Britain's tax department is quite alert to the ways of rich folk, or thinks it is. About 6500 Brits – about one in every 5000 of its taxpayers – each have a net worth of $35 million or more. Her Majesty's Revenue and Customs set up a specialist unit in 2008 focused on their tax affairs and annual returns. At any one time, more than a third of them are under active investigation.
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With a sense of humour that I expect the Australian Tax Office lacks, each of these 6500 "high-net-worth individuals" has his or her own personal "customer relationship manager" in the tax agency.
About 98 per cent of the targets pay professional advisers – usually lawyers and accountants – to manage their tax affairs.
Experience has led the specialist unit to judge that 32 per cent of these high-risk taxpayers have a high propensity to dodge tax (they are classified as "red"). Another 37 per cent are classified as "amber": likely to try something on if they believe they can get away with it. Another 31 per cent are classified as "green": not regarded as seriously dodgy.
Such proactivity by the taxman might, one would expect, be yielding dividends.
Not really. In 2008-09, the year in which the unit was established, the 5900 then on the list paid about $A7.2 billion in income tax. By 2014-15, the number of targets had increased by 10 per cent, but the combined income tax take from them had fallen to $5.7 billion, about $1.5 billion less. The unit found some dodging by some of its targets – about $700 million worth; otherwise, the take would have been down by about $2 billion, or 27 per cent.
Over the same period, the tax paid by ordinary British taxpayers increased by about 10 per cent, from $400 billion to about $450 billion. It's not generally thought that the very rich were taking a bath during the period.
Embarrassing results like this bring out high-net-worth bureaucratese, worthy of Alan Tudge or Christian Porter, defending the indefensible at Centrelink. The British tax office "agrees an annual target for compliance yield [whatever that is], but not for tax revenues".
"HMRC has not yet evaluated the effectiveness of its approach to high-net-worth individuals," it told British Parliament's public accounts committee the other day. "It has taken the yields from its work, feedback from tax agents, and changes in behaviour, such as fewer late self-assessment returns, as indicators of success. But it has not yet looked at what works and why in its current approach."
It thought an "implicit suggestion" from the British National Audit Office that it formally evaluate its high-net-worth unit to see how it could be improved was "a good one".
The parliamentary committee, like the audit office before it, was fairly scathing. The tax office's lack of transparency was eroding public trust in a fair tax system and made it more difficult for the department to explain what it did well, it commented. The lack of transparency, a marked unwillingness to prosecute blatant evasion, and the declining tax take left the department open to the perception that there was one rule for the rich and another for everyone else.
The committee was not even amused by the idea that each of the super-rich had a personal customer relationship manager to superintend the process of ensuring each was paying the right amount of tax. Frankly, it thought the relationships too chummy, and the department lacked firmness and toughness against evasion.
The very title risked sending out a message to other taxpayers about extra help being available to the wealthy, it said.
"HMRC repeatedly told us that it does not give advice to taxpayers," the committee reported. "However, we were not convinced by its assertion that there is a clear line between giving its view on potential transactions and giving tax advice, and we do not think there is enough clarity about what customer relationship managers can and cannot do. In addition, while calls from most taxpayers to HMRC call centres are recorded routinely, meetings and phone calls with high-net-worth individuals are not recorded." Fancy that.
One can read from this sad tale almost anything one likes. The head of our Department of the Prime Minister and Cabinet, Martin Parkinson, would probably use words like risk management, disruption and innovation somewhere in his reflections. Some of his more ideological colleagues, in the Treasury perhaps, might see it as a Laffer curve parable about how tax collections might fall if rates are increased (or enforcement increased), just as revenue might rise if tax rates drop. Others might wonder whether a Tory government is ever serious about addressing tax rorting.
Australian taxpayers would be relieved to know that our tax department has rather more powers and, generally, slightly more resolve in dealing with dodgy behaviour by "red" high-net-worth individuals. That's assuming that blatant dodging happens in Australia, of course. More people are eaten by Australian crocodiles each year than are convicted of offences brought by the serious financial crimes taskforce.
Adjusted for population, an Australian target list on British lines would contain about 2400 high-net-worth individuals (they would include the Prime Minister), with about 800 of these being congenital cheats, and 900 liable to cheat if they thought they could get away with it. Perhaps the proportion would be higher given our convict stains though, of course, no one with Bligh or Packer, or merchant banking or the law, in his background could ever be suspect.
Our Tax Office's record against high-end tax dodgers is lamentable, in part because the brave words of cabinet ministers, Labor or Liberal, about taking on tax dodgers never seem to amount to much. Just as Joe Hockey and Tony Abbott were grandstanding about transnational tax avoidance at the G20 conference, they were consciously slicing into the Tax Office's staffing allocation, with the axe seeming to fall heaviest in areas focused on tax dodging by rich folk.
It's one of the reasons for general cynicism, here as much as in Britain, about whether government is ever serious about dealing with tax evasion, avoidance or the extensive use of artificial constructions that push at the boundaries of tax law.
This perception is a burden that Malcolm Turnbull and Scott Morrison must tote as they try to win public support and to negotiate with crossbench senators over proposed tax cuts to business at the same time the government is trying to reduce benefits for young families and the young unemployed. A process made even more difficult by the plain misuse and abuse of Tax Office data in the incompetently planned and managed scheme to hold welfare beneficiaries guilty of being overpaid unless they could prove otherwise.
Turnbull's tax plan for "small business" was put before electors and – at least in the sense that he enjoys a House of Representatives majority of one, significantly lower than the one he had when he made the promise – he can claim a mandate for it. His problem is that the very same election saw Labor, Greens and various ultimately successful Senate candidates either vehemently against the proposal or actively unenthusiastic about it. In general principle, at least according to 1975 Coalition theories about the money power of a Senate, they have at least the same mandate to resist.
The big problem, already being exploited by Labor, is the contrast between a government preaching fiscal prudence and the need to cut back on welfare for the poor, at just the same time it's doling out tax cuts to its mates in business and the big end of town. It fails the pub test, even bearing in mind Paddy Gourley's recent comment about the number of people in the pub who are as pissed as parrots.
Some trade-off might (perhaps of tax cuts subsidised by a reduction of spending on submarines) might be politically saleable, assuming there was a great deal of earnest talk about how a tax cut could lead to small business investment, extra employment, more taxpayers and the full trickle-down miracle. But that's a deal rather more difficult to sell when the transaction is about pain for disadvantaged people (some of whom may be our children) paying for concessions for a group not famous for paying tax at anything like the marginal rate.
As the Coalition has pointed out, Labor spokesmen and women have at times argued for company tax concessions using exactly the same theories as are now being put by the Coalition. Indeed, Labor, including Bill Shorten, have willingly inflicted pain on welfare beneficiaries at least as cruel as anything now promoted by the government. But the bastardry, opportunism and sheer bloody-mindedness of the Coalition saw such measures opposed by Abbott and other Coalition spokesmen, including Turnbull, in opposition and, height of hypocrisies, Labor being accused of promoting "class warfare" whenever it made any effort to target benefits, or wean the middle-class from dependence on the expenditure side of the tax system. No piece of short-term cleverness ever goes unpunished.
The best hope that Turnbull and Morrison have is not of persuading enough crossbench senators to be "responsible" and to override Labor. Only Labor and the Coalition vie for actual government, a process that depends on winning more than 50 per cent of the two-party-preferred vote. Independents and members of smaller parties are not looking for majority support but for their niche in the voting market, along with a lot of publicity for grandstanding. Their votes are for hire, not purchase. And they are said to be thriving in an environment in which the sort of people who might vote for them are openly discontent with the performance of government and mainstream politicians, and the dogma of Treasury clerks.
But Labor needs to imagine being in government, to contemplate how it will balance the books and to design its own smorgasbord of measures calculated to bring budgets closer to balance, and capable of being described, by those whose opinions are said to matter, as sensible, responsible or, at the least, arguable. The last election showed Labor was up to the task, even if not quite up to persuading more than 51 per cent of voters. It had spending measures designed to attract support. But it had revenue measures and proposed cuts to services to pay for them. Some of its measures were unpopular – something Labor knew – but it gritted its teeth nonetheless. The more economistically-minded Labor frontbenchers have even swallowed the Kool-Aid on the marvellously stimulatory effect of tax cuts for small business. (It may be true, but there is a better evidence base for the virgin birth. On matters like this, however, economists go for faith and hope rather than precedent.)
The present debate occurs in the middle of some uncertainty and panic about what President Donald Trump in the United States might be planning on tax cuts, and what effect this will have on other advanced economies. Trump has been promising major corporate tax cuts, with some expecting a plan to drop it to Singapore or Hong Kong levels. It is taken as gospel among those who favour tax cuts for the rich that this will lead to a flight of economic activity away from high-corporate-tax countries to low-tax regimes. If this is so, the tax cuts proposed by Turnbull will seem very modest, and will have little effect on stimulating investment or fresh economic activity.
But Labor might have more room to manoeuvre, and in a way that triangulates the opposition. There are fresh ideas around, not least in Eastern Europe as a result with some flat-tax models. Estonia, for example, has dropped corporate tax altogether. It taxes dividends paid to shareholders, if at a low rate (21 per cent). A company that retains its profits and reinvests them in the enterprise pays no tax on the profits. If retained profits caused a share price to increase, those who sold would need to pay capital gains tax on their profits (21 per cent). An Estonian company can fully write-off all capital investment in plant, equipment and structure in the year of spending it. Dividends paid to shareholders arrive with the tax already prepaid, as everyone pays 21 per cent income tax (and 21 per cent value added tax).
These are the most competitive tax rates in the OECD. But when Estonia cut taxes to produce this model, its tax revenue increased significantly. Much the same effect was seen in other former Soviet Bloc countries, such as Lithuania, Slovakia, Hungary and Russia, which adopted similar schemes. Russian income-tax collections have increased by 700 per cent (300 per cent in real terms) since it adopted flat taxes. And flat or not, the effect is usually progressive and effective, if only because there is little advantage to be gained from artificial transactions. Perhaps Joh Bjelke Petersen, who campaigned for flat taxes (and probably a flat earth) in 1987, was right after all.
Jack Waterford is a former Canberra Times editor.
