President Abbott: or why prime ministers should not be immune from removal by their party


After the failure of the ‘spill’ motion on 9 February, Abbott said:

We think that when you elect a government, when you elect a prime minister, you deserve to keep that government and that prime minister until you have had a chance to change your mind.

Ignoring that the polls were indicating the people had already changed their mind, the statement continued Abbott’s approach in the lead-up to the spill motion (and since) that he was elected by the people, whereas John Howard had previously said the ‘leadership’ was a ‘gift of the party room’.

Who is right?

Abbott’s approach, as was Kevin Rudd’s, is that he was elected by the people as prime minister but under the Westminster system of parliamentary democracy, which we use, members of the House of Representatives (where governments are formed) are elected by the voters of single electorates. They are elected to represent those electorates. Under the Westminster system, we have a strong party system in place to provide stable government — it would be next to impossible to have stable government if every individual member acted as an independent in the interests of their own electorate. That means that when we elect an individual member for an electorate, we also know to which party he or she will add their vote in the parliament. The leader of each major party, whether Liberal, Labor or National, is elected by the members elected to the parliament for that party (although Labor now includes an element of membership participation in a contested vote). It is true that we know the leader of each party going into an election and therefore who will probably be prime minister if the party wins enough seats to form government, but there is no rule that says that must be so — it is an expectation that has been created.

It is also true that election campaigns now tend to focus around the leader of each party and, in that sense, there is an element of a presidential election about the campaigns. (Whether that is good or bad is a debate for another time.)

In essence, we now have a Westminster system operating for and in the parliament but something closer to a presidential system operating in the way election campaigns are conducted. It is little wonder that voters become confused.

Despite claiming he was elected by the people, like a president, Abbott tried to use the Westminster system to defend his position in the spill motion. He called on his ministers to support him under the Westminster convention of ‘cabinet solidarity’ but ‘cabinet solidarity’ is primarily about policy decisions: it says that, no matter how much argument goes on in a cabinet meeting, once a decision is agreed each minister is bound to support that decision publicly — it is not meant to be about internal party politics.

There are significant differences between a Westminster democracy and a presidential democracy, particularly as operates in the US — from which we seem to draw most of our election campaign techniques.

The first major difference is that the US president is not only head of the executive government but also head of state. Our prime minister is only head of the executive government. The Queen of Australia is our titular head of state but the role is fulfilled by the governor-general and under our system the head of state has next to no role in the daily activities of government but the US president does. Our governor-general still signs laws into effect but does so on the advice of the government of the day and, certainly by convention, has almost no power to over-ride that advice. The US President can veto legislation passed by the congress if he (no ‘her’ as yet) does not like it.

A second major difference is that the US president selects his cabinet from anywhere — they don’t have to be members of the congress, indeed rarely are. In our case, not only the head of the executive government but members of the cabinet are drawn from those elected to the parliament. There is no rule that this should be so but it is one of the conventions of the Westminster system. The fact that the Westminster system relies on convention, rather than being enforced by rules, was evident when Campbell Newman first became leader of his party in Queensland while still outside the parliament: we could not countenance, however, that he could become a member of the government while outside the parliament and a seat had to be found for him before the ensuing election.

The American system is very much the old system of a democratic monarchy. The monarch (president) selects his own ministers (secretaries of state) and they are required to appear before parliament (congress) to answer questions about, and be held accountable for, actions they may have taken or not taken, as the case may be. Basically all the Americans did when they achieved independence was replace the monarch in that system with an elected president. And a little like the Abbott and Rudd misapprehension in Australia that people vote directly for the prime minister, it is also a misapprehension in the US that people vote directly for the president. They are actually voting for members of an ‘electoral college’ at the state level, who then join all those elected by other states and select the president. Originally members of the electoral college were free to vote for whomever they liked but now most states nominate all their electoral college votes to the winner of the popular presidential vote in that state. The electoral college was introduced because the early founders of the US republic were wary of giving the people a direct say in the election of the president and because it was feared that someone sympathetic to the British could be elected and effectively ‘undo’ the revolution: the college was an intermediary that also gave the states a greater say in the election of the president. (Apparently there have been four occasions when the electoral college votes did not match the popular vote, including in 2000 when George W Bush was elected.)

Which approach is more democratic? (As an aside, I did once convince an American, using the preceding arguments, that their system was closer to a democratic monarchy.)

In our system all members of the government have been voted for: they have won an electorate somewhere in the country or a large enough proportion of the vote to be elected to the Senate. There are no outsiders. Ministers can be voted out of parliament just like any other member, as can prime ministers (Howard) and state premiers (Newman).

The closest our prime minister comes to a presidential power is the ability to select ministers, remove ministers and move ministers in what we commonly call a ‘reshuffle’. (Technically it is the governor-general who has that power but, because the governor-general must act on the advice of the government, it is effectively the prime minister.) While that has always been the Liberal way, Labor only adopted that approach when Rudd became prime minister. Before that the Labor caucus elected from its number those who would be ministers and a Labor prime minister could only allocate portfolios to those who were elected. (Labor returned to that approach in opposition when Bill Shorten was elected in 2013.) Ministers can be removed for many reasons: misbehaviour outside the parliament, not being a good minister, disloyalty (as perceived by the prime minister or the party), travel rorts, undeclared gifts, undeclared pecuniary interests, and so on, or simply the need to reward someone else with a ministry.

Abbott has already selected one ministry and conducted one reshuffle so he has exercised that power. If ministers can be removed in such a way, it logically seems to follow that prime ministers can also be removed within the parliamentary party system, not only by popular vote. Even the name ‘prime minister’ suggests that — the person is only the ‘first’ minister, or the ‘chief’ or ‘head’ minister, but still a minister. If people can only vote once every three years (in the normal course of events) who has the power to remove a prime minister in between? We know from 1975 that the governor-general is one such person but it requires extreme circumstances that cannot be resolved politically or by the courts.

There is an argument that democracy can be enhanced by the use of plebiscites and ‘recall’ votes, as in a number of US states. Such an approach certainly allows for democratic participation in consideration of major issues and legislation and provides a capacity to ‘recall’ a leader or representative who has lost the support of the majority of the population. Would such an approach work in Australia? I don’t think so.

Australians are notorious for viewing voting as an irksome duty, not something they willingly undertake to express their democratic rights. A majority tend to want to vote and then leave the government to ‘get on with it’ for the next three years and not bother them too much: as Howard once described it, we want to be left alone feeling ‘relaxed and comfortable’. But we do react when things are going on that we don’t like and that is expressed in the opinion polls, sometimes in public dissent and these days on social media.

Under the presidential system, when a policy proves unpopular, it is most likely that a secretary of state will be removed so that he or she is no longer a symbol of a disliked policy. The president, as head of state, must remain. Although it is also possible to remove a minister under our system, it has become the case that the prime minister now seems to represent all facets of the government and wears the blame for policy miscalculations. In Abbott’s and Rudd’s cases that blame is probably warranted because of the way they centralised power within their own offices. It can also apply more generally because our prime minister is head of the executive government and therefore bears some responsibility for all actions of the government (just as the CEO of a company does): our prime minister does not have the immunity of a head of state.

Popular expressions of discontent with policy can’t actually change the prime minister — only an election or a party-room vote can do that. Therefore public expressions of dissent between elections can only be meant to encourage the parties to change their policies or their leadership, or both.

Liberal party leaders have always had a lot of power, perhaps because the party was founded around an individual, Robert Menzies. That leads to many more ‘captain’s picks’ as we are now seeing with Abbott as leader. Labor leaders historically have had less power but Rudd changed that hoping to entrench his own position. Now a Labor party-room change of leader requires a petition signed by 75% of the caucus when in government, or 60% of the caucus when in opposition. It does not seem to apply if a leader steps down. If the new leadership is contested, then a vote takes place that includes Labor party members. It is not impossible to change a Labor leader between elections but it is more difficult under the new rules: it is likely to lead to greater use of the ‘tap on the shoulder’ to encourage a leader to resign rather than go through the petition process and also to factional agreements to nominate only one person for the leadership to avoid a vote.

One of the arguments that was put in favour of Rudd’s new rules was that it allows ‘hard’ decisions to be made without concern about the polls. In a democracy, however, governments should be in the business of convincing the people that hard decisions are justified. Hawke and Keating made major changes largely through consensus of key stakeholders and publicly arguing the need for change. Even Howard’s GST was spoken about for some time before it was introduced and did go through one election that the Liberals won despite the GST — so there was a mandate of a sort. If prime ministers are safe in their position, with no ability to remove them before the next election, then they may see no need to convince the people about the correctness of any policy approach — which seems to have been the attitude Abbott and Hockey took with the budget.

What is wrong with a party removing its leader if it is seen that the leader has lost the support of the people or that the policies being pursued are being rejected by the people?

I think that removing a party’s ability to remove its leader would lead us towards a presidential system that is undemocratic. Where is the democracy in a system that says the prime minister cannot be removed, except at an election, if the people are already speaking through the polls, through demonstrations and on social media? If a party cannot remove its leader in such circumstances, then it is not listening to the people — and that is not democratic.

Mr Abbott, like Mr Rudd before you, you are not a president, you are not a head of state, and your party room can remove you in the interest of democracy.

What do you think?

About Ken

This week Ken argues that the party-room removal of a prime minister is an expression of democracy, not an undemocratic procedure as Rudd and Abbott have claimed. Please express your own democratic rights and post a comment on whether Ken is right.

Next week we welcome the return of our resident gypsy, if a gypsy can be said to be resident. Jan presents a piece questioning why the mainstream media, after spending so long supporting Abbott, now seems surprised at his incompetence. The piece, of course, is entitled, 'Surprise, surprise ...'



But we’ve done tax reform – haven’t we? (Part 2)


Last week we briefly looked at some of the problems with the current tax system. It seems that a number of those who should have a high level of understanding of the fundamental flaws in the current taxation system agree that the system needs reform.

Price Waterhouse Coopers suggest:

. . . there is a clear need for comprehensive tax reform — done the right way. The ‘right way' means increasing those taxes that have the least effect on investment and employment, and at the same time reducing reliance on taxes that distort incentives to work, invest and transact business. It also means addressing those factors which increase the complexity of the tax system and the cost of compliance.

Business Spectator reports:

Without widespread tax reform, the Australian government faces a prolonged period of sluggish wage growth and poor productivity. That might sound pessimistic but that’s the simple equation laid out by outgoing Australian Treasury secretary Dr Martin Parkinson.

Peter van Onselen wrote in The Australian (pay walled):

To the extent that consensus among tax professionals on the best way to collect revenue can be found, broad-based taxes are preferable to direct taxes. That’s because direct taxes such as income tax fall victim to bracket creep and stifle productivity. They feed into higher wages, too, which can affect inflation and Australia’s international competitiveness adversely.

But broad-based consumption taxes such as the GST can be regressive, in so far as they hurt lower-income families disproportionately to higher-income families given their flat application.

But this is a situation that can be easily overcome, is generally overstated and certainly isn’t a reason to abandon GST reform, which must be tackled boldly by our political leaders. It is always possible for policy decision-makers to make up for regressive GST application on the spending side.

Firstly, lets discuss the difference between ‘broad based’ and ‘direct’ taxes.

A ‘broad based’ tax is something like the Medicare levy. Everyone who pays tax pays a percentage based on their level of income to fund the ‘free universal’ healthcare system supported by the government. Distortions exist to ‘manufacture’ compliance with various social policies such as the surcharge made to those on higher incomes without private health insurance. GST is another ‘broad based’ tax: as the value of the tax is based, however, on the goods or services being purchased, rather than people’s incomes, someone on $40,000 per annum proportionally pays a higher rate of tax than someone on $140,000 per annum should they decide to purchase the same product. This distribution effect can be ‘engineered’ out through use of rebates etc. — as was promised with the Carbon Pollution Reduction Scheme (Carbon Tax).

Direct taxes are charges such as income tax. You pay a certain percentage based on your income. While someone who is in the fortunate position to pay tax on the highest ‘margin’ pays more dollars than someone on the lowest margin, the person on the lower margin usually contributes a greater value of their annual income.

So, according to the experts, the problem is the complexity and ‘side effects’ of the current tax system: to fix the problems, move to broad based taxes based on equitable criteria and simplify the system. Sounds reasonably easy, doesn’t it?

This is where the politics comes in. In 1975, Asprey and Parsons handed over the full report of the Taxation Review Committee. The Asprey Report received little attention from Whitlam or Fraser: it did contain, however, discussion around the major taxation reforms of the 1980’s and 1990’s (capital gains, dividend imputation and GST to name a few).

The Rudd/Gillard government commissioned Ken Henry, former treasury secretary, to perform another review of the taxation system in 2010. Henry’s review (which was told not to look at the GST — one would assume for political reasons) suggested a number of reforms to improve the taxation system. The politics surrounding the review was that ‘a package’ would be recommended. Ken Henry obviously disagreed. The Henry Review advised:

The review has aimed to set strategic directions for the future architecture of the Australian tax and transfer system. It has not produced a one-off tax policy package, and it has not advanced the detailed design or timing of measures. Indeed, it is neither possible nor desirable to make all of these changes (138 recommendations) too quickly.

In the words of John Hewson:

. . .those expectations were there, so when they were thwarted, the Review was all too easily dismissed, politically, as “just another study/review/inquiry”, easily essentially shelved by the media, although [the government] also all too easily “cherry-picked” with attempts to implement just a handful of its recommendations.

Against this background, the [then ALP] government only picked some “high profile” recommendations immediately, such as the mining tax, and when that backfired, it then only did smaller issues, quietly, leaving the bigger issues like savings and State taxes untouched.

Hewson goes on to note that the Rudd/Gillard government implemented 40 of the Henry Review’s recommendations but the Abbott government has since reversed the implementation of all but seven of them — without identifying the recommendations came from the Henry Review.

This piece started with a comment from an accountancy/business services firm (Price Waterhouse Coopers) stating what it believes is necessary. Not to be outdone, others have expressed their opinion as well, including Ernst & Young, The Conversation here and here, the Housing Industry Association, Newscorp’s The Australian (pay walled) and Prosper, an organisation that has been campaigning for a century for a greater reliance on property taxes to replace direct taxes. There are no doubt others as well — time precludes finding them and space from listing them.

Each group that enters the tax reform debate overtly or covertly expresses an opinion that would assist their members or customers — as is their right. It certainly doesn’t help any government in designing a fair and equitable solution for all of society, especially when affected industry groups commission and use selected facts in television advertising that certainly don’t mention that compensation to taxpayers was a part of the deal.

Politically and economically, tax reform is a hard ask. Hawke/Keating and Howard/Costello both were successful to a degree in implementing reforms to the Australian taxation system. There are also those that suggest the whole system should be replaced by ‘flat taxes’.

Of course there are a number of versions of ‘flat tax’ from the ‘pure’ — everyone pays a percentage of their income with no deductions or rebates allowed — through to systems that allow deductions, negative taxes and other arrangements. Wikipedia discusses some of the different versions here.

The economics editor of The Australian argues that ‘flat tax’ is an economic necessity (pay walled). In 2010, Abbott, then opposition leader, suggested a version of flat tax would be beneficial and commented it was recommended by the Henry Review. The ALP disagreed. Greg Jericho, writing on ABC’s The Drum website, suggests that ‘Unless you’re wealthy, you’re not going to like flat taxes’. Jericho makes the point that flat taxes are by their nature regressive, as they are a ‘broad based’ tax.

Remember the disparity in the actual proportion of a person’s income when buying a product we looked at a couple of hundred words ago? Twenty per cent of $140,000 is $28,000 and 20% of $40,000 is $8,000. So the person on $140,000 still has $118,000 per annum to spend while the person on $40,000 only has $32,000. Regardless of the dollar amounts, the person on the lower income is paying more value from their income when a broad based tax (such as a GST or ‘flat income’ tax) is levied. Certainly there can be some ‘engineering’ of the tax system so that the value contributed by both the higher and lower income earner can be made fairer but that is adding to the cost of managing the tax revenue and reduces the ‘purity’ of the revenue collection system.

Hewson, in his paper, suggests that Hawke/Keating achieved some tax reform because they crafted a message supporting the need for change to the then system by way of the ‘Tax Summit’ and demonstrating that change would reduce the level of tax evasion, such as the ‘bottom of the harbour’ scheme that was apparent in the 1970’s and 80’s. He also claims that his “Fightback” package, that was taken to the 1993 election, was the subject of various campaigns to create fear, uncertainty and desperation. To an extent, it is a fair call. Hewson also suggests that 1% of tax revenue is taken by the administration of the tax revenue system — demonstrating its complexity.

It seems that a simplified revenue collection system is a given to make our taxes work harder. Another factor that needs to be considered is the current rhetoric from political parties of all colours that the country’s budget is closely related to a household budget and has to either balance or be in surplus.

To simplify the current revenue collection system, tax reform is needed. If tax reform is discussed, every ‘special interest’ group in the country will have its say in an attempt to protect the interests of their members/customers. While ‘flat taxes’ are superficially attractive, they do have a tendency to favour those earning a higher income unless ‘engineering’ is performed to make the tax impost fairer (in which case what is the point of a nominally one-size-fits-all ‘flat tax’ system?).

Something that recent governments have painted themselves into a corner on is the mythology that the country’s budget is similar to a household budget and must be balanced or in surplus. It doesn’t — as Australia issues it’s own currency. The Conversation recently discussed ‘Why the Federal Budget is not like a household budget’ and noted:

The real calculation faced by government should not be about how much money the government has — it has an infinite amount. The calculation should be about the capacity of the economy to absorb government spending without driving inflation.

Seeking a balanced budget and automatically borrowing any deficit spending (as we currently do) is an effective but unsophisticated way of ensuring government spending doesn’t cause runaway inflation. Taxes and government borrowing remove money from the private sector, creating space for government spending (which injects money into the private sector). Remember, the government does not have to borrow or tax in order to finance spending because they can create money.

The Political Sword has previously looked at the fallacy of the balanced budget debate here and here. Peter Costello (former treasurer) not unsurprisingly has a comment on the difficulty of balancing budgets versus tax reform:

This is harder than balancing a budget and I've done both.

John Hewson’s push to become prime minister in 1993 failed due in part to a lack of understanding of his tax reform measures. John Howard found that he could not pass the GST without diluting the ‘purity’ of the tax to appease the Australian Democrats; Julia Gillard had to negotiate to get a ‘watered-down version’ of the Mining Tax through the Senate. So far, Abbott’s government has not demonstrated that it can negotiate well enough to ensure that the minor parties and independents in the Senate would commit to a package of reasoned and logical tax reform.

During October 2014, Abbott called for a mature debate on inter-governmental relations in general and the GST in particular. It is unlikely to happen until either the current government learns how to build a consensus as Hawke and Howard did or has the numbers and the motivation to do something for the common good. Either way a mature debate cannot be conducted in 30 second sound bites so loved by our current prime minister and the media.

What do you think?

About 2353

This week 2353 completes his ‘Tax reform’ discussion and paints the political difficulties of achieving tax reform. As he writes, almost everyone agrees we need tax reform but we don’t seem able to come to agreement on what should be done. Please tell us your views of tax reform and how we can achieve it.

Come back next week for Ken’s view of "President Abbott: or why prime ministers should be not immune from removal by their party".



But we’ve done tax reform – haven’t we?


Here’s a tip for 2015. If the Abbott Government can remove the current opinion polls and stories of excess and incompetence from the front pages, it has been signalling that it intends to tackle ‘tax reform’ during the life of the current government. It wouldn’t be the first to attempt to do this: Governments back to the days of Hawke in the 1980’s have legislated large changes in the way the government charges for the services it provides — and the continual evolution of the Australian and international community would indicate that further changes are necessary now and in the future.

There is an implication that the governments that rate highly on ‘economic management’ also seem to be considered ‘good’ governments. The Hawke/Keating Government introduced a number of changes to tax collection practices during the 1980’s, as did the Howard Government in the 1990’s, and were still considered ‘good’ governments. No doubt Abbott would like to share the same perception.

This week’s discussion piece is a very brief overview of some of the issues with payment of taxes (charges and levies); next week we will look at some of the realities of ‘tax reform’ — why it isn’t as easy as some commentators, politicians and academics suggest.

In an ideal world, taxes would fund measures to ensure that everyone has an equal standard of living — ensuring that each member of society pays an equal amount of money to receive an equal amount of benefit. We don’t live in an ideal world.

Naturally, each member of society perceives their needs and wants to be more important than others: if for example I am retired and can’t fund my own living expenses, I expect the government to provide an allowance to make it easier to meet my ongoing commitments and live to a standard that is similar to that I enjoyed when I was employed. In contrast, if I am a parent with a young family committed to pay a mortgage and the expenses of young children, I would look to the government to give me a supplement to my income to assist in the provision of essentials to what are effectively non-productive members of the family (‘my’ children) as well as assistance towards the costs of child care, maternity leave and so on.

Both groups of people have an equal expectation of government support and an equal reason to believe the government should assist them — after all the retired person has contributed to society through their labour and payment of taxes for a considerable period of their lives; while a parent is still contributing labour and taxes while bringing up children who will in turn contribute labour and taxes to support the community into the future. The unfortunate thing is that when a government claims (probably with some justification) that it cannot afford to be as generous as it was in the past, there is a considerable proportion of the population who believe that their needs or wants are more important than other groups within the community: why are others getting some benefit which is reducing the funding that I can claim?

There is a ‘long and proud’ history of robust discussion of taxation matters in Australia. In 1854, the Eureka Rebellion in Ballarat was primarily a revolt against the imposition of a tax (licence fee) on miners, regardless of their success at their chosen profession. While it could be said that they lost the battle, the miners won the war with their leader, Peter Lalor, being elected to the Victorian Parliament along with eight other miners in 1855.

At the Print Media Enquiry in 1991, Kerry Packer is reputed to have said:

I am not evading tax in any way, shape or form. Now of course I am minimizing my tax and if anybody in this country doesn't minimize their tax they want their heads read because as a government I can tell you you're not spending it that well that we should be donating extra.

‘In this world nothing can be said to be certain, except death and taxes’ observed Benjamin Franklin in 1817. There are also a number of comments regarding the morals and ethics of the Roman tax collectors in the Bible. It seems that Australians aren’t the only ones that don’t appreciate the need for taxes.

Packer altruistically assisted the funding of installation of defibrillators in most New South Wales ambulances, so he wasn’t averse to donating money to a ‘good cause’. However, he has a point: why should I pay proportionally more than the next person to the government to fund community services?

John Hewson, is the ex-Liberal Party Federal Leader who took a GST to the 1993 election as a part of his “Fightback” package, and lost. Hewson is now a professor of economics at Australian National University and an occasional media commentator. He observes when tax law was introduced into the Federal Parliament in 1915, the act consisted of 24 pages, but in the 1980s the legislation ran to some 1200 pages and today it tops out at some 5500 pages. Clearly as the government has discovered ‘faults’ in the legislation, it has amended the legislation to rectify the errors. That has led to those who can afford the cost finding additional loopholes that have yet to be plugged by the government of the day. After all, as Kerry Packer pointed out (above), tax minimisation is perfectly legal — tax evasion isn’t. The Australian Taxation Office (ATO) annual report for 2013/14 runs to 266 pages, which seems to be rather a lot when all they should really be saying is everyone paid their fair share and the world moved on.

There are a number of factors for the dramatic increase in the size, and one would imagine complexity, of tax law in the past 30 years. Let’s look at two of them: tax compliance and tax minimisation.

During the 1970’s, some lawyers and accountants devised a system where companies were formed, traded, made profits and just before tax was to be paid, the assets of the company were given to another related entity and the former company shell sold to an unsuspecting person without the financial backing to pay outstanding commitments, such as tax on the original company’s income. The ATO was an unsecured creditor (a person or legal entity who is owed money by the business without legal entitlement to any of the assets by way of a mortgage or charge) to the original company, along with unsuspecting service providers and employees, and effectively got nothing as it was a pointless exercise to bankrupt the unsuspecting person. The scheme is known as the ‘bottom of the harbour’ as effectively the companies that were stripped of assets were sent there to drown.

In recent times, the ATO has prosecuted a number of ‘famous’ and ‘influential’ people as a result of Operation Wickenby, including The Masters Apprentices bass guitar player and John Farnham’s manager Glenn Wheatley and star of television comedy and movies (including Crocodile Dundee) Paul Hogan.

Tax minimisation is completely legal, but it reduces the tax revenue available to fund the services we as a community expect the various levels of government in Australia to provide. There are a number of ‘common’ schemes that are used on a daily basis including:

    • Negative gearing –To ‘negative gear’ you borrow money to purchase an asset that will not pay it’s own way (such as an investment property or share portfolio). The difference between income from the asset and the costs of the asset, including interest, can be claimed as a tax deduction. Those that use this scheme often offset the losses against other income (thereby reducing their taxable income) and also hope that a future increase in the price of the asset when it is sold will equal or exceed the losses they have claimed on their tax return.
    • Novated leasing - A three way agreement between an employee, employer and financial company where the employer nominally purchases a car (or similar) for an employee and funds the purchase from the employee’s pre-tax income effectively reducing the employees taxable income and tax liability.
    • Exporting profits - Apple is the subject of the link here as it apparently transferred around $2 billion to an Apple related entity based in Ireland while declaring and paying tax on a profit of under $100 million in Australia during 2013. Apple is not the only global company using this strategy. Other household names also move the bulk of their profits around the globe to avoid paying tax as well. How it works is the Australian customer deals with an Australian seller, but the financial transaction takes place in another jurisdiction where a significant proportion of the purchase price is claimed for the ‘production of the item’ and ‘intellectual property’ used in the product. That amount is sent directly to a related corporate entity in a country that offers the company a better tax treatment than Australia. The only part of the purchase that is ‘transferred’ to the Australian company is the price of the sale infrastructure and transport of the item to the purchaser. It is fair to say that a number of these ‘arrangements’ will cease to exist in the next few years as it has been recognised as a significant issue by governments and is now the subject of negotiations at events such as the G20.
In addition, governments of all colours introduce ‘targeted’ tax benefits or liabilities to manage social behaviours. There is a significant tax impost if someone purchases a packet of cigarettes — the argument being that there is a measurable drop in consumption of cigarettes (an arguable benefit to society in reducing smoking related illness) every time the tax rate rises. Australia also introduced a ‘Luxury Car Tax’ in 1990 in an effort to improve the viability of local vehicle manufacturing. Australian engineers can design a competitive product as shown by Ford and Holden/General Motors retaining the capacity to design a vehicle from the ground up once the current manufacturing capacity is withdrawn. A discussion on how and where Luxury Car Tax applies is here. Then GST is applied to the final cost of some products (including taxes), so we are paying tax on tax in some cases.

John Hewson claims:

… there are 125 taxes paid by Australians annually — 99 levied by the Commonwealth (recognising many agriculture and food levies), 25 by State and Territory governments, and one by local governments. These revenues are heavily concentrated with over 90% derived fro[m] just 10 taxes, reflecting 95% of Commonwealth revenue, over 60% of State revenue, and 100% of local government revenue.

Hewson also observes that over 66% of Australians use the services of agents to submit their annual tax return — surely an indictment of the perceived complexity of the system.

So we have a complicated system of taxes, charges and levies, which has been added to and amended over the past century. Is ‘tax reform’ a good idea in theory? — of course it is, but there is a political cost to doing it, ask John Hewson.

What do you think?

About 2353

The next part of this discussion will be posted next week and looks at the practicalities of introducing a fair, reasonable and easy to understand taxation system.



Abbott continues to tell porkies


I was surprised during last December (and again in the past week after the unsuccessful spill motion) when Abbott and his ministers reverted to the line that the LNP government had inherited a huge budget deficit from Labor.

Early in December they were claiming that Labor had been deceitful by going into the 2013 election claiming that the deficit was only $18 billion whereas when the Liberals gained the treasury benches it was shown to be $46 billion (and I noticed in Abbott’s appearance at the National Press Club at the beginning of February that he had rounded this up to $50 billion). That attack, in itself, was part of Abbott’s resetting of the agenda after his ‘ragged week’ and was obviously intended to turn attention back on Labor and away from the problems his government was facing: there is no doubt that approach will continue.

The first lie is the $18 billion deficit. That was the figure in the last Wayne Swan budget in May 2013 but Swan also made an ‘Economic Statement’ in August (during the election period) as the terms of trade deteriorated and economic activity slowed, reducing government revenue. By the time of the PEFO (Pre-election Financial Outlook) the deficit was actually $30 billion, which had been revealed slightly earlier in Swan’s ‘Economic Statement’. The $12 billion increase came from slowing GDP growth, and the subsequent decrease in revenue, and only $373 million (about 3% of the increase) arose from policy decisions by Labor. So Abbott’s claim that there was a $28 billion increase in the deficit is a fiction created by adopting a set of figures that had already been superseded before he was elected (although semantically it was the figure ‘going into the election’ — so perhaps Abbott is just playing with words again).

Abbott’s claim, however, was also dealt with at the time and found to be false. In June last year, Chris Bowen said that Joe Hockey had doubled the deficit by changes to government spending and changes to government economic assumptions and parameters: the ABC’s Fact Check found that Bowen’s statement — ‘checks out’. Other economic commentators also pointed to the spending and revenue decisions made by the Abbott government as making a major contribution to the increased budget deficit.

Although it has been done before, I will go through the details of the government’s finances. Please bear with me, as I will have to provide quite a few figures in explaining the situation, using the 2013-14 PEFO and MYEFO (Mid-year Economic and Financial Outlook), with some minor reference to the last two budgets. And it should be noted that the PEFO is the only financial document that is put out by Treasury and the Department of Finance. MYEFO and the budget are products of the government of the day after, of course, taking advice from the financial departments, but the final shape of those documents is always a result of government decisions. PEFO simply sets out the current situation based on the ruling assumptions and existing policies.

Firstly, we do need to understand that treasury forecasts are simply that — they are ‘estimates’ and ‘projections’. As such, they are subject to many qualifications and assumptions. Treasury itself states that:

The forward estimates of revenue and expenses … incorporate assumptions and judgments based on the best available information at the time of publication together with a range of economic assumptions and other forecasts and projections.

Major taxes such as company and individuals’ income taxes fluctuate significantly with economic activity. Capital gains tax is particularly volatile and is affected by both the level of gains in asset markets and the timing of when those gains are realised.

In addition revenue forecasting relies heavily on the observed historical relationships between the economy, tax bases and tax revenues. Such relationships may shift over time as the economy changes, presenting a further risk to the estimates.

(In relation to that last statement, the economy is currently undergoing changes as the mining boom ends and, therefore, there is an increased risk to the surety of the estimates.)

The MYEFO gives examples of the potential impact of certain hypothetical changes. If commodity prices fall, impacting the terms of trade and causing GDP to fall by one per cent, then government revenue could be reduced by $5.5 billion. On the other hand, if there is a 0.5 per cent improvement in both labour productivity and workforce participation, government receipts could increase by $3.7 billion.

Those examples are important because Treasury also explains the ‘confidence levels’ of the economic and fiscal forecasts. For example, although MYEFO forecast GDP growth of 2.5%, the 70% confidence level places growth anywhere between 1.75% and 3.25%, and the 90% confidence level between 1.5% and 3.5%, which means the preceding hypothetical examples actually fall within the range of possible forecasts.

With those provisos in mind, we can consider the actual figures and what went into increasing the budget deficit. If we believe Abbott the increase was $28 billion but only $16 billion if we believe PEFO. Or we can also look at the accumulated deficit over the forward estimates (to 2016-17) which increased from $54.6 billion to $122.7 billion, a difference of $68 billion. I will work on the last figure because that provides the full impact of Abbott government decisions.

Firstly, you will probably recall Hockey’s payment of $8.8 billion to the Reserve Bank, something the economic commentators said was not sought by the bank and was unnecessary. That leaves $59.2 billion to account for.

Abbott’s big ‘policy’ of repealing the carbon ‘tax’ was a major contributor to the loss in government revenue, to the tune of $13.7 billion over the forward estimates. That leaves $45.5 billion.

Repeal of the mining tax saw the loss of another $3.3 billion. That leaves $42.2 billion. (Those three big ‘decisions’ by the Abbott government cost the budgets over the forward estimates a total of $25.8 billion.)

There was another set of significant losses to revenue that many of us would not have heard about. Apparently there were 92 taxation and superannuation changes that had been announced by previous governments but not yet implemented. Abbott and Hockey decided to proceed with only 34 of those changes, foregoing another $3.1 billion in revenue. That leaves $39.1 billion.

The ABC Fact Check explains changes to a couple of the assumptions and parameters better than I can:

  • a change to the terms of trade methodology, reducing the economic growth forecasts, causing a $2 billion hit to the bottom line over the forward estimates
  • a change in the projected unemployment rate, leading to higher benefits payments totalling $3.7 billion extra
That leaves $33.4 billion.

But there was also a projected slowing of the economy: GDP growth figures were lowered. While this is something over which neither the Labor nor Abbott governments have much control, the Treasurer does have a say in selecting which figure to use for the forecasts (see the earlier paragraph on confidence levels). In MYEFO, the slowing economy was projected to reduce taxation receipts by $37 billion over the forward estimates.

So Abbott government decisions had actually increased the potential deficit by $71.6 billion over the forward estimates and it had to juggle the figures even to keep the increase to $68 billion. Even allowing that some of the worsening of the deficit would have happened no matter who was in government, Abbott government decisions directly added about $29 billion to the deficit (and up to $34.6 billion if we add the government influence in changing parameters).

Offsetting those losses, Abbott and Hockey had proposed abolishing the benefits introduced by Julia Gillard that were to be funded from the carbon and mining taxes. That would have decreased spending by $9.5 billion or reduced the deficit by that amount: but, of course, he has not been able to abolish all of those measures, so the deficit remains higher. Even if they had passed the parliament, the deficit would still have increased by $62.1 billion of which at least $20 billion would have arisen from decisions by the current government.

Estimates of government revenue for 2013‒14 were continually revised downward from the 2013‒14 budget through to the 2014‒15 budget:

  • $376 billion in the 2013‒14 budget
  • $369.5 billion in the PEFO
  • $364.9 billion in the MYEFO
  • $363.5 billion in the 2014‒15 budget
Despite that continual revision, the actual figure for the 2013‒14 financial year was lower still at $360.3 billion, $15.7 billion below the original budget estimate in May 2013 and even $3.2 billion below Hockey’s budget estimate in May 2014. So there are clear revenue problems for the government that have nothing to do with decisions by the former Labor government.

(As a postscript, Hockey’s more recent MYEFO in December 2014 also showed that revenue was continuing to decline in 2014-15; down $6.3 billion since his own budget estimate and down almost $21 billion on the forecast in Swan’s last budget.)

You would think that if a government takes decisions that decrease revenue it would also take other measures to increase revenue (not focus solely on cutting costs) but Abbott’s government has locked itself into the neo-liberal position of reducing taxes and so has very little room for manoeuvre. During the election campaign, it could be argued that Abbott lied by omission by not detailing how he would make up the foregone revenue ($17 billion) of his promises to abolish the carbon and mining ‘taxes’. People were left to believe that the ‘taxes’ could be abolished and nothing more need be done. I would suggest that Abbott knew that at the time and, given his promise not to raise taxes, already knew that he would undertake significant spending cuts to make up the shortfall — but of course he wouldn’t discuss that in any detail. And then, to justify the cuts, his government artificially increased the deficit and blamed it on Labor.

If Abbott and Hockey had really wanted to increase revenue to improve the budget position they would have kept Labor’s tax on annual superannuation earnings above $100,000 and the reduction in the fringe benefits tax concession on novated car leases: or have considered similar measures on other ‘tax expenditures’. Tax expenditures are foregone taxes when government provides certain benefits without taxing them or allows concessional tax rates: for example, military personnel receive a number of allowances and benefits that aren’t taxable although legally they are ‘income’. (It is only the tax foregone, not the full cost of the benefit that is counted.) Changing tax expenditures allows governments to increase revenue without increasing income tax, although there would obviously be vested interests who would ‘lose’ from such changes — such as the outcry from vehicle retailers and manufacturers when the change to the taxation of novated car leases was first announced.

In the 2013-14 budget the cost (foregone revenue) to government of tax expenditures was about $120 billion and was projected to rise to $146 billion in 2016-17 (which is the equivalent of 8% of GDP or about a third of projected government revenue in 2016-17).

While many concessions would be considered socially beneficial, there are others that appear to be of most benefit to those on higher incomes — superannuation is the one most commented on in that regard. In 2013-14 it was estimated that the concessional tax applying to superannuation cost the government $35 billion in revenue and that was projected to rise to $51 billion in 2016-17, or a total of $170 billion over the forward estimates. Eliminating the concessional tax rate for the earnings of superannuation funds would raise $65 billion over the forward estimates, and eliminating the concession for employer contributions would raise $62 billion, a total of $127 billion. While it would somewhat defeat the purpose of compulsory superannuation (to reduce old age pension payments) to entirely eliminate concessions, there is certainly scope for changes that could easily raise a few billion dollars: for example, even to raise the concessional tax rate from 15% to 17.5% could potentially raise $4.25 billion over the forward estimates: or $8.5 billion if raised to 20% — that is still a ‘concessional’ rate of tax but just not as generous.

Why isn’t Abbott considering such measures? Instead, he is even scrapping the changes that Labor made that would have helped revenue.

He is blaming the deficit on Labor when it is clear that about half of the increase in the deficit comes from a ‘natural’ fall in taxation receipts as the economy slows and transitions away from the mining boom, and the rest from decisions by Abbott and his government after it came to power. Other commentators, more expert than I, have already shown his claim is false and yet he returned to it in December, and again in the past week, obviously taking the view that because it was disproved six to eight months earlier most voters would not remember. That is probably partly true but it is also pure propaganda, no longer just ‘spin’: ‘spin’ is about putting the best possible light on a bad situation, not about blatant lies. Abbott, as he did in opposition, appears to be operating on the principle that if he tells the same lie often enough, people will believe it.

What do you think?

About Ken Wolff

Ken says that although this is old news he will have to keep returning to it because that is what Abbott and Hockey keep doing.

Next week we will continue the financial theme and how to raise revenue with 2353’s discussion of ‘Tax reform’.