Whenever John Howard looks like getting a bit more relaxed and comfortable those nasty “elites” start baying for reform. They’re at it again calling for tax reform. Personally I always appreciated Tahiti’s approach to tax which is called “soak the visitor”. Their GST ensures that tourists pay so much tax that the islanders live income tax free. GST one day, no income tax the next.
The approach goes back to Captain Bligh’s time when Tahitians offered their daughters for the night to Western sailors in exchange for nails extracted from the visitor’s ship. The sailors got down to tin tacks fairly quickly and ships rapidly disassembled themselves and slid gracefully into the sea. “Soak the visitor” - rather literally in this case. But I digress.
Our situation doesn’t allow us Tahiti’s tricks on tax - or tacks. Not enough tourists I’m afraid. So we face the usual dilemmas on tax - it’s not easy to raise revenue efficiently and fairly.
Recently the Australian Chamber of Commerce and Industry (ACCI) released a tax “blueprint” (pdf file 34.7 kb) for the future. They don’t actually say that “greed is good”, but their official position seems to be that that greed isn’t really, really bad. They want to further extend our already indefensible concessions on capital gains tax (CGT). So unearned income is “special” - more precious than income earned from the sweat of your brow. That doesn’t sound too fair to me, what about you?
ACCI says that further CGT concessions would reward innovation. We should do that directly - with ACCI’s proposal to restore tax concessions for research and development. But without better targeting, further CGT concessions will just intensify the distortions for property speculation provided already by existing concessions making it even harder for first home buyers. That isn’t just unfair. It distorts the market. It’s inefficient.
ACCI want to increase the income threshold at which the top marginal rate cuts in. I agree. They also want to cut the top marginal rate to the corporate tax rate of 30 per cent. But, despite the ubiquity and respectability of the case for “alignment”, I think it’s based on a simple misunderstanding. People ask “if you can ‘choose’ to pay tax at a 30 per cent rather than 48.5 per cent why wouldn’t you?” But the money in a company is hermetically sealed from its owners. That’s the point of it. So you can’t use any profits in your company until you pay them to yourself as dividends. Get it? When you pay yourself dividends that’s income on which you pay personal tax - whereupon the tax advantage of the company disappears.
People also think that somehow owning a company enables you to “write off” more expenditure in the company. But the company is a red herring in this story. Tax avoiders and evaders (oops I nearly wrote “we”) will claim personal expenses as business expenses irrespective of the corporate structure. Indeed the immediate benefits of doing so within a company are less because of the lower rate.
The one remaining lurk is the way in which a company’s “undistributed profits” provide its owners with free loan from the tax man. Personal tax is not payable on company profits until they’re distributed as dividends. But, as Bob Hawke’s Finance Minister Peter Walsh used to point out in response to Paul Keating’s agitation for alignment, that problem can be addressed directly by re-introducing the surtax on undistributed profits that we abolished in 1985 when we aligned the personal and company rates - it turned out only briefly. (The additional revenue this generated could be used to lower company tax further and or offset any additional tax burden a surcharge imposed on new investment).
Good on ACCI for emphasising tax compliance costs - now running at over $8 billion or 1 per cent of our economy. These are not transfers, felt as pain by the taxed, but recouped as pleasure by beneficiaries of government spending on roads, hospitals and schools etc. Compliance costs are all pain: Money down the drain.
Sadly I doubt that ACCI’s solution - an Inspector General and Tax Administrative Impact Statements - will achieve much. Until we can get our legal system to arbitrate tax disputes according to broad principles rather than minute mechanical rules, complexity and costs keep escalating as lawmakers and tax avoiders endlessly play “chase the loophole”.
The Tax Act is 7,000 pages and counting. Meanwhile, here’s a suggestion that would be cheap, efficient, fair and popular. Give everyone credit for tax deductions of some reasonable amount - say $500 or so - and abolish tax returns for anyone who doesn’t want to claim any more than that. New Zealand did something similar relieving over a million taxpayers of filing a return. The same thing here would save 6 million people from the headache of filing returns, and around $300 million each year (about half of the estimated gains from the GST) from going down the drain in compliance costs.
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