Beware Google Tax Grabs

with Sinclair Davidson

Last month, Treasurer Joe Hockey ­announced the government had “embedded” auditors in 10 ­unnamed multinational corporations to ensure they pay tax on profits earned in Australia. And the government is “contemplating additional legislative action” to ensure multinationals pay their “fair share”.

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.

Last month, the British government announced a “Google tax” to tax 25 per cent of the profits earned by multinational firms in Britain that are “profit-shifted” to other jurisdictions.

As the London-based Institute of Economic Affairs pointed out, the British proposal is a “retrospective and arbitrary tax change designed to attack a particular small set of well-identified businesses that are not popular with the public”.

This financial year, the Australian government is budgeting to collect $71.6 billion in company tax revenue. Hockey says just 10 targeted multinationals could contribute up to another $3bn in revenue. This doesn’t seem plausible. Indeed, the entire corporate tax debate is a cloud of confusions and misconceptions.

There is a big difference between tax minimisation, which is legal and tax evasion, which is not and properly so. Hockey has made no allegation of illegality. Perhaps they are not paying as much tax as the government would like but there is no evidence that multinationals are not paying their correct tax liabilities.

Australia has some of the strongest tax avoidance laws in the world. Every government ­announces a “tax crackdown”. The idea that the powers which successive governments have granted the tax office are insufficient to deal with any problem in the tax system is ludicrous.

Governments have defined their own domestic tax base and established rules to define the international tax base.

The British Google tax is a big change to the principles of taxation. Countries can either operate a residency-based tax system or a source-based tax system. Many high-income countries ­operate residency-based systems and then enter into double taxation agreements to avoid (or minimise) double taxation.

The Google tax looks like a shift to a source-based tax system – or worse, an arbitrary hybrid of the two, designed on the run to meet temporary political goals. The British general election will be held within six months.

Politics aside, the question is how big is the problem of profit-shifting? The evidence isn’t as clear as governments and tax ­bureaucracies would like it to be.

In the past, academic studies suggested the amount of forgone tax revenue from profit-shifting was substantial. Shocked by those estimates, the OECD launched a broad campaign against profitshifting and tax competition.

Yet in recent years, economists have gained access to far more ­detailed data sets that offer a better picture of what happens within multinational firms. Now the story looks very different.

In a recent survey paper, Dhammika Dharmapala of the University of Chicago concludes “the estimated magnitude of (profit-shifting) is typically much smaller than that found in earlier studies”. Estimates of the amount of shifted profits are now between 2 per cent and 4 per cent.

This is not enough to justify undermining Australia’s relatively effective and coherent corporate tax system. Or risk damage to our investment reputation.

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

The Unspoken Benefits Of Tax Avoidance

Few things excite a treasurer more than tax avoidance.

The idea conjures up fantasies of great pots of untaxed money – money the government is morally entitled to but for one reason or another (the weakness of previous administrations, probably) is being denied.

No surprise then, as his budget savings fade away into nothingness, Joe Hockey has turned his mind to the old corporate tax avoidance chestnut.

On the weekend in Cairns the G20 finance ministers agreed to tackle “base erosion and profit shifting … to make sure companies pay their fair share in tax”. Our very own Hockey, as G20 host, is leading the charge.

Profit shifting refers to the fear that multinational firms are structuring themselves to route profits through lower-taxing countries.

Base erosion is the fear that this profit shifting is eroding the tax base, starving governments of funds.

The Organisation for Economic Co-operation and Development (OECD) started focusing on base erosion and profit shifting last year, pushing it to the front of the G20’s agenda.

They’ve been amply backed up by breathless newspaper stories about the complex tax structures of firms like Apple that have divisions in Ireland and the Netherlands.

All very interesting except for one thing. The profit shifting problem isn’t that much of a problem.

It’s true that in the 1990s, when economists and policymakers first turned their mind to how multinational firms plan their tax liabilities, they looked at aggregate country-level data and concluded (as one of the first major studies said) “companies locate a sizable fraction of their foreign activity in tax havens”.

This early work implied profit shifting was both real and substantial.

But now economists are working with more fine-grained data specifying how firms structure their internal debt around global affiliates. And as they look closer at those affiliates, the evidence is telling a very different story.

A 2014 overview of the empirical literature by one of the major scholars of global tax avoidance, Dhammika Dharmapala, concludes “in the more recent empirical literature, which uses new and richer sources of data, the estimated magnitude of (base erosion and profit shifting) is typically much smaller than that found in earlier studies”.

There is even, as Dharmapala points out, some evidence to suggest profit shifting has been declining in the last decade, not increasing.

We’re now talking about multinational corporations shifting somewhere between 2 per cent and 4 per cent of their profits to tax havens.

Two to 4 per cent is not nothing, of course.

But these lower numbers help resolve the big profit shifting puzzle. If the corporate tax base is being eroded, then why is revenue from corporate tax going up?

Between 1965 and 2007 corporate income tax revenue increased from 2.2 per cent of GDP to 3.8 per cent of GDP in OECD countries. (Revenue fell somewhat during the Global Financial Crisis but is on the rebound.) This despite the fact that corporate tax rates have been lowered over the last 40 years.

Even the OECD, in its 2013 paper Addressing Base Erosion and Profit Shifting, thinks the stability of corporate tax revenue is a bit odd (see here, page 16).

Perhaps the answer is simple: profit shifting isn’t as big a deal as newspapers and treasurers think.

At least, if nothing else, those facts ought to engender some scepticism about whether there really is a profit shifting crisis. Let alone one that requires urgent, internationally coordinated action.

So where is that scepticism?

We’ve seen how quickly commentators look for self-interested political motivations behind government pronouncements on national security and foreign policy. This is healthy. But all that valuable distrust seems to disappear when we talk about crackdowns on corporate tax – a field where political self-interest is blindingly obvious.

Hockey admitted earlier this month Australia has “amongst the strongest anti-avoidance laws in the world”.

Like many other countries, Australia has a general anti-avoidance rule, a catch-all law that allows a court to override any scheme it believes is designed primarily to produce a tax advantage.

Our anti-avoidance rule is incredibly broad and creates enormous uncertainty. But it is also extremely powerful. If there was really a tax avoidance problem in Australia the authorities would be well equipped to handle it.

Multinational corporations have to make choices when deciding where they should base themselves. Different countries have different labour costs, workforce skills, levels of infrastructure, protection of the rule of law, and, of course, different tax rates.

The G20’s real gripe is that they are being forced to compete for the tax affections of the world’s biggest companies.

You can understand why the treasurers of the world think tax competition is harmful. They want to maximise their government’s revenue.

It’s not obvious why we should share their concern.

At the end of the day, consumers and workers benefit when corporate tax rates are low and attractive. Anything that pressures our governments to keep those rates low is a good thing.

Tides To Turn For Shorten On Debt, Boats And Tax

Bill Shorten is romping ahead in the polls right now, but being in opposition is a long-term goal and the tables will turn on three big policy areas before the next election, writes Chris Berg.

Bill Shorten has one of the worst jobs in Australian politics – first opposition leader after a loss of government.

Just ask Brendan Nelson, Kim Beazley, Andrew Peacock, and Billy Snedden.

Yet, thanks to the Government’s disastrously bad selling of the budget, Shorten has an impressively winning poll position. If the election were held tomorrow, Labor would romp it back in.

Unfortunately for Shorten there are no federal elections scheduled for tomorrow.

Opposition is a long-term game – almost certain to be longer term for Shorten than most, as Labor’s new party rules make it virtually impossible to spill him before the next election.

In the Sydney Morning Herald on Sunday Mark Latham claimed the “right-wing hunting pack” is targeting Shorten because he is too successful. (This is the sort of canny judgment that made Latham such a success himself.)

But polls go up, polls go down. If we look out two years from now to the next election, Labor’s political profile is very different. Where Shorten looks strong now, he is vulnerable in 2016. Where he looks vulnerable, he is actually quite strong.

Let’s take the big issues of last year’s election: debt, boats, and the carbon tax.

The debt is Shorten’s biggest weakness.

This seems paradoxical, perhaps, because the Coalition’s budget – that is, its solution to the debt problem – is deeply unpopular. According to an Essential Poll earlier this month, just 23 per cent of voters think that Labor should support university deregulation. Just 27 per cent think Labor should support the pension changes. Just 32 per cent think Labor should back the Medicare co-payment.

These are gimmes for Shorten. Yet opposing the specific proposals will do little to rebuild Labor’s economic reputation.

Wayne Swan destroyed Labor’s standing on the economy when he was unable to wrestle the budget back into the black. Year after year Swan claimed that the budget was returning to surplus. Year after year we got deficits.

It’s easy to free ride on public dissatisfaction with government policy. Voters might be hostile to the Coalition’s individual budget measures but voters are not stupid. Shorten has to suggest – perhaps just hint, allude, imply, give us a knowing wink – that there could be a better way to fix the deficit.

That’s the difference between being a time-serving opposition leader and a viable potential prime minister.

If Shorten is strangely weak on the budget, he is strangely strong on boats.

Labor has careened from one side to another on the asylum seeker issue. Last week a few in caucus tried to engineer a shift back to the left again. Quite apart from the morality and practicality of the policy, Labor looks hopelessly divided and confused.

But will it in two years?

Right now, Labor will be secretly crossing its thumbs that the boats have, in fact, stopped, and stay stopped. It is in Labor’s interest to get boats off the front page; to remove asylum seekers from the centre of Australian politics. A weakness isn’t a weakness if nobody is talking about it.

For Labor, the carbon tax is neither vulnerability nor strength.

This is strange, perhaps, because the carbon tax has been one of the defining policies of the last decade. Elections have been won and lost on it. Prime ministers and opposition leaders have fallen at its altar.

Yet much of the heat dissipated from the carbon tax debate after it was introduced. Kevin Rudd smothered what remained when he announced he would transition from the tax to an emissions scheme. This is a rare example of trying to confuse voters as a deliberate political strategy. (I outlined the farcical nature of this announcement on The Drum when it was made last July.)

Climate activists have tried to respark climate change as a political issue – every once in a while the Climate Institute puts out a poll to try to get momentum going again, as they did yesterday – but realistically the issue is on hiatus. All sides have dug in. It isn’t a positive. It isn’t a negative. It just is.

It is often said that the Coalition didn’t win the 2013 election, Labor lost it.

In other words, it was the Rudd and Gillard government’s faults that were highest on the minds of voters as they faced the September ballot, rather than Tony Abbott’s virtues.

This is true as far as it goes, but those faults were made powerful because of the Coalition’s dogged prosecution of them.

Abbott made the carbon tax into a political liability. It wasn’t before. Same with the boats. And Abbott and his predecessor Malcolm Turnbull made Labor wear its deficit spending.

By contrast, Shorten is just along for the ride. He’s been gifted the budget backlash. He’ll likely be spared the need to take a stand on asylum seekers. And he’s been excused from boldness on the carbon tax debate.

Shorten might be polling well now, but if he wants to be competitive in 2016 he’ll have to be more proactive than that.

You Can’t Just Tax Your Way To A Surplus

In 1979, the free market economist Milton Friedman reviewed Margaret Thatcher’s first budget in his Newsweek column. Like Australia today, Britain faced a serious long-term budget problem. Like Tony Abbott, Thatcher had been voted in to fix it.

Friedman thought her budget was excellent – a rare example of financial prudence in a highly imprudent decade. It was chock-full of privatisations and tax reforms. The sort of stuff Thatcher became legendary for.

But, alongside the tax reductions and spending cuts, the Thatcher budget also increased Britain’s sales tax to compensate for some lost revenue.

This was a problem. As Friedman wrote, “From the long-run point of view, it seems to me preferable to resort to a temporarily higher level of borrowing rather than a possibly permanently higher level of indirect taxes.”

In other words, if the unpalatable choice is between a deficit and a tax hike, then a slightly prolonged deficit is the lesser of two evils.

Thirty-five years later, the Abbott Government’s proposed deficit levy is supposed to be a temporary measure – perhaps limited to four years.

Abbott should listen to Friedman. “Temporary” taxes are rarely temporary. Once introduced, they have a habit of staying high and sticking around.

After all, Australia’s income tax itself was only meant to be short-term thing. The Commonwealth Government introduced the income tax during the First World War in order to pay for the high cost of military participation.

Of course, as the Commission of Audit demonstrated dramatically last week, the choice the government faces is not between a prolonged deficit and higher taxes. The Government could cut spending and abandon its Direct Action and paid parental leave schemes.

There is something faintly ludicrous about a Government fighting its budget battle on two fronts.

For the free market right, the deficit levy is not just a broken promise – we’ve come to expect broken promises in Australian politics – but a betrayal by a leadership team that, for the last six years, has been claiming to favour low taxes above everything else.

For the left, the Commission of Audit represents a fundamental attack on the Australian social democratic settlement.

The audit commission report is remarkable. It is incredibly rare to see major government reports so explicitly driven by philosophical beliefs about the proper scope of government.

This is something Australian politics could do with more of, not less. Bold premises, radical conclusions. It’s similar in a way to what came out of Kevin Rudd’s 2020 Summit, but the audit commission is more coherent and doesn’t bother pretending to be the result of Ruddian consensus politics.

Yet to what end? The Abbott Government won’t do much with the report. What is radical in the audit commission is unlikely to be adopted. The policies which will be adopted have been floating around forever.

There is no way that this Government will be returning income taxes to the states. Sure, Tony Abbott has gone through an evolution of his views on federalism since he wrote his 2009 book Battlelines. He is apparently no longer a myopic centraliser. But there is no one in Government with appetite for such epoch-making reforms.

The things that will be adopted – like selling Medibank Private – have been obvious low-hanging fruit for many years.

So in many ways the audit commission reveals the Abbott Government’s lack of reforming ambition rather than its radicalism.

The deficit levy underscores that timidity. Don’t be fooled by the recent polls. Compared to cutting spending, raising taxes is the easy option.

The basic political economy problems with deficits and taxes are similar.

The reason it’s important to return the budget to surplus is to ensure that there is constant pressure on politicians to spend only what the tax system brings them. This is because every political incentive goes the other way. The best way to ensure a voting bloc supports you is to offer them financial support. Unchecked, governments want to spend more than they tax.

The only real constraint on this runaway spending dynamic is the fiscal norm that says budgets need to be returned to surplus. Short-term governments rarely worry about long-term consequences.

So it is important that we reduce the deficit as soon as possible. But not by any means possible.

Because, as Milton Friedman cautioned Margaret Thatcher, while the long-term dynamic of forgiving budget deficits would be bad, the medium-term dynamic of introducing higher taxes would be far worse.

Yesterday morning Tony Abbott said “in the long run the voters will thank us for doing what is absolutely necessary”.

Maybe. But in the long run voters should have no confidence that this Government – or a future Labor government – will happily forego the new stream of revenue the deficit tax will provide.

Scare Campaigns Aside, GST On Food Is A No-Brainer

Let us thank Kevin Rudd for reminding voters that “great big new tax” scare campaigns are a bipartisan affair.

The sole hook for Labor’s claim that the Coalition will increase the GST is Joe Hockey’s promise to conduct a review of Australia’s taxation system that would include the GST within its terms of reference. (Kevin Rudd’s Henry Tax Review specifically excluded the GST.)

From that, Rudd has concluded that the price of Vegemite will rise 50 cents under the Coalition.

Pretty deceitful, but such is politics. And let’s not be precious. Recall the often farcical tabling of electricity bills by the Coalition in the last parliament. When a politician wants to make an argument – right or wrong – they’ll stretch the truth to breaking point. Whatever works.

But the carbon tax has nothing on the GST. The GST is the great bogey-tax of our generation.

Thirty-eight years after it was first formally proposed in Australia, the GST still retains its power to spook the political class.

In 1972 William McMahon’s government commissioned the first full-scale review of the Australian taxation system since the Great Depression. The review, chaired by NSW Judge Kenneth Asprey, concluded that the key to a simple and efficient tax system was a broad-based tax applied uniformly to all goods and services.

By the time Asprey’s report was released, it was 1975 and the prime minister’s name was Gough Whitlam. The only tax reform Labor was interested in was that which might suppress Australia’s skyrocketing inflation.

Malcolm Fraser’s cabinet toyed occasionally with a goods and services tax, but ultimately left it alone. Paul Keating proposed a GST which was then scuttled by Bob Hawke. John Hewson put it officially back on the political agenda, but an opportunistic Keating tore it down again when he tore Hewson down. And John Howard had to denounce the GST before he could introduce it. By comparison, introducing the carbon tax was a cakewalk.

No surprise our politicians don’t want to revisit all that pain.

But any self-respecting tax review has to include the GST. And any review would conclude that broadening the GST’s base – that is, applying the GST to food – is a no-brainer. Excluding food increases the GST’s complexity and reduces its efficiency.

The argument that a GST on food would disproportionately hurt the poor is misconstrued. Yes, the smaller your income, the more you’re likely to spend on food as a proportion of your income. But the food exemption doesn’t just make food cheaper for the poor. It makes food cheaper for everyone. There are much more targeted better ways to help people on lower incomes – direct welfare payments, for instance, or varying the income tax schedule.

If you were a benevolent dictator designing a tax system from scratch, the GST would apply to all consumption goods and services. The ideal system might even set the GST higher than 10 per cent. There are a lot of inefficient, complex taxes that target production which could be replaced by a simple GST that targets consumption.

(This is important. Free marketeers tend to favour GST reform not because they love taxes but because the GST should replace more distortionary ways of raising government revenue. Any GST tax change ought to be revenue neutral. Hopefully the Coalition remembers this in government.)

Of course there is no benevolent dictator, and we wouldn’t want one.

Policy thought experiments like this are an economists’ fallacy. They assume the best policy can be modelled on a computer or detailed in a white paper and then imported holus-bolus into a nation’s legislative framework. The world doesn’t work like that. The elegant, uniform, and broad-based consumption tax envisaged by the Asprey review was shredded when it came into contact with the Australian Democrats.

One of the current furphies is the idea that Tony Abbott couldn’t change the GST even if he wanted to – it would need to be renegotiated with the states. This is wrong, at least on the face of it. The GST is a Commonwealth law, and a Commonwealth law can be changed by the Commonwealth parliament whenever it likes.

But there appears to be an evolving political norm that would compel the Commonwealth to negotiate to change the GST, even though it technically does not have to do so.

Such a constraint is a good thing. The GST is, after all, supposed to be the states’ tax.

And we know from experience that a tax unconstrained by norms or rules can become a monster.

One of the major taxes that the GST replaced – the wholesale sales tax – was introduced by James Scullin’s Labor government in 1930.

The wholesale sales tax was originally levied on a selected range of goods at a uniform rate of 2.5 per cent. But by 1940 the government had hiked the tax to more than 8 per cent, varied the selection of goods, and introduced multiple rates. The rate and the schedule changed repeatedly over subsequent decades. Scullin’s simple wholesale sales tax became a complex behemoth that the federal government couldn’t stop tinkering with.

The GST has so far avoided this fate in large part due to the trauma involved in implementing it.

Maybe we should also thank Kevin Rudd for ensuring the GST remains a toxic tax.

Why Greedy Gerry And His Mates Will Win In The End

Gerry Harvey is not Australia’s most popular man right now. It would have taken a hell of a campaign to convince Australians that imposing GST on internet retail purchases under $1000 was not just good policy, but the only fair thing to do.

It’s hard to feel bad for the retailers’ coalition, which includes Myer, David Jones and Target as well as Harvey Norman, because it seems like they’re trying to divert attention from higher prices in their shops, which have nothing to do with the GST at all. Hence the popular backlash.

But despite their tone deafness, the retailers have identified an issue that will be huge in the future. For better or worse, the government will eventually be forced to close the GST-free loophole. The alternative is to admit an efficient consumption tax is impossible in a world of global commerce.

Sure, in 2010, only a tiny percentage of retail sales were online. But there is no reason to believe Australians’ engagement with online retail and services has peaked. After all, it took some time to get where we are today: people had to get comfortable with buying goods, sight-unseen, from a website or auction seller.

There’s a generation gap too: 82 per cent of Australians aged 25 to 34 reported purchasing goods online, compared to 38 per cent of those above 65.

And the cost of international shipping is becoming trivial.

The UK-based site, Book Depository, is somehow able to beat almost all Australian retailers on price and ship its products across the world for free. It’s a volume game: the more they ship, the cheaper the shipping for each individual item becomes. The courier discounts the site has negotiated mean many Australian books are cheaper to ship from the UK than to buy at a bricks-and-mortar store here.

Sites like Book Depository use air freight. The savings are even more substantial when you ship.

The rise of the shipping container since the 1960s has reshaped and propelled globalisation more than any other innovation. Where earlier goods would be stowed haphazardly on pallets in small cargo ships, they are now shoved into metal boxes of uniform size, which has changed international commerce to the extent that transport costs are becoming irrelevant.

That’s two disruptive changes working in concert. Driving one side of retail, the revolution of the internet has been proclaimed far and wide. But the revolution on the other side, in international transport, is just as significant yet largely unnoticed.

The waves of change in retail and industry are immense and, of course, welcome. Right now, Gerry Harvey may seem like a rent-seeking whinger. But it is a virtual certainty his campaign is just the first skirmish in a long war between government and consumers who are comfortable circumventing domestic taxes.

As long as the loophole remains, we can expect retailers to try to blur the distinction between overseas and domestic retail. As a pre-Christmas gambit, Myer announced it was considering building a Myer-branded website in Shenzhen, China, to exploit the GST-free loophole.

A transparently political announcement, but not a stupid idea. If there’s a competitive advantage to be gained from restructuring a business to avoid paying local tax, someone (not necessarily Myer, but someone) will try.

The retailers haven’t quite made their case. At the moment, the logistical hurdles to imposing the GST at the border are insurmountable. And there’s obviously no way to get every online retailer around the world to comply with Australian tax law.

Julia Gillard said last week that levying GST on international purchases under $1000 may cost more than it would raise. (Customs ain’t free.) That’s as good a reason as any to rebuff the retailers. Yet it’s at best a temporary reprieve. As online commerce inevitably grows, the arithmetic will change. No government will tolerate watching its revenue hollowed out by changing consumer preferences.

The reaction to the retailers’ campaign has been intense, a reminder Australians don’t like paying tax very much. Less tax is better than more tax; better again is no tax at all.

Yet whether now or in 20 years, the government will have to face the fact that globalisation makes it easier and easier for individuals to get cheap deals. This includes seeking the lowest tax liability.

Policy makers and bureaucrats designing tax systems have long struggled with the fact that globalisation makes it hard to impose heavy taxes. We’ve seen this in the mining tax debate, where miners have threatened to take investment money overseas.

So as we now avoid tax by shopping online, perhaps we might rethink our moralising about those miners or, indeed, the wealthy individuals who protect their earnings in tax havens.

With the internet, tax avoidance is no longer just for the rich.

I think that’s a welcome development. Politicians with big spending dreams will disagree. Gerry Harvey mightn’t be popular, but eventually a government will do his bidding.

Snapping at heels of civil liberty

It was obviously a tactical error for Paul Hogan to tell the Australian Taxation Office to “come and get me, you bastards”.

The ATO claims Hogan used offshore accounts to hide profits from his film Crocodile Dundee and avoid paying tax. So they slapped him with an order to prevent him leaving the country. Never say the Tax Office isn’t fearless: Hogan was visiting Australia for his mother’s funeral.

The order was lifted yesterday after the Tax Office and Hogan had a ”cordial” meeting.

There are many reasons to be concerned by this course of events. The Hogan case is a window into just how draconian the government’s taxation and regulatory powers have become.

To start: Hogan has not been charged with any crime. Sure, he allegedly owes the government money – some reports claim it could be up to $150 million, after interest and penalties.

But he has an absolute entitlement under our taxation system to dispute that amount. And there’s a fair chance he could win: about half of all tax disputes end with the taxpayer paying less than the ATO claimed. Tax disputes are complex and technical. Taxpayers have been known to make mistakes. So has the ATO.

On a purely practical level there was little reason to believe he was a flight risk. Hogan is no Carlos the Jackal. Yes, he lives overseas, but he has returned to Australia frequently in the many years he has been under investigation. He has five children and nine grandchildren here.

Hogan’s bad luck was to find himself smack bang in the middle of a political push to eliminate the use of overseas tax havens. He is the highest profile target of Project Wickenby, a federal government crackdown on offshore tax evasion and tax avoidance.

Project Wickenby’s conflation of evasion and avoidance is a big problem. Everyone tries to avoid paying more tax than they have to. We all keep receipts of work-related expenses and rigorously, if not enthusiastically, tally them up to be deducted from our income.

One Henry tax review recommendation was to set a “default” deduction, institutionalising this minor and common form of tax avoidance.

Sometimes avoidance is more complicated – digging through the tax act for exemptions. Australia’s income tax law is 5743 pages long. Compare this to Hong Kong’s 200 pages, and it’s no surprise there are many cunning schemes to minimise tax.

There’s nothing wrong with that. Australians have no moral obligation to pay more tax than the tax law requires – even if it means using offshore accounts. The government itself admits that many uses of tax havens are completely legitimate.

Evasion is supposed to be very different from avoidance. For one, it’s clearly and unambiguously illegal. You evade tax when you are liable to pay tax, but deliberately do not.

In Australia, the distinction between evasion and avoidance has been long recognised by law. Yet in the past two decades the government has deliberately blurred the distinction in order to investigate tax havens and their clients.

One reason governments don’t like tax havens is obvious: money goes to the haven instead of government coffers. But perhaps a bigger reason is tax competition. Lower taxes elsewhere pressure governments to keep their own tax rates down.

The Organisation for Economic Co-operation and Development has been running a campaign to have developed nations harmonise their taxes as far as possible and end the “harmful” competition.

This international debate about the legitimacy of tax havens and the desirability of tax competition is the background to Project Wickenby and the case against Hogan.

For now, whether Hogan’s alleged use of offshore accounts is evasion or avoidance is an open question. While this question remains unresolved, the ATO’s violation of Hogan’s freedom of movement – a basic civil liberty – is obscene.

It is also a reminder that some of our regulatory agencies and government departments are vested with extraordinarily coercive powers. Since 2004, Wickenby investigators have been repeatedly accused of being aggressive and using intimidation as a weapon.

The Australian Securities and Investments Commission can be just as draconian. ASIC has a remarkable array of powers. It can compel people to answer questions with no recourse to the court system. ASIC runs private hearings, where people are made to give evidence under oath, with “as little formality and technicality” as possible – “formalities” such as the rules of evidence and the privilege against self-incrimination. The ASIC Act even says the regulator should do “whatever is necessary”.

A Senate report in 2000 found that a number of government agencies had stronger powers to enter and search private property than the federal police. In the Herald in July, Professor George Williams argued that many powers held by the Australian Building and Construction Commission “greatly exceed those given to any police officer in the nation”.

And the Rudd government’s Carbon Pollution Reduction Scheme Bill – had it passed – would have eliminated the right to silence and the privilege against self-incrimination, and reversed the onus of proof for suspected polluters.

The erosion of these rights and protections in order to tax and regulate should be a big concern.

These protections have developed over centuries to defend the rights of individuals against coercive and unjust state power.

Polluters deserve rights, too. So do unions targeted by the ABCC. And people suspected of corporate wrongdoing. And wealthy taxpayers.

The ATO has badly abused Hogan’s civil liberties. That’s bad enough. But more worrying is that many other regulators have the ability to do so as well.