Opening statement to Senate Standing Committee on Economics Inquiry into the Treasury Laws Amendment (GST Low Value Goods) Bill 2017

With Sinclair Davidson

We recommend that the Treasury Laws Amendment (GST Low Value Goods) Bill be rejected by the parliament. It is our view that this is not an integrity measure, that this is not the government closing a loophole in the GST legislation as they claim, but rather that this is a new tax. This new tax does not promote fairness for Australian retailers or consumers. It deviates quite substantially from the current GST design and is only superficially similar to the GST in that it has a 10 per cent rate. The GST itself is a tax which purports to tax Australian consumption, but it is actually a sales tax, and the legal incidence of this tax is on the seller of the goods, and the economic incidence is the assumption that the tax is then passed on to final consumers.

This particular tax, however, does not vest legal incidence in the seller of the goods; it vests legal incidence in the electronic distribution platform and/or the people offering transportation services. It is those companies and entities which facilitate a transaction between foreigners and Australians who will bear the tax, not the seller and not the consumer. This is not a tax on Australian consumption at all, but rather it is a tax on trading with Australians.

As an aside, I noticed before that you were concerned about double taxation. If this tax is collected by the foreign seller or the electronic distribution platform, they may have a problem convincing their own tax authorities that this is not revenue to them, and they may in fact then be taxed on that in their home country. So they need to be able to tell a story that remitting money to the Australian government is actually a legitimate business expense, and I suspect we will find that it is not. So double taxation will come in, in that these foreigners in fact will be taxed in their home countries on a 10 per cent increase in revenue. I was also astonished to discover that the authorities—certainly the tax office—seem to be recklessly indifferent to consumer fraud. That is certainly a massive problem.

The unintended consequences of this tax are such that I think the government has not much thought about these consequences at all. It is very likely to reduce competition in the domestic market as foreign sellers withdraw their services and stop selling. It is likely to expose Australians to darker elements of the internet, reducing antifraud protections and consumer protections that they currently enjoy. It draws foreign entities into the Australian tax net, which currently are exempt from the Australian tax net. No thought has been given at all to the consequences of Australian businesses then being drawn into foreign governments’ tax nets. So not only will there be a greater compliance on foreigners imposed by the Australian government; foreign governments will in turn put a compliance burden on Australian businesses hoping to trade with their citizens. That has not been discussed at all. So the net compliance effect of this is unknown, certainly much more than the budgeted amount of $13 million, which I think is just the salaries of the people who will be working on this. The increased compliance cost on small business is likely to create a barrier to growth. Obviously, large Australian businesses are in a position to wear those fixed costs of foreign compliance. This will create a barrier to small business growth in Australia and again will be a barrier to entry.

This fails as a protection mechanism. Australian consumers pay well above 10 per cent price differentials when buying from domestic retailers than with foreign goods anyway. It fails to produce substantial revenue for the Australian government. We estimate it is less than 0.2 per cent of additional revenue on the existing GST. It is not clear to us that these inherent flaws can ever be repaired. If the government were to simply abolish the $1,000 threshold at the moment, they would find themselves in the position of having to borrow money to collect revenue at a loss, which of course is a completely nonsensical position.

We think the government should leave well enough alone, not introduce a new tax, not expose Australians to the dangers of the dark internet and substandard or unsafe goods, and not encourage Australians to move away from reputable online sellers. So this has no redeeming features whatsoever and it should not be legislated into existence. Thank you.

GST change is a plain and simple tariff, Scott Morrison

With Sinclair Davidson

The Turnbull government’s proposal to eliminate the $1000 threshold before the GST is levied on imported goods is not a tax integrity measure. It is a tariff, and one that will have serious repercussions that the government does not seem to have considered seriously.

The end of the low-value threshold was first flagged by the government in December 2014. It formed part of last year’s budget. Now there is actual separate legislation before parliament, and a Senate committee inquiry that will give its verdict on the legislation the same day Scott Morrison releases his 2017 budget.

By July, if everything goes to the government’s plan, the commonwealth will be receiving a stream of GST revenue from every global internet retailer that supplies Australian customers with a total of more than $75,000 worth of goods.

That’s the plan, anyway. This proposal is no more convincing now than it was two years ago when it was first announced.

In 2011 the Productivity Commission concluded that inspecting low-value imports at the border to assess their GST liability would cost more money than it would raise. So rather than getting Customs to collect the GST, the government wants to convince foreign online retailers to do it for them.

Let’s imagine this ploy works. Some of the consequences are easily predictable. First, many Australians will substitute away from well-known online sellers — such as eBay and Amazon — that have built excellent reputations for facilitating and protecting trade, to those less well-known sellers that are likely not to charge the GST.

Doing so will expose more Australians to online fraud and lead to them purchasing less reliable products from unreliable suppliers that may not meet our high quality and safety standards. It also will expose more Australians to the more unsavoury sellers on the internet, possibly leading to an increase in unlawful imports into the country.

At the very least, a 10 per cent increase in the cost of digital goods will make intellectual property ­piracy just that little bit more ­attractive. This is a real cost of the policy that must be fully accounted for.

Second, the way the government proposes to implement this measure constitutes an exercise in extraterritorial power. The commonwealth Treasury does not have jurisdiction over eBay (headquartered in San Jose, California) or Amazon (headquartered in Seattle). Attempting to rope them into our tax system will place the Australian government in conflict with our major trading partners. At the very least this should generate trade disputes at the World Trade Organisation.

Doubly so if our trading partners read the Treasurer’s second reading speech introducing the legislation, which makes it clear that this is a protectionist measure to benefit the Australian small businesses that have been “unfairly disadvantaged” by the fact they pay taxes that firms in other countries do not.

This is the nub of the issue. Transactions that occur in foreign countries should not be liable to the Australian GST.

The GST is usually described as being a “consumption tax” but in fact, for practical reasons, it is a tax on sales.

When Australian consumers purchase goods online from, say, a company based in Britain, the sale does not occur in Australia — it occurs in Britain.

The money is exchanged in Britain, the order is produced in Britain, the sale is processed in the Britain and the dispatch order is made from Britain.

The fact the goods are subsequently imported into Australia does not mean those goods should be liable to an Australian sales tax. A tax levied on imports is a tariff. This legislation is an embarrassing reversal of Australia’s longstanding free trade agenda.

Morrison pointed out in his second reading speech that his legislation is a “significant world first”. That is not something of which he should be proud.

In the realm of tax administration, at least, Australia is showing itself to be a bad international player.

Rather than introducing a new tariff to protect Australian business from international competi­tion, the government should focus its efforts on those features of the Australian business environment that impose such high prices on local consumers.

Working to lower company tax, high wage structures and reducing red tape would benefit Australians far more than protectionist measures for their small-business constituency.

Submission to the Senate Standing Committee on Economics Inquiry into the Treasury Laws Amendment (GST Low Value Goods) Bill 2017

With Sinclair Davidson

Executive Summary: The elimination of the low-value threshold for the Goods and Services Tax constitutes a new tax on inbound internet trade – that is, it will function as a tariff imposed on Australian consumers.

  • The tax will raise very little revenue and will be expensive and complex to administer.
  • The tax deviates substantially from the existing GST design.
  • The tax is less a tax on consumption but on the reputation of foreign internet businesses.
  • The tax is inconsistent with the government’s commitment to deregulation, the promotion of international trade, and its innovation agenda.
  • The tax rejects principles that the Howard government established in terms of deregulation and the promotion of international trade.
  • The tax will do nothing to address the issue of high retail prices in Australia.
  • While masqueraded as a tax integrity measure, this tax is clearly intended to operate as a form of protectionism.
  • The tax will reduce competitive pressure within the domestic Australian economy, and (as a consequence) expose Australian consumers to government sanctioned higher retail prices.
  • The tax will lead to Australian consumers substituting away from large reputable electronic distribution platforms to more disreputable platforms leading to higher rates of internet fraud and possibility criminality. Product safety and consumer protection rights are likely to be compromised.
  • The tax has few safeguards to ensure compliance and remittance of revenue to the Australian government.
  • The tax contributes to increased levels of regime uncertainty within the Australian policy environment.

Parliament should reject the Treasury Laws Amendment (GST Low Value Goods) Bill 2017.

Available in PDF here.

Diverted Profits Tax Will Go Nowhere

With Sinclair Davidson

The Turnbull government’s diverted profit tax has passed the Parliament. Introduced in response to the moral panic that, somewhere, somehow multinational corporations don’t pay a fair share of taxation, this new tax is at odds with the government’s professed belief in lowering the corporate tax burdens, is at odds with our international competitors, and (as we learnt just this month), is even at odds with the Australian Taxation Office’s tax enforcement priorities.

The 40 per cent tax on diverted profits is expected to raise $100 million. That implies that the federal government estimates a mere $250 million of diverted profits. To put that figure into perspective, the federal government recently announced a tightening of the rules on the grandparent child care benefit. That policy change would result in welfare savings of $250 million.

Grandparents allegedly rorting the welfare system are a much bigger budget problem than multinational corporations allegedly rorting the tax system.

Indeed, Tax Commissioner Chris Jordan gave the game away on March 16 when he told a Tax Institute conference that the gap between what large corporates and multinationals pay and what they should pay in tax was “relatively modest” and that “the biggest gap we’ve got in the system is us” – that is, individual taxpayers.

After five years of hyperventilating about corporate tax avoidance, this is a striking confession. The previous treasurer Joe Hockey made much of the fact that the ATO had identified 30 multinational corporations likely to offend and had embedded agents in those firms and would carefully investigating their practices.

True, Scott Morrison did say that this diverted profits tax is a tax integrity measure. Ensuring the integrity of the tax base is a legitimate policy goal. But a diverted profits tax is a counterproductive and illiberal way to go about it.

It allows the ATO to impose upfront liability and collect tax on allegedly diverted profits. It reverses the onus of proof and removes the right to silence – thus multinational corporations the right to natural justice under the Australian legal system. That is not a reasonable integrity measure but rather a punitive regime that targets foreign investors and successful Australian companies.

This is a policy that substantially increases the powers of the ATO without any governance measures to ensure that abuses do not occur. No doubt these powers will be exercised by the ATO to collect revenue beyond the amount intended by Parliament. That is simply the nature of regulatory bureaucracies and it will be small comfort for those multinationals who successfully challenge the ATO that their money is eventually returned to them.

Even more fundamentally, the diverted profits tax doesn’t sit well with current policy settings, nor with economic reality. There is currently a lot of effort and anti-business rhetoric to collect $100 million. Is it a coincidence that business investment is low? Or is that government is passing tax laws that violate societal norms of fairness and are creating an uncertain and arbitrary tax environment?

Business doesn’t know what tax rate they will face in Australia in years to come. It could be 30 per cent. It could go down to 25 per cent over 10 years if the Turnbull government’s corporate tax cut goes through. Or it could be as high as 40 per cent if some Canberra bureaucrat, empowered by the diverted profits tax, gets a bee in their bonnet about multinational structures they do not understand.

There’s been a lot of talk about policy uncertainty in the Australian energy market. With a lot less fanfare the corporate tax confusion is doing the same to the entire corporate sector. This is not how to ensure jobs and growth

In the meantime, Australia is facing an international environment where the British Prime Minister is openly discussing turning the UKinto a tax haven, and the Trump administration wants to reduce America’s corporate tax rate to between 15 and 20 per cent. The Turnbull government has chosen the wrong time to put multinational engagement with Australia at risk.

Question on Notice response to the Select Committee on Red Tape

Red Tape Committee
Department of the Senate
PO Box 6100
Canberra ACT 2600

Dear Committee,

At the Sydney public hearings on the Select Committee on Red Tape on 24 February 2017, Senator Dastyari asked me to take on notice a “large ideological question”:

Do we want socialism in one country or perpetual revolution?

I am glad to supply an answer to this question.

Senator Dastyari’s question recalls a debate between Leon Trotsky and Joseph Stalin regarding the future direction of the socialist movement. I doubt a debate between two totalitarian mass murderers remains a major bone of contention within the Australian Labor Party in 2017. As the Senator would know, Lenin dismissed Labor as a “liberal-bourgeois party”.

But as Karl Marx and Friedrich Engels so compellingly pointed out in their Communist Manifesto, the bourgeois “has played a most revolutionary
role in history”. They observed that “by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, [the bourgeoisie] draws all nations, even the most
barbarian, into civilization”.

Marx and Engels are spot on. The competitive marketplace, with the innovation and change brought about by free entrepreneurial activity, is itself a permanent revolution. The Labor Party, having presided over much of the economic reform of the last few decades, can rightly take credit for allowing the permanent revolution to be unleashed in Australia.

Contrast this revolution of the free market with socialism in one country. Countries that have experimented with the socialist model of economic control have stagnated. They have been forced to copy and counterfeit living standard-enhancing technologies rather than contribute towards that technological development. Central planning has historically been deeply inefficient and corrupt. The economic problems of planning do not seem likely to be resolved any time soon. The necessity of centralised power in order for planning to function also creates serious problems of political authoritarianism. It could be said that socialism in one country is also a “permanent revolution”, but unlike the market revolution (which grows wealth, living standards, and the ability for individuals to live
the lives they choose) the socialist revolution is a revolution against its own citizens.

It should be clear that I favour the permanent revolution of the market to a permanent revolution of socialist control. However, as recent political events have emphasised, the market revolution also entails disruption, as industries shift across borders and technological change undermines established business models. Furthermore, in our actually existing political-economic system, the heavy burden of regulation, red tape and taxation can make it hard to establish new firms to replaced obsolete ones, prevent successful firms from expanding, and encourage rent-seeking and other prosperity-reducing behaviour.

I advise that the growth of the administrative state, with its network of unaccountable and antidemocratic independent regulatory agencies, and quasi-independent watchdogs and standards bodies, has failed to suppress the market’s permanent revolution, but has placed many obstacles for citizens and workers who have to try to adjust to those changes. If parliament wants to help workers adjust to the permanent revolution, it should be looking to repeal regulatory and red tape burdens that make it harder to find a job and grow a business.

Please do not hesitate to contact me further for more details

Kind regards,
Chris Berg
Postdoctoral Fellow, RMIT University
Senior Fellow, Institute of Public Affairs

Opening statement to Commonwealth Senate Select Committee on Red Tape inquiry into the effect of red tape on the sale, supply and taxation of alcohol

With Darcy Allen

The Institute of Public Affairs welcome the opportunity to appear before this inquiry. Red tape is one of the most pressing challenges facing Australia. A recent IPA estimate calculated that red tape costs us $176 billion in forgone economic output every single year. That $176 billion is more than we pay in income tax and it is the equivalent of Australia’s largest industry. Cutting red tape is one of the keys to ensuring our future prosperity; therefore the present inquiry into red tape is welcome. Liquor licensing in particular is a significant burden on Australian businesses. This is a red-tape problem not only for late-night venues but for thousands of cafes and restaurants across this country.

If we look to South Australia as an example, there are more liquor licences for restaurants than under any other category. Business owners spend millions of dollars in compliance costs each year and these pieces of red tape generate economic distortions that hold our country back. The central contribution of our submission is a broad, cross-jurisdictional analysis of liquor-licensing regulations. We have two main findings. First, that across various states there are multiple different types of liquor licences, sometimes over 10; and, second, many jurisdictions exhibit complex and tiered fee structures ranging into the tens of thousands of dollars. Based on these findings, we make three recommendations. First, Australian states and territories should seek to streamline the number of licence types to the minimum viable level. A wide range of different licence types acts to increase business uncertainty and thereby compliance costs. We see no logical reason that some states would require 13 different licences, for instance.

Our second recommendation stems from the fact that many jurisdictions are characterised by excessive and complex liquor licence fee structures. The fees for application and renewal of liquor licences are progressively tiered from the cheapest to the most expensive licence, based on factors such as venue capacity and patron numbers. Some states even apply complex multipliers based on these factors. We recommend the structure of the licence fee system across Australia be flattened. By ‘flattened’, we mean: to reduce the difference between the lowest and the highest licence fee. There is no clear reason why the current fee structure is tiered, apart from the chance to raise more government revenue.

Our final recommendations concern licensing more broadly. We recommend that all Australian jurisdictions shift their regulatory resources away from licensing, first towards enforcing the basic principles of the regulation of liquor on operating businesses. That is to say, we should proceed by enforcing defections from agreed, simple laws, rather than increasing the red tape and compliance burden, which collectively impacts all businesses. Indeed, this broad principle, if applied to many Australian industries, would help ameliorate Australia’s growing red tape problem. Thank you for your time. We welcome any questions you may have.

An Institutional Theory of Free Speech

Abstract: The paper provides a theory of freedom of speech based on the new institutional political economy. Through politics individuals seek to achieve collectively what they would not be able to achieve individually, forming institutions of social control. But institutions have costs which need to be discovered. Freedom of speech facilitates information discovery about the subjective costs of social institutions. Those costs are not only discovered but created through the acts of speech and expression. The paper develops this institutional approach by contrasting and complimenting against the three dominant theories of free speech: Mill’s marketplace of ideas theory, Meiklejohn’s democracy theory, and Baker’s liberty theory. The paper then shows how the institutional theory can be meaningfully applied to two common questions in freedom of speech debates: that of protest on publicly accessible property, and the relationship between freedom of speech and political correctness.

Working paper available at SSRN.

Opening statement to Commonwealth Parliamentary Joint Committee on Human Rights inquiry into Freedom of speech in Australia

With Simon Breheny

Freedom of speech is a basic Australian value. A survey, commissioned by the Institute of Public Affairs and released today, finds that 95 per cent of Australians say freedom of speech is important and 57 per cent say it is very important. If you would like copies of that poll, it is available here today. Australia’s commitment to freedom of speech makes this country one of the most diverse, prosperous and socially welcoming on the face of the planet. Laws that undermine free speech put at risk our success story as a socially inclusive and cohesive nation.

Section 18C of the Racial Discrimination Act is one of the most significant restrictions on freedom of speech in this country. Along with the rest of the provisions of part IIA of the Racial Discrimination Act, section 18C ought to be repealed outright. It is an excessive, unnecessary and counterproductive restriction on Australians’ liberties. Alternative proposals for reform would not solve the problems with the legislation that have been identified in particular by recent court cases involving section 18C. In our analysis, simply removing some of the words from the section—or worse, replacing those words with new words—would be ineffective or redundant, or would create even more uncertainty about the scope of the law.

Some participants in this debate argue that freedom of speech is protected by section 18D, but section 18D is a weak and unstable foundation for such an important right. Section 18D has been applied in just three out of more than 70 cases that have been decided by the courts since part IIA was first inserted into the Racial Discrimination Act in 1995. Parliament should not imagine that section 18D provides any certainty about the law. In the QUT case, Judge Jarrett noted a conflict in the authorities about the way in which section 18D might operate.

More fundamentally, section 18D places a burden on the respondent to prove why he or she should have the right to speak freely. This is not a requirement that a free country like Australia should be proud of. A fence is not a moral trump card. Australia is driven by other values, including individual freedom and a democracy. Section 18C harms these values. We urge this committee to recommit to the liberal democratic values that make this country great and to recommend the full repeal of part IIA of the Racial Discrimination Act. Thank you.

“Stop This Greed”: The Tax-Avoidance Political Campaign in the OECD and Australia

Abstract: Corporate tax avoidance has come to be a major political and popular issue. This paper considers the evolution of the corporate tax debate; it scrutinizes the empirical claims and the calls for crackdowns on corporate tax avoidance. It focuses on two jurisdictions, the OECD and Australia, to show how international claims were reproduced in domestic political rhetoric. The paper then considers the economic function of tax competition, and examines the evidence underlying the OECD’s claim that the corporate tax base is being “eroded” by “profit shifting” to lower tax jurisdictions.

Author(s): Chris Berg, Sinclair Davidson

Journal: Econ Journal Watch

Vol: 14 Issue: 1 Year: 2017 Pages: 77–102

Available at: link

Cite: Berg, Chris, and Sinclair Davidson. “Stop This Greed: The Tax-Avoidance Political Campaign in the OECD and Australia.” Econ Journal Watch, vol. 14, no. 1, 2017, pp. 77–102.

Continue reading ““Stop This Greed”: The Tax-Avoidance Political Campaign in the OECD and Australia”

Safety and Soundness: An economic history of prudential bank regulation in Australia, 1893-2008

Abstract: This thesis is an economic history of the prudential regulation of banks in Australia between the crash of 1893 and the global financial crisis (GFC) of 2008. It applies two theoretical frameworks in order to characterise the institutions of prudential regulation and identify the sources of regulatory change over the period studied. The institutional possibility frontier is used to characterise regulatory regimes. Three common models of political economy – public interest, public choice, and ideas – are used to identify the causes of changes in those regimes. The thesis uses unexamined and underused archival sources to refine and expand our understanding of regulatory change in the period studied.

As policymakers in the wake of the GFC conceive of new approaches to prudential regulation of banks, it is important to understand where and how prudential regulation has been adopted in the past. Yet no general study of the history of prudential regulation of banks in Australia exists. This thesis is an attempt to provide that study. Prudential regulation in the period covered has swung between extremes: first, from a laissez faire approach to regulatory control, where regulation was both light and poorly administered, to a system of financial repression, where prudential regulation was both heavy and thorough. As the Australian financial market has been opened to foreign entrants and global competition since the 1980s, prudential regulation has been expanded, formalised, and internationalised. Prudential regulation of banking offers a window into broader changes in the way Australian governments have controlled economic activity.

The thesis makes a number of significant contributions to knowledge. First, it finds that, contrary to later claims by the Reserve Bank of Australia, the Curtin government established a bank deposit guarantee in 1945, and was understood to have done so by the parliament and the Commonwealth Bank, which was to administer the guarantee. Second, it offers a new history of the origins of the deregulation movement in Australia, by situating the Fraser government’s 1979 Campbell committee inquiry into financial regulation in the context of a building society crisis and a contest between two visions of Australia’s economic future. Third, it offers the first account of Australia’s rapid adoption of the international Basel Capital Accords in 1988. Fourth, it provides a new interpretation of the development of prudential regulation after the introduction of foreign banks in 1985, which helps identifies the ideological drivers and economic pressures that led to the (re)creation in 2008 of the Australian bank deposit guarantee scheme by the Rudd government.

The thesis also develops a new theoretical approach to analysing changes in political economy. The ‘subjective political economy’ framework aims to integrate diverse ideological viewpoints and motivations into an institutional model of regulatory control. By characterising institutional choices as a trade-off between subjective costs, the thesis shows how changing ideas about the purposes, possibilities, and risks of prudential control drove regulatory changes. Furthermore, the framework provides a way to understand institutional innovation as changing perceived costs places pressure on the institutional choices available.

The thesis finds that the history of prudential regulation of banking in Australia was driven by changing perceptions of the relationship between the state and the economy and the responsibilities of governments to bank depositors. Australians have long seen the relationship between banking and the state as a window to understand political economy more generally. By bringing the Basel adoption and prudential regulatory changes to the front of any account of the period of financial regulatory reform, we can see how the reform movement of the 1980s was characterised less by ‘deregulation’ and more by regulatory evolution and expansion. A reassessment of the changes in prudential regulation since the crisis of 1893 should inform our understanding of the trajectories and development of Australia’s regulatory state.

Available in PDF here.