Monday, October 10, 2011

Taxation reform is a cargo cult for business

When you look at the varied contributions to the public policy debate made by business people and their lobby groups, one attitude unites them: the politicians owe them a living.

Government, it seems, has one overwhelming responsibility: to make life easier for business. You see this in business people's views on "competitiveness". Economics has a lot to say about competitiveness, but not what business people imagine it says.

To them, competitiveness refers to the ability of Australian firms to compete in international markets against the enemy, firms from other countries. It's a zero-sum game, apparently: either we win and they lose, or they win and we lose.

Hence our government's obligation to improve our team's competitiveness by cutting the taxes Australian firms have to pay or by weakening the bargaining power of employees and so cutting our firms' labour costs.

What economics actually says is, first, trade is a positive-sum game: both countries win by exploiting the "gains from trade". Second, competitiveness isn't a gift governments confer on their businesses, it's a stricture they impose as the best way of ensuring firms aren't able to make excessive ("super normal") profits at the expense of the intended beneficiaries of competitiveness, Aussie consumers.

Most of the micro-economic reform project was aimed at increasing competitiveness by making life tougher for business: by reducing protection against competition from imports (the exports of our supposed enemies), by removing regulations that inhibited competition between local firms, and by beefing up prohibitions on anti-competitive practices.

We know micro reform failed to achieve a lasting increase in the rate of productivity improvement. Its lasting benefit has been to make the economy more flexible and resilient in response to economic shocks.

In particular, by increasing the intensity of competition in so many markets it has robbed many businesses of their former pricing power - including their ability to conclude sweetheart deals with their unions - and made our economy markedly less inflation-prone.

So much for the happy notion micro reform involves governments making life easier for business.

Further evidence of business's cargo-cult attitude to the role of government can be seen in its approach to tax reform. Business has an insatiable obsession with taxation. It wouldn't matter how much reform we'd achieved, its demands for more reform would be undiminished. That's because it's convinced the less tax it has to pay the easier its life will be.

There's a large element of self-delusion in this. Neither business people nor punters genuinely understand that, in the final analysis, companies - being inanimate objects - don't bear any tax burden. In the end, only humans pay tax - whether they're the owners, the managers, the employees or the customers of the company.

Just how the ultimate burden of all the various taxes companies pay is shared between those groups does matter, of course, but that's a complex empirical question with uncertain answers. And it's a safe bet all the sparring over company tax at last week's tax forum was motivated more by perceptions and appearances than empirical realities.

The key reform demanded at the forum, pushed hard by the Business Council, was for the rate of company tax to be cut from 30 to 25 per cent, with the cost to be covered by an increase in the GST.

Don't like the sound of that one? Neither did the union reps. But, cried the business people and the tax economists, didn't you know empirical studies show the ultimate "incidence" of company tax falls largely on labour? Since much the same is true of the GST, what rational reason could unions have to object to such a neutral rebalancing of the tax mix? But that question cuts both ways. If the ultimate incidence of company tax is borne by labour, why are company executives so desperately keen to get its rate reduced? (And how do the tax economists explain why such a shifting of the furniture would be so clearly beneficial for the economy overall?)

A point rarely mentioned is that the existence of dividend imputation means the local shareholders of companies have nothing to gain. For them, a lower company tax rate just means smaller franking credits. And that being the case, exactly why does big business imagine a lower company tax rate would be such a benefit? Perhaps because many, maybe most, of the chief executives who make up the Business Council actually represent the interests of foreign shareholders, who aren't subject to the imputation system.

For further evidence of business's cargo-cult mentality, consider what I call the "leadership theory of tax reform", so much in evidence at the forum. Consider the air of righteous disappointment exhibited by business leaders and commentators when Julia Gillard failed to meet the Business Council's demand that she commit to a 10-year program of tax reform.

Oh, if only the government would exhibit some Leadership, they cried. Come again? This government is already knee-deep in unfinished tax reform, all with no active support from business (the deeply divided Business Council) and much active opposition (the business coalition running TV ads against the carbon tax).

This is even though some businesses urged the reform on the government (we want certainty on the price of carbon) and many parts of business stand to gain from the mining tax (20 per cent of the desired cut in the company tax rate, concessions to small business and a one-third increase in the captive market compulsory super delivers to the financial services industry).

All the righteous calls for politicians to show Leadership on tax reform come without the slightest commitment that business will back up the leader when the going gets tough. Dream on, guys.