Company Tax

Having read Ken Henry’s recent speech, I wanted to do something for Crikey! on it, and proposed something for Friday, but they wanted it today – which gave me 45 minutes. The result is below. If I would have liked to have put some things better, I got my main messages across.

For as long as the galahs in the petshop have been incanting the slogans of economic reform, the idea of “alignment” between the top personal marginal tax rate and the company rate has been a holy grail of tax reform.

It seems so logical — as assorted know-alls argue — “why pay 45% tax when you can incorporate and pay 30%?” There are some tax deferment issues, but properly administered, companies neednt present substantial tax avoidance opportunities. You cant enjoy a companys money without it being paid to you as dividends — and when it is guess what? You pay tax on it.

Meanwhile, the economies which have posted the fastest growth in the last couple of decades have some of the largest gaps between their company tax and top marginal rate. Irelands economic acceleration has been supercharged by a company tax rate of 12.5%. Its top personal rate? 42%.

Things are changing. Im hoping well finally twig that the quest for the holy grail finally comes to be seen as the wild goose chase it is — an arduous, uncertain and costly exercise which, if were unlucky enough to be successful will yield us, well, a goose!

A week or so ago the government sensibly abandoned its aspirational goal of removing the top marginal rate. And now Treasury Secretary Ken Henry has indicated hes keen to cut capital taxes.

Economic theory since the 1970s has shown that taxes on investment have very high costs because their incentive effects on saving and investment compound heavily over time. This is the literature which Henry (implicitly) cites. Im less convinced by it than him. A substantial part of the effect relies on people being implausibly far-sighted. And simply cutting taxes on capital is strongly regressive.

But Id argue that the case for cutting company tax is, if anything, stronger than Henry lets on. Thats because another kind of “alignment” — that between low levels of company tax rates and high levels of economic growth — is one of the few really robust policy implications of cross country studies.

Henry also hinted that one source of funding for lower company tax could be more direct taxation of the resources rents that have arisen from the resources boom. We said something similar in the Review of Australias National Innovation System released in September. And we proposed another way of funding lower company tax.

There is strong evidence that [dividend] imputation credits are not fully valued by the market. Further, because foreign buyers of Australian shares are the marginal investor and so dominate the price setting process, as Cannavan, Finn, and Gray suggest, “in a small open economy such as Australia, the companys cost of capital is not affected by the introduction of a dividend imputation system.

That last sentence may not say much to you so let me translate. Dividend imputation foregoes more than $20 billion per year (no, that’s not a misprint) and yet it doesnt lower the cost of capital to our firms and so its a simple “windfall” transfer to domestic shareholders.

Abolishing dividend imputation could fund a wholesale cut in company tax from 30% to somewhere around 19%! Then some additional resource rent taxation and some anti-avoidance measures like some of the ones we abolished when we briefly managed alignment in 1987 could see us lowering company tax towards Irish levels.

Oh, and it would make our domestic tax arrangements less, not more regressive.

Count me in.

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pedro
pedro
13 years ago

It strikes me that if company profits are so well protected then cutting the company tax rate should not for long, at least, significantly reduce total tax revenue.

The fact that imputation does not much affect the cost of capital to companies is not necessarily an argument against it. People receiving the money earned through their investments is a valid end in itself.

I have no conceptual problem with resource rents because the resources are public property. But the idea that deals done and rules set are changed by government when resource prices increase is pretty ordinary.

NPOV
NPOV
13 years ago

What happened to Patrick’s post?

tim watson
tim watson
13 years ago

Getting rid of dividend imputation looks like a good idea- especially when you factor in the compliance costs, and the need to maintain franking accounts etc.

I hope the review also focuses on personal tax. As a humble office worker I have access just about no work related deductions- contrast this situation to your average sub-contractor or small business operator where just about everything work related is tax deductible.

The personal tax system is currently heavily biased against employees in comparison to the self-employed. Why should I subsidise people who choose to work for themselves?

Patrick
Patrick(@patrick)
13 years ago

well, in practice, that is the effect. Obviously foreign investors try and minimise their tax as much as anyone, but practically, to the extent that they pay any they are contributing to refunding all those super fund franking credits. Not to mention your school fees, but not your mortgage.

Tel_
Tel_
13 years ago

I hope the review also focuses on personal tax. As a humble office worker I have access just about no work related deductions- contrast this situation to your average sub-contractor or small business operator where just about everything work related is tax deductible.

Essentially, as an office worker, you don’t have any expenses because your boss carries the cost. That isn’t something to complain about, I would rather have a lack of expense, than a tax deductable expense any day.

If its good that theyre subsidising us, shouldnt we put our company tax rate UP?

As long as they are willing to keep forking out, why not keep taking their money? There comes a time when they will invest elsewhere and when that happens you know you pushed your luck too far. After that they won’t want to come back.

So getting them to subsidise us robs us of a lot of capital.

But what does the curve look like? I would guess it has a sharp flip-over point where our relative position as compared with other investment options looks bad. This requires an understanding of why investors are looking at Australia in the first place (often for more reasons than merely the rate of return). For example, if we refused to disclose foreign investments to their national governments we could also collect a lot more capital by turning ourselves into an offshore haven. Then we could have the capital and keep the tax, but pay a cost in diplomatic negotiations. Chinese investors tend to put their money where the Chinese government encourages them to put it so buying resource stocks in Australia is mostly to ensure stable supply of resources rather than any particular rate of return. Some buy Australian stocks because they really want to buy Australian dollars but find it easier to hold shares than cash,. Also if you are speculating on currency then there are stocks that tend to approximately go up when the Aussie dollar goes up, and down when the Aussie dollar goes down, so there’s a multiplier effect for the speculators (e.g. any business importing foreign goods to sell into the Australian market, there are going to be a heap of electronics retailers who don’t make sales budget this Christmas).

billie
billie
13 years ago

I applaud Ken Henry’s concern with the absurd complexity of taxation which leaves Australians searching accountants who hand out sound financial advice in a timely manner, which is illegal according to the Tax Act. Its truly frightening to find out that actions taken 18 months ago can cause a tax liabilitylarger than your income.

The Tax Act isn’t effective at getting the likes of Kerry Packer to pay his fair share of tax but its very good at screwing modest wage earners and those transitioning from prensions to work into the ground.

Sinclair Davidson
Sinclair Davidson
13 years ago

If the government were to abolish the dividend imputation system what would happen to the unused accumulated franking credits (estimated at about $100 billion)? They can’t just the ‘cancelled’ – the government would have to pay compensation. If they were granfathered in place all sorts of distortions and inefficiencies would arise as people tried to access them via one scheme or another. As Patrick suggests the best way to reduce that (unfunded) contingent liability (one that actually isn’t on the books either) is to reduce the corporate tax rate – that reduces the value of those unused tax credits without generating a compensation claim. While those unused credits continue to accumulate the cost to government of eliminating the dividend imputation system continues to grow (this was exacerbated when the Howard government started writing cheques to repay excess credits in the early 2000s).

Patrick
Patrick(@patrick)
13 years ago

Nick, I agree that my comment wasn’t very thought-out – in fact it was quite the opposite.

Nonetheless, international aspect is complex. First, foreign investors are nominally subject to only 15% withholding on unfranked dividends, and in the case of UK and US inbound investors (about two-thirds IIRC) they are very often not subject to any withholding tax at all, whether or not the dividend is franked.

Yes, they are generally then taxed on the dividend in the US, but not necessarily in the UK or many other countries with at most 10% withholding. So Australia has basically decided on concessional, if not outright single-level taxation for non-US foreign investors. On the other hand this is almost irrelevant for US companies who are almost always taxed on the foreign profits of their subsidiaries anyway, and for whom Australian tax is merely a foreign tax credit. They do still like nil WHT but mainly for the cashflow advantage (and of course if in losses in the US in which case they would waste their foreign tax credits).

So why should Australian investors be double-taxed in this context? At least surely there should be some form of dividend concession – at least capital gains tax treatment so individuals and super funds could discount?

Personally I see franking as really only ‘fairness’.

Of course, I do agree with the corporate tax point – and I think my point that this undermines the franking argument (because reduces the cost) is (unlike my other points perhaps) quite valid.

Sincs, I see considerable difficulty with that argument. First is whether non-alienable legislative tax concessions are ‘property’. Don’t tell me that you can alienate them by franking a dividend, that doesn’t count.

So in short I agree that we should reduce corporate tax but can’t see the advantage of getting rid of franking credits to ‘pay’ for this. Because this is effectively charging Australian investors for a benefit that will accrue, in direct terms, primarily to foreign investors. Obviously there are the long-term increased-tax-receipts-from-larger-pie benefits which you and I both believe in but we both know that these do not really ‘count’ for the political debate, which is why you feel the need to suggest ‘paying’ for these cuts in this manner. Maybe you could just get a napkin in front of Big Kev and Ken?

tim watson
tim watson
13 years ago

“Essentially, as an office worker, you dont have any expenses because your boss carries the cost. That isnt something to complain about, I would rather have a lack of expense, than a tax deductable expense any day.” Tel_

Office workers have work related expenses just like any other worker. As an example, clothing and wardrobe related expenditures are deductible to sub-contractors, but not employees for no discernable or coherent theoretical reason.

I would rather see deductions go out the wazoo, and lower tax rates for all rather than the current deductions regime that is preferential to certain classes of workers.

I agree there is a lack of expense for office workers in many respects, but this is accompanied by a lack of ownership of any of the assets used in their work.

Ken Parish
Admin
Ken Parish(@ken-parish)
13 years ago

Much of this discussion is a bit beyond me, I must confess, although I’ve always agreed with Nichoas’s basic point that the international evidence seems to indicate that cutting corporate tax rates is one of the more effective ways of maximising growth/produtive economic activity.

Whether funding the rate cuts by abolishing dividend imputation is a good idea is another matter, and probably a fairly complex one as Patrick’s comments suggest. I suspect the only useful contribution I can make is to suggest that it is unlikely that abolishing dividend imputation (including existing franking credits as opposed to just prospectively) would trigger a constitutional requirement for compensation. That is becase it is unlikely that franking credits are “property” for the purpose of Constitution section 51(xxxi). See Health Insurance Commission v Peverill (1994) 179 CLR 226 where the High Court held that Medicare entitlements to a pathology provider were not “property” for constitutional purposes:

It is significant that the rights that have been terminated or diminished are statutory entitlements to receive payments from consolidated revenue which were not based on antecedent proprietary rights recognized by the general law. Rights of that kind are rights which, as a general rule, are inherently susceptible of variation. That is particularly so in the case of both the nature and quantum of welfare benefits, such as the provision of medicare benefits in respect of medical services. Whether a particular medicare benefit should be provided and, if so, in what amount, calls for a carefully considered assessment of what services should be covered and what is reasonable remuneration for the service provided, the nature and the amount of the medicare benefit having regard to the community’s need for assistance, the capacity of government to pay and the future of health services in Australia. All these factors are susceptible of change so that it is to be expected that the level of benefits will change from time to time. Where such change is effected by a law which operates retrospectively to adjust competing claims or to overcome distortion, anomaly or unintended consequences in the working of the particular scheme, variations in outstanding entitlements to receive payments under the scheme may result. In such a case, what is involved is a variation of a right which is inherently susceptible of variation and the mere fact that a particular variation involves a reduction in entitlement and is retrospective does not convert it into an acquisition of property. More importantly, any incidental diminution in an individual’s entitlement to payment in such a case does not suffice to invest the law adjusting entitlements under the relevant statutory scheme with the distinct character of a law with respect to the acquisition of property for the purposes of s.51 xxxi) of the Constitution.

Of course, whether any government should, in either policy or moral terms, cancel existing statutory entitlements is another question entirely. Like Nicholas, I think existing entitlements should be honoured perhaps with a time limit.

Sinclair Davidson
Sinclair Davidson
13 years ago

Thanks for that Ken (as an aside would that apply to superannuation too? So why couldn’t the federal government move public servants from a defined benefit super to a defined contribution super?). I’m not entirely covinced that pre-paid tax (a liability to the commonwealth) is equivalent to receiving a benefit (discretionary spending), but I’m sure that argument would be made and your opinion above would be part of the whole argument.

The time limit would distort dividend decision making so would lead to inefficiency of some sort or another. So if the imputation system were scrapped it would be best to allow firms to continue to use them in their own time until accumulated credits were exhausted (that would probably have asset pricing complications too). So all up the imputation shouldn’t have been introduced (far better to simply have dividends tax-free in the hands of investors) but its not clear to me how it could be abolished without some dislocation in the market.

Tel_
Tel_
13 years ago

Office workers have work related expenses just like any other worker. As an example, clothing and wardrobe related expenditures are deductible to sub-contractors, but not employees for no discernable or coherent theoretical reason.

Here’s the relevant link:

http://ato.gov.au/individuals/content.asp?doc=/content/18824.htm&pc=001/002/013/008/007&mnu=924&mfp=001/002&st=&cy=1

You can claim the cost of buying, renting, repairing and cleaning occupation-specific clothing, protective clothing and certain work uniforms.

You cannot claim the cost of purchasing or cleaning a plain uniform or clothes you bought to wear for work that are not protective or specific to your occupation even if your employer tells you to wear them – for example, a bartenders black trousers and white shirt or a managers suit or stockings.

So the important distinction is not whether you are a sub-contractor or an employee, but whether your uniform is “occupation-specific”. There are a whole swathe of special rulings for each occupation, plus distinctions between compulsory and non-compulsory. I agree that it’s a mess, but never the less, there are plenty of employees out there claiming work uniforms (e.g. nurses). Most office workers don’t wear any sort of uniform, but sub-contractors doing the same work in the same office are still subject to the same rules (as far as I can discover, I only ready this stuff).

The most annoying one for me is that you can’t claim travel to and from work, but you can claim travel while you are at work. So you get stupid little one-desk offices for the purpose of being “at work” for tax purposes. They should just give up and let people claim all work related travel.

I would rather see deductions go out the wazoo, and lower tax rates for all rather than the current deductions regime that is preferential to certain classes of workers.

That would be handing a huge advantage to corporations who would buy everything out of their pre-tax earnings and only be taxed on their declared profits. While an individual tradesman running a small business and trying to compete with the corporation would be taxed on all their tools, fuel, etc. Unless you are suggesting that corporates be taxed on their gross income, in which case low margin business would simply shut down, unable to ever make a profit.

NPOV
NPOV
13 years ago

“Unless you are suggesting that corporates be taxed on their gross income, in which case low margin business would simply shut down, unable to ever make a profit.”

Silly question…do we need company tax at all?

As far as the problem of tax avoidance goes – it really just doesn’t seem that hard to ensure that individuals cannot possibly benefit from pretending that their personal income (which they use for buying items for their personal pleasure) is somehow a form of company profit. Surely there’s at least one developed economy out there that has largely solved the problem of tax avoidance via incorporating?

Patrick
Patrick(@patrick)
13 years ago

A: not really, but it is far more efficient to tax corporations than it is to tax individuals.

One answer would be to use consumption/transaction/land taxes.

NPOV
NPOV
13 years ago

Is it really that much more efficient though? Because we do BOTH – we tax corporations and we tax the incomes all of the individuals that make up those corporations.

Further, if the economic evidence suggests that cutting corporate tax rates is a very good predictor of boosting economic activity, but cutting personal income tax rates (especially those at the higher end) not so much, then that would suggest that corporate taxes are actually inefficient, no?

tim watson
tim watson
13 years ago

“So the important distinction is not whether you are a sub-contractor or an employee, but whether your uniform is occupation-specific.” Tel_

Wrong, if you were running a business you would claim all clothing related expenditure as business related deductible expenditure under ITAA 1997 s 8-1 end of story.

As an individual/employee you face all the silly issues highlighted in the link, and more!

In terms of your comments about how corporations would be advantaged under the change I suggest, the same tax treatment would apply for corporations/small businesses so there is no advantage/disadvantage to either form of enterprise if such an approach were taken. Currently, there is broadly no differential tax treatment between small or large businesses- without wanting to get to technical. There are some STS concessions that benefit small businesses and small business CGT relief provisions, again that benefit small businesses. So holding all other things constant, if you got rid of deductions and lowered rates, this wouldn’t be a problem for small business compared to corporations.

NPOV
NPOV
13 years ago

tim, do you actually have a list of things that you would be able to claim as, say, a contractor but can’t as an employee?
I work as a contractor, but because I work from home on equipment owned by the company I work for, there’s actually not very much I can claim, except overseas travel expenses and some percentage of my utility bills. I’m not even strongly motivated to bother claiming that much, given the hassle of going through credit card statements etc. that it will involve, and the fact that I really don’t have an issue with the amount of tax I would have to pay without such deductions.
(It has been suggested to me, however, that I could legally pay far far less tax by arranging to have my income paid into some overseas account etc. etc. – I don’t know of any good reason such an option should be available to me, so I have no interest in taking it up).

Patrick
Patrick(@patrick)
13 years ago

Sorry, NPOV, we are talking about different kinds of efficiency. I agree with you! But I was talking about efficiency for the government to collect the tax in the first place – since corporates already prepare detailed accounts. I admit that this isn’t necessarily the kind of efficiency we want :)

The additional deductions are pretty broad – but the biggest advantage is that you can accumulate income indefinitely in the company, pay it as dividends to corporate shareholders who can accumulate it, etc, and you can pay yourself whatever suits you as between super and wages. Also, you can (within reason) pay someone to help you with a lot less fuss, or choose to pay dividends to a family trust, and ‘split’ the income in that manner.

Plus your employer saves on workcover, insurance, payroll taxes, etc.

The ATO actually took the super / wages split point to court for tax avoidance, but lost pretty comprehensively (and deservedly) (Ryan v FCT, IIRC).

tim watson
tim watson
13 years ago

“tim, do you actually have a list of things that you would be able to claim as, say, a contractor but cant as an employee?”

Sorry NPOV, I’m using a rather loose description of the term “sub-contractor”. I’m using it the sense of the self-employed small business person operating as a business, usually under the guise of a company. People operating in this capacity (as I’m assuming you aren’t), can claim most business related expenditure they incur as deductible. When you are an employee of a business, the range of items that you can claim deductions for as an “individual” as the tax office calls you, dwindles significantly. I think that you would most likely fall into the later category.

NPOV
NPOV
13 years ago

Patrick, I was vaguely aware I was conflating two different meanings of “efficiency” in the same post, but my first point still stands: why would it cost the government more to collect tax if we scrapped company taxes completely and only collected income taxes, giving we currently collect both?

A question – when the tax departments processes an income tax return, does it know whether or not the taxpayer is on the board of a corporation? Should it?
Is there any reason this couldn’t be used as the basis for assessing the taxable income of such individuals as a special case (e.g. potentially even based on the individual’s total personal spending for a tax year?)

NPOV
NPOV
13 years ago

Well you may be right tim, but certainly my accountant didn’t think there was any advantage in me choosing to set myself up as a company. Could you give me an example of something that I might be able to claim as a deducation if I did?

tim watson
tim watson
13 years ago

If you ran your business under the auspices of a company you would be able to claim the following expenses:

Utilities (or a proportion of them for a home office)
office expenses
work related travel
depreciation on equipment (equipment may include vehicles, computers, etc etc)
capital allowances on building works
subscriptions
interest on geared equipment/ assets/ investments
wages and salaries- if you are employing others.
Fringe benefits provided by your company to you.
Superannuation.
workcover
insurance
certain state taxes (payroll if you are employing people)
Any other business related expenses.

Your accountant may be right, depending on the scale of your operations.

NPOV
NPOV
13 years ago

Yes, I can in principle claim all those right now – in practice there’s not a lot that’s really worth claiming, except work related travel.

But if I was a salaried employee, I could expense them all to the company – indeed, that’s what other employees at the company do. So what’s the difference?

tim watson
tim watson
13 years ago

The difference is that, as an employee a lot of the above expendiutre you do not incur, and therefore cannot claim deductions for, or alternatively a lot of this expenditure will be regarded as private and domestic by the ATO.

There are benefits in incorporating, provided the scale of operations is sufficient. If travel is your largest expense, then it is probably not worth bothering.

But think about the tax benefits to your average tradey/ small business.

Not to mention income splitting benefits- your company could pay dividends to family members who are on lower marginal rates of tax.

You can throw a family trust into the mix if you like with a corporate beneficiary to defer paying tax.

Lot’s of options to save tax for high net wealth individuals.

NPOV
NPOV
13 years ago

Well see that’s the thing – yes, I could probably set myself up as a company, and pay half my income to my wife, claiming she was a personal secretary or some such (she does do very occasional work for the company). That would save me significant amounts of tax. I do actually wonder on what grounds this would be illegal. It certainly should be.

Tel_
Tel_
13 years ago

Wrong, if you were running a business you would claim all clothing related expenditure as business related deductible expenditure under ITAA 1997 s 8-1 end of story.

Should your average office-style business start buying clothing for all the staff, it would be regarded as a fringe benefit, but don’t let me stop you from trying it! Actually, the whole fringe benefits thing in business is pretty weird because the ATO just depends on business to honestly declare what they happen to think is a fringe benefit. For micro-business (one and two man companies) the ATO randomly audits in the chance of maybe catching someone out with some detail. Since the exact definition of a fringe benefit is vague and complex, and the money involved is small, micro-business gets away with stuff that big business would get whacked for. It gets even worse when you look at occupations such as “network engineer” where some guys spend all day climbing through roofs and floors dragging cables while others spend all day at a desk configuring routes and firewall rules and many people do a bit of both. Are they office workers or electricians? No one knows… What happens when someone’s work is also their hobby and personal interest? If I write computer games, and I play computer games, am I working very hard or not at all (and why should anyone care anyhow)?

Not to mention income splitting benefits- your company could pay dividends to family members who are on lower marginal rates of tax.

Ahh yes, but the income-splitting dodge is not going to be solved by twiddling with allowable deductions. This is a consequence of our non-linear income tax scales. The only system immune to such shenanigans is a flat-rate linear tax system. Should any government propose this, they will be accused of ripping off the poor. Mind you, if someone on unemployment benefits (i.e. generally regarded as poor) goes and gets a job (generally regarded as a good thing) then their benefits stop the moment they start work, but they quite often get no actual pay until the end of the month and their effective marginal tax rate (including the loss of unemployment benefit) is huge. In relative terms they suffer a penalty for working, and this is when the lion’s share of the federal budget goes into welfare so obviously there are some problems with our current system. If the non-linearity of income tax is bad, the non-linearity of welfare is mind blowing.

NPOV
NPOV
13 years ago

“…the income-splitting dodge is not going to be solved by twiddling with allowable deductions. This is a consequence of our non-linear income tax scales. The only system immune to such shenanigans is a flat-rate linear tax system”.

…except nobody’s ever seriously proposed that. All flat-rate proposals I have read have very high tax-free threshold. So there’s still an advantage to be gained by spitting your income among as many people as you can usefully get away with. But income-splitting doesn’t seem to be that hard a problem to solve either. For instance, I know my own dad used it at one point – making me one of the dividend recipients. But I never even saw an account in my name into which any money went, and certainly wasn’t able to access it. How can that be legally justifiable?

NPOV
NPOV
13 years ago

On that note, though, if you’re going to make income tax flat, then why bother with income tax at all? It would seem more sensible to simply tax the things that money can be used for.

Personally I’d be happy to support such a concept if some other means can be found to keep effective income inequality in check. For instance, we could tax the things that wealthier people spend most of their money on at far higher rates.

Tel_
Tel_
13 years ago

… if some other means can be found to keep effective income inequality in check.

You strangely seem to believe that we have a means for this now.

Patrick
Patrick(@patrick)
13 years ago

Maybe you are right – certainly franking must mainly benefit the better-off, although I wonder if that gives enough credit to the role of super funds.

Nonetheless I think that classical (ie double) taxation of dividends would lead to the bizarre situation where it would be fundamentally more attractive for foreign investors to buy Australian shares than for Australians. I always hated ‘equity’ and ‘simplicity’ and ‘efficiency’ because they were contradictory and excessively vague, but it would seem to me that in a broader sense, such a result would be inequitable in the sense of ‘the other meaning of equity’.

Still we can agree on cutting company tax :)

NPOV

A consumption tax is inherently progressive because rich people simply spend much more. Different rates are a disaster, in my view – if in doubt: raise the rate and compensate. For similar reasons excluding food was probably a mistake.

NPOV
NPOV
13 years ago

“A consumption tax is inherently progressive because rich people spend much more”

Well that’s only meaningful if you actually mean “spend much more on goods & services as a fraction of their income”. Which would be news to a lot of people.

If we were to scrap income and company taxes and replace the lost revene entirely with consumption taxes, then we’d probably need a GST somewhere around 40%.
But that would mean that those currently paying almost no net income tax would be slugged with a huge increase in the tax they’d have to pay, while those of us who earn income taxed at rates over 40% would almost certainly be better off. The only way that would be feasible would be a massive increase in benefits to lower-income earners, which would surely hugely increase churn.

And, Tel, yes, by most measures, Australia does manage to keep effective income inequality reasonably in check, though certainly not as well as Denmark.

Patrick
Patrick(@patrick)
13 years ago

Although Denmark does so partly by being horribly racist and not having any millionaires. I’d rather be here (although, fwiw, some of my non-Australian friends have found Danish and Australian culture quite comparable – personally I have my doubts).

How much do you want to bet that under your scenario (ie 40% GST) someone like a Packer would pay much more tax than previously?

But I would be happy with 20% GST; 20% income tax (whether individuals or corporates); low-income earner compensation, and borrow the difference (if any).

Tel_
Tel_
13 years ago

Well thats only meaningful if you actually mean spend much more on goods & services as a fraction of their income. Which would be news to a lot of people.

Why does the fraction of their income have anything to do with it?

If someone is earning a huge income and not spending it, then let them. They put the money in the bank presumably, and the bank is busy lending it out to other people. Where is the problem?

NPOV
NPOV
13 years ago

Actually Tel – I agree – I don’t see any great need to onerously tax income that is being left in bank accounts. But do we actually know what fraction of the income earned by high income earners does exactly that?

Patrick claimed consumption taxes are progressive because the rich spend more.
But that’s nonsense if, say, those earning 20K a year spend almost their entire income on goods and servicess (so, for instance, 80% of their income is effectively taxed at, say, 40%), whereas those earning 20M a year spend only a quarter of their income on goods and services, meaning that only 25% is effectively taxed at 40%. If you see the point of progressive taxation as being able to reduce effectively income inequality (in order words, to boost the spending power of the lowest-income earners by moderating the spending power of the highest-income earners), then a flat consumption tax would not only fail to achieve that but actually make things worse than if there were no taxes at all.
In “no tax” world, someone living in public housing earning 20K might be spending 16K on goods & services, and 4K on non-taxable stuff (most of which would probably actually *be* effectively taxes, e.g. car registration etc.), whereas someone earning 20M might be spending 5M on goods & services within Australia, 5M on goods & services outside Australia, 5M on mortgage payments + rent, and re-investing (perhaps just leaving in the bank) the remaining 5M.
Introduce a 40% GST, and all of a sudden, Mr 20K’s spending power is reduced by about 30%*, whereas Mrs 20M’s is barely affected, because a) it only affects the half of her spending that is done inside Australia and b) she can easily reduce the amount she re-invests – which, yes, may reduce her longer-term spending power but probably also the spending power of Mr 40% too, depending on how much of that re-invested income goes towards businesses being able to provide cheaper goods & services and provide jobs.

So how, exactly, are consumption taxes in any way ‘progressive’?

* if everything is now 1.4x as expensive, then he can only afford about 1/1.4 = .7% as much as he could before. So a 40% GST is roughly equivalent to a 30% income tax…have I got that right?

NPOV
NPOV
13 years ago

And BTW, Patrick, if it’s true that James Packer would pay more tax under a 40% GST, 0% income/company tax scenario than he does now, then that’s proof there’s something fundamentally wrong with the way that the tax code defines “income”.
Anything that can be spent on goods and services is income, and should be subject to current income tax rates. If Packer currently spends, say, 2.8M a year on goods and services, then he should be declaring an income of at least 5M – 2.2M (~44%) of it going in income tax. If there were no income tax, and instead a 40% GST, his 5M would go a fair bit further, as goods/services would only be 1.27x more expensive as now, hence he’d be able to purchase the equivalent of 3.94M of goods/services at today’s prices on the same income.

pedro
pedro
13 years ago

“Anything that can be spent on goods and services is income, and should be subject to current income tax rates.”

NPOV, what about the $50 Grandma gave you for christmas?

But ignoring gifts and lotteries, nobody should be able to obtain $5mil to spend on personal things without paying tax. I thought pretty much all the holes were sealed. Though I don’t doubt that part of that $5mil might be corporate expenditure. Even Packer will need a company car and have business dinners and travel I expect.

NPOV
NPOV
13 years ago

Pedro, I’m not so sure all the holes are sealed – offshore bank accounts seem to be a way many of the rich avoid income tax. Does the tax code define any money withdrawn from offshore bank accounts used to pay for personal goods & services as income? If not, why not?

pedro
pedro
13 years ago

That’s true. foreign earned money that never makes it home. And some foreign earnings are created. But perhaps we need to accept that even the ATO is not omniscient. Contra Patrick, James Packer will mainly spend that money overseas and not pay GST any way. Though it can be loaned back into the country.