As the full implications of the Panama Papers are still being unravelled, John Passant analyses the IPA's Mikayla Novak's argument, which favours tax havens and maintaining privacy for investors.
This is a group who argue for, among other things, limited and efficient government. Just how limited we shall see in a moment.
Why an alleged think tank which receives little response, let alone support, from readers gets a run in the Canberra Times is beyond me — other than to perhaps reinforce the massive shift to the right the paper has been undertaking over the last few years, and to curry favour with sections of the Liberal Party in their drive to dismantle government spending on the poor, on public schools and education, on higher education, on climate change and the like.
In Novak’s latest effort ‘Tax havens a sign of government fiscal mismanagement’ (The Canberra Times, 16 April), she goes full "libertarian" and argues, in between blaming governments for tax avoidance and arguing for "reform" of the welfare state, that the West should transition their economies to tax havens.
This raises an important question. What are tax havens?
They have two key aspects: no or low income tax and secrecy. As a consequence of both the low tax and the secrecy, according to the Tax Justice Network, somewhere between $21 trillion and $32 trillion (up to twenty times Australia’s annual GDP) is stashed away in tax havens.
I am sure Novak does not support the use of tax havens for criminal activities and hiding the proceeds of crime, nor that she wants to see Australia become a coven for crooks, convicts and criminals. However, the logic of her defence of privacy for investors in tax havens leads to that very outcome.
"the Australian Crime Commission's serious and organised crime intelligence holdings."
Oh, and speaking of the Panama Papers, a Deputy Commissioner of Taxation at the same Senate hearings told the Committee that Mossack Fonseca was not the only company advising clients on tax haven use. They knew of about 100 similar companies. Mossack Fonseca is not even the biggest of these advice factories.
My guess is Novak’s call to turn Australia and other Western countries like us into tax havens, is about abolishing or radically reducing income tax.
The impact of doing so without increases in other taxes would be disastrous. Income tax in Australia raises over $250 billion a year. Losing that amount of funding would destroy public schools, public hospitals, public transport, roads, universities, the pension... The list is almost endless.
Perhaps Novak supports increasing the GST to make up the shortfall. This would require a GST rate of somewhere in the region of 50 per cent and would be political suicide.
Of course, as the representative of a "free" market institute, what Novak might also want is a minimalist state with a small GST to only fund the defence forces, police, the courts and the like. This is both politically and economically unrealistic and unrealisable.
The ideology of (incorrectly described) individualism ignores the history and reality of the development of capitalism over the last century or more. A fit and educated workforce, with health and education services often funded by the state, have been key elements in the growth of capitalism since the end of the World War II.
There is something else in the provision of those basic services. They were a response to ordinary working men and women wanting a better world after the suffering and privations they had suffered during the Second World War.
"If you do not give the people social reform, they are going to give you social revolution."
That, too, is likely to be the response of workers in the West today to the sort of dismantling of basic government services the IPA and others envisage.
So what explains the fact that half of all global trade nominally occurs through tax havens?
“It’s called capitalism. We are proudly capitalistic. I’m not confused about this.”
Therein lies the problem. Tax avoidance is systemic. Business sees paying taxes as a cost to them rather than as a contribution to the society which allows them to exploit their workers and make profits from them.
Competition forces companies to look for cost savings to give them better after tax returns than their competitors — and what better way to do that than to cut your tax bill while your competitors pay more to government? This, in part, explains why 38 per cent of big business paid no income tax, why on top of that one third of the top ASX companies have effective tax rates less than 10 per cent and why 57 per cent of the ASX 200 companies have subsidiaries in tax havens.
The drive to cut business taxes and government spending reflects what Marx identified many years ago as the problem at the heart of capitalism, the tendency of the rate of profit to fall. The very competitive drive forces companies to invest in machines at the expense of the one real value, namely workers. The very success of capitalism creates its crises. Cutting company tax is a short lived counter to that profit rate decline inbuilt into capitalism.
Amidst all the hullabaloo about high taxes in Australia, it is worth remembering that Australia is a low tax country by OECD standards, on a par with Turkey and Japan and just above the United States.
What can we do about tax avoidance and tax minimisation? Well, we need to realise that the tax game is rigged in favour of capital and the rich. The main tax havens are the City of London and the U.S., through American states like Delaware and U.S. tax techniques like inversions and "ticking the box". Tax havens are the logical expression of global capitalism. They are intrinsic to it.
Australia already has some legislated tax havens which we could address — things like the superannuation tax concessions, negative gearing and the capital gains discount which, all up, forgo about $40 billion a year in tax. The top 10 per cent of income earners, overwhelmingly, get the biggest benefits from all these arrangements.
As a first step in comprehensive tax reform, we could seriously address these legislated tax rorts or losses for the rich, not just play around at the edges as Labor, and now the Government, in relation to the superannuation concessions, are suggesting.
We could go much further in reintroducing equality into the tax debate.
We could increase the tax rates on the top income earners. In addition, we could consider a net wealth tax, or even just estate and gift duties, on the top 10 per cent of wealth owners — that group who hold 45 per cent of our wealth.
We could discuss how to criminalise tax avoidance, and to impose tax burdens on companies who use tax havens.
The time has come, too, to investigate a minimum company tax on big business revenue, in addition to taxable income, to get some return from the up to $600 billion in untaxed, or lightly taxed, revenue of those big businesses. An economic rent tax on the banks should also be part of any tax reform discussions.
We are limited only by our imagination and the political power and capital of the rich that ensures they continue to shun making an adequate tax contribution to the society in which they live and prosper.
John is a former assistant commissioner of the Australian Tax Office in charge of international tax reform. You can read more from John on his website en Passant, or follow him on Twitter @JohnPassant.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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