25 Oct 2012

Big Business Ducks Reform

By Ben Eltham

Our business leaders are always calling for leadership and comprehensive reform but they go weak at the knees when it's time to make decisions? Ben Eltham on why business can't be trusted on tax reform

For an elite class that likes to go on a lot about "leadership", we don't see a lot of it from our business leaders.

Leadership is the stock-and-trade of corporate retreats, of management seminars, and in the coursework of MBA degrees. But if we define leadership as working for something larger than the pursuit of shareholder value, true leadership in the Australian business sector is pretty thin on the ground.

For those who doubt me, behold the leadership deficit in the current round of Annual General Meetings being held around the country. The boards of company after company are being hauled over the coals by angry shareholders, incredulous at the rewards heaped upon executives and directors who have presided over the wholesale destruction of the value of their stocks.

Take Fairfax Media, for instance, where chairman Roger Corbett has seen the company's shares lose more than 90 per cent of their value. During this time, his pay as the chairman has actually been going up. Not surprisingly, more than a third of Fairfax Media's shareholders voted against the board's remuneration report  — giving it a "strike" under the government's two strike laws that see a compulsory spill of all board positions in a company which twice records a 25 per cent "no" vote.

There's plenty of richly-rewarded corporate underperformance to go around this AGM season, from BlueScope Steel (which handed out a $750,000 bonus to its CEO Paul O'Malley last year, only months before it recorded a $1 billion loss) to Billabong, Perpetual, Pacific Brands, Cabcharge and Crown.

But if you really want to see the dearth of corporate leadership in this country, look no further than the Business Tax Working Group.

Set up a year ago by Treasurer Wayne Swan, the Working Group was composed of key business lobbyists such as Jennifer Westacott and Peter Burn, and was chaired by top KPMG accountant Chris Jordan. Its task was to figure out a way to lower company tax rates in Australia, by reducing the special tax breaks and other loopholes.

"The working group will look at reforms that can increase productivity and deliver tax relief to struggling businesses in our patchwork economy and develop a set of savings options within business tax, such as broadening the base and addressing loopholes or unnecessary concessions," Swan announced in October 2011.

Last night, the Business Tax Working Group issued its draft final report. Could Australia's company tax rates be lowered, by broadening the base and removing various exemptions?

No. "The Working Group has made a number of findings but is unable to recommend a revenue neutral package to lower the company tax rate," it concluded. After meeting for a year and taking more than 80 submissions, it couldn't come up with a way to reduce company tax while making sure that just as much revenue flowed to the Commonwealth. In one of the understatements of the year, the draft final report observed that "there was not agreement in the business community to broaden the business tax base to fund a cut in the company tax rate at this time."

The conclusion will come as no surprise. Right from the beginning, business leaders were opposed to the fundamental conceit of the Working Group: revenue neutrality. The Business Council of Australia, which represents Australia's largest corporations, even put in a submission to this effect.

Given that the BCA's Westacott was on the Working Group, you'd imagine this submission got a pretty good hearing. "The revenue needed for a material company tax rate cut can't be found through other business tax changes without very deep impacts on some companies and sectors," she said in a BCA media release back in September.

It takes a special type of chutzpah to argue that the rest of society should pay for business tax cuts. But that's what the Business Council is saying. By rejecting the possibility of finding the revenue for reducing the overall rate by getting rid of special industry perks and exemptions, the BCA is effectively arguing that business tax cuts should be financed by higher taxes for workers and consumers, or by more government borrowing, or by cuts to government services for everyone.

It's important to note that there are sound economic arguments in favour of lower company tax rates. Lower business taxes help business make better returns on investments, and those returns are eventually shared between workers and shareholders. As a result, GDP grows, and so do wages. Given this imperative, cutting company tax rates counts as sensible economic reform.

But, as the Working Group itself notes, company taxes have already been lowered significantly in recent decades, and the base has been broadened. The chart below, from the Working Group's final paper, shows what has occurred. Tax rates have fallen from nearly 50 per cent in the 1980s to 30 per cent today, as this chart shows.

Despite the broadening of the company tax base, there are still plenty of distortions and loopholes out there. The Working Group wasn't even allowed to examine some of the more controversial tax breaks, such as negative gearing for investment properties, capital gains tax exemptions on the family home, the astonishing tax rort of self-managed superannuation funds, or the diesel fuel rebate for big mining companies — just to name four.

Instead, the Working Group confined itself to three pretty sensible areas for reform. These were reforms to the tax deductibility of business debt, capital depreciation write-offs, and research and development tax refunds. All three are essentially technical quirks in the tax law that give billions in deductions and write-offs to mainly big, multi-national corporations.

The tax deductibility of interest payments, for instance, allows companies to load themselves up with huge amounts of debt, that they can then gain a tax deduction for. This not only encourages excessive risk-taking in the mould of Centro or Babcock and Brown, it also distorts investment priorities away from other forms of capital, such as equity.

Capital depreciation write-offs are another big rort loved by the mining industry. Under current rules, any piece of equipment used in exploration or prospecting can be immediately written off, for a tax advantage. Under the current "first-use" provisions, this deduction occurs even if the asset involved — such a drilling rig — is used first for exploration, and then later used for actual production In other words, mining companies can get an immediate deduction for assets they end up using for many years to produce resources. The Working Group estimates that removing this loophole would raise around $900 million a year.

Then there's the research and development tax offset. This tax refund gives companies investing in eligible research and innovation activities a tax payment equal to 10 per cent of their investment (pdf) — even if the R&D is activity they would have undertaken anyway. This is another disguised tax break for the mining sector, as much of the money the taxpayer gives out with this incentive goes to the big mining companies. The Working Group estimates that by putting a $20 billion cap on company eligibility — in other words, excluding the big three mining companies from getting the R&D offset — $200 million a year could be saved. Do you think BHP Billiton needs a taxpayer subsidy to do mining research? No, me neither.

You can debate the merits of each of these proposals at length, of course, but what they collectively show is that it's not hard to find loopholes and tax breaks worth billions of dollars a year. In principle, it should be relatively easy to fund the savings required to deliver the approximately $5 billion a year the Working Group says will be required to lower the company tax rate to 27 per cent — the level it says will be required to make a meaningful impact.

The problem is that business in this country isn't serious about meaningful tax reform. If it comes to a choice between the special interests of their own industry protections and loopholes, versus the general interest of the Australian community, business leaders take their own special interest every time.

We've been here before. The Henry Tax Review recommended a reduction in company tax rates down to 25 per cent, funded by a broad-based series of tax reforms, including increased land taxes and more taxes on non-renewable resources. The latter idea was taken up Kevin Rudd and Wayne Swan in their ill-fated proposal for a Resource Super-Profits Tax. Of course, we know how the mining industry responded to that idea.

As a result of the highly effective campaign against the RSPT — a campaign which went a long way towards dynamiting what was left of Kevin Rudd's support amongst Labor backbenchers — the incoming Gillard administration negotiated a watered-down mining tax with the big mining companies, the Minerals Resource Rent Tax. The MRRT is levied at a lower rate, covers fewer minerals, and collects much less revenue than the RSPT would have.

Almost no revenue at all, in fact. The September quarter this year is the first that the MRRT has been in operation. No tax was collected via the MRRT. Not a cent.

The MRRT debacle shows why business leaders can't be trusted to help draft business taxes. Business leaders in this country like the BCA's Tony Shepherd claim they want "comprehensive tax reform". But what they really want are lower business taxes, and to keep their own special tax breaks as well.

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Dr Dog
Posted Friday, October 26, 2012 - 09:14

In other news the bears I asked to look after my picnic basket ate all my sandwiches!

K Brown
Posted Sunday, October 28, 2012 - 21:28

Principle and leadership is required on this issue. John Howard delivered when the LNP reduced company tax from 33 to 30%. Wayne Swan is gutless. Over the last 4 years his "tough" budget decisions have been universally derided. Don't hold your breath for him to take action on this matter. He is useless.