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nearing perdition ...

nearing perdition ...

Financial meltdown, environmental disaster and even the rise of Donald Trump – neoliberalism has played its part in them all. Why has the left failed to come up with an alternative?

Imagine if the people of the Soviet Union had never heard of communism. The ideology that dominates our lives has, for most of us, no name. Mention it in conversation and you’ll be rewarded with a shrug. Even if your listeners have heard the term before, they will struggle to define it. Neoliberalism: do you know what it is?

Its anonymity is both a symptom and cause of its power. It has played a major role in a remarkable variety of crises: the financial meltdown of 2007‑8, the offshoring of wealth and power, of which the Panama Papers offer us merely a glimpse, the slow collapse of public health and education, resurgent child poverty, the epidemic of loneliness, the collapse of ecosystems, the rise of Donald Trump. But we respond to these crises as if they emerge in isolation, apparently unaware that they have all been either catalysed or exacerbated by the same coherent philosophy; a philosophy that has – or had – a name. What greater power can there be than to operate namelessly?

So pervasive has neoliberalism become that we seldom even recognise it as an ideology. We appear to accept the proposition that this utopian, millenarian faith describes a neutral force; a kind of biological law, like Darwin’s theory of evolution. But the philosophy arose as a conscious attempt to reshape human life and shift the locus of power.

Neoliberalism sees competition as the defining characteristic of human relations. It redefines citizens as consumers, whose democratic choices are best exercised by buying and selling, a process that rewards merit and punishes inefficiency. It maintains that “the market” delivers benefits that could never be achieved by planning.

Attempts to limit competition are treated as inimical to liberty. Tax and regulation should be minimised, public services should be privatised. The organisation of labour and collective bargaining by trade unions are portrayed as market distortions that impede the formation of a natural hierarchy of winners and losers. Inequality is recast as virtuous: a reward for utility and a generator of wealth, which trickles down to enrich everyone. Efforts to create a more equal society are both counterproductive and morally corrosive. The market ensures that everyone gets what they deserve.

We internalise and reproduce its creeds. The rich persuade themselves that they acquired their wealth through merit, ignoring the advantages – such as education, inheritance and class – that may have helped to secure it. The poor begin to blame themselves for their failures, even when they can do little to change their circumstances.

Never mind structural unemployment: if you don’t have a job it’s because you are unenterprising. Never mind the impossible costs of housing: if your credit card is maxed out, you’re feckless and improvident. Never mind that your children no longer have a school playing field: if they get fat, it’s your fault. In a world governed by competition, those who fall behind become defined and self-defined as losers.

Among the results, as Paul Verhaeghe documents in his book What About Me? are epidemics of self-harm, eating disorders, depression, loneliness, performance anxiety and social phobia. Perhaps it’s unsurprising that Britain, in which neoliberal ideology has been most rigorously applied, is the loneliness capital of Europe. We are all neoliberals now.

The term neoliberalism was coined at a meeting in Paris in 1938. Among the delegates were two men who came to define the ideology, Ludwig von Mises and Friedrich Hayek. Both exiles from Austria, they saw social democracy, exemplified by Franklin Roosevelt’s New Deal and the gradual development of Britain’s welfare state, as manifestations of a collectivism that occupied the same spectrum as nazism and communism.

In The Road to Serfdom, published in 1944, Hayek argued that government planning, by crushing individualism, would lead inexorably to totalitarian control. Like Mises’s book Bureaucracy, The Road to Serfdom was widely read. It came to the attention of some very wealthy people, who saw in the philosophy an opportunity to free themselves from regulation and tax. When, in 1947, Hayek founded the first organisation that would spread the doctrine of neoliberalism – the Mont Pelerin Society – it was supported financially by millionaires and their foundations.

With their help, he began to create what Daniel Stedman Jones describes in Masters of the Universe as “a kind of neoliberal international”: a transatlantic network of academics, businessmen, journalists and activists. The movement’s rich backers funded a series of thinktanks which would refine and promote the ideology. Among them were the American Enterprise Institute, the Heritage Foundation, the Cato Institute, the Institute of Economic Affairs, the Centre for Policy Studies and the Adam Smith Institute. They also financed academic positions and departments, particularly at the universities of Chicago and Virginia.

As it evolved, neoliberalism became more strident. Hayek’s view that governments should regulate competition to prevent monopolies from forming gave way – among American apostles such as Milton Friedman – to the belief that monopoly power could be seen as a reward for efficiency.

Something else happened during this transition: the movement lost its name. In 1951, Friedman was happy to describe himself as a neoliberal. But soon after that, the term began to disappear. Stranger still, even as the ideology became crisper and the movement more coherent, the lost name was not replaced by any common alternative.

At first, despite its lavish funding, neoliberalism remained at the margins. The postwar consensus was almost universal: John Maynard Keynes’s economic prescriptions were widely applied, full employment and the relief of poverty were common goals in the US and much of western Europe, top rates of tax were high and governments sought social outcomes without embarrassment, developing new public services and safety nets.

But in the 1970s, when Keynesian policies began to fall apart and economic crises struck on both sides of the Atlantic, neoliberal ideas began to enter the mainstream. As Friedman remarked, “when the time came that you had to change ... there was an alternative ready there to be picked up”. With the help of sympathetic journalists and political advisers, elements of neoliberalism, especially its prescriptions for monetary policy, were adopted by Jimmy Carter’s administration in the US and Jim Callaghan’s government in Britain.

After Margaret Thatcher and Ronald Reagan took power, the rest of the package soon followed: massive tax cuts for the rich, the crushing of trade unions, deregulation, privatisation, outsourcing and competition in public services. Through the IMF, the World Bank, the Maastricht treaty and the World Trade Organisation, neoliberal policies were imposed – often without democratic consent – on much of the world. Most remarkable was its adoption among parties that once belonged to the left: Labour and the Democrats, for example. As Stedman Jones notes, “it is hard to think of another utopia to have been as fully realised.”

It may seem strange that a doctrine promising choice and freedom should have been promoted with the slogan “there is no alternative”. But, as Hayek remarked on a visit to Pinochet’s Chile – one of the first nations in which the programme was comprehensively applied – “my personal preference leans toward a liberal dictatorship rather than toward a democratic government devoid of liberalism”. The freedom that neoliberalism offers, which sounds so beguiling when expressed in general terms, turns out to mean freedom for the pike, not for the minnows.

Freedom from trade unions and collective bargaining means the freedom to suppress wages. Freedom from regulation means the freedom to poison rivers, endanger workers, charge iniquitous rates of interest and design exotic financial instruments. Freedom from tax means freedom from the distribution of wealth that lifts people out of poverty.

As Naomi Klein documents in The Shock Doctrine, neoliberal theorists advocated the use of crises to impose unpopular policies while people were distracted: for example, in the aftermath of Pinochet’s coup, the Iraq war and Hurricane Katrina, which Friedman described as “an opportunity to radically reform the educational system” in New Orleans.

Where neoliberal policies cannot be imposed domestically, they are imposed internationally, through trade treaties incorporating “investor-state dispute settlement”: offshore tribunals in which corporations can press for the removal of social and environmental protections. When parliaments have voted to restrict sales of cigarettes, protect water supplies from mining companies, freeze energy bills or prevent pharmaceutical firms from ripping off the state, corporations have sued, often successfully. Democracy is reduced to theatre.

Another paradox of neoliberalism is that universal competition relies upon universal quantification and comparison. The result is that workers, job-seekers and public services of every kind are subject to a pettifogging, stifling regime of assessment and monitoring, designed to identify the winners and punish the losers. The doctrine that Von Mises proposed would free us from the bureaucratic nightmare of central planning has instead created one.

Neoliberalism was not conceived as a self-serving racket, but it rapidly became one. Economic growth has been markedly slower in the neoliberal era (since 1980 in Britain and the US) than it was in the preceding decades; but not for the very rich. Inequality in the distribution of both income and wealth, after 60 years of decline, rose rapidly in this era, due to the smashing of trade unions, tax reductions, rising rents, privatisation and deregulation.

The privatisation or marketisation of public services such as energy, water, trains, health, education, roads and prisons has enabled corporations to set up tollbooths in front of essential assets and charge rent, either to citizens or to government, for their use. Rent is another term for unearned income. When you pay an inflated price for a train ticket, only part of the fare compensates the operators for the money they spend on fuel, wages, rolling stock and other outlays. The rest reflects the fact that they have you over a barrel.

Those who own and run the UK’s privatised or semi-privatised services make stupendous fortunes by investing little and charging much. In Russia and India, oligarchs acquired state assets through firesales. In Mexico, Carlos Slim was granted control of almost all landline and mobile phone services and soon became the world’s richest man.

Financialisation, as Andrew Sayer notes in Why We Can’t Afford the Rich, has had a similar impact. “Like rent,” he argues, “interest is ... unearned income that accrues without any effort”. As the poor become poorer and the rich become richer, the rich acquire increasing control over another crucial asset: money. Interest payments, overwhelmingly, are a transfer of money from the poor to the rich. As property prices and the withdrawal of state funding load people with debt (think of the switch from student grants to student loans), the banks and their executives clean up.

Sayer argues that the past four decades have been characterised by a transfer of wealth not only from the poor to the rich, but within the ranks of the wealthy: from those who make their money by producing new goods or services to those who make their money by controlling existing assets and harvesting rent, interest or capital gains. Earned income has been supplanted by unearned income.

Neoliberal policies are everywhere beset by market failures. Not only are the banks too big to fail, but so are the corporations now charged with delivering public services. As Tony Judt pointed out in Ill Fares the Land, Hayek forgot that vital national services cannot be allowed to collapse, which means that competition cannot run its course. Business takes the profits, the state keeps the risk.

The greater the failure, the more extreme the ideology becomes. Governments use neoliberal crises as both excuse and opportunity to cut taxes, privatise remaining public services, rip holes in the social safety net, deregulate corporations and re-regulate citizens. The self-hating state now sinks its teeth into every organ of the public sector.

Perhaps the most dangerous impact of neoliberalism is not the economic crises it has caused, but the political crisis. As the domain of the state is reduced, our ability to change the course of our lives through voting also contracts. Instead, neoliberal theory asserts, people can exercise choice through spending. But some have more to spend than others: in the great consumer or shareholder democracy, votes are not equally distributed. The result is a disempowerment of the poor and middle. As parties of the right and former left adopt similar neoliberal policies, disempowerment turns to disenfranchisement. Large numbers of people have been shed from politics.

Chris Hedges remarks that “fascist movements build their base not from the politically active but the politically inactive, the ‘losers’ who feel, often correctly, they have no voice or role to play in the political establishment”. When political debate no longer speaks to us, people become responsive instead to slogans, symbols and sensation. To the admirers of Trump, for example, facts and arguments appear irrelevant.

Judt explained that when the thick mesh of interactions between people and the state has been reduced to nothing but authority and obedience, the only remaining force that binds us is state power. The totalitarianism Hayek feared is more likely to emerge when governments, having lost the moral authority that arises from the delivery of public services, are reduced to “cajoling, threatening and ultimately coercing people to obey them”.

Like communism, neoliberalism is the God that failed. But the zombie doctrine staggers on, and one of the reasons is its anonymity. Or rather, a cluster of anonymities.

The invisible doctrine of the invisible hand is promoted by invisible backers. Slowly, very slowly, we have begun to discover the names of a few of them. We find that the Institute of Economic Affairs, which has argued forcefully in the media against the further regulation of the tobacco industry, has been secretly funded by British American Tobacco since 1963. We discover that Charles and David Koch, two of the richest men in the world, founded the institute that set up the Tea Party movement. We find that Charles Koch, in establishing one of his thinktanks, noted that “in order to avoid undesirable criticism, how the organisation is controlled and directed should not be widely advertised”.

The words used by neoliberalism often conceal more than they elucidate. “The market” sounds like a natural system that might bear upon us equally, like gravity or atmospheric pressure. But it is fraught with power relations. What “the market wants” tends to mean what corporations and their bosses want. “Investment”, as Sayer notes, means two quite different things. One is the funding of productive and socially useful activities, the other is the purchase of existing assets to milk them for rent, interest, dividends and capital gains. Using the same word for different activities “camouflages the sources of wealth”, leading us to confuse wealth extraction with wealth creation.

A century ago, the nouveau riche were disparaged by those who had inherited their money. Entrepreneurs sought social acceptance by passing themselves off as rentiers. Today, the relationship has been reversed: the rentiers and inheritors style themselves entrepreneurs. They claim to have earned their unearned income.

These anonymities and confusions mesh with the namelessness and placelessness of modern capitalism: the franchise model which ensures that workers do not know for whom they toil; the companies registered through a network of offshore secrecy regimes so complex that even the police cannot discover the beneficial owners; the tax arrangements that bamboozle governments; the financial products no one understands.

The anonymity of neoliberalism is fiercely guarded. Those who are influenced by Hayek, Mises and Friedman tend to reject the term, maintaining – with some justice – that it is used today only pejoratively. But they offer us no substitute. Some describe themselves as classical liberals or libertarians, but these descriptions are both misleading and curiously self-effacing, as they suggest that there is nothing novel about The Road to Serfdom, Bureaucracy or Friedman’s classic work, Capitalism and Freedom.

For all that, there is something admirable about the neoliberal project, at least in its early stages. It was a distinctive, innovative philosophy promoted by a coherent network of thinkers and activists with a clear plan of action. It was patient and persistent. The Road to Serfdom became the path to power.

Neoliberalism’s triumph also reflects the failure of the left. When laissez-faire economics led to catastrophe in 1929, Keynes devised a comprehensive economic theory to replace it. When Keynesian demand management hit the buffers in the 70s, there was an alternative ready. But when neoliberalism fell apart in 2008 there was ... nothing. This is why the zombie walks. The left and centre have produced no new general framework of economic thought for 80 years.

Every invocation of Lord Keynes is an admission of failure. To propose Keynesian solutions to the crises of the 21st century is to ignore three obvious problems. It is hard to mobilise people around old ideas; the flaws exposed in the 70s have not gone away; and, most importantly, they have nothing to say about our gravest predicament: the environmental crisis. Keynesianism works by stimulating consumer demand to promote economic growth. Consumer demand and economic growth are the motors of environmental destruction.

What the history of both Keynesianism and neoliberalism show is that it’s not enough to oppose a broken system. A coherent alternative has to be proposed. For Labour, the Democrats and the wider left, the central task should be to develop an economic Apollo programme, a conscious attempt to design a new system, tailored to the demands of the 21st century.

Neoliberalism – the ideology at the root of all our problems

 

all the elephants in the room ...

John Passant’s notes for his recent talk at the ANU College of Law National Law Reform Conference. on tax, inequality & challenges for the future.

In a speech in 2013 Barack Obama labelled inequality “the defining challenge of our time”. What I am going to do today is talk about equality and equity in the tax debate. I will look briefly at inequality in Australia today and how it has been growing over time. I will then look at ways tax could address to some extent that growing inequality. My aim is to raise options, to put everything on the table rather than discuss what is politically feasible at the moment. My aim is to plant the seeds for the future.

According to ACOSS there are about 2.5 million Australians living in poverty, including over 660,000 children.  One in three pensioners live below the poverty line.

Further, according to Oxfam, inequality globally, and in Australia, has been growing over the last few decades. The OECD, ACOSS and others confirm that trend has been evident in Australia too.

Australia’s inequality is above the OECD average and has been growing above average over time.

As part of that process of growing inequality in Australia our tax system has become less progressive.

The OECD for example in its 2011 Divided We Stand report said of Australia:

‘Income inequality among working-age people has been rising since 2000 and is today above the OECD average. In 2008, the average income of the top 10% of Australians was 131 300 AUD (88 800 USD), nearly 10 times higher than that of the bottom 10%, who had an average income of 13 700 AUD (9 300 USD). This is up from a ratio of 8 to 1 in the mid 1990s. The growth in inequality since 2000 was driven by two forces in different periods: widening disparities of market incomes (gross earnings, savings and capital) between 2000 and 2004 and weakening redistribution since 2004.

In relation to redistribution policies, tax is front and centre.  As the OECD report on Australia says:

Key findings: 

  • The richest 1% of Australians saw their share of total national income almost double, from 4.8% in 1980 to 8.8% in 2008 [Table9.1]. Moreover, that of the richest 0.1% rose from 1% to 3%. At the same time, top marginal income tax rates declined markedly, dropping from 60% in 1981 to 45% in 2010.

  • The tax-benefit system in Australia has offset just over half of the rise that occurred in market income inequality during the past two decades, a percentage that is higher than in many other OECD countries. 

  • Nonetheless, since the mid-1980s, taxes have become less redistributive. Both progressivity and average tax rates have declined.

The OECD argued that tax policies and transfers reduced inequality by 23%.

There is another element to inequality. It is not just that it has been increasing. It is that there is a concentration of wealth that sees the systemic inequality consolidate and increase.

Thomas Piketty, Joseph Stiglitz, Andrew Leigh and Paul Krugman have all been warning in various ways about the threats that growing inequality can pose to the system over time both in its economic functioning and in the challenge that might occur to its current arrangements.

We can see reflections of that in the rise of Bernie Sanders and his calls for political revolution in the US. The rise and popular support for Jeremy Corbyn as Labour leader in the UK is another example. The social turmoil in parts of Europe, and the electoral swings to the left in places like Greece, Ireland, Portugal and Spain, and the rise of the racist and in some cases fascist right across the Continent highlight the urgent nature of the challenge.

What can be done? Given that the major increase in inequality stems from increasing wage differentials between the low paid and average paid workers one answer might be for workers to pursue big pay increases to address the disparity.  However since this is a talk about tax and law reform, what policies could we put on the table to address that growing inequality, even if not fully addressing it but only ameliorating it?

A few more general points before we examine specific proposals.

Australia by OECD standards is a low tax country. Our average tax take as a percentage of GDP at 25.6% is about 8% lower than the OECD average and puts us on a par with Turkey, South Korea and just a bit above the US.

If nothing is off the table, let’s start off by putting some of the less equitable proposals on the table.

One proposal from the Abbott and Turnbull governments (which is now off the table) was to increase the GST to 15% and extend it to currently non-taxable items such as fresh food, health and education. This NATSEM graph shows the regressive nature of the proposals based on an increase in the GST to 15% and a 5% tax cut to compensate.

Company tax cuts

Business and elements within the government are keen on company tax cuts. The argument Cabinet secretary Arthur Sinodinos and others have raised is that such cuts flow through to better wages and more employment. There is little evidence to support the assertions about increased wages and increased employment.

Now for some suggested reforms to make the current system more equitable.

Superannuation tax concessions

Here is a graph from the financial system inquiry, the Murray Inquiry, about who gets what in terms of the tax concession for superannuation.

In other words the benefits flow overwhelmingly to the very well off. Abolishing the benefits for the top ten percent of income earners would free up $12 billion in revenue a year.  Some of that tax expenditure money would look for other low taxed treatment, such as negative gearing and capital gains tax concessions.

The sum total of revenue forgone through the superannuation concessions (i.e. not just for the top ten percent) is about $30 billion. Abolishing the concessions totally (i.e. not just for the top ten percent) has the potential to improve the budget bottom line by about $30 bn, enough to lift the 30% of pensioners living below the poverty line out of poverty and increasing the pension by $100 a week. Of course those enjoying the benefits of the superannuation tax concessions might then look for other tax reducing strategies. Treasury says there would be some minor impacts but believes that about $29 bn would be added to the Budget if the concessions were abolished. .

Negative gearing of rental properties is one alternative avenue for those keen to reduce their tax.

Negative gearing

Negative gearing is a legitimate tax deduction although I have often wondered why the Commissioner doesn’t announce he is going to review the losses given that there is an argument the outgoings are not expended to gain assessable income but to make the loss and thus to reduce the tax payable on other income, and to make a concessionally taxed capital gain. The political climate is too hot to do that. My memory is that a very senior tax officer in the 1980s did make comments along those lines and in the face of a frenzy of complaints the Commissioner backed down.

The main beneficiaries in terms of the size of the negative gearing benefits are the well off.  Here is how the Grattan Institute puts it:

Like most tax concessions on investment, tax benefits from negative gearing are biased to the wealthy. The increase in after tax return as a result of the current negative gearing/capital gains interaction is larger for individuals on higher marginal tax rates, all else being equal.22 Among individual taxpayers, the top 10 per cent by taxable income receive more than one third of the benefits from rental deductions. But taxable incomes are assessed after rental losses. In other words, people who are negatively gearing will have lower taxable incomes because they are negatively gearing. Correcting for this by assessing income before rental loss deductions shows that the top 10 per cent of income earners receive almost 50 per cent of the tax benefits of negative gearing.

An important aspect of the thinking of negative geared investors is the capital gains concessions that flow when the property is sold.

Capital gains tax concessions

Unlike all other forms of gain taxed as income (wages, business profits, interest, rent etc) capital gains are taxed concessionally. If you hold an asset for greater than 12 months when you sell it you only include half the net capital gain in assessable income. Treasury estimates this tax expenditure forgoes a bit over $6 billion a year.

As someone bought up on the Haig Simons model of income – any gain is income and should be taxed accordingly, I am in favour of treating capital gains in exactly the same way as any other gain. According to the Treasury’s 2016 Tax expenditure Statement abolishing the concession has the potential to improve the Budget bottom line by almost $6 billion, ignoring minor leakage to other concessions.

The revenue foregone from these 3 tax concessions – the top ten percent of superannuation holders, negative gearing on rental properties, and the CGT concession – is about $25 billion a year.  While there would be some leakage from that figure if these concession were abolished or modified, as the well-off sought out other concessionally taxed areas, these are the main areas in terms of revenue foregone.  And if there were a surge of investment in other concessionally taxed areas then we can tighten those areas up too.

Tax avoidance

The Panama Papers have ignited debate again about the tax avoidance activities of high wealth individuals and big business.  In two recent tax transparency reports the Commissioner released details of the tax paid by big business public companies (i.e. those with a turnover greater than $100 million) in December 2015 and then in March this year of tax paid by those big business private companies with a turnover of greater than $200 million.

The Tax Justice Network/ United Voice publication ‘Who pays for our common wealth’ found that

Within the ASX 200 companies: 

  • nearly one-third have an average effective tax rate (ETR) of 10% or less;

Here is a graph from the ATO website showing the combined public and private company figures.

This is consistent with previous estimates. For example in 2010 Deputy Commissioner Jim Killaly told us

“Between 2005 and 2008, more than 40% of all big business taxpayers [turnover greater than $250 million] that lodged tax returns paid no tax. Of those, 20% were making a profit.”

The figures the ATO has put out also show that even when big business does pay income tax it can be at much lower rates than the statutory rate of 30% on taxable income.

Here is a chart from the ATO on that. Where the hell is it? Disappeared from ATO website with the merger of the public and private data.

The history to date of addressing tax avoidance has been in my view a softly softly one politically, legislatively and administratively. The recent legislative crack downs are fairly minor as are Labor’s proposals fiddle at the edges with changes to the debt equity ratio.

None of them recognise the real problem – the competitive drive to reduce costs, where business see tax as a cost rather than a contribution to society.  Eric Schmidt, when he was CEO of Google captured that well when he said:

‘I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.’

‘The company isn’t about to turn down big savings in taxes,’ he said.

‘It’s called capitalism,’ he said. ‘We are proudly capitalistic. I’m not confused about this.’

Is there a solution at least in part to this big business no or low tax conundrum? It may be time to consider a minimum company tax, based not on actual taxable income but gross revenue. In similar vein it might be time to consider asking companies which want to make money in Australia to pay an operating fee for carrying on business here. The fee could be based on the gross revenue and reduce the closer the company got to a 30% effective tax rate. That might catch for example likes of Google and Apple and the Base Erosion and Profit Shifting they undertake, respectively.

Wealth taxes

After the Henry Tax Review handed down its report respected international tax expert Neil Brooks wrote that the word equity did not receive more than a few passing references in the report but efficiency was mentioned everywhere.

Brooks argued for consideration of wealth transfer taxes – things like estate and gift duties.

We lost death duties to state tax competition in the 1970s when Joh Bjekle-Petersen abolished Queensland death duties and the other states and the Commonwealth quickly followed suit.

It is time to reconsider them, especially if they can be targeted at the estates of the rich.

I think it is also time to consider not just a wealth transfer tax but a wealth tax, ie: a tax annually on the wealth of the say top ten percent. I displayed before that graph of wealth ownership in Australia with the top 20% owning 60% of the wealth.  The top ten percent own 45% of Australia’s wealth. That wealth in total is about $6.5 trillion. So the top ten percent own about $3 trillion of Australia’s wealth. A one percent annual wealth tax on them would raise by my back of the envelope calculations about $30 billion annually from them.

I am not alone on this. Thomas Piketty argues for a global wealth tax to address concentrations of wealth, growing inequality and would allow governments to invest in infrastructure and education. Obviously that would require cooperation across borders, something that will be difficult given US intransigence to address the tax avoidance by its companies, based on the perhaps mistaken idea that US companies avoiding tax overseas pay tax on that income in the US. Apple for example pays $110 bn in the US at around 35%, the US company tax rate, and pays about 1% on average on its non-US income.  The problem with this is that the offshore income isn’t necessarily taxed in the US. Despite this the intransigence remains.

This is an argument for Australia going it alone.

Taxes on wealth too may not impact on investment or the capital production and reproduction process, especially if the money is then used in productive investment in infrastructure, education and health.

Pay the rent

Whenever I think of a tax system that pays the rent to Aboriginal people and Torres Strait Islanders I think of Midnight Oil and their great song Beds are burning.

The time has come

To say fair’s fair

To pay the rent

To pay our share

Paying the rent can only be part of a wider settlement with Aboriginal people and Torres Strait Islanders, a settlement that recognises prior ownership and soerignty. It is out of those democratic negotiations with elcted represetatives aof the original inhabitants that the form of paying the rent will take shape, although I would imagine mining companies and pastoralists would be to sections of the capitalist class from whom much rent would flow. So too from the churches.

Economic rent

The Henry Tax Review recommended a tax on the economic rent of mining companies. The first iteration of this was Kevin Rudd’s Resource Super Profits Tax and the second Julia Gillard’s Minerals Resource Rent Tax. I am not going to go into the history of this other than to note I wrote about these rent taxes and what it told us about the nature of the ALP in 2014 for the Accounting Research Review.

I merely note that the MRRT was designed by the big 3 mining giants and would have raised little income in part because it allowed mining companies to use current value in working out the base on which their return rate was worked out rather than historical cost.

Here is how the Henry Tax Review describes economic rent:

‘An economic rent is the excess of the return to a factor of production above the amount that is required to sustain the current use of the factor (or to entice the use of the factor).’

The review uses an interesting example which, while it makes the point pretty simply, should signal concerns among those of us supportive of workers winning higher wages.  Thus the Review went on to say about economic rent:

‘For example, if a worker is paid $100,000 but would still be willing to work at the same job if they were paid $75,000, their economic rent would be $25,000.’

Leaving aside the politics of wages as economic rent, and concentrating on the principle of economic rent, this is the argument too about mining company economic rent. The return on investment in mining in Australia was at one stage estimated to be 20%, well above that required for continued operation of mining and continued investment in new mines.

Taxing economic rent is not some loony left idea. It is a recognition that such rents arise because of barriers to entry for example of new competitors, or in the case of minerals and resources because of their finite nature (and I would add the monopoly of land and resources and the incredible amounts of capital needed to invest in new mines).  Taxing economic rent is in other words a substitute for competition, taxing the rent so that the return becomes similar to what would arise if competition flooded in to or was able to flood in to the high return areas.

Why limit our discussion to resource rents? Obviously the market has changed now and the economic rents have dried up in the resource sector in Australia. Why not just tax all economic rent?

What other sectors might be making economic rents? Any thoughts?

Yes, the banking and finance section appears to be earning economic rents. Its rate of return was estimated a few years ago to be about 16%, well above long term government bond rate currently of 2.45% plus 7% (which is a guide to economic rent in high risk industries.)  I suspect the reason there is no rent tax on banks is because they would increase their prices to consumers (e.g. housing loan rates) and this would produce a political backlash against a government who did this. That then would in my mind be an argument in favour of government regulation, price control, of home loans and other products offered to ordinary working Australians.

The Labor government I think focussed on minerals because they are sold to offshore entities and any price increase would be indirect.  However if taxing economic rent is about mimicking competition then the logic suggests that we should tax all economic rents, if we do decide to tax them.

Carbon tax

The evidence of global warming continues to amass and the cries of scientists, environmentalists, some politicians and others to do something grows louder as the globe warms.

More mundanely the abolition of the carbon tax saw a loss in revenue of about $8 billion annually. The debates at the moment appear to be around whether there should be a price on carbon and if so whether that price is in the form of a carbon tax or arises from an emissions trading scheme.  Both are inequitable in that any increase in retail prices falls disproportionately on ordinary working people as consumers.  A response might be that not having a liveable planet in which an economy can function is pretty inequitable. That is true but for me the question then becomes who should bear the cost of any remedial action, the polluters or those who consume their products to live?  Which class in essence pays the price for the

Financial transactions tax

First proposed by Keynes, a financial transactions tax would apply a small tax (say 0.05%) to financial transactions. Australia used to do this with its Bank Account Debits Tax (or BAD tax.) One variation is to limit it to cross border transactions – ie flows into and out of Australia.  Thus if I transferred say $10,000 to support my brother who is a Catholic priest in the US, I would pay $5.

A variation on this is the Tobin tax, a proposal to tax currency conversions to prevent short term speculation in currencies.

A marijuana tax

The recent discussion about competition between the states and territories got me thinking about a proposal I have had in my mind and written about on my blog some time ago. In addition the debate in the last day or two about lock out laws and alcohol fuelled violence here in Canberra got me thinking about alternative mind altering substances to alcohol that do not induce violence.

Colorado became the first US state to legalise the personal use of marijuana and tax its sale though licensed retailers. It imposes a Medical Marijuana Sales Tax; Retail Marijuana Excise Tax; Retail Marijuana Sales Tax; Retail Marijuana Special Sales; Maybe the ACT or another Territory or State could do something similar.

The results have been interesting. The revenue raised has been $135 m. Much of this then covers the costs of regulation, education and other costs. The sky hasn’t fallen in and some early research suggests violent crime and robberies has fallen although drug driving is a problem.  So too is accidental ingestion by children. (About half the sales are of food products with marijuana in them.)  The number of people who supported the binding referendum vote for the change at 55% has increased slightly to 57% in recent polls.

Maybe the A.C.T. could follow Colorado’s lead?

A land tax

The cat fight over giving the States and Territories income tax rights highlights the need for those jurisdictions to find alternative tax bases to those they already have.

One of the recommendations of the Henry Tax Review was for States and Territories to abolish their inefficient stamp duties (for example on house purchases) and replace them with a land tax on unimproved value (i.e. excluding buildings and improvements in the valuation).  Only one jurisdiction has taken up the challenge so far and that is the ACT which has in place a long term process in place to abolish stamp duty on housing sales with land tax.  As the Henry tax Review makes clear this is a simple efficient tax.

Recommendation 51:

Ideally, there would be no role for any stamp duties, including conveyancing stamp duties, in a modern Australian tax system. Recognising the revenue needs of the States, the removal of stamp duty should be achieved through a switch to more efficient taxes, such as those levied on broad consumption or land bases. Increasing land tax at the same time as reducing stamp duty has the additional benefit of some offsetting impacts on asset prices.

Recommendation 52:

Given the efficiency benefits of a broad land tax, it should be levied on as broad a base as possible. In order to tax more valuable land at higher rates, consideration should be given to levying land tax using an increasing marginal rate schedule, with the lowest rate being zero, with thresholds determined by the per-square-metre value.

Recommendation 53:

In the long run, the land tax base should be broadened to eventually include all land. If this occurs, low-value land, such as most agricultural land, would not face a land tax liability where its value per-square-metre is below the lowest rate threshold.

Recommendation 54:

There are a number of incremental reforms that could potentially improve the operation of land tax, including:

  1. ensuring that land tax applies per land holding, not on an entity’s total holding, in order to promote investment in land development;

  2. eliminating stamp duties on commercial and industrial properties in return for a broad land tax on those properties; and

  3. investigating various transitional arrangements necessary to achieve a broader land tax.

I would have thought, as the revenue problems for the States and Territories grow and vertical fiscal imbalance worsens, and the Commonwealth further underfunds services like public health and public education, that other States and Territories in addition to the ACT will begin thinking about land tax both as a replacement for inefficient taxes like stamp duty and as a growth tax to support future spending needs.

I might leave it there and open it up for discussion, remembering nothing at least for us is off the table, and that I want to view the options through the prism of equity, not just or even efficiency.