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John Passant

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My interview Razor Sharp 18 February
Me interviewed by Sharon Firebrace on Razor Sharp on Tuesday 18 February. http://sharonfirebrace.files.wordpress.com/2014/02/18-2-14-john-passant-aust-national-university-g20-meeting-age-of-enttilement-engineers-attack-of-austerity-hardship-on-civilians.mp3 (0)

My interview Razor Sharp 11 February 2014
Me interviewed by Sharon Firebrace on Razor Sharp this morning. The Royal Commission, car industry and age of entitlement get a lot of the coverage. http://sharonfirebrace.com/2014/02/11/john-passant-aust-national-university-canberra-2/ (0)

Razor Sharp 4 February 2014
Me on 4 February 2014 on Razor Sharp with Sharon Firebrace. http://sharonfirebrace.files.wordpress.com/2014/02/4-2-14-john-passant-aust-national-university-canberra-end-of-the-age-of-entitlement-for-the-needy-but-pandering-to-the-lusts-of-the-greedy.mp3 (0)

Time for a House Un-Australian Activities Committee?
Tony Abbott thinks the Australian Broadcasting Corporation is Un-Australian. I am looking forward to his government setting up the House Un-Australian Activities Committee. (1)

Make Gina Rinehart work for her dole
(0)

Sick kids and paying upfront

(0)

Save Medicare

Demonstrate in defence of Medicare at Sydney Town Hall 1 pm Saturday 4 January (0)

Me on Razor Sharp this morning
Me interviewed by Sharon Firebrace this morning for Razor Sharp. It happens every Tuesday. http://sharonfirebrace.com/2013/12/03/john-passant-australian-national-university-8/ (0)

I am not surprised
I think we are being unfair to this Abbott ‘no surprises’ Government. I am not surprised. (0)

Send Barnaby to Indonesia
It is a pity that Barnaby Joyce, a man of tact, diplomacy, nuance and subtlety, isn’t going to Indonesia to fix things up. I know I am disappointed that Barnaby is missing out on this great opportunity, and I am sure the Indonesians feel the same way. [Sarcasm alert.] (0)

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Draft notes for a talk on tax, inequality and challenges for the future at the forthcoming National Law Reform Conference at ANU

These are the overlong notes of my draft talk that I have to basically cut in half for my talk next week at the ANU College of Law National Law Reform Conference. I will be speaking on tax, inequality and challenges for the future. None of the various graphs and pie charts have transferred over. If I get time tomorrow I will bring them across.

John

I acknowledge and celebrate the First Australians on whose traditional lands we meet, and pay my respects to the elders of the Ngunnawal people past and present.

In a speech in 2013 Barack Obama labelled inequality “the defining challenge of our time”. What I am going to do today is talk about equality and equity in the tax debate. I will look briefly at inequality in Australia today and how it has been growing over time. I will then look at ways tax could address to some extent that growing inequality. My aim is to raise options, to put everything on the table rather than discuss what is politically feasible at the moment. My aim is to plant the seeds for the future.

According to ACOSS there are about 2.5 million Australians living in poverty, including over 660,000 children.  One in three pensioners live below the poverty line.

Further, according to Oxfam, inequality globally, and in Australia, has been growing over the last few decades.  The OECD, ACOSS and others confirm that trend has been evident in Australia too.

Australia’s inequality is above the OECD average and has been growing above average over time.

As part of that process of growing inequality in Australia our tax system has become less progressive.

The OECD for example in its 2011 Divided We Stand report said of Australia:

‘Income inequality among working-age people has been rising since 2000 and is today above the OECD average. In 2008, the average income of the top 10% of Australians was 131 300 AUD (88 800 USD), nearly 10 times higher than that of the bottom 10%, who had an average income of 13 700 AUD (9 300 USD). This is up from a ratio of 8 to 1 in the mid 1990s. The growth in inequality since 2000 was driven by two forces in different periods: widening disparities of market incomes (gross earnings, savings and capital) between 2000 and 2004 and weakening redistribution since 2004.

In relation to redistribution policies, tax is front and centre.  As the OECD report on Australia says:

Key findings:

  • The richest 1% of Australians saw their share of total national income almost double, from 4.8% in 1980 to 8.8% in 2008 [Table9.1]. Moreover, that of the richest 0.1% rose from 1% to 3%. At the same time, top marginal income tax rates declined markedly, dropping from 60% in 1981 to 45% in 2010.
  • The tax-benefit system in Australia has offset just over half of the rise that occurred in market income inequality during the past two decades, a percentage that is higher than in many other OECD countries.
  • Nonetheless, since the mid-1980s, taxes have become less redistributive. Both progressivity and average tax rates have declined.

The OECD argued that tax policies and transfers reduced inequality by 23%.

There is another element to inequality. It is not just that it has been increasing. It is that there is a concentration of wealth that sees the systemic inequality consolidate and increase.

 

This pie chart captures the amount of the wealth each part of society owns.

 

Thomas Piketty, Joseph Stiglitz, Andrew Leigh and Paul Krugman have all been warning in various ways about the threats that growing inequality can pose to the system over time both in its economic functioning and in the challenge that might occur to its current arrangements.

We can see reflections of that in the rise of Bernie Sanders and his calls for political revolution in the US. The rise and popular support for Jeremy Corbyn as Labour leader in the UK is another example. The social turmoil in parts of Europe, and the electoral swings to the left in places like Greece, Ireland, Portugal and Spain, and the rise of the racist and in some cases fascist right across the Continent highlight the urgent nature of the challenge.

What can be done? Given that the major increase in inequality stems from increasing wage differentials between the low paid and average paid workers one answer might be for workers to pursue big pay increases to address the disparity.  However since this is a talk about tax and law reform, what policies could we put on the table to address that growing inequality, even if not fully addressing it but only ameliorating it?

A few more general points before we examine specific proposals.

Australia by OECD standards is a low tax country. Our average tax take as a percentage of GDP at 25.6% is about 8% lower than the OECD average and puts us on a par with Turkey, South Korea and just a bit above the US.

If nothing is off the table, let’s start off by putting some of the less equitable proposals on the table.

One proposal from the Abbott and Turnbull governments (which si now off the table) was to increase the GST to 15% and extend it to currently non-taxable items such as fresh food, health and education. This NATSEM graph shows the regressive nature of the proposals based on an increase in the GST to 15% and a 5% tax cut to compensate.

 

Company tax cuts

Business and elements within the government are keen on company tax cuts. The argument Cabinet secretary Arthur Sinodinos and others have raised is that such cuts flow through to better wages and more employment. There is little evidence to support the assertions about increased wages and increased employment.

Now for some suggested reforms to make the current system more equitable.

Superannuation tax concessions.

Here is a graph from the financial system inquiry, the Murray Inquiry, about who gets what in terms of the tax concession for superannuation.

In other words the benefits flow overwhelmingly to the very well off. Abolishing the benefits for the top ten percent of income earners would free up $12 billion in revenue a year.  Some of that tax expenditure money would look for other low taxed treatment, such as negative gearing and capital gains tax concessions.

The sum total of revenue forgone through the superannuation concessions (i.e. not just for the top ten percent) is about $30 billion. Abolishing the concessions totally (i.e. not just for the top ten percent) has the potential to improve the budget bottom line by about $30 bn, enough to lift the 30% of pensioners living below the poverty line out of poverty and increasing the pension by $100 a week. Of course those enjoying the benefits of the superannuation tax concessions might then look for other tax reducing strategies. Treasury says there would be some minor impacts but believes that about $29 bn would be added to the Budget if the concessions were abolished. .

Negative gearing of rental properties is one alternative avenue for those keen to reduce their tax.

Negative gearing

Negative gearing is a legitimate tax deduction although I have often wondered why the Commissioner doesn’t announce he is going to review the losses given that there is an argument the outgoings are not expended to gain assessable income but to make the loss and thus to reduce the tax payable on other income, and to make a concessionally taxed capital gain. The political climate is too hot to do that. My memory is that a very senior tax officer in the 1980s did make comments along those lines and in the face of a frenzy of complaints the Commissioner backed down.

The main beneficiaries in terms of the size of the negative gearing benefits are the well off.  Here is how the Grattan Institute puts it:

Like most tax concessions on investment, tax benefits from negative gearing are biased to the wealthy. The increase in after tax return as a result of the current negative gearing/capital gains interaction is larger for individuals on higher marginal tax rates, all else being equal.22 Among individual taxpayers, the top 10 per cent by taxable income receive more than one third of the benefits from rental deductions. But taxable incomes are assessed after rental losses. In other words, people who are negatively gearing will have lower taxable incomes because they are negatively gearing. Correcting for this by assessing income before rental loss deductions shows that the top 10 per cent of income earners receive almost 50 per cent of the tax benefits of negative gearing.

An important aspect of the thinking of negative geared investors is the capital gains concessions that flow when the property is sold.

Capital gains tax concessions

Unlike all other forms of gain taxed as income (wages, business profits, interest, rent etc) capital gains are taxed concessionally. If you hold an asset for greater than 12 months when you sell it you only include half the net capital gain in assessable income. Treasury estimates this tax expenditure forgoes a bit over $6 billion a year.

As someone bought up on the Haig Simons model of income – any gain is income and should be taxed accordingly, I am in favour of treating capital gains in exactly the same way as any other gain. According to the Treasury’s 2016 Tax expenditure Statement abolishing the concession has the potential to improve the Budget bottom line by almost $6 billion, ignoring minor leakage to other concessions.

The revenue foregone from these 3 tax concessions – the top ten percent of superannuation holders, negative gearing on rental properties, and the CGT concession – is about $25 billion a year.  While there would be some leakage from that figure if these concession were abolished or modified, as the well-off sought out other concessionally taxed areas, these are the main areas in terms of revenue foregone.  And if there were a surge of investment in other concessionally taxed areas then we can tighten those areas up too.

Tax avoidance

The Panama Papers have ignited debate again about the tax avoidance activities of high wealth individuals and big business.  In two recent tax transparency reports the Commissioner released details of the tax paid by big business public companies (i.e. those with a turnover greater than $100 million) in December 2015 and then in March this year of tax paid by those big business private companies with a turnover of greater than $200 million.

The Tax Justice Network/ United Voice publication ‘Who pays for our common wealth’ found that

Within the ASX 200 companies:

  • nearly one-third have an average effective tax rate (ETR) of 10% or less;

Here is a graph from the ATO website showing the combined public and private company figures.

This is consistent with previous estimates. For example in 2010 Deputy Commissioner Jim Killaly told us

“Between 2005 and 2008, more than 40% of all big business taxpayers [turnover greater than $250 million] that lodged tax returns paid no tax. Of those, 20% were making a profit.”

The figures the ATO has put out also show that even when big business does pay income tax it can be at much lower rates than the statutory rate of 30% on taxable income.

Here is a chart from the ATO on that. Where the hell is it? Disappeared from ATO website with the merger of the public and private data.

The history to date of addressing tax avoidance has been in my view a softly softly one politically, legislatively and administratively. The recent legislative crack downs are fairly minor as are Labor’s proposals fiddle at the edges with changes to the debt equity ratio.

None of them recognise the real problem – the competitive drive to reduce costs, where business see tax as a cost rather than a contribution to society.  Eric Schmidt, when he was CEO of Google captured that well when he said:

‘I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.’

‘The company isn’t about to turn down big savings in taxes,’ he said.

‘It’s called capitalism,’ he said. ‘We are proudly capitalistic. I’m not confused about this.’

Is there a solution at least in part to this big business no or low tax conundrum? It may be time to consider a minimum company tax, based not on actual taxable income but gross revenue. In similar vein it might be time to consider asking companies which want to make money in Australia to pay an operating fee for carrying on business here. The fee could be based on the gross revenue and reduce the closer the company got to a 30% effective tax rate. That might catch for example likes of Google and Apple and the Base Erosion and Profit Shifting they undertake, respectively.

Wealth taxes

After the Henry Tax Review handed down its report respected international tax expert Neil Brooks wrote that the word equity did not receive more than a few passing references in the report but efficiency was mentioned everywhere.

Brooks argued for consideration of wealth transfer taxes – things like estate and gift duties.

We lost death duties to state tax competition in the 1970s when Joh Bjekle-Petersen abolished Queensland death duties and the other states and the Commonwealth quickly followed suit.

It is time to reconsider them, especially if they can be targeted at the estates of the rich.

I think it is also time to consider not just a wealth transfer tax but a wealth tax, i.e. a tax annually on the wealth of the say top ten percent. I displayed before that graph of wealth ownership in Australia with the top 20% owning 60% of the wealth.  The top ten percent own 45% of Australia’s wealth. That wealth in total is about $6.5 trillion. So the top ten percent own about $3 trillion of Australia’s wealth. A one percent annual wealth tax on them would raise by my back of the envelope calculations about $30 billion annually from them.

I am not alone on this. Thomas Piketty argues for a global wealth tax to address concentrations of wealth, growing inequality and would allow governments to invest in infrastructure and education. Obviously that would require cooperation across borders, something that will be difficult given US intransigence to address the tax avoidance by its companies, based on the perhaps mistaken idea that US companies avoiding tax overseas pay tax on that income in the US. Apple for example pays $110 bn in the US at around 35%, the US company tax rate, and pays about 1% on average on its non-US income.  The problem with this is that the offshore income isn’t necessarily taxed in the US. Despite this the intransigence remains.

This is an argument for Australia going it alone.

Taxes on wealth too may not impact on investment or the capital production and reproduction process, especially if the money is then used in productive investment in infrastructure, education and health.

Pay the rent

Whenever I think of a tax system that pays the rent to Aboriginal people and Torres Strait Islanders I think of Midnight Oil and their great song Beds are burning.

The time has come
To say fair’s fair
To pay the rent
To pay our share

Paying the rent can only be part of a wider settlement with Aboriginal people and Torres Strait Islanders, a settlement that recognises prior ownership and sovereignty. It is out of those democratic negotiations with elected representatives of the original inhabitants that the form of paying the rent will take shape, although I would imagine mining companies and pastoralists would be to sections of the capitalist class from whom much rent would flow. So too from the churches.

Economic rent

The Henry Tax Review recommended a tax on the economic rent of mining companies. The first iteration of this was Kevin Rudd’s Resource Super Profits Tax and the second Julia Gillard’s Minerals Resource Rent Tax. I am not going to go into the history of this other than to note I wrote about these rent taxes and what it told us about the nature of the ALP in 2014 for the Accounting Research Review.

I merely note that the MRRT was designed by the big 3 mining giants and would have raised little income in part because it allowed mining companies to use current value in working out the base on which their return rate was worked out rather than historical cost.

Here is how the Henry Tax Review describes economic rent:

‘An economic rent is the excess of the return to a factor of production above the amount that is required to sustain the current use of the factor (or to entice the use of the factor).’

The review uses an interesting example which, while it makes the point pretty simply, should signal concerns among those of us supportive of workers winning higher wages.  Thus the Review went on to say about economic rent:

‘For example, if a worker is paid $100,000 but would still be willing to work at the same job if they were paid $75,000, their economic rent would be $25,000.’

Leaving aside the politics of wages as economic rent, and concentrating on the principle of economic rent, this is the argument too about mining company economic rent. The return on investment in mining in Australia was at one stage estimated to be 20%, well above that required for continued operation of mining and continued investment in new mines.

Taxing economic rent is not some loony left idea. It is a recognition that such rents arise because of barriers to entry for example of new competitors, or in the case of minerals and resources because of their finite nature (and I would add the monopoly of land and resources and the incredible amounts of capital needed to invest in new mines).  Taxing economic rent is in other words a substitute for competition, taxing the rent so that the return becomes similar to what would arise if competition flooded in to or was able to flood in to the high return areas.

Why limit our discussion to resource rents? Obviously the market has changed now and the economic rents have dried up in the resource sector in Australia. Why not just tax all economic rent?

What other sectors might be making economic rents? Any thoughts?

Yes, the banking and finance section appears to be earning economic rents. Its rate of return was estimated a few years ago to be about 16%, well above long term government bond rate currently of 2.45% plus 7% (which is a guide to economic rent in high risk industries.)  I suspect the reason there is no rent tax on banks is because they would increase their prices to consumers (e.g. housing loan rates) and this would produce a political backlash against a government who did this. That then would in my mind be an argument in favour of government regulation, price control, of home loans and other products offered to ordinary working Australians.

The Labor government I think focussed on minerals because they are sold to offshore entities and any price increase would be indirect.  However if taxing economic rent is about mimicking competition then the logic suggests that we should tax all economic rents, if we do decide to tax them.

Carbon tax

The evidence of global warming continues to amass and the cries of scientists, environmentalists, some politicians and others to do something grows louder as the globe warms.

More mundanely the abolition of the carbon tax saw a loss in revenue of about $8 billion annually.  The debates at the moment appear to be around whether there should be a price on carbon and if so whether that price is in the form of a carbon tax or arises from an emissions trading scheme.  Both are inequitable in that any increase in retail prices falls disproportionately on ordinary working people as consumers.  A response might be that not having a liveable planet in which an economy can function is pretty inequitable. That is true but for me the question then becomes who should bear the cost of any remedial action, the polluters or those who consume their products to live?  Which class in essence pays the price for the

Financial transactions tax

First proposed by Keynes, a financial transactions tax would apply a small tax (say 0.05%) to financial transactions. Australia used to do this with its Bank Account Debits Tax (or BAD tax.) One variation is to limit it to cross border transactions – ie flows into and out of Australia.  Thus if I transferred say $10,000 to support my brother who is a Catholic priest in the US, I would pay $5.

A variation on this is the Tobin tax, a proposal to tax currency conversions to prevent short term speculation in currencies.

A marijuana tax

The recent discussion about competition between the states and territories got me thinking about a proposal I have had in my mind and written about on my blog some time ago. In addition the debate in the last day or two about lock out laws and alcohol fuelled violence here in Canberra got me thinking about alternative mind altering substances to alcohol that do not induce violence.

Colorado became the first US state to legalise the personal use of marijuana and tax its sale though licensed retailers. It imposes a Medical Marijuana Sales Tax; Retail Marijuana Excise Tax; Retail Marijuana Sales Tax; Retail Marijuana Special Sales; Maybe the ACT or another Territory or State could do something similar.

The results have been interesting. The revenue raised has been $135 m.   Much of this then covers the costs of regulation, education and other costs. The sky hasn’t fallen in and some early research suggests violent crime and robberies has fallen although drug driving is a problem.  So too is accidental ingestion by children. (About half the sales are of food products with marijuana in them.)  The number of people who supported the binding referendum vote for the change at 55% has increased slightly to 57% in recent polls.

Maybe the A.C.T. could follow Colorado’s lead?

A land tax

The cat fight over giving the States and Territories income tax rights highlights the need for those jurisdictions to find alternative tax bases to those they already have.

One of the recommendations of the Henry Tax Review was for States and Territories to abolish their inefficient stamp duties (for example on house purchases) and replace them with a land tax on unimproved value (i.e. excluding buildings and improvements in the valuation).  Only one jurisdiction has taken up the challenge so far and that is the ACT which has in place a long term process in place to abolish stamp duty on housing sales with land tax.  As the Henry tax Review makes clear this is a simple efficient tax.

Recommendation 51:

Ideally, there would be no role for any stamp duties, including conveyancing stamp duties, in a modern Australian tax system. Recognising the revenue needs of the States, the removal of stamp duty should be achieved through a switch to more efficient taxes, such as those levied on broad consumption or land bases. Increasing land tax at the same time as reducing stamp duty has the additional benefit of some offsetting impacts on asset prices.

Recommendation 52:

Given the efficiency benefits of a broad land tax, it should be levied on as broad a base as possible. In order to tax more valuable land at higher rates, consideration should be given to levying land tax using an increasing marginal rate schedule, with the lowest rate being zero, with thresholds determined by the per-square-metre value.

Recommendation 53:

In the long run, the land tax base should be broadened to eventually include all land. If this occurs, low-value land, such as most agricultural land, would not face a land tax liability where its value per-square-metre is below the lowest rate threshold.

Recommendation 54:

There are a number of incremental reforms that could potentially improve the operation of land tax, including:

  1. ensuring that land tax applies per land holding, not on an entity’s total holding, in order to promote investment in land development;
  2. eliminating stamp duties on commercial and industrial properties in return for a broad land tax on those properties; and
  3. investigating various transitional arrangements necessary to achieve a broader land tax.

I would have thought, as the revenue problems for the States and Territories grow and vertical fiscal imbalance worsens, and the Commonwealth further underfunds services like public health and public education, that other States and Territories in addition to the ACT will begin thinking about land tax both as a replacement for inefficient taxes like stamp duty and as a growth tax to support future spending needs.

I might leave it there and open it up for discussion, remembering nothing at least for us is off the table, and that I want to view the options through the prism of equity, not just or even efficiency.

 

John Passant

6 April 2016

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