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Recent Media

This section provides a selection of media items posted in the last seven days on issues within TaxWatch’s area of interest. Items of longer-term interest will then be transferred to the monthly archives and may also be filed under he relevant topic in the Tax Policy collection.


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Welfare sector urges negative gearing and private health cuts to save $9.4bn

Acoss proposes winding back negative gearing and capital gains tax discounts and abolishing private health insurance subsidies in the budget

Paul Karp, The Guardian, 27 February 2017

The government could save $9.4bn in 2018-19 with measures including winding back negative gearing and capital gains tax discounts and abolishing private health subsidies, the welfare sector peak body has said. In its budget submission, released on Monday, the Australian Council of Social Services has called on the Turnbull government to adopt the measures in the May budget in order to reinvest $4bn to fight poverty and inequality. “After two years of chasing the ill-conceived 2014 budget cuts, it’s time the government … moved on from the one-sided focus on spending cuts, particularly in social security,” said the chief executive of Acoss, Cassandra Goldie. “It is clear that governments will not be able to fund the cost of essential services such as health, aged care and NDIS from present tax revenues.” Goldie said services must be paid for with “structured tax reform and growing the revenue base fairly, steadily and efficiently”. Acoss wants the government to wind back spending and tax concessions to boost revenue by the following amounts in 2018-19:
  • Halving the capital gains tax discount from 50% to 25% over 10 years ($500m)
  • Abolishing negative gearing for new investments ($300m)
  • Taxing private trusts ($1.5bn)
  • Taxing income retained in private companies ($1.2bn)
  • Abolishing the private health insurance rebate ($3.5bn)
  • Superannuation contributions reforms ($1.3bn)
Labor took the first two measures to the federal election and they have been repeatedly opposed by the Coalition. Only the Greens have proposed abolishing the private healthcare rebate. Goldie noted the government had signalled it wanted to tackle the problem of housing affordability, and said Acoss’s preferred measures would “reduce speculative investment in rental properties that has helped fuel” a crisis on the issue. Despite reports the government was considering changes to capital gains tax, on Sunday finance minister, Mathias Cormann, repeated that the government had no plans to make changes. Goldie said Acoss was “deeply concerned” at the prospect the government could fund tax incentives for private investment in housing by scrapping the National Affordable Housing Agreement. Acoss proposed a number of new revenue measures which in 2018-19 would raise the following amounts:
  • Applying the Medicare levy surcharge to all high-income earners even if they have private insurance ($4.1bn)
  • Cracking down on international business tax avoidance ($500m)
  • Abolish fuel tax credits for off-road use, except agriculture ($2bn)
  • Abolish deductions for mining exploration, saving $500m in 2017-18 and $300m in 2018-19
  • Levying a sugar tax on sweetened drinks ($500m)
  • Reforming alcohol excise by taxing wine at $56 a litre of alcohol and cider at $33 a litre ($2.3bn)
Goldie said that Australia spent just 9% of GDP on welfare compared with the OECD average of 12.4%. “We are also the sixth-lowest taxing country of 34 OECD countries.” Revenue raised from the measures could pay for a range of improvements to the welfare safety net, including increasing the dole and student payments by $54 a week at a cost of $1.9bn in 2017-18. Indexing family payments and introducing a sole parent supplement instead of using the family tax benefit system to support children would cost a further $1.2bn in 2017-18. Other social spending proposed by Acoss included:
  • Increasing commonwealth rent assistance by $775m in in 2017-18
  • Restoring community service funding levels, including through the Indigenous advancement strategy at a cost of $1.89bn in 2018-19; and
  • Indexing community services funding to wage movements at a cost of $391m in 2018-19
Goldie said in order to be fair the budget must prioritise problems including unaffordable housing, unemployment, family payments, and “chronic under-investment in mental and dental health”. “In our budget submission, Acoss has outlined a comprehensive set of proposals which would allow the government to address areas of urgent reform at the same time as repair the national revenue base, while ensuring much needed investment in vital public infrastructure.” Top

Business investment is weak, but an unfunded company tax cut won’t fix it

Jim Minifie, The Conversation, 27 January 2017

Eight years after the global financial crisis (GFC), economic growth remains weak in many rich nations. Australia has been an exception to the malaise, but growth has slowed as the mining boom winds down. Business investment is vital to economic growth and to lifting living standards, but a new Grattan report explores why Australian business investment is plummeting. Australia is now experiencing its biggest ever 5-year fall in mining investment, as a share of GDP. Non-mining business investment fell from 12% to 9% of GDP after 2009 and remains unusually low. Why is it low, and what should we do?

The shift to services has reduced investment

Most of the gap in investment between today’s non-mining investment rate and that of the early 1990s is due to long-term structural changes in the economy. The non-mining market sector slowly became less capital intense, it shifted towards capital-light services, and it shrank as a share of GDP. Together, these factors have reduced non-mining business investment by almost 2% of GDP since the early 1990s. In the chart below, the decline in investment needed to offset “capital consumption” reflects declining capital intensity across the non-mining economy.

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These declines are benign. Many non-mining industries now require less capital per dollar of output than they did in the past, because equipment is better and cheaper, in part thanks to the rise of China as a manufacturer. The shift to capital-light services largely reflects households choosing to spend more of their income on these services as their incomes grow.

The role of output growth

A less benign factor, slow output growth, has cut non-mining investment by about a percentage point of GDP compared to 1990, and about two percentage points since the boom years of the mid-2000s, when above-trend growth and buoyant financial conditions drove very strong investment. The role of growth can be seen in the chart above. In turn, output has grown more slowly for two reasons: slower potential output growth, and a widening gap between actual and potential output.

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Grattan 2

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The potential growth rate of the economy has declined in recent years. The International Monetary Fund (IMF) estimates that potential GDP is now growing at just over 2.5% a year, about a percentage point below its pace between 1995 and 2004. Potential growth (the rate of output if all resources are being used efficiently) has declined mainly because productivity growth has slowed and the working-age population is growing more slowly. Productivity growth was exceptionally weak between 2004 and 2010. It recovered in recent years, but remains weaker than it was in the 1990s and early 2000s. The working-age population is growing more slowly, mainly because of a decline in net migration since its peak in about 2012 and, in part, because the population is ageing. In addition, actual growth has been a bit slower than potential in recent years. The IMF estimates the gap between actual and potential output to be about 1.7% of GDP, though it is difficult to estimate with much precision. Several pieces of evidence suggest that actual output is below potential. Inflation is relatively weak and there is some spare capacity in the labour market. The capital stock is ample given the current level of output: office vacancy rates are high, while business capacity utilisation is close to its long-term average. Transition from the mining boom may have made it difficult for the economy to operate at potential. As mining investment falls, demand for construction, in particular, weakens. In theory, as the terms of trade and mining investment decline, the real exchange rate and other prices can change to maintain full employment. But in practice, slow output growth is common after mining booms, perhaps because businesses and workers take some time to reassess their opportunities.

What next?

Looking ahead, if output growth remains subdued, the current level of non-mining business investment may be the “new normal”. If the economy continues to rebalance, non-mining investment is likely to increase. There are encouraging signs that non-mining investment responds to the exchange rate and other aspects of the business environment in the medium term: it has begun to pick up in NSW and Victoria. Output could even grow above potential for a few years, as the IMF and RBA both forecast. But investment is not likely to return to the levels of the mid-2000s.

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Is a company tax cut the answer?

The government has proposed cutting the company tax rate from 30% to 25%, largely on the basis that the competition for mobile capital has intensified (see chart below). That would attract more foreign investment and could increase total business investment by up to half a percent a year. But such a cut would also reduce national income for years and would hit the budget. Committing to a tax cut before the budget is on a clear path to recovery risks reducing future living standards.

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Grattan 4

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Other company tax changes could help. An allowance for corporate equity would make currently marginal investment projects more attractive, though highly profitable firms would pay more tax. Accelerated depreciation would encourage investment, as would moving from today’s model to a cash flow tax. Both of them help firms to reduce tax paid at the time they make investments. But they would hit the budget hard in the early years, and would have to be phased in slowly. An allowance for investment (for example, permitting firms to claim over 100% of depreciation) would support new investment without giving tax breaks on existing assets, but may be costly to administer, as firms could be tempted to relabel some operating expenditure as capital expenditure. Government should ensure any company tax changes are offset by other tax increases or spending cuts.

What else should policymakers do?

Government stimulus and interest rate cuts can encourage business investment if there is spare capacity in the economy. Australia does have some spare economic capacity. But there are constraints on both arms of macroeconomic policy. The RBA is reluctant to cut interest rates from their already low levels, as it is concerned about risky lending. Public debt has grown (though it is still not high by international standards), though bank balance sheets remain large compared to GDP, limiting the scope to expand public sector debt. Monetary policy should remain supportive, and tough prudential standards can help limit risky lending. There may be modest scope to build more public infrastructure, if governments can improve the quality of what they build. Broader policies to support economic growth would also lead to more and better private investment. They include reducing tax distortions, boosting labour participation, encouraging competition, improving the efficiency of infrastructure and urban land use, tightening regulatory frameworks, and more reliable climate policy. No single policy is a silver bullet, but together, they can help make better use of Australia’s existing assets and make new investment more attractive. Top

Cut company tax and you cut national income, says Grattan Institute

Peter Martin, The Sydney Morning Herald, 27 February 2017

The Turnbull government's proposed company tax cut would drop national income for years before it boosted it and would never be self-funding, a new analysis from the Grattan Institute has found. One of the key justifications for the proposed phase down in the company tax rate from from 30 per cent to 25 per cent over 10 years has been that it would boost national income and wages. "Even assuming you get those things in the long run, there will be a period of time in which national income falls," said the director of the Grattan Institute's productivity growth program Jim Minifie. "That's because you are giving a tax cut to foreigners, meaning the benefit at first goes overseas". "The Treasury has cited work that says it would take four or more years for investment to respond, lifting Australian national income but it could take a decade." "The challenge for government is that it would be trying to do that at a time when if is not quite clear whether it can repair the budget. In other words, it's proposal isn't fully funded."

Write-off solution

The Grattan Institute report, Stagnation nation? Australian investment in a low-growth world finds that a cheaper and more effective measure would be an investment allowance that permitted companies to immediately write-off a portion of their investment before depreciating the rest over time. "One worry is that some firms might be tempted to rort the system by relabeling operating costs as investment, but it might be manageable," Dr Minifie said. The government could do both, allowing the investment allowance to fill the initial hole in national income that would be created by the company tax cut, but it would have to specify how it was going to pay for both. Other measures were even less attractive. A tax cut for small business was "hard to justify" as a means of boosting investment while accelerated depreciation delayed tax payments. An "allowance for corporate equity" of the kind proposed by the former treasury secretary Ken Henry would treat payments to shareholders in the same way as interest payments, meaning no tax would be paid on projects yielding an ordinary rate of return, and higher rates would be paid on those yielding more. It would make projects that were only mildly profitable more attractive, but it would be hard to implement because it would create losers as well as winners. “In other words, it's proposal isn't fully funded.” Grattan Institute's Jim Minifie, Non-mining investment had fallen from 12 per cent to 9 per cent of GDP, lower than at any time in the fifty years from 1960 to 2010. But it was important to keep the problem in perspective. Top

If the robots are coming for our jobs, make sure they pay their taxes

John Naughton, The Guardian, 26 February 2017

Periods of automation bring disruption and hurt workers’ wages. Perhaps Silicon Valley should pick up the compensation bill for the next one The problem with the future is that it’s unknowable. But of course that doesn’t stop us trying to second-guess it. At the moment, many people – and not just in the tech industry – are wondering about the impact of automation on employment. And not just blue-collar employment – the kind of jobs that were eliminated in the early phase of automating car production, for instance – but also the white-collar jobs that hitherto seemed secure. In a much-cited 2013 study, for example, economists David Autor of MIT and David Dorn of Spain’s CEMFI institute found that because computers could now be substituted for low-skill workers performing routine tasks (book-keeping, clerical work and repetitive production and monitoring activities) we were going to see a “hollowing-out” of middle-skilled, middle-wage jobs and “a corresponding rise in employment at both the high and low ends of the skills spectrum”. And in a 2015 study, two Oxford researchers, Carl Frey and Mike Osborne, took the 702 categories that the US labour department uses to classify jobs and tried to estimate which of them might be vulnerable to automation using the “smart” technologies that are now commonplace. Their conclusion: almost half (47%). If these predictions are accurate, then there is trouble ahead because the existence of a stable middle class seems to be a prerequisite for a liberal democracy. But because of the aforementioned problem with the future, we don’t know how immediate the threat of high-end automation is. It could be that getting to this particular future will take a lot longer than the technology’s boosters and Cassandras think. But no one – with the possible exception of Donald Trump – doubts that it will happen. The standard riposte to concerns about automation is to pooh-pooh them. This is an old story, sceptics contend. Anxiety about the rise of the machines goes back to Elizabeth I and the stocking frame. And each time the fears have been overblown: the new technology did indeed destroy jobs; but the new industries that it enabled eventually created even more jobs. So calm down: it will come good in the end. And maybe it will. But there’s still a problem. What both the boosters and the sceptics ignore is that waves of automation have always involved periods of traumatic disruption. In a fascinating recent article the economist Tyler Cowen pointed out the problem with blithe assumptions about a better future – they miss out on the history of what actually happened in the great industrial transformations of the past. “The shift out of agricultural jobs,” he writes, “while eventually a boon for virtually all of humanity, brought significant problems along the way. This time probably won’t be different, and that’s why we should be concerned.” Estimates for private per-capita consumption from 1760 to 1831, for example, suggest that it rose only by about 22%. And Cowen cites estimates by the economic historian Gregory Clark that “English real wages may have fallen about 10% from 1770 to 1810, a 40-year period. Clark also estimates that “it took 60 to 70 years of transition, after the onset of industrialisation, for English workers to see sustained real wage gains at all”. Translate that to the present and you can see the dangers. If the people hitherto known as middle-class were to experience this kind of income suppression, we would expect political trouble. Yet, says Cowen, that may be the track the US is on. Median household income is down since 1999, and median male wages were probably higher in 1969 than they are today. His conclusion: transition costs from automation will be higher than many economists – and everyone in the tech industry – likes to think. Then there is the question – also avoided by the tech industry – of who pays those transition costs. Conventional thinking says that the owners of the machines should reap the rewards, while the state picks up the costs of the ensuing human wreckage. So when Bill Gates pitched into the debate last week with a proposal that robots should be taxed, just like human workers are, you can imagine the splutters of outrage from the neoliberal fortresses of Silicon Valley. “Right now,” he said, “the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things. If a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level.” And the money raised should be used to retrain people the robots have replaced, with “communities where this has a particularly big impact” first in line for support. I never thought I’d write this, but here goes: good for you, Mr Gates. Top

All high earners to pay Medicare levy surcharge under budget proposal

Peter Martin, The Sydney Morning Herald, 26 February 2017

All high-income Australians would pay the 1 to 1.5 per cent Medicare levy surcharge under a budget proposal that would raise a breathtaking $4 billion per year, more than six times the net amount saved in the first Turnbull budget. At present only high-income Australians without private health insurance are made to pay the extra levy. Extending it to all families earning more than $180,000 per year and all individuals without children earning more than $90,000 per year would raise at least $900 per year more from each high-income Australian with private health insurance, and would offset the removal of the high-income temporary budget deficit repair levy, which expires in the middle of this year. "In 2013 there was bipartisan agreement, and broad public support, for an increase of 0.5 percentage points in the Medicare levy to help fund the National Disability Insurance Scheme," said Australian Council of Social Service chief executive Cassandra Goldie. "One option to address the revenue challenge would be to increase the levy by a further 0.5 points to 2.5 per cent. But our preferred option, which would raise a similar amount, is to remove the exemption for holders of private hospital insurance from the high-income surcharge. It would affect only those households very likely to have a capacity to pay." The ACOSS budget submission says the change would be unlikely to significantly affect private health insurance cover as the households concerned were unlikely to be "income-constrained". Even if it did, it would make little difference to the cost of government health care. The total savings package put forward by ACOSS amounts to $9.5 billion per year. Other savings include removing the Private Health Insurance Rebate ($3.4 billion per year), axing the Extended Medicare Safety Net, "which mainly benefits higher income earners using relatively expensive health services" ($340 million), axing fuel tax credits for off-road use that are mainly used by mining companies ($2 billion), winding back the capital gains tax discount ($500 million), phasing out negative gearing ($300 million) and lifting the superannuation preservation age from 60 to 67 over 15 years. Half of the savings from removing the Private Health Insurance Rebate would be directed to public hospitals, community-based health services, dental health services and preventative health services. ACOSS would also boost Newstart and other payments by $54 per week at a cost of almost $2 billion per year. "Without cuts of the kind we have proposed, it is clear that governments will not be able to fund the cost of essential services to the level we need," Dr Goldie said. "What's not reasonable are cuts that would require people who need to see a doctor or attend hospital or move into aged care to pay more." ACOSS has also asked the government to drop the remaining so-called zombie measures from its unpopular 2014 budget which have still not made it through the Senate. Finance Minister Mathias Cormann said on Sunday he hadn't given up on some of those measures and was not "prepared to put up the white flag". Top

Taxpayers to pay for oil spill clean-ups under petroleum resource rent tax

Treasury confirms companies would be able to claim tax deduction for expenses incurred from cleaning up pollution

The Guardian, 25 February 2017

Australian taxpayers will be forced to subsidise the clean-up costs of oil spills in the Great Australian Bight thanks to the terms of the controversial petroleum resource rent tax. Treasury officials have confirmed that oil companies would be able to claim a tax deduction under the PRRT for expenses incurred cleaning up oil spills. Different “uplift rates” would apply to clean-up costs depending on whether the spills resulted from exploration or production activity. In response to a question from Greens senator Peter Whish-Wilson during Senate estimates last year, treasury officials have confirmed that clean-up costs for oil spills from exploration wells would be classified as “exploration expenditure” under the PRRT regime. It means the costs of cleaning up oil spills from exploration wells would be tax deductible, and could be held over and “uplifted” into future years at an annual rate of 17.5%. “If there was a problem with an exploration well requiring remediation expenditure, to the extent that the expenditure had a close or quite direct connection with the physical activities of the petroleum project, it would be considered exploration expenditure for petroleum resource rent tax purposes and would be available to be carried forward and uplifted,” a treasury official said. The Australian Taxation Office has independently confirmed that the cost of cleaning up oil spills from production wells – different from exploration wells – could be uplifted by 8% a year, according to Footprint News. It means Australian taxpayers would be forced to subsidise the clean-up of oil any spill in the pristine Great Australian Bight, paid for via a loss of future taxpayer revenue. In December, oil giant BP officially withdrew its application to drill for oil in the Bight, ending months of uncertainty after it announced it was not pursuing the project but then did not withdraw its application. But Chevron still plans to drill four exploration wells in the area, starting in 2017, with public consultations with stakeholders slated for the first quarter of this year. Whish-Wilson told Guardian Australia the news is further proof that the subsidies Australia provides for fossil fuels are “obscene”. “The rules are written so if a company created an oil spill with their exploration rig, they could make a profit from it,” he said. “A standard tax deduction for an oil spill clean-up would be bad enough, but in this case the deduction grows in value every year. No other sector, no other set of businesses gets such ridiculous and costly deductions. “Are we a sovereign nation who charges a fair amount for the resources these companies extract or are we a petro-state doing the bidding of global oil barons? “The rules have been written by the oil companies for the oil companies and they are laughing all the way to their banks. Parliament enacted these broken laws and its time that Parliament reasserted itself over the fossil fuel giants and rewrote them.” Jason Ward from the Tax Justice Network said the PRRT system was an “absolute scandal”. “First we learn that we are giving away our natural resources to the world’s largest oil companies for free and now we know they can get tax credits for oil spills,” he said. “It is mind-boggling that this is actually how the PRRT works.” The treasurer, Scott Morrison, announced a formal review of the PRRT regime in November following a rapid decline in revenues from the tax. He acknowledged revenues from the PRRT had halved since 2012-13, while crude oil excise collections had fallen by more than half. When he announced his inquiry into the tax, he said he wanted it to be completed in time for this year’s budget. Top

RBA's Philip Lowe says joining the global tax race 'not actually that useful'

Jacob Greber, Australian Financial Review, 24 February 2017

Reserve Bank of Australia governor Philip Lowe has clarified his recent intervention in the company tax cut debate, saying he doesn't necessarily support the move but believes it's up to parliament to decide whether Australia should join a global race to the bottom "You could argue that this is - from a global perspective - not actually that useful," Dr Lowe told a parliamentary committee on Friday. "The lowering of the corporate tax rate just changes the location of the investment" without necessarily the amount, he said. Warning that it's better not to "compete" on tax rates, Dr Lowe said it was ultimately a question for the parliament as to whether Australia responds. "Do we respond to what's going on around the world? If we don't respond there are at least some firms that will decide to take their capital elsewhere. That's for parliament." Dr Lowe insisted he wasn't trying to "advocate" a particular position on tax, but was merely laying out the technical reality of the changing world. "There is a form of international tax competition going on. In the post -crisis environment countries have seen lowering the tax rate as a potential strategic advantage." In his opening statement to the committee, Dr Lowe reiterated the central bank's view that the economy is gradually lifting out from the weight of the receding resources investment boom. He said the outlook for Australian growth was being boosted by a recovery in global activity, the lower Australian dollar - even if he said it would be better if it were lower - and rising commodity prices. Dr Lowe said there was an expectation that the US Federal Reserve would again hike interest rates, putting upward pressure on the US currency. He said this was something the Reserve Bank had been waiting for a long time. On the downside, Dr Lowe cautioned that it was unlikely that iron ore prices would remain high - even though they are currently boosting confidence and delivering a fresh boost of income for governments and ultimately workers. He also warned that households were unlikely to boost spending given consumption growth has been rising faster than incomes in recent years. "We think that process has run its course," Dr Lowe said. "Households aren't really willing to run down the savings rate." Dr Lowe reiterated that the central bank doesn't want to cut the official cash rate to engineer a short-term fall in the unemployment rate, which he described as being too high. Doing so would only encourage households to take on more debt, which would ultimately build up more risks in the housing market and make consumers more vulnerable to a future downturn, he said. Top

CGT, negative gearing changes would remove heat from housing, says Philip Lowe

Jacob Greber, Australian Financial Review, 24 February 2017

Reserve Bank of Australia governor Philip Lowe has strengthened the central bank's criticism of tax incentives for property investors, saying changes would help remove some of the "heat" from the market that has worsened housing affordability. In wide-ranging testimony that hammered home the theme that the governor is finished with more rate cuts, Dr Lowe also warned that driving down borrowing costs would have only a small impact yet worsen household fragility. Dr Lowe said that while some of his own staff argue in favour of more rates stimulus to drive down unemployment, the main result would probably be further increases in house prices. He also lambasted the lack of planning and transport investment to improve affordability, saying there needs to be more work done on making the big cities more compact. "We certainly don't solve the problem of high house prices by adding to demand. We solve it by increasing supply," he said. "The population densities of our biggest cities, Sydney and Melbourne, are not that high by world standards. We've got to make them denser, but not everyone likes that." On the contentious question of tax breaks for property investors, Dr Lowe admitted he wasn't sure what effect changing the system would have on the property market. However, he said the critical question for policy makers was not to change either negative gearing or the capital gains tax discount in isolation, but to consider how the two things interacted. He said negative gearing allows investors to change the timing of when they pay tax, which is why what matters is the interaction with capital gains tax. "I think it is likely it would reduce investor demand for a while, because that combination is one of the things that encourages people to buy investment properties. If you have less demand, for a while you will have lower prices, and it would take some of the current heat out of the housing market." The governor's remarks are the latest intervention in the tax debate by the Reserve Bank, which first questioned the value of property tax breaks in a submission to a parliamentary review of affordability in 2015. Labor has pledged to remove negative gearing, while the Turnbull government is still considering whether to wind back CGT discounts. Pointing to widespread signs of improvement around the world, particularly among businesses, Dr Lowe expressed unease at China's debt problems, saying that each year he becomes "more nervous" about how a potential economic crisis there would have a "first order effect" on Australia's economy. Despite being eager to promote a more optimistic outlook to the House of Representatives economics committee on Friday, Dr Lowe found himself mostly debating politically sensitive issues of tax reform. He clarified his recent intervention earlier this month in the company tax cut debate, saying he doesn't necessarily support the move but believes it's up to Parliament to decide whether Australia should join a global race to the bottom. "You could argue that this is - from a global perspective - not actually that useful," Dr Lowe said of the global trend towards lower corporate tax rates. "Lowering of the corporate tax rate from one country to another just changes the location of investment, it doesn't increase aggregate investment," he said. "Do we respond to what's going on around the world? If we don't respond there are at least some firms that will decide to take their capital elsewhere. That's for Parliament [to decide]." Dr Lowe insisted he wasn't trying to "advocate" a particular position on tax, but was merely laying out the technical reality of the changing world. "There is a form of international tax competition going on. In the post-crisis environment countries have seen lowering the tax rate as a potential strategic advantage." In his opening statement to the committee, Dr Lowe reiterated the central bank's view that the economy is gradually lifting from under the weight of the receding resources investment boom. He said the outlook for Australian growth was being boosted by a recovery in global activity, the lower Australian dollar - even if he said it would be better if it were lower - and rising commodity prices. Dr Lowe said there was an expectation that the US Federal Reserve would again hike interest rates, putting upward pressure on the US currency. He said this was something the Reserve Bank had been waiting for a long time. On the downside, Dr Lowe cautioned that it was unlikely that iron ore prices would remain high - even though they are currently boosting confidence and delivering a fresh boost of income for governments and ultimately workers. He also warned that households were unlikely to boost spending given consumption growth has been rising faster than incomes in recent years. "We think that process has run its course," Dr Lowe said. "Households aren't really willing to run down the savings rate." Dr Lowe reiterated that the central bank doesn't want to cut the official cash rate to engineer a short-term fall in the unemployment rate, which he described as being too high. Doing so would only encourage households to take on more debt, which would ultimately build up more risks in the housing market and make consumers more vulnerable to a future downturn, he said. Top

No zealot about cutting company tax, Ken Henry despairs about Australia's politicians

Peter Martin, The Sydney Morning Herald, 23 February 2017

Former Treasury chief and National Australia Bank chairman Ken Henry is far from a zealot on cutting company tax rates. Ahead of his call to arms about economic reform delivered to the Committee for the Economic Development of Australia in Canberra on Thursday, notes delivered to journalists said he would call for "a much lower company tax rate, achieved much more quickly than is presently under consideration by our Parliament". But the speech he actually delivered added a qualification. He wanted a much lower company tax rate "or some other mechanism that reduces substantially the cost to Australian businesses of equity capital sourced from abroad". Asked afterwards why he had included the qualification, Dr Henry said he had never been single-minded in pursuit of a lower company tax rate. His 2009 Henry Tax Review included a number of alternative ways of encouraging investment. One was a so-called Allowance for Corporate Equity system that would allow companies to deduct from their income a "normal return on their equity" before paying tax on only above normal returns, working in the same way as the proposed mining super profits tax. The treasurer Wayne Swan set up a business working group to examine the idea. It dropped it when it became clear it would involve no overall cut in tax. Another idea was to reconfigure or drop dividend imputation, and another was to tax income from capital gains in exactly the same way as interest. In his address, Dr Henry said every government proposal to reform the tax system in the past 10 years had failed and almost every major infrastructure project had been the subject of political wrangling. "In the most recent federal election campaign, no project anywhere in the nation – not one – had the shared support of the Coalition, Labor and the Greens," he said. "Today's dysfunction stands in marked contrast to earlier periods of policy success – where politics was adversarial, every bit as partisan – but when the tribal tensions within parties were generally well managed and the political contest appeared to energise policy, not kill it." A visionary government would build cities from scratch, as China was doing. "Based on official population projections our governments could be calling tenders for the design of a brand new city for two million people every five years, or a brand new city the size of Sydney or Melbourne every decade, or a brand new city the size of Newcastle or Canberra every year," Dr Henry said. "Instead, they have decided that another 3 million people will be tacked on to Sydney and another 4 million on to Melbourne over the next 40 years. Already, both cities stand out in global assessments of housing affordability and traffic congestion." "Have you ever heard a political leader addressing that question? Do you think anybody has a clue?" Other ideas for government included a broader base and higher rate of the goods and services tax, apolitical infrastructure planning and pricing, including the widespread use of road user charging, and the removal of stamp duties on residential property. "Fourteen years ago, our political leaders were told that there was an urgent need to address the crisis in business confidence in the energy and energy-intensive manufacturing sectors, due to the absence of credible long-term policies to address carbon abatement. It is quite extraordinary, but nevertheless true, that things are very much worse today," he said. Asked the best way for business to step up and influence government he said the worst thing anyone with a bright policy idea could do would be to give it to a politician. "It will be dead within 24 hours." Top

Mexico's sugar tax leads to fall in consumption for second year running

Health experts are watching the progress of the tax to see if it will lower the rates of obesity-related diseases and type 2 diabetes

Sarah Boseley, The Guardian, 23 February 2017

Mexico’s sugar tax appears to be having a significant impact for the second year running in changing the habits of a nation famous for its love of Coca-Cola, and will encourage countries troubled by obesity and contemplating a tax of their own. An analysis of sugary-drink purchases, carried out by academics in Mexico and the United States, has found that the 5.5% drop in the first year after the tax was introduced was followed by a 9.7% decline in the second year, averaging 7.6% over the two-year period. Mexico has high rates of obesity – more than 70% of the population is overweight or obese – and sugar consumption. More than 70% of the added sugar in the diet comes from sugar-sweetened drinks. Coca-Cola is particularly popular and holds a place in the national culture, while former president Vicente Fox was the regional head of the company. Health experts worldwide have been watching the progress of the Mexican tax closely because it could potentially lower the rates of obesity-related diseases and type 2 diabetes in a country with a population of more than 122 million. The scientists cannot yet calculate the effect on health. But they write in the journal Health Affairs: “These reductions in consumption could have positive impacts on health outcomes and reductions in healthcare expenses in Mexico.” The Mexican tax, if successful, may pave the way for taxes in other countries. “At the global level, findings on the sustained impact over two years of taxes on the beverages in Mexico may encourage other countries to use fiscal policies to reduce the consumption of unhealthy beverages ... to reduce the burden of chronic diseases,” they say. The study has been carried out by the University of North Carolina at Chapel Hill’s Gillings School of Global Public Health and the Mexican Instituto Nacional de Salud Pública (National Institute of Public Health). They found that the tax, which is just 1 peso (4p) per litre of sugary drink, had its biggest impact on the poorest households, where the decline in purchases was 18.8ml per person per day in 2014 and 29.3ml in 2015. Purchases of other untaxed drinks went up on average by 2% over the two years, although the second year showed a decline. There is evidence from other data, however, of an increase in the production of still bottled water two years after the tax began, which the authors say may suggest some consumers are turning to water instead. “Overall the results from our study contradict industry reports of a decline in the effect of the tax after the first year of its implementation. We found a greater reduction in purchases of sugar-sweetened beverages in 2015 than in 2014. Moreover, both the absolute and relative reductions were highest among households at lower socioeconomic levels,” said the paper. Barry Popkin, distinguished professor in the department of nutrition at Gillings and one of the authors, looked forward to collecting data on the health impact. “It will be important for us to continue to monitor this tax and see how this actually will affect overall diets, diabetes prevalence and other biological markers of the many noncommunicable diseases linked with excessive sugary beverage consumption,” he said. Adam Briggs, of the Nuffield department of population health at Oxford University, said the results of the study were “really encouraging, particularly from a UK perspective where the sugar-sweetened beverages levy is due to be introduced in just 12 months’ time. “These are very important data for policymakers considering implementing soft drink taxes and it will be fascinating to see how sales continue over time … measuring independent health outcomes of such isolated policies is really challenging but, as the authors say, these reductions in consumption would likely have important population-level health benefits in terms of diabetes and obesity-related diseases.” The UK planned levy is different to the Mexican tax in its design and structure, he said. “However, the principle that price change leads to sustained behaviour change remains important.” Gavin Partington, director general of the British Soft Drinks Association, said: “Given their fervent belief in the principle of taxing soft drinks we should at least be encouraged that the authors accept causality cannot be established in terms of the impact of the tax in Mexico and the claimed falls in consumption. Nevertheless, while it seems obvious that price can have an impact on sales levels, it is far from clear that the tax on soft drinks in Mexico has had any impact on levels on obesity.” A new report from Euromonitor International said that 19 countries had so far introduced what it called “sin taxes” on food and drinks and more would do so in the near future, with the aim of reducing sugar consumption by 20% in line with guidance from the World Health Organisation. Euromonitor suggested the Mexican tax may be too low to have the desired effect and that the higher tax of 33 US cents per litre introduced in Berkeley, California, has been a bigger success. Berkeley “is said to have reduced SSB [sugar-sweetened beverage] consumption by 21% and increased water consumption by 63%. In comparison, other cities in the US reported a 4% increase in SSB consumption, and only 19% increase in water consumption in that time,” said the report. It pointed to countries that might want to introduce “sin taxes” in the near future. “According to the NHS in the UK, consumers should not exceed more than 70g of fat and have no more than 90g of total sugar a day. Euromonitor’s Passport Nutrition data shows that 37 of the 54 (69%) researched countries exceed the fat intake recommendation, and 38 (70%) exceed the sugar recommendation. The top three sugar consumers are Chile, the Netherlands and Belgium, while the top three fat consumers are Germany, Sweden and Austria,” it said. Top

Why small business tax cuts aren’t likely to boost ‘jobs and growth’

Saul Eslake, The Conversation, 20 February 2017

The Turnbull government’s signature economic policy at last year’s election was a 5% cut in the company tax rate, over a ten-year period, at a cost to revenue estimated to be in excess of A$48 billion. As the government itself has conceded, this now stands very little prospect of being passed by the Senate. However, there is one element of the government’s proposal which appears to enjoy almost universal political support - the idea that “small” companies should get a tax cut. The only disagreement among the Coalition, Labor and the Greens on this score is how small a company should be in order to be deserving of paying a lower rate of tax. From the standpoint of good economic policy this is surprising. There has been a lively debate for a while among economists as to whether cutting company tax rates will boost economic growth, employment and real wages – and the extent to which this theory is supported by evidence. But there is no evidence at all to support the notion that preferentially taxing small businesses will do anything to boost “jobs and growth”. Advocates of tax and other preferences for small businesses often argue that small businesses are the “engine room of the economy” – because, for example, 96% of all businesses are small businesses, or because small businesses employ more than 4.5 million people. According to the latest available ABS data, small businesses (defined as those with fewer than 20 employees) employed just under 45% of the private sector workforce in June 2015. Despite this, small businesses accounted for only 5.2% of the increase in private sector employment over the five years to June 2015. By contrast, large businesses (defined as those with 200 or more employees) employed less than 32% of the private sector workforce in June 2015 – but they accounted for more than 66% of the increase in private sector employment over the five years to June 2015.

Employment and employment growth by size of business

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ABS Australian Industry (8155.0) 2014-15, Author provided.

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Similarly, a smaller proportion of these small businesses engage in any of the four categories of innovation which the ABS recognises in its annual survey of business innovation than of medium or large businesses.

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ABS, Summary of IT use and innovation in Australian businesses (8166.0), 2014-15, Author provided.

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So on the basis of the available evidence, a policy which sought to encourage employment creation and innovation via the use of preferential tax treatment would surely preference large businesses, rather than small ones. However, that would be politically challenging, given that a large majority of voters think that big companies should pay more tax, not less. What sort of businesses create jobs and growth when tax is reduced? An alternative approach, which would be much more likely to have positive effects on employment, investment and innovation, would be to tax new companies at a lower rate. OECD research shows that young businesses are the primary drivers of job creation. And new companies are more likely to be at the frontier of productivity growth. New businesses are of course likely to be small, at least initially. Confining preferential tax breaks to new businesses - for example, by prescribing that a lower tax rate is only available to a business for the first (say) three years after its incorporation - focuses the assistance on those businesses which are actually likely to innovate, and to create jobs. This is instead of dissipating it on the much larger number of businesses who have no desire, intention or ability to do either. Preferentially taxing new businesses is therefore much more likely to achieve the stated goals of boosting jobs and growth, and of encouraging innovation, at much lower cost. In addition to this, preferentially taxing new businesses avoids the perverse incentives that inevitably arise when the eligibility for some form of preferential treatment is determined by a business’ size. This is frequently demonstrated by the reluctance of businesses to put on an extra worker when doing so would render them liable to pay state payroll tax. Of course, there would need to be compliance measures designed to forestall “rebirthing” of companies in order to prolong access to tax preferences intended to benefit new companies, but that would not be difficult to provide. The Coalition’s support for a preferential tax rate for small businesses appears to owe more to its long-standing, almost religious, belief that there is something inherently more noble or worthy about owning and operating a small business, than there is about managing or working for a large one (or a government agency). Also that this belief should be reflected in the tax system, rather than basing it on any evidence that taxing small businesses at a lower rate than large ones will have any positive impact on economic or employment growth. Why Labor and the Greens should support this view is much more of a mystery. Top