Tag: taxation

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.