SUMMARY CONCLUSIONS TO THIS INSIGHT ARTICLE

Silly Taxes Upset Proper Industrial Development.

Australia has largely ignored the tax reform proposals communicated in the 1685 pages (circa 5 kgs) of the August 2008 Treasury Paper and the December 2009 Henry Report. The Labor government is not inclined to take tax reform seriously and next week’s tax summit will cause more confusion than ever. Tax policies that promote profits and jobs create the fiscal cash-flows able to be applied to meaningful social and commercial infrastructure. Delusions built around the narrow emotional theme of ‘fairness’ are no substitute for national aspirations rooted in hard and enjoyable work-place ambitions. Synthetics, such as job protection and safety nets, means capital deployment to other places and jobs created abroad to cement ourselves as import obsessed and dependent. A Liberal Government is, of course, an unknown quantity, but their track record and ethos does appear to offer better prospects for sustainable prosperity.

There is no such things as a ‘jobless recovery’ and no government can be anti-business and pro-jobs.

 

STUPID

Acronyms, in our view, are a formula for thought.

"STUPID" was coined by Gerry Van Wyngen and our editor in March 1991 when they submitted a proposal via a full page advertisement in The Australian newspaper for the abolition, or phasing out, of payroll tax. This tax was regarded as an impediment to employment and economic growth and was no longer appropriate to the economic circumstances Australia was in at the time. The advertisement was addressed to Prime Minister Hawke, Premier Greiner, Reserve Bank Governor Fraser, and Mr Kelty, then head of the Australian Council of Trade Unions. The rationale, supported by an economic model, was that unemployment would be cut by 1%, inflation would reduce to under 2%, and the cost to consolidated revenue was less than supposed. This latter point was predicated on the fact that payroll tax is deductible so that only a net 70% of it finds it way into taxation coffers.

1991? Fundamental change does not occur quickly.

 

THE HENRY REPORT

Ken Henry, as Treasury Secretary, handed down his 1319 page report on 23 December, 2009. The terms of reference were narrow and focused more on social outcomes than economic outcomes that might lead to the balanced achievement of social outcomes. Thus the terms of reference had the tax cart well ahead of the fiscal policy horse.

The report followed the 366 page report from Treasury dated 18 August, 2008 called "Australia’s future tax system – Architecture of Australia’s tax and transfer system".

Both reports have been substantially and substantively ignored.

 

ECINYA’S INTEREST IN TAXATION

Taxation is what taxpayers are willing to pay for goods and services that are provided by a Committee called the government. Unwilling taxpayers will either move offshore, evade their taxation responsibilities at home, or decide that the safety net of welfare will give then a happy and fulfilled life. It is thus incumbent upon government to tax wisely and spend wisely. Unfortunately, governments in modern democracies have a limited shelf-life and act and react to community and business demands which invariably means that good governments give a bad government a nest-egg to squander, and bad governments give various deficits – debt, domestic and current account – to be repaired.

In good times all things are possible but pervasive prosperity over economic and business cycles enables government to deliver viable social and infrastructure outcomes. Prosperity seldom occurs when taxes are too high, economic growth too low, and interest rates too high. The fountain of fiscal policy is taxation. Economic momentum, or velocity, occurs within context of an harmonic monetary policy. Australia has been generally blessed with good Reserve Banks and occasionally blessed with good governments. In the post war period, Menzies was appropriate for his time in a world that moved slowly; Keating-Hawke-Walsh were excellent fiscal managers, as was Howard-Costello. Whitlam, Fraser, and Rudd-Gillard-Greens have been conspicuous failures.

The American political historian, Barbara Tuchmann said in 1984: "Social systems can survive a good deal of folly when circumstances are historically favorable, or when bungling is cushioned by large resources or absorbed by sheer size as in the United States during its period of expansion. Today, when there are no more cushions, folly is less affordable." In this, our spring of 2011, clearly 1984 is upon our doorstep again.

THERE IS NO REASON FOR OPTIMISM THAT THE TAX SUMMIT NEXT WEEK WILL ACHIEVE ANYTHING MEANINGFUL OR WORTHWHILE………..The Labor-Greens coalition shows no depth of understanding of local or global economics that would promote meaningful tax reform.

THEREFORE, we revisit sections of our May 2010 commentary on the Henry Report with some updated commentary in context of circa 15% of the economy growing strongly – the resources sector- and 85% of the economy heading for a possible recession as the cushion of the budget surplus was squandered in 2008 and 2009 in a fiscal panic attack around the Global Financial Crisis.

 

ECINYA’S TAX REFORM PACKAGE

• Extend the Federal parliamentary term to a maximum of 4 years and a minimum of 3.5 years to give policy time to work or to be modified, abandoned, or fine-tuned.
• Abolish direct donations to political parties by pooling them into a fund with a formula for distribution to retard the growth of crony capitalism and crony socialism.
• Expand the GST to food which will be a big tax, and compensate "the losers" such as pensioners and genuine welfare recipients.
• Capital gains on the sale of residential and commercial investment properties and personal share-holdings to be treated as ordinary income on a long-term sliding scale basis, say 7-9 years. (gains 100% taxable year1, 90% year 2, 70% year 3, 60% year 4, 40% year 5, 20% year 6, 10% year 7, zero thereafter.) Too much real and personal property is tied up in dormant and indolent hands. The national balance sheet is comatosed as a result. Inert can hurt.
• Abolish payroll tax collected by the states via a compensation system and abolish many of the other taxes proposed by Henry.
• Increase the tax free threshold and change personal and company tax rates as dramatically as is sensible.
• Have a target rate of total taxes to total GDP similar to the inflation targetting system e.g. 20% in good times.
• Introduce tax breaks on certain forms of savings particularly for younger people specifically savings to acquire a home.
• Have an exceptionally modest federal royalty tax on mining, say about 5% exceeded slightly by the mining royalties currently collected by the states.

 

KEN HENRY’S TAX REFORM PACKAGE

The key recommendations are set out below and we use the same numbers in our cross-reference commentary. We have ignored the 133 (non-key at this stage) recommendations not taken up by Mr Rudd and his Treasurer.

1. Impose a 40% "resources rent tax" on the mining sector (emphatically disagree).
2. Cut the company tax rate from 30% to 25% (agree)
3. Flatten personal tax rates, increase the personal tax-free threshold from $6,000 to $25,000 (agree)
4. Replace state-based taxes such as payroll tax and stamp duty with broader consumption taxes including land tax on the family home (emphatically agree, except for land tax on family home).
5. Curb negative gearing (disagree)
6. Combine all family tax benefits into a single means-tested payment (emphatically agree).
7. Taxes on interest earned from savings be slashed by 40% (emphatically agree)
8. Remove the medicare levy (don’t know)
9. Restore fuel indexation (don’t know, but do not like indexing anything, inflation numbers too rubbery)
10. Introduce traffic congestion charges (agree).

 

Mr SWAN’S KEY CHANGES (our comments are in brackets)

1. Impose a 40%"resource super-profits" tax on the mining sector from 2012-13 (expedient rubbish).
2. Raise the compulsory superannuation rate from 9 to 12% by 2019-20 (agree)
3. Cut the company tax rate from 30% to 28% by 2014-15, two years earlier for small business (Agree, let’s hope that the definition of small business is not the same as for the wrongful dismissal laws. Lot of potential silliness here.)
4. Create a $700m infrastructure fund to help build state infrastructure from 2012-13. ( Disagree: Unwieldy, complex, hopefully the Building Education Revolution and National Broadband are not the templates.)
5. Continue to allow workers approaching retirement to top up their super by $50,000 a year. (Agree)

 

UPDATE

The Resources Tax is currently a confusion, but has been modified to something in the 20-30% bracket, down from 40%. It should be scrapped altogether. Additionally, a flood levy tax has been imposed, and this should be scrapped as well. Additionally, a carbon tax is being proposed that will achieve very little, or nothing at all, in the short or medium term, and this should be scrapped as well.

We are of the opinion that the path to recovery and trend growth in the economy will not be achieved by increased taxation in whatever form it takes. Rather we would prefer to see some incremental reductions in government spending, some incremental changes in the tax mix, and in context of fiscal responsibility being evident to both consumers and the Reserve Bank, reductions in interest rates.

 

SOME ‘RUBBERY’ NUMBERS

In fiscal 2010 total tax revenues ( Commonwealth, State and Municipal) were $333 billion equivalent to about 27% of Australia’s GDP. This $333 billion was made up as follows –

• $187 billion as taxes on income (56%)
• $89 billion as taxes on goods and services inclusive of GST (27%)
• $32 billion property taxes (10%)
• $17 billion as payroll tax (5%)
• $8 billion other taxes on goods and activities (2%).

Treasury has recently pointed out to the Gillard-Greens coalition government that the GST is a growth tax, and in an ex-growth economy the GST goes down, not up. They supplied the following numbers to increase the GST tax take at the current 10% (which Ecinya thinks should not be changed) –

• $5.9 billion for food – uncooked, not prepared, not for consumption on premises for sale, some beverages.
• Health and medical services $2.95 billion.
• Education $2.6 billion
• Financial supplies $2.2 billion.
• Imported services $1 billion
• Financial supplies, reduced input tax credits $990 million
• Water, sewerage and drainage $700 million.

If the after-tax cost of payroll tax is about $12 billion ($17b x 70%), then taxing food, medical and education would result in $11 billion of additional receipts. If the federal and State governments could then over time reduce thier expenditure by say 2% of the total tax take of $333 billion that would give another $7 billion to apply towards reducing tax on savings and some property taxes such as stamp duty on housing. We fully appreciate that payroll tax is a state tax and respectfully suggest that state governments phase out the tax in return for a quarterly Federal reimbursement of the payroll tax revenue foregone.

We are in no position to do the modelling but we do know that taxes are so diffused across the economy that the current sytem is unweildy, inefficient and counter-productive. Current complexity allows politicians and social engineers to obfuscate and confuse us as well as themselves. Changes do not require ‘tough’ decisions, they just require sensible and appropriate decisions well-explained. All taxes impact on prices. What we do not need is the hyperbole of a past back-bencher who, in 1999, said:

"When the history of this Parliament, this nation and this century is written, 30 June 1999 will be recorded as a day of fundamental injustice – an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians. It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up. It will be recorded as the day when the nation’s taxation system moved from progressivity to regressivity. It will be recorded as the day when the Parliament of the country said to the poor of the country that they could all go and take a running jump."

That back-bencher was, of course, Kevin Michael Rudd.

 

 

HEAD QUOTES TO ASSIST PERSPECTIVE

When the legislative changes for the GST were back in the House of Representatives on 30 June 1999, a little known Queensland Opposition backbencher, Kevin Rudd, told the Parliament: "When the history of this Parliament, this nation and this century is written, 30 June 1999 will be recorded as a day of fundamental injustice – an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians. It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up. It will be recorded as the day when the nation’s taxation system moved from progressivity to regressivity. It will be recorded as the day when the Parliament of the country said to the poor of the country that they could all go and take a running jump."

From "The Costello Memoirs", 2008. Hyperbole in magnificent dimension from our former PM.

This model, not good luck, is the reason Australia has enjoyed a fifteen year expansion…. It is defined by a floating exchange rate that operates as a shock absorber, a credible medium-term inflation target that governs interest rate policy at the discretion of an independent central bank, a shift towards a more decentralised wage-fixing system, and a permanent budget surplus strategy set at about 1 to 1.5 per cent of GDP.

Paul Kelly, The Australian, May 2006.

Tax reform will fail because there is no leadership on the issue.

A sub-optimal Prime Minister carrying a litany of fiscal disasters on his curriculum vitae cannot be trusted to formulate proper tax policy nor to implement his misguided efforts in a near-enough-to-viable way. At Mr Rudd’s current level of fiscal recklessness Australia will gravitate towards the parlous state of fiscal folly currently in view in parts of Europe and the United States of America. You cannot run policy through the prism of a PM’s ego. Australia has tried that before, and failed. All countries that try it fail.

Prosperity is the tide that carries us all to fulfilment of our material and social goals and aspirations. You cannot be anti-business and pro-jobs.

Mr Rudd uses weasel words like "working families" without definition, prefaces his remarks about "long-term sustainability" and "Australia’s national interest while I am Prime Minister" whilst being engaged in short-term waste and misallocation of resources. He was elected, not ordained, yet continues to give interviews outside of his church. Presumably Jesus Christ has given prior approval. He talks in platitudes of ‘stronger, fairer and simpler’ as layers of bureaucracy and complexity are added to an already stressed tax and fiscal expenditure system. In 11 years of absolute and relative prosperity John Howard ‘did not meet the challenges of government’ according to Mr Rudd. Boy oh boy, does this guy have a self-esteem problem.

In terms of primeval salesmanship, immediately upon Mr Rudd becoming Prime Minister, the neo-conservatives were responsible for our manifest fiscal and social folly. Now it is the turn of ‘the greedy miners’ where years of toil, often speculative exploration, overcoming extraction, production and transport difficulties and having to sell into often volatile and cyclical markets. But expertise and positioning over time count for nought. Mining companies re-capitalise themselves in the good times to sustain development in the bad times. Many developments do not produce a viable return for years and years.

In looking at the rhetoric coming from Mr Rudd on the tax "reform" package, the paras immediately above and Kevin’s quoted response to the GST in 1999, it seems certain that even when the PM is putting on his trousers each day it is an historic event. The nonsense never ends!

Ecinya Insight article "Ken’s Crusade" 5/5/2010

This has been written to attempt a brief articulation of a major concern that far from saving Australia from the ‘global financial crisis’ the actions, rhetoric and policies of the current Australian government are going to totally immerse us in it, or delay our recovery from it, or both. We are just 1% of the global economy. Time is needed to see where the stimulus packages of China, America and Europe will lead the world. Current local policy prescriptions seem to be pre-emptive, excessive, and poorly targeted.

Ecinya has suggested that payroll tax relief, personal tax cuts being brought forward, and some relaxation of capital gains taxes for long-term residential property holders upon sale would provide sufficient short-term relief. We are totally opposed to the $950 per person hand-out which apparently will cost about $11 billion and we don’t understand the pre-occupation with direct infusions for commercial property as opposed to working through the banking system. We are strongly in favour of infrastructure spending, but the schools programme is blatantly political and can unfold more slowly than currently envisaged. Some of the ‘green’ programmes seem also to be politically inspired.

Ecinya private article written February 2009, re-produced under Insights 1/9/2009: "A reflection: Australia and the global financial crisis."

Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)

1. The GST was a gigantic and productive taxation reform, not just a tax grab. It was both fair and balanced.
2. Certain economic reforms under Hawke and Costello underpinned a substantial amount of economic progress. These reforms were real policy.
3. From Ecinya’s response to the Rudd government’s response to the Henry tax ‘reform’ package.
4. From Ecinya’s response to the Rudd government’s response to the global financial crisis.

 

A VISIT TO OUR COLLINS DICTIONARY

The dictionary is always a source of wisdom and inspiration. Politicians are as fond of the word ‘fair’ as they are of ‘working families’ , ‘ordinary Australians’ and ‘sustainable outcomes’. ‘Fair’ is defined in our dictionary as "free from discrimination, dishonesty; apparently good or valuable". Just 14 words later ‘fairy tale’ is defined as "a highly improbable account".

In the world of tax reform, that ageless and enduring pursuit of the earnest and aspirational politician, whenever the word ‘fair’ is repeated ad nauseum as if it were irrefutable logic, one invariably realises on closer examination, that it really is a ”fairy tale’…… "a highly improbable account". Such a politician invariably needs the money to pay for his fiscal misdeeds, and propensity for recklessness, wrapped in the cloak of good intentions.

Such is clearly the case with the Resources Super Profits Tax, and prior to this episode, the GFC – the global financial crisis.

 

BUT THERE IS MUCH MORE TO THIS FAIRY TALE

A rich and generally unloved father dies after a long illness lasting nearly 12 years. After the funeral and a brief period of false mourning his 4 surviving children begin to criticise their father’s personal legacy that gave rise to his fortune, his cars, drivers, premises, status and his abundant cash. His children inherit the estate after intensive discussions with his executor and subsequently go on a spending spree with not a lot to show for it. Pretty soon they are out of money and have to mortgage assets and future cash-flows to maintain their profligate lifestyle. In their defence a few of their good mates benefited enormously from their good fortune and bountiful generosity. The children are, of course, the gaggle of four – Kevin, Wayne, Julia and Lindsay. They were, with just one exception, decent people that having not earned the fortune themselves, and having not liked their father benefactor, just got too excited at first, then careless. The executor was, of course, Ken Henry, who replaced his old and wise boss, Ted Evans, and Ken was pleased to be able to keep the children happy and fulfilled.

Ecinya is of the opinion (well documented in past Insight articles) that ‘climate change’ and ‘THE global financial crisis’ were convenient episodes for Mr Rudd to demonstrate his capacity to strut the world stage and offer solutions ostensibly beyond most of the capacities and capabilities of the other 19 countries in the G20. Note that Australia bats at about number 17 out of that 20 in absolute terms and at about 8 in per capita terms. The above table demonstrates clearly in our view the need for Australia to be modest when it seeks to be persistently loud on global issues. Hyperbole can easily be counter-productive on the global stage.