introduction of the discount was accompanied by removal of inflation adjustment and averaging provisions.”

Mr Carling’s report takes the view that there is no reason to regret this change as a policy mistake.

“It was an unequivocal improvement,” he said.

Now that is the type of language we want to hear. Let’s make sure that we get beyond all the loaded terminology in this debate and, if there is to be change, ensure it is beneficial for Australia.

The CIS report can be found here: http://bit.ly/1Jiu9Qx

Uber’s new world order

BEFORE Easter, Business News hosted Sir Bob Geldof at what turned out to be a fascinating luncheon. Everyone will have a different take on what Sir Bob had to say. I really enjoyed how he tried to use historical context to warn about the changes that are taking place; and poverty’s role in that.

In May, we have the local boss of Uber, Simon Rossi, as our next guest. Mr Rossi will be speaking on digital disruption. Interestingly, in his speech Sir Bob was critical of modern digital companies, which he claimed were monopolistic and determined to put many existing operators out of business in a way that would diminish choice for consumers.

He was particularly critical of Google and Facebook but he also singled out share-economy sites such as airbnb and Uber for affecting those who run existing businesses. While I sympathise (and few business are as affected as those in the newspaper game) and can see his point when he highlighted, for instance, that airbnb, with 700 employees, had the same market capitalisation as Hilton, with 150,000 staff.

However, just because an industry employs a lot of people doesn’t justify its right to exist. To use Sir Bob’s own turn-of-the-century analogy, I wonder what he would have said 100 years ago when the sudden growth in automobiles started to put blacksmiths and hay carters out of business?


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