More Well Thought Out Economic Policy From The Greens

Bob Brown and the Greens have made yet another ill thought out venture into the economic policy debate, this time suggesting lowering the corporate tax rate for small and medium enterprises (SME).

All sounds quite reasonable at first: help small businesses invest in capital expenditure and staff by cutting their taxes, while making big corporations pay more … until you think through how the policy could actually be implemented.

We can and should have progressive tax rates for individuals. This works because each person has (legally) one tax file number.

However, the relationship between companies and individuals is many to many. Companies can and usually do have multiple shareholders and directors. Many people are shareholders and directors of multiple companies.

Suppose company tax rates are structured so that the first $100,000 or $1,000,000 of profit attracts a 25% tax rate, with 30% tax on all profit after that. The tax minimization strategy available to many is to split into multiple incorporations, each qualifying for SME tax status. A company earning 5 times the profit threshold could split into 5 ACNs and reduce its tax rate from 29% to 25%. Sophisticated accounting could probably reduce this further.

This is clearly against the spirit of the proposed tax changes, but not actually illegal. How do you make it illegal in practice?

Outlaw people being directors or shareholders of more than one company in the same industry subgroup? Outlaw it if the companies had the same registered or business address?

Either would be an outrageous violation of economic liberty. Why should a citizen not be allowed to own shares in or be a director of more than one travel or real estate agent or clothes shop?

Oh well, if they really were separate business on separate premises, that would be OK. Allright then, I’ll just register my 5 companies at separate addresses. How would the tax office know the difference?

If more sophisticated manoeuvering were required, a company with 5 directors and shareholders could split into 5 entities, each with one director and shareholder and a (secret) side agreement. This is illegal because it is a conspiracy to defraud the ATO, but how would it be proven, particularly if the shareholders were family members?

Imagine the tortuous set of rules and the Byzantine bureaucracy which would be required to ensure compliance with the intentions of such a system. But then, tying everyone up with countless rules, creating enormous bureaucracies and then berating those who fight against them as selfish, redneck, buccaneer capitalists is standard practice for the left.

The Greens' response to the above would probably be to say: "Oh yes, but people shouldn't do that and would be prosecuted if they did."

Yeah, OK ... We'll just make policy on the basis of how people should behave in the leftists' fairytale world of "moral, socially aware" people (or their definition thereof). Let's not worry about the costs and logistical nightmare of enforcement in the real world. We'll change people's behaviour with propaganda directed at their children.

This is typical of the Greens, particularly when they hold forth on economic issues. All touchy feely and would be nice if people and the world were different, but totally infeasible to implement in practice. They have not even given the logistical issues one iota of meaningful consideration, perhaps because their grasp of economics is so limited, they simply were not aware of them. They even make Wayne Swan look halfway competent.

There is nothing wrong with singling out very large corporations from particular industries, such as banking and mining and making them pay higher tax rates to support the security of the environment which allows them to post record profits.

There already exists a Petroleum Resources Rent Tax, levied on the principle that the oil companies are lessees of the land from which they are extracting a finite resource, which is still owned by the Commonwealth of Australia (as it is the lessor).

We could already have a mining rent tax along the same principles, had it not been so poorly handled by this government.

Extra taxes on the big banks (which most citizens support) are possible, via a range of measures: increasing the tax rate just for them, increasing banking licence fees, increasing compulsory funding of the prudential regulator, or requiring a minimum percentage of bank capital to be invested in low interest, Federal government bonds.

This last provision could be quite lucrative in terms of tax revenue: if 10% of bank capital was required to be held in government bonds which paid 1% less than the government's normal cost of funds, CBA and Westpac would effectively each be paying $40M extra in tax per year.

That doesn’t sound like much, but a 1% increase in the tax rate for banks would only translate into approximately the same amount of extra revenue. Additionally, it allows the government to borrow cheaply and forces a certain percentage of bank capital to be invested securely.

Measures such as increasing the insurance premium for government guarantees of bank deposits are bad policy because this ends up being a tax on all of us, as costs are passed through via lower deposit or higher lending interest rates.

The compulsory investment of bank capital in government bonds does not increase banks’ cost of funds, but does decrease revenue, although so does an increase in tax rates. Both will have a tendency to increase lending interest rates in the absence of regulation.

Of course, if the Howard government had kept 51% of the CBA, it would add a lever with which to control fees, deposit and lending interest rates via competition, as well as earning a nice dividend each year and we probably would not be having the conversation about exorbitant bank profits.

So, good work Bob! More quality economic policy from the Greens.

If you want to talk about economic issues, stick to advocating government investment in green technologies which will create revenue and jobs. There is no reason why governments should not attempt to pick winners by taking equity stakes in local solar panel manufacturers or geothermal power start ups like Geodynamics.

Tilt the playing field by adding a tariff proportional to the gap in efficiency between locally made cells and imported ones, or on the cost of CO₂ involved in transporting them here. Allow a higher renewable energy certificate multiplier on locally manufactured solar systems. Maybe then Silex wouldn’t have had to close its solar panel plant, costing 100 jobs.