Forcing GST On Imports Doesn’t Stack Up

In opposition the Coalition promised no new taxes or tax increases. On Friday Joe Hockey announced the Coalition’s latest tax increase: eliminating the GST low value threshold on imported goods.

Currently GST is not imposed on imports worth less than the low value threshold of $1000. When you buy books from Amazon or clothes from ASOS, you don’t pay GST. As of July 2017, you will.

Well, you probably will. This is going to be very hard for the Government to implement.

The GST collection won’t be levied when goods are imported. Inspecting packages at the border costs more money than it raises, as the Productivity Commission conclusively found in 2011. (The Assistant Treasurer, Josh Frydenberg, has been saying that “real improvements in technology” make that finding no longer true, but the inspection problem isn’t really a technological one, it is a time and warehousing costs one.)

Instead, Australian Taxation Office officials are going to fly around the world to ask “hundreds” of foreign companies exporting more than $75,000 worth of goods to Australia to levy the GST at their end. Nice work if you can get it.

The politics here is obvious and unflattering.

Friday’s announcement satisfies the retailers who have been lobbying for years to reduce the threshold, claiming it makes domestic goods uncompetitive.

Of course, the GST threshold is a convenient scapegoat for much deeper issues in the Australian retail sector. Even if GST were imposed on all goods, many representative products would still be more expensive sold from Australian shops than foreign ones, as my colleague Mikayla Novak has shown. And international shipping isn’t free.

Friday’s announcement also satisfies Treasury and the state governments who are clamouring for more revenue. Like everything else Hockey has dressed up as a “tax integrity measure”, the elimination of the GST threshold is nothing more than a tax grab.

But, politics aside, let’s look at the low value threshold on its own merits.

Almost nobody in the debate has acknowledged that the threshold has been slowly lowering ever since the introduction of the GST. This is because the $1000 threshold is fixed – it is not indexed to inflation. And a grand isn’t worth as much as it used to.

This is the point the Treasury’s own Tax Board made in 2010, writing that inflation will “reduce over time any potential bias in favour of imported goods over local goods of the same quality and value”.

So Australian retailers have been complaining about a tax distinction that has been constantly and automatically eroding in their favour for the last decade and a half.

And that’s before we consider the fact that the dramatic reversal of the dollar has made domestic retailers much more competitive than foreign ones in the last few years.

The GST is usually described as a consumption tax. It is not a consumption tax because the GST is not levied on consumption. It is levied on sales by firms operating in Australia. In the real world, the GST is a sales tax with an input credit.

That observation might sound pedantic but it has big implications for the import threshold debate. If the GST is in fact an Australian sales tax, then trying to impose it on sales by foreign companies in foreign countries is not a tax integrity measure at all. It is a tax on imports. It is, in other words, a tariff.

Foreign companies do not, and should not, pay Australian taxes – just as companies in foreign countries do not operate under Australia’s regulatory framework or our political institutions.

As the Howard government said when it introduced the GST in 2000, “the government wants to ensure it does not unnecessarily draw non-residents into the GST system”.

And the idea that we need to raise taxes at our border in order to ensure “competitive neutrality” or to “level the playing field” is mercantilist nonsense. In fact, it’s not clear why GST should be levied on any foreign imports at all, apart from a pure protectionism.

In practice, the GST is only going to be levied on foreign companies that a) provide more than $75,000 goods into Australia and b) don’t slam their door in the face of Australian tax officials when they come knocking.

So there’s a non-trivial chance Hockey’s GST move will just encourage Australian consumers to move from bigger websites to smaller websites, trying to avoid the 10 per cent tariff.

On Friday Hockey said he has many “levers” at his disposal to “pressure” companies overseas to collect Australian taxes.

Maybe he does. But if so, that should be recognised for what it is: trying to squeeze money from foreign companies for no other reason than to satisfy retail lobbyists and feed the Government’s apparently unrestrainable spending habit.

Why Multinationals Are Not Avoiding Australian Tax

with Sinclair Davidson

The title of the interim report of the Senate economics committee inquiry into corporate tax avoidance, released this week, is “You cannot tax what you cannot see”.

This is a rather embarrassing admission that the evidence for widespread corporate tax avoidance – the avoidance which has filled so many newspaper columns, so many hyperbolic speeches in parliament – just doesn’t exist.

Imagine being pulled over by the police and told that even though you’ve been observed driving below the speed limit, stopping at stop signs, giving way at give way signs, indicating correctly, wearing your seatbelt, and maintaining a respectable distance from the car in front, the police have a hunch you’re somehow violating community expectations.

While the Senate committee feels sure there are questionable corporate tax practices going on, it doesn’t actually find any.

Rather, it relies very heavily on the political rhetoric of a now-discredited 2014 report by the Tax Justice Network, which claimed that firms were denying the government vast sums of revenue through opaque and confusing tax arrangements.

In fact, what the committee’s interim report shows is that the tax practices of the big tech firms are quite explicable.

For instance, Microsoft and Google have their regional headquarters in Singapore. As the committee admits, these headquarters are not shells, existing solely to avoid giving Joe Hockey money. They’re real. They have real offices, real assets, and real staff doing real work. In Singapore. Not Australia. Just because those Singapore headquarters digitally export some products and services to Australia does not mean they should pay Australian corporate tax on the profits.

Even more explicable is large firms with large research and development costs deducting those costs from their taxable profits. The R&D corporate tax deduction is bipartisan government policy. It seems a bit much for governments to introduce a tax incentive then get angry with firms for using it.

The lack of evidence of tax avoidance makes the committee’s belief that the Australian government should name and shame corporate tax avoiders vaguely comic.

Certainly, the Australian Tax Office should be vigilant ensuring firms are paying what they owe. Firms that fail to do so should face the full consequences of the law. But that already happens. Australia has some of the strongest anti-avoidance laws on the planet. The government has the tools, right now, to deal with illegal tax evasion.

Underpinning this whole debate is the fact that Australia’s corporate tax rate is very high. At 30 per cent, it is substantially above the OECD average of 25.3 per cent. And Australia is one of the most heavily reliant countries on corporate tax revenue in the OECD. The Senate committee admits that this heavy burden puts Australia at a “comparative disadvantage”.

With such a disadvantage, it is no surprise that multinational companies are not lining up to establish their regional headquarters here.

But a failure to establish regional headquarters in Australia – “avoiding permanent establishment” in the lingo of the committee – does not constitute tax avoidance. Australia’s tax and regulatory environment is not competitive. Singapore’s is competitive. This ought to cause some soul-searching by the Parliament. Handwringing about phantom corporate tax avoidance just postpones consideration of the real problem.

Perhaps we might expect the sort of anti-corporate nonsense espoused at the inquiry from Labor and the Greens. What’s really disappointing is the full-throated support of the corporate tax panic from the Coalition.

Government senators on the committee wrote a dissenting minority report. Yet their complaint was that the committee did not fully acknowledge all the exciting work the Abbott government was doing to clamp down on multinationals.

Earlier this year the government released its own proposed legislation to deal with corporate tax avoidance. In effect that legislation would empower the ATO to second-guess where it feels profits should be booked for tax purposes.

The consequences of such an approach would be dire. It would expose multinational firms to double taxation. It would be a huge incentive for those firms to leave Australia all together, taking jobs and economic activity with them.

All this fretting about tax avoidance makes good demagoguery. But it might seriously harm Australia’s economy.

Hockey’s ‘Grand Deal On Tax’ Is Just Wishful Thinking

Joe Hockey is looking for a “grand deal” between government and the community on tax reform. On Wednesday last week he addressed a PricewaterhouseCoopers audience calling for a discussion about big, long-term changes to the tax system that might set us up for coming economic changes.

There’s no reason to doubt his sincerity. Hockey seems genuinely interested in the structure of the tax system. He was recently speculating whether the GST has a future in a global economy, where transactions are digital and borderless. It’s not hard to imagine the blue sky conversations he’s enjoyed with Treasury boffins where they ponder such imponderables.

But his hope for a grand deal on tax is folly. Tax reform is easy to talk about. It’s very hard to implement. It’s even harder to implement in a way that prevents the political system from undermining the virtues of the reform in question. And it’s almost impossible to implement when your government has no political capital.

Australian governments levy more than 100 separate taxes. Each of these interact in complicated ways, introducing incentives for us all to rearrange our affairs, to work, spend and save differently. No real-world tax is perfect, perfectly fair or perfectly efficient. They all bias economic activity somehow. (Sometimes this bias is intentional. So-called “sin” taxes are designed to stop us buying the product that is being taxed.)

Over time, governments have amended the system to reduce the most obvious biases and distortions. Many of those policies that are today fashionably described as tax loopholes or concessions exist because, in their absence, some activity would be penalised.

On The Drum last year, for instance, Alan Kohler criticised dividend imputation for making Australian investors obsessed with collecting dividends. But if we didn’t have it, income earning through corporate investment would be taxed twice – first in corporate tax, then when it is returned to investors through income tax.

The tax system is an evolved formula that reflects decades of lessons, errors and political compromises.

So designing a more efficient tax system than what we have now is relatively easy. Everyone has their own ideas. Yesterday John Daley and Brendan Coates of the Grattan Institute were pushing for property levies. NSW Premier Mike Baird proposed a 50 per cent increase in the GST. Tony Abbott likes that one.

But there’s a big difference between tax design and tax reform, as the Harvard economist Martin Feldstein noted four decades ago. Tax systems can be designed on a blank sheet of paper. But tax reform has to be done in an existing political system, underpinned by existing political institutions, coordinated with existing political compromises, and against the backdrop of a welter of political interest groups with political influence and media friends.

All that politics inevitably leaves its mark. All economic reform is the result of bargaining between the most powerful interest groups. What looks like a beautiful, clean, theoretically-efficient tax on paper is distorted and damaged when the political class try to enact it. Not all laws come out looking like firmly-cased and richly-coloured sausages. Sometimes what falls out of the legislative meat grinder is just a coarse pile of mince and broken pieces of pig intestine.

Hockey should know this. Remember the mining tax? The idea of a resources rent tax was, as so many economists said at the time, an elegant and efficient tax compared to the royalties system. But imposing such a tax on top of the Australian landscape was, it turned out, a hopeless task.

First of all, the mining tax was introduced by the federal government. But state governments owned the resources and charged the royalties. So the designers had to work around that problem by crediting back royalty payments. Second, it had to be introduced into an existing landscape where decisions about mining investments had already been made – hence another round of compromises and transitional arrangements.

And all this happened before the Rudd government learned it was not strong enough to resist a publicity campaign by mining companies. The replacement mining tax, introduced by the new prime minister, Julia Gillard, was even worse.

The last real tax reform success was 15 years ago, when the Howard government introduced the GST. But that success is easy to overstate. Parliamentary negotiations meant that large swathes of consumer products now fall outside the GST net. The original intention was that states would eliminate stamp duties on mortgages and other loans. That didn’t happen. And the way the GST is distributed means states bicker over their share and generally act like mendicant clients of an autocratic Commonwealth.

Hockey wants big picture thinking and long-term reform. It is good we have a Treasurer thinking such thoughts. But Hockey is not a theoretician. He is a parliamentarian. And what can be imagined on paper and what can be negotiated in politics are very, very different.

Submission to Treasury consultation into exposure draft of Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015

With Sinclair Davidson

Introduction: The Tax Laws Amendment (Tax Integrity Multinational Anti-avoidance Law) Bill 2015 exposure draft represents an important and concerning watershed in the practice of Australian corporate tax governance.

The draft bill would base the assessment of Australian tax liabilities on an assessment of tax rules in other countries. It undermines global tax agreements to which Australia is a part that have developed to prevent double taxation, risking the phenomenon that those agreements were designed to avoid. It offers a disincentive for the world’s biggest firms from establishing operations in Australia. It mischaracterises readily understandable business decisions as tax avoidance and penalises firms for normal corporate structural practices.

The scope of this legislation amounts to a substantial, yet entirely unpredictable, increase in corporate tax, and an attendant increase in the regulatory burden faced by large firms operating in Australia. We dispute the claim that this is a “tax integrity” measure. It is very much a tax increase.

Available in PDF here.

An analogue budget meets the digital world

Budgets are a matter of light and shade. You have to get the balance right. And so having spent the weekend talking about its wonderful childcare plans, yesterday the Government paraded Treasurer Joe Hockey in front of cameras toformally announce some of the budget’s so-called “tax integrity measures”.

Yes, tax integrity measures. Treasury’s spinners would have worked hard on that little catchphrase. Funny how measures to strengthen the integrity of a tax system always seem to deliver more tax to the government.

First, the Government plans to adjust anti-avoidance laws to crack down on multinationals shifting their profits to lower taxing jurisdictions. Second, the Government is going to introduce a Netflix tax – that is, try to impose the GST on digital downloads like books, music, videos and so on.

These two are linked, and in an important way that perhaps even Hockey does not realise. Analogue tax system, meet digital world.

Let’s start with profit shifting. I’ve tackled the claims that multinationals are evading taxation by shifting their profits across borders on The Drum before. Long story short: it’s a beat up. But the Government wants a budget that sounds fair and nothing sounds fairer than beating up on big companies. The corporate tax is a diffuse and confusing tax. It’s designed that way.

We are told Australian Taxation Officers have been “embedded” in 30 different multinational companies. We’re not told which companies. And at the press conference yesterday the treasurer didn’t want to tell us how much revenue the new anti-avoidance measures might raise. “It’s billions of dollars, obviously.”

This should be a red flag. It’s true that Treasury doesn’t have a good track record for estimating how much money new taxes will raise – recall the embarrassingly low take from the mining tax. But this looks less like prudence and more like a lack of confidence. Running a media or political campaign against corporate tax avoidance is easy. Trying to reverse engineer the tax accounting of the world’s biggest firms is hard.

The Government’s crackdown has a certain Sisyphean quality. In a world where much value is tied up in intangible intellectual property, it is borderline nonsensical for politicians to command that economic activity occurs in this jurisdiction or that jurisdiction.

It used to be the case that big firms had capital assets you could see and touch. Factories, vehicles, equipment, land. What mattered to firms were things like location, infrastructure, access to markets, the price and skills of the labour force and so on. But now the assets of the biggest firms can be placed anywhere in the world instantaneously. So they tend to be clustered in low tax jurisdictions with established and reliable legal systems. Like Ireland and Singapore.

What isn’t obvious is why this is a bad thing. Yes, higher tax countries like Australia would prefer that firms book their intellectual property here so Treasury could skim some cash off the top. But treating big firms to a publicity focused “crackdown” only harms what we should be trying to improve: the Australian investment environment. Firms should want to put their assets here. Implicitly, the Government’s profit shifting claims suggest they do not.

There is almost exactly the same issue with the Netflix tax. Once again, the Government is trying to shoehorn a national tax better suited for an analogue era into the age of digital globalisation.

“It is plainly unfair that a supplier of digital products into Australia is not charging the GST whilst someone locally has to charge the GST,” Hockey said at the press conference on Monday.

But why? The GST is a tax that the Australian government has chosen to place on Australian businesses. If there is an unfairness here it is an unfairness imposed by the government when it chose to introduce the GST. It is not “unfair” that other countries do not charge the Australian GST.

When we import goods from other countries – real or intangible – they are priced free of the burden of the many taxes and regulatory costs imposed by the Australian government. This does not make international trade unfair. In fact, all those institutional, regulatory and geographic differences between different trading partners are why international trade is so beneficial.

And – as with the profit shifting debate – the Government’s rhetoric is running far ahead of its capabilities. It is absolute fantasy that Hockey and the Australian Treasury will be able to impose our taxes on international digital goods providers in any meaningful way.

Yes, they might be able to convince a few of the big firms to play ball. But many already are playing ball. Apple, for instance, already charges GST. Those online firms with no Australian base and few Australian interests are unlikely to sign up to this new impost. What’s the Government going to do? Censor them?

It was reported last week that the Abbott Government has scotched many of the tax increases on the table in order to free itself to attack Bill Shorten for wanting to increase tax. That’s good, as far as it goes.

But it would be better if they opposed tax increases because they find increasing tax inherently objectionable.

Ultimately, the tax “integrity measures” announced yesterday have to be seen in the context of a Government that thinks the only viable way back to surplus is more revenue.

Conservative Voters Blindsided By Coalition Tax Increases

What exactly is the point of a Coalition government if it offers the same sort of tax increases as voters expect from Labor and the Greens?

It’s disturbing how quickly the Abbott government has turned its attention to boosting government revenue rather than reducing government spending. It’s only been in power 18 months.

First, there’s the planned deposit tax, a levy imposed on all our bank accounts purportedly to pay for the deposit insurance introduced by Labor during the global financial crisis.

When Kevin Rudd proposed the deposit tax in August 2013, Joe Hockey, then shadow treasurer, said it showed how “Australians end up paying for Labor’s waste and mismanagement”. So what does it say now the tax is being mooted by the Coalition?

Then there are all the possible changes to the GST. The GST-free import threshold of $1000 might be lowered. The government is drawing up legislation to impose GST on digital downloads – the so-called Netflix tax. There’s even been discussion of broadening the GST base to include things like fresh food, health and education.

There’s also a Google tax on the horizon. Hockey said last month companies that do not pay the “legitimate level” of tax are “thieves”. But tax minimisation is perfectly lawful. We all do it when we fill out our tax forms. In fact, firms have an obligation to their shareholders to minimise tax.

To change corporate tax law as Hockey wants wouldn’t be recouping money that is rightfully the Treasury’s. It would be increasing the corporate tax burden, and increasing investment uncertainty while it’s at it.

Likewise, the government wants to tackle what is described as the superannuation tax “concession”. Here it is on a virtual unity ticket with Labor.

Don’t be fooled by the word concession. It is a euphemism. The issue here is that while income is taxed progressively – rich people pay proportionally more than poor – superannuation is taxed at a flat rate of 15 per cent. The government thinks wealthy people are putting too much money into super, avoiding high marginal income tax rates, and depriving Treasury of money. Let’s be blunt: to eliminate superannuation concessions would be just another tax increase.

But there is a more fundamental point. Superannuation is taxed at a lower rate to counterbalance the income tax system’s bias against savers. All those so-called loopholes and thresholds and concessions exist for a reason. Many of them exist to prevent perverse and unfair taxation, to treat different assets equally, to avoid double taxation, to encourage saving. And all of them were instituted as part of a democratic bargaining process. Eliminating a loophole is the same as raising a tax.

The Coalition should know this instinctively. Liberal parliamentarians campaigned under the slogan “Our Plan: Lower Taxes”. When he became leader Tony Abbott declared “there will not be any new taxes as part of the Coalition’s policies”. Now his team are lining up alongside Bill Shorten and Christine Milne to push for new and higher taxes. Let’s hope they’re embarrassed.

I haven’t even mentioned bracket creep, the process whereby inflation slowly pushes wage-earners into a higher tax bracket without making them wealthier.

The tax system is full of little revenue-scrounging tricks like that, tricks of language and mathematics and perspective that hide who pays and how much.

Funny how those tricks always work in Treasury’s favour. Bracket creep could be done away with once and for all by indexing income tax to inflation. Malcolm Fraser’s government experimented with such a policy, but abandoned it. It is in the government’s political interest to let bracket creep work its subtle expropriating magic.

The government’s problem is spending, not revenue. The public spat this month between Hockey and Peter Costello was revealing. If you missed it, Costello criticised Hockey’s desire to raise tax. Hockey responded that he wished he had the sort of revenue Costello enjoyed in government.

But hold on: Hockey does have that sort of revenue. If we adjust the figures for inflation, Hockey has $18.6 billion more revenue than Costello received in his last budget. (The most recent reported figures appear in the December Mid-Year Economic and Fiscal Outlook.)

The government’s other budget excuse – that the iron-ore price is bottoming out – isn’t convincing either. Yes, iron ore could go as low as $US36 ($46) a tonne. It was nearly $US200 a few years ago. But that was under Labor. Costello hadn’t been so lucky. Iron ore only lurched above $36 after the Howard government left office.

Hockey said he was kicking off a national conversation about tax and efficiency when he launched his tax discussion paper last month. Economists – particularly the sort of economists that populate treasury departments – spend a lot of time thinking about what is the most efficient tax system. The discussion paper reflects a lot of that thought. It judges taxes on how much they distort our incentives to work and produce.

However, efficiency isn’t the only thing we want in a tax system. Too often politicians use the word efficiency as a synonym for ingenious. The 17th-century French finance minister Jean Baptiste Colbert famously described the art of taxation as “plucking the goose as to get the most feathers with the least hissing”. You can understand his view. For a treasurer the most important thing is maximising revenue.

But it’s not obvious why we should be pleased the government wants to pluck more of our feathers. A Coalition government, no less.

Moral Panic Overlooks Real Company Tax Problem

with Sinclair Davidson

The corporate tax profit shifting debate is a classic example of moral panic. First, it’s incredibly complicated. How many Australians could explain how company tax is calculated, let alone what business practices a “double Irish Dutch sandwich” refers to?

Second, it’s driven by hyperbolic and simplistic reports of companies paying little to no tax. These stories pivot on even more complicated scandals, such as “Lux Leaks”, and the technicalities of foreign tax systems.

And third, it’s wildly overstated. The best current estimates of how much corporate tax is shifted across borders is in the realm of 2 per cent to 4 per cent of total corporate tax.

It’s true that earlier estimates in the 1990s were much more than that. It was those high estimates that got the Organisation for Economic Co-operation and Development interested in the issue. But the firm- and affiliate-level evidence is better now. It’s pointless to scrutinise a moral panic for the clarity of its claims. But the corporate tax debate is missing the point.

As a society we don’t value firms for the money the government extracts from them. We value firms because they produce goods and offer services that make us richer, our lives easier, more convenient and more enjoyable, and our standards of living higher.

We ought to design our tax system to encourage foreign firms operating and doing business on Australian shores, bringing investment and jobs. Any attempt to tackle profit shifting that raises uncertainty or lowers Australia’s investment climate would be a disaster.

The corporate tax is not a good tax. As a recent Treasury paper pointed out, it is one of the most inefficient taxes levied by Australian governments. The burden of the corporate tax is scattered and obscure.

Greens leader Christine Milne has been running around this week accusing companies of not paying their “fair share”. But that fair share is always and inevitably passed on to someone else. The literature on the incidence of corporate taxation suggests the burden of corporate tax is worn in the short term by investors, and in the long run by a combination of investors and workers. Of course, under our superannuation system every worker is an investor as well.

Few of the standard justifications for the existence of corporate tax – particularly in a small, open economy – are compelling. One fear is that company owners might divert their personal income into the company. But they’d still have to pay capital gains tax on the way out again. Another argument is that corporate tax is an easy way to get money out of multinationals. Absurd, we know.

That’s why there are academic tax papers with titles such as “Why is there corporate taxation in a small open economy?” and “Can capital income taxes survive? And should they?”

For the political class, the corporate tax has one great advantage: it’s unclear who ultimately pays. It’s easy and comfortable to beat up on corporations, just as long as you stay mum about who actually ends up paying corporate tax. The whole system rests on this clever one-two trick. Who could sympathise with big bad business?

But even if the government wishes to keep the corporate tax fiscal illusion going, there’s hope. For all the handwringing about the double Irish Dutch sandwich, one point often missed is that Ireland has been very clever. That country’s low corporate tax rates have brought in multinationals, and with them jobs and investment.

It’s not obvious those low rates have come at a cost to the Irish budget. Corporate tax revenue as a percentage of total revenue in Ireland is almost exactly the OECD average. There’s no reason we couldn’t copy the Irish example – get in on the Irish-Dutch sandwich ourselves. The Irish make their own luck. So should we.

This Small Business Fetish Has Gone Too Far

As part of its back to basics campaign, the Abbott Government has telegraphed a small business tax package for the 2015 budget.

The plan, as far as we know, is that small business will get a tax cut of about 1.5 per cent. Big business will be left paying the standard rate of 30 per cent.

The Coalition has long had a romantic attachment to small business as a sort of moral heart of Australian private enterprise, but this policy is the worst sort of small business fetishism.

It threatens to further undermine an already complicated corporate tax system, confuses the sources of economic growth, and will distract policymakers from the much more fundamental task of opening protected areas of the economy up to competition.

Let’s take these one at a time.

It beggars belief that while the political class is banging on about the convoluted the tax code, “unfair” tax concessions, and clever corporate tax minimisation, the Government is planning to increase the complexity of the corporate tax system.

How long before we see the first exposé in Fairfax business pages about large corporates rearranging themselves to take advantage of the concessional small business rates?

The proposed small business tax cut would make the Australian corporate tax system explicitly progressive. Just as we pay a higher rate of income tax according to our wealth, firms would pay a higher rate of corporate tax depending on their size. The United States has a progressive corporate tax. Ours is flat – 30 per cent no matter what.

Now, in practice, firms don’t pay the same 30 per cent rate. As my Institute of Public Affairs colleague Sinclair Davidson has documented, all those deductions, offsets and credits mean the effective tax rate – that is, the amount of tax paid – hovers about 25 per cent. On top of this, small businesses tend to have much more variable profitability, so they tend to pay less than big business already.

Even with this caveat in mind, progressive corporate taxes are a terrible idea.

Corporate taxes are very different from income taxes. Income taxes are ultimately paid by the people whom the tax is levied upon. The money comes out of the pocket of the person who fills in the tax return. I’d prefer our income tax to be flat. But progressivity for income tax at least has its own internal logic.

Corporate taxes are very different. The cost of corporate tax is ultimately paid by someone other than the corporation – passed on to consumers through higher prices, or to shareholders, or even to the company’s employees.

After all, companies don’t pay corporate tax, people do.

It’s not at all clear why we would want to tax people who buy products from large firms more than those who buy from small firms. Unless, of course, the small business tax cut is a form of primitive industry policy to prop up small business and make it artificially competitive.

Large firms exist for a reason: to take advantage of economies of scale. Large scale manufacturing is more efficient than small scale manufacturing. Big is beautiful. All else being equal those big multinationals that everyone hates have given us cheaper products and higher living standards.

This hints at a much deeper confusion underlying the Government’s small business fetishism.Joe Hockey likes to describe small business as the “engine room of the economy”. Funnily enough Wayne Swan used to say the same thing.

Of course, no single sector is the engine room of the economy. That’s just rhetoric. (Anyway, what happened to mining?)

But the Government seems to be attributing the economic characteristics of entrepreneurship onto small business. Entrepreneurs bring new products to market, put competitive pressure on existing firms to do better, undercut monopolies, and keep not just the economy going but our living standards improving.

All those giant firms that dominate the 21st century economy – Google, Apple, Microsoft, etc – were originally garage start-ups. Why would we want to penalise the next Google for growing by taxing them at a higher rate?

Obviously by definition entrepreneurs start as small business owners. But not all small businesses are equally entrepreneurial. The defining characteristic of an entrepreneur is that they do something new. They are driven by an idea. We hear from Canberra that big business is a threat to small business. Well, entrepreneurs are a threat to big business. Paper beats rock.

If the Government wants to help entrepreneurs, it shouldn’t be looking first at the tax code. It should be looking at the sorts of things raised by the Harper review into competition policy last week. That is, the regulatory restrictions on entering markets, like the taxi or retail pharmacy markets, which hold back entrepreneurs from exerting competitive pressure on incumbent businesses.

It’s true that the small business tax cut is a lot less objectionable than the tax increases being proposed, like the bank deposit tax and an increase in the GST. Maybe it’s churlish to criticise a tax cut when the real risk is tax increases.

But the Abbott Government says it understands the importance of free enterprise and the market economy. It should want to reduce corporate tax on all firms – not just small ones.

A Submission to the Senate Inquiry into Corporate Tax Avoidance

With Sinclair Davidson

Introduction: In October 2014 the Australian Senate agreed to an inquiry into corporate tax avoidance. This comes after a wave of media comment about apparent tax “minimisation” strategies practiced by large multinational firms, particularly firms operating in the technology space.

The debate over company tax avoidance at home and abroad is a highly politically charged one, but the evidence suggests it offers far more heat than light.

The debate has exposed that the mechanics of Australia’s company tax is poorly understood. Even basic aspects of the company tax – such as the distinction between accounting profit and taxable profit – have been misinterpreted and those misinterpretations repeated.

Such misunderstandings and confusions multiply when the debate turns to the interrelation between company tax in different countries and the international corporate tax regime. Further complications are the growing significance of intellectual property and “border-less” commerce in the digital age. This makes the existence of confusion about the company tax burden understandable. But that confusion is no basis on which to alter the structure of the tax system, nor impose new regulatory controls or privacy-limiting information sharing policies, which could undermine the value of Australia as a business friendly economy.

Furthermore, the overarching public policy goal for Parliament must be the ultimate health of the economy, and the prosperity of the Australian people. We value multinational activity in Australia not because they provide revenue for the government budget, but because they create economic activity: provide jobs, services, and enhance our wellbeing.

Parliament must avoid introducing policy settings which purport to protect the stability of public revenue but at the same time cool the investment climate and push multinational economic activity outside of Australia.

The debate over corporate tax avoidance resembles another controversial and complex tax debate in recent years – that surrounding the mining tax. As we argued in The Australian in in January 2015:

The government should tread carefully. This obsession with multinationals and corporate tax looks like the Rudd government’s mining tax debacle. In 2010, Wayne Swan said foreign-owned mining companies were paying only 13 per cent tax in Australia. Tax office data told a different story but the government ploughed ahead. As we learned, populism made for poor policy …

There’s another reason for [the government] to be careful. When all the dust had settled from Swan’s tax crusade, the mining tax raised almost no money anyway.

Available in PDF here.

When Is Tax ‘Reform’ Actually Just A Tax Grab?

The worst thing about the Abbott Government’s newfound interest in reforming the GST is that it makes Kevin Rudd right.

During the 2013 campaign one of Rudd’s biggest attacks on the Coalition was that Tony Abbott was desperate to increase the GST.

The sole hook for this claim was the fact that the Coalition had promised a tax review that, unlike Rudd’s Henry Review, was supposed to scrutinise the GST alongside everything else.

On that basis any attempt to study Australia’s tax mix could be assumed as a plan to increase any and every tax.

Rudd’s GST attack was deliberate, disingenuous fearmongering – based on virtually nothing, used to fill out a campaign desperate for anything.

Yet now here we are, in 2015, and the Coalition can’t help itself talking about changing the GST.

Rudd would be feeling pretty good about his ability to predict the future. The great sage of Griffith.

There are apparently two proposals on the cards. The first is lowering the threshold at which consumers can import goods without paying GST. The idea is that local retail doesn’t compete on a level playing field against foreign websites.

The second is the perennial one of broadening the base. The GST should be applied to things like fresh food – things that were specifically excluded when the tax was first introduced by the Howard government at the turn of the century.

Both interesting ideas. It’s nice to chat about policy.

Incidentally, these proposals will raise the government quite a bit of money.

It’s painfully obvious that the main reason we’re talking about the changing the GST is because of the Government’s dire budget and political situation.

There’s a big difference between tax reform and tax grabs. The sudden interest in the GST looks everything like a tax grab.

But there’s another reason for the GST gabfest: the Coalition’s search for a “narrative” that will push them through to the next election.

Folk political memory recalls how John Howard won his first re-election on the GST – the same new tax that had sunk John Hewson just a few years before. Even more impressively, Howard pulled off this trick after an unfortunate and unhappy first term.

So you can understand why trying to replicate the master’s 1998 success might have some appeal.

But the GST was a grand program, not a technical adjustment. When Howard and Peter Costello announced the GST they described it as “not a new tax, a new tax system”.

The idea was not that the GST would simply replace the sales tax but would reduce taxes across the board. Howard claimed “the heart” of the system was “the largest personal income tax cut in Australia’s history”. And the GST was supposed to allow states to abolish stamp duties and transaction taxes, and a host of other inefficient taxes.

Despite some superficial similarities, Howard was in a very different political space to Abbott. Howard had much more political capital. Budget repair was on track. There was a sense in the late 1990s that we had prosperity in our future – a sense somewhat lacking today.

And, most of all, Howard’s “non-core” promises did nowhere near as much damage as Abbott’s policy backflips have done.

One of the most credibility damaging moves this Government made was its introduction of the deficit levy on high income earners in the 2014 budget.

Not only did it destroy the promise that “taxes (will) always be lower under the Coalition”, but it raised the marginal tax rate on high income earners to 49 per cent – just under that morally dubious rate where more marginal income goes to the government than to the earner.

The Abbott Government’s approach to taxation thus far has been almost exactly the same Labor’s. They’ve been trying to quietly bump up taxes and tax rates at the edges without causing a stir. In August last year the indexation of the fuel excise resumed. In April the Fringe Benefit Tax rate is going to be bumped up as well.

Then of course there’s bracket creep, which steadily and inexorably raises everybody’s tax rate without the Government having to lift a finger.

You might object that possible changes to the GST should be treated on their own merits. They’re either good ideas or bad ones, regardless of what else is going on in the broader economic or political sphere.

As my IPA colleague Mikayla Novak has pointed out, lowering the import threshold is in the not-a-good-idea category. It won’t fix the problems of the retail sector, and it would be prohibitively expensive to impose.

And as for broadening the base? Well, a broad tax is better than a narrow one. But unless this change is matched by wider reform, imposing the GST on food would be simply soaking the poor.

But the Government isn’t thinking about efficiency, or fairness. It’s thinking about politics. Let’s hope parliament doesn’t use the GST for a short-term budget fix.