En Passant

There are two defining characteristics of the state - defence of the system and collection of revenue.

Rudd Labor has promised to increase military spending by 3 percent in real terms till at least 2013. Its forward defence strategy is aimed at dominating the immediate region and containing China, both under the umbrella of the most powerful country in the world, the United States. 

It is the duality of this forward defence that the Australian ruling elite have decided necessitates our close involvement with American expansion across the globe.

Yet when it comes to the other pillar of the state – tax collection – Rudd Labor and predecessor Governments have been much less forthcoming.

The Australian Tax Office collects over $300 billion in taxes annually and at the same time gives away $100 billion in disguised grants (known as tax expenditures), much of which – apart from the non-taxation of people’s homes – is to big business.

As a community we fund the ATO $3 billion a year to collect $300 billion.  While the headline return rate is thus one hundred dollars collected for every dollar spent, the returns on the hard to collect money appear to be about eight dollars for every dollar spent.

For example, last year the Government gave the ATO $700 million to raise an extra $5.7 billion in tax. 

In a speech last month Deputy Commissioner of Taxation Jim Killaly said that 40 percent of big business (those with a turnover greater than $250 million) had paid no income tax in the three income years between 2006 and 2008. He also said twenty percent of those companies were actually making accounting profits.

Analysis by Adele Ferguson and Stuart Washington in the 13 March edition of the Sydney Morning Herald showed that most industries actually pay much less than the headline 30 percent tax rate. For the finance sector for example they found the figure was 20 percent.

In other words almost half of all big business pays no income tax and those that do mostly pay much less than the notional 30 percent.

Yet unlike defence, the Government handcuffs the Tax Office. Like all other agencies except Defence the ATO is subject to an efficiency dividend which automatically cuts its funding every year by one percent (plus the two percent extra efficiency dividend of 2008/09).

This turns the ATO into a supplicant for more funds rather than an eager pursuer of big business.

This is intentional. 

 The ATO is deliberately hamstrung. For example it has various oversight and advisory bodies poring over its every action to make sure it doesn’t ‘overstep the mark’ and actually force big business to pay tax. Rudd Labor could remove these fetters on the ATO’s effectiveness. It won’t

The ATO doesn’t have the resources to fully investigate big business effectively. No Government – Labor or Liberal – has the political will to give the Tax Office the money, the staff or the powers to attack non-compliance by big business. They are the Governments of big business.

Both conservative parties see big business as the engine of economic development and tax as some cost to them operating. It is this philosophy which shapes Government underfunding of the ATO.

The tax system is built on the archaic distinction between capital and income but every attempt to develop a more sensible base - such as treating all gains as income – is met with ferocious opposition from big business and their advisers.

The fact that much big business activity is international also creates enforcement problems for the Tax Office. Cross-border arrangements are of their nature often more complex and less transparent.

The ATO hasn’t exactly covered itself in glory here. It has run down its specialist international section and promoted the narrow thinking detail fetishists into leadership positions across the Office.  If action is taken now it will still be a decade before the ATO overcomes these organisational problems.

Couple all of this with a range of complex laws resulting from the archaic income/capital distinction and the opportunity for game playing – also known as tax planning – is immense. 

As the former Assistant Commissioner in charge of the ATO input into international tax reform I battled long and hard and eventually won a grand total of 8 staff to help me in our task.

By comparison one of the large accountancy firms had 20 staff working full time (ie looking for tax arbitrage opportunities) on those same reforms.

Paying tax officers, and hence all public servants more, would help address the intellectual and commitment divergence.

There is a myth around that tax is about equity. The reality, as the figures show, is the exact opposite.  The whole system is set up to favour big business. Making sure the ATO collects only part of what it can from them is part of that strategy.

The comparison with Defence is instructive.  We are supposedly in Afghanistan to fight terrorists, but the Government allows the tax terrorists to destroy the revenue system and cut the revenue benefits that could be provided in the form of better schools, hospitals and transport to ordinary working Australians. 

Rudd Labor could easily fund the ATO with an extra $1 billion to specifically attack the avoidance schemes and other rorts by big business and bring in around $10 billion. It could even change our laws to redress the power imbalance currently in favour of the avoiders.  It won’t.