The low-hanging fruit in putting more funds in government coffers is the goods and services tax (GST). Shortly after the recent federal election, Treasurer Joe Hockey said there would be “no change to the GST, full-stop, end of story”. My suspicion is that it will be a second term agenda item.
While no politician wants to talk about tax increases during an election campaign, the government knows that it has a problem. The GST as it stands is no longer a growth tax – household consumption (spending patterns) has softened resulting in GST revenue not growing as fast as it once did.
As a result, like it or not, the GST has to climb above its current flat rate of 10 per cent. As well as increasing the GST rate, I suspect that we will also see changes to the GST tax base. This will likely be broadened to cover “products” which are currently GST exempt including health, education and fresh food.
Being a consumption tax, the GST is classified as an indirect tax and the prevailing rate is low in comparison to most other nations. Conversely, our direct (income) tax rates are high in a comparative sense. I believe we need a shift from direct to indirect taxation to favour the taxing of spending over the taxing of income.
Indirect tax is where a proportion of the money spent on goods is taken, whereas a direct tax is levied as a proportion of a person’s income. Taxation schemes can be classified as progressive (the more one earns, the higher the tax rate) or regressive (those with lower incomes pay a higher percentage of tax).
There are classic arguments for and against progressive and regressive taxes. It’s said that progressive income taxes penalise hard work and ambition since the more someone earns the more they pay to the government. The standard counter-argument is that the “rich” should pay more.
Conversely, it is argued that regressive taxes hurt the poor more as they take a larger percentage from low-income earners than from high-income earners. The rebuttal here is that all consumers should pay the same dollar amount (flat tax) regardless of income level.
Putting aside individual beliefs and biases, I repeat my assertion that we are well overdue for a serious debate in Australia about tax reform. We owe it to ourselves and our grandchildren to develop a more efficient and stable form of revenue generation for the continuing prosperity of our nation.
Posting Date: 18 November 2013
Corporate welfare
In 1974, corporate Australia witnessed one of the costliest new product failures in its history. A year earlier, the vehicle manufacturer, Leyland Australia, launched a large family car called the P76. The car was plagued with quality problems from poor assembly practices and was quickly labelled a lemon.
Aside from the quality problems, Australians did not want a petrol guzzling car at a time when the world was in the midst of an oil crisis. Australian car buyers felt the P76 was too big and too thirsty – not to mention its ugly wedge shape – and opted to stick with their Holdens and Fords.
Fast forward forty years and it is now Holden and Ford that are producing cars Australians don’t want. Due to changing consumer preferences, we have lost our appetite for home grown cars. Fewer than half of Australia’s 15.6 million drivers prefer to buy an Australian made car.
Australia’s car market is now primarily composed of cars imported from Asia and Europe. Our local auto sector cannot compete with cars made better and cheaper overseas. Sales of locally made cars are at record lows with Australian manufacturers propped up by government subsidies.
Just like Leyland, Holden and Ford misjudged the market, yet they – along with Toyota – have been enjoying a $5.4 billion aid package to the industry. According to the Productivity Commission, subsidies to the industry have averaged about $550 million a year for the past six years.
The Commission recently recommended that Federal Government assistance to the embattled local car industry should stop. It said that the justification for subsiding car makers is weak and that “ongoing industry-specific assistance to the automotive manufacturing industry is not warranted”.
Workers in the auto sector are paid allowances which are more generous than in most other areas of manufacturing. The perks include Sunday pay of 2.5 times the normal rate, ‘wash up time’ after shifts, paid time to donate blood, cash bonuses and forced plant shutdowns over Christmas.
These uncompetitive work practices contributed to the decisions made over recent months by all three car manufacturers – Ford, Holden and Toyota – to close down their Australian car manufacturing operations. The harsh lesson is that government spending alone cannot sustain an uncompetitive industry.
This also applies to the agricultural sector and the recent decision by the Federal Government to reject a request for $25m in financial assistance to fruit canner, SPC Ardmona. Our national carrier, Qantas, also made a request for government support.
The Federal Government recently signalled that multi-billiondollar corporate rescue packages will become a thing of the past. “The age of entitlement is over, the age of personal responsibility has begun,” warned Treasurer, Joe Hockey.
As I opined in my post, Free trade versus protectionism, it’s in Australia’s best interests to specialise in those things in which it has a comparative advantage. It’s clear that protectionism cannot preserve jobs in the long-run and taxpayers should not be subsidising underperforming industries.
Only profitable industries create jobs and while job losses in one sector are always painful, local production should not be defended from imported competition. As a general rule, I believe that markets should be allowed to operate free from government interference.
To be sure, I don’t believe in unrestrained competition where one wins at any cost. Governments have a role to play in defining the rules of competition so that it’s not survival of the most ruthless or the most deceptive. Beyond that, it’s up to each market participant to avoid extinction.
At the end of the day, it’s consumers and not governments who really determine business survival. As in the natural world, Darwinian selection should determine the winners and losers in the corporate world. In this jungle, the brutal reality is that some companies will thrive while others will perish.
Posting Date: 24 February 2014
Economics is a social science. It is the study of human nature as it applies to money. Economists analyse the behaviour of individual people and firms within an economy (microeconomics) and examine the economic activity of an entire country (macroeconomics). When it comes to money we do not always make rational choices and, as explained in a number of the blog posts in this chapter, this contributed to the Global Financial Crisis. Other topics covered include household debt, personal savings, interest rates, property prices, money management, GDP measurement and money supply.
Financial crisis defies logic
The academic world of economics may fit neatly into mathematical equations, but does it describe the real world? I think we humans are far too emotive for rational economic models to accurately predict our behaviour. The Global Financial Crisis is proof positive of that.
The dislocation in financial markets was caused by irrational lending practices – saddling borrowers with dodgy (subprime) loans they could not afford. As the loans went sour, markets overreacted and then fear and panic set in. Investor confidence plummeted and everyone rushed to the (stock market) exit door.
The