Rudd's crazy Canberra tax shuffle

Kevin Rudd has done it again and Australia has been “Rudded”. It looks like the snap decision to attack motor fringe benefits will be very similar to the mining tax and, on a net increase to government revenue basis, not raise anything like the $1.8 billion Kevin Rudd is forecasting over four years. In ignorance, what Kevin Rudd has actually done is to attack vast sectors of the government payroll system — that’s why so much money is being “raised”.

Like the mining tax fiasco it will increase the fear among overseas investors that Australia has blown the benefits of the mining boom and its politicians have has no idea how to run the country. As always we will see lower productivity. But I have a solution, which I will save until the conclusion of the commentary.

The similarities between the fringe benefit attack and the mining tax are remarkable. On both occasions very optimistic revenue projections were made because Treasury officials did not understand how the tax changes would work in practice.

Its true that the fringe benefits system was the subject of abuse and that abolishing the concessions will have a far lesser effect on the local car making industry than would gave been the case a decade ago. (Could the new FBT rules help local auto? July 18)

But as the detailed data comes through it becomes apparent who was benefitting most from these FBT tax gains. According to the Australian Salary Packaging Industry Association (ASPIA) 28 per cent of State and Federal pubic servants use this system plus one third of teachers and police. In the private sector usage is much less — around 21 per cent of private workers.

Now while ASPIA is clearly biased, their basic point will be correct because we all know that the public service unions, plus teachers, police and nurses have pressed to include salary packaging in their awards. These groups are among the most unionised in the country so State and Federal governments are simply going to be forced to pick up the tab.

We are embarking on a typical Canberra shuffle where revenue raising actions are taken in Canberra that decrease state revenue and the states then fight like polecats to regain it. And if we slash the incomes of low-paid health workers in this way, again there will have to be some offsetting compensation, much of which will come out of state or federal government coffers.

The Gillard government has mercilessly attacked the small enterprise sector so what the sudden FBT change is doing is telling them that Rudd is no different to Gillard. They have become so angry with the government that the “Barbecue” solution is already gathering speed. Currently cars are declared as 80 per cent for business use. A large number of workers in the private sector will be required to write up log books in a way that shows an 85 per cent business travel content and the extra money raised will be used to cover the cost. This will be an organised form of tax cheating. I don’t condone this but as we have seen in Europe when governments act unpredictably, tax cheating and the cash economy become widespread. The Federal Government will need to hire thousands of new tax inspectors to cover the multitude small amounts of individual transactions — drastically increased compliance changes will be a net cost to revenue, let alone productivity. On the other side coaching classes will be set up to help people do a good job of tax cheating via false log books.

Productivity will be affected. If you assume that the biggest user of car packaging are the governments themselves and you add the increase in tax cheating and the cost of regaining compliance then I would be stunned if the car FBT change nets half the $1.8 billion forecast over the next four years.

That is, of course, better than the mining tax, which raised almost nothing.

However it gets worse. To the extent that the tax change affects motor makers it will be required to be included in the motor makers compensation now being negotiated or we will have no car manufacturing industry, throwing vast numbers of people onto the dole.

My solution? Only allow the FBT concessions for cars made in Australia. That would slash government aid to the motor industry, mean a boost to employment in the motor manufacturing industry, eliminate the large car abuse and continue to lower the costs for state and federal governments who are the biggest users of salary packaging.