Rent-seeking rampant

The Rudd government’s proposal to tighten up documentation requirements for the very generous tax concessions provided for people who receive motor cars as a fringe benefit has produced some striking examples of rent-seeking from the Australian right, notably including Catallaxy and the Australian Financial Review. Catallaxy has a string of posts defending this rort.

The Fin gives lots of space to bleating rent-seekers, while imputing to “academics” the opinion that this is a subsidy. I guess that’s fair enough, given that the Fin regards basic science as a matter of academic opinion, while treating the failed dogmas of the 1980s as proven facts. And, of course, the Opposition has promised to oppose the measure, while weaselling out on the question of whether it would reverse the changes if elected.

This really is a test for Rudd. If he wants to refute the oft-repeated claim that he is all spin and no substance, this is his first chance, and one of the best he is going to get.

86 thoughts on “Rent-seeking rampant

  1. @Jim Rose

    Spare me the boilerplate.

    What’s your formula for achieiving and maintaining the optimal size and scope of state provision Jim? What’s the optimal proportion of expenditure by the state in OECD/G20 countries, or even just the top 10?

  2. I’m surprised at the surprise. The Right has never prized the free market or rejected state power as matters of principle, but chooses the systems that best defend the interests of the powerful.

    It’s entirely consistent for conservatives to rail at government distortions of the free market when it curbs the profits of the wealthy, then turn around and complain that the rich are being thrown into a Darwinian free market by a state which should be protecting their perks.

    First an ETS, now company cars…if no one stops this it will all end in social democracy!

  3. I know a number of people with novated leases. They have relatively high incomes (as I do) but, unlike me, they want to drive flash foreign cars. (My car is also foreign-built, but that’s only because no-one in Australia builds diesel-powered utes. I digress.)

    While there may be lower income earners who benefit from similar schemes, I’m not convinced that, even if they were to be subject to the same regime (justifying the leased vehicle as a requirement of their employment), it would substantially effect local car manufacturers. After all, it’s not like they’re building cars anyone in their right mind would want to buy.

  4. It is a pity that treaty (treaty yeah!) prevents discussion on this site of Catallaxy’s multiple recent posts exploring the Turnbull option.

  5. John Quiggin :
    Terje, so you have no problem with targeted tax exemptions as an instrument of policy?

    In general I’d say the opposite. But there are multiple considerations. One is whether the exemption is about promoting some policy in order to distort the market and another is about the administrative burden created or avoided.

    So for example I don’t agree with the GST exemption for fresh food because it both distorts the market and complicates compliance. But I do agree with companies being able to expense 100% of a mobile phone service provided to an employee because whilst some percentage of usage is in reality for private benefit the compliance cost of working this out correctly isn’t really worth the headache.

    When it comes to the rules for car leases I’m not strongly committed either way. I really don’t know how much these cars are used for private benefit versus personal benefit. But I do think that keeping log books to prove one way or the other is a major pain for honest people and an easy thing to falsify for dishonest people. It may well be that the Rudd reforms in this area make good sense overall in terms of removing a market distortion, in which case congratulations are in order. Some honest analysis by an independent expert looking at the numbers would be helpful.

    My criticism on this matter is simply reserved for the fact that the government is both promoting a floating carbon price and seeking new tax revenue when the price drops. Will we be getting tax cuts the moment the carbon price rises again? Excuse me if I’m cynical about such a prospect.

  6. The latest example of an attempt to ‘distort the energy market’ in the EU comes from the nuclear power industry (UK) who is lobbing the EU in Brussel to provide subsidies for nuclear power because, despite the low carbon price, nuclear is not competitive with renewables. (Source: “Der naechste Unsinn” (the next boneheaded stupidity), Sueddeutsche Zeitung, 20 July 2013).

  7. I have to correct the title of the newspaper article I referenced @7,p2. “Der ….. Irrsinn”, rather than Unsinn. Irrsinn translate to insanity. Unsinn is nonsense. So boneheaded stupidity seems about right to convey the idea.

  8. @Jim Rose
    If you think there’s something bad about this, it’s obfuscatory not to explain what it is that you think is so bad about it; and if you don’t think there’s anything bad about this, it’s obfuscatory not to acknowledge that fact; so either way you’re obfuscating, and I wish you’d stop.

  9. @John Brookes

    I have a friend who has taken advantage of salary packaging at his university. He considers it his duty, because it is such a rort, and the more people exploit it, the quicker it will be repealed.

    Hey I liked this rationalisation – “I was taking advantage of it to highlight its contradictions.”

    Since he gets a fin advantage from this reasong, is he a Sophist? “a specious argument used for deceiving someone..The practice of charging money for education and providing wisdom only to those who could pay led to the condemnations made by Socrates, through Plato in his dialogues, as well as Xenophon’s Memorabilia.”

  10. @TerjeP
    Fair questions, but we’ll also see if energy companies drop the rate increases they attributed to the carbon price.

    Something tells me the market’s response will be to laugh heartily and cut another line of cocaine.

  11. @TerjeP #6

    But I do agree with companies being able to expense 100% of a mobile phone service provided to an employee because whilst some percentage of usage is in reality for private benefit the compliance cost of working this out correctly isn’t really worth the headache.

    Headache for who? Thanks for your crocodile tears but as an enthusiastic tax avoider you have a conflict of interest here! So let the experts deal with compliance issues.

    You may recall that a reason in favour of a consumption tax was that it minimised avoidance opportunies. And the marginal cost of high-end tax investigation in the 1980s – “deadweight losses” – was estimated as 30% of the amounts recovered. (I recall Peter Groenewegen wrote about this.) There is a history here of ATO learnings and remedies, and taxpayers should have *some* confidence that their interests are being prosecuted. Better enforcement of FBT rules only threatens the cheats and rent-seekers.

  12. Headache for who?

    The business and the employee obviously. They are the ones that would have to keep records and calculate the breakdown. Plus give the nature of many mobile plans you might need an actuary.

  13. So, Terje, the businesses and employees are saved the trouble of keeping records and non-avoiding taxpayers get to pay more tax. Please tell me you running in Bennelong again this year so I can vote against you again.

  14. Fran Barlow :
    Jim Rose
    Spare me the boilerplate.
    What’s your formula for achieiving and maintaining the optimal size and scope of state provision Jim? What’s the optimal proportion of expenditure by the state in OECD/G20 countries, or even just the top 10?

    Milton Friedman used to say

    “If you want to see capitalism in action, go to Hong Kong.

    between 1960 to 1996, Hong Kong’s per capita income rose from about one-quarter of Britain’s to more than a third larger than Britain’s.

    Brad Delong has a great quote on Friedman in a review of a biography of him:

    we are interested in Friedman as intellectual adversary—where his arguments are strong enough to make the reality-based among us rethink our positions and change our minds, and where his arguments lead us to strengthen and better understand our own.

    As John Stuart Mill wrote in his “Essay on Coleridge,” every liberal should pray for an intelligent conservative intellectual adversary: “Lord, enlighten thou our enemies. Sharpen their wits, give acuteness to their perceptions, and consecutiveness and clearness to their reasoning powers: we are in danger from their folly, not from their wisdom; their weakness is what fills us with apprehension, not their strength.”

    Milton Friedman was the answer to our prayers.

  15. So, Terje, the businesses and employees are saved the trouble of keeping records and non-avoiding taxpayers get to pay more tax.

    Basically yes. Although those other taxpayers are probably the same taxpayers anyway. But I take it you have never run a business and have some batshit crazy ideas about what it entails anyway.

  16. p.s. you’re basically implying that policy makers should not give any weight to concerns about productivity. That you should spend private dollars chasing public cents.

  17. @TerjeP
    That’s nonsensical, but who cares, since it boils down to the classic Too Much Red Tape argument.

    To recap: government regulation of trade practices places an unreasonable administration burden on entrepreneurs trying to compete in the free market, but so does requiring businesses to detail their eligibility for subsidies from the government.

    The elected government must hand out taxpayer money to private interests with no strings attached, and let them spend that money any way they please.

    What could possibly go wrong with that setup?

  18. By itself that’s a reasonable statement, Terje, but this thread began with JQ observing that your allies want the red tape abolished and the subsidies kept very much in place, but without any regulation.

    Declare yourself a pariah if need be, but don’t argue as though your views are shared by the editors of the AFR or anyone at the IPA.

  19. TerjeP, you seem to be taking your alleged aim of testing your ideas on this blog-site to extremes because:

    1. Your argument that the record keeping requirements for tax deductions for mobile phones requires an actuary, given the nature of the plans, is either silly or shows your believe that anything which is produced ‘privately’ must be good. (a) It is a silly argument because an employee, who is issued with a mobile by his or her employer, can get a private mobile phone for private use, colour coded if necessary. (b) It is a biased argument because, if you consider the billing methods of privately produced mobile telephone services require an actuary (which you imply is too expensive) to fulfil the record keeping requirements, then the problem lies with the private mobile telephone service provider.

    2. In comparison to the task faced by a cost minimising [1] householder, the record keeping requirements in question on ‘business’ are trivial. The major supermarket chains, Woolies and Coles, have complex marketing strategies in place which require a cost minimising shopper to keep a mental or physical record of price series for a huge array of goods and an inventory system in the household. The complex marketing strategies involve ‘specials’ and, for quite some time now, two sets of specials. One set is available to everybody and another one for ‘reward card’ holders (some membership scheme where the data may end up in some surveillance system on buying behaviour – who knows where). The introduction of the second set of specials multiplies the computation and record keeping requirements by a positive factor, although I can’t tell you now the numerical value of the factor – it might change tomorrow anyway. Furthermore, pattern recognition abilities – a higher order mental ability – on part of the shoppers are required to minimise costs. All this is to be done without the tax deductible expense of an accountant or a book keeper, or even an electronic device that is small enough to keep in the pocket. On the other hand, the income of those who device these complex marketing strategies are a tax deductable expense for ‘business’.

    Your story about red tape and loss of productivity due to government requirements is a bleeding heart story for some abstract notion of ‘business’ in the eyes of ‘householders’.

    The distinction between ‘business’ and ‘householders’ is to a large extent artificial, serving analytical purposes and these categories should be used only by people who are familiar with the relevant methodologies.

    [1] Under some conditions, cost minimisation implies profit maximisation. Note, some but not all conditions. To the best of my knowledge the required conditions are not fulfilled in our real life economies.

  20. So you think the tax law should require employees with company mobile phones to keep a log books to track which calls are personal and which are business related? Should they do the same for their desk phone in the office? How about if they access websites for private benefit whilst at work? If they use a company pen to write down a personal memo on company stationary should they make a record of it so that the ATO is not short changed due to a personal benefit being expensed. Don’t you think at some point such record keeping gets ridiculous? I mean you may think ridiculous occurs at a later point than me but do you at least concede that at some stage trying to separate private benefits from business benefits becomes a futile and petty exercise.

  21. @TerjeP

    “But I take it you have never run a business and have some *** crazy ideas about what it entails anyway.”

    Perhaps you have some *** crazy ideas about how ‘special’ people who run a business are? You seem quite sure that you deserve special treatment because you do run a business. I have seen this attitude from my own business owning relatives and from those small – and I mean small in mind and character – business people who have been my ‘bosses’.

    Sancho, Terje only argues for his own self-interest. That is his religion.

  22. I’m with TerjeP on the subsidies and red tape. You could clean the whole system up a lot by not using the tax system for micro-redistribution. Keep it progressive, but that’s it, no “family tax benefit part B” nonsense. Personal tax: “how much do you earn? Give us 10% of everything over $20k, 20% up to $80k, 30% after that. The end”. Company tax: “net earnings? Give us 30%. The end”. Want an R&D subsidy? Apply for it as a grant. Want the government to donate money to Ford? Campaign accordingly. Want a tax-deductable phone? Great. Use it for personal calls? Split the bill. Show your working, the tax department will want to see it.

    One side benefit would be the nudge effect that people are less inclined to take the second step of applying for a grant, and again that explicitly applying for a subsidy would be hard for some “self-sufficient” people. So fewer people would apply.

    I was thinking that with international “earnings redistribution” or whatever the approved circumlocution for tax evasion by multinationals is, would a Tobin tax help with that? Maybe not the whole answer, but could it be part of the solution?

  23. That’s not what Terje meant, Moz, and you know it. I agree with you, btw – we should also remove all the direct and indirect subsidies to fossil fuel industries, miners generally, etc.

  24. Log books seem so quaint in this day and age, anyway. I have an ancient car but I understand the up to date ones are chock full of smart electronics, so can’t a car help with tracking its use with the aid of some kind of downloadable smartphone app? Surely that would not be too taxing for the executive class, most of whom are welded to their devices anyway?

  25. @David Irving (no relation)

    I know nothing. And deny everything. Or is it that I can’t recall? I’m not sure any more, it was so long ago. But I know I’m opposed to hiding subsidies in the tax system or anywhere else, I want them out there in public where we can all discuss them rather than spending our lives ferreting out the rorts.

    Helen, the objections are not based on the practical issues, they’re based on the principle of the thing – no tax rort shall ever be repealed without a fight.

  26. Helen, i heard on the first day there’s an app for it. i don’t know what all the complaining is about. if you can’t be bothered honestly accounting for your supposedly justifiable perk you shouldn’t have it. -a.v.

  27. One of the interesting things about salary packaging for cars, from my observation of people I’ve known and worked closely with, is that it encourages people to drive rather than use public transport. Rorting (using for private use) of course makes this more so. Also salary packaging is particularly attractive to people who live a long way from their work (it saves you more the further you have to drive). So all in all I think there could be major environmental benefits from ending salary packaging for cars. However offering it for public transport (which one of my former employers was starting to look at) could be beneficial for the environment.

  28. Perhaps you have some *** crazy ideas about how ‘special’ people who run a business are? You seem quite sure that you deserve special treatment because you do run a business.

    Julie – ahhh no. You seem to have misunderstood what I said but at the risk of being misunderstood let me reiterate.

    Sometimes at work as an employee I will use a pen to write on a post-it-note some reminder that is of personal benefit. Perhaps my wife rang to say I should pick up milk. Now the use of the ink and paper was a personal benefit not a business activity. If you want a corporate tax system with absolutely zero leakage then all personal benefits must be separated and excluded from business expenses. So some leak proof system would require that a record is made of all the post-it-note and ink that is used for personal benefit. The accounts department would then tally up all the post-it-notes and drops of ink used each month for personal benefit and having done so they would calculate FBT and remit the associated revenue to the ATO.

    If you did this the tax man would collect a few extra cents of FBT each month. The company would however incur $100’s of dollars in extra labour costs doing the accounting. And of course they would claim this labour as a business expense. Which would reduce their regular company tax by a lot more than a few cents.

    This is an extreme example. But it shows that at some point extra compliance creates a lose / lose situation. The ATO loses. The shareholder loses. And the staff do mindless bean counting.

    So any pragmatic policy maker will create exemptions. The ATO does not expect companies to pay FBT on personal benefits given to employees such as the use of post-it-notes and pens. And the ATO has decided that personal calls made on company mobile phones are also not worth accounting for.

    Now you can argue that the ATO and FBT tax policy should be more aggressively demanding compliance. Maybe it should go after personal calls on company phones. But if you think compliance comes at zero cost, or that there is absolutely no limit to how aggressive they should be, then you’re batshit crazy.

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