Thursday, November 13, 2008

Real Opportunity For Tax Reform

There were a few clues to the forthcoming review of taxation to be found in Treasury Secretary Ken Henry’s address to the National Press Club this week. While not giving too much away, Dr. Henry identified the complexity of our tax and transfer system as one of the major factors under consideration. This complexity presents as both the sheer number of taxes which exist in the system, and the compliance obligations which come with those taxes. He described the complexity itself as acting like another tax in that it provides a drag on the economy, although it does so while making no contribution to revenue.

While much of this complexity impacts upon business, it also applies to individuals with relatively simple tax affairs. It has previously been suggested that personal income tax returns could, in many cases, be dispensed with altogether, with a flat figure work related expenses deduction applied across the board. At the same time, the interaction between tax and welfare payments also suffers from complexity and high effective marginal rates, which mean that for every dollar of extra income an individual loses a high percentage as a combination of taxes and lost welfare payments.

Simplification of personal taxes would save us all a lot of wasted time and the expense of a tax agent, but it’s the arena of business taxes which provides the opportunity to really give a boost to the economy, which in turn would benefit us all. There has been a push to reduce company tax for quite some time, and that may well be on the agenda. But Dr. Henry specifically mentioned the role of tax arrangements in promoting foreign investment, at the same time as discouraging the shifting of profits offshore to avoid taxes.

It has also been reported that, although Dr. Henry did not specifically discuss dividend imputation, there may be a case for removing it. The suggestion is that imputation offers foreign investors no benefit while also discouraging Australian companies from investing offshore as foreign profits do not qualify to be offset against the tax on dividends. It is a complication, but the obstacle is that our entire superannuation system has been built around the mechanism of imputation, not to mention the Mum and Dad shareholders who have built a portfolio with an eye on tax effectiveness.

Dr. Henry made it clear that this “root and branch” review of taxation which has been ordered by the government will not be merely a “pruning and shaping” exercise. It would be safe to assume that when the review is complete, the recommendations will be substantial. It is also reasonable to view the current economic turmoil as an opportunity to rebuild the system virtually from the ground up to make it fairer and more efficient. While we have been promised tax reform in the past, it is reasonable to expect that, this time, we will get genuine reform. From the clues we have so far, it certainly seems that is the intention of Dr. Henry and his review panel.

What remains then is for the government to deliver on its commitment.

Wednesday, November 12, 2008

NSW Mini Budget Offers Pain Without Purpose

The New South Wales mini budget has confirmed once again that the government simply doesn’t understand what it’s doing. Filled with fear at the idea of a billion dollar budget black hole, they have desperately clutched at straws to fill that hole and return the budget to surplus as quickly as possible. The trouble is that it won’t work.

The role of government as a money manager is two fold. First, it must manage its own money responsibly to ensure that it can continue to function and provide the services upon which the community depends. Second, it must manage the economy so that the community can prosper. One is not more important than the other, and both are interconnected.

This mini budget is doomed to fail on the basis that it has been drawn up to address the first responsibility and boost the budget bottom line, at the expense of the second responsibility by increasing taxes and charges while cutting spending and investment. The fundamental flaw in this approach is that the added drag on the economy will serve to undermine the ability of the community to pay those increased taxes and charges.

While the government might seek to blame their circumstances on the Global Financial Crisis, the truth is that they were already in trouble and the global situation has only amplified it. More importantly, the impact of the global situation on the broader community is the very reason why the government should be more focused on boosting the economy than boosting their own revenue. That way, a stronger economy will provide them with stronger revenue anyway.

Instead, we have the exact opposite. At a time when the Federal Government is trying to pump money into the economy to prop it up, the New South Wales Government is trying to suck more money out of the economy to prop itself up. Yes, there are enormous challenges for New South Wales, and the Global Financial Crisis has made it more difficult. But that is the very reason why the State Government should be investing in road and rail infrastructure, public transport, and providing real incentives to the property and construction sector, not with handouts, but with abolishing ridiculous and excessive levies and charges.

The obstacle is that this would require the courage to accept a budget deficit and to take on appropriate debt to provide the infrastructure which would in turn provide the framework to encourage more investment in the state. The Government talks about taking the tough decisions, but that is not what they have done. They have in fact taken the easy way out and dumped the cost on Mum, Dad and the kids.

Tuesday, November 11, 2008

Victims Of Deceit

The modern technology of DNA testing seems to have opened a Pandora’s box when it comes to the question of paternity. Now that it is possible to determine whether or not a man is the biological father of a child that he is told is his, the awful truth has emerged that some men have been deceived and exploited. Further complicating the matter has been the introduction of a legal framework over the years enforcing the payment of child support money, which is only right and proper, but when it turns out to be based on a false claim, then the situation becomes complicated.

It has recently been made legally possible for men to claim back child support money paid for children subsequently proven not to be theirs. So far, 18 men in New South Wales have done so. Hundreds more know they are not the biological father and may also have a claim. It is also likely that thousands more don’t know, and may never know.

Now it seems reasonable for money paid under such false premises to be repaid by the women involved, and that has been the finding of the court in some cases. But this is where it gets complicated. Women’s groups are reported to be outraged, and claim that it is the children who will suffer. Matters are further complicated by the fact that in many cases the children have been brought up thus far believing a particular individual to be their father, and even some of the men themselves have formed a parental bond which carries real emotional significance regardless of the circumstances.

So how do we untangle such a mess?

First, if a government agency has determined that a man should pay, then that agency should carry the liability to reimburse the man. Second, the woman should be liable to the agency for any false claims made. Thirdly, the question of who is responsible for the welfare of such children needs to be made clear.

I suspect that these outraged women who claim that the children will be the ones to suffer, are probably the very same women who proudly assert that a woman’s right to choice is sacrosanct. If we accept that, as our society seems to have done, then it logically follows that women also carry the responsibility. It seems to me that men have been given no right to choice in this matter, until now. If a single woman falls pregnant, our society recognizes her right to choose whether to have the baby or not, but the man has no such choice.

The case of Queenslander Ken Rogers resulted from what was described as a drunken fling. He had no ongoing relationship with the woman, and no contact with the child, and yet paid $71 000 over a decade until he discovered the child is not even his. Now that the court has ordered that he be repaid the money, it might well be true that the child will suffer as a result of the financial impact on his mother, but stop and ask: whose fault is that?

Even if you forgive the mother for making a false claim, whether deliberate or not, it certainly isn’t the fault of Mr. Rogers, the innocent victim of years of deceit.

Monday, November 10, 2008

Last Roll Of The Dice For NSW Government

Twas the night before the New South Wales Mini Budget, and all through the house not a creature was stirring, not even a louse…. Er, I mean politician. Sadly, this is no fairy tale, and the taxpayers of New South Wales ought not expect much from the Government in the way of gifts. This mini budget was announced by a Government with a massive shortfall in its revenue even before the true extent of the Global Financial Crisis became known.

Confronted with the failure of the plan to privatise electricity, there was really no choice but to revise the budget. The problem is that while the economic downturn is depriving the budget of revenue, any commensurate reduction of spending will inevitably contribute to the downward drag on the economy. Even worse than that is the very real prospect that any reduction in spending will also result in a reduction in services.

It has already been revealed that the Government intends to cut $500 million from the health budget, even though the Health Department is already indebt and struggling to pay its bills. Services are already being cut with bed numbers reduced and specialist wards closed to try to make ends meet. Even if $500 million in savings could be found in the bureaucracy of the Health Department, that money would be better spent on boosting actually medical services rather than disappearing back into the budget bottom line.

Equally, the plan to increase property taxes might sound like a Robin Hood measure to tax the wealthy to help the poor (New South Wales Government), but if the disastrous experience of the exit stamp duty experiment is any indication, there’s a good chance that what little property market investment remains will be killed off.

In New South Wales, the construction industry is supposed to be one of the prime economic drivers, and as such should be a prime candidate for a boost. Of course, it is property and transaction taxes which provide a significant percentage of Government revenue, so it might seem like a good idea to increase them to help boost the budget bottom line. But if there are no transactions, there is no revenue. Cutting property and transaction taxes, on the other hand, should help to stimulate the sector, producing increased activity and therefore increased tax revenue.

With GST revenue also falling because of the economic slowdown, there is a valid argument to suggest that the Commonwealth should do something to bolster State revenue. No relief can be expected on that front for two reasons. First, the Commonwealth has its hands full with its own problems. Second, given the record of mismanagement in New South Wales, it is unlikely the Commonwealth would trust them with the money. Right now, the New South Wales Government is on its own.

This is that last roll of the dice for the New South Wales Government. It is their last chance to rescue their political fortunes. Unfortunately the combination of their own mismanagement and the impact of the wider economic crisis has left them ill equipped to do so. Instead, it appears that they will act to prop up the budget bottom line rather than the State’s economy. If that’s the case, it will be another victory for short sighted thinking over the long term prosperity of the State.