A lesson in how not to cook up a birthday cake
John Hewson's GST-on-a-birthday-cake moment is now folklore on how not to sell a new tax. That lesson is something the Rudd government is now learning; it has experienced many birthday-cake moments explaining its resource rent tax.
It isn't clear what preparation the Rudd government undertook before announcing the tax. Probably very little. While the resource tax has been damned by faint praise - apparently it's "elegant" - few economists have come out in support of the actual tax. It is one thing to say that so-called resource rents should be taxed, but quite another to support the actual tax being proposed.
At his public lecture, Professor Ross Garnaut, who literally wrote the book on the taxation of mineral rents (with Anthony Clunies Ross in 1983) said that he had not been consulted before the tax went public.
It is astonishing that such a broad-ranging reform could simply be cooked up in Treasury and unleashed on an unsuspecting public.
The Rudd government has announced a consultation process, yet the contentious aspects of the tax, namely the rate at 40 per cent and the threshold at 6 per cent, are non-negotiable. This is an arrogant and lazy approach to tax reform.
The arguments made in support of the tax are simply risible. We have heard all sorts of nonsense about resources belonging to all Australians and the need for compensation when in fact the resources belong to the state Crowns and mining companies already pay royalties for those mining rights.
Then there was the argument that mining companies are really foreigners and the profits move offshore. Even if that argument were true - it isn't - a country as heavily reliant on foreign capital as Australia can't afford the luxury of capital xenophobia.
Last Sunday Treasurer Wayne Swan put out an Economic Note making the argument "that mining companies in Australia get a big discount on the company tax they pay because of very generous tax concessions they get at the expense of Australian taxpayers".
As evidence, Swan quotes an academic working paper published last year by the US think tank, the National Bureau of Economic Research. The Henry review also quoted that paper.
This argument shows a fundamental lack of judgment on Swan's part and raises the question as to what exactly the public got for the $10 million the Henry review cost to produce. The paper, written by PhD student Kevin Markle and his professor Douglas Shackelford, is an econometric examination of the relative tax burdens of domestic and multinational corporations.
They calculate effective tax rates and then strip out size and country and industry effects (and time effects) to examine whether different types of companies face different effective tax rates.
While it is a very good paper, Markle and Shackelford never intended to support the argument that the Henry review or Swan is attempting. This paper has been quoted inappropriately and out of context. What is extremely concerning is that Treasury and Swan's advisers don't know that context, or don't care about the context. Either way, through ignorance or indifference, the Rudd government is attempting to introduce a tax based on an argument that is demonstrably wrong.
If anyone wants to calculate the effective tax rates of Australian companies they need look no further than the Australian Tax Office.
According to the latest ATO statistics, for the 2007-08 financial year, Australian mining companies paid tax at a rate of 27.81 per cent, far above the overall average of 24.56 per cent.
These numbers from the Tax Office are very different from the popular perception that Australian companies pay very low rates of tax â€" especially compared with the statutory rate of 30 per cent. This is due to differences between tax accounting and financial accounting. For tax accounting purposes, the ATO is more prescriptive in how revenues and costs are accounted for, whereas generally accepted accounting principles allow more leeway.
The difference between the statutory rates and the effective rates can be explained by these accounting differences, and also by features of the tax system such as rebates, foreign tax credits and so on. Ken Henry and Wayne Swan should know that.
Ross Garnaut made the point that the resource rent tax needs to be debated on its own merits. He suggested it was the miners who were being somewhat shrill. To be blunt, the federal government is no better. In fact by continually making the kind of false claim like that we saw at the weekend one is invited to wonder whether the tax does have any merit, or if the government is simply desperate for cash.