07/10/2010 - 00:00

Tax a window to bureaucrats’ world view

07/10/2010 - 00:00

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The MRRT will alter the face of the mining sector.

Tax a window to bureaucrats’ world view

TAX changes everything, as Australia is about to re-discover with the planned tax-attack on its mining industry, and as Britain and Sweden have just proved in a remarkable pair of examples – one negative, the other positive.

In Australia, the damage from applying punitive taxes on coal and iron ore production will become more apparent over time, just as previous tax attacks took years to do their worst.

If in doubt, consider why Australia operates a ludicrous fly-in, fly-out mine staffing system rather than creating communities in its thinly populated north.

The answer is tax, first by the removal of special tax treatment (a bonus for remote workers) for anyone living north of the 26th parallel.

Until that incentive was eliminated by tax officials comfortably housed in the suburbs of Canberra there was a bit of extra cash for people enduring the hardships of impossibly hot and humid summers in Australia’s tropics – in towns where the beer cost twice as much as southern cities.

To make sure there were no company-developed towns, Canberra followed up its elimination of an income-tax break by creating the fringe benefits tax (FBT).

The argument in favour of FBT was that it would stop long executive lunches in Sydney and Melbourne and cut the use of non-cash payments such as company cars and company-sponsored staff meetings in the European snow resorts.

As with so many good intentions, the impact of FBT was far worse on people who were not abusing the system. FBT has been a classic example of the baby going out with the bathwater, an end to any encouragement for company-sponsored accommodation, and the slow death of northern towns.

The Minerals Resource Rent Tax, and its predecessor the Resource Super Profits Tax, show just how little our politicians have learned over time and how they fail to understand that leafy Belconnen in Canberra is as different from Port Hedland as Mars is from the Earth.

Perhaps the most predictable effect of the MRRT, if its final design is as feared, will be the non-development of railways, road and port systems to service mines – or, the non-development of mines because the essential infrastructure services will not be tax deductible.

Because the review committee is yet to hold its public hearings (but probably has already drafted its final communiqué to accord with the government’s wishes) it is impossible to say ‘what a farce’, yet.

But, in time, we will all be saying that because of that most glaring of errors, a failure of bureaucrats to recognise that bulk commodities such as coal and iron ore have less to do with geology than they do with transport economics.

BHP Billiton and Rio Tinto understand this point, intimately. That’s why they refuse to let anyone else use their fully-depreciated railway and port systems because they have argued repeatedly in court, and before the Productivity Commission, that their mines are inextricably connected to their railways and ports – they are one system.

So, here we are a few decades on from the end of northern tax reduction and the start of the FBT, about to take our next step down a road guaranteed to slow northern development because so few people (voters) living in the south understand how tough life is beyond the 26th.

The view overseas

NOW, for the first of those two other tax examples to prove the point that tax changes everything – how Britain has wiped out a large chunk of its once world-leading investment banking sector.

Love them or hate them, bankers are an essential part of the business system and have been for a few thousand years.

However, bankers are like the money they manipulate – they migrate to where they are most welcome, with management consultancy Kinetic Partners revealing last week that 25 per cent of London’s investment bankers have moved to Switzerland; not just for a lower tax rate, more because they view Switzerland as having a more stable tax regime.

The cost to Britain’s tax revenue from losing 1,000 bankers and hedge fund managers is estimated to be around $800 million a year in income tax alone.

Sweden is proof of tax changing everything from the opposite direction. It has made a series of tax cuts, and watched its economy blossom as more jobs are created, retail sales rise, and property prices pick up.

What Sweden did at the height of the global financial crisis was cut company tax from 28 per cent to 26.2 per cent, cut payroll tax, and raise income tax thresholds to put more money into the pockets of consumers.

Australia doesn’t need the job boost, but for the purposes of arguing that tax is the world’s most efficient change agent the Swedish and British examples are a perfect example of what happens when you fiddle with tax.

Worth dying for?

IF talk of the MRRT, and how it might work, is not up your alley, how about a tax which is guaranteed to wake you up – death duties.

Killed off in 1979 after decades of campaigning by people such as WA senator, the late Sid Negus, the debate about death duties is moving back to centre-stage thanks to the review of the national tax system by Treasury boss, Ken Henry, and from the unexpected support for the idea from top investment banker, Mark Carnegie.

Having politicians and bureaucrats talk about the revival of death duties is one thing. Having a prominent investment bank toss fuel on the fire is another, and while the return of an inheritance tax seems unlikely, it is being discussed. You have been warned.

Window to the past

THE final word on tax changing everything goes to the infamous ‘window tax’, which was applied in parts of Britain and Europe in the 18th and 19th centuries. The tax was based on the number of windows in a house, because glass windows were considered a luxury.

The result was the creation of architectural monstrosities, or bricked up spaces where windows had been removed to dodge the tax.

 

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“The hardest thing in the world to understand is income tax”

Albert Einstein

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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