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Archive: December 2012

This section provides a selection of media items from December 2012.


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RESOURCES TAXES ‘COST MORE THAN THEY RAISE’

Sid Maher, The Australian, 12 December 2012

TREASURY has estimated the cost of implementing and administering the new mining tax as well as the existing and extended petroleum resource rent tax at more than $60 million for the three years to the end of next year.
An answer to a question on notice from opposition assistant Treasury spokesman Mathias Cormann said the Australian Taxation Office was provided with additional funding in the 2010-11 budget to implement the new resource rent tax arrangements, which included both the minerals resource rent tax and the extension to the PRRT. “The operating cost of implementing and administering the new resource rent tax arrangements, including MRRT and existing and extended PRRT, is estimated to be $60.48m over the financial years 2010-11 to 2012-13,” the answer said.
PRRT administration costs were put at $3.6m for the 2009-10 financial year.
The cost was revealed as the Association of Mining and Exploration Companies estimated the administrative and set-up costs for small iron ore and coalminers and junior exploration for the MRRT at more than $20m.
The MRRT failed to raise any revenue in the first three months of its operation and the government, in the mid-year-economic and fiscal outlook, downgraded its revenue forecasts for the tax to $2bn from $3.7bn for 2012-13, which was estimated in the May budget. “We are now in the ridiculous situation where the MRRT appears to be costing the budget and the economy more to administer and comply with than it is raising in revenue,” Senator Cormann said.
“Only the Labor Party can come up with a complex new tax targeting an important sector in our economy, which is more distorting, more costly to administer and more costly to comply with than the previous arrangements and which hasn’t raised a dollar.”
But a spokesman for Wayne Swan said that over the past three years, resource rent taxes had raised $3.5bn — dwarfing the resources that had been allocated to administer the collection of the revenue.

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DEPARDIEU FLIGHT SPARKS TAX ACCUSATIONS

Henry Samuel, The Age, 12 December 2012

PARIS: France’s Prime Minister has criticised rich citizens fleeing the country’s tax on high earners, saying they were greedy profiteers seeking to “become even richer”.
Jean-Marc Ayrault’s spoke out after France’s best-known actor, Gerard Depardieu, took up legal residence in a small village just over the border in Belgium, with hundreds of other prosperous French nationals seeking lower taxes.
“Those who are seeking exile abroad are not those who are scared of becoming poor,” Mr Ayrault declared after unveiling sweeping anti-poverty measures to help those affected by the economic crisis.
These individuals were leaving “because they want to get even richer”, he said. “We cannot fight poverty if those with the most – and sometimes with a lot – do not show solidarity and a bit of generosity,” he said.
Announcing plans to spend up to euros €2.5 billion ($3.1 billion) by 2017 to help the poor, Mr Ayrault said poverty affected 12.9 per cent of the population in 2002, but that figure rose to 14.1 per cent in 2010.
France’s Socialist President Francois Hollande, who famously once declared “I don’t like the rich”, has pledged to tax annual income of more than €1 million at 75 per cent. The British Prime Minister, David Cameron, controversially said he would “roll out the red carpet” for any French residents trying to flee the tax increase.
Mr Hollande has since introduced other hefty new charges on capital gains and inheritance, while increasing France’s wealth tax, and an exit tax for entrepreneurs selling their companies.
Last week owners of second homes in France were told the value of their properties could collapse after Mr Hollande’s administration announced an additional 3-5 per cent tax on capital gains above €100,000.
Mr Ayrault did not mention Mr Depardieu on Monday, but the star drew fierce criticism from left-wing politicians and commentators.
A Socialist MP, Yann Galut, called for the actor to be “stripped of his nationality” if he failed to pay his dues in France, saying the law should be changed to enable such a punishment.
The consumption minister, Benoit Hamon, said the move amounted to giving France “the finger” and was “antipatriotic”. The left-leaning daily Liberation called Depardieu a “drunken, obese petit-bourgeois reactionary”.

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LOGICAL FLAWS BLUNT THE CASE FOR CUTTING COMPANY TAX RATE

Ross Gittins, The Sydney Morning Herald, 15 December 2012

ONE of big business’ greatest disappointments this year was its failure to persuade the Gillard government to cut the 30 per cent rate of company tax. On business’ economic reform wish-list, cutting company tax is second only to getting more anti-union provisions back into industrial relations law.
So you can be sure business will be campaigning for lower company tax in the months leading up to next year’s federal election.
I’m sure many business people regard the benefits of lower company taxation as so obvious as to be self-evident but, in economics, you have to spell out just why you believe a lower tax rate would make the economy a better place.
Presumably, the argument is that lower company tax would encourage greater investment in business activity, thus making the economy grow faster and create jobs.
It’s surprising there’s been so little debate of this proposition among supposedly argumentative economists – until now. On Saturday, the Australia Institute will publish on its website a technical brief by David Richardson, ”The Case Against Cutting the Corporate Tax Rate”.
According to Richardson, company tax has the great virtue of being a tax on profit. If you don’t make a profit, you don’t pay the tax.
So company tax doesn’t add to the cost of doing business, meaning the imposition of the tax makes no difference to the profitability of business activities. And, since the tax is applied at the same rate to profits from all business activities, it should have no effect on decisions about which activities to pursue, or how much activity to undertake.
”By contrast, many other taxes are payable whether or not the company makes a profit,” Richardson says. ”For example, the iron ore royalty rate in Western Australia will soon be 7.5 per cent of the value of the iron ore mined. If the mining company receives $100 a tonne, pays $7.50 in royalties and has expenses of $95 a tonne, it will run at a loss … There is no way a profit-related tax can do that.”
In exposing this logical flaw in the argument that the rate of company tax affects the amount of business activity undertaken, Richardson quotes the Nobel laureate Joseph Stiglitz from a book he published this year, The Price of Inequality: ”If it were profitable to hire a worker or buy a new machine before the tax, it would still be profitable to do so after the tax … what is so striking about claims to the contrary is that they fly in the face of elementary economics: no investment, no job that was profitable before the tax increase, will be unprofitable afterward.”
Richardson reminds us that, according to elementary economics, investment will continue until the return on the marginal investment is just equal to the cost of capital. This is true whether you evaluate the investment on a pre-tax or post-tax basis. Why? Because, although company tax will reduce the return on the investment, it will also reduce the (after-tax) cost of capital. If returns are taxed, interest costs become tax deductible.
Richardson notes that the economists Gravelle and Hungerford, of the US Congressional Research Service, who reviewed the empirical evidence that might or might not support claims that lower company tax increases economic growth, debunk the notion.
It’s widely argued that because Australia is a ”capital-importing country” and needs a continuous inflow of foreign equity investment, we need to keep our company tax rate competitive if we’re to attract all the funds we need. Since other countries have been lowering their rates, we must lower ours.
But Richardson says Gravelle and Hungerford showed ”there was no convincing empirical evidence that suggested international capital flows were influenced by corporate tax rates. The differences among Organisation for Economic Co-operation and Development [member countries'] rates tend to be so small as to hardly matter compared with other factors”.
He says a good deal of foreign investment in Australia comes from Asian countries with much lower company tax rates than ours. In 2011, China was the third-highest foreign investor in Australia by value during the year, while India was fifth, Singapore was sixth, Thailand 12th and Malaysia 14th.
”The simple point is that Australia attracts investments originating in the very economies that are supposed to have more competitive taxation systems,” he says.
Note that the US accounts for 27 per cent of the accumulated stock of foreign investment in Australia, Britain for 23 per cent and Japan for 6 per cent.
An argument against cutting our company tax rate is that, because of the way double-taxation agreements between countries work, where foreign investors in Australia come from countries whose company tax rate is higher than ours – such as the US – they gain no advantage from our lower rate. What they save in payments to our taxman just increases their payments to their own taxman.
When, at a tax summit last year, the ACTU expressed opposition to a cut in company tax, business and its economist supporters retorted that, when you work it through, the burden of company tax ends up being borne mainly by wage earners.
That is, businesses pass the burden of company tax on to their customers in the form of higher prices, and most customers are wage earners. Didn’t the unionists know this? Why were they so ill-informed?
It’s true that, being inanimate objects, companies don’t end up paying tax: only people pay tax. So the burden of company tax must be shifted to customers, employees or shareholders, or some combination. But determining just who, in practice, ends up shouldering the burden of a tax is notoriously hard.
It’s true, too, there’s been a rash of studies purporting to show it’s the workers who end up carrying the can. But the Congressional Research Service report criticised those studies and showed their results were unrealistic.
One study, for instance, estimated a 10 percentage-point increase in the corporate tax rate would reduce annual gross wages by 7 per cent. But when Richardson applied that rule to our economy, he found it was saying such a move would increase company tax collections by $22.5 billion and reduce wages by $49.6 billion.
Pretty hard to believe. Incredible, in fact. The economic case for a lower company tax rate is surprisingly weak.

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STUDY CALLS FOR INCREASED LIQUOR TAXES TO DEAL WITH ‘PRE-DRINKING’

Timothy McDonald, ABC News, 11 December 2012

A new study warns against a soft approach to alcohol, saying mandatory licensing conditions have been successful while voluntary ones have failed. The study also says people who drink at home before going out on the town are far more likely to get into trouble.
TONY EASTLEY: There are calls this morning warning against a soft approach to alcohol, saying that mandatory licensing conditions have been successful while voluntary measures have largely failed.
The new study also says people who drink at home before going out on the town are far more likely to get into trouble.
The study’s lead author wants to see the price of bottle shop alcohol increased to reduce the problems of pre-loading on alcohol before hitting the pubs and clubs.
Timothy McDonald reports.
TIMOTHY MCDONALD: The study, dealing with alcohol-related harm and the night time economy, compared approaches to licensing in Newcastle and Geelong.
Newcastle pubs are required to limit trading hours, can’t sell shots after 10pm and must limit the number of drinks being served at one time.
In Geelong the measures are voluntarily, and include ID scanners, improved communication between venues and police, and an education campaign.
The report’s lead author, Associate Professor Peter Miller from Deakin University, says it’s clear which one works better.
PETER MILLER: You always get rogue traders and the bottom line always competes with responsible service of alcohol. We did over 130 venue observations in the 18 month period, and in the end the mandatory conditions worked and the voluntary ones just didn’t.
TIMOTHY MCDONALD: But he says it’s not just the pubs that have a role to play. Many people take advantage of cheaper prices at bottle shops and start drinking before they even leave the house.
And those that do are more likely to get into a fight.
Peter Miller says the bottle shops should be forced to contribute more.
PETER MILLER: Currently all the very cheap liquor being sold from the very large packaged liquor outlets contributes to harm but it doesn’t actually contribute to any of the measures that ameliorate that harm, such as the security- you know, police out at night, people in emergency departments.
And on the other side, when you raise the price of alcohol, you reduce consumption, particularly amongst people who are dependent and young people who have limited budgets.
TIMOTHY MCDONALD: Are you talking about increasing prices across the board or are you talking about some kind of a floor price per standard drink?
PETER MILLER: No, I’m definitely talking across the board. The floor price wouldn’t achieve what a tax or a levy on the packaged liquor outlets could achieve.
TIMOTHY MCDONALD: So is it your sense that bottle shops haven’t really been contributing their fair share, whereas pubs are perhaps forced to interact with councils and perhaps take responsibility for what comes over their bar?
PETER MILLER: Yes, I think that’s exactly the point. I think it’s very much about packaged liquor outlets paying up their fair share of the costs that they incur on society.
I think it’s really important for people in the community to think about when they’re paying for alcohol, that’s not the only time they actually pay for alcohol. We pay for alcohol through our taxes, through every time we have to wait for the police to turn up on a Saturday night or have to wait in an emergency department on a Saturday or Friday night.
So we need the packaged liquor outlets to start contributing to the costs of the liquor they sell.
TONY EASTLEY: Associate Professor Peter Miller from Deakin University ending Timothy McDonald’s report.

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DJS AREN’T THE VILLIANS OF THE WEEK

John Birmingham, Brisbane Times, 11 December 2012

You people, sometimes you do my head in. Compare the widening gyre of rage and hysteria spinning from the centrepoint of 2Day FM’s phone-prank-gone-wrong, with the strangely subdued public response to continuing revelations of epic tax avoidance by some of the world’s richest corporations.
In the former case, where a radio station’s prank phone call is perceived to have led to the suicide death of a nurse, the eruption of anger seems genuine, and deeply personal, as millions of individuals take to their favoured publishing platforms to howl out their disgust, and somewhat less genuine, in the case of competing media outlets swooping on the tragedy the sake of their ratings.
But why should the outrage be so personalised? Very few voices were raised in protest at the stupid stunt before the nurse’s death, in spite of the very real prospect that such a joke could have serious consequences for the targeted individual. It’s not a great stretch to imagine somebody losing their job over such a lapse, for instance, and given the poor economic situation in the UK, with it their house, their children’s education, their relationship and so on.
But very few of The Appalled protested the prank in those terms last week.
It was all a bit of a larf, wasn’t it, guv?
Apart from the shameful joy of joining a massed hunting pack in full blood lust there seems to be little utility in even engaging with this tragic farce.
On the other hand, anyone who pays tax has a direct personal interest in whether enormously wealthy and powerful corporations such as Apple and Google game the international legal system to avoid paying their fair share of the burdens of civilisation. Every dollar that they and companies like them avoid by routing the income through foreign tax havens is a dollar that somebody without access to their vast resources must make good.
Governments are finally beginning to cut up rough with these companies, demanding for instance that Google pay its tax in the countries where it sells its advertising, rather than in some convenient low tax bolthole on the other side of the globe. The Australian Tax Office recently handed Apple a bill for $27 million in back taxes. And the Starbucks chain, sniffing the wind, has offered to cough up an extra £20 million to the British authorities even though, legally, it doesn’t have to.
As big as those sums are, however, they are nothing as compared to $21 trillion estimated to be hidden in offshore havens by the world’s true elites. Not the latte sipping Birkenstock elites of fevered right wing imagination, but the super rich individuals and corporations who have opted out of carrying any share of the burden of civilisation by refusing to pay for it.
Where is spit-flecked rage on Twitter, the protest pages on Facebook, the creepy threats from Anonymous for these groups and individuals?
Is it that you just don’t care? Or that you are incapable of seeing how you are personally disadvantaged by this gargantuan theft from the public realm, preferring instead to vent your spleen on a couple of moronic radio hosts?

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OECD SET TO SLAM TAX SYSTEM FAILINGS

Katie Walsh, The Australian Financial Review, 10 December 2012

The OECD is expected to ramp up pressure on Australia to reform its tax system, following the failure to rescue stagnated GST or adopt key recommendations from the Henry tax review.

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IF WE’RE GOING TO TAX THE RICH, THEN LET’S TAX THE RICH

Chris Weigant, The Huffington Post, 10 December 2012

Due to the political courageousness of President Obama (there is simply no other way to put it), the folks inside the Beltway are finally having a serious discussion about taxing the rich. Obama is not only strongly fighting for higher tax rates on the higher-income earners, but he was the one who put the subject front and center in the election season — when he could easily have punted it to a non-election year.
But the “tax the rich” policies so far being discussed (at least the ones that leak out to the public) are laughably timid and tame, when you really examine the big picture. So far, what is making Republicans howl is President Obama’s plan to end the Bush tax cuts on the top two marginal income tax rates, which would raise them from 33 percent to 36 percent, and from 35 to 39.6 percent. Seen one way, that’s impressive, since tax rates haven’t gone up in such a fashion since President Clinton’s first year in office. But seen another, it’s not all that radical at all.
Consider the fact that nothing Obama is doing is going to “fix” the problem of Warren Buffett paying a lower tax rate than his secretary — a problem Obama has repeatedly said he’d like to tackle. On “entitlements reform,” only a few lonely voices crying in the wilderness are suggesting ending the most regressive federal tax around, by scrapping the cap on income for Social Security payroll taxes. Also seemingly forgotten in this debate is the proposal for a “millionaires’ tax” or a “transactions tax.” The real measure of whether Democrats and Republicans are both selling smoke and mirrors is whether they permanently fix the Alternative Minimum Tax — again, a subject which has barely been mentioned.
If we’re really going to get serious about taxing the rich, why not… well… tax the rich? Chances for changing the tax code for upper-income folks don’t come around all that often (it’s been 20 years since the last one, remember), so why not push not only for higher rates, but to fix some of the most glaring ways our tax code favors those with monstrous incomes. Let’s take a look at a few of these ideas, one by one.

Scrap the Cap
This one is pathetically easy to understand, and pathetically easy to fix. Many Americans aren’t even aware of how the lower 90 percent of paycheck-earning Americans pay higher taxes than the upper ranks.
Social Security taxes are supposed to be a “flat tax” — everyone pays the same rate. It’s so simple that Social Security taxes (“FICA,” on your paystub) don’t even appear on a normal person’s income tax form. It’s a straight 6.2 percent of your income that gets taken out, every single paycheck. Except for the wealthiest, of course — they pay less.
Because only (currently) the first $110,100 you make in income is taxed. Every dollar you earn up to this limit is taxed at a flat 6.2 percent rate. Every dollar you make over this limit is taxed at a zero percent rate. Meaning most Americans don’t make it over the cap, and thus pay a full 6.2 percent on their entire income.

Everyone pays the same 6.2 percent up until that $110,100 limit. From this point on, the percentage drops because once the cap is hit, you’re done paying the tax for the year. Someone making $150,000 a year pays only 4.6 percent, as a result. Now let’s look at a higher income range — one which begins to show the massive tax break higher income folks get.

Take income up to a million dollars a year. The tax rate steeply falls until about $250,000 a year (who pay 2.7 percent), and then falls off more slowly as incomes rise. When you hit $750,000, you are paying less than one percent a year in Social Security taxes. By the time it hits a million bucks a year, it’s down to 0.7 percent. Which brings us to the real top earners.

At $5 million a year in income, the tax falls to one-tenth of 1 percent. A firefighter pays 6.2 percent, but if you clear $5 million you pay 0.1 percent. At $75 million a year in income, the figure falls below one one-hundredth of 1 percent — only 0.009 percent.
Want to “save” Social Security? Scrap the cap. Make everyone pay the same flat percentage rate. Flat taxes are bad enough, but regressive taxes — defined as “those who have more pay less” — should be an outrage. Scrap the cap. Social Security could be saved for decades by this one simple step. Make every one of those charts a flat line.

Solve the Buffett Problem
Warren Buffett, as everyone should know by now, pays a lower income tax rate than his secretary, despite the fact that Buffett makes one whale of a lot more income than his secretary does. This, despite the supposed-progressive nature of the income tax system. The reason is the biggest loophole of them all. This mother of all loopholes? Treating income rich people make differently than income normal people make. You see, the way Mitt Romney makes most of his money is taxed at a much lower rate than the way a nurse or teacher makes money. Which is why Romney is able to pay less than 14 percent income tax on an income of $20 million. Astonishingly, if the Paul Ryan budget had been made law, Romney would have paid less than one percent on the same $20 million income. I speak, of course, of “capital gains” (and “dividends” as well, but I’m just going to lump them all together for the sake of conversation).
Of all the thousands of ways an individual can make money (or “create an income”), only one is taxed at less than half the rate of the others. It happens to be “making money on Wall Street and the stock market.” What a surprise! The method the already-wealthy use to increase their wealth is treated separately by the tax code. It is taxed less than half of what you earn in a paycheck. This is the “Buffett problem.”
The solution to this problem is easy, too. Tax all income the same. Equality of taxation! It doesn’t matter how you make that dollar, the government should tax it exactly the same — anything else is simply not fair. In fact, this should be made progressive, too — which will instantly neutralize all the howling from the anti-taxers about how this will hurt the middle class.
Make all income made through capital gains up to $250,000 each and every year tax-free. No capital gains taxes whatsoever on any money made up to the $250,000 limit — you can just write off all profits up to that point on your yearly tax form. Then every dollar made above that limit is treated as income. Period. And taxed at the same rate as every other type of income.
This removes the argument that there are small investors who would be harmed. Very few Americans’ retirement plans make $250,000 in income each and every year. In fact, it would be a massive tax break for small investors, which would have a positive impact.
But for the Buffetts and the Romneys of the world, they’d be paying the same (or greater) tax rate as their secretaries. And they, too, get to write off a whopping quarter-million of it each and every year, as an incentive. Problem solved.

Tax Wall Street Speculators
Institute a transactions tax of 0.25 percent on all Wall Street transactions over a certain limit per year. Make all the stock trades you want up to, perhaps, $250,000 per year tax-free. But then on trades over this amount, charge a fraction of one percent as a “speculation tax.” This idea isn’t original (actually, none of these ideas is original), I should mention. Raise money for the Treasury by putting a very gentle brake on the stock market, to the tune of 25 cents on every $100 traded. Wall Street bears a large portion of responsibility for our fiscal problems, so it’s time to make them contribute toward fixing them.

Cap deductions
Right now this is the favorite solution of the Republicans (of course, they want this solution and none of the others, to be clear). Cap what rich people can deduct on their income taxes. The figure I’ve heard tossed around, however, is way too low. Capping deductions at $50,000 would snare a lot of folks making under $250,000 per year, I would be willing to bet. So raise the limit enormously, but make it a hard cap.
Let upper-income folks have a full quarter-million in deductions each year. They can write off up to $250,000, no matter how they’re deducting it and no matter how much their total income (this would be separate from the $250,000 capital gains break described above, I should mention). But that’s it. This change could be accomplished by changing a few words on the last box on Schedule A to read “if this amount is over $250,000, then just enter $250,000.” That’s all it would take. No more writing millions of dollars off each year, sorry. Again, by setting the limit extremely high, this would not ensnare anyone in the middle class at all.

Add Two Tax Brackets
This one’s pretty easy, too. One of the things Republicans (stretching back to Ronald Reagan) have been successful at over the years is not just lowering tax rates, but reducing the number of tax brackets that exist. Most of this reduction has happened at the upper end of the scale (which should come as no surprise).
This one is easy to fix, and key Democrats such as Sen. Charles Schumer have been pushing the idea for a while now. Create a millionaires’ tax bracket. In fact, I’d go further and create a bracket at $1 million in income, and another one at $10 million in income. This removes the squabbling about the “middle class” versus “the truly wealthy” as anyone pulling down a cool million a year simply cannot be classified as “middle class” by anyone (at least not with a straight face). We had multiple tax brackets for a reason in the past — to tax the stratosphere of the income levels. Let’s get back to this way of targeting the upper ranks once again.

The AMT Big Lie
I’ve offered up all of these ideas today to show how timid the proposals currently being discussed truly are. I would bet that none of the problems above will even be addressed in the fiscal cliff negotiations, and I don’t expect them to be addressed at any time in the next year, either.
There’s a quick and easy way to show how the politicians in Washington — from both sides of the aisle, mind you — are simply playing games when they talk about any “long-term solutions” to the tax code. They are, indeed, not going to institute a fix on any sort of permanent basis, mostly because then they’d have to tell a certain uncomfortable truth about the budget projections. Which they’re just not going to do — from either side of the political divide.
Here’s the test: will the Alternative Minimum Tax be fixed for more than one year in any “deal” which emerges? The answer to that will be: “No. No, there will not be a permanent fix to the AMT.”
Which is how you will know that both sides are simply lying about what the budget will look like in the next ten years. Flat-out lying. Both sides.
The Alternative Minimum Tax was created to solve exactly the same problem they’re trying to solve now — making the wealthy pay their fair share. It was created to rein in abuse of deductions and loopholes. It was created to make sure the wealthiest paid at least a minimum of taxes (it’s right there, in the label). It is, in short, the perfect solution to the problems they’re now trying to hash out.
Instead of upping rates, instead of fixing loopholes or deductions, the politicians could instead just fix the AMT and return it to its original purpose of snaring ultra-wealthy folks who are trying to lower their tax liability on each year’s tax form.
The problem with the AMT is that the limit was set so long ago that it is laughably low today (Nixon signed the original AMT into law). But the politicians in Washington play a game with it, each and every year, like clockwork. The game is called “let’s pretend it’s going to exist for nine years out of ten, because it makes the budget projections look so much better.” When figuring a ten-year budget, the next year will show an “AMT fix” where the AMT limit is raised to where it should be, to only apply to the very wealthy. But the nine years after that will show the AMT levels at the old rate, because such smoke and mirrors means nine years of “tax revenue” which is simply never going to appear gets added into the mix. With nine years of such falsehood, to put this another way, it makes it much easier to project smaller budget deficits.
Each year, Congress “fixes” the AMT, right before the end of December. Each year, they only fix it for a single year. Nobody wants to be the one who points out the lack of clothing on the Emperor, because then the other side will accuse them of wanting to “explode the deficit.”
So while there is indeed a vehicle for taxing the rich in a way which lays down clear rules and clear targets — a way which has existed since 1970 — it will not be used in the fiscal cliff deal. A permanent fix will not even be discussed, I would wager.
If President Obama really wanted to clearly and permanently change the tax structure for the wealthiest Americans, he would be out there pushing for all of his ideas to be wrapped into the one package of a permanent AMT fix. Instead, this will be treated as an afterthought in the whole debate — it’ll barely rate a footnote in the stories which appear about any impending deal. Perhaps in the fifteenth paragraph of an in-depth newspaper story will be the line “…and they’ve also agreed to the standard one-year fix for the AMT.”
If you want to tax the rich — if you really want to address the problems in our tax code that outrageously favor the wealthiest among us — there are multiple ways to do so. I understand why Obama has drawn a political line in the sand over raising rates on the top 2 percent of earners. But it has focused the debate only on this one part of an overall solution. There are plenty of other ways to make the tax code more fair, more balanced, and more evenhanded for the middle class.
My guess is none of them will happen soon. Perhaps Obama will claim victory and get rates raised to 39.6 percent, or perhaps John Boehner will talk him down to 37 percent. But because the media and all the politicians have focused on this one battle royale, my guess is that virtually no attention will be paid to any of the other fine ideas out there to tax the rich. Which is a shame. Because these opportunities seem to come along only once in a generation.

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BRITAIN COULD END THESE TAX SCAMS BY HITTING THE BIG FOUR

Polly Toynbee, The Guardian, 10 December 2012

The spiders spinning the web of avoidance are the major accountancy firms who make billions from the public purse
Sometimes it only takes a spark. Never imagine nothing can be done: UK Uncut packs a punch far above its weight, as did the suffragettes, slave trade abolitionists and most causes great and small. A clever protest deftly done on the right issue can catch the public imagination and the media’s attention: now the public accounts committee investigates and the government is obliged to pledge action.
At Saturday’s Starbucks occupation of 40 coffee shops, the point was easy to explain to passers-by: companies massively avoiding tax help to cause the cuts that shut libraries, Sure Starts and women’s refuges. This short occupation with an orderly exit and loud chants causes Starbucks deep reputational damage. Costa, nearby, does pay its taxes, while Starbucks avoids its duty to the civilised society it depends on.
Take note, all other corporate avoiders: Manchester Business School estimates that Starbucks will see a 24% drop in sales over the next year, from the experience of reputational crises in 50 other companies. The eye-popping stupidity of choosing this same week to cut its staff’s paid lunch breaks and sickness and maternity pay suggests a company whose only efficiency is in tax-avoiding. The £20m it offers as a “donation” to HMRC may even be tax deductible: it can offset this “overpayment” against future tax, once public attention has drifted elsewhere, adding to the phenomenal recent drop in corporation tax receipts, as companies copy one another’s avoidance schemes.
In 2009 the Guardian’s tax gap series kicked off this debate, exposing devious but legal devices such the “double Luxembourg”, the “Dutch sandwich” and Roger the Dodger of Barclays. This is the most dangerous kind of investigation, where any mis-step risks lethal lawsuits from those with deep enough pockets to kill: it cost us £100,000 in lawyers’ fees alone, plus months of journalists’ time digging into opaque company accounts. We told how Boots, bought by private equity firm KKR, abandoned its Nottingham home to put its HQ in Zug, the Swiss tax haven. By loading the company with debt, its tax bill dropped from £606m to £74m – and Barclays lent them billions to do it. GlaxoSmithKline and Astra Zeneca moved to Puerto Rico and Shell took its trademark to Switzerland. Diageo transferred brand names to a Dutch subsidiary, so Johnnie Walker whisky paid just 2% tax.
How did they put the profits from a whisky blended in Kilmarnock into low-tax Amsterdam? Deloitte did it, reportedly so proud they broke open champagne when it went through. And that is the crux of the matter. At the heart of almost every tax-avoiding scheme is one of the big four accountancy firms – Deloitte, PricewaterhouseCoopers (PwC), KPMG and Ernst & Young.
Tax campaigner Richard Murphy, whose razor-sharp work with the Tax Justice Network fuels so much of this campaign, says these four are at the heart of the worldwide web of avoidance, with offices in all the main tax havens. PwC explained on the radio last week that the reason it had large offices in Bermuda was to audit the local hospital. Few clients could use these havens without one of the big four as auditor: virtually no business happens in havens, but bankers, lawyers and accountants need to be located there.
The four have a grip on the auditing of many major firms. The dogged work of accountancy professor Prem Sikka shows how they work, cold-calling to offer elaborate tax schemes. They hardly ever give bad audits to companies hiring them, and despite grave failures in auditing banks, they are not disciplined by professional accountancy bodies. Nor does the Treasury recover costs, even when successfully challenging their elaborate scams.
The public accounts committee last week gave a satisfying roasting to three boutique tax-avoidance firms. Margaret Hodge tore a strip off them, as one admitted that all his schemes had been declared illegal and shut down. But now the committee needs to go after the big four: none of this could happen without them. In his autumn statement George Osborne declared – as chancellors always do – that he would pursue avoiders. But he replaced only a fraction of the Revenue’s cuts, with another 10,000 staff still to be lost.
If Osborne were serious, stern regulation could stop all this. As it is, companies that pay their auditors £700 an hour will sometimes undeservedly get a clean bill of health, as did Northern Rock, HBOS, Bear Stearns and the rest. One radical suggestion is that the National Audit Office should take charge of all big company auditing itself, paid by a levy according to company size: it would protect shareholders from inadequate audit and taxpayers from avoidance. Banks are still receiving clean audits, despite the governor of the Bank of England declaring them to be zombies paralysed by undeclared bad debt.
So far attacks on tax avoidance focus on the web, but now it’s time to go for the spiders that spin it. The same firms that conspire to deprive the state of revenues are paid large sums as consultants by the very government they weaken. KPMG, along with McKinsey, is conducting much of the sale of the NHS to private contractors. If you want to see this curious contradiction, look no further than PwC’s website, which blends its contrary functions in one sentence: “Our Government and Public Sector practice comprises over 1,300 people, more than half of whom work in our consulting business, with the remainder in assurance and tax.”
Osborne has announced a consultation on making honest tax payment a condition of winning government contracts. But these companies are woven into every aspect of government and business. The chair of the NAO, Sir Andrew Likierman, is a director of Barclays and past president of the Chartered Institute of Management Consultants. The NAO auditor general, Amyas Morse, was previously global managing partner at PwC. Meanwhile, accountancy firms are major donors to the Conservative party.
With political will, all this can be cleaned up. However remiss in office, Labour should seize the initiative. The OECD is urging the G20 to agree on a fair system for taxing companies according to where profits arise – though countries are locked in cut-throat corporation tax competition. However, the UK controls most tax havens and could shut them down overnight if it copied Charles de Gaulle: angered by tax scamming, he once surrounded Monaco and cut off its water supply until it relented.

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POWER RETAILERS REJECT ABBOTT CLAIM ON CARBON TAX

The Sydney Morning Herald, 10 December 2012

Energy retailers say consumers won’t see instant cuts in their power bills if the carbon tax is abolished.
Opposition Leader Tony Abbott insists the scrapping of the government’s carbon pricing laws under a future coalition government would “instantly” reduce electricity bills by 10 per cent.
But Energy Retailers Association of Australia chief Cameron O’Reilly says that’s not the case.
“If the carbon price was repealed, customers would not see an instant decrease in their energy bills,” Mr O’Reilly told AAP on Monday.
“Legislative changes and regulatory reviews would have to take place prior to changes in the price.”
Retailers would then need to review their pricing and notify customers.
Mr O’Reilly said the abolition of the tax would impact on customer bills in different ways because of the variety of contracts in the market.
The carbon component of the wholesale price, which retailers pass on to customers, involves energy from a range of sources such as coal, gas, hydro and wind – all with different carbon intensities.
“Also there are a number of assumptions about how this is passed on to the consumer,” Mr O’Reilly said.
Estimates and modelling of the potential impact of the carbon price varied between state and federal governments as well as industry.
Retailers had also locked in the carbon price in “hedges”, so that could also take time to flow through.
Network and wholesale costs and green schemes had contributed to recent price rises in energy bills, Mr O’Reilly said.

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‘SHAPE-SHIFTERS’ FACE SCRUTINY

Peter Martin, The Sydney Morning Herald, 10 December 2012

STARBUCKS, Google, Apple, eBay and other ”shape-shifting” corporations that route their business through intermediaries in tax havens may soon face an Australian tax from which other corporations will be exempt.
The idea will be discussed at a special reference group set up to advise Treasury on a scoping paper setting out the extent of multinational tax minimisation and ways the Australian government responds.
The 14-member reference group is laden with critics of multinational tax practices, including ACTU assistant secretary Tim Lyons, Serena Lillywhite of Oxfam Australia, Jason Sharman of the Centre for Governance and Public Policy at Griffith University, Mark Zirnsak of the Uniting Church and Tax Justice Network, and Frank Drenth of the Corporate Tax Association.
Others appointed by Assistant Treasurer David Bradbury include the executive director of Treasury’s revenue group, Rob Heferen, who will chair the group, Foreign Investment Review Board chairman Brian Wilson, former tax commissioner Michael D’Ascenzo and public policy specialist Greg Smith.
The only corporate representative is Ross Lyons, a tax executive at Rio Tinto.
The consulting firms PwC, Deloitte, Ernst & Young and Clayton Utz are also represented. Mr Bradbury has asked Treasury to report by the middle of the year, using the specialist group as a sounding board. ”This isn’t just a reporting exercise,” Mr Bradbury said.
”That’s pointless without recommendations for ways of collecting tax from corporations that make money from [Australia] without paying proportionate tax.
”Some significant multinationals are deriving considerable revenues from Australian economic activity but paying tax out of proportion to that gain.” In Britain, Starbucks has taken the ”unprecedented” step of pledging to pay £20 million ($A30.6 million) in corporate tax it says it does not owe, offering as a gesture not to claim deductions for royalties it pays to its Amsterdam office.
The move has enraged rather than calmed critics such as Liberal Democrat tax spokesman Stephen Williams, who said it confirmed corporations such as Starbucks seemed to think paying tax was voluntary.
Niv Tadmore, a Clayton Utz partner who will be on the Australian specialist group, said the tax rules were relics of the time when doing business in Australia meant ”setting up a shop or a factory here or coming here every six months”.
One idea would be a withholding tax notionally applying to all corporate income but from which companies headquartered in nations with tax treaties would be exempt.
”You point it at everyone and have exceptions for countries bound by treaty obligations, that’s the polite way of doing it,” he said.

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PANEL NAMED ON MULTINATIONAL TAX AVOIDANCE

The Australian, 10 December 2012

TREASURY official Rob Heferen will lead an expert panel set up by the federal government to look at methods used by multinational corporations to reduce their Australian tax bills.
The establishment of the 14-member specialist reference group, which includes union, business and taxation industry representatives, is the first step in a Treasury examination of multinational tax minimisation strategies.
“We don’t want to see a future where hardworking Australia families and businesses have to pay disproportionately high taxes because multinational corporations are not pulling their weight,” Assistant Treasurer David Bradbury said in a statement on Monday.
The panel will be chaired by Treasury revenue group head Mr Heferen, who will prepare a paper for the government on the issue.
Companies such as Google, Apple, eBay and Starbucks have used tax havens to reduce their tax liabilities, raising concerns about whether they pay their fair share.
In the UK, the government has clamped down on Starbucks which has paid no tax in the last three years despite reporting annual sales over around STG500,000 billion ($A770.06 trillion).

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SPECIAL REPORT: PEOPLE POWER FORCES BIG BUSINESS TO PAY UP

Sarah Morrison, The Independent, 9 December 2012

The extent of corporate tax avoidance, and the anger it provokes, widened considerably yesterday with revelations that a leading investment bank has been using a trust based in the Channel Islands to avoid company and staff taxes on payments, including bonuses.
The bank, JP Morgan, is expected to reach a £500m settlement with the Government over a Jersey-based trust, to which more than 2,000 current and former staff will contribute, according to a report in the Financial Times. The trust fund has been running for 20 years, and is thought to contain anything between £2bn and £9bn. Amazingly, US citizens who worked at the bank were barred from participation in the scheme because of US tax laws.
The news coincided with nationwide protests yesterday at more than 40 branches of Starbucks, the US-owned coffee-shop chain which has become infamous, and subject to boycotts, for paying what has been called “single-shot taxes on Venti-size sales”. Several branches were forced to close as demonstrators occupied them in protest at the firm – which has had revenues for the past 14 years of £3bn, yet paid only £8.4m in corporation tax throughout that time, including no tax for the past three years. Starbucks has said it will pay £20m over the next two years in reparations, an offer widely derided.
There has yet to be a similar offer from the other firms known to have paid little or no corporation tax such as Google, with UK sales of £2.5bn, but tax paid of only £6m; and Amazon, which reported in the US revenues from the UK of £3.2bn, but declared a turnover of only £147m on which it paid corporation tax of less than £2m. The scale of their avoidance can be gauged by the rates of tax paid by other leading retailers: Lush (42 per cent); John Lewis (35 per cent); M&S (27 per cent), and Next (26 per cent). The rate paid by Amazon is less than 1 per cent. The Independent on Sunday last week revealed that Premier League football clubs paid only £3m in corporation tax, despite making more than £150m profit, a rate of 2 per cent.
The JP Morgan scheme used an employee benefit trust (EBT), which enables companies and staff to avoid paying employer’s national insurance contributions and income taxes. Many are now being wound up after laws were passed clamping down on their use. An HM Revenue & Customs spokesman said: “The Government has legislated to remove any doubt that arrangements involving third parties, including EBTs, are ineffective as a way of avoiding tax.” A spokesman for JP Morgan told the FT: “Our employee trust has always been transparent… and its independent trustee has consistently paid taxes in accordance with UK tax law.” He added: “In addition to taxes paid by the trust, JP Morgan has paid, on average, more than £1bn of corporation and payroll taxes to HMRC annually over the past decade.”
Richard Murphy, director of Tax Research UK, said the settlement “proves for two decades the tax industry has been out of control, selling abusive schemes that are now beginning to unwind”. He added: “[It is time] to bring them back under control; we need to introduce a general anti-abuse principle which stops this industry in its tracks… JP Morgan is part of a massive tax-avoidance area which HMRC has been working for several years to close and recover the tax. There may be hundreds of millions of pounds more to get.”
Richard Bacon, a Tory MP and a member of the Commons Public Accounts Committee (PAC), agreed that something must be done. He said: “The Government has been doing the same thing for decades, adding 700 pages each year to the tax pages, expecting that to get rid of loopholes, but they just create new words for clever accountants and lawyers to play with. The problem is we have a very complicated tax system; we need much greater simplicity and lower tax rates.”
The Government is currently consulting on a general anti-abuse rule (GAAR) targeted at artificial and abusive tax-avoidance schemes, with a view to bringing forward legislation next year. For Mary Monfries, head of tax policy and regulation at PricewaterhouseCoopers, simplicity is key. She described “complexity” as a “key problem with the current tax model”, adding that the GAAR should “help to act as a disincentive” against “abusive, extreme tax avoidance arrangements”.
For Mr Murphy, however, this is not enough. “It is only intended to tackle the most abusive of pre-packaged tax-avoidance schemes eg, film partnership abuse and the likes of K2 of which Jimmy Carr was a member. That’s important, but it deliberately goes nowhere near the sort of corporate tax-avoidance that Starbucks, Google, Amazon and many others have done,” he said. “As such, it falls far short of public expectation and could even provide an excuse to those avoiding [paying tax] by saying, since it does not impact on their behaviour, it must be acceptable. That’s worrying.”
The Chancellor, George Osborne, said in his Autumn Statement that the coalition would get tough on tax dodgers, promising HMRC an extra £154m over the next two years to crack down on tax avoidance and evasion. But politicians, economists and campaigners said the whole system, and the loopholes it’s created, needed to be overhauled.
Margaret Hodge, chair of the PAC, said: “The Government must treat this with urgency; they have talked the talk, now they must walk the walk. There are things they can do straight away; they don’t have to use the taxpayer’s pound to buy services from companies who avoid tax, and they don’t have to wait for the press to name and shame the culprits; they could do that themselves.”
Catherine McKinnell, Shadow Exchequer Secretary to the Treasury, said the Government needed to ensure HMRC “have the resources they need to do the job. Pressing ahead with around £2bn of cuts and the loss of 10,000 staff over the next three years risks being a false economy.”
An untaxing guide to the big issue
What is the difference between tax evasion and tax avoidance?
Tax evasion is illegal; for example, not declaring income or inappropriately claiming expenses. Tax avoidance is about using the law to reduce your tax bill. Starbucks paid no corporation tax in Britain over the past three years, despite UK sales of nearly £400m last year. This was via legal mechanisms.
Who pays corporation tax? The corporation, its owners or the people who buy its products or services?
Corporation tax will be paid by the company’s owners, or shareholders. Some people argue, however, that because the tax affects the cost base of a company, it could also be partially borne by its consumers.
What is the problem with the current tax model?
In a nutshell, it’s too complicated. For campaigners, it is “skewed in favour of big business”, because they can afford to hire accountants, lawyers and bankers to find legal loopholes. Others claim the problem lies in the fact that companies’ profits are taxed across up to 100 jurisdictions, with different tax rates. A company’s corporation tax bill depends on how much profit it makes in each country.
If most tax avoidance is because of loopholes, why do governments create those loopholes?
Governments do not create loopholes intentionally. Some tax avoidance occurs because of uncertainty in the law – Britain, for example, has one of the longest tax codes in the world, comprising about 15,000 pages – while in other cases companies seek specialist help to find ways to reduce their tax legally.

Can we ever get rid of tax avoidance? If not, why not?

While we have 194 countries in the world, and differing tax and accounting systems, there are always likely to be loopholes. But avoidance can be mitigated, by providing disincentives to avoid tax, and penalties if companies are found guilty of it.

What is the Government proposing to do, and will it work?

The coalition is consulting on a General Anti-Abuse Rule, targeting artificial, abusive tax-avoidance schemes, with a view to legislating next year. Some say this will not quash most tax avoidance, or the kind that Google, Amazon and Starbucks carried out, as it will focus only on extreme cases.

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OBAMA REJECTS REPUBLICANS’ ‘TOO LITTLE, TOO LATE’ TAX PROPOSAL

Lori Montgomery, The Sydney Morning Herald, 6 December 2012

WASHINGTON: The US President, Barack Obama, rejected on Tuesday a Republican proposal to collect new taxes from high earners by limiting their deductions and tax breaks, insisting that any deal to avert the year-end ”fiscal cliff” must include an agreement to raise the top income tax rates.
”We’re going to have to see the rates on the top 2 per cent go up. And we’re not going to be able to get a deal without it,” Mr Obama told Bloomberg Television in his first TV interview since the November 6 election.
Senior Republican aides said the White House offered no additional response to the plan, maintaining a stony silence.
Mr Obama instead appeared to toughen his stance on tax rates, the central dispute between the two parties.
”Let’s let tax rates on the upper-income folks go up,” Mr Obama said. ”And then let’s set up a process with a time certain, at the end of 2013 or the [northern autumn] of 2013, where we work on tax reform, we look at what loopholes and deductions both Democrats and Republicans are willing to close. And it’s possible that we may be able to lower rates … at that point.”
Senior Republicans said they were astonished by the White House reaction to their proposal, which represented their first explicit offer to raise revenue. While the concession came after nearly three decades of strict Republican anti-tax orthodoxy, Democrats dismissed it as too little, too late.
Some conservatives also baulked at the proposal drafted by the House Speaker, John Boehner. Senator Jim DeMint of South Carolina said: ”Boehner’s … tax hike will destroy American jobs and allow politicians in Washington to spend even more” without reducing the deficit. The Heritage Foundation said Mr Boehner had ”abandoned core conservative principles”.
But many other conservatives, including Republican freshmen who have repeatedly frustrated Mr Boehner’s efforts to deal with Democrats, said they were withholding judgment on the plan.

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PRESSURE TO CLOSE MINING TAX LOOPHOLE INTENSIFIES

Phillip Coorey, The Sydney Morning Herald, 1 December 2012

TREASURY official Rob Heferen will lead an expert panel set up by the federal government to look at methods used by multinational corporations to reduce their Australian tax bills.
The establishment of the 14-member specialist reference group, which includes union, business and taxation industry representatives, is the first step in a Treasury examination of multinational tax minimisation strategies.
“We don’t want to see a future where hardworking Australia families and businesses have to pay disproportionately high taxes because multinational corporations are not pulling their weight,” Assistant Treasurer David Bradbury said in a statement on Monday.
The panel will be chaired by Treasury revenue group head Mr Heferen, who will prepare a paper for the government on the issue.
Companies such as Google, Apple, eBay and Starbucks have used tax havens to reduce their tax liabilities, raising concerns about whether they pay their fair share.
In the UK, the government has clamped down on Starbucks which has paid no tax in the last three years despite reporting annual sales over around STG500,000 billion ($A770.06 trillion).

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INCLUDE GST IN WIDER REVIEW, SAYS MCCLINTOCK

Gemma Daley and Mathew Dunckley, The Australian Financial Review, 4 December 2012

Changing the goods and services tax should be an option as part of a broader look at making taxation more efficient, COAG Reform Council chairman Paul McClintock says, a position at odds with Prime Minister Julia Gillard.
Mr McClintock said the GST could not be excluded from a comprehensive look at tax as revenue was not meeting increasing demand.
“You can’t look at the national tax system and exclude the GST,” he said in an interview. “It needs to be part of the mix.”
Many experts believe the GST should be increased from 10 per cent and apply to more widely to raise more money for state governments, which are struggling to meet the cost of healthcare and other vital services.
In an interview on Friday with The Australian Financial Review Ms Gillard ruled out increasing the GST.
GST grew 8.3 per cent a year until the global financial crisis and only 2.2 per cent a year since then.
A report of an 18-month review of the GST published last week called for broad reform to increase taxation revenue, including reducing dependence on inefficient state levies such as royalties. Premiers will use the report as a springboard for a new round of lobbying to address broader issues of federal-state financial relations.
South Australian Premier Jay Weatherill said the issue was likely to be discussed at the Council of Australian Federation meeting of state premiers on Thursday.
He said Queensland had asked for the issue to be placed on the agenda. It could then be discussed at the Council of Australian Governments meeting on Friday.
“The GST was estimated to provide a certain level of revenue to the states and it is below that,” he said.
“The services we provide don’t reduce simply because GST receipts reduce. There is a substantial issue around Commonwealth/state financial arrangements.
“We certainly believe there has to be a response to this question . . . of what we expected to get from GST and what we now get from GST.”
Mr Weatherill said the GST had not been reliable and “fluctuates ¬dramatically”.
“The national economy is a relatively good economy. But the parts of the economy that the states depend upon for their revenue, property and retail, are the parts doing it the toughest. That has resulted in dispro¬portionate deterioration in state budgets than would otherwise be the case but the community demand for services doesn’t react to the level of available GST.
“This is a dilemma that needs to be grappled with. It needs to be grappled with by the federal government together with the states.”
The report of the GST review also said there should be more focus on plugging loopholes in the $48 billion tax, in particular overseas online buying.
Both sides of politics have said they won’t contemplate either a rise in the 10 per cent GST rate or a broadening of its base.
“Politically it is extremely difficult to prosecute,” Mr McClintock said.
“Australians are losing faith, quite quickly, in the ability of governments to work together.
“I think there has been a long period where there has been a growing level of suspicion between the ¬governments as to whether there has been a real commitment to working together.
“The Commonwealth government collects 80 per cent of the funding and with that they have to have a clearer view as to what their expectations are if they’re collecting it on behalf of another government – this is clear in the GST, where there is no suggestion the GST is anything more than a state tax.
“When you get into other areas of taxation the question of who has responsibility is very confused.”
The GST review said Australia needed to concentrate more on efficient taxes, such as the GST, over inefficient taxes. It singled out state royalties as one of the ¬danger issues.
NSW has pushed for a review of transitional arrangements as part of a broader look at tax, saying it would push this aggressively at a meeting of state and federal treasurers on December 17.
“What’s required now is for the federal government to show leadership on this issue in pursuit of good tax policy and what is in the long-term interests of the nation,” NSW Treasurer Mike Baird said.
“In line with the tax reform proposals currently being considered by the states and territories, the NSW government firmly believes that developing a response and transitional arrangements should be a priority.”

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SLUG ON THE RICH MAY SUCCUMB TO ‘COMPLEXITY’

Daryl Dixon, The Age, 4 December 2012

Senior public servants are yet to be informed of how the government will levy the 15 per cent super surcharge on taxpayers with high incomes. This new tax was unveiled in the May budget but the Taxation Office remains silent about how it will administer it and how it will avoid the myriad practical and conceptual obstacles that led to the similar, earlier surcharge being scrapped.
This time around, the surcharge will target taxpayers receiving $300,000 or more a year in assessable income and superannuation. This trigger point is three times higher than the threshold of the first super surcharge, but this in no way simplifies the administrative problems for the Tax Office.
Ironically, unlike the first surcharge – which severely affected private-sector taxpayers because of their large tax-deductible super contributions – the heaviest burden this time will fall on politicians, senior public servants, academics and other members of generous defined-benefit funds.
This is the result of the 75 per cent reduction (from $100,000 to $25,000) in the allowable tax-deductible super contributions available for accumulation fund members aged 50 or more. With penalty tax at 46.5 per cent levied on all excess contributions, accumulation fund members are now, wherever possible, limiting their annual contributions to $25,000 and will thus face a maximum surcharge of $3750 a year
The potential annual surcharge bills for politicians, public servants and other defined-fund members will be much higher than this, because they receive much larger employer super benefits. Members of defined-benefit funds have not been forced to reduce their super benefits, because the government decided to exempt their funds from the effect of the penalty tax via grand-fathering provisions applying to pre-2007 entitlements.
In announcing the new 15 per cent surcharge, Prime Minister Julia Gillard said it would apply to all taxpayers, including senior ministers. To do this, however, means applying the tax to the annual actuarial value of defined super fund benefits of all taxpayers with assessed incomes above $300,000.
Not only does this raise difficult entitlement valuation issues, but, as with the earlier surcharge, in many cases there is no cash in the relevant funds to pay annual liabilities as they accrue. For example, the employer benefits provided by the CSS, PSS, MSBS, DFRDB, judicial and parliamentary super schemes are unfunded and are only paid when the benefits are claimed.
This means that, unless the government is prepared to force the affected taxpayers to pay their annual liability out of their after-tax incomes, it will, as with the earlier surcharge, need to establish special surcharge liability accounts, with interest accruing until the liability is ultimately paid. In several cases, the high actuarial costs of several defined-benefit funds will result in the build-up of large surcharge liabilities for high-income earners.
For example, the parliamentary pension scheme has an actuarial cost estimated to be, on average, more than 50 per cent of current salary. For a minister earning, say, $300,000 a year, the average employer super benefits subjected to the new 15 per cent surcharge would be about $150,000 annually. The annual surcharge liability in this case would be $22,500 and it would grow with interest until the pension benefit is claimed.
At the end of 10 years, the total liability would be very large indeed. As with the earlier surcharge, this would encourage early retirement so as to minimise the accruing liabilities. This is what happened in the case of federal judges, who are able to claim a full pension at age 60 and a minimum of 10 years’ service.
For the above reasons, it would be unsurprising if the government abandoned its plans to levy the new surcharge on the grounds of administrative complexity. It would thus not need to highlight that a key reason for doing so would be the large liabilities that would accrue on the benefits of higher-income defined-benefit fund members (such as ministers), especially if they stay in their funds for any extended period.

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LITTLE AUSSIE BATTLERS NEED TAXMAN ON THEIR SIDE

Michael Catterall, The Australian Financial Review, 4 December 2012

Banks and miners have long been tall poppies ripe for pruning, but it seems politicians and the public are now turning their ire towards technology.
The Googles, Apples and Facebooks of this world have been accused of overcharging and misappropriating private information. In the view of the Assistant Treasurer, David Bradbury, the tech giants aren’t playing fair at the tax game either.
However, while Google and Apple may grab the headlines, these behemoths are far from typical of the technology companies operating in Australia.
The majority of Australia’s digital business community is made up of small businesses, with the four largest players in Australia’s technology sector accounting for only 8.6 per cent of revenue (according to IBIS). These little Aussie battlers typically face more prosaic concerns than complex inter-jurisdictional tax planning.
Their more urgent needs are about support for innovation in the early years, then satisfying capital-raising and cash-flow demands, attracting talent and offering incentives to key employees.
Effective tax reform is critical in maintaining a robust business economy. Beyond revenue collection, it must also support the development of local industries, yet technology companies increasingly find themselves at odds with the direction of tax reform in Australia.
There has been a substantial reduction of reliance on primary and manufacturing industries, combined with an expected slowdown in the mining sector. We are no longer able to grow our profits or pull them out of the ground. Development of the technology sector is a crucial part of maintaining Australia’s economic strength. Yet IBIS predicts competitive forces over the next five years will see Australian digital start-ups and SMEs exposed to high levels of consolidation and attrition, as smaller companies without an international presence lose contracts to larger players.
If measures are not introduced to better support local innovators, it is clear the diversity of Australia’s technology industry is at risk.
The question is whether the reforms the government is proposing will give everyone a fair go, or whether Australia’s vital technology heartland will be collateral damage in the hunt for Google’s missing billions. What we are seeing is that local technology companies are becoming the “tax victims” as the ATO chases the reward of country-clever technology.
Our traditional system taxes companies based on geography. Two questions remain paramount: where is an entity resident, and where is the source of its income?
However, the development and delivery of technology need not take place on a production line and is not constrained by geographical limits. These companies are by their nature innovative, fluid and mobile.
Treasury has shown that tax reform directed at the technology sector is high on its agenda, but to date that has manifested itself only in revenue-raising measures. Far from supporting growth, recent reforms have hit the industry hard. Changes to the R&D tax incentive have proved more generous in intention than application for digital companies.
We’ve also seen the effective abolition of the living away from home allowance, directly affecting the ability to attract specialised, class-leading talent.
The disabling of employee shares as an effective means of rewarding and offering incentives to employees by demanding tax upfront has also caused companies such as industry poster-child Atlassian to weather major costs to provide its employees with stock options.
The new, retrospectively effective transfer pricing rules compound this by increasing the compliance burden and uncertainty around historic cross-border transactions.
What the industry needs now is certainty, simplicity and support. This means: an absence of retrospective legislation; a stable and accessible R&D tax incentive that encourages genuine innovation; employee share scheme concessions to enable employees to invest and share in future success; and an end to escalation of the compliance burden for SMEs through application of realistic threshold criteria for complex anti-avoidance provisions.
Mining companies enjoy various concessions to support upfront entrepreneurial investment. Technology investors take similarly high levels of risk but do not enjoy the same concessions.
Without this support, the innovators and risk-takers will simply move on. Technology in Australia needs to see concessions for companies in losses, and relaxation of the tax loss carry forward rules to encourage additional new equity investment.
We have a culture of innovation in this country that is increasingly our most valuable resource. It needs to be supported and nurtured by our tax system. If we can’t tax Google, it is important we have the mechanisms in place so that one day we might grow our own Google.

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STARBUCKS, GOOGLE, AMAZON ACCUSED DODGING TAX

Rachael Brown, ABC Radio Australia, 4 December 2012

Corporate giants Starbucks, Google and Amazon have been accused of “immorally” avoiding corporation tax in the United Kingdom. Starbucks has only paid corporation tax in the UK once in the past 15 years.
Corporate giants Starbucks, Google and Amazon have been accused of “immorally” avoiding corporation tax in the United Kingdom.
The British Parliament’s Public Accounts Committee has been quizzing big businesses about their tax contribution in the UK.
The report found multinational firms are using complex structures and exploiting tax laws to move offshore profits that were “clearly” generated within Britain.
Committee chair Margaret Hodge says the low level of tax taken from multinational firms with large UK bases is “outrageous”.
“Global companies with huge operations in the UK generating significant amounts of income are getting away with paying little or no corporation tax here,” she said.
“This is outrageous and an insult to British businesses and individuals who pay their fair share.”
Coffee chain Starbucks for example has only paid corporation tax once in the past 15 years.
It transfers some of its profits to a sister company in the Netherlands in the form of royalty payments.
Starbucks on Sunday said it was reviewing its tax affairs in the country and admitted: “We need to do more.”
The report also criticises online retailer Amazon and internet search giant Google, neither of which has paid much tax.
Amid rising public anger over the issue, Britain has announced a campaign against “tax dodgers” and “cowboy advisers”.
Finance minister George Osborne says the Treasury will be tracking down wealthy individuals and companies who avoid paying tax.
“The government is clear that while most taxpayers are doing their bit to help us balance the books, it is unacceptable for a minority to avoid paying their fair share, sometimes by breaking the law,” he said.
He says new tools and funding will be handed to Britain’s tax-collecting body, HM Revenue and Customs (HMRC), to help tackle the problem.
“The action… will help HMRC close in not only on those who seek to avoid or evade tax, but on the dubious ‘cowboy advisers’ who sell them the schemes and dodges they use to cheat the law-abiding majority,” he said.
A central part of the policy will be a new agreement on exchanging information with US tax authorities.
The government says it will also look to conclude similar agreements with other countries.

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NZ POINTS WAY TO TAX CHANGE

Jacob Greber, The Australian Financial Review, 3 December 2012

The way New Zealand Finance Minister Bill English sees it, delivering tough economic reform requires leadership, determination and building a case for change that the electorate can understand.
With Australia’s major political parties firmly refusing to countenance any discussion about tax reform that includes the goods and services tax, Mr English may provide something of a template.
He and Kiwi Prime Minister John Key came to office just as the global financial crisis erupted, forcing them to level with the New Zealand electorate about the need to retool their tax system.
Their biggest step was raising the GST from 12.5 per cent to 15 per cent combined with across-the-board income and company tax cuts.
Rather than surprise the public with a sudden announcement about such significant change, as was the case when Treasurer Wayne Swan revealed the original mining tax in May 2010, Mr English set about building a case for reform.
“The first step was getting a very good public understanding of what kind of economic rebalancing was needed,” he told The Australian Financial Review in an interview.
“About the same time, we set up a completely open policy process around tax reform, [that] got together a group of business, academic and policy people.”
The advisory group took up work that the New Zealand Treasury had been doing on shifting the tax base away from direct taxes towards indirect taxes. The group’s deliberations were made public throughout, giving the government an opportunity to respond as proposals emerged.
Crucially, Mr English said, the process allowed the public to “follow the logic” of increasing taxes on consumption and speculative property investment and lowering taxes on savings, investment and work.
“It was easier for us to stand up and say; ‘look, those things that caused these massive problems, we’re going to tax them more; those things we’ve not had enough of, like work, saving and investment and exporting, we’re going to tax those less. Over time the public accepted that argument to the point that when we actually announced the package, it wasn’t controversial.”
Here, comprehensive tax reform remains taboo for both Labor and the Coalition.
Prime Minister Julia Gillard and Opposition Leader Tony Abbott have ruled out increasing or broadening the GST, despite ¬signals from the welfare lobby that it was willing to consider an increase if there were other concessions.
At the same time, prominent policymakers such as Treasury secretary Martin Parkinson have warned that the nation’s long-term budget faces a crunch caused by an ageing population and rising demand for services.
Mr English declined to comment on what the Australian government should do, but said he expected reforms in future.
“We’ve always admired the way that, going back 20, 25 years, Australia has delivered considered and consistent reform in its economy and that’s been part of the success of Australia,” he said. “We’d expect that to continue.”
Mr English said NZ completed its first full financial year under his new arrangements in March. It was still too early to determine whether the reforms had achieved their goals, but he said the public had been told it would need to wait five to seven years before the results became clear.
“On the way through we, I think, avoided making excessive claims for the benefits of it,” he said.
While the National Party-led government was able to raise the GST by simultaneously cutting income and company taxes, Mr English conceded it would be a tougher sell today than in 2009.
“At the time, there was a sense of the need of for some pretty significant policy shifts,” he said, suggesting he believes tough reforms have more chance of success at times of crisis.
“We had a particular opportunity after the global financial crisis to put tax change in the context of re-balancing the economy at a time when everyone understood the need for that.
“They were witnessing the consequences of… excessive debt fuelled consumption and asset prices. Those consequences were clear in their heads, so there was a compelling need for policy which would change the economy in a way that would reduce those consequences and boost prospects for sustainable growth.”
Mr English said the hardest moment during the lead up came when the media started demanding the government either rule in or rule out certain proposals.
“The trickiest day was when someone stuck a microphone in front of me and the prime minister and said ‘well, would you contemplate increasing GST?’ and we had to say yes.”
“We were worried about it but the public weren’t that worried about it,” he adds.

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GOVT DELAYS DECISION ON TAXING ONLINE GOODS

Katie Walsh, The Australian Financial Review, 3 December 2012

The federal government has kick-started efforts to improve the processing of parcels as they enter the country, as a precursor to possibly slashing the GST exemption for imports worth less than $1000.
The government rejected advice to cut the threshold to $500 almost immediately, saying Customs was not yet ready for the onslaught of packages that would result.
“It would be fair to say that without significant investment and reform of the way in which we process parcels, there could be chaos at our borders,” Assistant Treasurer David Bradbury said in Sydney yesterday, releasing the government’s interim response to its parcel processing taskforce, which reported in September.
, as reported in The Australian Financial Review A steering committee made up of senior Treasury, Customs, Tax Office and other bureaucrats will prepare business cases and draft plans to improve processing, reporting back in the second half of next year.
Only then can the government decide on whether to lower the threshold, Mr Bradbury said. He acknowledged that the $1000 threshold was “quite high by international standards” and disadvantaged local retailers.
That delay raises the risk that a decision might not come until after an election, a fact retailers don’t want to derail any changes.
Australian Retailers Association executive director Russell Zimmerman said the experience of stalled legislation following government changes in various states was frustrating. “If there’s a change in government, we would be talking to the government and the opposition to ensure this process continued,” he said. Mr Zimmerman wants the threshold to start to move down before next Christmas, giving some help to those retailers who turnover 60 per cent of their sales during the festive season each year.
“The industry needs it to happen urgently,” he said.
The National Retail Association said it was disappointed with the delay. “Similar tax reform has been undertaken in the UK, EU, Canada, Japan and the USA,” said NRA chief executive Trevor Evans. In the UK, the threshold is as low as £15 ($23).
“The sad reality is that the longer the government delays taking action on this issue the greater risk it poses to local retail jobs and livelihoods,” Mr Evans said.
Mr Bradbury acknowledged the need to address the issue.
“There are strong in-principle grounds for objecting to the unfairness of an arrangement that leaves local retailers at a disadvantage to those that are providing their goods and services from offshore,” he said.
On Friday, the GST distribution panel recommended an almost immediate cut to a $500 threshold.
That would boost the number of packages that breach the GST threshold from around 20,000 to 1.23 million, Mr Bradbury said; something customs and freight handlers were not ready for.
The panel also recommended ultimately moving to as low as $20, by taxing offshore retailers directly. The government will instead consider the taskforce’s plan, of enabling some offshore retailers to pay GST at sale point as part of a “package” of measures.
NSW Treasurer Mike Baird said he would “aggressively” push federal Treasurer Wayne Swan to address the issue as a “matter of urgency”.
“Online retailing is a growing part of our retail market, and frankly, we need to bring our tax system into the modern age to capture that,” he said.
States miss out on over $600 million a year because of the low value import threshold.
Each year around 58 million parcels that escape the GST net cross the border.
The latest National Australia Bank online retail sales index shows domestic online sales grew 28 per cent in the year to October – faster than offshore online sales. Three-quarters of online purchases were from domestic sellers.
In a response to the parcel processing taskforce, the government has agreed in-principle to six of its recommendations, including gathering electronic data before parcels arrive, removing the secondary-check role of Australia Post in opening mail, and making Australia Post and freight forwarders responsible for collecting the tax.
The government will hold initial consultations with state and territory governments on the issue.
It will deal with the rest of the taskforce’s recommendations in its final response next year.
Mr Bradbury blamed the previous Liberal government for encouraging the lack of investment by customs and Australia Post to cope with “massive numbers of parcels”, by increasing the then-$250 threshold in 2005.
He called it a “beta max moment”.
“They made the wrong call, like those people that we all recall that went and brought beta max video over VHS.”

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CUT IN GST-FREE THRESHOLD EYED

Clancy Yeates, The Sydney Morning Herald, 3 December 2012

The federal government is laying the groundwork for a future cut in the $1000 GST-free threshold for goods bought from overseas online stores.
Assistant Treasurer David Bradbury said on Monday that the $1000 threshold was “very high” compared with overseas, and the government would start preparing “business cases” for changing the tax rules governing low-value goods purchased from overseas.
Although it has ruled out cutting the threshold immediately, and no final decision on the matter has been made, the government will commence a series of processes that would allow it to change the threshold at a future date.
For instance, it will consider legal changes to encourage foreign firms to collect GST from Australians, and will kick off negotiations with the states on the contentious issue.
It expects more detailed information on the matter next year, which would inform its final decision on the issue.
Mr Bradbury said domestic retailers should not be unfairly disadvantaged by the $1000 threshold, even if it was not the main reason many Australians shopped at overseas online stores.
“While this is not the biggest challenge confronting the retail sector, the government does recognise that on the basis of fairness and tax neutrality, Australian retailers should not be disadvantaged by taxation arrangements which favour overseas retailers,” Mr Bradbury said in a statement on Monday.
“The government also acknowledges that the current threshold of $1000 at which GST is collected on low value parcels is very high by international standards.”
Mr Bradbury made the comments as he unveiled the government’s interim response to a Treasury taskforce that has examined what steps may need to be taken for the threshold to be lowered.
A landmark review by the Productivity Commission last year gave “in-principle” support for cutting the threshold, but found it did not yet make economic sense.
Some 58 million parcels enter the country each year under the low value import threshold – and collecting GST on these goods is likely to be extremely complicated and expensive.
Treasury’s taskforce has taken a closer look at how to cut these costs, and recommended a number of changes that could allow the government to lower the threshold in the future.
In its interim response, the government accepted most recommendations and outlined various steps it would take before providing a final response next year.
Although it has not made a final decision on the threshold, it will start talks with the states about putting in extra funding to support changes to the parcel processing regime.
The government will also introduce legislation separating the threshold for customs duty from the threshold for GST, allowing the threshold for GST to be lowered in the future if needed.
It will also consider calls that it change the laws to enable overseas firms to the collect the GST from Australian customers.
States receive all of the $50 billion a year that is raised by the GST – but growth in tax collections has stalled in recent years, prompting state premiers to demand the threshold be lowered.
Retailers have also lobbied for the threshold to be lowered, saying it gives foreign operators an unfair advantage.
The executive director of the Australian Retailers Association, Russell Zimmerman, called for an immediate cut, saying the current system also online retailers based in Australia, as well as physical stores.
“It’s important to note this is not a ‘bricks vs. clicks’ battle; rather, the increasing amount of Australian retailers operating online are also on an unlevel playing field as a result of the GST loophole,” Mr Zimmerman said.

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AS COMPANIES SEEK TAX DEALS, GOVERNMENTS PAY HIGH PRICE

Louise Story, The New York Times, 1 December 2012

In the end, the money that towns across America gave General Motors did not matter.
When the automaker released a list of factories it was closing during bankruptcy three years ago, communities that had considered themselves G.M.’s business partners were among the targets.
For years, mayors and governors anxious about local jobs had agreed to G.M.’s demands for cash rewards, free buildings, worker training and lucrative tax breaks. As late as 2007, the company was telling local officials that these sorts of incentives would “further G.M.’s strong relationship” with them and be a “win/win situation,” according to town council notes from one Michigan community.
Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives, adding up to billions in taxpayer dollars, according to data compiled by The New York Times.
Some officials, desperate to keep G.M., offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million.
But their overtures were to no avail. G.M. walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist. One township, Ypsilanti, Mich., is suing over the automaker’s departure. “You can’t just make these promises and throw them around like they’re spare change in the drawer,” said Doug Winters, the township’s attorney.
Yet across the country, companies have been doing just that. And the giveaways are adding up to a gigantic bill for taxpayers.
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.
“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
The Times analyzed more than 150,000 awards and created a searchable database of incentive spending. The survey was supplemented by interviews with more than 100 officials in government and business organizations as well as corporate executives and consultants.
A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas if they did not get subsidies in the United States.
Over the years, corporations have increasingly exploited that fear, creating a high-stakes bazaar where they pit local officials against one another to get the most lucrative packages. States compete with other states, cities compete with surrounding suburbs, and even small towns have entered the race with the goal of defeating their neighbors.
While some jobs have certainly migrated overseas, many companies receiving incentives were not considering leaving the country, according to interviews and incentive data.
Despite their scale, state and local incentives have barely been part of the national debate on the economic crisis. The budget negotiations under way in Washington have not addressed whether the incentives are worth the cost, even though 20 percent of state and local budgets come from federal spending. Lawmakers in Washington are battling over possible increases in personal taxes, while both parties have said that lower federal taxes on corporations are needed for the country to compete globally.
The Times analysis shows that Texas awards more incentives, over $19 billion a year, than any other state. Alaska, West Virginia and Nebraska give up the most per resident.
For many communities, the payouts add up to a substantial chunk of their overall spending, the analysis found. Oklahoma and West Virginia give up amounts equal to about one-third of their budgets, and Maine allocates nearly a fifth.
In a few states, the cost of incentives is not significant. But several of them have low business taxes — or none at all — which can save companies even more money than tax credits.
Far and away the most incentive money is spent on manufacturing, about $25.5 billion a year, followed by agriculture. The oil, gas and mining industries come in third, and the film business fourth. Technology is not far behind, as companies like Twitter and Facebook increasingly seek tax breaks and many localities bet on the industry’s long-term viability.
Those hopes were once more focused on automakers, which for decades have pushed cities and states to set up incentive programs, blazing a trail that companies of all sorts followed. Even today, G.M. is the top beneficiary, public records indicate. It received at least $1.7 billion in local incentives in the last five years, followed closely by Ford and Chrysler.
A spokesman for General Motors said that almost every major employer applied for incentives because they help keep companies competitive and retain or create jobs.
“There are many reasons why so many Ford, Chrysler and G.M. plants closed over the last few decades,” said the G.M. spokesman, James Cain. “But these factors don’t mean that the companies and communities didn’t benefit while the plants were open, which was often for generations.”
Mr. Cain cited research showing that the company received less money per job than foreign automakers operating in the United States.
Questioned about incentives, officials at dozens of other large corporations said they owed it to shareholders to maximize profits. Many emphasized that they employ thousands of Americans who pay taxes and spend money in the local economy.
For government officials like Bobby Hitt of South Carolina, the incentives are a good investment that will raise tax revenues in the long run.
“I don’t see it as giving up anything,” said Mr. Hitt, who worked at BMW in the 1990s and helped it win $130 million from South Carolina.
Today, Mr. Hitt is the state’s secretary of commerce. South Carolina recently took on a $218 million debt to assist Boeing’s expansion there and offered the company tax breaks for 10 years.
Mr. Hitt, like most political officials, has a short-term mandate. It will take years to see whether the state’s bet on Boeing bears fruit.
In Michigan, Gov. Rick Snyder, a Republican in his first term, has been working to eliminate most business tax credits but is bound by past awards. The state gave General Motors $779 million in credits in 2009, just a month after the company received a $50 billion federal bailout and decided to close seven plants in Michigan.
G.M. can use the credits to offset its state tax bill for up to 20 years. “You don’t know who will take a credit or when,” said Doug Smith, a senior official at the state’s economic development agency. “We may give a credit to G.M., and they might not take it for three years or 10 years or more.”
One corporate executive, Donald J. Hall Jr. of Hallmark, thinks business subsidies are hurting his hometown, Kansas City, Mo., by diverting money from public education. “It’s really not creating new jobs,” Mr. Hall said. “It’s motivated by politicians who want to claim they have brought new jobs into their state.”
For Mr. Hall and others in Kansas City, the futility of free-flowing incentives has been underscored by a border war between Kansas and Missouri.
Soon after Kansas recruited AMC Entertainment with a $36 million award last year, the state cut its education budget by $104 million. AMC was moving only a few miles, across the border from Missouri. Workers saw little change other than in commuting times and office décor. A few months later, Missouri lured Applebee’s headquarters from Kansas.
“I just shake my head every time it happens, it just gives me a sick feeling in the pit of my stomach,” said Sean O’Byrne, the vice president of the Downtown Council of Kansas City. “It sounds like I’m talking myself out of a job, but there ought to be a law against what I’m doing.”
Outgunned by Companies
For local governments, incentives have become the cost of doing business with almost every business. The Times found that the awards go to companies big and small, those gushing in profits and those sinking in losses, American companies and foreign companies, and every industry imaginable.
Workers are a vital ingredient in any business, yet companies and government officials increasingly view the creation of jobs as an expense that should be subsidized by taxpayers, private consultants and local officials said.
Even big retailers and hotels, whose business depends on being in specific locations, bargain for incentives as if they can move anywhere. The same can be said for many movie productions, which almost never come to town without local subsidies.
When Oliver Stone made the 2010 sequel to “Wall Street,” in his mind there was only one place to shoot it: New York City. Nonetheless, the film, a scathing look at bankers’ greed, received $10 million in tax credits, according to 20th Century Fox.
In an interview, Mr. Stone criticized subsidies for industries like banking and agriculture but defended them for Hollywood, saying that many movies can be shot anywhere and that their actors and crew members pay state income taxes. “It’s good,” Mr. Stone said of the film subsidies. “Or like basically the way business is done. I don’t understand what the moral qualm is.”
The practical consequences can be easily seen. The Manhattan Institute for Policy Research, a conservative group, found that the amount New York spends on film credits every year equals the cost of hiring 5,000 public-school teachers.
Nationwide, billions of dollars in incentives are being awarded as state governments face steep deficits. Last year alone, states cut public services and raised taxes by a collective $156 billion, according to the Center on Budget and Policy Priorities, a liberal-leaning advocacy group.
Incentives come in many forms: cash grants and loans; sales tax breaks; income tax credits and exemptions; free services; and property tax abatements. The income tax breaks add up to $18 billion and sales tax relief around $52 billion of the overall $80 billion in incentives.
Border War: Kansas City
Collecting data on property tax abatements is the most difficult because only a handful of states track the amounts given by cities and counties. Among them is New York, where businesses save an estimated $1.1 billion a year in property taxes. The American International Group, the insurance company at the center of the 2008 financial crisis, continued to benefit from a $23.8 million abatement from New York City at the same time it was being bailed out with $180 billion in federal money.
Since 2000, The New York Times Company has received more than $24 million from the city and state.
In some places, local officials have little choice but to answer the demands of corporations.
“They dictate their terms, and we’re not really in a position to question their deal terms,” Sarah Eckhardt, a commissioner in Travis County, Tex., said of companies she has dealt with recently, including Apple and Hewlett-Packard. “We don’t have the sophistication or the resources to negotiate with a company that has the wherewithal the size of a country. We are just no match in negotiating with that.”
Local officials can find themselves across the table from conglomerates like Shell Oil and Caterpillar, the world’s largest maker of construction equipment.
Shell has been offered a tax credit worth as much as $1.6 billion over 25 years from Pennsylvania, which competed with West Virginia and Ohio for an energy production facility. Royal Dutch Shell, the parent company, made $31 billion in profits in 2011 — about $3.5 million every hour. The company’s chief executive made $13.1 million last year, according to Equilar, an executive compensation firm. Pennsylvania predicts that the plant will create thousands of long-term jobs, but it did not require them in exchange for the tax credit.
Caterpillar has received more than $196 million in local aid nationwide since 2007, though it has chastised states, particularly its home base, Illinois, for not being business-friendly. This year, Caterpillar announced a new plant in Georgia, which offered $44 million in incentives. Local counties chipped in free land and other aid, including $15 million in tax breaks and $8.2 million in road, water and sewer repairs.
The company, whose profits are soaring, recently froze workers’ pay for six years at several locations, arguing that it needed to remain competitive. A spokesman for the company, Jim Dugan, said it employed more than 50,000 people and invested billions of dollars nationwide.
Local officials typically have scant information about the track record of corporations, like whether they lived up to job assurances elsewhere. And some officials acknowledged that they did not know to what extent incentives were a deciding factor for companies.
“I don’t know that there’s a way to know other than talking to the businesses, and the businesses telling us that that was a factor in creating jobs,” said Ken Striplin, the city manager of Santa Clarita, Calif., which gives tax breaks in a designated enterprise zone. “There’s no box that says ‘I would have created this job without the enterprise zone.’ ”  “The management owes it to their stockholders to try to get the best economic deal that they can.”
Marilyn P. Nix, former G.M. real estate manager
California is one of the few states that have been cutting back on incentives. But that does not mean its cities are following suit. When Twitter threatened to leave San Francisco last year, officials scrambled to assuage the company.
Twitter was not short on money — it soon received a $300 million investment from a Saudi prince and $800 million from a private consortium. The two received Twitter equity, but San Francisco got a different sort of deal.
The city exempted Twitter from what could total $22 million in payroll taxes, and the company agreed to stay put. The city estimates that Twitter’s work force could grow to 2,600 employees, although the company made no such promise.
A Twitter spokeswoman said the company was “very happy to have been able to stay in San Francisco.” City officials did not respond to inquiries.
Like many places, San Francisco has been cutting its budget. Public parks have lost about $12 million in recent years, though workers at Twitter will not lack for greenery. The company’s plush new office has a rooftop garden with great views and amenities. Enjoying the perks, one employee sent out a tweet: “Tanned on Twitter’s new roof deck this morning as some dude served me smoothie shots. This is real life?”
A Zero-Sum Game
It was the company every state had to have. In 1985, General Motors was looking for a spot to manufacture its Saturn, a new compact car that would compete with Japanese imports and create thousands of American jobs.
Incentives were not in wide use, and several states had only recently begun to allow more of them.
In fact, when G.M. announced the search, its chairman, Roger Smith, said the perks would not be a predominant factor. “Tax breaks can’t make a silk purse out of a sow’s ear,” Mr. Smith told The Detroit Free Press. He said G.M. planned to avoid states that had large debts or lackluster schools.
Undeterred, some 30 states stepped forward in what became a full-out competition. One official, Bill Clinton, then the governor of Arkansas, traveled to Detroit offering income tax credits and sales tax exemptions worth nearly $200 million.
Mr. Smith essentially kept his word and chose Tennessee, which had put together a relatively small package. Reid Rundell, a retired G.M. executive, said in a recent interview that it had come down to geography. “The primary factor was distribution for incoming parts, as well as outgoing vehicles,” Mr. Rundell said.
But the gates had been opened. In 1992, South Carolina lured BMW with a $130 million package; the next year, Alabama got Mercedes-Benz at a price tag that topped $300 million.
“What the auto incentives did back then was really raise the profile of economic incentives both within companies, in government and in the public’s eye,” said Mark Sweeney, who worked for the South Carolina Commerce Department in the 1990s and now advises companies on obtaining government grants.
By 1993, governors were regaling one another at a national conference with stories of deals beyond the auto industry, including a recent bidding war for United Airlines that drew more than 90 cities. The airline had set up negotiations in a hotel, and its representatives ran floor to floor comparing bids, said Jim Edgar, then the governor of Illinois.
Mr. Edgar said he had called for a truce, concerned that the practice was unfair to companies that did not receive incentives. But many states would not sign on, he said, particularly those in the South, where businesses were moving.
“If you’ve got some states doing it, it’s hard for the others not to do it,” Mr. Edgar said. “It’s like unilaterally disarming.”
Soon after, economists at Federal Reserve branches were questioning the use of incentives. One, in Minnesota, used mathematical proofs and game theory to show that competition between states did not increase overall economic value. Several other economists have since called the practice a zero-sum game.
A group of taxpayers in Michigan and Ohio went as far as suing DaimlerChrysler after Ohio and the City of Toledo awarded the automaker $280 million in the late 1990s. The suit argued that it was unfair for one taxpayer to be given a break at the expense of all others.
The suit made its way to the Supreme Court, and G.M. and Ford signed on to briefs supporting Daimler, as did local governments. The National Governors Association warned the court that prohibiting incentives could lead to jobs moving overseas. “This is the economic reality,” the association said in a brief.
The governors offered no hard evidence of the effectiveness of tax credits, but the Supreme Court did not consider whether they worked anyway. In 2006, the court concluded that the taxpayers did not have the legal standing to challenge Ohio’s tax actions in federal court.
The tab for auto incentives has grown to $13.9 billion since 1985, according to the Center for Automotive Research, a nonprofit group in Ann Arbor, Mich. G.M., the top recipient, was awarded $3.3 billion of the aid. Since 1979, automakers also closed more than 267 plants in the United States, about half of which still sit empty, according to the center.
The auto industry and some local officials have long argued that auto companies create so many jobs and draw in so many supporting suppliers that all taxpayers benefit. Even if companies shut down years later, as Saturn did in Tennessee for a few years, the trade-off is worth it, they said.
“I do believe that if a state ever is going to create incentives,” said Lamar Alexander, who was Tennessee’s governor in 1985 when Saturn selected the state, “the auto industry would be by far the No. 1 target, because an auto assembly plant is a money target.”
Still, Mr. Alexander, now a United States senator, said that recruiting a large factory today would be more expensive. “It has changed a lot,” he said. “It’s almost become a sweepstakes.”
G.M. Gets Into the Act
G.M. may have initially minimized the role of local dollars, but as the company’s financial problems grew, incentives became a big part of its math.
The actions of the company were described in more than two dozen in-depth interviews with former company officials, tax consultants and governors and mayors who have dealt with G.M.
The automaker’s real estate division, Argonaut Realty, oversaw the hunt for the most lucrative deals. Up and down the corporate ladder, employees were encouraged to push governments for more, according to transcripts of public meetings and interviews. Even G.M. plant managers knew that the future of their facilities depended in part on their ability to send word of big discounts back to Detroit.
Union representatives were enlisted to attend local hearings, putting a human face on the jobs at stake. G.M.’s regional tax managers often showed up, armed with tax abatement wish lists and highlighting the company’s gifts to local charities.
Big Tax Incentives, Little Returns
“We knew what our investment of X amount meant to the community, and we knew we needed to partner with the community to be successful,” said Marilyn P. Nix, who worked as a real estate executive at G.M. for 31 years until retiring in 2005.
At the top of G.M., executives reviewed the proposals from various locations and went where the numbers added up.
“I know people like to blame the industry for taking advantage of the incentives, but you go back to what your fiduciary responsibility is to the stockholders,” Ms. Nix said. “As long as you’ve got people that are willing to better the deals, the management owes it to their stockholders to try to get the best economic deal that they can.”
For towns, it became a game of survival, even if the competition turned out to be a mirage.
Moraine, Ohio, was already home to a G.M. plant in 1997 when the company pushed hard for additional incentives. G.M. said it was looking for a place to accommodate more manufacturing.
Wayne Barfels, the city manager at the time, said a G.M. representative had told officials that Moraine was competing with Shreveport, La., and Linden, N.J. After the local school board approved property tax breaks, The Dayton Daily News reported that the other towns had not been in discussions with G.M.
The school board considered rescinding the deal, but allowed G.M. to keep it after a company official apologized. In 2008, G.M. shut the Moraine facility.
In towns where General Motors remains, local officials praised the company. “I can say they have been a great partner to us,” said Virg Bernero, the mayor of Lansing, Mich. “It would do something to the psyche of this community if they were not here. I mean, I just praise God every day.”
Looking to lure businesses beyond automakers, states have routinely bolstered their incentive tool kits. In 2010 alone, states created or expanded about 40 tax credits and exemptions, according to the National Conference of State Legislatures.
The nature of the credits has also changed. New ones are geared toward attracting technology and green energy companies, but it is hard to know whether 15 years down the road they will thrive or wind up stumbling like the automakers. And many modern companies, like those in digital technology, can easily pack up and leave.
“I don’t see anything that suggests that Twitter and Facebook are better bets in the long run,” said Laura A. Reese, the director of the Global Urban Studies Program at Michigan State University. Ms. Reese advises local governments to invest in residents through education and training rather than in companies where “it’s hard to pick winners.”
“These economic development deals with a company just serve to guarantee that the nation’s largest companies can receive tax breaks wherever they go.”
Yet states try to do it all the time. In 2010, Rhode Island, which has the nation’s second-highest unemployment rate, recruited Curt Schilling, a former Red Sox pitcher, to move his video game company from Massachusetts. The company, 38 Studios, had never released a game and was not making money, but the governor at the time had the state guarantee $75 million in loans.
The company failed and dismissed all of its roughly 400 workers this May. Rhode Island taxpayers are now on the hook for the loans.
Officials said part of the difficulty was that communities do not get much say in a company’s business strategy.
“We, as communities, stake our futures with these people who are supposed to know what they’re doing, and sometimes they don’t,” said Arthur Walker, a businessman in Shreveport and former chairman of the city’s chamber of commerce.
Mr. Walker and other officials in Shreveport know firsthand. In 2000, they were worried that G.M. would close a plant in their area and responded with a generous proposal: the city would cut the company’s gas bill and provide work force training grants. In addition, G.M. would benefit by a recent increase in one of the state’s income tax credits.
Eager to encourage innovation, Shreveport officials suggested ways the city could assist G.M. in building electric cars. “We wanted to be part of the future,” said Mr. Walker, whose brother worked at the plant.
G.M. took the city’s incentives but not its business advice and began building the giant Hummer there.
“We knew they needed to build green cars — I mean, who builds a Hummer for the 21st century?” Mr. Walker said. “It was a losing proposition that we found ourselves in. We couldn’t win because those people weren’t making the correct business decisions, in my view. When it didn’t work, we’re the ones left holding the bag.”
The Hummer was discontinued in 2010, and the Shreveport factory closed this August, the final victim of G.M.’s bankruptcy.
Ypsilanti’s Losing Battle
For much of the last 20 years, Doug Winters has been agitating for General Motors to be held accountable.
Mr. Winters, the attorney for Ypsilanti Township and several other places around Ann Arbor, has lived in Ypsilanti all his life. His grandmother labored at the local plant, Willow Run, during World War II, when it made bomber planes. People in town still proudly point out that a woman known as Rosie the Riveter worked there as well. After the war, when G.M. moved into the plant to manufacture its automatic transmission system, his father got a job.
Mr. Winters loves the history of Willow Run but hates what he views as corporate hypocrisy: G.M. asked for government help on the one hand and then appealed to free-market rationales for closing shop.
Over the years, Ypsilanti granted G.M. more than $200 million in incentives for two factories at Willow Run, Mr. Winters said. “They had put basically a stranglehold on the entire state of Michigan and other places across the country by just grabbing these tax abatements by the billions,” he said. “They were doing it with a very thinly disguised threat that if you don’t give us these tax abatements, then we’ll have to go somewhere else.”
Ypsilanti first sued G.M. in the 1990s to prevent the company from closing the factory at Willow Run that made the Chevrolet Caprice.
The town had granted the company tax incentives after the factory manager argued that G.M.’s ability to compete with other carmakers was at stake, documents in the lawsuit show. The tax break and “favorable market demand,” said the plant manager, Harvey Williams, would allow the automaker to “maintain continuous employment.”
Nevertheless, G.M. shut the factory. A lower court found in favor of Ypsilanti, but the ruling was reversed on appeal. The judge said that a company’s job assurances “cannot be evidence of a promise.”
“We’re their own private ATM. When they need money, they come begging, but when they don’t want oversight, they say ‘get out of the way.’”
Doug Winters, attorney for Ypsilanti Township, Mich.
In 2010, when the company closed the remaining factory at Willow Run, Mr. Winters sued again. This time, Ypsilanti argued that the automaker should have been forced to close overseas factories instead, especially since American taxpayers had bailed out G.M. In addition, Ypsilanti sought to recover money from G.M., saying the company had agreed to reimburse the town for some incentives if it left.
So far, Ypsilanti’s claims have not been addressed. They were complicated by G.M.’s bankruptcy, which allowed the carmaker to emerge as a new company and leave some of its liabilities and contractual obligations behind.
When asked whether the new G.M. has civic responsibilities to its former factory towns, Mr. Cain, the company spokesman, said: “Our obligation to the communities where we do business is to run a successful business. And when we prosper, it allows us to do more than just turn the lights on and make cars.”
He also said that since the bailout, “G.M. has invested more than $7.3 billion in its U.S. facilities, and we’ve created or retained almost 19,000 jobs in communities all over the country.”
Matthew P. Cullen, who oversaw real estate and economic development for G.M. until he left the company in 2008, said the automaker was aware of its impact on communities. He said that what happened with G.M. was the result of an entire industry changing and that there had been no bad intentions.
“If you go forward in good faith doing everything you can and make the investment, then you’re partners,” Mr. Cullen said. “Sometimes partnerships in business work, and they work for 60 years. And in some cases, they don’t, and it doesn’t make you a bad partner.”
Some towns that are still dealing with the fallout of plant closings might disagree. In Pontiac, Mich., tax revenues have fallen 40 percent since 2009 after the old G.M. knocked down buildings on its property, resulting in lower tax assessments, according to the city’s emergency manager.
In Ypsilanti, an entity set up to sell off G.M. property is marketing the plant as valuable. At the same time, it has been arguing for lower property taxes on the grounds that its plant is not worth much.
Ypsilanti’s supervisor, Brenda Stumbo, said the township would be stung hard by further revenue cuts. Ypsilanti has already slimmed down its Fire Department, and city workers are juggling multiple jobs. There are seven to 10 home foreclosures a week, giving the township the highest foreclosure rate in the county, Ms. Stumbo said.
“Can all of it be traced back to General Motors?” she said, listing auto suppliers that closed after G.M. did. “No, but a great deal of it can.”
Nonetheless, Ms. Stumbo said that if G.M. would bring jobs back to town, she would be willing to grant the company more incentives.
But Mr. Winters is not so sure. He said he would never support more incentives without stronger protections for Ypsilanti. “They’ve done a lot of damage to a lot of people and a lot of communities, and they’ve basically been given a clean slate,” he said. “It’s a ‘get out of jail free’ card.”
Lisa Schwartz and Ramsey Merritt contributed research.
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