IAN McAULEY. Tax reform, not tax cuts

From an unlikely source comes a message that Australia doesn’t need “smaller government”. Rather we need tax reform to ensure we can build a social safety net, and fund world-class health and education.

Imagine the chairman of one of our big four banks publicly asserting that Australia’s taxes are too low.

No, it’s not a fantasy.

Last Friday, in a speech to the Australian Institute of Company Directors, NAB Chair Ken Henry said “We know the total tax take is too low, but that simple fact seems too horrible to admit.”

In the same speech he mounted a strong case for cutting corporate tax rates.

Confusing? Contradictory?

Not really, unless one holds a model of economic  policy as a Manichean struggle between a “tax-and-spend left” and a “small-government right”  – the way in which Turnbull and his ministers frame our nation’s economic choices.

Henry’s speech is about tax reform. It condenses his and his colleagues’ work ten years ago when, as Secretary of Treasury, he chaired the Australia’s Future Tax System Review, eponymously named the “Henry Review”. The Rudd-Gillard Government implemented only a few of its recommendations, and the Abbott Government’s only interest was in cutting public expenditure, not reforming taxes.

His message now is that we have too many taxes (ten taxes collect 90 per cent of our public revenue, while 100 other taxes collect the other 10 per cent), and we are taxing the wrong things. These were the main theme of the Henry Review. About our overall tax level, he says:

… we have to keep in mind that the purpose of taxation is to raise revenue to fund government spending; to do things like build a social safety net that reduces inequality, and to fund world-class education and health systems. The tax system is a critical determinant of our social fabric.

Within that context he makes a case for cutting corporate taxes, in a way that Turnbull just seems unable to do.

Rather than presenting a reasoned argument, the Turnbull Government shouts from the pulpit that cutting the top corporate tax rate would be good for “jobs and growth” and would lead to higher wages. Adding volume (but not reason) it has a cheer squad from so-called business lobbies and the Murdoch media. And quite disingenuously it has conscripted one of the world’s most unpopular and distrusted politicians to the cheer squad, suggesting that we should follow Donald Trump’s race to the bottom in cutting corporate taxes.

The government misrepresents the level of our corporate taxes. Treasurer Morrison cites the headline rate of 30 per cent, without acknowledging the benefit of dividend imputation, which brings our corporate tax rate for domestic investors down to one of the lowest in the developed world (around 9 per cent). Nor does he acknowledge tax avoidance by multinationals using transfer pricing and thin capitalisation to shift profits to low-tax jurisdictions.

Opinion polls confirm that the public is unconvinced by the government’s case. People reasonably expect that most benefits of lower taxes would flow to shareholders and already overpaid executives. The Reagan-Thatcher model of trickle-down economics is discredited.

Even if people don’t read the financial press or pore over national accounts, the conspicuously vulgar lifestyle of the rich demonstrates that the top end of town is doing very well. Official statistics confirm that the profit share of GDP, after a post GFC dip, has resumed its upward trend. Those who follow the financial press know that companies have plenty of money to invest, but lacking opportunities they are handing profits back to shareholders in the form of high dividends and capital buybacks: why would even higher profits change that behaviour?

Businesses make their investment decisions on a host of criteria, of which corporate taxes are only one. They seek countries with high quality transport and internet services, a well-educated workforce, uncorrupted political and social institutions, a professional public service  and a reasonably stable policy environment. On all these criteria Australia is slipping in relation to other countries. When countries cannot offer such supportive physical and social infrastructure all they have to turn to is tax cuts.

More basically, the government promotes business tax cuts as a means of cutting taxes in general. That means less money for public services and redistributive welfare.

That’s hardly the way to win friends and influence people when almost all government services (except border security) are stressed, when income and wealth inequality are rising, and when the electorate is becoming increasingly disenchanted with privatisation of once well-provided public services. (Come to think of it, Australians were never too enchanted with privatisation in the first place.)

Contrary to the often asserted view that taxes are universally loathed, research shows that people are comfortable about paying taxes provided they see them spent on needed public services. There is growing awareness that tax cuts often have a net cost, as once free and high quality public services give way to expensive private substitutes, such as toll roads and private health insurance.

Rather than buying into the “small government” agenda, Henry is promoting cutting corporate taxes in the wider context of tax reform. He wants to see taxes shifted from areas where they may distort resource allocation (for example property transfer taxes) to areas where they may help resource allocation, such as progressive land taxes (essentially a wealth tax), road user charges, a resource rent tax and a carbon emissions trading scheme.  (Some economists such as Joseph Stiglitz put it simply saying we should tax “bads”, not “goods”.) And Henry calls for a broader consumption tax, something that was ruled out in the terms of reference for the Henry Review.

He is clearly frustrated at the way the government and its supporters in the business lobbies have put their case for tax cuts:

… we in business should not expect to be taken seriously in tax reform debates until we demonstrate a serious commitment to a purpose that improves the wellbeing of Australians. Surely nobody needs to spell out why a businessperson motivated by nothing more than profit is going to have a hard time convincing anybody of the merits of a proposition to cut the rate of tax applying to profit.

We can argue about aspects of Henry’s agenda. As one who has studied and taught public finance I’m sceptical about the case for cuts in company tax in the current environment, as I have written in a recent New Matilda article. Benefits would flow only to foreign investors: we would do better to mobilise our domestic savings towards wealth-creating investment. On the other hand, in disagreement with many on the “left”, I see a strong case for increasing consumption taxes. They are mildly regressive in their collection, but because they flow to state governments they fund health, education, public housing and urban infrastructure, all important parts of the social wage, making the net effect highly progressive.

The important point however is that Henry is talking about tax reform in its widest context, and not in a “small government” context. He recognises the economic importance of a balance of public and private goods in an economy.

It’s unlikely that the present government can dig itself out of its ideological trench to do anything about tax reform. An incoming Labor Government would do well to pick up the tax reform agenda, and undertake a proper process of policy reform – widespread consultation, a green paper, a white paper. Labor in office has a good record of tax reform: the Hawke-Keating Government introduced dividend imputation, cut the corporate tax rate from 49 per cent to 36 per cent, and reformed capital gains tax so as to bring tax neutrality between dividends and capital gains (a reform the Howard Government was quick to abolish). At a sub-national level the ACT Labor Government is at the forefront of replacing property transfer taxes with land taxes.

In an unlikely but welcome turn of events, it seems that the Chairman of NAB, without any partisan bias, has just written a tax policy for an incoming reforming government.

 

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development.  He and Miriam Lyons in their work Governomics: Can we afford small government? put the case for a stronger and better-funded public sector, and present evidence of public support for higher taxes to fund public services.

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4 Responses to IAN McAULEY. Tax reform, not tax cuts

  1. Wayne McMillan says:

    Hi Rod and Hetty, I think tax reform is not the main issue here, but macroeconomic reality. Most governments and politicians have not realised or pretend not to understand the power of sovereign governments to issue currency when they have floating exchange rates. The Gold standard was abolished in 1971 and we now live in a different monetary and fiscal environment.
    Wayne

  2. Rob Stewart says:

    I agree with almost all the points made by Ian McCauley. However, I don’t hold any hopes he may have for fair and efficient tax reform being undertaken by any incoming government.

    One comment I would add concerns the absolutely farcical, deluded phantasm of assumptions used in the economic modelling. Even with the most heroic assumptions the net social gains from the $65 billion tax splurge are miniscule, and surely within margins of error. And the supreme irony of it is that even these tiny, possible gains, decades down the track, are only achievable by assuming Australia actually exists as some kind of wonderful socialist utopia – in perfect balance, perfect household equality, no unemployment, no inflation…. and presumably world peace as well! Stephen Long’s article back in February 2017 does a wonderful job in eviscerating the modelling.

    I hold no hope for any fair, reasonable and efficient reform, not just of the taxation system, but of broader public and business governance systems and arrangements. The extremely short sighted (quarterly), and economically destructive focus on profit results at the expense of real investment and growth is just one example. I have no doubt the tax cuts to the bigger end of town would in fact be trousered through share buy backs – increasing share prices, and even more excessive executive remuneration and bonuses – more jobs? higher wages? I doubt it.

    The Government is correct in pointing out Labor’s obsequious duplicity and staggering hypocrisy on this matter. It’s true that the likes of Shorten and Bowen have, in the past, made all the right noises to the top end of town about lower corporate tax rates. Now they like to qualify their comments with weasel words like “when it’s affordable” but right now the time isn’t “right”. The mug punter is supposed to belive this means when we get back to surplus or some other economic metric. What Labor actually means is the time will be “right” when they get back into office, so they can do the grovelling to big business.

    This is all just part of the ongoing neoliberal agenda. That’s the agenda that has continued to be rolled out in earnest for the past 40 years. The agenda that speaks with a forked tongue. It’s about private luxury and public squalor, corporate welfare and private responsibility, turning persons into businesses and businesses into persons, competition and hard work for the small and vulnerable, and market power, rents and leisure resorts for the rich and pampered.

    Neoliberalism has won but it can never accept victory. It’s replaced democracy with the donocracy. It owns the LNP and Labor. It’s perfect at ensuring it gets what it wants and the people don’t get what they want – for those interested look at Princeton University research on democracy and public policy outcomes. Or just consider the multi trillion dollar bank bailouts in the GFC.

    The current company tax cut debate here and elsewhere is perfectly consistent with Sheldon Wolin’s theory of inverted totalitarianism (look it up if not familiar) and Chomsky’s fourth principle of the ten principles of wealth and power outlined in his book Requiem for the American Dream – the 4th principle being “Shift the Burden” ie. the economic burden from the rich to the poor.

    There was a time when jobs and real wage rises in market economies revolved around market power of capital and labour. Neoliberalism is crushing labour market power. Then it was about productivity and profits. That got de-linked. Then it was about foreign competition, technical redundancy, mobile capital and market financialisation. Now, it seems it doesn’t matter how profitable a firm is, in order to get a decent pay rise the big end of town needs a tax cut. To be clear, what is being argued is that private sector wage increases must now be subsidised by the public, by government! If agreed to, further company tax cuts will be a sine qua non in any future wage discussions. This is perfectly consistent with neoliberalism’s essential feature of corporate welfare.

    This is modern government working as it is told to do. It is not failure. We need to recognise this.

    (A question for who ever will moderate this comment. I wouldn’t mind actually providing a contribution or two for considerstion of posting on P&I. But I have searched the site and can’t seem to get access to any style guide for authors or anything other than commenting on other people’s posts. Maybe it’s my ludditism or maybe contributions are by invitation only. Grateful for your advice.)

  3. Hetty Bogerd says:

    The media have fallen into line with the government that cutting company tax is necessary because our 30% rate is too high? Where are the critical articles,who is researching and questioning this fallacious mantra?
    Many companies pay no tax.
    The ATO released the following figures.In 2015, 576 companies made $410 billion and paid no company tax.In 2016, 732 companies made over $500 billion and paid no company tax.
    With the $273 billion these companies should have paid we could have investment in government owned solar power farms,more could be given to the states to cut down hospital waiting lists,schools could be funded to help kids who have dyslexia,dysgraphia and Dyscalculia. More money could be given to the states to build low cost and innovative public housing.
    There are numerous other worthy and essential projects that need funding and instead of trying to con the public with the nonsensense of trickle down economics, the Federal government should be introducing policies and procedures to make all companies pay their 30% tax.

  4. Wayne McMillan says:

    Ian,
    You are conflating the need to tax with the purpose of taxation and what constitutes efficient and effective taxation. Federal governments with a sovereign fiat currency and free floating exchange rate, don’t have to rely on taxation to provide the public goods and services that a country needs.

    Taxes under these circumstances don’t fund expenditure. What determines whether a nation can provide all of the public goods and services it needs is whether a country has idle resources available to utilise. As long as there are idle resources not being fully used then governments can put these resources to good use in providing the roads schools, hospitals and services etc that we all need.

    Taxation takes money out of an economy when its overheating, or helps to redistribute income and wealth when it’s not being shared fairly.

    The design and implementation of taxation policy is another matter. Obviously we must always be careful that taxes don’t put an unfair burden on anyone and don’t have a distorting impact on the production of goods and services. In addition, the costs of administering taxes, the revenue adequacy and their compliance costs, must always be taken into consideration when constructing a sound taxation system.

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