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Drip-Fed Economies Die

Drip-Fed Economies Die

It’s a bloody disgrace! It’s un-Australian and it’s nothing more than stealing from your own neighbour.

Finally, The Australian Financial Review, who received 28,000 pages of leaked tax information, forwarded it to ATO Commissioner Chris Jordan. The information reveals how 343 local and foreign companies used accounting firm PwC to slash their tax bills through total swap returns, royalty payments, hybrid debt structures and secret deals with tax havens like Luxembourg.

Neither the AFR nor Montgomery implies that any illegal activity has occurred, but these companies and their advisers should hang their heads in shame for ripping off the Australian economy and its constituents by reducing the funding available for better health services, better schools for our children and better infrastructure for our economy.

According to the AFR, “the ability to move profits around the world purely by paperwork in return for what seems a minor fee to Luxemburg is a recurrent feature in the leaked tax agreements.”

Well, if chasing profits around the world is too hard and complicated to police, simply tax the revenue of these companies and don’t rely on them to tell you what their revenue was, and co-opt the data of the companies that facilitate the payments for their products and services – the banks, credit card and online payment facilitators.

A move to taxing revenue would also result in a better overall allocation of capital to those ventures that produce the highest returns.

It’s pretty simple; if you receive revenue from selling a product in Australia and/or selling it to an Australian, a portion of that revenue must be retained in Australia as tax. One suspects it would render profit shifting and transfer pricing impotent.

And, of course; the same intense spotlight now being applied to profit shifting and tax havens needs to be directed to those operators who start companies, rack them up with debts owed to suppliers for services rendered and then put them into receivership or liquidation, only to re-emerge under another entity to do it all again. In other countries such operators would be taken out the back and shot. To these people I say; Ripping off your neighbour denies them the liberties you yourself abuse. If you engage in such activities, your liberties should be taken away just as you have taken them from those who served you.

Australia is struggling competitively; we need to ensure there are no more leaks. Clean it up Joe, even if some of the people you thought were your mates are involved!

 

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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12 Comments

  1. What Is a “Loophole”?

    It is instructive to pause for a moment to examine the pejorative term
    “loophole.” What is a “loophole,” anyway? It is never defined, but the flat-
    taxers seem to make the implicit assumption that the government really
    owns, or should be owning, all of what everyone makes, at least up to some
    arbitrary percentage decided by the government. Hence, any failure of
    government to confiscate everyone’s property up to that amount is somehow
    a moral blot that needs to be rectified. But to me it is far from self-evident
    that the government, rather than we ourselves, should have the primary right
    to our own earnings.

    The “closing of loopholes” under a flat tax will mean a merciless and
    continuing search-and-destroy mission by which the government will root
    out and obliterate every little hideyhole in which many of us have been able
    to squirrel away a bit of our own earnings and our own property, and keep
    them safe from the ever-expanding maw of the federal government.

    Corporations

    But if, in the famous Milton Friedman formula, TANSTAAFL (there ain’t
    no such thing as a free lunch), then we can also add the term TANSTAAC
    (there ain’t no such thing as a “corporation”). There is no existing entity
    called a “corporation” that feels, works, thinks, earns income, and then
    enjoys that income. A “corporation” is only a label for individuals who
    organize themselves, and hope to earn income, in certain ways. There is no
    income-earning thing called a “corporation” that exists and earns income
    above and beyond the people, that is, the stockholder-owners, who constitute
    that corporation. Therefore, a tax on corporate income is an unjust and
    “unfair” (if I may use that term) double tax on the same income, as well as a
    tax hitting at savings and investment. Instead of raising income tax rates on
    corporations, as the Treasury plan and the flat-taxers would do, we should
    move in the other direction, end double taxation, and cut the corporate tax to
    zero. Stockholders should be taxed just once, on the income they
    individually earn from the corporate form.

    TANSTAAFT (“there ain’t no such thing as
    a fair tax”). Conservative flat-taxers like to analogize to the free market, and
    maintain that they are trying to achieve neutrality to the market. But
    consider: what in the world is a “fair” price on the market?

    Many medieval economists came to grief on this issue. What is the “fair
    price,” for example, of Wonder Bread? Who knows? For my part, as a
    Wonder Bread consumer, I’d love to see the price down to about a penny a
    loaf, and the Wonder Bread Company would undoubtedly love to be able to
    charge $100 a loaf. As it is, after the higgling and haggling of the market, we
    all settle for about one dollar a loaf. There seems to be no sense to the
    concept of fairness in price except what is arrived at, from day to day, as the
    result of voluntary transactions on the market.

    But what of taxation? Unfortunately, we can’t even apply the voluntary
    transaction criterion here, because by its very nature, taxation is coercive,
    and is not arrived at by the voluntary bargaining of individuals on the
    market. So what then is a “fair” tax? I submit that the concept simply doesn’t
    apply.

    All I know is that, as a taxpayer, I would like my taxes to be as low as
    possible. I suggest, then, that we cease the impossible quest for fairness in
    taxation, and try to arrive at taxes as low as possible. For whom? For
    everyone.

    One of my favorite economists, the 19th-century Frenchman, J. B. Say,
    after pointing out that taxation is a coercive transfer from individuals and
    groups to the government, crippling their ability to produce and consume,
    concluded:

    “The best scheme of finance is to spend as little as possible; and the best
    tax is always the lightest.” In short, to paraphrase Jefferson, “That
    government is best which spends and taxes least.”

    Instead of worrying about distributing taxes “fairly,” or what is supposed
    to amount to the same thing, allocating tax suffering equally, we should set
    about trying to minimize tax suffering as much as we can down the line. And
    if we approach the problem that way, we should find it easier to gain broad
    agreement. Rather than trying to figure out whether a proportional,
    degressive, regressive, or progressive income tax structure is “fairest,” we
    may find we can agree on reducing the tax burden of everyone.

    Thus, let us compare two hypothetical tax systems. In system A, there is a
    progressive income tax, ranging from one to ten percent. In system B,
    everyone pays a flat, strictly proportional income tax, of 20%. I have a
    hunch that, in choosing between these systems, even the upper-income
    groups would opt for the far more progressive, but much lower tax burden.
    The central point is the lowness of each tax, rather than the distribution of
    the burden.

    People are, or should be, interested in lowering their own tax burden rather
    than enviously trying to aggravate the burdens of other people. And here is a
    genuine basis for solidarity among taxpayers of all groups and sizes. The
    point, then, is not that “they”—whoever “they” are—are paying too little
    taxes and should be brought to heel, The point is that all of us are paying too
    much. The flat-tax movement is part of a process by which the government
    and its allies have been able to split and deflect the tax protest movement
    from trying to lower the taxes of everyone, into trying to force everyone into
    paying some arbitrarily defined “fair share.”

    The Case Against the Flat Tax by Murray Rothbard

  2. “Of course I am minimising my tax. And if anybody in this country doesn’t minimise their tax, they want their heads read, because as a government, I can tell you you’re not spending it that well that we should be donating extra!”
    Kerry Packer

    Rather than more regulation maybe we should be trying to be more competitive, encourage more entrepreneurs who build business could solve the problems of better health education etc???.. Just a thought.

    Got no arguements with the second part though, The sanctity of the contract is most important concept of capitalism.

    • Of course you should minimise your tax within the law. That intent of that law however is being usurped by modern globalisation. You will read a lot here at the blog on how we could me more competitive. Just type “tax” into the search bar on the home page of this blog site. One solution is to charge no tax for a holiday period for start ups…The big problem however is that the government cannot afford to do that when large global companies are not paying the government what the government is due.

      • “when large global companies are not paying the government what the government is due.”

        reprinted in Chodorov, Out of Step
        (New York: Devin-Adair, 1962), pp. 216–39. As Chodorov says:
        A historical study of taxation leads inevitably to loot, trib-
        ute, ransom—the economic purpose of conquest. The
        barons who put up toll-gates along the Rhine were tax-
        gatherers. So were the gangs who “protected,” for a
        forced fee, the caravans going to market. The Danes who
        regularly invited themselves into England, and remained
        as unwanted guests until paid off, called it Dannegeld; for
        a long time that remained the basis of English property
        taxes. The conquering Romans introduced the idea that
        what they collected from subject peoples was merely just
        payment for maintaining law and order. For a long time
        the Norman conquerors collected catch-as-catch-can
        tribute from the English, but when by natural processes
        an amalgam of the two peoples resulted in a nation, the
        collections were regularized in custom and law and were
        called taxes.

        there are two groups of individuals in society: the taxpayers and
        the tax consumers—those who are burdened by taxes and those
        who benefit. Who is burdened by taxation? The direct or
        immediate answer is: those who pay taxes.

        Who benefits from taxation?
        It is clear that the primary beneficiaries are those who live full-time off the proceeds, e.g., the politicians and the bureaucracy. These are the full-time rulers.

        It should be clear that regardless of legal forms, the bureaucrats
        pay no taxes; they consume taxes.

        ( If a bureaucrat receives a salary of $5,000 a year and pays $1,000 in
        “taxes” to the government, it is quite obvious that he is simply receiving a salary of $4,000 and pays no taxes at all. The heads of the government have simply chosen a complex and misleading accounting device to make it appear that he pays taxes in the same way as any other men making the same income.)

        Additional beneficiaries of government revenue are those in society subsidized by the government; these are the part-time rulers.

        Generally, a State cannot win the passive support of a majority unless it supplements its full-time employees, i.e., its members, with subsidized adherents.

        The hiring of bureaucrats and the subsidizing of others are essential in order to win active support from a large group of the populace. Once a State can cement a large group of active adherents to its cause, it can count on the ignorance and apathy of the remainder of the public to win passive adherence from a majority and to reduce any active opposition to a bare minimum.

        Man, Economy, and State with Power and Market by MURRAY N. ROTHBARD

      • It’s a nice ideological diatribe, but it bears no resemblance to reality. Some amount of central government is necessary for society, suggesting that every individual employed by the State contributes nothing is ridiculous.

    • While I won’t pass judgement on his original intent, that statement of Kerry Packer’s has been used by all and sundry as the justification for all manner of beggar thy neighbour style behaviour when it comes to avoidance of paying tax. There never seems to be any shortage of people to come out in support of such thinking.

      It has been apparent for a long time now that it is too much too put tax laws in place and expect people to honour their intent for the sake of the greater good. To be effective against the more selfish traits of human beings, they need to be watertight and enforced ruthlessly. Unfortunately, the odds of us getting the leadership we need in this area are not good.

      • Michael Winter
        :

        “Beggar the Neighbour” is a bit harsh. Why is trying to “minimise” tax legally so evil??? How will the government spend it better than I would? If you believe they spend it so well nothing is stopping you from donating more!
        And beggaring my neighbour what rot. My “neighbour” would benefit a lot more from me not paying more taxes than they would if I gave it all to the government. Me paying $100 dollars to a charity or a neighbour in need it goes directly to that “neighbour”, $100 in taxes after it has been apportioned to the politions wages foreign wars benefits to multicorps my neighbour would be lucky to get $10.

        If my business paid less taxes then that gives me more cash to grow my business, which in turn means more jobs and more profit which ultimately mean more in taxes to the government as well, all from reducing taxes.

      • Unfortunately people are educated in the schools that Government know best what is good for you and me and that what ever Government do is in your best interest and that service they provide are better than form private organizations.

        Somehow Government is better than individual — no Vices

      • Unfortunately, many of those things are largely fixed costs – the government will pay its politicians and go to war irrespective of whether or not you pay tax, so your tax reduction only means that you contribute less to those activities rather than it meaning that you are simply more efficiently directing money to an end recipient.
        Your argument also relies on the assumption that your charity will equate to the same amount as your reduced tax, yet somehow I suspect that business tax reduction leads to much more profit retention than it leads to charity.

  3. Andrew Longden
    :

    While on the surface it appears that profit shifting conduct is grossly unfair – there is a lot of empirical work that suggests the overall impact may be positive.

    Findings include profit shifting allows companies to increase investment and employment in high-tax countries (such as Australia) that they otherwise would not make if profit shifting strategies weren’t possible. Essentially, foreign direct investment (as seen with many profit shifting strategies) is not a substitute for direct investment – rather it is a complimentary activity.

    Introducing new restrictions or taxes at a point where the global economy is fragile would be very brave and perhaps unwise.

    Why doesn’t Australia decrease the statutory corporate tax rate? There is a lot of evidence that a permanent move of this nature has a strong stimulatory effect. Tax receipts may suffer in the short term, but the country will reap the benefits pretty quickly. Over the past 30 years corporate tax receipts in Australia have risen from 2.5% to 4.4% of GDP despite the statutory tax rate falling from 45% to 30%.

    At the end of the day the government should weigh up the benefits and costs of allowing and restricting profit shifting and proceed down the most overall beneficial or least costly route.

    • Love the theory. Problem is it also entrenches monopolies and stifles start ups and competition because the government cannot of afford to support smaller business (where all big businesses started). Lowering corp tax rate for start ups at least would be a fantastic first step…

      • “Problem is it also entrenches monopolies and stifles start ups and competition”

        Only government can put laws and regulations to enable those monopolies to be formed.

        If government wants to support small business they just need to remove all laws and regulations which is stopping small business from competing.

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