If Tony Abbott and Joe Hockey, not to mention the states, were to pay attention to the OECD, they would raise GST rates and take away incentives to negatively gear and to avoid paying tax on super payouts.
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They would introduce new taxes on land, mining super profits, congestion and death. And at the same time as doing all this, they would reduce company and personal taxes.

The question of which economic and tax policies are best for Australia is, as usual, at odds with the reality of politics. Most of these suggestions are not vote winners.

The Organisation for Economic Co-operation and Development’s two-year Economic Survey of Australia is aimed at dealing with one core issue for Australia – how do we grow and prosper as our resource treasure box keeps dwindling?

“We don’t really have easy solutions,” OECD senior economist Phil Hemmings said.  “We try to make sure policy makers know what the economics say, what direction things should be heading in. There are varying degrees of difficulty in implementation.”

Among the most difficult is lifting the GST, given our leaders have promised repeatedly they won’t. But the OECD says it makes sense. Its report suggested room for a more growth-friendly tax mix that could include broadening the base and raising the rate of the goods and services tax and increasing the use of state-based land taxes. These changes, it suggests, could be combined with a reduction in the company tax rate and personal income taxes.

“With a rate of only 10 per cent and fairly widespread exemptions, GST raises only half the revenues, as a share of GDP, compared with the OECD average and significantly less than the countries making the most use of such tax,” the report said.

While it did not advocate a specific rate, it said New Zealand and Israel had wide bases and rates of 15 per cent and 18 per cent respectively.

Mr Hemmings said somewhere between 15 and 18 per cent would make sense, but would have to be accompanied with compensation to lower-income households. The current system of not having a raft of goods and services taxed was that, despite them being well meaning, they are very inefficient, he said.

“If you’re not charging GST on bread you’re not charging it on bread bought by everybody, including the wealthy,” he said. “It’s far better to have targeted policies that make transfers to low-income households.”

The report also suggested lower personal tax rates, but at the same time stopping those on high incomes claiming concessions to reduce their marginal tax rates. It took particular aim at high-income earners who could lower the tax they paid by salary sacrificing cars, through superannuation concessions and deductions for rental property.

It suggested incentives to negatively gear could be reduced.

“For instance, the Henry tax review recommended a discounting mechanism that would lower the reduction in taxable income from net investment loss.”

Mr Hemmings said those on higher incomes benefited most from rental deductions. He also raised issues with the fact there was no tax on super payouts for over 60s. The report said the current tax treatment of pensions was unusual.

“Making superannuation income tax-free has meant that sizeable sums of public money are implicitly being spent in a way that largely benefits middle and upper income earners,” the report said, adding that for 2013-14 the spend was estimated at about $32 billion, the equivalent to about 2 per cent of GDP.

“There’s room for tax savings on that front,” Mr Hemmings said. “[Australia] is extremely light on tax at the payout of superannuation.”

The report also suggested the Abbott government review the current paid parental leave plan and look at other tax incentives to encourage workforce participation by women. It did not mention tax-deductible child care, but Mr Hemmings said this could be a good option in addition to other forms of support for child care.

In terms of lowering corporate taxes, the report welcomed the Abbott government’s promise to cut the corporate-tax rate. It did not signal a perfect rate but Mr Hemmings said it could go low as 20 to 25 per cent, and be coupled with a tax system that stopped companies profit shifting.

“Campaigns against tax evasion and aggressive avoidance should continue,” the report said.

It also said tax policy should not be a one-way street favouring immediate business interests and called for a tax on miners’ “supernormal profit” despite the Coalition’s big campaign to get rid of the mining tax introduced under the former Labor government.

Some combination of a super profits tax and greater state-based royalties would make sense, Mr Hemmings said.

“With a supernormal profits tax the government only gets revenue when companies are making profits, whereas with royalties they always get revenue, as it’s based on volume. We think a combination of the two would work.”

Other taxes called for in the report included increasing the fuel excise, the introduction of a congestion levy, and a possible new tax on death to stop rich people bequeathing assets to younger generations.

“It’s an issue worth exploring, but one of the problems with death taxation is various forms of avoidance,” Mr Hemmings said. “People start transferring wealth before they die. So you’d also have to look at taxation of gifts. It’s a complicated area.”

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Does the OECD know what it’s talking about? You bet. It might be a committee of Paris-based outsiders, but it works out what to say by talking to Australian bureaucrats. Officials from the Treasury, the Department of Prime Minister and Cabinet and the Reserve Bank allow it to say in public what they are only allowed to whisper in private.
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The Australian Treasury posts an officer to Paris full time in order to influence the content of OECD reports. It gets a look at (but not the final say over) their wording.

The OECD is concerned that the proposed free market in university fees will not be free at all. If they compete on price it might work, but many of them might not find it in their interest to seem cheap and less attractive.

The OECD says the Abbott government’s plan to pull young Australians off the (already modest) dole will have to be watched to make sure it doesn’t significantly hurt low-income households.  Its plan to increase pensions by only the consumer price index runs the risk of being unsustainable. Eventually the pension will have to be lifted, something not accounted for in the budget’s 10-year projections.

Australia’s superannuation tax concessions are monstrous (2 per cent of GDP) and pretty ineffective. They are directed to high-income Australians who were always going to save and to the compulsory component of super contributions which were always going to be collected.

And our GST is too low. If it was higher and income taxes were lower we’d put in more hours, something the Henry tax review would have told the last government had it not rigged its terms of reference to prevent it.

It’s worth listening to what OECD says. The cone of silence imposed on Australian bureaucrats mean it is one of the few chances we get.

Peter Martin is economics editor of The Age.

Twitter: @1petermartin

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Success? Christopher Pyne’s plan to allow universities to charge more for courses will work only if there is genuine competition, the OECD says. Photo: Alex EllinghausenThe Organisation for Economic Co-operation and Development has taken aim at a raft of Australian budget measures, describing one as potentially unsustainable and another as requiring close monitoring.
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It has also urged Australia to shake up superannuation tax concessions and to lift sharply the goods and services tax to cut income tax.

The Paris-based organisation’s biennial review of Australia found the balance of risks facing the Australian economy contained more substantial downside than upside.

“External risks, chiefly from commodity markets, combined with speculative activity in the housing sector and uncertainties in the responsiveness of non-resource sectors, could conspire to generate a period of weak macroeconomic activity,” it said.

The Abbott government’s decision to restrict access to Newstart for young Australians might not work as intended, it said.

“The proposals will certainly motivate some to seek and take up work or go into further education.  However, the precise impact of such reform is difficult to predict. Close monitoring, and adjustment as appropriate, is important.”

The report described Australia’s fixed-rate, means-tested Newstart benefit as “modest”. Two years ago it suggested it should be increased.

The report’s lead author, OECD economist Philip Hemmings, told Fairfax Media the Newstart change could have a significant impact on low-income households and had to be watched closely.

The government’s proposed cut to pension indexation was likely to be unsustainable over the long term, he said. Australia’s aged pension replaced only 60 per cent of half Australia’s average wage, which was low by OECD standards.

The government’s plan to remove the link between the age pension and wages would cause its value to drift down in relation to average incomes, Mr Hemmings said. At some point it could “cross socially acceptable limits of adequacy”.

Australia’s tax treatment of superannuation was unusual, the report said.

A Howard government decision to make most superannuation payouts tax free meant sizeable sums of public money were implicitly being spent in a way that largely benefited middle and upper income earners, it said.

The report said Australia’s superannuation tax concessions cost about $32 billion, which is about 2 per cent of GDP.

The government’s plan for fully paid parental leave is expensive and should face a “careful impact assessment” to check that it stacks up against alternative plans that would funnel more money toward child care.

The success of its government’s plan to cut university funding while allowing universities to increase their fees would depend on whether universities competed genuinely on fees. “Monitoring of the reforms will be important to ensure access to higher education is not compromised, particularly for students from disadvantaged backgrounds,” the report said.

Australia’s goods and services tax is low by international standards, raising only half as much of gross domestic product as the OECD average. As a result, Australia’s tax burden falls more on other taxes, including those on labour and business. The report said New Zealand and Israel were good models for Australia, with GST rates of 15 per cent and 18 per cent respectively. To the extent that a boosted GST disproportionately hurt low-income households, the impact could be softened by boosting benefits and carefully designing income tax cuts.

The report backed the Abbott government moves to give the states more control over their hospitals and schools and more direct access to tax. It was critical of Rudd government programs that tied grants to outcomes. Australia’s states had good room to lift their own taxes without help from the Commonwealth, it said.

Excessive exemptions meant only 5 per cent of Australian businesses were eligible for state payroll tax. Local government rates were an exceptionally efficient tax but were underused. Other states should emulate the Australian Capital Territory in boosting local government rates while they lowered stamp duties, the report said.

The decision to replace the carbon tax with direct action grants for businesses that cut emissions could work, having the same effects as a carbon tax at the margin, providing difficulties in establishing baseline emissions and checking the achievement of emissions reductions were overcome, it said.

The report suggested establishing a “secondary market” for direct action grants, which would allow the Abbott government to harness market forces in the same way as Labor’s emissions trading scheme was going to.

While supporting of the government’s plan to spend more on infrastructure, it said the projects approved must be backed with robust and transparent cost-benefit analysis, to ensure economic use of the existing stock and appropriate selection of new infrastructure projects.

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Broken pledge: Joe Hockey. Photo: Alex EllinghausenTreasurer Joe Hockey has broken a pledge to impose tough new tax avoidance rules on multinational companies that shift billions of dollars in profits between Australia and their international subsidiaries.
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The practice of global corporations loading up subsidiaries with debt and then claiming relief from the Australian tax man on the interest paid gives an “unfair competitive advantage” over local rivals, Treasury said in 2013.

“When some taxpayers avoid or minimise their tax in a sustained way, the tax burden eventually falls more heavily on other taxpayers,” a Treasury issues paper found at the time.

The Gillard government announced the abolition of deductions under section 25-90 of the Income Tax Assessment Act 1997 as part of a package to combat tax minimisation by global corporations, at a projected benefit to the taxpayer of $600 million.

In November last year, Mr Hockey and the then Assistant Treasurer, Arthur Sinodinos, announced they would not legislate Labor’s package, saying it would impose “unreasonable compliance costs on Australian companies” with subsidiaries offshore.

The current loophole favours the largest companies operating in Australia. Mining industry sources suggested they include Swiss-based Glencore and Anglo American.

Instead, Mr Hockey – who has trumpeted a global tax crackdown on multinationals through the G20 process – and Mr Sinodinos pledged in November to “introduce a targeted anti‑avoidance provision after detailed consultation with stakeholders”.

But in Monday’s Mid-Year Economic and Fiscal Outlook, a single line on page 117 revealed: “The government will not proceed with a targeted anti-avoidance provision to address certain conduit arrangements involving foreign multinational enterprises, first announced in the 2013-14 MYEFO.”

While companies like IKEA and Apple have been in the news for “offshoring” billions of dollars made in Australia, tax experts told Fairfax Media it was Australia-based global players that will benefit the most from the government’s backdown.

Companies with significant operations overseas get a “double bonus” under the existing law, introduced by the Howard government in 2001, because dividends from their international subsidiaries are tax exempt yet the interest on borrowings used to grow overseas operations is tax deductible.

One of the loudest opponents of the plan to abolish deductions was major Liberal Party donor Paul Ramsay, now deceased, who complained it would make it more expensive for his company Ramsay Health Care to use debt to invest in Europe.

On Tuesday, shadow assistant treasurer Andrew Leigh accused Mr Hockey of “sneaking in another giveaway for multinational companies” despite presiding over a near doubling of the deficit in 2014/15.

“Yet again the Treasurer has shown that he is happy to let big companies off the hook while hacking into foreign aid, schools, hospitals and pensions,” Mr Leigh said.

Mr Hockey’s office referred questions to Finance Minister Mathias Cormann, who took on Mr Sinodinos’ portfolio after he stood aside pending upcoming findings by the NSW Independent Commission Against Corruption.

In a statement, Mr Cormann insisted “No promise was broken” by the announcement in MYEFO on Monday

“Following consultation with stakeholders and the Australian Taxation Office, it became very clear that a targeted anti-avoidance provision would be ineffective,” he said.

“It is important to remember that the proposed changes to section 25‑90 were never advocated in isolation, but were part of a broader package to address profit shifting by excessive allocation of debt to the Australian operations of multinationals.

“The government has implemented key elements of this package, including tightening the thin capitalisation safe harbour limits and ensuring the foreign non-portfolio dividend exemption for Australian companies only applies to returns on equity.

“As a result of these changes, all debt used to fund Australian operations, including debt used to fund offshore investments which give rise to 25-90 deductions, is now subject to the binding constraint of the thin capitalisation rules, which provide protection against abuse of section 25‑90 deductions.”

John Passant, an outspoken tax expert from the Australian National University, recently wrote about the government’s decision not to abolish section 25-90 deductions.

“It is unfortunate in the extreme that the Treasurer and Treasury have listened to a group of rent seekers being unjustly rewarded by not repealing section 25-90. But since this is a government of the 1% that is not surprising and we can conclude in fact that Hockey’s bluster about addressing tax avoidance by his rich mates is just that – complete and utter bluster,” he wrote.

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Social Services minister Kevin Andrews says it’s not yet possible to tell whether six months is enough time for the government to come up with a revamped paid parental leave package. Photo: Andrew Meares Kevin Andrews Photo: Andrew Meares
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Kevin Andrews Photo: Andrew Meares

Kevin Andrews Photo: Andrew Meares

The federal government’s new paid parental leave scheme may not be ready in time for its scheduled July 1, 2015 start date, Social Services Minister Kevin Andrews has indicated.

Mr Andrews has told Fairfax Media that it was not yet possible to say whether six months would be enough time to come up with the revamped package, after Prime Minister Tony Abbott earlier this month said he would be making further changes to his scheme. Mr Andrews said the government would not know what the timetable is until it had worked on the policy over the summer holidays.

“Until we do that work and know exactly what it looks like and what the parameters are, then we can’t make that assessment.”

Mr Andrews said it was still the government’s “aim” and “aspiration” to meet the July 2015 start date.

“But you have to be realistic about it as well.”

This comes as paid parental leave researcher Marian Baird expressed strong doubts that the government would have enough time to devise the new scheme.

“I can’t see how they can possibly write the new legislation and have it ready by July, unless they continue the current scheme,” the Sydney University professor of employment relations said.

The current scheme, introduced by Labor, provides women with the minimum wage for 16 weeks. One suggestion from PPL critic and Nationals Senator John Williams has been to expand this to 26 weeks and add superannuation.

Mr Abbott has said he remains committed to paying women their “real wage” under his policy. Professor Baird, who is a member of the team evaluating the current PPL scheme, said it would be very complicated to work out what a recipient’s income replacement wage would be.

Earlier this month, Mr Abbott announced that he would be making changes to the paid parental leave scheme that he took to the last two elections over the summer break. While he did not give any specific detail, he said the government would be putting more money into childcare, to come up with a “holistic” families package in the new year.

The Social Services Minister said that the government would be working in a “careful, methodical way” to come up with something “positive”.

He added that childcare had been the issue that voters had been giving him feedback about.

“That’s the issue that people that a lot of people are concerned about. Costs have blown out, it’s difficult for a lot of families,” he said.

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