IT WAS a refreshing invitation. Microsoft founder Bill Gates said that if governments wanted to tax multi-nationals more, they should “change the rules” and do so. But that is easier said than done. And when you look at corporate tax over the past decade you see just what a hard time Labor has had compared to the easy run that the Howard Government had. But more of that anon.
Those “rules” to which Gates refers to, now run to 11 volumes, but no-one in their right mind would print them out.
It has got like this because generations of lawyers, income tax advisers and corporations have used increasingly complex structures and transactions to remove money coming in from any possibility that it could be described as “assessable income” under the numerous provisions of the Income Tax Assessment Act.
And by-and-large the judges have gone along with these games.
They would agree with Gates when he said, “In a system of laws it is very important that if you follow the laws. You do not have some second standard. This is not a morality thing. This is about the law.”
“Companies should not give away shareholders’ money unless the law required it,” he said.
In a way he is right. It is a pity, though, the judges have become so literal in the interpretation of the law that the legislature and tax administrators have had to resort to ever more complicated wording to close each loophole as it appears.
We have been doing this for more than 40 years. The result has been sections of the Tax Act that read like this:
“The amount included in your assessable income under subsection 45.5(2) or 45.10(2) is reduced if: (a) you acquired the plant at or before 11.45 am, by legal time in the Australian Capital Territory, on 21 September 1999 and you disposed of the plant or an interest in it after that time; and (b) the sum of the amounts (your proceeds) referred to in paragraph 45.5(1)(e) or 45.10(1)(f) . . . . .” Need I go on?
Yep, that is a purely randomly grabbed section of the Income Tax Assessment Act and there are hundreds of others like it. What help would it be to change that rule?
The more the rules are changed, widened, tightened and clarified, the more corporations create trusts, subsidiaries, overseas entities, and complicated transactions to get around them.
The Microsoft story illustrates the point. (And the US suffers the same tax problems as Australia.) Gates said he has paid $6 billion in taxes in his lifetime. It sounds like a lot, but it is less than 10 per cent of his present fortune of $68 billion and less if you add the $28 billion he has made and given away.
Most wage slaves would pay a higher percentage of tax than that on their life’s income, let alone their next wealth.
Gates says he has got good service for his $6 billion. Indeed, he has. His company Microsoft could not have made its wealth without using vast amounts of government-provided infrastructure.
So what is to be done, if we cannot simply “change the rules”?
Well, since 2000, the private sector in Australia has proven to be singularly more ept at gathering tax than the Government. In 2000, the private sector was essentially given the task of collecting the GST. It is a gem of a tax – a clean 10 per cent off the top.
It took a short time to settle in, but the most recent ABS table tells the story, and it incidentally tells what a hard time Labor has had with revenue compared to the Howard Government.
We will take two periods: 2002-3 to 2007-8 (Howard years) and 2007-8 to 2011-12 (Labor years)
Corporate tax doubled in the Howard years and was flat under Labor. In the Howard years company tax rose steadily from $38.5 billion to $78.5 billion. Then it collapsed to a low of $60 billion in 2009-10 and has still not recovered to its 2007-8 level.
In short, Howard had rivers of revenue with which to portray himself as the great financial oarsman. Labor has had to battle against the current.
Income tax rose 36 per cent in the Howard years and just 21 per cent under Labor. The GST rose 42 per cent under Howard and just 10 per cent under Labor.
Labor has copped higher expectations and falling revenue growth while Howard could dispense largesse to the voters every year.
But overall, the GST was the winner on the revenue front. It rose steadily in all but one year, and rose by more than income tax or corporate tax over the whole period.
The GST is by far the most resilient tax and the most efficiently gathered. Small wonder Tony Abbott wants to widen and raise it.
It would be a good thing, too. And now one of the richest men in the world has invited us to do precisely that.
The GST is the one way to force the wealthy to pay tax. If they want to enjoy their wealth they must pay it and it is collected at the point of transaction so there is no escaping it.
Why waste our time changing the income-tax rules if they can be just walked around?
Incidentally, for all the squeals about falling revenues, revenue is not falling, only the rate of growth of revenue is falling. Commonwealth revenue has gone up 61 per cent since 2002-3. Adjusted for population (15 per cent) and CPI (30 per cent), it still means it rose higher than the rise in income per person of 15 per cent.
So if you think the government is still taking an ever-growing share of national wealth, you would be right. The only question is: are they spending it wisely.
Finally, whatever one might think about Bill Gates’s views on tax or the quality of his software, he and his wife, Melinda, have done terrific work on overseas aid.
CRISPIN HULL
This article first appeared in The Canberra Times on 1 June 2013.
As a retired accountant who spent a few years doing tax returns, I reluctantly must agree with you about income tax. One wonders how much the judicial attitudes to tax avoidance are influenced by the fact that judges are drawn from a section of society where high incomes are the norm and therefore schemes to minimise tax have some appeal.
The GST is efficient (but not entirely unavoidable – people don’t always act in the way economists think they “should” and the black economy is till out there) but it is inherently highly regressive requiring considerable compensation for low income recipients, which I suspect is a cause of some of the “excessive” increase in government outlays.