Posted by John, March 20th, 2013 - under Tax the rich.



As profit rates have fallen and are up to half what they were in the boom years of the 50s and 60s, the state has responded across the globe by cutting taxes on capital.

In Australia company tax rates have been cut from 49% in 1985 to over time 30% today and with various attempts to cut it further, the latest being the failed Resource Super Profits Tax whose revenue was to be used to fund tax cuts for business.

Australia also has a dividend imputation system so that any company tax paid is credited against the tax a shareholder is to pay on the dividend the company pays to them. This makes companies basically conduits for tax paid – they collect the tax that would be paid by investors and remit it to the ATO. It is not tax on them but the collection of tax on the anticipated tax shareholders will pay.

The Henry Tax Review recommended a cut over time to 25% to keep the Australian rate in the middle of the pack of OECD countries. It also recommended consideration be given to an Allowance for Corporate Equity type system. This just means that companies that have say $100 m of capital will get a notional deduction of some percentage of that amount (e.g. the long term government bond rate, currently about 3%, or the long term company bond rate, currently about 7%) from their income. Thus a company would need to earn at least whatever that rate is before it can be taxed.

The ACTU was keen on this because it would mean most manufacturing industries, with an average return on investment of about 6%, would pay little or no tax, depending on the rate chosen. The Business Tax Working Group put it in the too hard basket.

Irrespective of what is happening with Australian profit rates, falling global profit rates have seen governments around the world to cut company tax rates and this will force a future Australian government to do the same to remain competitive, or internationally competitive or whatever the phrase is. As a capital importing nation the headline company tax rate is important for Australia in attracting highly mobile foreign capital.

Ok, let’s get in to the juicy bit of the talk. It is not just business and other pressure on governments to reduce company tax rates that is important. Competition forces individual companies to try to cut all costs to improve their after tax profits. One way to do that s obviously for a company to cut its tax bill. If it can pay less tax whose its competitors pay the standard or normal rate, it gets a competitive advantage over them.

So companies do all they can to avoid tax. Sometimes this is through specific government tax concessions, and sometimes it is through tax avoidance arrangements.

Who here works? Good. And you all pay tax? Good. That is better than Starbucks, which has been in operation in Australia since 2000 and in that 12 years has paid no income tax. Not a cent.

One of the people up the front is Twiggy Forrest. Twiggy owns Fortescue Metals Group. BRW Rich list has him as being one of Australia’s richest men with wealth estimated at over $3 billion. In the last 16 years guess how much tax FMG has paid? Zero. Zilch. And with $700 million of accumulated losses FMG won’t pay tax in the next couple of years either.

Sitting here in the front row is Nathan Tinkler. He is a mining man and in 2010 was listed on the BRW Richest 200 list. Nathan lives permanently in Singapore, in fact in the same street as Gina Rinehart. In court proceedings last week Nathan declared his taxable income was just $9000. Everyone in this room who works fulltime will have earned more than Nathan Tinkler. But not to worry. His wife just happens to have a trust with assets of over $1 billion and she gives him money to live on every few months. Talk about lucky eh?

What about Google? You put ads on Google by contracting with Google Ireland or now Google Singapore. It has revenue from Australia of between $1 and $2 billion a year. Last year it paid just $74000 in tax (i.e. its tax bill was less than 1% of its revenue).

Google has tax avoidance arrangements aroudn the globe. Its Chairman Eric Schmidt defended his company’s tax avoidance activities around the globe, activities which have seen it funnel almost $10 billion into Bermuda, saving $2 billion in taxes. He said:

“I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.”

The company isn’t about to turn down big savings in taxes, he said.

“It’s called capitalism,” he said. “We are proudly capitalistic. I’m not confused about this.”

And that is the point. Competition forces them to seek legal and sometimes not so legal ways to reduce tax. Anyone here shop at Myer?

So how much tax does business in Australia pay? Somewhere between $50 and $60 billion a year (depending on the impact of the GFC) out of the $370 billion in Commonwealth taxes collected, i.e. about 15% of all Commonwealth revenue. Now GDP is about $1.5 trillion and companies’ share of that is almost 30%, i.e. about $450 billion. So companies pay say $60 billion tax out of income of $450 billion, about 13%.

Most government revenue comes from workers, either through income tax or GST. The theoretical issues I will leave for another day. I will just say that the level of tax on workers can’t be so high that it cuts their after tax wage too much, because otherwise they might fight for better wages to improve their living standards. Workers have to have enough after tax income to buy the necessities of life.

Of course the alternative to increasing taxes on workers (which the Henry Tax Review specifically recommended) is to cut government spending on public services like health and education, transport and so on. But Henry, as well as recommending an increase in tax on workers on incomes between $37,000 and $94000 also recommended a broader based land tax and a move to further taxing consumption because this was efficient. He is looking for higher taxes on workers nd different bases to get more out of us and so to give government the revenue to spend on social services.

And the razor cuts into services still.

According to the ATO, between 2005 and 2008 40% of big business (turnover greater than $250 million) paid no income tax. The figure will be larger after the GFC. The number of companies who are non-taxable is 61%, and increase over previous years.

Some industries are worse than others. Now I know you will be keen to learn to know just how much income tax the mining industry pays. Well, it is the industry with the lowest number of taxpaying businesses of any. 73% of mining companies are non-taxable.

Remember the Resource Super Profits tax? It would have been at a rate of 40% on all super profits on all minerals. The mining bosses didn’t like it and mounted a big campaign against it. The ALP abandoned its traditional social democratic role of imposing solutions on some capitalists for the benefit of capital, rolled Kevin Rudd and the new PM, Julia Gillard negotiated a settlement with the big 3 mining companies, BHP, Xstrata and Rio Tinto.

It applies only to coal and iron ore and its effective rate is only 22.5%. Instead of raising 3.7 bn (original estimate), or $2 bn (revised estimate, it raised just $126 million in the first six months, of which $78 million is from BHP.

So what can be done?

According to the Australia Institute Australia is a low tax country.

The influential American think tank the Center on Budget and Policy Priorities recently pointed out that the US was a very low-tax country compared with other OECD countries and published the following graph to back up its case.

The long slow playing out of this process in the tax field has been to flatten tax rates, reduce tax burdens on capital, shift taxing to consumption in part from income, all with the view to improving the efficiency of the system, i.e. improving profit rates.

Neoliberalism has been about shifting wealth from labour to capital to address falling profit rates. One indicator of this is inequality.

Inequality has increased. The labour share of gross national income going to labour is at its lowest (54%) and that to capital its highest (28%) since records began to be kept.

Ian McAuley has captured this graphically in New Matilda over a longer period of time showing that the trend for profits as a share of national income has been more or less consistently upwards since about the mid-1970s. The graph seemingly doesn’t display here or in New Matilda.

The long slow playing out of this process in the tax field has been to flatten tax rates, reduce tax burdens on capital, shift taxing to consumption in part from income, all with the view to improving the efficiency of the system, i.e. improving profit rates.

So now we have an outline of an argument. As profit rates fall because of the way production under capitalism is organised the other members of the band begin to demand that the state cut taxes on capital and slash public services to stimulate growth. It is a countervailing tendency.

Neoliberalism arose in the 70s in response to the collapse in profit rates in the developed world in the late 60s and early 70s and the failure of Keynesianism to address the crisis. In the UK and US the political expression of this new philosophy of a strong state to impose the market and curb unions and workers and shift more wealth into the hands of the ruling class was Thatcher and Reagan. In Australia it was the Hawke Labor government whose strategy was to lock workers into wage cuts though managed capitalism, i.e. through the Accord.

The results have been successful from capital’s point of view.

Finally the OECD Divided we stand and the ACCOSS poverty indicator are sober reading.

The number of people living in poverty, according to ACOSS is 12.8% of the population, up for the 8% in 1994.

2.2 million Australians, including 600,000 children, live below the poverty line.

The 1 percent own 40 percent of the world’s wealth.

The top 10 percent own over 85 per cent.

The world’s 2,000 biggest companies sell about half of total world output.

In Australia:

The richest 20 percent own 61 percent of the wealth,

The poorest 60% hold 18% and

The poorest 20 percent own just one percent.

The richest 1% of Australians saw their share of total national income almost double between 1980 and 2008:

1980: 4.8%

2008: 8.8%

The top 10% saw their income grow 4.5% per year since the mid-80s.

The bottom ten percent grew by only 3% per year.

As a percentage of GDP and compared to the other 34 OECD countries Australia is a low tax and low spending government.

Tax collections have averaged about 21per cent of GDP over Labor’s five years.

By contrast, they averaged 23.4per cent of GDP over the Liberals’ 12 years, and a remarkable 24 per cent over their last six years.

According to the ACTU ‘[h]ouseholds in the top 20% of the income distribution pay an average of 34.5% of their incomes in taxes; households in the bottom 20% pay 26.7%.’

This seems a small difference between the rich and poor for a supposedly progressive tax system.

Now remember that that top 20% own 61% of the wealth and the bottom 20% own 1%.

A progressive tax system could help address these results, although it won’t undermine the societal and economic drivers for growing inequality or the massive disparity in wealth unless a much more radical tax system were to come into being.

But before we look at specific tax the rich proposals in brief, a word to all those who might think taxing the rich is a reformist or liberal or other non-socialist slogan. Let me quote Lenin:

We see that the demand put forward by the Social-Democrats—the complete abolition of all indirect taxes and their replacement by a real progressive income tax and not one that merely plays at it—is fully realisable. Such a measure would, without affecting the foundations of capitalism, give tremendous immediate relief to nine-tenths of the population; and, secondly, it would serve as a gigantic impetus to the development of the productive forces of society by expanding the home market and liberating the state from the nonsensical hindrances to economic life that have been introduced for the purpose of levying indirect taxes.

So what would the beginnings of a progressive tax system here and now look like? How can we squeeze the rich till their pips squeak (to use a phrase from a right wing UK Labour Party Treasurer in the 1970s)?

Abolish the GST and make the tax system sharply progressive. This could include a rent tax on all companies receiving rents – banks, all minerals. End the $15 billion grant to the very rich superannuants. Treat capital gains like all income, i.e. tax it all. Abolish all business tax concessions. There’s $50 billion for you a year before we even begin to talk about wealth taxes, inheritance taxes, and making the income and company tax systems steeply progressive.

In France Jean-Luc Mélenchon from the Left Party proposed a 100% tax rate on those earning more than about $360,000. Easy to do here too. Make the rate on those earning more than $200000 a year 100%. That affects 2% of taxpayers.

What to do about all those loss companies who don’t pay and haven’t paid tax for years. Tax all big business on a percentage of their gross income, not taxable income. Impose in other words a minimum company tax on companies for the privilege of exploiting us.

Plan B

Capital may react to attempts to tax them more with a capital strike or threat thereof. Nationalise them under workers control as part of plan B. But there is I suggest an even better solution – class struggle

Strikes

One reason neoliberalism arose as a philosophy and practice was the quiescence of the working class.

From the Accord onwards strike levels have collapsed in Australia.

The picture today, even with ten days lost per thousand workers is very very low historically. Compared to the golden days of the late 60s and early 70s it is miniscule. As Jade Eckhaus writes ‘… in the 1970s annual strike days per 1000 workers varied between 600-1200…’ To reiterate: in 2011 and before that it was ‘generally less than five [!]’

It is this loss of class combativeness, this lack of class struggle that helps explains the neoliberalisation of Australia and two consequences for tax – the capture of tax policy by the one percent and growing tax inequality, itself a subset of growing inequality and a lack of will to tax the rich.

Let me finish off with two points.

Taxing the rich will only be on the agenda, and using the extra money to improve public health, education, transport and address climate change also will only be on the agenda with a resurgence of class struggle by workers in Australia.

An upsurge of class struggle will be about increasing real wages and improving the living standards of workers by getting back some of the surplus value we create for the bosses or defending jobs, or social services, pensions and the like.

In doing that a more progressive tax system can be put back on the agenda. Strike to make the rich pay for better government services.

Like all posts on the blog, comments (see under the heading close after 7 days.)

I am speaking at Marxism 2013 over Easter in Melbourne on Why not tax the rich? I am also speaking in Canberra this Thursday night (21 March) at 6 pm in Haydon-Allen Room G 52 on this too.

I’ll fix the typos and other errors up tomorrow. it is late; it has been a long day and I am to tired.