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Let’s cut through the ‘spin’ on tax

Both sides of politics are claiming they have the better plan on tax to stimulate economic activity. The truth is both sides are planning to deliver different curate’s eggs.

Both plans are good in parts but neither addresses key deficiencies in the Australian taxation system and structural problems with our Budget.  

First thing is first.  It feels like no-one has actively made the case for budget repair, so here’s why it matters to farmers.  Sustainability of the budget is crucial for macroeconomic stability. 

The longer that we run larger budget deficits, the more we need to look offshore to fund our domestic investment needs. 

Our need for foreign investment comes from our domestic savings shortfall.  That can either come from the private sector or the public sector.  The lever most readily within the government’s control is the gap between its receipts and its payments - the surplus or, in Australia’s case, the Budget deficit.

The effect of running larger deficits for longer is that the exchange rate is higher than it otherwise would be and, therefore, our exports are more expensive and less competitive on world markets. 

At the National Farmers' Federation (NFF), we’ve roughly estimated that if the exchange rate was one per cent higher than it otherwise would be in 2018-19, it would take around $260 million off net farm gate returns.  That is after taking into account that our (imported) inputs like chemicals, fertilisers, fuel and so forth would be cheaper!  With around three quarters of our products going overseas, farmers have serious skin in the game. 

So the Budget needs to be repaired, but how should it be done? We would argue that the focus needs to be on curtailing growth in public spending.  Budget repair on the revenue side is inherently flawed because the flow of funds into the coffers is far less predictable than the spending side of the Budget – it varies much more with the business cycle.  A couple of bad years can blow your fiscal strategy out of the water.

The other point to note is that ever since 2010-11, cash receipts forecasts have been too optimistic – we’ve had seven ‘bad years’.  So net debt keeps rising.  

We’ve roughly estimated that if the exchange rate was one per cent higher than it otherwise would be in 2018-19, it would take around $260 million off net farm gate returns.
Scott Kompo-Harms, General Manager Trade & Economics

Also, we can’t keep raising taxes forever to cover ballooning spending.  The more we raise taxes, the more we damage the incentives for hard work, saving and investment.

So what are both sides of politics proposing?  First the good stuff.  Both sides appear to be offering big ticket tax cuts on incomes and/or companies – big tick.  And the news that rises in the medicare levy have been thrown out – big tick also.

We particularly like accelerated depreciation.  The Coalition’s small business instant asset write-off for assets under $20,000 is a great idea – unfortunately, the write-off is due to expire on 1 July this year – let’s hope common sense prevails and it gets extended.  Retaining it in perpetuity would be better.  In a similar vein, Labor’s proposal for an Investment Guarantee where 20% of the value of assets over $20,000 can be written off by any business in the first year is another smart use of accelerated depreciation.

But the price for these goodies comes with a real sting in the tail.  There are a range of moves going the other way and the implications are nowhere as easy to understand – for policy experts, let alone the average punter.  Labor is planning to tax trusts as companies and take away franking credit refunds.  And the Coalition has announced a range of ‘integrity measures’ for small business capital gains tax and on ‘stapled securities’.  These are nothing more than tax rises on certain taxpayers.  The trouble is, the complexity of these measures mean that no-one really knows who these ‘certain taxpayers’ are.  So what is given with one hand is taken from the other.

There is some breathtaking hypocrisy going on too.  We have the Labor economic team arguing that company tax cuts are merely a handout to big businesses.  Probably one of the closest things to an iron law in economics relates to the ‘incidence’ of a tax or who actually pays it.  One of the fundamental tenets of that is that no matter which side of the market you apply a tax to – buyer or seller – in practice, it gets shared the same way through the impact on prices.  In the case of company tax versus income tax it is a little more complex. 

It is true that falling company tax rates across the world mean that we have to move with the times and follow suit.  The problem is we have a range of other structural problems to deal with.  The first is that our personal income tax rates increase too steeply and our top rates of income tax are too far in excess of our company tax rate.  This is what drives people to use complex business structures – combinations of trusts and companies – to avoid those punitive top rates.  What our leaders are proposing is to remove more and more of those options, but those are just tax rises by another name.  And, due to their complexity, they will hit a range of people who they never intended to hit.  It would be far better to remove the incentives to do that in the first place.

Simplicity of the tax system is an equity issue both in a horizontal sense – that people with similar incomes and assets should be taxed the same – and in a vertical sense – that higher income earners should bear more of the tax burden.  The more complex the tax system, the greater the ability for higher income earners to structure their affairs so they pay less tax.  And they do it without the rest of the general public knowing it is happening.  Hardly a good outcome.

So what should we be doing?  First, have a single standard definition of small business for tax purposes.  The Coalition has created three new income thresholds, so for capital gains tax purposes, a small business is one with turnover of less than $2 million, whereas for company tax, a small business is a company with turnover of less than $25 million, soon to rise to $50 million.  To be eligible for fringe benefits tax concessions, your turnover needs to be less than $10 million.  And if you’re unincorporated and therefore pay income tax, you’re eligible for an offset if your turnover is below $5 million.  STOP. THIS. MADNESS.

Across the Tasman, our nearest neighbour is showing us how it is done.  With regard to income tax, they have no tax free threshold (we do), their lowest tax rate is 10.5 per cent (our is zero + 2 per cent medicare levy), the top tax rate is 33 per cent (ours is 47 per cent + 2 per cent medicare levy), so their income tax schedule is much flatter than Australia.  But the real kicker is that the top 25% of income tax payers pay around 60 per cent of all income tax collected.  That percentage is almost the same in Australia.  And their company tax rate is 28 per cent, so the gap between the top rate and the company tax rate is almost a quarter of the gap in Australia, so our incentives to try and find loopholes is much larger.

I bet if you asked New Zealand PM Jacinda Ardern if she wanted to swap NZ’s income tax and company tax regime for Australia’s, the answer would be a polite no.

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