December 06, 2011 | Graham

Government ad absurdum

Peter Martin reveals that Labor is planning to tax any company that makes better returns than average and not tax those companies that make worse returns than average.

When I previously suggested that once the government had taxed mining “super profits” they might tax other companies’ “super profits” I thought I was making a debating point. This was a reductio ad absurdum. An example which proved how wrong the particular case was by taking it to its logical but extreme conclusion.

Little could I have known that this government, and its public service advisors, are so absurd that they would actually take the idea to its extreme and propose arranging the whole company tax structure on the same basis  as my satirical rhetoric.

Under the government proposal companies that earn a return on assets the same as, or worse than, the government bond rate will pay no tax. Those companies smart enough to earn more on their assets than they would by putting them in the bank will be taxed.

Way to go – penalise those people who know what they are doing by taking the money they might invest in doing more of the same and hand it to those people who are incapable of earning their own living. That’s how you make a country rich.

What are the consequences of this proposal?

I don’t have time to make a comprehensive list, but here are a few. Please feel free to add to them in the comments below.

It skewers the idea that the mining resource rental tax is about sharing an asset that we all own. If the tax is on “super profits” then all companies will pay the same amount, irrrespective of whether they are mining minerals or ideas.

Productivity growth will grind to a halt (and those who claim to know say it isn’t high enough at the moment). Nothing measures productivity better than return on assets. It has its faults, but it is the best method. Tax good return on assets higher than low return and you redistribute income from the most productive parts of the private sector to the government – the least productive part of the public sector.

Australia’s growth will grind to a halt. The incentive to put assets into growth industries and companies will be curtailed. Instead people will invest in manufacturing plants in Victoria providing low paid drudgery instead of jobs, and returns less than bank interest  because the tax system will reward them for it.

Capital outflows will increase. The only way Australians will be able to get the fruits of innovation will be by investing overseas in companies in countries where high rates of return are rewarded.

Flexible finance structures where risk is diversified will be unwound making returns from companies more volatile. One of those structures is leasing real estate. If you rent property you will be taxed at a higher rate than someone who owns the same property. For tax reasons companies will want to own their own premises because it will make no immediate cash flow difference, but it will lower the return on assets. It will also lock them into a long term ownership structure that mitigates against corporate efficiency.

I can think of a slew of other reasons, but open to you. It is a reminder of why we need an election as soon as possible. This government is full of do-nothing, know-nothing opportunists who have no idea what they want to do, or what their ideas might do to what we have.

Posted by Graham at 10:58 pm | Comments (11) |
Filed under: Uncategorized


  1. For those companies that operate in a genuinely competitive environment I agree but I don’t think many people would think that Coles and Woolworths in the liquor, groceries and now fuel markets would meet Adam Smith’s ideas of competition and certainly our four banks don’t genuinely compete. Money is a facilitator, not a guns or butter alternative in any economic sense.
    While the CBA was a government owned bank, the other banks were in effect held on a leash but now the cost imposed by the big four are a massive drain on everyone but their shareholders.
    As for tax and royalty costs on mining companies, if those charges slow up the rate at which we sell off our resources that will be an improvement for the longer term.
    Otherwise our grandchildrens’ grandchildren will be back on the sheep’s back and worse. They will have no manufacturing industry and no way to pay for what they wish to purchase from overseas.
    Australia is living on its capital.

    Comment by John Turner — December 7, 2011 @ 8:27 am

  2. As the person who organised the Conference at the University of Canberra where these ideas of an allowance for corporate equity were discussed and from which Peter Martin drew his report, let me say that I think you misunderstand the impact of this proposal. It will in fact mean most companies pay no income tax. Far from wreaking the destruction you envisage, it may in fact make Australia a capitalist nirvana, or so Treasury hopes and believes.

    The real question will be what is the return above which the profits should be taxed. The long term government bond rate? The average company bond rate? The higher the level, the more companies which pay no tax.

    One argument might be that there should be a risk factor somehow incorporated. So for risk free business income the rate should be lower than for high risk investment.

    To use an example. Say the risk return in mining is 13%. Any return above that would be taxed, but nothing below it.

    Even if the rate were uniform, say 7 percent, for all companies, it would mean that for those companies earning above that rate the first 7% would not be taxed. and for those below that level, no tax and presumably a carry forward of the notional loss to offset against future super profits. Most companies have a return below 7% and if that were the level then most companies would pay no tax.

    Personally I think that all super profits should be taxed on top of ordinary income. But that is not what is being discussed.

    Comment by John Passant — December 7, 2011 @ 8:43 am

  3. 1. You cannot legislate the poor into prosperity by legislating the wealthy out of prosperity.

    2. What one person receives without working for, another person must work for without receiving.

    3. The government cannot give to anybody anything that the government does not first take from somebody else.

    4. You cannot multiply wealth by dividing it.

    5. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that is the beginning of the end of any nation eg Greece.

    6. As the great controlled economics experiment between West & East Germany demonstrated, Socialism fails when it runs out of other people’s money!

    Comment by Chris Golis — December 7, 2011 @ 9:19 am

  4. John, I guess you’ve never heard of transfer pricing.

    All this would do is make companies transfer profits to off shore subsidiaries, & losses to Oz.

    God help us if we don’t get rid of you fools sooner rather than later.

    Comment by Hasbeen — December 7, 2011 @ 9:26 am

  5. Hasbeen, guess you’ve never heard of Division 13? Halfwit.

    Comment by John Passant — December 7, 2011 @ 9:33 am

  6. Hasbeen,
    re, John, I guess you’ve never heard of transfer pricing

    One of the things that undermined my reputation with Sir Ian McLennan, them CEO of BHP, was asking a question re transfer pricing of refined alumina in his presence during a visit to the Gladstone bauxite refinery in the early 70’s
    Subsatantial penalties on transfer pricing and a requirements for disclosure of end user price in export licenses or certificates should fix that potential problem.

    Comment by John Turner — December 7, 2011 @ 9:47 am

  7. Anyone who thinks transferring pricing wouldn’t go on doesn’t understand how the real world works.

    John, this wouldn’t turn Australia into a capitalist nirvana it would turn us into Cuba, or Pakistan. How exactly do you run an economy when no-one pays tax except those who do well? You don’t. Those who do well go overseas and sell you their product through domestic subsidiaries that earn low profit margins leaving you without a tax base.

    Company tax already pays a lot of our taxes – a shift which occurred under John Howard. This just makes the burden fall even more narrowly.

    Comment by Graham — December 7, 2011 @ 11:10 am

  8. It’s pretty silly bit it’s not absurd or disastrous in the way you paint it. It’s a conceptually simple way of introducing a more progressive company tax system. A few of the objections raised are the same as the arguments for tax breaks for the rich – which we already know don’t impact on productivity in the adverse way that has been suggested.

    It’s not, however, fundamentally different to the current tax system – it just resets ‘zero’ as JP has explored. It will have bugger all impact on incentives to earn, or overall productivity. On the flipside, it probably won’t provide any benefits either.

    You rightly identify that it will warp the way some companies structure and report on their assets and profits – and there won’t be any benefit coming from this.
    It will only adversely warp investment (e.g. in Dandenong manufacturing) in so far as these can be restructured to be significantly different to the cash that could be invested in bonds. Or possibly where risk-adjusted returns are significantly different… This is possible, but how significant would it be?

    So yes it’s a bad idea, but mainly because it’s not a good idea, and will waste everyone’s time while they’re at it.

    Comment by JohnB — December 7, 2011 @ 1:03 pm

  9. One thing this discussion is overlooking is the effect on and of franking credits.
    With lower taxes on companies there will be fewer franking credits. Franking credits are added to the net income of each taxpayer to determine taxable income. The gross tax is calculated and the net tax paid is gross tax less the value of the franking credits. Any excess franking credits are recovered paid to the income earner as a refund and that incomer earner pays no tax because the companies have paid it for him or her.
    Someone in Treasury may be able to calculate the overall effect but it well beyond anyone with out all the required information.

    Comment by John Turner — December 7, 2011 @ 4:09 pm

  10. John, I think you will find that they will look to get rid of franking credits too, which will be ironic as they were a Paul Keating innovation, and I think fairly unique to Australia.

    But there are ways to get around the franking credit issue – such as issuing bonus shares in lieu of dividends, or paying low dividends and retaining maximum earnings, that assuming the company is getting a positive return on assets, should turn up in capital growth at some stage, and hence subject to the much lower capital gains tax regime.

    I don’t really understand your post JB. There is a case for progressive taxation for individuals because we want all individuals to survive and prosper, so if someone is incapable of earning someone else has to pay some of their “share” of the tax pie.

    But there is no case for trying to preserve businesses. We want commerce to be Darwinian with poor businesses dying and being replaced by better ones.

    By taxing very successful companies more highly you are robbing them of perhaps half the money they have available to reinvest (depends on the dividend payout ratio).

    A company earning say 20% on assets will double its size roughly every three years. A company earning 6% will double every twelve years. You are effectively swapping one for the other.

    Comment by Graham — December 7, 2011 @ 6:07 pm

  11. This is the Green/Bob Brown Philosophy.We have to punish achievers.Their aim is the destruction of the middle class to stop us consuming thus saving the planet.A very noble cause which will see democracy replaced by plutocarcy.Both Greece and Italy are already ruled by banksters.

    The Rothschilds are one of the biggest financiers of the Green movement.They want an Indian style society.They the elites and the poor unwashed masses who will have no wealth or rights.

    `This is what the environmentalists want for us under the guise of saving the planet from Anthropological Global Warming.No mention of the coldest start to summer in Sydney for 51 yrs or the latest leaked emails from the IPCC implying collusion and cover ups.

    Comment by Ross — December 8, 2011 @ 6:31 pm

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