When he was opposition leader in 2013, Tony Abbott startled a gathering of fellow Liberals in Melbourne by telling them: "No one ... is the suppository of all wisdom." His prime ministership verified the aphorism time and again. At the end of his reign, Abbott's "suppository" of wisdom had dissolved.
While it's a field of rich pickings, Abbott's unwisdom may peak on taxation. In saying that "it's my guiding principle that we are taxed too much", he encumbers himself with a policy without a context, a solution addressing only ideology. Worse, in adopting the assertion of nutty American talk-show host Rush Limbaugh that "no country has ever taxed its way to prosperity", Abbott (and Rush) display not so much unwisdom as an astonishing historical ignorance.
The truth is that, almost without exception, prosperous countries have robust taxation systems and impoverished ones do not. Efficient and fair taxation is central to countries' well-being. However, tax is usually controversial because it involves taking from some and giving to others. It creates winners who are often ungrateful and losers who are usually unhappy. Such are the banalities to which Abbott can reduce comment.
Abbott, however, is not the only one to struggle to speak sensibly about taxation. Indeed, many prominent players who opened their mouths on the topic in the recent past have put their feet in them. The facts about tax may be bad enough; the steady flow of fictions, distortions and shallowness is a good deal worse.
Before getting to that, it must be said that this year's federal budget put Abbott in his place. It recognises that government finances suffer from, among other things, a revenue problem and it increased some taxes accordingly. In 2015-16, total federal revenue was 23.4 per cent of GDP; in 2013-14, it was 22.7 per cent. In most of the early years of the 21st century, revenue exceeded 25 per cent, falling after the 2008 financial crisis. The government forecasts revenue to be 25.4 per cent of GDP by 2020-21.
This is a step in the right direction, notwithstanding the puzzling apprehensions of Murdoch press scribes who fret about "monumental social spending". The facts are that, this financial year, the government estimates its payments will be 25.1 per cent of GDP and 25 per cent by 2020-21 compared with 25.5 per cent and 25.6 per cent during the Abbott government. Further, between 2017-18 and 2020-21, real per capita payments are estimated to be about the same as they were between 2011-12 and 2016-17. In short, socialists searching for nirvana in this year's federal budget will not find it.
On what to do about taxes, perhaps the most befuddling arguments have been around corporate tax: its legislated lower rate for small to medium companies and the government's intention to reduce the overall rate from 30 per cent to 25 per cent, at a cost it now says will be about $65 billion. Advocates say these reductions are needed because current rates are internationally uncompetitive and that reductions will increase economic growth and employment.
While very high corporate tax rates can be a drag on economies, there's little evidence in experience or modelling (apparently) that reductions in the "headline" rate in Australia will have significant benefits. Indeed, while those implemented for small and medium companies may be emotionally satisfying, they are likely to be of less benefit than the scant gains likely from those planned for large enterprises.
It's true that Australia's legislated corporate tax rate is relatively high. It is exceeded by only four OECD countries and it approximates another five. However, bald comparisons of statutory rates are, especially when taken in isolation, an unsatisfactory way of assessing Australia's investment competitiveness. For example:
- Businesses contemplating where to put their money look at investment environments in the broad; they will vary enormously, as between places like Ireland, Turkmenistan, France, Thailand and Australia. On many criteria, Australia enjoys great advantages over lots of countries and its competitive position will be well above many with lower corporate tax rates.
- While a legislated rate of corporate tax is one thing, the effective rates actually paid are usually more important. These comparisons are not easy but the US Congressional Budget Office was confident enough earlier this year to publish some (admittedly based on data a couple of years old). In a field of 18 countries, this data showed Australia to be exactly in the middle of the field. On the total amount of corporate tax paid as a proportion of company income, Australia was lower than all but three.
- The comparison of tax rates is complicated by Australia's dividend imputation, a system used by few others. It provides incentives for Australians to invest domestically while potentially making corporate tax cuts more attractive and rewarding for foreign investors.
The lesson is that when politicians and business people urge reduced corporate tax because of Australia's place in the "headline rate" league table, that's likely to be an expression of ideology and/or self-interest and should be regarded accordingly. When Scott Morrison says "more favourable tax rates in the United States, the United Kingdom, Europe and Asia put further pressure on our ability to attract investment", that's more than half wrong. The US and Europe's two biggest countries, France and Germany, have higher corporate taxes than Australia. And when Alberto Calderon, the chief executive of explosives company Orica, says Australia's "corporate taxes are the highest in the OECD", he blows up any authority he may pretend to have because his assertion is untrue.
A race to the lowest corporate tax common denominator based on crude comparisons of legislated rates that fail to take into account all relevant factors or the complications of international comparisons is a recipe for public sector impoverishment in Australia and the development of an environment that risks making investment less rather than more attractive. Further, it's not good enough for Bill Shorten to confine his opposition to shallow rhetoric about the government giving "a tax handout to your rich mates ... that's going to put extra debt on the backs of every Australian".
Mention of Shorten brings to mind his curious position on the government's wish to increase the Medicare levy. He backs it but only for the top two income-tax brackets. Whatever his rationale, Shorten's line is a threat to a Medicare fundamental: its universality, which was key to the scheme when his predecessors introduced it. That is to say, with the exception of those now with a taxable annual income of $21,000 or less, all would contribute an equal amount relative to their incomes expressed as a flat percentage rate. Shorten, the great champion of Medicare, wants to undermine the extent of its universality in what seems to be a quest for political advantage.
At the same time, Shorten's sympathy for the "workers" doesn't extent to supporting the government's attempts to move school funding to a needs basis (as recommended by the ubiquitous Gonski) – no indeed. Shorten is willing to retain the advantage of well-off schools because he says the government is spending $22 billion less than the ALP would; $22 billion that is unprovided for and thus mythical.
Finally, there's the so-called "bank tax" or levy, a $6.2 billion impost on the five major banks over four years. This has caused a fury in some quarters – especially, of course, in the affected banks. National Australia Bank chairman and former Treasury secretary Ken Henry was one of the first out of the blocks, raging that this was "bad tax policy" that would damage the economy and need to be subbed by shareholders. Henry called for an "open, public inquiry" on the levy, a proposal even less likely than a royal commission on the banks.
His rage was mild, however, compared to the self-proclaimed "voice for freedom", the Institute for Public Affairs. It said the tax was a "quasi-nationalisation of the major banks and will permanently reduce economic growth ... and discourage investment in Australia". What crap.
Part of the problem is the government's ineptitude in explaining the rationale for the tax. Treasury secretary John Fraser told a Senate estimates committee last month the tax was not based on the implicit guarantee the government gives to the banks on the basis that they're too important to allow to fail. He said "the primary purpose, as the Treasurer and others have said, is to raise money to help in the process of fiscal repair". It's no wonder many in the business community are sick with worry about who will be hit next, or why ANZ chairman David Gonski asked that the levy be lifted when the budget is repaired, however that might be judged.
The government and the Treasury secretary got things back to front. The implicit guarantee is a significant benefit for banks, in terms of credit ratings, the cost of capital and the like, although these benefits will vary according to changing financial circumstances. For 2013, the Reserve Bank estimated the benefit to be up to $3.75 billion. It's hard to imagine why the banks should be able to obtain this degree of benefit without making a contribution to the taxpayer for it. The guarantee provides a perfectly reasonable basis for the levy. If that were to be so, there would be no reason for other businesses to worry about being next in line to be hit, and bank shareholders and customers, as beneficiaries, should not complain about contributing.
John Howard's GST was probably the last half-sensible political debate about taxation, although it might not have seemed so at the time. It's been more or less downhill ever since reaching its nadir with the appalling, successful campaign by the Minerals Council against the ALP's mining tax. There's not a lot of comfort in more recent experience.
The health and capacity of the Commonwealth's administration depends to a significant degree on the extent to which politicians and others are prepared to discuss taxation in a rational and reasoned way. If they are unable to convince taxpayers of the need to pay for the government services they need, it gets back to the delusion that more can be done by continuing efficiency dividends and unsupplemented funding for improvements in staff remuneration. This ceased to be a joke long ago. The good thing about this year's budget is that it's trying to lift revenues and not just cut costs.
One excellent decision in the budget (see Budget Paper 2, page 75, cross portfolio measures) is to "standardise overseas allowances for Australian government employees". In a fit of gothic stupidity, responsibility for determining these allowances was devolved to agencies in the 1990s with the consequence that people in individual overseas posts from different agencies were compensated differently for the same disadvantages their postings involved.
One niggle: the papers say an objective is "to ensure that allowances better align with community expectations". That's silly because such expectations cannot be measured and it would be asking too much to expect a person on an Armidale bus to have much of an idea about what allowances are reasonable for Australian officials posted to Tehran. These allowances should essentially be based on cost-of-living differences between Australia and individual posts, and on any special difficulties in those posts, some which are very testing. Whatever, the standardisation decision is expected to save $37 million over four years. Imagine what might be recouped if the same approach were applied to remuneration for staff within Australia – hundreds of millions of dollars, most likely.
Paddy Gourley is a former senior public servant. firstname.lastname@example.org