We now know why John Hewson has been so determined on the goods-and-services tax. He has been to Damascus and back.
A biography of Dr Hewson by Christine Wallace published last week tells us how Dr Hewson arranged his tax affairs while a consultant in 1985.
Dr Hewson’s tax arrangements, though perfectly legal, were a bit more complicated than a straight real-estate investment with negative gearing.
The normal mug struggles to buy a house and slowly pays it off over a lifetime. Though he lives in it, it is still his life’s investment. None the less, every time a plumber is called of a coat of paint goes on, he pays for it out of hard-earned after-tax income.
Others get slightly higher incomes. They are not complete mugs, but they are not yet in the Hewson league. They pay their first house off quickly then borrow money against it to invest in a second house. All the money borrowed is tax deductible and off-set against their wage-slave income. This is called negative gearing. Every time a plumber is called or a coat of paint goes on the investment house it, too, is tax deductible. However, the remaining wage-slave income is taxed at normal personal-tax rates _ 48{ per cent at the margin and perhaps an average of 30 per cent.
Then you get into the Hewson league. You form a company (or buy a $2 company) to own the investment house and to employ yourself. At the time Dr Hewson was a consultant to several banks. His company, Brintmar Holdings Pty Ltd, employed him and sold his services to the banks. He also sold his second house, mortgaged to one of those banks, to the company. In one swoop you have a consulting/investing company, with its income tax being paid at the lower company rate. After out-goings the tax rate can be as low as 15 per cent.
Mugs and mid-range mugs can’t do that. First, their employers often do not want to hire them as consultants. They are employed as employees and tax is taken out as they earn _ PAYE. Secondly, the up-front costs of setting up a company and transferring titles makes the exercise too expensive if you are dealing with small-beer property and small-beer income.
So, when John Hewson was out on the road to Damascus he was blinded by the simplicity of tax-minimisation schemes. Remember this was long after the tax-scheme-supporting Sir Garfield Barwick had left the High Court and after John Howard as Treasured had made large in-roads into tax avoidance schemes. Tax minimisation is still alive and well. To be fair, Hewson’s scheme was not overly artful and a fairly obvious thing to do given the state of Australia’s tax law.
The sad thing is that it is still the case in Australia that quite elementary and legal changes to a tax-payer’s affairs can dramatically reduce tax. Moreover, many of these scheme involve unproductive “”investment” in real estate, usually established real estate in the main capitals. They rarely involve productive, risk investment in inventions and manufacturing. (See the article on negative gearing in today’s finance pages, for example.)
Having discovered the ease of tax minimisation and its appalling effect on Australia’s productive effort, Hewson was converted to fundamentally changing the tax system.
Christine Wallace ably described Hewson’s conversion from Baptism to economic rationalism, however, his conversion over tax policy is perhaps of greater import in this election campaign.
Hewson wants to lower income tax and raise a consumption tax. He firmly believes this will help Australia’s productive effort. And he knows why. He knows where the bodies are buried. He knows why the present set-up is so unfair and why it supports unproductive pursuits _ because that’s what he did.
Why invest in producing exportable innovative widgets when one can invest in existing housing and reduce your income tax bill? Why invest in fixed-tem deposits when the earnings will be taxed at high marginal rates? Why pay high marginal rates in the first place when through borrowings and companies you can reduce your tax liability?
Looking again at the original Fightback after the revelations about Hewson’s tax arrangements, Hewson’s conversion is seen more clearly. After a short introduction, the very first words of Fightback are: “”The current tax system is unfair.” Who better to tell us than Dr Hewson?
Fightback goes on to say the present system “”has worked to the benefit of the rich at the expense of the great majority” and that it “”invites avoidance”.
This is true. The 193 three people who earned more than $1 million a year in 1990-91 averaged an effective tax rate of 26 per cent. At a marginal rate of 48{ per cent after the first $50,000, there is clearly something wrong here.
Dr Hewson is right. The only way to make these people pay more tax is to tax consumption. If they want to enjoy their $1 million a year they will have to pay at least $150,000 in tax and then pay some unavoidable income tax to bring their marginal rate up to something like the rate you and I pay. The pity is that Dr Hewson relented on food. Lavish parties require a lot of food. Better to tax it all and compensate the low-income earners, but the churches who forced Dr Hewson to back down were too naive to realise that.
Fightback recognises the need to reduce “”investment” in old housing stock and increase investment in productive endeavours. Rationalising the tax system and lower personal tax is the way to do it.
Part of that rationalisation, according to Fightback, is to “”increase the corporate tax rate to align it with the top marginal personal income tax rate, and thus eliminate tax avoidance through incorporatisation.” And who better to tell us about this than Dr Hewson?
Dr Hewson, or anyone else for that matter, is perfectly entitled to use the taxation, company and real-estate laws to minimise the incidence of taxation. This is tax avoidance, and it is legal. Tax evasion, where misinformation is given to tax authorities to get out of tax due, however, is illegal. The real point, however, is why does Australian law still defeat productive investment with defective tax laws. We are indebted to Dr Hewson for illustrating that point.
In the meantime, the Australian electorate is despairing that this election campaign is descending to the gutter. When the Prime Minister, Paul Keating, latched on to Christine Wallace’s revelation this week, the Opposition immediately came back with a reference to Mr Keating’s investment in the piggery.
There is now a hint that Parliament may sit next month, before the election is called, so the Government can exploit the revelations.
Good. Now that the piggery and Brintmar have had a partial airing, the Australian people are entitled to no the full details. Given Mr Keating has slapped a writ on Senator Michael Baume for comments Baume made on Melbourne radio, the only way we will get a real airing is under parliamentary privilege.
During this airing ordinary wage-earning Australians who are paying quite large marginal tax rates with few deductions will get an insight into the corporate world. We might get some details of exactly how much tax Dr Hewson paid on what income in the mid-1980s. And the Opposition might be courageous enough to ask some questions about Mr Keating’s piggery in the House of Representatives where he can respond, instead of in the Senate, where he can’t.
Specifically, it might ask how is it that the publicly available accounts of Euphron Pty Ltd, a company half-owned by Mr Keating and his family, show an increase in the Keatings’ share-holder equity from 430,100 to $4.2 million in less than a year. Was that gain a real one? If it was, will tax be paid on it? If it was only a paper gain, what purpose was there in doing the accounts like that?
These matters should not be dismissed as muck-raking or descending into the gutter. Rather they are capable of revealing fundamental questions of how Australia is taxed and how it invests, and they should reveal the financial background and perspicacity of the two men vying for the position that can change those things to make Australia a fairer more productive place.