Category: Tax

Challenges await Australia’s new Tax Commissioner

by Miranda Stewart

In January 2013, Mr Chris Jordan AO starts as Federal Commissioner of Taxation in charge of the Australian Taxation Office (ATO). He follows Mr Michael D’Ascenzo AO, who was not reappointed after his seven-year term.

Mr Jordan will be only the 12th Commissioner and only the second external appointment in the ATO’s history. All appointments have been male. The first Commissioner, George McKay, appointed from the New South Wales public service in 1910, seems to have died from overwork in 1917 after administering on a shoestring the federal land tax and income tax introduced in 1915 to help fund World War I. The next Commissioner, Robert Ewing, appointed an assistant commissioner to help. In his 22 year innings until 1939, Mr Ewing oversaw a new federal estate tax, payroll tax, and the turbulent time before World War II, when the federal government took over the income taxes of the States.

Mr Jordan is a former chairman of KPMG and company director. His appointment has been widely welcomed especially by business and professional groups. He has been on the Board of Taxation since its establishment in 2000 and was appointed chairman in June 2011. His early working life as a policeman may also stand him in good stead.

So what are the challenges facing Mr Jordan in his new appointment?

Today, the ATO is an organisation of 25,000 people that collected net tax of $273 billion in 2010-11. Mr Jordan will be responsible for the income tax, GST, fringe benefits tax, petroleum and mineral resource rent taxes, medicare levy, fuel taxes and higher education levies. The ATO also administers parts of the superannuation system, child support, the Australian Business Register and Valuation Office.

The ATO is under constant pressure to increase revenue collection. Most revenue is collected through its highly effective income tax and GST withholding systems. These ensure electronic transfers from taxpayers to government coffers throughout the year. The ATO manages these systems at a remarkably low administrative cost of a little under $3.5 billion a year, a cost to revenue ratio of about 1 per cent. This does not include compliance costs of taxpayers and business and we know that these are significantly higher than direct governmental costs of tax collection, and regressive in their impact.

Mr Jordan’s main responsibility – and biggest challenge – is to keep this efficient organisation running well. He will have to manage his staff so that sick days are kept to a minimum and make sure the next computer roll-out stays on budget. He has lost one valuable support in this task, as Jennie Grainger, former Second Commissioner in charge of Compliance, has just taken up an appointment in Her Majesty’s Revenue and Customs in the UK. Several other leading ATO staff are also retiring, including senior legal experts.

Some have suggested that Mr Jordan can – and should – lead a change in ATO culture, presumably to make it more business and taxpayer-friendly. One commentator, for example, suggests that he will better understand the plight of small business.

It is true that the ATO has a strong organisational culture. Being the subject of widespread popular dislike will do that. ATO staff also understand their importance to government. Still, caution is needed: that strong culture contributes to the morale of ATO staff, and that helps keep the revenue rolling in.

Mr Jordan has demonstrated his effectiveness in liaison with government and business. He will no doubt strengthen the work begun by Mr D’Ascenzo in engaging with taxpayers and the tax profession about most aspects of administration and interpretation of tax law.

But it is important that the Commissioner of Taxation is – and is perceived to be – absolutely independent both of the government of the day, and of undue professional or business tax influence.

Mr Jordan faces the challenge of handling revenue collection in relation to high wealth individuals, including investigations into international tax evasion started under Mr D’Ascenzo. He must oversee controversial large corporate audits that challenge cross-border transfer pricing activity and tax planning. He becomes Commissioner in an era of unprecedented and expanding inter-governmental tax cooperation.

Mr Jordan will be in charge of new risk-based audit, settlements, and real-time information disclosure arrangements with large business. UK Secretary of Taxation Mr Dave Hartnett was at the forefront of these developments. He recently retired amid public controversy that he took “enhanced relationships” with big business too far. Within limits, a prickly relationship between business, the profession and the Commissioner is probably healthy. It won’t be Mr Jordan’s job to be liked.

What of Mr Jordan’s role in tax reform? That is only a small fraction of the job. In 2002, Treasurer Peter Costello moved the tax legislation function into Treasury. Mr Jordan will keep his seat on the Board of Taxation, but only as an ex officio member. He may be able to strengthen the voice of the core administrator in Treasury’s tax law reform processes. That would be a good thing. But his main job is to keep that revenue – about $750 million per day – rolling in to fund government to do what the public wants it to do.

Miranda Stewart is a Professor at Melbourne Law School, University of Melbourne.

This article was first published at www.theconversation.edu.au

 

Harnessing monopoly for the common good

by Karl Fitzgerald

All other things being equal, the owners of the earth have a comparative advantage over those in business or earning a wage. With $21 trillion hidden in global tax havens revealed this year (), and Starbucks, Amazon and Google being grilled in the UK Parliament this week, the need for a fairer tax system is growing.

The clamour for the expansion of the GST is at fever pitch here in Australia. What are the motivations behind this?

Few have noted the spree of government reports advocating for a fairer system via the ‘transfer of tax bases’ – the move from mobile to fixed tax bases. Such a move would wipe out the ease of using tax havens and tax trickery. This is code for saying ‘those who own the land must pay for the governing of the land’.

Ken Henry’s Australia’s Future Tax System, the NSW Lambert report, the ACT’s Quinlan Report, the UK’s Mirlees Report and the NZ Tax Working Group have all advocated to some extent the need to move to fixed tax bases.

In effect they are discussing the ability of people like Gina Rinehart to make $2 million an hour whether she gets out of bed or not.

In economic parlance, this is a discussion about economic rents – in broad terms the naturally rising value of the earth (or licensed monopolies). Bureaucrats are trying to awaken the people to the fact that the tax system can be used to harness these powers of monopoly for the common good.

But what have been the policy responses?

With austerity pressures blindsiding the people in mass sackings, the IMF has been busy installing the next layer of inequality. The global land bubble has blown the world economy apart but yet the answer has been to hit the consumer with regressive sales taxes. Someone earning $20,000 pays the same amount as someone on $20 million. Sounds great right?

This is the plan set out by far right think tanks such as the Cato Institute and the Heritage Foundation.

Rising sales taxes have occurred in the UK, France, NZ, and Japan to name a few. American consumers experienced 542 increases across jurisdictions in (2010).

However, this won’t stop the property speculation that was the catalyst to these problems.

It is only a matter of time until the same bubble mentality takes hold of the most precious asset – our homes. This is in effect what Bernanke’s QE3 is trying to trigger – the next land bubble.

Economists have long acknowledged that ‘asset bubbles always end in tears’. Why then are we encouraging the same mistakes?

Considerable resources must be spent educating society about the advantages those with monopoly rights have over the rest of the economy. Similar to climate sceptics, property bubble sceptics see nothing wrong with First Home Owners committing to a lifetime of historically high mortgage payments. A blind eye is turned from the $100′s of extra dollars fleeing local communities each week and heading towards deep pockets in the banking and real estate industries. The multiplier effect of such behaviour is damaging small local business, our largest employer.

TV shows such as Location, location location feverishly promote the value of prime locations as an investment strategy.

Why then does the economics profession ignore the role of location?

The advantage of living near a new train station or public hospital is delivered in higher land values. These publicly funded advantages result in private windfalls, leading to the deadweight losses of inefficient taxation. The recent Committee of Melbourne’s Moving Melbourne report identified the need for ‘value capture policy’ to finance the infrastructure deficit. Lucy Turnbull has advocated for similar policies in Sydney’s Cities Expert Panel.

Meanwhile small business struggles with rising rents, while surrounding them here in Melbourne is a commercial vacancy rate of some 24% (PDF, Appendix C). Such speculative supply kept off the market forces up rents, undermining our export competitiveness.

Treasurer Swan’s recent business tax reform initiative asked the corporate community to orchestrate their own tax cuts. They threw in the towel early when competing lobbyists couldn’t come to an agreement within the terms of reference. The stalemate was a call out to government to tax those without a strong lobby group – the consumer, with a higher GST. Chris Jordan, the head of this body, has now been appointed the lead of the ATO.

Those locked out of the housing market see some $2.6 billion per year given to negative gearing property investors over the last decade, 92% of which is spent on existing housing. The latest addition to Treasurer Swan’s ‘price of inequality’ is the booming Self Managed Super Fund industry. All other things being equal, those who already own a home are now permitted not just negative gearing write-offs, but a capital gains tax exemption for residential property investments via an SMSF vehicle.

Gen X, Y and Z will soon realise that baby boomers own nearly half of housing wealth. The latest empowerment of SMSF’s announced in the MYEFO will only enhanced this generational inequity. Treasurer Swan seemed genuine in his pre-budget moves to remove the capital gains exemptions for SMSF’s barely two years after their introduction into the residential sector. Unfortunately the lobbyists cornered him and single mums were hit with the cutbacks instead.

The power of organised oligopoly was dramatically demonstrated in the challenge to pokie reform when PM Julia jumped at the thought of a $20 million campaign across marginal seats by the Australian Hotels Association. The blight on democracy was compounded by the revelation that only $3 million was required for the desired policy outcome.

Lest we forget – the Victorian pokie licence auction, slammed by the auditor general as a $3 billion giveaway.

For the level playing field to truly exist, the power of monopoly must be broken down for all to see. The cheekily titled ‘digital dividend’ Senator Conroy is proposing could well hold the key. Instead of a fee simple auction of the electromagnetic spectrum’s 700 khz bandwidth, an annual lease could be charged for what is described as ‘the waterfront real estate’ of the EMS. This lease would be based on an annual valuation of the bandwidth’s value. The value of these property rights is destined to escalate once iphone 10 allows individuals to holographically transport themselves to the other side of the globe. Over time, government could share in the rising value of the earth, the economic rent, to keep price overheads low as classical economists once championed.

Within this lease could be a caveat that X amount of free airtime be provided to each political party in a campaign year, as New Zealand allows. Politicians would then face less pressure to pawn their principles as they wouldn’t have to pay for advertising on the once public airwaves.

The scientific community have been very open in accepting its failure to simplify core messages to the public over climate change, allowing breathing room for climate sceptics to control the debate. Similarly in the economics profession, some responsibility must be taken for the current situation where the global property bubble has been ignored as a catalyst for the credit crisis (falling land prices → bank write downs).

To be a science, economics must relate to reality. Thankfully economists such as Joseph Stiglitz, Michael Hudson and Martin Wolf are raising the flag as we re-frame economics as the essential science, never dismal.

In closing, the pot of gold at the end of each property flip must face closer scrutiny if we are to give equal opportunity to future generations. The tax system must be directed to equalise the opportunities between those who own our common wealth and those who are contributing to the community. Otherwise, rent seeking in the race for the rising value of the Earth will distort both economic and political decision making.

Karl Fitzgerald is the Projects Coordinator for Earthsharing Australia.

This article was first published at www.onlineopinion.com.au

You talkin’ to me? Gerry Harvey’s one-man, online retail debate

Gerry Harvey is great media talent. When I first became interested in online retail, I almost immediately became interested in Gerry.

As far back as 2000, Gerry told ninemsn on a live chat forum “that most of the online business will be conducted by traditional retailers and that over 90% of the e-retailers will in fact all go out of business one after the other”.

In 2008, he famously told Smart Company that online retailing “is a complete waste of time”. During his short-lived campaign to have GST applied to all goods bought by Australians from overseas websites he said that online retail was “escalating to proportions that are quite unbelievable” and was threatening to put scores of retailers out of business.

By June 2011, he was sanguine: “We find people will order smaller things online, but for bigger items they’ll mostly come to the store, go home and order online”.

You might think this was Gerry changing his mind over time about the implications of online retail. But then I saw this interview on Lateline. If current affairs television consistently reached this level of rollicking entertainment, I would watch it a lot more often.

Gerry came across as a more avuncular and amusing version of Queensland’s late Joh Bjelke-Petersen. It became obvious watching this interview that there was no evolution to Gerry’s opinions on online retail – he held them all simultaneously.

There’s a popular line of thought that Gerry is a dinosaur, a man out of time who doesn’t get the internet. On the contrary, I think that there a lot of people who don’t get Gerry, or perhaps his business, and its complicated relationship with online retail.

When Gerry talks about the internet he is addressing at least two very different audiences. The first is the investment community who want to know that Harvey Norman has a digital strategy, understands “omnichannelling” and is forward focused.

The second are Gerry’s army of franchisees who want to hear that someday this war will be over. All of Harvey Norman’s Australian stores operate as franchises, aside from the recently acquired Clive Peeters and Rick Hart outlets. In the last financial year, franchisee sales revenue fell by 2% and the fees Harvey Norman Holdings received from their franchisees fell 5%.

Gerry has to walk a tightrope – being seen to embrace or at least understand online retailing while convincing his franchisees that the internet is not going to destroy their livelihood.

The franchisee structure makes it incredibly difficult for Harvey Norman to wholeheartedly embrace online retail. This underscores a very important point about the internet. It’s a disruptive technology. For a lot of businesses, it is not simply a matter of adding another channel. The landscape will change so much that a new business or business model is required. This is something that Fairfax Media and News Limited know only too well.

When Gerry talks about online retailing, most people think they are listening to a retailer. But Harvey Norman is also a major retail property owner and developer. It owns 74 sites across Australia and has a $2 billion property portfolio that includes properties in New Zealand, Malaysia, Singapore and Slovenia.

For retail property owners, online retail is not such a good thing. The investors who want to hear that Harvey Norman has a digital strategy also need to hear that the internet is not going to devalue its retail property portfolio. This is a tricky message to sell.

The strategy of banks and other businesses in the 90s and 2000s to divest themselves of property now looks very sensible. Australian banks have wholeheartedly embraced the internet and their customers have in turn embraced online banking. Banks may be affected by other people’s commercial property devaluing, but mostly they don’t have to worry about their own.

Online retail promises or threatens to greatly change how Australians buy and sell over the next few years. However it works out, I hope that Gerry Harvey is around a fair bit longer, saying things to provoke and amuse us.

Anybody who tells us omni-channelling, a glib and ugly expression if ever there was one, is “bullshit”, deserves an audience.

Scott Ewing is a Senior Research Fellow – The Swinburne Institute for Social Research at Swinburne University of Technology.

This article was original published online at The Conversation

 

The Unrepentant And Unreformed Bankers

By Phil Angelides

Money laundering. Price fixing. Bid rigging. Securities fraud. Talking about the mob? No, unfortunately. Wall Street.

These days, the business sections of newspapers read like rap sheets. GE Capital, JPMorgan Chase, UBS, Wells Fargo and Bank of America [2] tied to a bid-rigging scheme to bilk cities and towns out of interest earnings. ING Direct , HSBC and Standard Chartered Bank  facing charges of money laundering. Barclays caught manipulating a key interest rate, costing savers and investors dearly, with a raft of other big banks also under investigation. Not to speak of the unprecedented wrongdoing that precipitated the financial crisis of 2008.

Evidence gathered by the Financial Crisis Inquiry Commission clearly demonstrated that the financial crisis was avoidable and due, in no small part, to recklessness and ethical breaches on Wall Street. Yet, it’s clear that the unrepentant and the unreformed are still all too present within our banking system.

A June survey of 500 senior financial services executives in the United States and Britain turned up stunning results. Some 24 percent said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed, 26 percent said that they had observed or had firsthand knowledge of wrongdoing in the workplace, and 16 percent said they would engage in insider trading if they could get away with it.

That too much of Wall Street remains unchanged is not surprising. Simply stated, the banks and their leaders have paid no real economic, legal or political price for their wrongdoing and thus have not felt compelled to change.

On the economic front, the financial sector has rebounded nicely from its brush with death, thanks to an enormous taxpayer bailout. By 2010, compensation at publicly traded Wall Street firms had hit a record $135 billion.

Last year, the profits of the nation’s five biggest banks exceeded $51 billion, with their chief executives all enjoying pay increases. By 2011, the 10 biggest U.S. banks held 77 percent of the nation’s banking assets.

On the legal front, enforcement has been woefully inadequate. Federal criminal financial fraud prosecutions have fallen to a two-decade low. Violations are settled for pennies on the dollar – the mere cost of doing business, with no admission of wrongdoing and with the bill invariably picked up by insurers or shareholders. (When it’s shareholders, that’s not someone else far away, that’s your 401(k), pension fund or mutual fund.)

When Goldman Sachs was charged with failing to set policies to prevent insider trading, it was fined $22 million, an amount the bank collects in about seven hours of trading. Goldman’s record $550 million penalty for securities fraud in 2010 amounted to less than 2 percent of that year’s revenue.

On the political front, after a brief stint in the penalty box, the big banks have resumed the political muscling that got them two decades of deregulation.

To block reform, the financial industry has spent more than $317 million on lobbying in Washington over the past two years and more than $230 million in federal political contributions in the 2010 and 2012 election cycles.

It’s been to good effect. Two-thirds of the regulations called for in the financial reform law passed two years ago are still not in place. And the House Republicans, the banks’ sturdiest allies, have slashed at the budgets of the Securities and Exchange Commission and theCommodities Futures Trading Commission to impede their ability to investigate wrongdoing.

Clearly, the present order is unsustainable. We need to demand fundamental changes now, breaking up the big banks to snap their stranglehold on our markets and our democracy, ensuring that the newly minted financial reform laws are implemented, and wringing out rampant speculation.

But true reform can only occur if we root out the corruption that has distorted our banking system and undermined the productive work of the many good people in the financial sector.

The system of financial law enforcement is clearly broken. Think of it this way: If someone robbed a 7-Eleven of $1,000 but could settle a few days later for $25 and no admission of guilt, would they do it again?

Only enforcement with real consequences will work. That means vigorous pursuit of criminal cases against individuals involved in wrongdoing, the surest method to deter malfeasance.

It means enforcement agencies eschewing weak settlements in civil cases and seeking remedies with teeth such as civil penalties, restitution and executives forfeiting their jobs. And, it means tougher financial fraud laws. In that regard, the bipartisan proposal by Sens. Jack Reed, D-R.I., and Charles Grassley, R-Iowa, to increase fines for securities fraud is a place to start.

To make any of this a reality, the U.S. Department of Justice and the federal regulators must have the will and the resources to do the job. President Obama has asked for additional funds for the Department of Justice, the SEC and the Commodities Futures Trading Commission.

Giving these agencies the tools to detect and prosecute wrongdoing will more than pay for itself – the Commodities Futures Trading Commission’s fine against Barclays for interest rate manipulation alone will pay for almost an entire year of that agency’s budget.

None of these changes will come easily, but this much is clear: We cannot allow Wall Street to continually flout our sense of right and wrong, to erode faith in our legal and political systems, and to put our financial system and economy in jeopardy.

Originally published in The San Francisco Chronicle.

News From George Soros’ Berlin Conference – Economists Discover Human Beings!

by Lynn Parramore
 
Could economists be leaving behind their mechanistic paradise for the messy, unpredictable human world?

  
Economists are peculiar creatures. Last week a large posse of them descended on Berlin for the third annual conference of the Institute for New Economic Thinking (INET), a think-tank co-founded by investor and philanthropist George Soros in 2009 in the wake of the global financial crisis.

As I roamed through the various sessions and gatherings, pointy-headed folk squinted at me and rattled off facts and figures that gave them the sort of thrill I get from seeing spring flowers in bloom. The field of economics is known for attracting Asperger’s-spectrum wonks better at formulating financial models than the flow of human interaction. But if the Berlin forum is any indication, the field is now fitfully reorienting itself: it wants to understand those fascinating and often irrational beings known as “people.”

Tellingly, the title of the conference was inspired by Milton. Not Milton Friedman, but John Milton: “Paradigm Lost: Rethinking Economics and Politics.” Intriguingly, the brochure opened with a passage from Book XII of Paradise Lost describing Adam and Eve’s expulsion from Eden — the moment when they look back wistfully on their former paradise, but then, teary-eyed, forge ahead, knowing that “the world was all before them.”

Early on in the program, economist Rob Johnson, INET’s executive director, pointed out that the old economic paradigm, so beautiful in its mathematical modeling, was destructively narrow and dogmatic. Its journals were like so many temples — if you didn’t follow the prescribed religion, you were out on your ear. The new economics would have to be broad, interdisciplinary and open to disagreement. And it would no longer be having a conversation solely with itself. Johnson announced his conviction that the new economics must be firmly grounded in the humanities.

Wow. At a time when undergraduates increasingly choose business majors and obtaining an English or history degree is widely considered a cultural affront, that was exciting news. Such a refocusing could certainly help economists become better able to describe reality, and just as importantly, consider the needs of human beings in their prescriptions.

Back in the late ’90s, when I was studying for a doctorate in English at NYU, my friend at the Wharton School of Business used to tell me about his lessons in rational behavior, perfect information and the pure motivation of self-interest. When I noted that a single exposure to Shakespeare or a page out of Freud’s oeuvre could relieve him of such fantasies, he got defensive and complained that all we did in the English department was sit around and read fiction. “Well,” I shot back, “That’s what you seem to be doing. Only you don’t call it that.”

I worried a lot that he and his colleagues, ignorant of human psychology and alarmingly shallow in their understanding of traditional Western values and ethics, would leave business school and go on to run large companies. 

I had reason to fear: They went on to help blow up the global economy.

In the humanities, we had our postmodern excesses, but they didn’t tend to wreak havoc on the word’s most vulnerable people. But free-market economics, in the words of INET panelist Paul Davidson, was a “weapon of math destruction.”

In his address to the conference, George Soros made it clear that economic obtuseness had helped produce the euro crisis, and that the failure was more profound then generally realized. Economics, he noted, had tried hard to imitate Newtonian physics and set itself on establishing timeless laws for reality. But, Soros insisted, it’s really a social science, and it was high time practitioners stopped pretending otherwise. (I would urge scientists to realize the same thing, but that’s a matter for another piece.) The famous financier emphasized that economic activity is based on the behavior of human beings who act on imperfect information and are driven by a wide variety of motives. They think. They are, by turns, rational, silly and euphoric. They have a will of their own. And they are definitely not inanimate objects whose movements can be neatly summed up in an equation.

If you consider economics this way, then you have to realize that markets, as Soros pointed out, are just as likely to produce horrifically damaging bubbles as they are to create equilibrium. So you’d better damn well understand that when you’re thinking about regulation and political frameworks like the eurozone. If the Europeans can’t wake up to this, Soros warned, they can pretty much kiss Europe goodbye.

I was struck by the idea that just as religious elites had once created an elaborate system based on “Divine Will” to justify their power and oppression, the obstinate free-market economists had created their own supernatural entities, referred to as “The Market” and “The Invisible Hand” in order to pretend that their policies were inevitable and natural. Was a Reformation now in the works?

Throughout the week, I heard economists (certainly not all, but many) talking as if human beings mattered. Chinese economist Jiahua Pan mentioned the need for an ethical foundation and ecological principles. James K. Galbraith discussed the human costs of inequality. Arjun Jayadev of the University of Massachusetts, Boston, talked about why people needed debt forgiveness. Speeches centered as often on what humans think and feel as they did on what financial models could predict. There were lectures on neuroscience and social values.

Some will say this is all just talk. You don’t get an insurrectionary adrenaline rush at an economic conference the way you do at an Occupy Wall Street protest. But such talk, particularly among those who teach tomorrow’s leaders and act as policy advisers at high levels of government, is critical to any chance of changing the paradigm. Do we want a society that is people-driven, rather than profit-driven? Then Johnson is right: economics must reacquaint itself with the humanities. Do we want an economy that serves society rather than a society that serves the economy? Then we have to keep insisting on the social nature of economics.

There’s reason to think that the effort coming from INET will be long-term and influential. During the week, the announcement came of a $25 million gift from William Janeway, senior advisor at Warburg Pincus and INET governing board member, and his wife, Weslie Janeway. Along with that donation, the governing board of INET has launched a $75 million fundraising campaign, and Soros, in response, has pledged $50 million. Conference attendees also learned of a joint project (INET@Oxford) with the Martin School at Oxford University focused on visionary interdisciplinary approaches to economics, equity and curriculum reform.

After half a century of free-market orthodoxy, the field of economics is not going to produce a new paradigm overnight. As a woman and an English major, I can be forgiven for hoping that more women and more English majors will be joining the conversation. The need for diversity is strong, and the call for a vigorous examination of values urgent. But there’s a whiff of change in the air, and you could feel its electricity in Berlin. The economists were beginning the painful and exciting process of leaving the old fantasies behind.

And the world was all before them.

Lynn Parramore is an AlterNet contributing editor. She is cofounder of Recessionwire, founding editor of New Deal 2.0, and author of ‘Reading the Sphinx: Ancient Egypt in Nineteenth-Century Literary Culture.’ Follow her on Twitter @LynnParramore.

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