As Prime Minister Abbott – the man who warned that the carbon price would wipe Whyalla off the map – called for a calm, measured debate on tax reform, he immediately put the highly contentious GST on centre stage. Meanwhile, as revealed in the Australian Financial Review, billions of dollars in company tax revenue are leaking out of Australia courtesy of profit shifting by multinational corporations. Leaders at this weekend’s G20 meeting will take the first coordinated steps to tackle this international scourge.
Australian business support for cracking down on profit shifting to tax havens seems a little feeble, with B20 chair Richard Goyder and Australian retailer Gerry Harvey among the few senior executives to condemn the immoral practice. Everyday Australians should not be expected to carry the burden of GST rate increases while profit-shifting multinationals enjoy a free ride on their backs.
Morality is not the only reason why Australian company executives should support the G20’s efforts to coordinate efforts to close down access to tax havens. Corporations domiciled in the Cayman Islands enjoy a competitive advantage of 30 per cent over full taxpaying companies operating in Australia. Left unchecked, profit shifting by multinational corporations will make a whole suite of honest Australian companies prime takeover targets.
Even if the takeover fate does not befall them, consider how galling it must be for Gerry Harvey to have to concede a 30 per cent advantage to Ikea when competing on furniture. And wouldn’t BHP Billiton and Rio like to pay the much lower effective Australian company tax rate that Glencore seemingly enjoys?
The Business Council of Australia argues that the Australian government must be conscious of international competition on company tax rates in setting the company tax rate. But when profit shifting to tax havens is rampant, the effective competition is for a zero rate.
Meanwhile, the unique power of the GST continues to weave its magic. This is the only tax whose every extra dollar of revenue can be spent not once but up to five times: on compensating the poor for its regressive effects, funding more state health and education spending, getting rid of inefficient state taxes, cutting the company tax rate and providing personal income tax relief. Roll up, roll up, to the magical mystery GST tour.
True conservatives should argue against a GST increase. The compensation to welfare beneficiaries required to remove its regressivity permanently expands the welfare state, just as it did in 2001 when family payments were sharply increased for lower and middle-income earners to make the GST palatable.
But true conservatives on high incomes have been smitten with a belief that the GST will fund their personal tax relief. A fair, efficient way of lowering marginal rates of income tax is to repair the gaping holes in the base created by superannuation tax breaks at the top, the halving of the capital gains tax and myriad other tax breaks for the better off.
Despite what they say close to elections, most state governments like the GST: the federal government wears the odium for imposing it while they get to spend the proceeds. An efficient, progressive state tax identified by Terry Moran and his colleagues in a recent CEDA report is land tax. Its electoral appeal would be improved if its proceeds were hypothecated to, say, public transport, or to health and education. But it’s a safe bet that the CEDA authors have not been knocked over by the states in a clamour to levy extra land tax when a federal GST rate rise offers them all care and no responsibility.
By all means, let’s have a proper discussion about tax reform, but let’s recognise that the GST cannot be all things to all people and the public will not accept company tax being a voluntary tax for profit-shifting multinationals. Now that it has been restored to the map, perhaps the ideal venue for such calm, reasoned debate is one of the great hotels in Whyalla where Sunday roasts are back down from $100 a plate to $14.95 with chips and veggies.
Craig Emerson, a former cabinet minister, is managing director of Craig Emerson Economics.