Treasurer Peter Costello, in the tax-purists corner, is shaping up against Primary Industries Minister John Anderson in the use-tax-for-a-purpose corner.
And the good old PAYE taxpayer is likely to cop some unintended hits – as usual.
Last week’s Ralph report on business tax suggested that company tax be cut from 36 per cent to 30 per cent but in return business would lose the benefit of accelerated depreciation.
In theory this would about balance out.
What exactly is accelerated depreciation?
Depreciation is a tax allowance for the falling values of capital assets, like plant and equipment. The theory is that you get a tax deduction for the value over the economic life of the asset. The Tax Commissioner sets what is a reasonable life of an asset or class of assets.
Accelerated depreciation is where you get tax deductions for the value of the asset more quickly that the real value of the asset declines. This happened in 1992 when the Parliament changed the tax rules. It said anything with an economic life of less than three years could be depreciated in one hit in the first year. So you could deduct most computers in one year. Anything under $300 could be deducted in the first year whatever the length of its economic life. Various other items could be deducted early, so a printing press expected to last 30 years could be written off in nine years.
Ultimately, you can only write off the value of the equipment, no more. And if you sell the equipment (or get an insurance pay-out for its loss) for more than its written-down value, the difference becomes assessable income.
In effect, all the Government gives you is an early rebate. Its value is only the equivalent of the interest on the value of the early deduction.
In times of low inflation and low interest rates, accelerated depreciation has less value than in times of high interest rates.
If the trade-off of rates for accelerated income goes ahead, there will be some fall-out depending on which items are included.
The biggest squeal will come from the 530,000 personal taxpayers who claim depreciation of $1.3 billion a year. They won’t see a cracker of the planned reduction in company tax.
Similarly for partnerships and sole traders. Family businesses which are not incorporated will not get and benefit from the reduction in the corporate tax rate but will lose the benefit of accelerated depreciation. (Funny that, from a pro-family pro-small-business government.)
A big squeal will come from manufacturers, miners and primary producers who use a lot of capital items.
On the other hand, service industries, which don’t use much capital will be delighted.
The lessons here are that any proposed change in the tax system causes winners and losers both up front and among people the government never thought of. The tax system is like a computer network. Fix one thing and create a whole lot of other problems.
Anderson, who represents a lot of primary producers, and presumably a lot of individual and family farmers, is therefore treating the plan with scepticism.
Costello, on the other hand, understands the need for Australia to mesh with other economies and for the tax regime to encourage the new service and knowledge industries. He is so like Keating, isn’t he. Keating floated the dollar, reduced tariffs and deregulated the financial industry on the same basis.
Costello’s position is more intellectually respectable, though more politically difficult.
It is better to use tax as a fairly neutral mechanism for raising revenue. You then apply the revenue to various social and economic ends for the good of the people (and to get re-elected). The trouble is that for centuries governments have used the tax system to do more than raise revenue. They have recognised that people do not like paying tax and will, where possible, avoid activities that attract it. Similarly governments have offered tax holidays and tax deductions for various activities they think are in the national good: to invest in mining, agriculture, the outback, films and so on.
The purists regard these things as business welfare. If there is to be a hand-out it should be stated as such in the Budget papers.
The trouble is, once free milk starts, there is a lot of squealing when it is taken away. Moreover, those on the winning side are not equally as vociferous in their support. Future gain is often seen as problematic whereas present pain is real.
Experience confirms this, so Costello will have a hard task.
It may be better intellectually to have lots broad-based taxes all at evenly fairly low rates (say 25 per cent for income, company tax, capital-gains tax and the goods and services tax). This provides no incentive for income shifting, less incentive for avoidance, and administrative efficiency.
The trouble is that the inevitable losers in this arrangement will take a lot of convincing that governments will compensate them adequately.
The farmer is more likely to be happier sitting on his combine harvester with the deduction in his pocket than waiting next year for a reduction in company tax or for overall government assistance to agriculture.
And on this one, the possible fall-out on PAYE taxpayers will make change even more difficult.