The greatest trick Joe Hockey ever pulled was convincing the electorate his budget shares the tax burden fairly. Almost. Bill Mavropoulos, Sonia Nair and Steve Burnham from Taxpayers Australia write that most experts have missed seeing the big (business) picture.
MANY PEOPLE, even LNP members, are scratching their heads over some of the tax measures this government has proposed in its latest budget. Many well-meaning commentators and analysts are looking at the effect of each tax measure on Australia and providing information to help people understand what is going on.
Tax measures don’t operate in isolation of one another, but as part of the broader tax system.
Although I can just picture readers giving me a slow clap because of the obviousness of this last sentence, the truth is when we think about the majority of commentary on tax and welfare measures proposed in this budget, the experts confine their analysis to the specific measure they are considering and its impact. Or, alternatively, they look at the macroeconomic impact of the changes to determine the impact on the economy as a whole.
This seems very logical, but by restricting one’s thinking in this way these experts are missing implications that should have been picked up by taking a broader look at how the measures will work together within the whole of the tax and welfare system.
The starting point for this review is to look at some of the measures that have been proposed by the government.
These measures include:
- Although not mentioned in great detail in the budget, the Paid Parental Leave (PPL) scheme and the associated 1.5% levy on the biggest companies to pay for it.
- Repeal of the mining tax by 1 July 2014 and the carbon tax by 1 July 2015 and removal of the schoolkids bonus, low income superannuation and small business tax concessions which were previously announced by the former government as part of the mining tax package.
- 2% Deficit Tax on individuals earning over $180,000, and
- The drop in the corporate tax rate by 1.5% from 1 July 2015.
- Petrol excise to be tied to CPI and failure to cut the fuel tax rebate for the mining industry
Follow the money
The first thing we notice is that the levy for the PPL on our largest companies seems to be offset by a drop in the company tax rate. But is this the whole story?
The short answer is, no.
The PPL corporate tax levy is not included in income tax — it is a separate type of tax entirely.
This distinction is important because of the way companies are taxed. Essentially, companies in Australia pass on the benefit of the income tax they have paid to their resident shareholders in the form of imputation credits. But the PPL levy isn’t an income tax.
The details regarding the PPL levy are scant. However, much like fringe benefits tax (FBT) it is not unreasonable that this levy would be a deductible expense that will reduce assessable income. This means it would reduce the tax payable by these large corporates.
In other words, it would reduce the income of large corporates that is subject to income tax. These corporates will also benefit from the drop in the corporate tax rate of 1.5%. This will mean that less benefit in the form of tax credits will be passed on to shareholders — though this might still be passed on in the form of greater profits. These corporates will have political cover to increase their prices to compensate for the PPL levy, even though − factoring in the tax cut and likely increased deductions − they have effectively receive a net tax cut.
So the question becomes, where is the funding for this measure coming from — if not from the large corporates?
The answer, of course, is the general revenue, or − to be blunt about it − your pocket and my pocket.
The government estimated that the revenue from the Carbon tax in the former Budget would be in the order of $6.5 billion. The MMRT repeal legislation did not include a revenue estimate of how much the tax would earn, however the latest estimate from the previous Budget predicted revenue of $5.3 billion from the 2013-14 year onward.
Then we consider the fuel excise.
The fuel excise will be tied to CPI and therefore increase every two years. This tax is largely borne by individuals, as the fuel tax rebate for large corporate businesses means around $4 billion in benefits is paid to them.
This rebate is largely passed on to the mining industry and is justified by saying they do not use the road infrastructure the excise was introduced to maintain — although if we’re all doing the heavy lifting, this might seem like a spurious excuse. Interestingly, as the fuel excise tax increases on the rest of us, so does the excise rebate subsidy to the mining companies, so that as we pay more to the government in fuel excise, so the government makes ever bigger handouts to the recipients of the fuel rebate.
Individuals versus corporates
The mining tax is touted to finally start increasing its tax take over the forward estimates and the carbon tax is already a decent earner of tax revenue.
The removal of these measures has been tied to the removal of, amongst other things, the $5,000 motor vehicle upfront deduction and $6,500 instant asset write off for small businesses. Due to the way larger corporates are structured, the additional profit not subject to tax will likely be repatriated overseas and thus not be subject to Australia’s tax system.
However, the reduction of small business concessions will push up these businesses taxable incomes.
Small businesses are largely set up as partnerships of natural people, trusts or individuals which means that business income is allocated to the business owners directly in their personal capacity, so putting upward pressure on their taxable incomes.
This, in turn, will mean that more people may potentially be subject to the 2% deficit levy on earnings over $180,000. Importantly, this levy in an individual’s name is not likely to be tax deductible, unlike the PPL levy described earlier for corporates.
The devil, it would seem, is in the detail but look at the bigger picture and what you can see is a concerted redistribution of national wealth away from individuals and small businesses towards large (often foreign owned) corporations.
Priorities of government
Understanding how tax works in a broader sense illuminates Hockey and Abbott’s deliberately confusing smoke and mirrors strategy. Their budget provides a stark vision of how they see the future for those that know where to look. The government is an ideological tide that is eroding away the tax obligations of their benefactors while simultaneously increasing the burden on the engine rooms of our economy — small business and hardworking employees.
The confusion around our tax system and how it operates means the majority of the general public is unaware of the exact effect of these budgetary measures on their daily lives. They have a vague sense that something is wrong, that they are being had, but they cannot put their finger on exactly how or why.
'If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability.'
Bill Mavropoulos, Sonia Nair and Steve Burnham are tax experts with Taxpayers Australia Inc — an independent non-for-profit advocacy group not affiliated with any political party. You can follow Bill on Twitter@VMavropoulos. You can follow Taxpayers Australia @TaxpayersAU.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
WHAT WE KNOW: Joe Hockey, fmr lawyer/banker, Cuban cigar smoker, rich banker wife, enjoys dancing over impoverishment of needy Australians.— Dave Donovan (@davrosz) May 13, 2014