Category: The Economy

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

 

Sharp rise in youth homelessness shatters stereotypes

by James Farrell

The number of Australians who were homeless on census night increased by 17% to 105,237 in the five years to August 2011. When adjusted for population growth, the increase the increase is still worryingly high, at around 8%. It’s clear we need a stronger commitment to address this significant social issue.

The census data, released this week by the Australian Bureau of Statistics (ABS), continues to shatter the stereotype of homelessness: the middle-aged alcoholic or drug-addicted man sleeping in a park.

Rather, 60% of people experiencing homelessness were under 35 years old, and an incredible 17% were aged under ten. The ABS acknowledges that census methodology is likely to underestimate youth homelessness, so the number is probably higher than the estimated 44,083 Australians under 25 currently recognised as homelessness.

As subsequent research from the Australian Institute of Health and Welfare shows, these young people will be more likely to be involved in child protection and juvenile justice services, further entrenching their disadvantage.

Almost half (44%) of homeless Australians were women; with women and children the fastest growing group seeking assistance from specialist homelessness services. This number, however, does not include women and children remaining in unsafe housing and continuing violent relationships. The ABS recognises that data sources other than the census must be used to better understand the incidence of family violence and the consequences on housing security and homelessness.

In welcome news, the number of people “sleeping rough” (in improvised dwellings, tents or sleeping out) decreased from 7,247 in 2006 to 6,813 in 2011. But more people are sheltered in such substandard overcrowded housing as to warrant being classed as being homeless; this group increased from 31,531 in 2006 to 41,390 in 2011.

The homelessness rate grew by more than 20% in New South Wales, Victoria and Tasmania, with a gob-smacking 70% rise in the ACT. Meanwhile, the largest fall was in the Northern Territory, which still has (by far) the highest proportion of people experiencing homelessness (731 people per 100,000 population, compared with a national average of 48.9).

The ABS has acknowledged it has further work to do to understand and measure homelessness experienced by Aboriginal and Torres Strait Islander people, which goes a long way to explaining the NT’s massive homelessness rates.

The ABS report has been the subject of significant media coverage, much of it couched in terms of the failure of governments to reduce homelessness. But given the social and economic changes since 2006, it’s surprising that the growth wasn’t higher.

Rather than whacking governments, the ABS data shows a need for governments to continue their efforts to address homelessness.

 

 Committing to end homelessness

The Commonwealth’s 2008 white paper on homelessness, The Road Home, boldly aims to halve homelessness by 2020 and offer accommodation to all rough sleepers. Similarly, states and territories have introduced bold and targeted action plans to address homelessness.

These commitments have been underpinned by important agreements between the Commonwealth and the states and territories. The National Affordable Housing Agreement (NAHA) focuses on early intervention and prevention strategies, better assistance for people with multiple support needs, and providing ongoing assistance to ensure stability for clients post-crisis. The National Partnership Agreement on Homelessness (NPAH) outlines funding arrangements for specific projects and commits partners to addressing agreed outcomes through program delivery.

But these agreements end in June 2013, making the next few months a vital time for the agreements to be renegotiated. At his address to the National Press Club this week, Housing Minister Brendan O’Connor committed to providing half the funds required for another year while the NPAH is renegotiated.

The states are yet to meet this commitment and are seeking additional resources from the Commonwealth. Details will be discussed at today’s meeting of housing ministers in Brisbane.

In addition to resourcing, more work needs to be done to ensure homelessness services are sufficiently funded and effectively delivered. To achieve this, we need to establish a monitoring system with nationally consistent, evidence-based measures to assess the effectiveness of homelessness services. This will allow us to focus on the outcomes of people experiencing or at risk of homelessness, rather than just on the number of people being provided with services.

As the ABS figures show, homelessness continues to be a social crisis in Australia today. Governments, and the broader community, must redouble their commitments to address, and ultimately end, this significant social policy challenge.

James Farrell is currently a Director of the Council to Homeless Persons, Treasurer of the Federation of Community Legal Centres and the National Association of Community Legal Centres and a member of the StreetSmart Australia grants committee.

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

 

Spotlight back on PPPs as BrisConnections falters

by Flavio Menezes

News that BrisConnections, which operate Brisbane’s Airport Link M7, has suspended trade on the ASX as it continues to talk with its debtors is likely to again lead to a debate about the role of Public-Private-Partnerships – or PPPs – in providing government infrastructure.

PPPs have been criticised in the wake of several high profile failures including Sydney’s cross-city tunnel, Brisbane’s Clem 7 tunnel and the consortium building the Ararat prison in Victoria, as well as the high cost to the public of PPPs undertaken in the 1980s and 1990s.

Supporters will argue that the PPP model works because ratepayers will be protected if the company that built and operated the tunnel fails.

Both sides are mistaken. Economic research suggests that PPPs can deliver better outcomes than traditional procurement but often governments choose PPPs for the wrong reasons and fail to take key steps to ensure their success.

Under public procurement, the government finances the construction phase of the infrastructure, tendering the construction to private parties. The operation and maintenance of the infrastructure also may be contracted to private parties.

Under a PPP, a government tenders a “bundle” consisting of financing, construction and operation to private parties. The contract is usually for a fixed period at the end of which the asset reverts back to the government.

An important advantage of PPPs is the potential efficiency gains from bundling the construction and operations/maintenance.

When bundling occurs, the winning firm minimises the total of construction and maintenance/operating costs. So design and construction are undertaken in a way to minimise the total cost of the project over its lifetime.

Another potential advantage from the involvement of private financing under a PPP is in avoiding the construction of politically motivated white elephants. Private parties will find it difficult to obtain financing for a project that is not commercially sound. Arguably, the PPP failures reported above could be related to the particular structure of those PPPs rather than the underlying economics of the projects.

There are also, however, wrong reasons for selecting PPPs over traditional procurement. For example, governments may favour PPPs over public tendering to alleviate its budget constraints. This argument is clearly wrong when PPPs involve direct government transfers, such as minimum income guarantees or other types of payments. It is also wrong to the extent that the PPP project is financed by user fees — a revenue stream which the government gives for the duration of the PPP contract.

Governments can be also attracted to PPPs because they perceive this model shifts the demand risk from the government to the private parties. This argument for choosing PPPs is erroneous for several reasons. Firstly, the private parties bearing demand risk do so in exchange for a risk premium. To the extent that they cannot influence demand, the government may be the best party to hold the risk. Secondly, the upshot of the financial difficulties with projects such as the M7 Airportlink is that it will be very difficult to find investors willing to finance similar ventures in the future.

Third, in a number of cases in Australia and overseas, governments have bailed out failed projects, for example, by renegotiating payments or taking equity stakes. In such cases governments ended up bearing at least some of the demand risk.

There are ways in which PPP tenders can be modified to allocate risk appropriately. For example, research developed over the past decade suggests a tender process that allocates risks appropriately. The key idea is to run a least-present value of revenue tender. The winner of the tender is the firm that has submitted the lowest required revenue (expressed in present value terms). The innovation of this process is that the duration of the concession is variable.

The contract only expires when the winner of the tender recovers the amount of revenue bid. This type of tender allocates the demand risk to the government, reducing financing costs and ensuring that the benefits of PPPs over public tender are realised. This approach has been successfully tested in Chile.

In the past decade, we have learned a lot about what works and what does not in PPPs. To avoid previous mistakes with PPPs, governments need to ensure that there is a robust process for evaluating PPPs. Moreover, closer attention needs to be paid in the design of PPP tenders and contracts, as suggested by both economic theory and international practice.

Flavio Menezes is a Professor of Economics and currently the Head of the School of Economics at the University of Queensland.

A longer version of this article is at Australian Policy Online.

The ‘Self-Made’ Myth and Our Hallucinating Rich

In real life, working hard only takes you so far. Those who go all the way — to grand fortune — typically get a substantial head start. So documents an entertaining, baseball-themed new analysis of the Forbes 400.

Let’s cut Mitt Romney some slack. Not every off-the-cuff comment the GOP White House hopeful made at that now infamous, secretly taped $50,000-a-plate fundraiser last May in Boca Raton reveals an utterly shocking personal failing. Take, for instance, Mitt’s remark that he has “inherited nothing.”

A variety of commentators have jumped on Romney for that line. They’ve pointed out that Mitt, the son of a wealthy corporate CEO, has enjoyed plenty of privilege, everything from an elite private school education to a rolodex full of rich family friends he could tap to start up his business career.

On top of all that, the young Mitt also enjoyed $1 million worth of stock his father threw his way to tide him over until big paydays started arriving.

Not quite “nothing.” But no reason to pick on Mitt either. Most really deep pockets, not just Mitt, consider themselves entirely “self-made.” The best evidence of this predilection to claim “self-made” status? The annual September release of the Forbes magazine list of America’s 400 richest.

Each and every year Forbes celebrates the billionaires who populate this list as paragons of entrepreneurial get-up-and-go. The latest top 400, Forbes pronounced last week, “instills confidence that the American dream is still very much alive.”

Of America’s current 400 richest, gushes Forbes, 70 percent “made their fortunes entirely from scratch.”

Forbes made the same observation last year, too, and most news outlets took that claim at face value. Researchers at United for a Fair Economy, a Boston-based group, did not. UFE analysts stepped back and took the time to investigate the actual backgrounds of last year’s Forbes 400. They released their findings last week, on the same day Forbes released its new 2012 top 400 list.

The basic conclusion from these findings: Forbes is spinning “a misleading tale of what it takes to become wealthy in America.” Most of the Forbes 400 have benefited from a level of privilege unknown to the vast majority of Americans.

In effect, as commentator Jim Hightower has aptly been noting for years, most of our super rich were born on third base and think they hit a triple.

In its just-released new report, United for a Fair Economy extends this baseball analogy to last year’s Forbes 400. UFE defines as “born in the batter’s box” those Forbes 400 rich who hail from poor to middle-class circumstances. Some had nothing growing up. Others had parents who ran small businesses.

About 95 percent of Americans, overall, currently live in these “batter’s box” situations. Just over a third, 35 percent, of the Forbes 400 come from these backgrounds.

Just over 3 percent of the Forbes 400, the United for a Fair Economy researchers found, have left no good paper trail on their actual economic backgrounds. Of the over 60 percent remaining, all grew up in substantial privilege.

Those “born on first base” — in upper-class families, with inheritances up to $1 million — make up 22 percent of the 400. On “second base,” households wealthy enough to run a business big enough to generate inheritances over $1 million, the new UFE study found another 11.5 percent.

On “third base,” with inherited wealth over $50 million, sit 7 percent of America’s 400 richest. Last but not least, the “born on home plate” crowd. These high-rollers, 21.25 percent of the total Forbes list, all inherited enough to “earn” their way into top 400 status.

Last year, a rich American had to be worth at least $1.05 billion to make the Forbes 400. This year’s entry threshold: $1.1 billion, the highest ever.


Forbes
, the United for a Fair Economy researchers sum up, has glamorized the myth of the “self-made man” and minimized “the many other factors that enable wealth,” most notably the tax breaks and other government policies that help the really rich get ever richer.

The narrative of wealth and achievement that Forbes is pushing, the new UFE study adds, “ignores the other side of the coin — namely, that the opportunity to build wealth is not equally or broadly shared in contemporary society.”

And many of those who do have that opportunity — like the mega millionaires in Boca Raton who applauded so warmly when Mitt Romney asserted he had “inherited nothing” — see absolutely no reason to turn that coin over.

Sam Pizzigati edits Too Much, the online Institute for Policy Studiesweekly on excess and inequality. 

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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