This section provides a selection of media items posted in September on issues within TaxWatch’s area of interest.
IN A SMALLER WORLD, TAX REFORM IS OVERDUE
David Uren, The Australian, 26 September 2013
AROUND the world, smaller economies that are more exposed to trade favour taxing spending over taxing income. They rely more on consumption taxes to finance their budgets than on company and personal income taxes.
This finding was established in a review of global tax systems conducted by leading US economists Larry Summers (President Barack Obama’s first choice as the next governor of the US Federal Reserve) and James Hines. It makes intuitive sense.
The US can get away with having one of the highest company tax rates in the world, at 39c in the dollar (compared with a global average of 25.5 per cent) because global companies need access to the world’s largest consumer market. They have no choice.
The US is almost the only country without a broad national consumption tax, although its states have various sales taxes. At the other extreme is Ireland, with a company tax rate of only 12.5 per cent, but a value added tax of 23 per cent.
With smaller economies, international companies can make a call. They will invest in those countries where conditions, including tax rates, are most advantageous. Economies closely linked to the world economy are under the greatest pressure to have tax systems that are competitive. Taxing spending provides smaller nations with a more secure revenue base.
Australia is the biggest exception to what has become known as the Summers-Hines hypothesis. We tax income, particularly company profits, much more heavily than most other countries and tax spending much less.
It was not always this way. When the last big round of tax reform in Australia was implemented, in 2000-01, the new 30c-in-the-dollar company tax rate was lower than most in the advanced world. There were 19 countries with higher rates and the advanced-world average was a little more than 33 per cent.
But 13 years later, Australia’s company tax rate remains stuck at 30c in the dollar while the Organisation for Economic Co-operation and Development average has come down to 25.5 per cent. There are now only six countries with higher rates, four of them among the world’s largest economies.
Our GST tax rate of 10 per cent, by contrast, is little more than half the average OECD rate.
When the then Treasury secretary Ken Henry embarked on his tax review, he made improving Australia’s international competitiveness a central objective. Investors and the most highly skilled labour can locate themselves anywhere and tax rates will influence their choices. Reducing taxes on what he called these “mobile” factors of production was a high priority.
In the internet world, consumption can be similarly global, but tax authorities have a better chance of, for example, capturing spending on advertisements on Google, than they do of identifying where it makes its profits.
In the 1980s round of tax reform, Treasury’s concern was that people had to pay tax on their dividends while companies also paid tax on the profits from which the dividends are paid. Dividend imputation has proven massively popular with Australian investors but, as it is not available to foreign investors (and is unknown in other countries), it is a further hurdle to global investment.
Australia has been able to maintain its peculiar mix of a high company tax rate and a low GST rate because of the resources boom. If global companies wanted to profit from China’s appetite for resources, they had to do it from Australia. Like the US consumer market, if you’re in the game, you’ve got to be on the field.
The mix of a high tax rate and big resource profits bankrolled the Howard government, with company taxes reaching a peak of 6.9 per cent of GDP, almost double the global average, in 2007.
Falling profits across the economy and the big investment deductions that the resource companies can now claim have eroded company tax receipts, which have fallen to 4.8 per cent of GDP. As new OECD research shows, this has delivered a bigger hit to total tax revenue in Australia than any other advanced country since the financial crisis. Even now, Australia is getting more tax from its companies than any other advanced country, with the exceptions of Norway and Korea.
As resource prices drift lower, the competitive standing of Australia’s non-resource industries will come into sharper focus. Tax rates that are punitive by global standards will starve them of investment.
The Abbott government’s planned company tax cut is of no benefit to Australia’s competitiveness as it is entirely neutralised by the paid parental leave levy for all but the smallest businesses.
The government has promised no tax reform before the next election. The failure of Labor to effect any lasting change as a result of the Henry tax review means Australia’s tax system will have been sealed in aspic for at least 16 years before there is any chance of change.
Australia will be approaching the 2020s with a tax system designed when the internet and globalisation were in their infancy. In 2000, China’s economy was a quarter the size of Japan’s.
Globalisation has transformed the nature of commerce in that time. Trade has risen from about 40 per cent of global production to about 55 per cent. Foreign investment has soared, including into Australia, where it has risen almost fivefold. Global investment is increasingly the driver of trade. Commerce in services and intellectual property is rising much more rapidly than trade in physical goods.
In their paper, Summers and Hines say globalisation is contributing to the problems that all advanced countries – large and small – are having in financing their government services, with capital shifting to the lowest cost centres of operation.
“Globalisation means that in some sense all countries are becoming smaller,” they say, arguing that the model of less tax on companies and more tax on spending should be adopted by everyone.
The longer Australia waits to tackle tax reform, the greater will be the loss of competitiveness and the more radical the task must be.
ACOSS: PRIME MINISTER ABBOTT HAS A PROMISE TO KEEP ON POVERTY
Cassandra Goldie, CEO of the Australian Council of Social Service (ACOSS), New Matilda, 25 September 2013
Tony Abbott assured Australia in his acceptance speech that the Coalition “will not leave anyone behind”. The true test of his government will be the extent to which it provides today’s “forgotten” a hand-up to lift our nation’s fortunes.
Our new Prime Minister set an early tone for his Government with the pledge to govern for all people in Australia, including those who didn’t vote for him. In his acceptance speech he said:
“A good government is one with a duty to help everyone to maximise his or her potential … We will not leave anyone behind.”
It was a defining start to his prime ministership, drawing a distinct marker by which the ultimate success of his government can be judged.
Only a week earlier at the Coalition’s campaign launch he outlined his vision that:
“Our country will best flourish when all of our citizens, individually and collectively, have the best chance to be their best selves.”
Since 1956 ACOSS has been the voice for the needs of the forgotten people in our country – those experiencing poverty and inequality – with a vision for a fair, inclusive and sustainable Australia where all individuals and communities can participate in and benefit from social and economic life.
Although most people are better off today than they’ve ever been, the harsh reality is that despite two decades of unprecedented growth, an increasing number of people on the lowest incomes are falling behind.
Late last year we calculated that 2.2 million people were living below the poverty line, including nearly 600,000 children. Disturbingly, the recent annual report of the longitudinal study of households (HILDA) showed that child poverty has increased by 15 per cent since 2001. Clearly this is unacceptable for a country as wealthy as ours and will need the attention of the new government.
An accord on unemployment
An urgent priority to guard against worsening hardship and poverty is action to tackle rising unemployment, with the number of people reliant on unemployment payments long-term rising from 300,000 to 500,000 since the global financial crisis. Too many people are at risk of being left behind in the labour market permanently and denied the chance to be their “best selves”.
Governments cannot reduce unemployment by their own efforts alone. The incoming government will need to partner with others: with unemployed people to stay active in the labour market, with employers and unions to ensure that they are not frozen out of jobs by lack of skills, age or disability, and with employment and community services to invest in training and work experience.
ACOSS has been working with business and unions on solutions to unemployment and one of the important first steps of the new government should be to bring these key stakeholder groups together to forge a compact about growing job opportunities, particularly for people who are long term unemployed.
The Coalition has already made some positive announcements around incentives for employers to take on mature-age unemployed people. ACOSS has developed concrete proposals in this area, including expanding the proven wage subsidy scheme and paid work experience, and greater investment in case management. In addition, we will need to tailor training and support to better prepare long term unemployed people for the jobs of the future.
Repair the safety net
The new government will also have to repair the serious holes in the social safety net, including disability services, equitable access to quality schooling, health and aged care services for older people, the economic and social conditions in Aboriginal and Torres Strait Islander communities, and the $150 gap between weekly “allowance” and “pension” payments. There’s no getting away from the fact that each of these areas will require significant public investment over many years.
Ultimately, one of the biggest challenges for the incoming government is the growing gap between people’s expectations of governments and the revenue available to them. Clearly this problem will not be resolved in a single budget. It can only be resolved through a dialogue with the Australian community over what we can realistically expect from government and how the tax system can best be reformed to collect public revenue in a fairer and more efficient way.
It is time we had a mature national discussion about this, including much needed structural reform of Australia’s tax and transfer systems. Long term this will be the only way to meet the fiscal challenge that our nation faces. It’s the only way to move us towards a sustainable budget bottom line and finance the important social programs we all want – such as disability services, equitable school funding, adequate income support payments, dental and mental health, affordable housing, and meeting the future costs associated with population ageing.
Reform of tax and public expenditure is also a partnership between government and the community. Far reaching reform is more likely to happen if the government sets clear long-term goals and enters into a well structured dialogue where all interests are represented.
ACOSS welcomes the announcement of the new ministry. The government has sensibly avoided rushing into new policy announcements. To restore the budget, strengthen essential community services and ensure that no-one is left behind it will need to work steadily, patiently and collaboratively with the community.
FOR THE PUBLIC GOOD? NONPROFITS AND POLITICAL DONATIONS
Robert A. G. Monks, The Huffington Post, 25 September 2013
What is a charity? In general, we think of it as an organization that does something to further the public good, doesn’t make a profit and is tax-exempt. We feel good about giving to them because they help people or do something good for society. But charities and nonprofits are a murky world these days. Big charities handle millions of dollars and the highest paid director of a charity makes over $2 million dollars. That’s a far cry from the local food bank, little league team or crisis hotline, and not what most of us picture when we think of a charity. And while they may accept donations and be tax-exempt, not all non-profits are charities. Under the IRS code, there are 28 designations for tax-exempt status including charitable, educational and recreational so there is a wide-range of groups that fall under nonprofit or tax-exempt status.
What makes non-profit groups so much more difficult to judge these days is that they may play a role in politics. How can a charity, a hospital or even a church be political? We know, for example, that hospitals and nursing homes (both individual hospitals and trade groups) have spent nearly $23 million on lobbying so far this year. The Supreme Court, in the Citizens United decision, placed an absolute premium on freedom of political expression –monetized it. However they’re categorized, these groups recognize their need for a voice in Washington — and voices cost money.
The recent brouhaha about the IRS unfairly scrutinizing conservative groups applying for tax-exempt status illustrates just how sticky — and political — nonprofit and charitable status has become. That status is important because it allows organizations to take donations and it also allows them to craft an image that they are working for the public good. In particular, social welfare groups as designated by the IRS in the 501(c)3 rules are confusing because they may not look or act like charities and they can appear very political in nature. This designation provides “for the exemption from federal income taxation of civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” The IRS admits that there is no definition of a social welfare group but offers the lofty idea that these groups embody, “the ideas of citizens of a community cooperating to promote the common good and general welfare of the community.”
Isn’t this a problem? That nebulous and idealistic description is supposed to offer guidance on who gets tax exempt status? Even corporate p.r. departments could spin that — I mean, aren’t grocery company employees a community of people contributing to the public good? Vague, complicated definitions make tax status determinations difficult and in the end you wonder if applications are ever refused. The problem isn’t what tax exempt organizations can do or not do, but the broad classification of these “social welfare” groups makes it easy for organizations to play politics with charity status. And they do.
Then there are the (501(c)6) organizations which includes business leagues and chambers of commerce. The U.S. Chamber of Commerce is a tax-exempt organization and according to their website, they advance the interests of business ” through its nationally-recognized team of lobbyists and policy experts. Together, they help craft pro-business legislation and block excessive taxes and regulations.” Their Wikipedia page calls them a “lobbying group representing the interests of many businesses and trade associations.” The Chamber has spent a billion dollars on lobbying since 1998, more than any other organization whether corporate or nonprofit. Since they don’t have to disclose their donors we don’t know who they are representing when they wine and dine in Washington but a look at their spending gives you an idea.
I guess that it’s to be expected that charities and nonprofits would have lobbyists and give to political campaigns in today’s politicized world. If you’re trying to affect change then you need to have influence with lawmakers. Clearly, savvy charities and nonprofits know that.
Here’s my question though: if we give these groups a break on taxes to support their mission to serve the public good, why don’t we get a full account of their donors and how they spend money on politics? Isn’t a transparent political system also for the public good? And, if no one is breaking rules or doing bad why should it be a secret? Let’s call for transparency in political spending across the spectrum — profit or nonprofit. Let political spending be out in the open and then we, as citizens, donors and consumers, can make the choices we feel are best.
As for the tax code, there may be some help on the horizon. Public Citizen is trying to bring some intelligibility to the issue of political spending through a new initiative called Bright-Lines. They are proposing new guidelines that clearly define political activity so that nonprofit organizations can engage in our political process without gaming the system, without fear of audits and in a way that is clear to all stakeholders. Something has to be done and this is a start — our tax code may need lots of work but clarity and transparency are an excellent place to start.
INFRASTRUCTURE BILL IS ACTUALLY GIANT CORPORATE TAX BREAK
Jaimie Woo, The Huffington Post, 25 September 2013
Let’s fund infrastructure by giving tax breaks to large corporations.
Only in Washington would this make sense.
Currently, many large corporations avoid taxes by booking profits to sham shell companies in offshore tax havens like the Cayman Islands. This offshore tax dodging costs Americans a whopping $90 billion each year in tax revenue.
Now there’s a new bill that would only exacerbate this problem. Introduced by Congressman Delaney (MD), it gives companies a temporary tax holiday, which rewards the worst offshore tax dodgers and encourages them to book even more profits offshore to avoid taxes in the future.
Rep. Delaney’s Partnership to Build America Act purports to solve both our infrastructure problems and our tax dodging problems by requiring companies to invest, at most, $1 in infrastructure plans for every $6 they get in tax breaks. Unfortunately, the tax holiday that he proposes — which would give corporations a window to bring the money they’ve been hiding offshore back into the U.S. without paying the usual taxes — would encourage more tax dodging in the future, thereby contradicting his original goal and ultimately depriving America of long-term infrastructure funding.
What’s more, the very companies that take greatest advantage of the holiday — those who book the most cash to P.O. box shell companies in offshore tax havens — actually get to appoint board members of the infrastructure bank created by the bill. Giving the biggest tax dodgers control over our infrastructure funds? That just doesn’t seem right.
Besides, the last time corporations got a tax holiday back in 2004, it failed in its goals to create jobs or increase U.S. investments. Instead, the 15 companies that benefited most from the holiday shed 21,000 jobs while increasing executive pay by 60 percent in the following two years. The holiday ended up incentivizing companies to divert even more of their earnings overseas.
At least 82 of the 100 largest publicly traded U.S. companies use tax havens, according to a a U.S. PIRG report. Some glaring examples: Microsoft keeps about $60 billion offshore, on which it would owe nearly $20 billion in U.S. taxes; Pfizer uses accounting gimmicks to shift the location of taxable profits offshore, allowing them to report no federal taxable income in the U.S. in five years; and Google achieved an effective tax rate of just 2.4 percent on its overseas profits between 2008 and 2010.
Companies like these would get both the biggest tax breaks and the most influence over infrastructure funds in Rep. Delaney’s bill. This legislation loses out on revenue in the long run, gives corporations tax breaks, and gets lost in contradictory logic.
As a recent college graduate who now works at a non-profit, I know firsthand the impact federal taxes put on my paycheck. But if hardworking Americans can pay the taxes that fund important public programs and infrastructure, so can big corporations. When corporations dodge taxes, every dollar they avoid paying must be covered by the public in the form of cuts to public programs, more debt, or higher taxes.
Let’s leave destinations like the Cayman Islands for the tourists and the vacationers, not sham corporate headquarters. As Congress scrambles to cut the deficit, closing offshore tax loopholes for corporations should be the first step, and they should reject Rep. Delaney’s harmful bill.
EITHER WE PAY THE TAX OR WE LOSE THE SERVICE
Tim Colebatch, The Sydney Morning Herald, 24 September 2013
”The GST is not going to change. Full stop, end of story.”
Prime Minister Tony Abbott
”I think the pressure that will come on Tony Abbott as Prime Minister is that all the states will say the GST is not growing sufficiently to fund basic services like health and education.
Do Australians really mind that much if the GST was 10 per cent or 12.5 per cent, if it means maintaining high-quality health and education, disability services and the like?
I suspect the Australian people are mature enough to say: ‘We’ll cop that’.”
WA Premier Colin Barnett
The GST will change: not in this three-year term, but change it will. We’re a long way from the end of the story. The pressures for reform are mounting, and will keep mounting. And we need to understand why.
The GST story is essentially about three issues. The first, and most important, is the one Barnett raised: the states do not have the revenue they need to meet our expectations for schools, hospitals, transport infrastructure and the myriad other services state governments provide.
That gap will only widen as rapid population growth and an ageing society increase the demand for services.
The second issue is one Tony Abbott does not want to buy into, for good reason. The four biggest states, all now under Coalition governments, are demanding an end to the long-running system by which the better-resourced states are forced to subsidise services in states with fewer resources and/or higher costs. But it’s a zero sum game, in which one state’s win is another state’s loss. Don’t expect action here.
The third is a smaller issue: the campaign by retailers, backed by the states, to slash the $1000 threshold for exempting online purchases from the GST. With online purchases now making up 6 per cent of retail sales, former treasurer Wayne Swan asked Treasury to produce options for change, and his successor, Joe Hockey, says that work will continue.
But the first issue is the big one, and the one we must face up to.
Unlike Labor, the Coalition plans to allow its tax inquiry to weigh up the future of the GST, and judge it on its merits. It is likely that the report will propose either a higher GST rate, maybe 12.5 or 15 per cent, or an expansion of the GST base, to cover goods and services now exempt – food, healthcare, gambling, education – or both.
The GST is a constitutional mess – a tax the Commonwealth collects, but the states spend. It raises equity issues that will require an increase to be partly offset by tax cuts and increases in welfare benefits. Yet, with that caveat, it is a fair, efficient and non-discriminatory tax, which most Western countries charge at a much higher level than we do.
But that is not how we see it. Colin Barnett is an optimist if he thinks Australians will agree to a higher GST to keep up the standard of state services. The polls suggest they would not cop it, because many do not see that the services they get depend on the taxes they pay.
Yet that is the key issue. And if Barnett and other premiers want to win the argument, they will have to take risks, go out and lead the public debate, and explain to us why the services we want from them have to be paid for, and that the GST is the best option for the purpose.
It is always safer for the premiers to dodge that debate, and take refuge, as Victorian Premier Dennis Napthine did last Friday, in saying the problem was not the size of the GST, but the share their state gets. No one is criticised for saying that, but it gets us nowhere.
Take Melbourne. By the end of next year, it will have 30 per cent more people than it had 15 years earlier. You cannot pile 30 per cent more people into the same infrastructure without enormous strains. Your roads, your hospitals, your train and tram services become congested unless you build new ones. And if you want to build, you have to pay for it, either with higher taxes now, or with higher taxes down the track, or both.
If population growth continues at this rate, by 2050 Melbourne and Sydney will be approaching the size that London is now. To function efficiently, they will have to have metros. To build the metros, we will have to pay more tax.
Our population is ageing rapidly, as the baby boomers move out of work and into retirement – to be followed within 15 years by GenX. This will slow revenue growth and increase demands on hospitals and aged-care services. How will we pay for it?
That’s what taxes do. They are the way we pay for the services that government provides for us. There are other ways, such as higher user-pays charges (hands up if you too think it’s a scandal that taxpayers pay 70 per cent of the bill for Melbourne’s public transport, and passengers just 30 per cent.) But asking people to pay for the services they use seems to be no more popular than getting them to pay taxes.
It’s an old Australian tradition to be hostile to governments. Every tax is a ”slug”, every service inadequate. Yet we believe the government should always be in surplus.
It seems we don’t understand how this body we call government works. Taxes go in, and services come out. Starve one, and you starve the other.
International Monetary Fund figures show that Australia has the second lowest level of government spending in the Western world. In the long run, that means we have the second lowest tax levels too. Yet we think we are highly taxed. If Barnett and his fellow premiers want to win this argument, they need to have the courage to get out and argue their case, again and again.
But that is risky.
The only Labor voice supporting Barnett was ACT Chief Minister Katy Gallagher. Realistically, no opposition can resist the opportunity to kick at tax increases, however strong the reasons for them, unless the government has made it part of the decision-making.
If tax reform were handled on a bipartisan basis, it would give business certainty for long-term investments, and enable both sides to introduce best-practice reforms, rather than having to look over their shoulder at the short-term political consequences.
In Europe, that is how they handle big decisions. It’s not our style, but it should be.
CLAMP DOWN ON TAX AVOIDANCE TO FIGHT POVERTY SAYS ACTIONAID
The Economic Voice, 24 September 2013
Clamping down on tax avoidance will be fundamental to fighting world poverty in the 21st century, ActionAid tells the United Nations.
Stamping out tax avoidance and unfair tax deals in the world’s poorest countries must be a key part of the plans to fight poverty after the Millennium Development Goals expire in 2015, ActionAid will tell the United Nations.
ActionAid has calculated that an estimated $300 billion is lost every year by developing countries through a combination of corporate tax avoidance and tax deals. That is equivalent to twice the amount spent on aid last year.
The money lost could instead help fund vitally needed education, health and sanitation programmes in some of the world’s poorest countries, a new ActionAid briefing paper – Post 2015: Business as Usual or Bending the Arc of History – has argued.
The paper is being launched today in New York in advance of the meeting of the United Nations General Assembly.
“At present the tax system is failing many developing countries. They are suffering because of bad international tax treaties and rampant tax avoidance and they face huge pressure from large corporations to give unnecessary tax breaks.
“Reforming the global tax system is one of the most powerful potential weapons in the international arsenal. The OECD have acted, the G8 have acted and the G20 have acted. Now it is time for the UN to do the same,” said ActionAid International Advocacy Co-ordinator Sameer Dossani.
In a report earlier this year, ActionAid revealed that a UK-based company’s tax avoidance and tax breaks cost Zambia an estimated $27 million which is enough money to put 48,000 children in school.
Former United Nations Secretary General Kofi Annan has also publicly condemned rampant tax avoidance saying it is one of the key challenges facing Africa in the 21st century.
ActionAid is arguing that cracking down on tax dodging and unfair tax deals must be part of a much more ambitious United Nations agenda for tackling inequality and poverty after 2015, and one that goes beyond the $1.25 extreme poverty line currently on the table.
“The United Nations now needs to be more ambitious. It needs to raise its game and raise its extreme poverty benchmark. And it needs to make tax justice a key part of its future work. Aid remains vital. But simultaneously clamping down on tax avoidance has the potential to lift millions of people out of poverty,” said Mr Dossani.
David Uren, The Australian, 24 September 2013
TAX revenue has fallen further since the financial crisis in Australia than in almost any other advanced nation as a result of its excessive dependence on company taxes.
An OECD study reveals other countries that suffered much more than Australia from the economic downturn have enjoyed much more stable revenue because of their greater use of consumption taxes, such as the GST.
Business Council of Australia chief executive Jennifer Westacott said the OECD finding endorsed the council’s call for a more competitive tax system. “Given Australia’s over-reliance on company tax, it is not surprising that the OECD found that we’ve experienced the largest fall in tax revenue as a share of GDP in the five-year period following the GFC,” she said.
The OECD research shows that Australia’s tax revenue has fallen by four percentage points of GDP following the onset of the global financial crisis, against an average fall across the advanced world of only 1.2 percentage points. At its peak before the crisis, company tax was delivering 17.8 per cent of government revenue compared with an OECD average of 11.3 per cent, but this had fallen to 14.6 per cent.
The study says company taxes are particularly sensitive to the economic cycle.
About half of advanced countries have lowered their company tax rates since the GFC despite the pressure on their budgets. The study said the financial crisis had reduced business investment in almost all OECD countries. Australia was an exception because of the resources boom, but investment in non-resource industries had been very weak. “A recovery in business investment is widely seen as critical for restoring economic growth,” the study said.
Although tax is not the most important determinant of investment, research shows it responds positively to rate cuts. While Australia’s company tax rate has remained steady at 30 per cent, the average rate among advanced countries has come down from 26.9 per cent to 25.5 per cent. Many countries, including Britain, Denmark and Norway have further company tax cuts planned.
Ms Westacott said Australia’s elevated company tax rate damaged its competitiveness. “Australia needs a tax system able to meet future revenue requirements, while fostering economic growth by ensuring our tax rates and tax bases keep us competitive.”
The Coalition has promised to cut the company tax rate to 28.5 per cent, but the larger companies, which account for almost 80 per cent of total tax collections, will not get the benefit as the tax cut will be offset by a 1.5 per cent paid parental leave levy.
The Coalition has said it will revisit taxes, including the GST, in a white paper to be issued ahead of the 2016 election and is resisting calls from some states to reconsider the GST rate before then.
The rest of the advanced world has relied heavily on increasing their consumption tax rates to restore their budget health, with the average rate increasing by just over one percentage point to 18.9 per cent, or almost double Australia’s 10 per cent rate.
The study noted that rising consumption tax rates had been offset by weak consumer spending, with households increasing savings rates in an effort to pay down debt.
Most countries have held personal income tax rates steady since the GFC, although some have increased top marginal tax rates and personal capital gains taxes. Australia is among a number of countries to have tightened retirement savings concessions in an effort to strengthen the budget.
More than half the advanced countries expect to have higher tax revenue next year than in 2007. However, Treasury’s latest estimates show Australia’s tax revenue will still be 1.3 percentage points of GDP below its level before the financial crisis.
The OECD said countries should seek to reduce their dependence on personal and company income taxes and make greater use of consumption, real estate, and environment taxes.
Emily Dugan, The Independent, 19 September 2013
One council tenant in three has been pushed into rent arrears since April, while tens of thousands in housing association properties are also affected.
More than 50,000 people affected by the so-called bedroom tax have fallen behind on rent and face eviction, figures given to The Independent show.
The statistics reveal the scale of debt created by the Government’s under-occupancy charge, as one council house tenant in three has been pushed into rent arrears since it was introduced in April.
Figures provided by 114 local authorities across Britain after Freedom of Information (FoI) requests by the campaign group False Economy show the impact of the bedroom tax over its first four months. The total number of affected council tenants across Britain is likely to be much higher than the 50,000 recorded in the sample of local authorities that responded to the FoI.
At least another 30,000 people living in housing association properties have also fallen behind on rent payments since the bedroom tax came in, with potentially tens of thousands more also affected, according to separate research by the National Housing Federation.
Barrow in Cumbria was the worst-affected area, where more than three-quarters of all council-house tenants have fallen into arrears since the bedroom tax started. In Clackmannanshire, Tamworth and South Kesteven more than half of all affected households have fallen behind on their rent since the charge was introduced.
The shadow Work and Pensions Secretary, Liam Byrne, said: “These appalling figures prove that while this government stands up for a privileged few, a debt bombshell is exploding for a generation of people.
“While the nation’s millionaires get a huge tax cut, thousands more now confront arrears and eviction from which they’ll never recover. This is final proof that the hated tax must be dropped now.”
Responding to the figures highlighted by The Independent, Mr Byrne told the BBC that “thousands and thousands of our neighbours are being pushed into foodbanks and into the hands of loan sharks because of this vicious policy”.
“The vast majority of people living in these homes are people with a disability. Hitting largely disabled people with this horrific tax and plunging them into debt – surely the message and the conclusion is very clear – we need to drop this tax, and drop it now,” he said.
He asked where people should move to, highlighting research published by the Labour party earlier in the year that suggested there were not suitable alternative homes for 90 per cent of those affected by the bedroom tax.
The bedroom tax penalises tenants if they have a “spare” bedroom by reducing their housing benefit by up to 25 per cent. As emergency funds from councils dry up, experts warn the situation is expected to deteriorate further over the coming months. The latest revelations are a further blow for the policy after a judge ruled last week that those with a smaller extra room would be exempt from the charge.
A smaller survey published last night found that one household in four hit by the bedroom tax has been pushed into rent arrears for the first time. Just over half of the 63,578 tenants of 51 housing associations were unable to meet their rent payments in the first months of the new system, according to research by the National Housing Federation.
The United Nations’ special rapporteur on housing Raquel Rolnik called for a rethink on the policy after finding the reform was causing “great stress and anxiety” to “very vulnerable” people.
Clifford Singer, campaign manager for False Economy, said: “Together with the raft of other benefits cuts the Government has forced through both this year and previously, the bedroom tax is driving tenants and families who were just making ends meet into arrears, and pushing those who were already struggling with the cost of living into a full-blown crisis.”
Only 16 of the 114 local authorities who responded to the FoI request have a “no-eviction” policy, meaning many thousands of families risk losing their homes as a result of the bedroom tax.
The TUC general secretary, Frances O’Grady, said: “The bedroom tax is not saving money. Instead it is pushing up rent arrears which will force councils to waste more cash on evictions, debt collection and emergency support for homeless families.
A Department for Work and Pensions spokesman said: “The removal of the spare-room subsidy is a necessary reform to return fairness to housing benefit. Even after the reform we pay over 80 per cent of most claimants’ housing benefit – but the taxpayer can no longer afford to pay for people to live in properties larger than they need. It is right that people contribute to these costs, just as private renters do.”
Toni Bloomfield, 25, lives in Chipping Norton, Oxfordshire, with her partner, Paul Bolton, 42, and his four children.
“I have to pay £98 extra a month since the bedroom tax came in,” she said. “We’ve got a four-bedroom house and Paul’s four children, aged between two and eight, live with us. Before the school holidays we were struggling and now we’re nearly three months behind on rent.
“The children get free school meals and feeding them through the holidays was tough. Paul and I are only eating in the evenings two or three nights a week to make sure we can put enough food on the table. We’re not working, but not out of choice. Trying to find a full-time job here is a nightmare.”
John Cadogan, Online Opinion, 18 September 2013
When Kevin Rudd announced sweeping changes to Australia’s Fringe Benefits Tax (FBT) system, it’s inconceivable the former Prime Minister fully appreciated the consequences of his actions.
On July 16, 2013 – within two months of the federal election – Kevin Rudd and his then treasurer Chris Bowen abolished the FBT concessions that had been freely available to vehicle purchasers for the past 27 years. This was done in an ill-fated and flawed attempt to be seen to be plugging a $1.8 billion hole in the budget, with Labor ‘under new management’ in the lead-up to the September 7 Federal election.
This dramatic and poorly conceived move on FBT policy had several immediate effects. There was a dramatic drop in the sale of cars manufactured locally. Holden sales dropped six per cent, while Ford’s plunged by more than 20 per cent (compared with August 2012). Both were near their lowest levels in two decades.
Ford Falcon sales dropped by almost 60 per cent, while Territory sales fell almost 40 per cent. As a result, Ford had no alternative but to halt production of both the Falcon and Territory at its Broadmeadows plant in Victoria. At least 750 workers were stood down in a series of rolling stoppages.
Holden fared somewhat better. Cruze sales fell substantially – down almost 10 per cent from 2628 in August 2012 to 2369 this year, despite a massive drop in the price. Commodore sales actually increased modestly – from 2435 in August 2012 to 2809 in August this year. (The jump in Commodore sales is probably more due to latent demand for the new VF model than anything else.)
Just two days after the FBT ‘bombshell’ announcement, industry bodies advised News Limited that 8500 new car orders had already been suspended. Three hundred jobs at specialist salary packaging financial services businesses were lost immediately, and 3000 more jobs were threatened as a result of the expected downturn in sales.
Fleet leasing companies, which are generally responsible for facilitating the purchase of one car in 10 – or about 100,000 cars each year – experienced a profound and immediate drop in orders. On average, that drop was 26 per cent – but on locally made cars, the drop was even higher, at 30 per cent. This downturn meant at least $160 million in lost economic activity in August alone.
Principally this policy was put in place not because of any intrinsic problem with FBT concessions, but as a convenient way to offset the drop in revenue from Kevin Rudd’s plan to float the price of carbon earlier than originally planned.
Shortly after the July 16 announcement, Anthony Albanese dismissed the 27-year-old FBT concession policy as a “rort”. The former Deputy Prime Minister, told ABC radio: “The chances are it’s not a Holden Commodore driver [rorting the system] it’s a BMW driver.”
However tasty this comment may have been as a soundbite, it stood up only briefly to scrutiny. Australian Salary Packaging Industry Association data showed 75 per cent of company car drivers were earning less than $100,000 per annum, and they drive vehicles typically costing less than $40,000 – in other words, much more likely to be driving a locally made car than an imported German premium brand.
Andrew Gardiner, who represents the National Tax and Accountants Association, told News Limited: “This is bad policy. Our members are concerned about the wider impact on jobs and the community.”
Under the previous system, the concession policy meant the government of the day assumed your private use of the vehicle was 20 per cent, and FBT was charged against that 20 per cent. The remaining 80 per cent of the vehicle’s use was FBT-free, which was a significant inducement for many to purchase a new vehicle under a ‘novated lease’ or ‘salary sacrifice’ arrangement.
These arrangements meant an employee could use pre-tax income to acquire a new car. That meant significantly increased buying power. Employers who facilitated the transaction were effectively rewarding their workers with a significant benefit at little or no cost to themselves. Thirdly, the struggling local carmakers were handed an ongoing increase in demand for their cars, because up to 80 per cent of locally made cars are either bought by fleets, or subject to a salary sacrifice arrangement.
This is perhaps the most perplexing aspect of the entire decision to axe FBT concessions. A succession of Federal Governments has given the local carmakers a total of $5.4 billion in taxpayer funded government grants over the past decade. It did not make sense to pump all these funds into the production side of the local car making equation, only to choke off the demand side by cutting the FBT concessions. Especially at a time when the local carmakers are under tremendous commercial pressure.
In addition, the Rudd Government’s policy added substantially to the administrative burden of many businesses. Instead of merely claiming the concession and being done with it, all businesses attempting to claim any vehicle deductions whatsoever would now be required to maintain vehicle log books.
Clearly, FBT concessions had played – and continue to play – a major role in local car manufacturing, and the health of the automotive sector, principally be being a major demand stimulus.
Just four days before the Federal election, Prime Ministerial aspirant Tony Abbott and his then shadow treasurer Joe Hockey made concrete their commitment to reinstating the FBT concessions, effectively reversing the Rudd Government’s changes. In an open letter, they said: “A Coalition Government will not proceed with the Labor Government’s poorly thought through changes to the Fringe Benefits Tax arrangements on cars.
“In particular, we want to acknowledge the role that the car leasing and salary packaging industry plays in assisting with new car sales, generating demand and, therefore, generating jobs.”
It didn’t take long for the Coalition to act, following the bloodbath of the Federal election. Just five days after Tony Abbott became Prime Minister-elect, Coalition Finance spokesman Andrew Robb declared Labor’s take on FBT policy “dead, buried and cremated” – to wide industry acclaim.
Bill Baker CEO at www.novatedleasing.com.au
said, “This is a terrific result for the [Australian] economy… a real stimulus package with no downside. Increased demand will help secure jobs in the car industry, and at the same time businesses and employees will benefit as well”.
Terry Macalister, The Guardian, 9 September 2013
Director’s fiduciary duty to shareholders is not to maximise dividends through tax avoidance, says new official advice
Britain’s business leaders will be sent advice on Monday from a top law firm warning them they cannot claim it is their fiduciary duty to shareholders to avoid tax. Farrer & Co was commissioned to look at the issue by tax justice commissioners who fear executives are trying to justify tax avoidance on the grounds that their priority is to enhance shareholder returns.
The legal assessment from Farrer & Co, which numbers the Queen among its clients, states: “It is not possible to construe a director’s duty to promote the success of the company as constituting a positive duty to avoid tax.”
Farrer says company directors have a wide discretion when calculating the social impact of their decisions. If they choose to pay tax responsibly, they would in fact be protected by the applicable law rather than at risk of liability, it explains.
The Tax Justice Network will dispatch a copy of the legal opinion to the heads of every company in the FTSE-100 index.
“This opinion should make a real difference to company directors who are being told by their tax advisers that they have a duty to adopt anti-social tax measures,” said John Christensen, director of the network.
“Legal risk in this area turns out to be a complete fiction, and company directors can stand firm and act according to their consciences rather than being swayed by what is effectively sales puff coming out of the tax avoidance industry.”
The issue became a hot potato in political circles after rows over the amount of duty paid by companies such as Amazon and Google. Reuters news agency recently reported moves by G20 nations to tighten fiscal rules, saying, “analysts in the investment community say corporate executives have a duty to shareholders to minimise their companies’ tax bills”.
David Quentin, a tax barrister who was involved in drafting the legal opinion, said companies were sometimes pursuing self-interest. “Board-level executives often benefit from performance-related reward packages which are indirectly affected by the amount of tax the company pays. Corporate tax avoidance is presented as a matter of high-minded ‘fiduciary’ duty, but it is probably better understood as being about personal reward,” he argued.
The advice from Farrer has been welcomed by corporate governance experts. Alan MacDougall, managing director of the pension investment adviser PIRC, said it was a very helpful clarification of directors’ duties and confirmed his organisation’s view that it was mistaken to argue that there is a legal obligation on directors to minimise the tax companies pay.
“Indeed in the current corporate environment aggressive tax avoidance has the potential to cause significant reputational brand damage, which could be detrimental …to companies and their shareholders over the long-term. We hope that directors, and their advisers, take careful note of this opinion. It is no longer acceptable for them to seek to justify tax avoidance through a misinterpretation of directors’ duties,” he added.
FORMAL LEGAL OPINION: COMPANY DIRECTORS HAVE NO FIDUCIARY DUTY TO AVOID TAX
The Tax Justice Network, 9 September 2013
This morning the Chief Executives of every company in the UK’s FTSE100 index will be receiving a letter from Tax Justice Network drawing their attention to a legal opinion prepared for us by the prestigious law firm Farrer & Co.
The opinion provides an unequivocal and authoritative view on whether or not company directors have a duty to their shareholders to avoid tax: no such duty exists in English law. Although this legal opinion in itself only directly applies to the UK, it potentially has wide international relevance, as we have noted before.
The text of our letter to the Chief Executives is as follows:
9th September 2013
Dear (Chief Executive)
It is often asserted that UK company directors have a fiduciary duty to their shareholders to avoid tax. The Tax Justice Network has now obtained a firm legal opinion from prestigious law firm Farrer & Co that provides an unequivocal and authoritative answer to this question: no such duty exists in English law.
The legal opinion is attached . . . We are sending the opinion to a wide range of UK media organisations and to the leaders of every company in the FTSE100.
There is a duty, say the lawyers, to promote the success of the company, but this should not be misunderstood as requiring blinkered attention solely to maximising distributable profits. “It is not possible to construe a director’s duty to promote the success of the company”, say the lawyers, “as constituting a positive duty to avoid tax”.
The opinion goes on to explain that company directors have a wide discretion to act with a view to the social impact of their decisions, and if they chose to pay tax responsibly rather than structure around tax they would in fact be protected by the applicable law rather than at risk of liability.
Tax justice campaigners, academics, legal experts and many mainstream commentators already know this, but a formal legal opinion is something more: it is authoritative and in this case unequivocal.
There is no fiduciary duty to avoid tax.
Tax Justice Network