Wednesday, May 26, 2010

How much tax?

Ian McIlwraith has dug where the Treasury appears not to:

"IF THE Treasury analysis of corporate tax, released by Treasurer Wayne Swan and recommended by Prime Minister Kevin Rudd, is an example of the quality of that department's work generally - we're in deep trouble.

After a heated 48-hour exchange of statistical fire, in which two US academics became collateral damage because their research was used as a weapon it was never designed to be, Rudd and Swan's army retreated to what it thought was higher ground, firing off a soon-to-be-published piece of Treasury research.

Keeping in mind that it was Treasury head Ken Henry and his people who reviewed the entire tax system, out of which review the government is implementing a minuscule percentage of recommendations, and that the consultative committee on the resource tax is also headed by a Treasury official - a lot of Australia's economic future is being gambled on the know-how in that department.

Yet the paper released on Monday is both out of date and superficial....
It uses the Australian Tax Office's 2004-05 statistics on the cash it collected. To be fair to Treasury, the ATO's publication is always late because of the lagged effect in processing returns - but not that delayed. The ATO statistics for the year 2007-08 were released in March. That seems ample time for Treasury to have upgraded its work - or at least to have included 2005-06 and 2006-07 figures.

While Treasury printed its usual disclaimer, that the opinions are the authors' and not necessarily the department's, the questions provoked by the article are not so much about opinion as quality - and government judgment in seizing on more so-called empirical evidence that is demonstrably thin.

Why, in 2010, it seems remarkable to the researchers that, in spite of a single corporate tax of 30 per cent, average tax rates vary across different industries is a mystery. For decades governments have introduced policies that slanted in favour of whatever industry they felt needed encouragement or protection. Which has meant a company's capacity to claim a tax offset varies depending on their business.

Had Treasury used the most recent ATO statistics, they might have produced a more fascinating insight into a corporate tax system that has far more problems than miners not being charged enough to make money out of mineral resources that belong to everybody (and not just the states in which they reside).

According to the ATO, companies generated $2264.23 billion of income in that financial year, yet barely 12 per cent of that ($235.59 billion) stuck to the sides as ''taxable income''. Out of that, only $57.85 billion in tax was paid by companies, so their average rate of tax was 24.5 per cent. They should have paid more than $70 billion.

Mining's contribution was $8.07 billion in tax on $29.01 billion of taxable income - or 27.8 per cent. The percentage of total mining industry income regarded as taxable was 18 per cent, well above the average for all industries.

Australian Bureau of Statistics figures of gross operating profits that year have Australian companies earning $215.98 billion, of which the miners made $77.69 billion - which is 36 per cent.

There is an undeniable discrepancy between the mining industry's share of gross profits (36 per cent) and its share of total tax paid (28 per cent).

The real problem is that companies were able to claim $12.3 billion of taxable losses that year (of which the $1.7 billion claimed by miners was comparatively underweight). On that evidence, dropping the corporate rate to 28 per cent is a little like lowering your expectations after years of failing to clear the bar.

That says that the current tax regime is very inefficient in converting company income into tax receipts - something Henry's review was supposed to fix, and it is difficult to see why dropping the corporate tax rate to 28 per cent will fix it.

Related Posts

. The Treasury strikes back - Disparities in Average Tax Rates

. Does Australia rely too heavily on mining taxes?

. Earn $25,000 tax-free. You would in Henry's fast-fading world

. It's the Tax Stats - love them, get lost in them, have fun.