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John Passant

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Reflections on tax

This is a copy of  a letter I sent to the Canberra Times about tax matters raised in its pages.

Dear Editor

Allow me as a tax teacher to comment on 2 tax issues raised in The Sunday Canberra Times of 4 April.

Mike Bannon in Tax Word refers to Yasser El-Ansary from the Institute of Chartered Accountants who ‘noted the decline in Australia’s competitiveness by having a company tax rate of 30 percent.’

This is self-serving nonsense. Australia was one of only two developed countries to avoid recession during the global financial crisis. Perhaps the 30 percent company tax rate contributed in some small way to that success.

Australia is experiencing a minerals and energy boom. Lowering the company tax rate would be a direct gift to our very profitable mining companies and their foreign purchasers.  There may be an argument to do that, but I haven’t yet heard it.

Further, despite all this talk of the 30 percent company tax rate impacting international competitiveness, 40 percent of large business paid no income tax at all in the 3 income years between 2006 and 2008. Not a penny.

And for those that did pay company tax most paid well below the headline rate of 30 percent. The finance industry for example has an effective tax rate of 20 percent.

When big business start contributing the appropriate amount to Australia’s revenue then, and only then, will I even begin to listen to their complaints about international competitiveness.

Second, in another example of self-serving comments Stuart Collins from the Housing Industry Association in his article ‘Negative gearing is under siege’ brings out the old furphy that attempts to curtail the rort in 1985 ‘put property investment into reverse. ‘

It did no such thing. In fact both investors and owner occupiers fled the market. Why? Because home loans and investment loans were 15.5 and 17.5 percent. In any event construction of new  homes by investors during that period was higher as a percentage of GDP than in 2009.

It is true rents rose 22% in the two years negative gearing was curtailed. In the two years after that restriction was removed they rose 23%.

My thanks to Tim Colebatch from The Age for these figures. His articles Housing at these prices will leave us all a heavy debt to bear and Caught in the cogs of the tax regime are both worth reading, although I disagree about a tax on all family home gains. I’d be more selective and limit it to homes worth more than say $2 m.

We as a community subsidise investors who have negatively geared rental properties to the tune of about $5 billion a year.  On top of that, the capital gains tax concession means these tax subsidised people pay only half the CGT on any gain on the property when they sell it.

As Tim Colebatch points out ‘in the 13 years to 2006-07, landlords as a group went from declaring net profits of $399 million to net losses of $6.4 billion. Those reporting profits grew by 36,000. Those reporting losses grew by 594,000.’

Those figures tell me people are in it for the losses and the big lightly taxed capital gain, not for earning rental income.

I teach my students that there has to be a link between any expenditure incurred and the production of assessable income for the expenditure to be deductible. It appears to me that the purposes of those who negatively gear are to get the losses, not to produce income and hence the loss should not be allowable.

The Commissioner of Taxation could (and in my view should) be testing this in the courts now.

But ultimately the negative gearing rort must be attacked legislatively, perhaps by allowing the losses made to only be offset against future rental income and by abolishing the 50 percent CGT concession.



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Comment from Marco
Time April 6, 2010 at 9:02 pm

Excellent, John!

Thanks for exposing and denouncing this kind of tripe. Our so-called democratic media is full of this kind of manipulation by self-styled experts. Yours is a valuable contribution to a debate that has traditionally being biased.

There is a spurious notion that has become pervasively ingrained in the equally spurious discourse of all these dozen-a-dime “experts” and that is present in the note you commented: the notion that “countries” (*) need to compete against each other to attract capital.

This prime example of criminal imbecility, sold as “economic expertise”, means that “countries” are supposed to be, in essence, equally attractive to investors, and, thus capital can and will flow freely among them, on the sole basis of its profitability.

In the most standard neo-classical parlance, this means that “countries” need to outbid each other to have the “privilege” of being attractive to investors. You will notice that this shifts the burden of competition from investors to “countries”. Or to put this in a more popular language: “countries” need to race to the bottom.

Countries do this by several means: intervening in the economy to lower wages or transferring environmental degradation costs to the local population, for example. This means that the local workforce/population directly subsidizes investors.

This can also be achieved by transferring tax burden to the public, as you already pointed out. In this case, the subsidy is mediated by the State.

What those “experts” conveniently forget is that natural resources are not freely transferrable among countries: if exploiting a mine in, say, Australia is not as profitable as an investor wants, he/she cannot just take the mine, and move it to another more convenient location.

Similar observation applies to agriculture, to retail commerce, or, indeed, to most services.

For activities like mining, the decision an investor faces is a binary one: either to exploit a mine or not, in which case they either invest their money in another location or put it to another use. Regardless, in the most standard neo-classical theory these “experts” preach, provided that profits are positive, someone will invest in the local mine (or in the local department store, or in the local farm).

In truth, investors have been allowed to do this with manufactures, for instance, with the well-known results that one can see in the American Rust Belt. You’ll notice that the key word here is “allowed”: often these manufacturers were originally profitable, but did not enjoy the extraordinary profits/subsidies forcefully extracted from an unregulated workforce, or could not fully transfer the costs of environmental degradation.

As a Marxist, you will notice two things in the previous text:

(1) Most of what I say here can be directly translated in Marxist terms. I prefer to state this in terms accessible to anyone versed in neo-classical “economics”, in the hope those “experts” feel motivated to dispute this.
(2) It refers to a capitalist mode of production, where capitalists manage to achieve extraordinary profits, EXCEEDING the surplus value normally extracted from the workforce.

(*) Country and countries are enclosed by quotation marks to call the reader’s attention to one fact: countries are not undifferentiated entities; they are concrete societies, with its own class structure, and classes are affected differently by this competition for investment.

Comment from John
Time April 7, 2010 at 8:40 am

Marco, the Financial Review ran an edited version of this on Tuesday 30 March on page 63 – the opinion page.

Comment from Marco
Time April 7, 2010 at 11:05 am


As a follow up to my previous post, have a look at these items:

From the BBC:

China coal ‘true cost’ at $250bn

You’ll notice this headline is wrong: it should say “true cost underestimated by $250 bn”.

In the report it is stated that, to account for all the “externalities”, Chinese coal should be 25% more expensive.

This report was commissioned by Greenpeace China (note for free-market readers: Greenpeace China is not a rabid communist organization) and carried out by the Unirule Institute of Economics (which happens to be a LIBERAL think-tank)

Greenpeace China:

Unirule Institute of Economics mission statement: