Pinning down those slippery tax targets

The Conversation

Last week was quite a big week in tax, although when the dust had settled it was not clear what – if anything – had really happened.
First, the treasurer announced in the Mid Year Economic and Fiscal Outlook that tax payments of large companies would be converted from quarterly to monthly instalments. On Wednesday, he announced that Commissioner of Taxation Michael D'Ascenzo will be retiring at the end of this year. The same day, the Treasury Business Tax Working Group issued its draft final report on business taxation. And on Thursday, it was confirmed that the Mining Resource Rent Tax has so far not raised a dollar of revenue for the government.

It's hard even for tax geeks to get excited about tax instalments. But the government estimate that this change will produce $5.5 billion in the 2013-14 fiscal year and $8.3 billion over the three-year forward estimates made us all sit up and take notice.

Monthly instalments will commence on January 1, 2014 for about 350 companies with $1 billion-plus of income a year and a year later for companies with income of $100 million-plus. These big end companies comprise only 0.2 per cent of companies in Australia, but pay more than 60 per cent of company tax.

Not surprisingly, companies – and many commentators – reacted uniformly negatively to the news. It's true that the extra $5.5 billion revenue in 2013-14 is mostly a short term fiddle, as this change brings forward into the 2013-14 fiscal year up to a quarter of the following year tax payment. But the extra revenue next year and going forward is also a function of the time value of money. In the longer term, it looks like a smart administrative move. The treasurer is right that large companies already make monthly GST and wage withholding payments. If company tax is legally owed, why not collect it more smoothly through the year, rather than (in effect) loaning companies the cash out of the public purse?

A monthly instalment system is novel. The global standard is quarterly company tax instalments – for example, both the US and UK operate quarterly systems. But if Australia can get this working at the big end of town, other cash-strapped governments might follow suit. It's less clear that a monthly system should be extended to companies with turnover of $20 million-plus a year (to commence on January 1, 2016). Much less revenue is at stake, and the cash flow issues for these businesses are more stark.

This shift to monthly instalments is possible in part because of the work of Commissioner Michael D'Ascenzo, who has done an impressive job stewarding the Australian Tax Office over his seven year term. In this time, D'Ascenzo has overseen an upgrade of key administrative systems of tax collection, including substantial new computing power that facilitates previously impossible data-matching, payment and refund processing, as well as sophisticated risk-based audit. This new computing system, although still going through some hiccups and implementation issues, should enable the government to actually administer a monthly instalment system for company tax.

Meanwhile, the Treasury Business Tax Working Group quietly released its "Draft Final” report, sans recommendations. This unusual step enables public viewing before sending it to the treasurer. The working group was established after the Tax Forum of October 2011, including among others representatives from large business, the Australian Council of Trade Unions and the tax profession. Its main brief was to consider how to cut the company tax rate (currently 30 per cent) on a revenue-neutral basis, fully funded by other reforms to the business tax base. The review of Australia's Future Tax System had recommended a cut to 25 per cent, and the government proposed (then delayed) a cut to only 29 per cent. Some of the possible "savings” include tightening cross-border debt safe harbours for business; removing the research and development or exploration tax concessions; or modifying depreciation of assets.

The working group report is supposed to pull no punches. It has signally – and explicitly – failed in this task. After much consultation and, no doubt, robust discussion, they note the "considerable debate and uncertainty” about winners and losers from a company tax cut funded by removal of concessions. They conclude, dryly, that "there is a lack of agreement in the business community to make such a trade-off”.

The AFTS review suggested that Australia's company tax is borne partly by labour – in fewer Australian jobs and lower wages – as well as by capital. But empirical evidence is lacking. A recent US report by the Urban-Brookings Tax Policy Center attempts to put some numbers to this analysis. It now builds into its models an assumption that 20 per cent of company tax is borne by labour, 20 per cent is on the "normal” return to capital, and a whopping 60 per cent is "super profit" or above-normal rates of return.

According to economic theory, we should be able to tax corporate super profit at nearly 100 per cent and not deter investment. But legally and administratively, that is hard to do. The situation of Australian companies may also be different, given the very valuable intellectual property owned by American companies. In this light, however, the current 30 per cent tax rate seems like a crude but reasonable compromise.

Finally, last week we learnt the MRRT has so far failed to raise any revenue for the government. Some of this is down to lower commodity prices, and price projections that were far too rosy. The MRRT is supposed to capture some of that corporate "super profit”. This result suggests a sad outcome of hasty compromises between big miners and government on the rate of the MRRT, the very high uplift factor for investment, too generous valuation thresholds for existing projects and the exclusion of all minerals except iron ore and coal. It's a salutary lesson of how not to do tax reform.

The current language of business tax reform is "international competitiveness”, and this is picked up by the working group. But we should not be distracted by this slogan. The working group report is a start: there are no easy fixes. Business tax reform requires more research into the economic and distributional issues to generate an acceptance of basic principles which we don't yet have, and a nationwide public debate.

Miranda Stewart is professor and director of Tax Studies, Melbourne Law School at University of Melbourne. This story first appeared on The Conversation. Republished with permission.