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Tax thought bubbles no real reform

06 April 2016

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Dr John Hewson is a former leader of the Liberal Party and Chair in the Crawford School Tax and Transfer Policy Institute.

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The profit-based company tax system is fundamentally flawed, as is the proposal to give extra taxing powers to the states. Who wants such a complex and ineffective system, asks John Hewson.

I guess it’s not meant as an April Fools joke. But apparently, apart from giving another layer of taxing powers to the States, the Turnbull Government is thinking of bowing to pressure from the top end of town to lower the company tax rate for larger companies to match small business at 28.5 per cent.

Of course, these captains of industry have been bleating pretty loudly of late, feeling particularly hard done by when Turnbull scrapped the possibility of an increase in the GST to pay for an even larger cut in the company tax rate. They had been hoping for something between 20 and 25 per cent.

They have also been mounting a very substantive rearguard action over the Turnbull Government’s decision to back an effects test, that would hold large business accountable for the way they have trampled over small business, as they have exploited their market, usually dominant, positions.

I was fascinated to see one of their leading spokespeople complaining that they should have won this debate as they had “acted in good faith”. Really! Even though they were running a completely baseless and indefensible position, mostly just intimidating government, to get their own way?

Of course, the government would defend a cut in the corporate tax rate as good for productivity, jobs and growth – some blind faith in the “trickle down effect”.

But, it matters just how the cut in company tax is paid for. If, for example, it is funded by the government hanging on to bracket creep, that will impact significantly on median income earners. And by delaying, say, child care benefits, it is not clear that the net effect would be positive – rather, most probably the contrary.

More broadly, it is reasonable to ask why the government bothers to sustain the present, profit-based, company tax system at all? Profit numbers are easy to fudge and it is easy for the system to be abused, especially with the “tax industry” of overpaid lawyers and accountants always somewhat ahead of the game.

Indeed, the tax industry is usually flat out working out ways around proposed new tax laws, even before the legislation is passed by Parliament.

Some of the most obscene examples are provided by the major multinationals, such as IKEA, Starbucks, Apple and Google, and a host of others, who pay very little tax in our country, even though they generate considerable revenue and actual profit within our shores.

Of course, they argue that they are only operating within the law and, unfortunately, this is mostly true. But, shouldn’t this be enough for governments to start to think about scrapping the corruptible profit-based system? Global efforts to improve coordination, data sharing and the like between various national tax authorities can only ever be expected to make a minimal improvement in a system that is fundamentally flawed.

Globally, the competition is on for lower corporate tax rates, something of a race to the bottom. Of course, if a 20 per cent rate is to be preferred to a 25 per cent rate, then presumably zero per cent would be most preferred?

Overly simplistic, isn’t it? No consideration is given to the question of equity in the distribution of essential tax burdens to fund our governments, their services, and our democracy.

Perhaps the simplest alternative system would be to just charge a flat percentage of revenue, with no deductions. Businesses focus on their revenues, and these are much easier to monitor than profit. Such a revenue tax would simply become a cost of doing business, to be offset by a very significant reduction in compliance costs.

Of course, some economists would want to complicate such a proposal, wanting to make “adjustments” for equity and so on. And there would be global consequences as some countries, such as the United States, would insist on receiving the tax revenue from US companies, wherever they operate. So perhaps you would need global distribution agreements?

As to the proposal to give the states income taxing powers, few would want another layer of tax and more complexity – just look at the US!

This piece was first published on Policy Forum, the website of the Asia and the Pacific Policy Society and Crawford School.

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